Reinvesting Dividends or no

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Reinvesting Dividends or no

Post by SemperFi79 » Sun Jun 23, 2019 4:50 pm

In my daily “learning” from this forum there have been varied discussions regarding “to reinvest dividends and capital gains” or not. I’d like to understand a comment made in another post suggesting how to invest
“In the taxable accounts set all the mutual funds to not automatically reinvest the dividends and capital gains distributions. That will help make all the gains long term so that if you need to change the investments some the tax bite will be less. You can then invest the dividends in a mutual fund you would want to keep for the long term or use them for fund your retirement.”

I’m confused how reinvesting creates an unnecessary short term gain? Also, understand being cautious about too large of gains in a Roth account? Right now my assets are 25% IRA and 75% taxable account. I currently have everything set to reinvest to potentially grow the assets vs going to the money market and trade.

I’d like to grow my inheritance as well as be aware of tax advantage or disadvantage.
Thanks. It’s a journey of new learning!

User avatar
Toons
Posts: 13424
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Reinvesting Dividends or no

Post by Toons » Sun Jun 23, 2019 5:06 pm

Reinvesting
An essential tenant in creating wealth.
Compounding is magical.
Max out the tax deferred,tax free upon withdrawal accounts.
I reinvested for over 35 years
Taxable and Retirement accounts.
Taxes were not an issue in taxable account as the investment firm does the cost basis recordkeeping as do I with Quicken software,never been a discrepancy.

:idea:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

User avatar
Wiggums
Posts: 2358
Joined: Thu Jan 31, 2019 8:02 am

Re: Reinvesting Dividends or no

Post by Wiggums » Sun Jun 23, 2019 5:16 pm

The answer depends in part on your investment goals. Some investors use dividends as a source of income to cover everyday expenses, while others focus on increasing their savings. For those who are focused on longer-term growth, dividend reinvestment can be a savvy way to multiply your gains.

Miriam2
Posts: 2748
Joined: Fri Nov 14, 2014 11:51 am

Re: Reinvesting Dividends or no

Post by Miriam2 » Sun Jun 23, 2019 5:33 pm

SemperFi79 wrote: In my daily “learning” from this forum there have been varied discussions regarding “to reinvest dividends and capital gains” or not. I’d like to understand a comment made in another post suggesting how to invest
In the taxable accounts set all the mutual funds to not automatically reinvest the dividends and capital gains distributions. That will help make all the gains long term so that if you need to change the investments some the tax bite will be less. You can then invest the dividends in a mutual fund you would want to keep for the long term or use them for fund your retirement.”

I’m confused how reinvesting creates an unnecessary short term gain? . . .
I think what is meant is that reinvesting creates an unnecessary short term gain IF you plan to sell shares of the fund within a year. If you sell, a short term gain would be taxed higher than a long term gain. If you're not going to sell shares of the fund in the foreseeable future, it would not matter, just reinvest the dividends and compound up.

brianc78
Posts: 8
Joined: Sun Jun 23, 2019 5:06 pm

Re: Reinvesting Dividends or no

Post by brianc78 » Sun Jun 23, 2019 5:35 pm

I believe it's better to reinvest all dividends if you don't NEED the cash. And if you don't feel comfortable reinvesting into the fund that paid the dividends, then maybe you should've picked a different fund. It's very simple: gains are good and big gains are better. Dividends used to be treated as short term gains (and taxed accordingly), but under George W. Bush it was changed so now they are taxed at the same rate as long term gains.

TerryDMillerMBA
Posts: 118
Joined: Tue Jul 05, 2011 8:32 pm

Re: Reinvesting Dividends or no

Post by TerryDMillerMBA » Sun Jun 23, 2019 5:46 pm

One thing I remember is that unless otherwise noted, the total market returns you will see referred to for past performances are assuming reinvested dividends.

alter
Posts: 250
Joined: Thu Feb 26, 2015 11:27 pm
Location: Chicago

Re: Reinvesting Dividends or no

Post by alter » Sun Jun 23, 2019 5:50 pm

I reinvest almost all dividends. In taxed accounts too. Tax-free municipal bond fund dividends are obviously best held in taxed accounts.

z3r0c00l
Posts: 1533
Joined: Fri Jul 06, 2012 11:43 am
Location: NYC
Contact:

Re: Reinvesting Dividends or no

Post by z3r0c00l » Sun Jun 23, 2019 5:51 pm

Since it is still a significant part of total return, I don't see why one would take dividends out of an investment meant for the long term. I do have dividends go to money market account and collect there until they hit a round number like $500 or $1000. Then I use that money to buy whatever fund is down at the time to rebalance. This simply makes the lots round numbers.

