Need clarification after reading Boglehead page on reinvesting taxable dividends or not

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Jackson12
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Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by Jackson12 » Mon Jul 17, 2017 11:43 am

I read the Bogleheads page here: https://www.bogleheads.org/wiki/Reinves ... le_account and still have so e confusion and need some clarification.

Here is our situation:

1. We have 3 main accounts at Vanguard In addition to some much smaller Roth accounts which we have no Interest in rebalancing as they are retirement accounts on a " set it and forget it" plan- and also subject to Roth rules and penalties for early withdrawals..

2. The rest of our accounts are primarily taxable and we also have a large settlement amount of over $600,000 in cash which resulted from sales of individual equities before we moved to Vanguard. They have not yet been allocated in our desired percentages and we want to remedy that since we are overweight in cash.

3 .We are already receiving dividends from these index funds ( basic 3 funds) and have so far automatically reinvested the dividends in the funds from which they came

4. Is there a general rule for whether to reinvest dividends or let them build up in a settlement account and then reallocate this cash when everything is rebalanced ? We dont want to face tax consequences from selling percentages of equity or bond funds to rebalance.

5. Is tax our bracket a factor?

Chuck
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by Chuck » Mon Jul 17, 2017 12:41 pm

There's no general rule, and the tax "consequences" are insignificant.

The only issue is how many transactions you want to have on your tax forms. That's it. I take dividends in cash and reinvest manually once or twice a year. It makes it a bit easier to do my taxes.

mega317
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by mega317 » Mon Jul 17, 2017 12:45 pm

There is no real rule on what to do with dividends. One factor in taxable is if you automatically reinvest, you will end up with many small tax lots which can be annoying. Another factor is as you mention, you'd rather not generate taxes in order to rebalance. What I do is send dividends in taxable to the settlement fund, and periodically use them to buy where I'm underweight. In Roth there are no tax consequences to trading (and no "rules and penalties for early withdrawals" just to trade) so I do automatically reinvest there. Wash sales could also be a consideration.

I don't think tax bracket is a factor in that the dividend is taxed when paid, regardless of what you do with it.
We have 3 main accounts at Vanguard In addition to some much smaller Roth accounts which we have no Interest in rebalancing as they are retirement accounts on a " set it and forget it" plan
I'm not exactly sure what you mean but I just want to clearly say that if you don't rebalance your retirement accounts your risk exposure could drift from where you want it.

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bertilak
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by bertilak » Mon Jul 17, 2017 12:52 pm

I think the main reason people choose not to reinvest dividends automatically in taxable accounts is two-fold, as you got at in your questions:
  1. Create fewer tax lots that would otherwise be a minor inconvenience at tax time. Note that the dividends themselves are taxable whether they are reinvested or not. "Automatically" or not makes no difference.
  2. Leave some cash around to help with re-balancing. This may have extra value if you are not actively contributing to the account.
Neither of those reasons are earth-shattering but that's the way I do it anyway. I handle re-balancing in my IRA and leave the taxable alone except as a place to re-invest my RMDs (and accumulated dividends) so the second reason doesn't come into play for me.
Listen very carefully. I shall say this only once. (There! I've said it.)

goingup
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by goingup » Mon Jul 17, 2017 1:21 pm

I've always reinvested dividends in all accounts. The taxes are the same regardless.

My reason is to get reinvested immediately, without delay or decision making. I try to automate as much as reasonably possible.

hulburt1
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by hulburt1 » Mon Jul 17, 2017 1:35 pm

I think age and retirement matters. I have my dividends go to money market fund and have a monthly amount sent to bank. I am now moving dividends to a Roth and having the dividends from Roth sent to me monthly tax free also.. I'm living on dividends from my Ira and Roth.

Jackson12
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or no

Post by Jackson12 » Mon Jul 17, 2017 1:59 pm

mega317 wrote:There is no real rule on what to do with dividends. One factor in taxable is if you automatically reinvest, you will end up with many small tax lots which can be annoying. Another factor is as you mention, you'd rather not generate taxes in order to rebalance. What I do is send dividends in taxable to the settlement fund, and periodically use them to buy where I'm underweight. In Roth there are no tax consequences to trading (and no "rules and penalties for early withdrawals" just to trade) so I do automatically reinvest there. Wash sales could also be a consideration.

