Reinvesting dividends in Roth IRA account

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
amr122
Posts: 7
Joined: Fri May 01, 2020 10:34 am

Reinvesting dividends in Roth IRA account

Post by amr122 »

I have a Roth IRA at Vanguard, currently set to NOT automatically reinvest dividends, to make TLH easier, because the Roth contains a fund also held in my taxable brokerage account. I make too much money to contribute to the Roth IRA normally, so I do an annual backdoor Roth.

Can I directly reinvest the dividends (which appear in my Vanguard settlement fund) back into the Roth account? If not, what would you recommend?

I understand that it's better to not have the Roth contain the same fund as my taxable brokerage account. Because of limited good mutual funds available in my 401 & 403b plans, however, the only way to have a good overall asset allocation is to hold the same fund in both my Roth and taxable account.

Thanks
User avatar
retired@50
Posts: 5169
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Reinvesting dividends in Roth IRA account

Post by retired@50 »

Which fund is held in common between the two accounts?

Regards,
This is one person's opinion. Nothing more.
User avatar
anon_investor
Posts: 5795
Joined: Mon Jun 03, 2019 1:43 pm

Re: Reinvesting dividends in Roth IRA account

Post by anon_investor »

amr122 wrote: Wed Apr 07, 2021 1:33 pm I have a Roth IRA at Vanguard, currently set to NOT automatically reinvest dividends, to make TLH easier, because the Roth contains a fund also held in my taxable brokerage account. I make too much money to contribute to the Roth IRA normally, so I do an annual backdoor Roth.

Can I directly reinvest the dividends (which appear in my Vanguard settlement fund) back into the Roth account? If not, what would you recommend?

I understand that it's better to not have the Roth contain the same fund as my taxable brokerage account. Because of limited good mutual funds available in my 401 & 403b plans, however, the only way to have a good overall asset allocation is to hold the same fund in both my Roth and taxable account.

Thanks
If the dividends are in the settlement fund for the Roth IRA account, then yes you can reinvest them in your Roth IRA.
User avatar
Strifey
Posts: 15
Joined: Thu Apr 01, 2021 4:15 pm

Re: Reinvesting dividends in Roth IRA account

Post by Strifey »

amr122 wrote: Wed Apr 07, 2021 1:33 pm
I understand that it's better to not have the Roth contain the same fund as my taxable brokerage account. Because of limited good mutual funds available in my 401 & 403b plans, however, the only way to have a good overall asset allocation is to hold the same fund in both my Roth and taxable account.

Thanks
What do you mean you have to hold the same fund in your Roth/Taxable? There are multiple mutual index funds and ETFs that perform the same function for your asset allocation.

Do you have an example?

Your 401K is limited, but your Roth IRA should have access to any funds. There's usually multiple index funds and ETFs that can fulfill your same asset allocation and track the same thing but not be exactly the same fund.

I.e. I have FSKAX in my Roth IRA and VTI in my taxable, both track U.S. total market but are different funds.

As for your question, I would only turn off auto-dividend reinvesting in a taxable account, I don't see the downside of reinvesting in retirement accounts (401K/IRA) because you can rebalance at any time without a tax penalty. But yes, if your Roth IRA produced dividends then you can reinvest back into your Roth IRA, your accounts and dividends should be self contained.
ruud
Posts: 363
Joined: Sat Mar 03, 2007 1:28 pm
Location: san francisco bay area

Re: Reinvesting dividends in Roth IRA account

Post by ruud »

amr122 wrote: Wed Apr 07, 2021 1:33 pm Can I directly reinvest the dividends (which appear in my Vanguard settlement fund) back into the Roth account?
Each account has its own settlement fund. So if you select "transfer to settlement fund" as the distribution option, the dividends of assets in your Roth IRA go to the settlement fund that belongs to that Roth IRA and from there can be used to buy (or add to) any asset inside the Roth IRA.
.
guitarguy
Posts: 1903
Joined: Mon Dec 20, 2010 4:10 pm

Re: Reinvesting dividends in Roth IRA account

Post by guitarguy »

Strifey wrote: Wed Apr 07, 2021 2:31 pm
As for your question, I would only turn off auto-dividend reinvesting in a taxable account, I don't see the downside of reinvesting in retirement accounts (401K/IRA) because you can rebalance at any time without a tax penalty.
The reason to turn them off in a Roth IRA would be to avoid a possible wash sale if the same (or "substantially identical") funds are held in taxable and the OP was to TLH.

With them set to not automatically reinvest, OP could wait 30 days to reinvest those dividends (manually, and yes still in the Roth IRA) so that a wash sale is avoided.
User avatar
Duckie
Posts: 8088
Joined: Thu Mar 08, 2007 2:55 pm

Re: Reinvesting dividends in Roth IRA account

Post by Duckie »

amr122 wrote: Wed Apr 07, 2021 1:33 pm Because of limited good mutual funds available in my 401 & 403b plans, however, the only way to have a good overall asset allocation is to hold the same fund in both my Roth and taxable account.
Where is your Roth IRA held, what custodian?
What fund are you duplicating in your taxable and Roth IRA? Many index funds have equivalent alternates that would not create a wash sale.
Topic Author
amr122
Posts: 7
Joined: Fri May 01, 2020 10:34 am

Re: Reinvesting dividends in Roth IRA account

Post by amr122 »

Answers to questions asked:

1. The fund held in both the Roth and taxable brokerage account is VSIAX: Vanguard Small-Cap Value Index Fund (Admiral shares).
2. My Roth IRA and taxable brokerage accounts are with Vanguard (other 401k & 403b accounts unfortunately are not).
3. I'm trying to avoid any potential of a wash sale, which is why I have automatic dividend reinvesting turned off in in my Roth (I also have it turned off for all funds in my taxable brokerage account).

Bottom line: I just want to know if manually reinvesting the dividends from the Vanguard settlement fund within the Roth into the same fund held in the Roth is permitted (since I make too much money for a direct contribution to the Roth).

Thanks
User avatar
Duckie
Posts: 8088
Joined: Thu Mar 08, 2007 2:55 pm

Re: Reinvesting dividends in Roth IRA account

Post by Duckie »

amr122 wrote: Wed Apr 07, 2021 6:20 pm I just want to know if manually reinvesting the dividends from the Vanguard settlement fund within the Roth into the same fund held in the Roth is permitted (since I make too much money for a direct contribution to the Roth).
It is permitted. Using the settlement fund to buy a different fund is not a contribution.
User avatar
Eagle33
Posts: 1305
Joined: Wed Aug 30, 2017 3:20 pm

Re: Reinvesting dividends in Roth IRA account

Post by Eagle33 »

The settlement account is part of your Roth IRA. It is just another mutual fund inside your Roth IRA. It is one of VG money market mutual funds. Just as you can sell and buy between other funds inside your Roth IRA, you can also sell/buy between the settlement account (MM mutual fund) and other funds inside your Roth IRA. No money is leaving or being added to you Roth IRA, just moving between funds - that includes the settlement account MM mutual fund.
Rocket science is not “rocket science” to a rocket scientist, just as personal finance is not “rocket science” to a Boglehead.
Post Reply