NMBob
Posts: 253
Joined: Thu Apr 23, 2015 8:13 pm

Re: Reinvesting Dividends or no

Post by NMBob » Sun Jun 23, 2019 5:53 pm

Sometimes it is good to control when or where you are buying or reinvesting the dividend cash back into shares.
Folks who try to do capital gain tax loss harvesting in taxable accounts have to avoid a wash sale. Selling shares for a capital gain tax loss and then accidentally having that same fund reinvest a dividend within 30 days after (or before) can cause a wash sale.
Last edited by NMBob on Sun Jun 23, 2019 6:00 pm, edited 2 times in total.

livesoft
Posts: 69566
Joined: Thu Mar 01, 2007 8:00 pm

Re: Reinvesting Dividends or no

Post by livesoft » Sun Jun 23, 2019 5:56 pm

SemperFi79 wrote:
Sun Jun 23, 2019 4:50 pm
In my daily “learning” from this forum there have been varied discussions regarding “to reinvest dividends and capital gains” or not. I’d like to understand a comment made in another post suggesting how to invest
“In the taxable accounts set all the mutual funds to not automatically reinvest the dividends and capital gains distributions. That will help make all the gains long term so that if you need to change the investments some the tax bite will be less. You can then invest the dividends in a mutual fund you would want to keep for the long term or use them for fund your retirement.”

I’m confused ....
I'm confused as well. Any time one buys shares that creates a new tax lot and those shares get a date acquired and start a holding period. It does not matter whether one uses a checking account to buy shares, a cash sweep account to buy shares, or dividend money that would normally go into a cash sweep account or a checking account to buy shares.

Sure if you don't buy shares ever again then that will make all your existing shares to eventually be shares bought a while ago and become long term shares. But that is ludicrous during one's accumulation phase. So maybe you want to use dividends from a fund to buy more shares in the same fund. But also sometimes maybe you don't. If you don't automatically reinvest dividend money, then you can still chose to manually reinvest dividend money. But if you automatically reinvest dividend money, then you don't have that choice.
Last edited by livesoft on Sun Jun 23, 2019 5:57 pm, edited 1 time in total.
Wiki This signature message sponsored by sscritic: Learn to fish.

KlangFool
Posts: 14559
Joined: Sat Oct 11, 2008 12:35 pm

Re: Reinvesting Dividends or no

Post by KlangFool » Sun Jun 23, 2019 5:56 pm

OP,

I do not automatically reinvest my dividend.

A) I reinvest my dividend to whatever fund that is low in my allocation. This reduces my rebalancing requirement.

B) I do "Tax Loss Harvesting" and "Tax Gain Harvesting" on my taxable account. Automatic reinvesting my dividend overcomplicating the wash sale consideration.

KlangFool

Wakefield1
Posts: 1059
Joined: Mon Nov 14, 2016 10:10 pm

Re: Reinvesting Dividends or no

Post by Wakefield1 » Sun Jun 23, 2019 6:35 pm

I believe that if you have a substantial amount of a Vanguard fund,and have had some $ in that fund for 5 or 10 years,and you are having automatic reinvestment of distributions and dividends (in a taxable account),if you sell a portion of your holding in the fund (say you need the cash for a car or house downpayment, I don't think you get hit with short term Cap Gain tax if you allow them to do the usual default accounting that they do. I think you can specify a different type of accounting for generating the IRS paperwork form.

Someone else might be able to clarify or correct?
(If you sell a lot you might need to pay an Estimated Tax that quarter (Fed and State)

NMBob
Posts: 253
Joined: Thu Apr 23, 2015 8:13 pm

Re: Reinvesting Dividends or no

Post by NMBob » Sun Jun 23, 2019 6:36 pm

I guess in a taxable account, when you start withdrawing, if you do not identify specific shares with the highest cost basis to sell first when you withdraw, then you will be either average cost or first in or first out tax basis. In that case, would it make sense in the latter years to invest into a different fund and then withdraw from that first, to have a smaller cap gain to be taxed on? This is assuming the more recent purchases have smaller gains.

