TLH dividend reinvestment problem

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climber2020
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TLH dividend reinvestment problem

Post by climber2020 »

Hi everyone.

I have 2 Vanguard accounts: Roth IRA and taxable. Both contain the same two funds: vanguard total stock and vanguard total international.

I harvested some losses today in my taxable account, exchanging total stock for large cap index, and total international for FTSE all world ex US. Dividends will be paid out later this month, so in my taxable account I turned off automatic dividend reinvestment and the distributions will go to my settlement fund in order to avoid a wash sale.

However, I cannot do this in my Roth. My taxable account is a brokerage account, but my Roth is one of the older style mutual fund accounts that I never transitioned. There is no settlement fund, and I cannot direct dividends to something like a prime money market fund because this would require a $3000 minimum transfer from my stock funds, which I don't want to do during all this volatility. In my Roth I also have a Total Bond fund that has been empty for well over a year, but I cannot direct dividends here either because it has a zero balance.

Has anyone else run into this problem and have any ideas on how to fix it?

This may be making it too complex, but the only thing I can think of is to exchange 100% of my funds in my Roth to their respective TLH partners, let the dividends in the new funds reinvest themselves, and after the wash sale period passes, change everything back to the original funds. Since it's a Roth there would be no tax ramifications of doing this.

The other option would be to "upgrade" my Roth IRA to a brokerage account, but I don't really want to do this because it mucks up the backdoor Roth process by adding several unnecessary steps (wife has a brokerage Roth so I've dealt with this unpleasantness for the last several years).

Thanks in advance for any advice.
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PhysicianOnFIRE
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Re: TLH dividend reinvestment problem

Post by PhysicianOnFIRE »

I've addressed the issue by avoiding owning identical funds in the two accounts.

I own Mid Cap, Small Cap, and REIT funds in the Roth IRA.

Taxable has US Stock (total stock market / large cap) and International stock funds.

:beer
-PoF
RubyTuesday
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Re: TLH dividend reinvestment problem

Post by RubyTuesday »

climber2020 wrote: Mon Mar 09, 2020 6:56 pm Hi everyone.

I have 2 Vanguard accounts: Roth IRA and taxable. Both contain the same two funds: vanguard total stock and vanguard total international.

I harvested some losses today in my taxable account, exchanging total stock for large cap index, and total international for FTSE all world ex US. Dividends will be paid out later this month, so in my taxable account I turned off automatic dividend reinvestment and the distributions will go to my settlement fund in order to avoid a wash sale.

However, I cannot do this in my Roth. My taxable account is a brokerage account, but my Roth is one of the older style mutual fund accounts that I never transitioned. There is no settlement fund, and I cannot direct dividends to something like a prime money market fund because this would require a $3000 minimum transfer from my stock funds, which I don't want to do during all this volatility. In my Roth I also have a Total Bond fund that has been empty for well over a year, but I cannot direct dividends here either because it has a zero balance.

Has anyone else run into this problem and have any ideas on how to fix it?

This may be making it too complex, but the only thing I can think of is to exchange 100% of my funds in my Roth to their respective TLH partners, let the dividends in the new funds reinvest themselves, and after the wash sale period passes, change everything back to the original funds. Since it's a Roth there would be no tax ramifications of doing this.

The other option would be to "upgrade" my Roth IRA to a brokerage account, but I don't really want to do this because it mucks up the backdoor Roth process by adding several unnecessary steps (wife has a brokerage Roth so I've dealt with this unpleasantness for the last several years).

Thanks in advance for any advice.
Can you not add a fund to the Roth mutual fund account and redirect Roth dividends to it?
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
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climber2020
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Re: TLH dividend reinvestment problem

Post by climber2020 »

PhysicianOnFIRE wrote: Mon Mar 09, 2020 7:01 pm I've addressed the issue by avoiding owning identical funds in the two accounts.

I own Mid Cap, Small Cap, and REIT funds in the Roth IRA.

Taxable has US Stock (total stock market / large cap) and International stock funds.

:beer
-PoF
I’m a 3 fund portfolio guy so this unfortunately wouldn’t work for me.

On an unrelated note, I enjoy the blog and hope retired life is treating you well.
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climber2020
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Re: TLH dividend reinvestment problem

Post by climber2020 »

RubyTuesday wrote: Mon Mar 09, 2020 7:05 pm
Can you not add a fund to the Roth mutual fund account and redirect Roth dividends to it?
I can't buy into a fund with new money because I've already maxed out my IRA contributions for the year.

I could transfer $3000 (the minimum required) from my stock funds to open a money market account, but I don't want to sell low just to save a comparatively small amount on some taxes.
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goingup
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Re: TLH dividend reinvestment problem

Post by goingup »

You could buy 3k of a MM fund in your Roth and direct dividends there. It’s possible to send dividends from one fund to another on the old mutual style platform.

You could also exchange your Roth holdings to mirror your new TLH partner holdings.

I’ve found it helpful to hold different funds in taxable than tax-advantaged for just this reason.
mega317
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Re: TLH dividend reinvestment problem

Post by mega317 »

This doesn't help you today but why don't you transition to a brokerage? I have to imagine the people holding on to their old mutual fund accounts for dear life don't overlap much with those thinking about TLH across multiple accounts.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
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climber2020
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Re: TLH dividend reinvestment problem

Post by climber2020 »

mega317 wrote: Mon Mar 09, 2020 9:48 pm This doesn't help you today but why don't you transition to a brokerage? I have to imagine the people holding on to their old mutual fund accounts for dear life don't overlap much with those thinking about TLH across multiple accounts.
Not too late to do that. I did a round of TLH yesterday, but still have approximately a week and a half to figure out the dividend reinvestment part.

