Dividend Distribution Question

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Poboy
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Joined: Sun Dec 15, 2013 5:16 am

Dividend Distribution Question

Post by Poboy »

Could someone please explain to me the advantage of "taking" your distributions from taxable fund accounts in lieu of "reinvesting" this income? I'm still a bit confused about the advantage of doing this. P.S. - I am now newly retired.

Thanks!
red5
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Re: Dividend Distribution Question

Post by red5 »

Poboy wrote:Could someone please explain to me the advantage of "taking" your distributions from taxable fund accounts in lieu of "reinvesting" this income? I'm still a bit confused about the advantage of doing this. P.S. - I am now newly retired.

Thanks!
I think this stems mainly from the issue of creating numerous tax lots over the years with reinvested dividends. Eventually this could create a headache come tax time when you sell all these lots. Either way you are going to pay taxes on the dividend income. Reinvesting means you are creating new tax lots and you will have to pay capital gains on those tax lots in the future when you sell them.

Some take all their dividends from their multiple funds and then invest them manually into whichever fund they want (perhaps as a part of rebalancing) which would create less tax lots.

However if you don't mind creating numerous tax lots go ahead and reinvest those dividends.
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Cernel
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Re: Dividend Distribution Question

Post by Cernel »

I agree with red5 in regard to keeping one's tax situation a little more simplified by taking the dividend distribution versus creating another tax lot by reinvesting.

I am also retired and I take my dividend distributions and send it to my On-Line Savings account to be used for my Monthly income needs. Since I use the Specific Lot method in my taxable account, by taking the distribution, I am not creating another tax lot that I then have to track. I don't have a pension and I am not yet on SS, so my income comes from my investments. So by taking the dividend distribution, it basically just simplifies things for me.
BigJohn
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Re: Dividend Distribution Question

Post by BigJohn »

Poboy, I reinvested dividends when I was working because I did not need the money to spend and wanted to increase the growth rate of my retirement savings. When I retired six month ago I stopped that because now I need to get income from my investments and this is good source of some regular income to pay bills. The alternative would be to reinvest dividends and then sell shares of something to pay the bills but this would just create lots of capital gain/loss events that would complicate taxes for no benefit.
"The greatest enemy of a good plan is the dream of a perfect plan" - Carl Von Clausewitz
dbr
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Re: Dividend Distribution Question

Post by dbr »

Poboy wrote:Could someone please explain to me the advantage of "taking" your distributions from taxable fund accounts in lieu of "reinvesting" this income? I'm still a bit confused about the advantage of doing this. P.S. - I am now newly retired.

Thanks!
In the first place an investor who is accumulating wealth would reinvest the dividends in any case. The only question is whether to do so automatically in the investment generating the dividends or to take the dividends in cash and invest them in something else, including possibly the original investment, in amounts and at times of one's own choosing. Spending the dividends is the same as withdrawing money from the portfolio.

As mentioned, one reason to not automatically reinvest but rather to "reinvest" larger amounts in fewer transactions is to avoid creating a large number of tax lots. People disagree as to whether this is even a problem. Some people go bonkers trying manage a complex array of tax situations and other people do it like walking across the living room.

The other factor is that one can use the cash received to rebalance the portfolio by directing investment into those asset that are lagging. This saves some tax cost to rebalance because you don't want to reinvest the dividend only to sell a leading asset at capital gains tax cost to get the cash to rebalance.

The whole thing is a matter of practical preference really.

Also, of course, we note that in retirement accounts where there are no tax issues, automatic rebalancing in each holding is probably what most people would do.
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cheese_breath
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Re: Dividend Distribution Question

Post by cheese_breath »

red5 wrote:
Poboy wrote:Could someone please explain to me the advantage of "taking" your distributions from taxable fund accounts in lieu of "reinvesting" this income? I'm still a bit confused about the advantage of doing this. P.S. - I am now newly retired.

Thanks!
I think this stems mainly from the issue of creating numerous tax lots over the years with reinvested dividends. Eventually this could create a headache come tax time when you sell all these lots. Either way you are going to pay taxes on the dividend income. Reinvesting means you are creating new tax lots and you will have to pay capital gains on those tax lots in the future when you sell them....
+1 There was a time I felt differently. I kept meticulous records in Excel of every lot I purchased through dividend reinvestment including formulas that would enable me on any given day to calculate the gain or loss for each lot. But when it came time to sell 'a lot of lots' I discovered it wasn't worth the hassle. Besides specifying only the ones with LTCGs to Vanguard I then had to go back and update my spreadsheet for each lot sold. I have my dividends deposited in my bank account now and am a lot happier, especially the way Vanguards record keeping is less than perfect these days which makes it even harder to specify the lots I want sold.
The surest way to know the future is when it becomes the past.
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Phineas J. Whoopee
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Re: Dividend Distribution Question

Post by Phineas J. Whoopee »

In addition to the tax lots issue noted by others - and I agree with dbr's observation that some people are better at handling them, even with the advent of covered shares - in taxable as you specified, you have to pay income tax on the distributions for the current year either way. If the distributions are less than or equal to how much you need to withdraw from the portfolio to meet your retirement spending goals, it's simpler just to take them and spend them than to reinvest them and then raise the needed money by selling shares shortly thereafter.

As dbr wrote, withdrawing dividends from a portfolio creates the same end result as any other method of drawing that amount from one.

PJW
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Taylor Larimore
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Wiki on Reinvesting Distributions

Post by Taylor Larimore »

Poboy wrote:Could someone please explain to me the advantage of "taking" your distributions from taxable fund accounts in lieu of "reinvesting" this income? I'm still a bit confused about the advantage of doing this. P.S. - I am now newly retired.

Thanks!
Poboy:

Our wiki has a good explanation of the advantages and disadvantages:

Reinvesting Dividends in a Taxable Account

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
shawcroft
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The Dividend Distribution Question

Post by shawcroft »

Poboy:
Starting in the late 1970's, I enrolled in dividend reinvestment services for several individuals shares we owned. Thought this would help use grow our holdings while on "automatic pilot" ( No thought about whether these were actually good companies to, own over many years)
When the time came in 2010 to establish the cost basis of these things and "clump' them into manageable groups ( 20 lots of 100 shares of XYZ corporation), it was an absolute nightmare of work. I used Quicken and it took me weeks.
As easy as this would appear, it can be an enormous "PIA" when you ave to establish the cost basis, especially if this has been going on for years...in my case, quarterly dividend payments over nearly 30 years.....at least 120 discrete actions..and then there were stock splits, spin-offs, and all sorts of corporate restructurings.
Still gives me nightmares to think about it....
Shawcroft
Topic Author
Poboy
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Joined: Sun Dec 15, 2013 5:16 am

Re: Dividend Distribution Question

Post by Poboy »

Thanks to all that responded.

This is a "load" of help for me to make the appropriate decision.

Poboy
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