I don't think tax bracket is a factor in that the dividend is taxed when paid, regardless of what you do with it.
We have 3 main accounts at Vanguard In addition to some much smaller Roth accounts which we have no Interest in rebalancing as they are retirement accounts on a " set it and forget it" plan
I'm not exactly sure what you mean but I just want to clearly say that if you don't rebalance your retirement accounts your risk exposure could drift from where you want it.
Yes I was not clear. I should have written " some portion of the cash which we have transferred to Vanguard, we have reallocated to a three fund portfolio.

It is a bit confusing fo me to explain but we do know the percentage of equities and bond funds we want in our overall portfolio.

mega317
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by mega317 » Mon Jul 17, 2017 2:33 pm

goingup wrote:
My reason is to get reinvested immediately, without delay or decision making. I try to automate as much as reasonably possible.
Despite my own strategy, there is definite value to this line of thinking.

Jackson12
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by Jackson12 » Mon Jul 17, 2017 5:27 pm

I'm the Op. Thanks for all the responses. Plenty of food for thought and I greatly appreciate the input.

mortfree
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by mortfree » Mon Jul 17, 2017 5:31 pm

other reasons for dividend handling in a taxable account:

- it makes tax loss harvesting easier if you don't have partial shares/lots (livesoft way).
- taking dividend in cash also allows you to adjust your AA by using the dividends towards other fund purchases.

I recently turned off auto reinvest of dividends in my taxable account for Apple and SPY (S&P500); left it on for Sirius XM.

I left reinvest dividends on in my Roth and 401k since no tax consequences.

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Artsdoctor
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Re: Need clarification after reading Boglehead page on reinvesting taxable dividends or not

Post by Artsdoctor » Mon Jul 17, 2017 5:58 pm

Jackson12 wrote:I read the Bogleheads page here: https://www.bogleheads.org/wiki/Reinves ... le_account and still have so e confusion and need some clarification.

Here is our situation:

1. We have 3 main accounts at Vanguard In addition to some much smaller Roth accounts which we have no Interest in rebalancing as they are retirement accounts on a " set it and forget it" plan- and also subject to Roth rules and penalties for early withdrawals..

2. The rest of our accounts are primarily taxable and we also have a large settlement amount of over $600,000 in cash which resulted from sales of individual equities before we moved to Vanguard. They have not yet been allocated in our desired percentages and we want to remedy that since we are overweight in cash.

3 .We are already receiving dividends from these index funds ( basic 3 funds) and have so far automatically reinvested the dividends in the funds from which they came

4. Is there a general rule for whether to reinvest dividends or let them build up in a settlement account and then reallocate this cash when everything is rebalanced ? We dont want to face tax consequences from selling percentages of equity or bond funds to rebalance.

5. Is tax our bracket a factor?
There is a quote in the article which is pretty unequivocal: "It is a good idea to take dividends in cash in several cases:" and then descriptions follow.

I agree with this statement! However, I would also be pretty quick in saying that sometimes simplicity is better. It can certainly be true that taking dividends in cash gives you tremendous latitude to spend or reinvest in ways that you see fit. There are multiple reasons for wanting those dividends dumped into cash which has been described above--all of them are valid. The top of my list is just being able to reallocate money where it's needed most (a sort of rebalancing). There are other reasons as well.

But I'm also not convinced that automatically reinvesting dividends wouldn't be preferable for many investors who really don't want to micro-manage their accounts. If you're reinvesting dividends and you're using average cost basis for capital gains purposes, there are few things that could be easier. And simpler has a lot of merit; it might cost you a few bucks for that simplicity but don't underestimate the value of keeping things super-simple.

You asked about your tax bracket, and the answer is "probably." If you're in the highest tax bracket and you're in a heavily taxed state, you may want to really watch your capital gains tallies. This will inevitably lead you to specific lot ID method for cost basis calculation so you really have to watch each and every transaction like a hawk. If that's the case, and you don't mind bookkeeping, then forgoing automatic dividend reinvestment will probably net you more in tax savings in the long run. At the very least, it'll give you more control.

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