I have no issues with my taxable account being brokerage, but doing a backdoor Roth in a brokerage account at Vanguard is more complicated (unnecessarily so) than it is in a mutual fund account, and I'm resistant to changing it.
nolesrule
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Re: TLH dividend reinvestment problem

Post by nolesrule »

climber2020 wrote: Tue Mar 10, 2020 5:59 am
mega317 wrote: Mon Mar 09, 2020 9:48 pm This doesn't help you today but why don't you transition to a brokerage? I have to imagine the people holding on to their old mutual fund accounts for dear life don't overlap much with those thinking about TLH across multiple accounts.
Not too late to do that. I did a round of TLH yesterday, but still have approximately a week and a half to figure out the dividend reinvestment part.

I have no issues with my taxable account being brokerage, but doing a backdoor Roth in a brokerage account at Vanguard is more complicated (unnecessarily so) than it is in a mutual fund account, and I'm resistant to changing it.
Backdoor Roth in a Vanguard brokerage account is quite easy. I've been doing it for years. Make contribution to Traditional brokerage account settlement fund. Wait a couple days for the funds to settle. Convert everything to Roth. Invest the money in Roth. The "hard" part is waiting for the funds from the bank transfer to settle.

But if you don't want to convert to a brokerage account, just pick a different "good enough" fund that will work with your asset allocation and buy the minimum so you can redirect the dividends.
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climber2020
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Re: TLH dividend reinvestment problem

Post by climber2020 »

nolesrule wrote: Tue Mar 10, 2020 6:57 am
But if you don't want to convert to a brokerage account, just pick a different "good enough" fund that will work with your asset allocation and buy the minimum so you can redirect the dividends.
This seems the simplest solution. Thanks for the idea.
aristotelian
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Re: TLH dividend reinvestment problem

Post by aristotelian »

climber2020 wrote: Mon Mar 09, 2020 7:08 pm
PhysicianOnFIRE wrote: Mon Mar 09, 2020 7:01 pm I've addressed the issue by avoiding owning identical funds in the two accounts.

I own Mid Cap, Small Cap, and REIT funds in the Roth IRA.

Taxable has US Stock (total stock market / large cap) and International stock funds.

:beer
-PoF
I’m a 3 fund portfolio guy so this unfortunately wouldn’t work for me.

On an unrelated note, I enjoy the blog and hope retired life is treating you well.
Sure it would. Sell the fund that will be distributing dividend. Buy an appropriate (but not identical) fund. Switch back in 30 days. You avoid the dividend and you still have a 3 fund portfolio with effectively the same allocation the entire time. If you insist on holding VTI and only VTI, then tax loss harvesting isn't going to work for you regardless of the dividend issue.
rkhusky
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Re: TLH dividend reinvestment problem

Post by rkhusky »

It seems like the options are to transition your Roth IRA funds to something else temporarily or to take the wash sale hit from the dividends. Note that wash sales are on a share vs share basis, so, if the dividend payment is very small compared to the loss, then you would still be able to book most of the loss. Total Stock generally distributes about 0.5% and Total International about 0.75%.

As an example, if you have $100K in VTSAX, you could expect a $500 dividend. If you are going to realize a $20K loss, then having about $500 of that disallowed might be okay with you, rather than selling some of your VTSAX for a week or so (note that there are ways to get around Vanguard's frequent trading restrictions).
Last edited by rkhusky on Tue Mar 10, 2020 8:27 am, edited 2 times in total.
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anon_investor
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Re: TLH dividend reinvestment problem

Post by anon_investor »

OP what about this option:
Exchange $3k from VTSAX in your Roth IRA to a different equity fund with similar exposure that does not create wash sale implications in your taxable account (e.g. VFIAX: Vanguard S&P 500 Index Fund; VLCAX: Vanguard Large Cap Index Fund), then set VTSAX to send all dividends to that fund. In that way, your money is not "out of the market" and you are avoiding any wash sale implications.
e5116
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Re: TLH dividend reinvestment problem

Post by e5116 »

mega317 wrote: Mon Mar 09, 2020 9:48 pm This doesn't help you today but why don't you transition to a brokerage? I have to imagine the people holding on to their old mutual fund accounts for dear life don't overlap much with those thinking about TLH across multiple accounts.
Sorry if I missed this, but how would this help with TLH? I actually am holding on to the old mutual fund account for taxable because I like the automatic exchange feature, getting my tax forms faster, and dividends going directly to my outside bank. But I have my IRAs as brokerage, so wouldn't be the end of the world. But I'm certainly a "sophisticated" investor thinking about TLH opportunities, and still holding on to the MF account. :D I also do what everybody says above and hold slightly different funds in taxable/tax-advantaged so I can re-invest dividends in tax-advantaged without worrying about wash sales.
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climber2020
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Re: TLH dividend reinvestment problem

Post by climber2020 »

anon_investor wrote: Tue Mar 10, 2020 8:26 am OP what about this option:
Exchange $3k from VTSAX in your Roth IRA to a different equity fund with similar exposure that does not create wash sale implications in your taxable account (e.g. VFIAX: Vanguard S&P 500 Index Fund; VLCAX: Vanguard Large Cap Index Fund), then set VTSAX to send all dividends to that fund. In that way, your money is not "out of the market" and you are avoiding any wash sale implications.
This is what I ended up doing. Exchanged $3000 of total stock for large cap index and directed all dividends to the new fund. This seemed like the easiest solution.

Thanks to everyone for the tips.
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