Dividends and Capital Gains

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rcm-489
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Joined: Wed Jun 09, 2021 9:37 am

Dividends and Capital Gains

Post by rcm-489 »

Hello -

This is the first time I have used this forum.
Please pardon my ignorance.

In 2018 I bought two Vanguard Funds:
Vanguard Tax Managed Balanced Fund (VTMFX)
Vanguard Wellington (VWENX)

Being a novice investor, I neglected to check the boxes for re-investing capital gains and dividends.
(I noticed this earlier this year and have since selected the option to have capital gains and dividends reinvested.)

Due to not selecting this option, the 2018, 2019 and 2020 Capital gains and dividends for these two funds were deposited in my Vanguard Settlement fund.
I would like to transfer the capital gains and dividends for those years from the settlement account and deposit into the funds as I should have done originally.
Is this wise?
By doing this, am I essentially getting taxed a second time for the capital gains and dividends?

Any advice is appreciated.

Thank you
sport
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Re: Dividends and Capital Gains

Post by sport »

Yes, you can do this. You will not be taxed twice on the same income. Distributions are taxable in the year received, whether or not they are reinvested.
livesoft
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Re: Dividends and Capital Gains

Post by livesoft »

rcm-489 wrote: Thu Jun 10, 2021 9:04 am I would like to transfer the capital gains and dividends for those years from the settlement account and deposit into the funds as I should have done originally.
Is this wise?
By doing this, am I essentially getting taxed a second time for the capital gains and dividends?

Any advice is appreciated.

Thank you
I will re-word what you wrote: You would like to use the dividend and capital gains distributions to buy more shares of the same fund that paid the dividend and capital gains distributions.

Buying more shares is essentially the same as using your checking account to buy more shares. I do not see a problem with that. And no, you would not be taxed a 2nd time.
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dbr
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Re: Dividends and Capital Gains

Post by dbr »

Lets underline that holding of a fund are bought, not deposited, that reinvestment means the broker uses the distributions to immediately buy more shares, and that the investor who has not had the broker immediately reinvest the distribution can invest the distribution themselves, either in the original fund or in something else. Leaving the money in a settlement fund means the investor by not taking action has invested the money in the settlement fund. Another option could be to have distributions sent to a checking account and spent.

Also, distributions are taxed as distributions just the same no matter what is done with them.

An important point that can cause confusion is that reinvested distributions increase the tax basis in the holding so that on sale they are not taxed twice.
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firebirdparts
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Re: Dividends and Capital Gains

Post by firebirdparts »

You'll get taxed either way if this is a taxable account. It may be better sometimes to avoid reinvesting dividends at such time that you are selling things (like maybe you're retired) as you can sometimes sell something and you'll find that they bought a tiny amount or triggered a little wash sale if your timing is poor. It's not the end of the world but it just creates an extra taxable event that you didn't really need.
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dbr
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Re: Dividends and Capital Gains

Post by dbr »

firebirdparts wrote: Thu Jun 10, 2021 12:32 pm You'll get taxed either way if this is a taxable account. It may be better sometimes to avoid reinvesting dividends at such time that you are selling things (like maybe you're retired) as you can sometimes sell something and you'll find that they bought a tiny amount or triggered a little wash sale if your timing is poor. It's not the end of the world but it just creates an extra taxable event that you didn't really need.
Right. Retirees with dividend paying taxable holdings probably just let the dividends be the first increment of the withdrawals they want. That is not even remotely the same as buying dividend stocks or bonds in order to "generate" income in retirement.
sycamore
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Re: Dividends and Capital Gains

Post by sycamore »

rcm-489 wrote: Thu Jun 10, 2021 9:04 am I would like to transfer the capital gains and dividends for those years from the settlement account and deposit into the funds as I should have done originally.
Is this wise?
By doing this, am I essentially getting taxed a second time for the capital gains and dividends?
Welcome to the forum, rcm-489!

You got good answers already for your questions.

In case you weren't aware, the Wellington fund is a good balanced fund but it's also tax-inefficient. It regularly has capital gains distributions and pays out bond dividends which are taxed at income tax rates.

You could have a more tax-efficient portfolio by splitting up your bond and stocks investments into separate funds. A bond funds would go in a tax-deferred account and a passive index stock fund (instead of an active fund like Wellington) in your taxable account.

The Tax-Managed Balanced Fund is more tax-efficient than Wellington because it uses muni funds for bonds and has a good strategy for its stocks.

I don't know if you have a lot of unrealized capital gains in Wellington, but it may be in your long-term interest to sell it and move to a more tax-efficient portfolio. If you're interested, consider posting details as described in the "Asking Portfolio Questions" thread.
dbr
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Re: Dividends and Capital Gains

Post by dbr »

A caveat is that balanced funds should usually be avoided in taxable accounts as they can be costly to undo after they have accrued large unrealized gains. A fund that would almost never be a mistake in taxable investing would be a total stock market fund.
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grabiner
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Re: Dividends and Capital Gains

Post by grabiner »

dbr wrote: Thu Jun 10, 2021 1:35 pm A caveat is that balanced funds should usually be avoided in taxable accounts as they can be costly to undo after they have accrued large unrealized gains. A fund that would almost never be a mistake in taxable investing would be a total stock market fund.
And this applies even to Tax-Managed Balanced Fund. If you move into a lower tax bracket, you won't want to hold municipal bonds. If you move to NY, you will prefer NY munis to the national munis in Tax-Managed Balanced Fund. If you get a job with better fixed income options than stock options in its 401(k), you will want to hold more bonds there. In any of these cases, if you want to change your bond holding, you'll have to sell Tax-Managed Balanced Fund, selling the stock for a capital gain. Holding a separate stock index fund and muni fund avoids this issue, as you can switch the muni fund for a different fund with little or no tax cost.
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Topic Author
rcm-489
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Re: Dividends and Capital Gains

Post by rcm-489 »

Thank you to all that replied to my post.
Very informative.
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