Dividends are reinvested but I end up paying taxes out of pocket at tax time.

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frotec
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Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by frotec » Thu May 09, 2019 5:46 pm

Every year I get dividends from my S&P Index ETF that i have opted to reinvest at my broker. However at tax time I have to pay the taxes out of my personal funds. Is there a good way to handle this type of situation. Like maybe have the broker reinvest 80% and give 20% in cash (to cover taxes). Your thoughts please. thanks

dbr
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by dbr » Thu May 09, 2019 5:50 pm

A lot of people would budget for tax costs from their personal funds.

If that is not sufficient it would mean you need to withdraw some money from your assets. Do you have more than one fund in your portfolio such that you can not reinvest there but reinvest in the others to hit the 80/20? I guess if a person were looking at your books in detail a practical suggestion might be evident. I don't think any broker is set up to take withholding before reinvesting dividends nor to pro-rate the reinvestment, but I could be wrong.

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Dialectical Investor
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by Dialectical Investor » Thu May 09, 2019 5:55 pm

Turn off dividend reinvestment in October or November. Turn back on in December or January. Or, always leave off, and periodically reinvest manually.

dbr
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by dbr » Thu May 09, 2019 5:57 pm

Dialectical Investor wrote:
Thu May 09, 2019 5:55 pm
Turn off dividend reinvestment in October or November. Turn back on in December or January. Or, always leave off, and periodically reinvest manually.
Duh, of course.

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mhadden1
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by mhadden1 » Thu May 09, 2019 6:00 pm

One way to handle dividends is to not reinvest automatically at all, but instead use the dividends as you wish, as they build up. That could be to pay taxes, or whatever. You could even use them to buy the stock/fund that is currently down, instead of reinvesting the dividends in whatever produced them.
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by RickBoglehead » Thu May 09, 2019 6:26 pm

mhadden1 wrote:
Thu May 09, 2019 6:00 pm
One way to handle dividends is to not reinvest automatically at all, but instead use the dividends as you wish, as they build up. That could be to pay taxes, or whatever. You could even use them to buy the stock/fund that is currently down, instead of reinvesting the dividends in whatever produced them.
This ^^^

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Wakefield1
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by Wakefield1 » Thu May 09, 2019 7:50 pm

Yes,so much extra tax withholding to cover the dividend tax liability that not so much pension is left over monthly. :-(
I suppose you could have tax withheld from the dividend payment itself depending on the brokerage or account(containing whatever security or money market) producing the dividend,but that would mean even more 1099 forms to worry about at tax filing time.

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grabiner
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by grabiner » Thu May 09, 2019 8:25 pm

frotec wrote:
Thu May 09, 2019 5:46 pm
Every year I get dividends from my S&P Index ETF that i have opted to reinvest at my broker. However at tax time I have to pay the taxes out of my personal funds. Is there a good way to handle this type of situation. Like maybe have the broker reinvest 80% and give 20% in cash (to cover taxes). Your thoughts please. thanks
If you have income from which tax is being withheld (a salary or pension), file a new W-4 to request more withholding from that income. For example, if you are paid every two weeks, and you know that you will owe $1300 in taxes on your investments, you can ask your employer to withhold $50 extra federal tax from each paycheck.
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22twain
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by 22twain » Thu May 09, 2019 8:31 pm

Wakefield1 wrote:
Thu May 09, 2019 7:50 pm
I suppose you could have tax withheld from the dividend payment itself depending on the brokerage or account(containing whatever security or money market) producing the dividend,but that would mean even more 1099 forms to worry about at tax filing time.
I don't have tax withheld from my dividends, but my 1099-DIV nevertheless has an empty Box 4 for federal tax withheld, and Box 15 for state. So I can't see there would be any extra forms. Except of course for whatever you have to fill out to tell the brokerage how much to withhold.
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grettman
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by grettman » Thu May 09, 2019 8:43 pm

I sometimes use my dividends from my taxable to invest in my Roth IRA.

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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by The Wizard » Thu May 09, 2019 8:50 pm

$1M in an S&P 500 fund in your taxable account would produce maybe $20k in dividends each year.
This would mean around $5k additional in taxes in the 24% marginal bracket.

It's a nice problem to have, with various solutions already mentioned.

It's also a good reason NOT to invest in a high dividend fund during your accumulation years, if ever...
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Topic Author
frotec
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Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

Post by frotec » Fri May 10, 2019 6:49 am

    Thank you all for some great suggestions. I really like the one about shutting of reinvestment for few months approach.

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    CyclingDuo
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    Re: Dividends are reinvested but I end up paying taxes out of pocket at tax time.

    Post by CyclingDuo » Fri May 10, 2019 7:16 am

    frotec wrote:
    Thu May 09, 2019 5:46 pm
    Every year I get dividends from my S&P Index ETF that i have opted to reinvest at my broker. However at tax time I have to pay the taxes out of my personal funds. Is there a good way to handle this type of situation. Like maybe have the broker reinvest 80% and give 20% in cash (to cover taxes). Your thoughts please. thanks
    Do you have the ability to keep your taxable income low enough to avoid paying taxes on the qualified dividends (or at least keep the taxes you will pay low enough to be only 15%) and still meet your household expenses?

    Depending on your salary, the number of plans you can fill as a working couple with the salary available, the amount of dividends, and keeping household expenses as low as possible - there may or may not be a window to pull it off.

    401k's/403b's/457b's/tIRA's, pension contributions, etc... .

    Taxable income limit for MFJ to pay $0 on dividends was $77,200 for 2018, but bumps up to $78,750 for 2019.

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