Reinvesting Dividends & Capitol Gains in my brokerage account

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Whitecap
Posts: 81
Joined: Wed Dec 09, 2020 9:34 pm

Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Whitecap »

Bogleheads,

A while back I stumbled across a discussion about when it was, or was not, advantageous to reinvest dividends and capital gains in one’s brokerage account. This is something I’ve always done through my investing life. BUT, on many occasion, Bogleheads have challenged me to rethink my strategic and tactical financial plans for the future. For the life of me, I can’t find the discussion. To make matters worse, I can’t seem to remember if the focus of discussion was tax mitigation in the de-accumulation phase, or something else.

My wife and I have been able to max out all 401ks, Roth IRAs, HSA, IBonds and our EF. This is the first year we will be adding to our brokerage account Schwab. I have about 9-14 years left of work (depending on how much satisfaction my job of service brings me). We will be adding about 50K a year in the brokerage account until I retire.

Is it appropriate to reinvest the dividends and capitol gains automatically, like usual. Perhaps there something out there related to brokerage accounts and taxable transactions, that I have yet to learn, which would disadvantage the reinvestment of dividends and capitol gains?

Help me understand the issues at hand.

Warm regards,
Whitecap :sharebeer
livesoft
Posts: 77681
Joined: Thu Mar 01, 2007 8:00 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by livesoft »

Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
Whitecap
Posts: 81
Joined: Wed Dec 09, 2020 9:34 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Whitecap »

Dang Livesoft!

To the rescue indeed! Beers on me if you come to my little town!

Thank you, sir!
:beer
Topic Author
Whitecap
Posts: 81
Joined: Wed Dec 09, 2020 9:34 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Whitecap »

Ok…. Now that I’ve read the above wiki on it (thank you @Livesoft), I’d like to know what most everyone one of us does in their brokerage accounts. Do Bogleheads reinvest D & CG if they are in the accumulation phase? Do they take the D & CG in cash if they are retired? This seems most logical to me, but I know nothin’. What say you?

This particular observation stood out to me from the Wiki:
If you are planning to use average cost basis, the reinvested shares will have the same average basis as all previous shares. If your next transaction in the fund is to sell shares, you will probably have a taxable capital gain, which you could have avoiding by taking the dividend in cash. Therefore, you will have an extra tax cost if you reinvest the dividend when you are likely to need to sell shares, either to spend money or to rebalance out of the fund.

I see there is more to learn now ……. cost basis. I’m realizing I have no idea what my cost basis is - on any of my accounts.

I read the Wiki, posted below. I must be FIFO, since I did not specify it?
https://www.bogleheads.org/wiki/Cost_basis_methods

Knowing that I have between 9-14 years before retirement, what cost basis should I set up on my accounts? What do the Bogleheads recommend? Should some accounts be selected for a different basis type than others?

Lay it on me - I’m interested to learn some more.

Warm regards,
Whitecap
:happy
sycamore
Posts: 2789
Joined: Tue May 08, 2018 12:06 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by sycamore »

In the past, I had turned on dividend + cap gain reinvestment for most of my taxable investments. Some of the larger ones I took in cash so that I could decide where to invest the distribution, and thereby keep my asset allocation balanced. That probably wasn't necessary; I could've just done rebalancing in my 401k or IRA, but it didn't hurt. Point being that AA rebalancing is one reason to not reinvest distributions.

I'm down to only two taxable investments, and recently turned off reinvestment as I can (and need to) use the distributions for spending in the near term. No point in reinvesting as that just creates new tax lots that I'd end up selling soon anyway. This is case where reinvesting is not appropriate.


Suggestion: in your brokerage account, do turn on "Spec ID" (or specific ID) for the cost basis method for each investment. Not all brokerages use that terminology but it should be something similar. Spec ID allows you to specify at the time you place a sell order which lots you are selling. This allows you to control how much cap gains (or losses) to incur. For example, if you want less cap gains, choose the share lot with a higher cost basis.

Also note that not all brokerages let you specify which lots at the time your sell. Schwab lets you do that for ETFs & stocks, but for mutual funds you have to call in or send a private message to indicate which shares you sold.
Topic Author
Whitecap
Posts: 81
Joined: Wed Dec 09, 2020 9:34 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Whitecap »

This thread is helping a lot.

viewtopic.php?t=298050
User avatar
goingup
Posts: 4216
Joined: Tue Jan 26, 2010 1:02 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by goingup »

Always reinvested divs/cap gains distributions in all accounts until retirement. Now we direct dividends in taxable accounts to our checking.
000
Posts: 5178
Joined: Thu Jul 23, 2020 12:04 am

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by 000 »

First, I always just use Specific Identification (SpecID) as cost basis for all securities including mutual funds.

