muni bond funds in taxable - reinvest dividends?

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btownguy
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muni bond funds in taxable - reinvest dividends?

Post by btownguy » Wed Oct 21, 2009 9:38 am

If you have a bond fund in your taxable account (likely municipal), it seems to me that it would be a tax nightmare if you have the dividends reinvested. Is it a common practice not to reinvest monthly dividends from bond funds in a taxable account?

dbr
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Re: muni bond funds in taxable - reinvest dividends?

Post by dbr » Wed Oct 21, 2009 9:50 am

btownguy wrote:If you have a bond fund in your taxable account (likely municipal), it seems to me that it would be a tax nightmare if you have the dividends reinvested. Is it a common practice not to reinvest monthly dividends from bond funds in a taxable account?
It is a common practice not to reinvest the dividends. Whether or not it is a tax nightmare depends on how on how difficult you find it to track and report the correct basis if you sell shares of the fund. A good brokerage or fund company will keep the data for you, but this can go awry if accounts are moved or there are other upsets over the years.

Richard123
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Post by Richard123 » Wed Oct 21, 2009 9:51 am

I do with VWIUX (Intermediate Tax-Exempt) and use it as a checking account. I make 4 to 5 withdrawals yearly. With interest rates being what they are, I feel any capital gains/losses will be compensated by the interest.

conundrum
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Post by conundrum » Wed Oct 21, 2009 12:56 pm

We have the limited term (VMLUX) and the intermediate term (VWIUX) muni bond funds in our taxable account. We do not reinvest dividends but put them in a tax exempt MMF. Quarterly we use these dividends and any new investment to rebalance.

Drum

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tetractys
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Re: muni bond funds in taxable - reinvest dividends?

Post by tetractys » Wed Oct 21, 2009 2:23 pm

btownguy wrote:If you have a bond fund in your taxable account (likely municipal), it seems to me that it would be a tax nightmare if you have the dividends reinvested. Is it a common practice not to reinvest monthly dividends from bond funds in a taxable account?
Yes I think it is a common practice, at least with members of this forum; but for individual reasons others reinvest. In my taxable account I have distributions from other funds reinvested into a muni fund, and I also reinvest the muni monthly dividends. So it's a trade off for me, nightmare free with most funds, a possible nightmare with the muni fund. But since the NAV of a muni fund shouldn't vary too much over long periods relative to a stock fund, I could easily sell shares of the muni fund using the Average Cost Single Category Method with little if any negative effect.

Still, I think Drum's suggestion is a good method if you want to hold a Money Market fund along with the muni fund in taxable.

Best regards, Tet
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bmb
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Post by bmb » Wed Oct 21, 2009 2:42 pm

For some of us, a bigger nightmare, tax or otherwise, is constantly using the MM funds to make new investments. Rebalancing need not be continual.
It will not be a tax nightmare if you keep your annual reports from the fund to compare with what your brokerage computes. It can easily be tracked on a very simple spreadsheet. All the reinvestments simply reduce the cost basis.
If the brokerage doesn't compute it, change brokerages - what are they charging you for, anyway?

knowmad
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Post by knowmad » Wed Oct 21, 2009 2:47 pm

Reinvest dividends and use average cost when paying taxes. Also, stop reinvestment and regular contributions 30+ days before selling to avoid the other complications associated with muni bonds (ie having to pay taxes on interest earned by shares sold within 6 months of purchase). For this reason, you should not use muni funds for ready cash or an emergency fund.

conundrum
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Post by conundrum » Wed Oct 21, 2009 2:59 pm

bmb

I am curious why you think using a MMF to make new investments is "a bigger nightmare". Our portfolio is 85% taxable and so to remain as tax efficient as possible we try to minimize taxable activity in our taxable account. All the dividends/capital gains from our equity and bond funds in our taxable account go into our tax exempt MMF. Any new investment $ also go into this MMF quarterly. Once a quarter we rebalance with this money, purchasing the fund that is the most out of balance with our investment plan. We make one purchase a quarter for a total of four purchases a year. The tax basis for these 4 purchases a year is quite easy to track. For us this have been a very simple and tax efficient process that requires only quarterly monitoring of our portfolio.

Drum

Rozdg
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Post by Rozdg » Sat Oct 24, 2009 1:38 pm

I assume all of you are talking about only if you sell muni shares. Right now, I'm reinvesting my dividends in the interm. muni at Vang.; but will eventually have the dividends shifted to my Ohio Muni money mkt. I assume there will be no tax implications involved at any time unless I sell shares which I'm not planning on doing. I just want to use the dividends in the future. I am correct, I hope, as that was my intention when I orginally took out the int. muni. (Thanks in advance for any confirmed info on this.)

Roz

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Post by Gekko » Sat Oct 24, 2009 4:37 pm

WHY is it a nightmare? i have a muni fund and i reinvest everything. SIMPLE AND EASY AND EFFECTIVE!