I do have a taxable fund that has big gains that is already in a brokerages default average share cost basis for mutual funds. When I put money into it now, the new share lot immediately has a good size unrealized tax gain due to average cost basis.

Trader Joe
Posts: 1431
Joined: Fri Apr 25, 2014 6:38 pm

Re: Reinvesting Dividends or no

Post by Trader Joe » Sun Jun 23, 2019 6:51 pm

SemperFi79 wrote:
Sun Jun 23, 2019 4:50 pm
In my daily “learning” from this forum there have been varied discussions regarding “to reinvest dividends and capital gains” or not. I’d like to understand a comment made in another post suggesting how to invest
“In the taxable accounts set all the mutual funds to not automatically reinvest the dividends and capital gains distributions. That will help make all the gains long term so that if you need to change the investments some the tax bite will be less. You can then invest the dividends in a mutual fund you would want to keep for the long term or use them for fund your retirement.”

I’m confused how reinvesting creates an unnecessary short term gain? Also, understand being cautious about too large of gains in a Roth account? Right now my assets are 25% IRA and 75% taxable account. I currently have everything set to reinvest to potentially grow the assets vs going to the money market and trade.

I’d like to grow my inheritance as well as be aware of tax advantage or disadvantage.
Thanks. It’s a journey of new learning!
Yes, always.

livesoft
Posts: 69566
Joined: Thu Mar 01, 2007 8:00 pm

Re: Reinvesting Dividends or no

Post by livesoft » Sun Jun 23, 2019 6:52 pm

Wakefield1 wrote:
Sun Jun 23, 2019 6:35 pm
I believe that if you have a substantial amount of a Vanguard fund,and have had some $ in that fund for 5 or 10 years,and you are having automatic reinvestment of distributions and dividends (in a taxable account),if you sell a portion of your holding in the fund (say you need the cash for a car or house downpayment, I don't think you get hit with short term Cap Gain tax if you allow them to do the usual default accounting that they do. I think you can specify a different type of accounting for generating the IRS paperwork form.

Someone else might be able to clarify or correct?
(If you sell a lot you might need to pay an Estimated Tax that quarter (Fed and State)
If you have Average Cost as the Cost Basis Method, then the oldest shares will be sold. In the situation you described, then yes, they would be shares held long-term and if sold at a gain and in high enough tax-bracket with no losses to use up (carryover or new ones), then you would get hit with a long-term capital gains tax.

OTOH, the short-term shares may have a loss or a much much smaller capital gain, so that if one used Specific Identification as the cost basis method and specified some of those shares and realized a smaller capital gain, then it is possible that the capital gains tax would actually be less.

Or maybe one could use a mix of shares held long- and short-term to have the lowest tax.

It is far more likely that shares purchased recently by a dividend reinvestment have little to no gains or even losses than shares held more than 5 years.
Wiki This signature message sponsored by sscritic: Learn to fish.

Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Re: Reinvesting Dividends or no

Post by SemperFi79 » Sun Jun 23, 2019 7:05 pm

I’m more clear based on your comments. I have two accounts that are Inherited IRAS that require RMDs, so I plan to have some dividends put into the money market do I don’t have to sell anything, otherwise I’m not touching anything for another 12 years when I’m 70. At least that’s the plan now.

I have more to learn from a tax perspective.

Thanks everyone.

Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Re: Reinvesting Dividends or no

Post by SemperFi79 » Sun Jun 23, 2019 7:17 pm

brianc78 wrote:
Sun Jun 23, 2019 5:35 pm
I believe it's better to reinvest all dividends if you don't NEED the cash. And if you don't feel comfortable reinvesting into the fund that paid the dividends, then maybe you should've picked a different fund. It's very simple: gains are good and big gains are better. Dividends used to be treated as short term gains (and taxed accordingly), but under George W. Bush it was changed so now they are taxed at the same rate as long term gains.
Hmm. Interesting. I have always believed it’s better to reinvest as you’re growing your assets. It’s another matter if you need the monies. At this point I am trying to grow the accounts in preparation for retirement and drawing SS.

Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Re: Reinvesting Dividends or no

Post by SemperFi79 » Sun Jun 23, 2019 7:20 pm

livesoft wrote:
Sun Jun 23, 2019 6:52 pm
Wakefield1 wrote:
Sun Jun 23, 2019 6:35 pm
I believe that if you have a substantial amount of a Vanguard fund,and have had some $ in that fund for 5 or 10 years,and you are having automatic reinvestment of distributions and dividends (in a taxable account),if you sell a portion of your holding in the fund (say you need the cash for a car or house downpayment, I don't think you get hit with short term Cap Gain tax if you allow them to do the usual default accounting that they do. I think you can specify a different type of accounting for generating the IRS paperwork form.

Someone else might be able to clarify or correct?
(If you sell a lot you might need to pay an Estimated Tax that quarter (Fed and State)
If you have Average Cost as the Cost Basis Method, then the oldest shares will be sold. In the situation you described, then yes, they would be shares held long-term and if sold at a gain and in high enough tax-bracket with no losses to use up (carryover or new ones), then you would get hit with a long-term capital gains tax.

OTOH, the short-term shares may have a loss or a much much smaller capital gain, so that if one used Specific Identification as the cost basis method and specified some of those shares and realized a smaller capital gain, then it is possible that the capital gains tax would actually be less.

Or maybe one could use a mix of shares held long- and short-term to have the lowest tax.

It is far more likely that shares purchased recently by a dividend reinvestment have little to no gains or even losses than shares held more than 5 years.
For RMDs I’m assuming the brokerage would know to use the oldest to sell? Or should I be considering something else? Tax loss and Tax harvesting are terms I don’t understand. However I do know I need to have a much better understanding for taxes and I don’t right now. Too many variables right now with the inheritance to have a true answer for taxes. Only estimates.

livesoft
Posts: 69566
Joined: Thu Mar 01, 2007 8:00 pm

Re: Reinvesting Dividends or no

Post by livesoft » Sun Jun 23, 2019 7:25 pm

RMDs mean a tax-deferred account and thus there is no cost basis unless one made non-deductible contributions and tracked them with a Form 8606. In other words, cost basis is almost always $0.00 and all the stuff I wrote only applies to taxable accounts.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
LilyFleur
Posts: 831
Joined: Fri Mar 02, 2018 10:36 pm

Re: Reinvesting Dividends or no

Post by LilyFleur » Sun Jun 23, 2019 7:42 pm

SemperFi79 wrote:
Sun Jun 23, 2019 7:20 pm
livesoft wrote:
Sun Jun 23, 2019 6:52 pm
Wakefield1 wrote:
Sun Jun 23, 2019 6:35 pm
I believe that if you have a substantial amount of a Vanguard fund,and have had some $ in that fund for 5 or 10 years,and you are having automatic reinvestment of distributions and dividends (in a taxable account),if you sell a portion of your holding in the fund (say you need the cash for a car or house downpayment, I don't think you get hit with short term Cap Gain tax if you allow them to do the usual default accounting that they do. I think you can specify a different type of accounting for generating the IRS paperwork form.

Someone else might be able to clarify or correct?
(If you sell a lot you might need to pay an Estimated Tax that quarter (Fed and State)
If you have Average Cost as the Cost Basis Method, then the oldest shares will be sold. In the situation you described, then yes, they would be shares held long-term and if sold at a gain and in high enough tax-bracket with no losses to use up (carryover or new ones), then you would get hit with a long-term capital gains tax.

OTOH, the short-term shares may have a loss or a much much smaller capital gain, so that if one used Specific Identification as the cost basis method and specified some of those shares and realized a smaller capital gain, then it is possible that the capital gains tax would actually be less.

Or maybe one could use a mix of shares held long- and short-term to have the lowest tax.

It is far more likely that shares purchased recently by a dividend reinvestment have little to no gains or even losses than shares held more than 5 years.
For RMDs I’m assuming the brokerage would know to use the oldest to sell? Or should I be considering something else? Tax loss and Tax harvesting are terms I don’t understand. However I do know I need to have a much better understanding for taxes and I don’t right now. Too many variables right now with the inheritance to have a true answer for taxes. Only estimates.
Something to check on if it's relevant for your situation: I'm not sure when you invested in funds in your brokerage account. I put a chunk into SCHB within I think the last six months, and when I clarified with Schwab about the qualified dividends from that fund being taxed at the lower capital gains rate, I'm pretty sure they told me that I would have to hold the fund for a year before the taxes due would be at the lower capital gains rate.