I don't currently auto-reinvest in taxable but may switch. The holdup for me is having fractional lots laying around.
chem6022
Posts: 51
Joined: Sat May 11, 2019 9:19 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by chem6022 »

Specific id is a given for maximum tax control on everything. I don't think the wiki gives a fair shake to reinvesting dividends for those who might only adjust things annually, especially during those long middle years of accumulation. I will be either retiring or taking a break soon and for accumulation i will turn off reinvestment.
User avatar
LilyFleur
Posts: 2101
Joined: Fri Mar 02, 2018 10:36 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by LilyFleur »

I do not reinvest dividends. I am semi-retired and use the dividends as part of my spend each year. I have not sold any funds in my brokerage account, so I have not paid taxes on capital gains. Under current tax law, my children would not have to pay the capital gains upon my death. If I end up needing the money and having to sell, I have the choice of different lots with different amounts of taxable LTCGs.
bondsr4me
Posts: 1776
Joined: Fri Oct 18, 2013 7:08 am

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by bondsr4me »

I reinvested both…
Topic Author
Whitecap
Posts: 81
Joined: Wed Dec 09, 2020 9:34 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Whitecap »

sycamore wrote: Mon Sep 13, 2021 4:41 pm
Suggestion: in your brokerage account, do turn on "Spec ID" (or specific ID) for the cost basis method for each investment. Not all brokerages use that terminology but it should be something similar. Spec ID allows you to specify at the time you place a sell order which lots you are selling. This allows you to control how much cap gains (or losses) to incur. For example, if you want less cap gains, choose the share lot with a higher cost basis.

Also note that not all brokerages let you specify which lots at the time your sell. Schwab lets you do that for ETFs & stocks, but for mutual funds you have to call in or send a private message to indicate which shares you sold.
Sycamore,
Thanks for the reply. Just as you said above, at Schwab, you can pick the cost basis when you sell. (It took me a while to figure out how to do it, but I figured it out. Since I’m in the accumulation phase, I’ve never had to sell an investment that was a taxable event).

Can you explain the bold above? I played around by preparing a fake sell for a stock I hold, and the site allowed me to select the lots I wished. But no such option was available for mutual funds. I’m a mutual fund guy……. Can you explain the process? I might just call Schwab tomorrow and have them explain it as well. Certainly one must be able to pick specific lots when one sells a mutual fund.

As for changing up the basis for each account at Schwab, here are my choices:

First In First Out (FIFO) (Current Account Default*) - Shares you acquired first are sold first.
Last In First Out (LIFO) Shares you acquired last are sold first.
High Cost Shares with the highest cost are sold first.
Low Cost Shares with the lowest cost are sold first.
Tax Lot Optimizer ™ Lots are selected and sold with the objective of taking losses first (short-term then long-term) and gains last (long-term then short-term). See the order of sales for this method:

What is the order of sales for the Tax Lot Optimizer™ method?
Short-term Losses Lots reflecting short-term losses are sold first, from greatest short-term loss to least short-term loss.
Long-term Losses Lots reflecting long-term losses are sold, from greatest long-term loss to least long-term loss.
Short-term, no gains nor losses Short-term lots that reflect no gain nor loss
Long-term, no gains nor losses Long-term lots that reflect no gain nor loss
Long-term Gains Lots reflecting long-term gains from least long-term gain to greatest long-term gain.
Short-term Gains Lots reflecting short-terms gains from least short-term gain to greatest short-term gain.

Tax lot optimizer appears to be the closest thing to Specific ID? Can Schwab save person here help me out?

Thanks again,
Whitecap
:happy
sycamore
Posts: 2789
Joined: Tue May 08, 2018 12:06 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by sycamore »

Whitecap wrote: Mon Sep 13, 2021 7:25 pm
sycamore wrote: Mon Sep 13, 2021 4:41 pm
Suggestion: in your brokerage account, do turn on "Spec ID" (or specific ID) for the cost basis method for each investment. Not all brokerages use that terminology but it should be something similar. Spec ID allows you to specify at the time you place a sell order which lots you are selling. This allows you to control how much cap gains (or losses) to incur. For example, if you want less cap gains, choose the share lot with a higher cost basis.

Also note that not all brokerages let you specify which lots at the time your sell. Schwab lets you do that for ETFs & stocks, but for mutual funds you have to call in or send a private message to indicate which shares you sold.
Sycamore,
Thanks for the reply. Just as you said above, at Schwab, you can pick the cost basis when you sell. (It took me a while to figure out how to do it, but I figured it out. Since I’m in the accumulation phase, I’ve never had to sell an investment that was a taxable event).