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Post by natureexplorer » Sun Oct 25, 2009 3:01 am

What are the disadvantages of automatic reinvestments? It seems fine to me, so I am wondering what I am missing.
Gekko wrote:WHY is it a nightmare? i have a muni fund and i reinvest everything. SIMPLE AND EASY AND EFFECTIVE!

kenner
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Post by kenner » Sun Oct 25, 2009 5:02 pm

Rozdg wrote:I assume all of you are talking about only if you sell muni shares. Right now, I'm reinvesting my dividends in the interm. muni at Vang.; but will eventually have the dividends shifted to my Ohio Muni money mkt. I assume there will be no tax implications involved at any time unless I sell shares which I'm not planning on doing. I just want to use the dividends in the future. I am correct, I hope, as that was my intention when I orginally took out the int. muni. (Thanks in advance for any confirmed info on this.)

Roz
Although muni bond fund interest payments in the form of dividends to shareholders are generally exempt from federal taxes (AMT being a possible consideration), if a fund distributes capital gains in a given year the gains could be subject to taxation.

Quote:

"Municipal bond funds usually invest primarily in municipal bonds. The interest generated by municipal bonds and the interest dividends distributed by bond funds that invest in municipal bonds is usually exempt from federal income taxes and is usually income tax-exempt at the state level for residents of the issuing state (of the underlying bond investment in the case of a bond fund). Capital gains distributed by bond funds and capital gains and losses recognized when bonds or bond fund shares are sold are still taxable, however."

http://personal.fidelity.com/products/f ... shtml#muni

Hopefully, some of our tax experts with knowledge in this area will weigh in on this issue. I imagine Vanguard management does all it can to keep shareholder taxes very low.

The 2009 fiscal year for Vanguard's Int Term Tax-Exempt Fund (VWITX) ends on October 31. Latest from VWITX: "Unrealized appreciation/depreciation as a % of NAV 4.88%".

latestart666
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Re: muni bond funds in taxable - reinvest dividends?

Post by latestart666 » Tue Dec 02, 2014 4:56 am

What about municipal bond etfs such as pza(powershares natl) in a taxable acct? Dont etfs tend to have less capital gains than mutual funds? Would reinvestment of etf dividends also complicate tax calculations?

feh
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Re: muni bond funds in taxable - reinvest dividends?

Post by feh » Tue Dec 02, 2014 12:50 pm

I do reinvest dividends from bond funds. I do not reinvest dividends from equity funds.

FWIW - in our taxable accounts, our AA is about 90/10, so the bond fund dividends don't amount to much. I am not yet retired, so not selling anything.

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Re:

Post by jdb » Tue Dec 02, 2014 1:25 pm

Gekko wrote:WHY is it a nightmare? i have a muni fund and i reinvest everything. SIMPLE AND EASY AND EFFECTIVE!
+1. All our Vanguard mutual funds, including muni bond funds in taxable and equity funds, are set for reinvestment of dividends, have been for years. I have never been told by our accountant who prepares the tax returns that it is a problem.

RunningRad
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Re: Re:

Post by RunningRad » Tue Dec 02, 2014 1:32 pm

jdb wrote:
Gekko wrote:WHY is it a nightmare? i have a muni fund and i reinvest everything. SIMPLE AND EASY AND EFFECTIVE!
+1. All our Vanguard mutual funds, including muni bond funds in taxable and equity funds, are set for reinvestment of dividends, have been for years. I have never been told by our accountant who prepares the tax returns that it is a problem.
+2

Note that this thread was started in 2009. I have found that over time, cost basis is very easy to manage, even when moving assets from firm to firm.
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jdb
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Re: Re:

Post by jdb » Tue Dec 02, 2014 1:44 pm

RunningRad wrote: Note that this thread was started in 2009.
And I thought this was current thread. Will have to start looking at dates. Should be a system to mark or otherwise identify threads past a few years old to make it easier for clueless readers like me.
Last edited by jdb on Tue Dec 02, 2014 1:56 pm, edited 1 time in total.

Van
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Re:

Post by Van » Tue Dec 02, 2014 1:48 pm

knowmad wrote:Reinvest dividends and use average cost when paying taxes. Also, stop reinvestment and regular contributions 30+ days before selling to avoid the other complications associated with muni bonds (ie having to pay taxes on interest earned by shares sold within 6 months of purchase). For this reason, you should not use muni funds for ready cash or an emergency fund.
Is the statement enclosed in parenthesis correct? I've just done an admittedly less than exhaustive search, and I can not find support for the statement that interest on muni bonds held less than 6 months becomes taxable.

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House Blend
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Re: Re:

Post by House Blend » Tue Dec 02, 2014 2:31 pm

Van wrote:
knowmad wrote:Reinvest dividends and use average cost when paying taxes. Also, stop reinvestment and regular contributions 30+ days before selling to avoid the other complications associated with muni bonds (ie having to pay taxes on interest earned by shares sold within 6 months of purchase). For this reason, you should not use muni funds for ready cash or an emergency fund.
Is the statement enclosed in parenthesis correct? I've just done an admittedly less than exhaustive search, and I can not find support for the statement that interest on muni bonds held less than 6 months becomes taxable.
Correct, but perhaps not explicit enough.

If you sell muni shares that have been held for < 6 months at a loss, then the loss you can claim is reduced by the amount of tax-exempt interest that those particular shares have generated.