Some of the tax strategies and money-saving strategies espoused here on BH are more specialized and esoteric than others (and harder to understand :happy). I do love learning here... but I did realize, once I understood it, that tax loss harvesting, just like credit card churning, was not something I really wanted to do with my time, nor did it really apply to my situation at this time (I have one GREAT credit card that gives me amazing rebates and that I pay off every month and I don't want to spend the amount of time required to churn credit cards, and the level of management required is just not what I want to do as a retiree). I like things to be super-efficient and easy :sharebeer

Another consideration, once you retire, and if you are hoping to leave money to heirs: it took a decent amount of time to learn about and create an Inherited IRA when I inherited from my parents. I think the Inherited IRA that I have from my parents is a good candidate to spend out completely before I start spending my own 401k. It would streamline the process for my children when I die. All of that paperwork which results from the death of a parent is NOT fun.

No doubt, a STEM type of person will disagree with these opinions. But, everyone needs to manage their money in a way that is maintainable for them. I'm a liberal arts type, and my method of budgeting drove my recent engineer boyfriends CRAZY. However, my credit rating is extremely high, and I do a great job of managing my retirement assets.

Wakefield1
Posts: 1059
Joined: Mon Nov 14, 2016 10:10 pm

Re: Reinvesting Dividends or no

Post by Wakefield1 » Sun Jun 23, 2019 7:54 pm

Best to think of tax deferred accounts as different ,don't get them mixed up with taxable accounts.
Best of all,in my opinion,the Roth IRA with its lack of required distributions to the original owner.
With regular tax-deferred accounts ,unless there is "basis" as reported and figured on Form 8606 you must pay tax on the distributions,whether minimum required or larger. The tax will be at the full income rate,not long term cap gain or "qualified".
Perhaps read up on Form 8606 and its instructions and the IRS publication on IRAs and Roth IRAs.
Assuming you are old enough to draw from the tax-deferred or IRA without penalty.

User avatar
CABob
Posts: 4786
Joined: Sun Feb 25, 2007 8:55 pm
Location: Southern California

Re: Reinvesting Dividends or no

Post by CABob » Sun Jun 23, 2019 7:57 pm

For RMDs I’m assuming the brokerage would know to use the oldest to sell? Or should I be considering something else? Tax loss and Tax harvesting are terms I don’t understand. However I do know I need to have a much better understanding for taxes and I don’t right now.
RMDs coming from an IRA are taxed as ordinary income so they don't need a cost basis or date of purchase. In other words, whether dividends are reinvested or not they have no effect on taxes.
Bob

Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Re: Reinvesting Dividends or no

Post by SemperFi79 » Sun Jun 23, 2019 7:59 pm

Ditto on enjoying efficiency and simplicity! I am often overwhelmed with the detail that some share about efficiency for taxes. I want to pay as little in taxes if possible and I’m sure the seasoned investors would see things differently in my goals. Anyway... will continue to sponge the comments. 😄

User avatar
LilyFleur
Posts: 831
Joined: Fri Mar 02, 2018 10:36 pm

Re: Reinvesting Dividends or no

Post by LilyFleur » Sun Jun 23, 2019 8:14 pm

SemperFi79 wrote:
Sun Jun 23, 2019 7:59 pm
Ditto on enjoying efficiency and simplicity! I am often overwhelmed with the detail that some share about efficiency for taxes. I want to pay as little in taxes if possible and I’m sure the seasoned investors would see things differently in my goals. Anyway... will continue to sponge the comments. 😄
Most BHs would be horrified at the thought of paying a financial institution 1% a year to manage their assets. However, we all have to understand our capabilities. One of my friends has absolutely NO financial sense, and I was horrified when he signed up with a Merrill Lynch advisor. However, without that advisor, the exposure to loss for him would be much, much greater. He is very impulsive and swayed easily.

I am simply grateful to be retired, not driving fancy cars, sending my children to public universities, buying my clothing mostly at Costco, doing tax planning all year long, using a fairly simple method of budgeting, feeling comfortable with my asset allocation, and continuing to learn here at BH. There is always more to learn, and our retiree brains need to be learning and growing!