Can you explain the bold above? I played around by preparing a fake sell for a stock I hold, and the site allowed me to select the lots I wished. But no such option was available for mutual funds. I’m a mutual fund guy……. Can you explain the process? I might just call Schwab tomorrow and have them explain it as well. Certainly one must be able to pick specific lots when one sells a mutual fund.

As for changing up the basis for each account at Schwab, here are my choices:

First In First Out (FIFO) (Current Account Default*) - Shares you acquired first are sold first.
Last In First Out (LIFO) Shares you acquired last are sold first.
High Cost Shares with the highest cost are sold first.
Low Cost Shares with the lowest cost are sold first.
Tax Lot Optimizer ™ Lots are selected and sold with the objective of taking losses first (short-term then long-term) and gains last (long-term then short-term). See the order of sales for this method:

What is the order of sales for the Tax Lot Optimizer™ method?
Short-term Losses Lots reflecting short-term losses are sold first, from greatest short-term loss to least short-term loss.
Long-term Losses Lots reflecting long-term losses are sold, from greatest long-term loss to least long-term loss.
Short-term, no gains nor losses Short-term lots that reflect no gain nor loss
Long-term, no gains nor losses Long-term lots that reflect no gain nor loss
Long-term Gains Lots reflecting long-term gains from least long-term gain to greatest long-term gain.
Short-term Gains Lots reflecting short-terms gains from least short-term gain to greatest short-term gain.

Tax lot optimizer appears to be the closest thing to Specific ID? Can Schwab save person here help me out?

Thanks again,
Whitecap
:happy
As I look at their web site right now, when I try to sell an ETF there's a specific input area to change the Cost Basis Method. I see FIFO, LIFO, High Cost, Low Cost, Tax Lot Optimizer, and Specified Lots. Upon picking the Specified Lots option, I see the various share lots of my ETF holding and I can specify how many shares of each one.

By contrast, when I try to sell a mutual fund, there is no option to specify cost basis method. As you noted, you can configure the cost basis method for mutual funds to FIFO, LIFO, High Cost, Low Cost, Tax Lot Optimizer; but no option for "Specified Lots." This is just the way Schwab's systems work - I recently asked a Schwab employee about this, and that's what he told me. I imagine they get this question often :(

From a 2019 Schwab form used to change cost basis accounting method , it says "Do not use this form to identify or match specific lots for unsettled trades. Please call 1-800-435-4000."

So that's what I would do -- give them a call prior to making the trade so you can confirm how to specify the lot information.

Side note: prior to trading, you can see what mutual fund lots you do have by going to Accounts > Positions > and look for your fund in the list. To the far right there's a little drop-down menu. Click on it. One of the options is Lot Details.
Topic Author
Whitecap
Posts: 81
Joined: Wed Dec 09, 2020 9:34 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Whitecap »

sycamore wrote: Mon Sep 13, 2021 7:53 pm
Whitecap wrote: Mon Sep 13, 2021 7:25 pm
sycamore wrote: Mon Sep 13, 2021 4:41 pm
Suggestion: in your brokerage account, do turn on "Spec ID" (or specific ID) for the cost basis method for each investment. Not all brokerages use that terminology but it should be something similar. Spec ID allows you to specify at the time you place a sell order which lots you are selling. This allows you to control how much cap gains (or losses) to incur. For example, if you want less cap gains, choose the share lot with a higher cost basis.

Also note that not all brokerages let you specify which lots at the time your sell. Schwab lets you do that for ETFs & stocks, but for mutual funds you have to call in or send a private message to indicate which shares you sold.
Sycamore,
Thanks for the reply. Just as you said above, at Schwab, you can pick the cost basis when you sell. (It took me a while to figure out how to do it, but I figured it out. Since I’m in the accumulation phase, I’ve never had to sell an investment that was a taxable event).

Can you explain the bold above? I played around by preparing a fake sell for a stock I hold, and the site allowed me to select the lots I wished. But no such option was available for mutual funds. I’m a mutual fund guy……. Can you explain the process? I might just call Schwab tomorrow and have them explain it as well. Certainly one must be able to pick specific lots when one sells a mutual fund.

