Help me understand Dividends Tax implications for VTSAX

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PhillyPhan
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Joined: Wed Nov 28, 2012 9:35 am

Help me understand Dividends Tax implications for VTSAX

Post by PhillyPhan » Mon Dec 17, 2012 3:30 pm

Thinking of starting a taxable account and purchasing 10-15k of VTSAX.
Wondering about dividends and the tax implications, is this something I need to concern myself with each year or only during years where I sell the fund? Is it adventageous to buy in 2012 or wait for 2013?
Any additional insight?
Also , I have maxed 401k and Roth for the year so this is been taken into consideration as well.
Thanks!

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House Blend
Posts: 4225
Joined: Fri May 04, 2007 1:02 pm

Re: Help me understand Dividends Tax implications for VTSAX

Post by House Blend » Mon Dec 17, 2012 4:29 pm

Welcome to Taxable Investing 101.
See also http://www.bogleheads.org/wiki/Tax_Basics

Given that you are contemplating a purchase this week, I would wait until the 19th to do it. Otherwise, you'll get a dividend on the order of $50-$75, and have to pay $7.50 to $11.25 extra in Federal tax on it. (If you had raised this question last week, I probably would not have mentioned it. IMO, it is worth postponing a purchase of TSM one day for this reason, but not one week.)

Tax-wise, on a quarterly schedule, this fund will distribute dividends to you that will be added to your taxable income, regardless of whether you spend or reinvest them.

Whenever you sell shares of this fund, you will be realizing capital gains or losses, depending on whether the shares you sold are worth more or less than what you paid for them. Short term gains are taxed at the same rate as ordinary income, but long term capital gains are generally taxed at a lower rate. Losses can be deducted from other gains, or from ordinary income if you have more losses than gains.

There's also a .000001 chance that this fund will distribute (small) capital gains. These are distributed to you in the same manner as dividends (and can be reinvested). They are taxed the same as any other capital gains (and may be long or short).

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Help me understand Dividends Tax implications for VTSAX

Post by livesoft » Mon Dec 17, 2012 5:48 pm

Note how VTSAX was up 1.25% today, so on a $10,000 investment, one would be up $125. The dividend is about 0.5% of the value.

So what does that mean? To me it means the idea of "don't buy the dividend" can sometimes work against you. OTOH, see that thread about BRSIX that is current.

But the tax implications are that you pay taxes on dividends you receive in your taxable account. The tax rate for qualified dividends is 15% or less right now, so not a big deal. Since folks are used to paying taxes on the interest earned on their bank accounts, this is pretty much the same thing, but a lower tax rate. If you undertand taxes on your savings account, then you pretty much understand taxes on your dividends from VTSAX.
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