Oh, and, thank you for your military service.

Wakefield1
Posts: 1059
Joined: Mon Nov 14, 2016 10:10 pm

Re: Reinvesting Dividends or no

Post by Wakefield1 » Sun Jun 23, 2019 8:52 pm

Looks like 590A and 590B can be read online at the IRS website (IRA contributions and distributions)

Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Re: Reinvesting Dividends or no

Post by SemperFi79 » Sun Jun 23, 2019 9:20 pm

I’m wondering if buying the tax prep software would be insightful for furthering my understanding and insight? Thanks for the IRS INFO. I’ll check it out.

Chris K Jones
Posts: 258
Joined: Sat Jan 20, 2018 6:54 pm

Re: Reinvesting Dividends or no

Post by Chris K Jones » Sun Jun 23, 2019 9:58 pm

I do not reinvest any of my dividends in my taxable account. Currently I direct any dividends paid towards funds that are lagging in my asset allocation. When I retire, my source of income before RMDs and social security will be dividends and I will sell shares to make up whatever else I need.

My IRA account is 100% bond fund. These are set to automatically reinvest.

dbr
Posts: 31155
Joined: Sun Mar 04, 2007 9:50 am

Re: Reinvesting Dividends or no

Post by dbr » Mon Jun 24, 2019 8:43 am

If you aren't reinvesting the dividends either immediately back in the funds that issued them or in some other appropriate investment, then what are you doing with them? It might be good to be clear what you are asking.

MichCPA
Posts: 851
Joined: Fri Jul 06, 2018 9:06 pm

Re: Reinvesting Dividends or no

Post by MichCPA » Mon Jun 24, 2019 9:19 am

I use my dividends to pay my estimated taxes, so I don't reinvest them unless they are in a retirements account.

Anything extra above the estimates just gets reinvested in the S&P 500, but that is small.

User avatar
tennisplyr
Posts: 2394
Joined: Tue Jan 28, 2014 1:53 pm
Location: Sarasota, FL

Re: Reinvesting Dividends or no

Post by tennisplyr » Mon Jun 24, 2019 10:21 am

Toons wrote:
Sun Jun 23, 2019 5:06 pm
Reinvesting
An essential tenant in creating wealth.
Compounding is magical.
Max out the tax deferred,tax free upon withdrawal accounts.
I reinvested for over 35 years
Taxable and Retirement accounts.
Taxes were not an issue in taxable account as the investment firm does the cost basis recordkeeping as do I with Quicken software,never been a discrepancy.

:idea:
+1
Those who move forward with a happy spirit will find that things always work out.

Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Re: Reinvesting Dividends or no

Post by SemperFi79 » Mon Jun 24, 2019 2:52 pm

dbr wrote:
Mon Jun 24, 2019 8:43 am
If you aren't reinvesting the dividends either immediately back in the funds that issued them or in some other appropriate investment, then what are you doing with them? It might be good to be clear what you are asking.
I’m immediately reinvesting in the find that issued them.

dbr
Posts: 31155
Joined: Sun Mar 04, 2007 9:50 am

Re: Reinvesting Dividends or no

Post by dbr » Mon Jun 24, 2019 3:03 pm

SemperFi79 wrote:
Mon Jun 24, 2019 2:52 pm
dbr wrote:
Mon Jun 24, 2019 8:43 am
If you aren't reinvesting the dividends either immediately back in the funds that issued them or in some other appropriate investment, then what are you doing with them? It might be good to be clear what you are asking.
I’m immediately reinvesting in the find that issued them.
In that case if you were to sell some shares and you don't sell specific ID or FIFO you could end up inadvertently selling some shares with short term gains or losses rather than long term gains or losses. Note short term gains are not the best but short term losses are preferred given a choice. You could also find yourself with a wash sale for some small number of shares. The same thing would be true if you invested those dividends in other things at frequent intervals. You may also not be selling shares, in which case it is not an issue.

If you expect to withdraw money at regular intervals it makes sense to just take the dividends when they are paid. It probably does not make sense to just pile up the dividends as cash beyond a reasonable length of time. It probably also does not make sense to spend the dividends just because they are there.