It is mentioned over here at fairmark:
http://www.fairmark.com/mutual/stcl.htm

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House Blend
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Re: Re:

Post by House Blend » Tue Dec 02, 2014 2:36 pm

jdb wrote:
Gekko wrote:WHY is it a nightmare? i have a muni fund and i reinvest everything. SIMPLE AND EASY AND EFFECTIVE!
+1. All our Vanguard mutual funds, including muni bond funds in taxable and equity funds, are set for reinvestment of dividends, have been for years. I have never been told by our accountant who prepares the tax returns that it is a problem.
Shrug.

The issue I see is that you are giving your recordkeeper more ways to screw up. For example, with monthly reinvestment of dividends, you are creating two lots with an altered basis due to a wash sale each time you sell shares at a loss. Three lots if you time it just right.

When I started out with muni funds, I reinvested dividends, but then had second thoughts when I ran into incompetent cost basis tracking at Vanguard. This was in the early stages of the roll out of covered shares. Perhaps the bugs have since been worked out, but I was sufficiently annoyed with it that I switched to Specific ID and stopped automatic reinvestment. I see no reason to go back now.

Certainly if you never sell any shares there is nothing to be concerned about.

Or, if you are willing to trust whatever numbers appear on your 1099, then there is nothing to be concerned about.

On the other hand, if just for fun, you create a wash sale by selling shares at a loss on Dec. 26, 2014, and purchase replacement shares on January 25, 2015, will your recordkeeper correctly identify your December sale as a wash sale on your 2014 Form 1099? If they don't, it is still your responsibility to get it right.

kenner
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Re: muni bond funds in taxable - reinvest dividends?

Post by kenner » Tue Dec 02, 2014 3:37 pm

Is it possible that the IRS will look solely at the NAV of shares sold versus the NAV of shares purchased?

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oldzey
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Re: muni bond funds in taxable - reinvest dividends?

Post by oldzey » Tue Dec 02, 2014 4:03 pm

I have my dividends from VWITX diverted to VMMXX

I do the same for my ETFs: VTI and VXUS
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kaneohe
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Re:

Post by kaneohe » Tue Dec 02, 2014 8:21 pm

bmb wrote:.................................................... All the reinvestments simply reduce the cost basis.
why don't reinvestments increase the cost basis?

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Steadfast
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Re: muni bond funds in taxable - reinvest dividends?

Post by Steadfast » Wed Dec 03, 2014 2:27 pm

As a resident of California in a high tax bracket, I use Vanguard's California Intermediate-Term Tax Exempt fund so distributions are not taxed at the Federal OR state level. So I reinvest all dividends, with no tax consequences.

If you can find a decent state-specific muni bond fund for your state, it makes a pretty awesome, simple tax shelter provided it makes sense for your tax bracket to hold in taxable accounts versus nominal bonds in tax-advantaged accounts.
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Re: muni bond funds in taxable - reinvest dividends?

Post by Noobvestor » Thu Dec 04, 2014 4:23 am

I let the dividends fall into a money market so I can use them to rebalance as needed.
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Re: muni bond funds in taxable - reinvest dividends?

Post by malloc » Thu Dec 04, 2014 12:31 pm

Steadfast wrote:
As a resident of California in a high tax bracket, I use Vanguard's California Intermediate-Term Tax Exempt fund so distributions are not taxed at the Federal OR state level. So I reinvest all dividends, with no tax consequences.

If you can find a decent state-specific muni bond fund for your state, it makes a pretty awesome, simple tax shelter provided it makes sense for your tax bracket to hold in taxable accounts versus nominal bonds in tax-advantaged accounts.

Is there no concern about tax loss harvesting?

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Re: muni bond funds in taxable - reinvest dividends?

Post by grabiner » Thu Dec 04, 2014 8:43 pm

malloc wrote:Steadfast wrote:
As a resident of California in a high tax bracket, I use Vanguard's California Intermediate-Term Tax Exempt fund so distributions are not taxed at the Federal OR state level. So I reinvest all dividends, with no tax consequences.

If you can find a decent state-specific muni bond fund for your state, it makes a pretty awesome, simple tax shelter provided it makes sense for your tax bracket to hold in taxable accounts versus nominal bonds in tax-advantaged accounts.

Is there no concern about tax loss harvesting?
Tax loss harvesting is a potential benefit of holding stocks in taxable; however, the "it makes sense in your tax bracket" should take this into account. In a normal situation, my rule of thumb is that it makes sense to hold munis in taxable and stocks in tax-deferred if muni yields are lower than stock yields. But that is based on typical tax rates; if you pay 10% state tax and 28% federal tax, your tax rate is 22.2% rather than the usual 15% on qualified dividends, and zero on in-state munis.

Note that I wouldn't recommend holding more than half your bonds in one state, for diversification reasons. You can hold the other half in a tax-deferred account; in some other form of taxable bonds such as TIPS and I-Bonds; or in Limited-Term Tax-Exempt, combined with a long-term fund for your state to get an intermediate-term duration which is more than 50% exempt from state tax.
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