But I think it is a mistake to state general advice that one should or shouldn't do things in any specific way. A better idea is for the investor to look with eyes open at how his individual investment actions are occurring and decide if there are things that might be done better or worse, all things taken into account.

softwaregeek
Posts: 260
Joined: Wed May 08, 2019 8:59 pm

Re: Reinvesting Dividends or no

Post by softwaregeek » Tue Jun 25, 2019 3:02 am

Dividends help me rebalance without selling assets and incurring capital gains.

remomnyc
Posts: 749
Joined: Mon Jan 04, 2016 4:27 pm

Re: Reinvesting Dividends or no

Post by remomnyc » Tue Jun 25, 2019 7:48 am

I reinvest dividends in my bond funds in tax deferred. Dividends from equities go to cash in tax deferred so as not to inadvertently create a wash sale. All dividends in taxable went to cash to rebalance when I was working and now to cash to spend in retirement.

Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Re: Reinvesting Dividends or no

Post by SemperFi79 » Fri Jul 05, 2019 4:17 am

dbr wrote:
Mon Jun 24, 2019 3:03 pm
SemperFi79 wrote:
Mon Jun 24, 2019 2:52 pm
dbr wrote:
Mon Jun 24, 2019 8:43 am
If you aren't reinvesting the dividends either immediately back in the funds that issued them or in some other appropriate investment, then what are you doing with them? It might be good to be clear what you are asking.
I’m immediately reinvesting in the find that issued them.
In that case if you were to sell some shares and you don't sell specific ID or FIFO you could end up inadvertently selling some shares with short term gains or losses rather than long term gains or losses. Note short term gains are not the best but short term losses are preferred given a choice. You could also find yourself with a wash sale for some small number of shares. The same thing would be true if you invested those dividends in other things at frequent intervals. You may also not be selling shares, in which case it is not an issue.

If you expect to withdraw money at regular intervals it makes sense to just take the dividends when they are paid. It probably does not make sense to just pile up the dividends as cash beyond a reasonable length of time. It probably also does not make sense to spend the dividends just because they are there.

But I think it is a mistake to state general advice that one should or shouldn't do things in any specific way. A better idea is for the investor to look with eyes open at how his individual investment actions are occurring and decide if there are things that might be done better or worse, all things taken into account.
The goal is no not withdraw any monies from the accounts. But...two Inherited Ira accts require RMDs. So the plan is to take RMDs at the end of the year and to turn off the auto reinvest for the last two quarters so I don’t have to sell anything. For the taxable accounts I’m keeping those on auto reinvest. I have enough cash in laddered CDs for home maintenance. I think I am more clear on the potential of dealing with short term gains. When I begin drawing SS at 70 I will have to re-evaluate. Thanks for the feedback.

StandingRock
Posts: 344
Joined: Sat Feb 02, 2019 6:54 pm

Re: Reinvesting Dividends or no

Post by StandingRock » Fri Jul 05, 2019 10:16 am

It's not clear to me if you're asking about automatic reinvestment or just reinvestment as a general principle. I don't use automatic reinvestment myself since I want to pool distributions and control the lots.

Topic Author
SemperFi79
Posts: 71
Joined: Fri Oct 05, 2018 2:42 pm

Re: Reinvesting Dividends or no

Post by SemperFi79 » Thu Jul 18, 2019 3:19 am

I am set up to automatically reinvest.

typical.investor
Posts: 1346
Joined: Mon Jun 11, 2018 3:17 am

Re: Reinvesting Dividends or no

Post by typical.investor » Thu Jul 18, 2019 3:46 am

SemperFi79 wrote:
Fri Jul 05, 2019 4:17 am
The goal is no not withdraw any monies from the accounts. But...two Inherited Ira accts require RMDs. So the plan is to take RMDs at the end of the year and to turn off the auto reinvest for the last two quarters so I don’t have to sell anything.
There is no need. For tax advantaged accounts such as the inherited IRA, capital gains are not an issue. So automatically reinvesting and then later selling shares to take the RMD won't result in any additional taxes.

SemperFi79 wrote:
Fri Jul 05, 2019 4:17 am
For the taxable accounts I’m keeping those on auto reinvest. I have enough cash in laddered CDs for home maintenance. I think I am more clear on the potential of dealing with short term gains. When I begin drawing SS at 70 I will have to re-evaluate. Thanks for the feedback.
For taxable, yeah mind the short term gains.

Personally, I might even keep auto-reinvesting on even when I start selling in taxable. I always sell by spec ID anyway to potentially manage the gains if I am trying to stay in a bracket. But if you ever have to rebalance in taxable, say if your tax sheltered accounts are all bonds as you age and you need to adjust your equites, then it's clearly better to take the dividends in cash and use them to target your AA (and avoid having to selling something later to do so).

scrabbler1
Posts: 2436
Joined: Fri Nov 20, 2009 2:39 pm

Re: Reinvesting Dividends or no

Post by scrabbler1 » Thu Jul 18, 2019 6:05 am

I've done different things with dividends and cap gain distributions over the years, depending on my financial situation and purpose of the dividends.

Back in my accumulation years, I reinvested everything, but sometimes I reinvested into a different fund I had just opened and was trying to build it up more quickly. Once I was satisfied I had built it up to a reasonable level, I resumed reinvesting back into itself again.

I wasn't concerned with long-term versus short-term lots because I use FIFO and rarely, if ever sold shares. Unless I was liquidating a fund, I never sold anything subject to the higher short-term cap gain taxes.

In my tIRA, I manually rebalance, so everything gets reinvested into itself.

Now, as an early retiree, and using only my taxable account to pay the bills, I take dividends in cash from my main bond fund and main stock fund. Cap gain distributions get reinvested, unless they are really BIG and I can't cover the added taxes from my existing cash - then I take it as cash and put some aside for taxes and reinvest the rest elsewhere. My smaller funds still reinvest everything.

My friend, who is not retired, has a small inherited IRA. He has to take RMDs so I have set it up so that the cash it generates from monthly and quarterly dividends covers, for now, the RMD with a little to spare. Nothing to sell there, either, although any gains would be shielded from taxes. The RMD itself is mostly used to pay income taxes on his taxable, nonwage income via 1099-R withholding. And the non-reinvested dividends (mostly from individual stocks) in his taxable account are used to make his annual Roth IRA contribution, again preventing him from having to sell anything which could trigger a cap gain or loss of any type.

PickitPaul
Posts: 47
Joined: Sat Jan 24, 2015 12:17 am

Re: Reinvesting Dividends or no

Post by PickitPaul » Thu Jul 18, 2019 12:12 pm

scrabbler1 wrote:
Thu Jul 18, 2019 6:05 am
And the non-reinvested dividends (mostly from individual stocks) in his taxable account are used to make his annual Roth IRA contribution, again preventing him from having to sell anything which could trigger a cap gain or loss of any type.
I thought the investing in Roth was for earned income? I know that IRA contributions have to be earned income, which dividends are not. Is requirement for Roth different :confused

22twain
Posts: 2175
Joined: Thu May 10, 2012 5:42 pm

Re: Reinvesting Dividends or no

Post by 22twain » Thu Jul 18, 2019 1:19 pm

PickitPaul wrote:
Thu Jul 18, 2019 12:12 pm
I thought the investing in Roth was for earned income? I know that IRA contributions have to be earned income, which dividends are not.
Money is fungible. It doesn't matter where an IRA contribution directly comes from, so long as you have earned income (compensation) of at least that amount.
My investing princiPLEs do not include absolutely preserving princiPAL.

scrabbler1
Posts: 2436
Joined: Fri Nov 20, 2009 2:39 pm

Re: Reinvesting Dividends or no

Post by scrabbler1 » Thu Jul 18, 2019 1:26 pm

PickitPaul wrote:
Thu Jul 18, 2019 12:12 pm
scrabbler1 wrote:
Thu Jul 18, 2019 6:05 am
And the non-reinvested dividends (mostly from individual stocks) in his taxable account are used to make his annual Roth IRA contribution, again preventing him from having to sell anything which could trigger a cap gain or loss of any type.
I thought the investing in Roth was for earned income? I know that IRA contributions have to be earned income, which dividends are not. Is requirement for Roth different :confused
My friend, who is still working (i.e. not retired), has a Roth IRA. I am an early retiree and have no Roth IRA, only a rollover IRA. He contributes to it. I don't (can't?) contribute to mine, not that I would if I could.

Post Reply