As for changing up the basis for each account at Schwab, here are my choices:

First In First Out (FIFO) (Current Account Default*) - Shares you acquired first are sold first.
Last In First Out (LIFO) Shares you acquired last are sold first.
High Cost Shares with the highest cost are sold first.
Low Cost Shares with the lowest cost are sold first.
Tax Lot Optimizer ™ Lots are selected and sold with the objective of taking losses first (short-term then long-term) and gains last (long-term then short-term). See the order of sales for this method:

What is the order of sales for the Tax Lot Optimizer™ method?
Short-term Losses Lots reflecting short-term losses are sold first, from greatest short-term loss to least short-term loss.
Long-term Losses Lots reflecting long-term losses are sold, from greatest long-term loss to least long-term loss.
Short-term, no gains nor losses Short-term lots that reflect no gain nor loss
Long-term, no gains nor losses Long-term lots that reflect no gain nor loss
Long-term Gains Lots reflecting long-term gains from least long-term gain to greatest long-term gain.
Short-term Gains Lots reflecting short-terms gains from least short-term gain to greatest short-term gain.

Tax lot optimizer appears to be the closest thing to Specific ID? Can Schwab save person here help me out?

Thanks again,
Whitecap
:happy
As I look at their web site right now, when I try to sell an ETF there's a specific input area to change the Cost Basis Method. I see FIFO, LIFO, High Cost, Low Cost, Tax Lot Optimizer, and Specified Lots. Upon picking the Specified Lots option, I see the various share lots of my ETF holding and I can specify how many shares of each one.

By contrast, when I try to sell a mutual fund, there is no option to specify cost basis method. As you noted, you can configure the cost basis method for mutual funds to FIFO, LIFO, High Cost, Low Cost, Tax Lot Optimizer; but no option for "Specified Lots." This is just the way Schwab's systems work - I recently asked a Schwab employee about this, and that's what he told me. I imagine they get this question often :(

From a 2019 Schwab form used to change cost basis accounting method , it says "Do not use this form to identify or match specific lots for unsettled trades. Please call 1-800-435-4000."

So that's what I would do -- give them a call prior to making the trade so you can confirm how to specify the lot information.

Side note: prior to trading, you can see what mutual fund lots you do have by going to Accounts > Positions > and look for your fund in the list. To the far right there's a little drop-down menu. Click on it. One of the options is Lot Details.
Super helpful to me, Sycamore. Thanks so much.

I’m now able to go and investigate the lots of my investing. Pretty interesting. Well, it looks like Sycamore broke the code on how exactly I’m going to sell my mutual funds when I retire. Sycamore, are you leaving your fund’s cost basis as FIFO or are you doing the “Tax Lot Optimizer”. Since you are just calling Schwab when you sell and picking the lots directly, it seems like it does not matter at all how we set the basis for each account beforehand. Am I wrong here?

Any other Schwab pointer you have for me?

A complimentary, virtual beer, awaits you my friend,
Whitecap
:beer
delamer
Posts: 12311
Joined: Tue Feb 08, 2011 6:13 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by delamer »

I’ve never automatically reinvested dividends, interest, or capital gains.

They go into my settlement account and I use them to rebalance.

I also keep some funds in the settlement account for situations where I need to withdraw cash.

That said, the account is mostly intended for inheritance by our adult children with some gifting to them in the short & long term while we are alive. So I expect most of it to pass to them with a step-up in cost basis. Therefore, it isn’t really a retirement account.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. | | Alexandre Dumas, fils
sycamore
Posts: 2789
Joined: Tue May 08, 2018 12:06 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by sycamore »

Whitecap wrote: Mon Sep 13, 2021 8:39 pm Super helpful to me, Sycamore. Thanks so much.

I’m now able to go and investigate the lots of my investing. Pretty interesting. Well, it looks like Sycamore broke the code on how exactly I’m going to sell my mutual funds when I retire. Sycamore, are you leaving your fund’s cost basis as FIFO or are you doing the “Tax Lot Optimizer”. Since you are just calling Schwab when you sell and picking the lots directly, it seems like it does not matter at all how we set the basis for each account beforehand. Am I wrong here?

Any other Schwab pointer you have for me?

A complimentary, virtual beer, awaits you my friend,
Whitecap
:beer
I have no plans to sell my mutual funds shares at Schwab anytime soon but I had previously picked the Tax Lot Optimizer cost basis as it seemed the best. However, I think you're right that it doesn't seem to matter what you pick if you're just going to call in anyway.

No other Schwab site pointers... I don't use it for much other than to periodically check that any dividends were distributed as expected and that my share count (in my spreadsheet) matches what they think.

Cheers to you Whitecap ;) :beer
Topic Author
Whitecap
Posts: 81
Joined: Wed Dec 09, 2020 9:34 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Whitecap »

:sharebeer
livesoft
Posts: 77681
Joined: Thu Mar 01, 2007 8:00 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by livesoft »

Please do not confuse HIFO, LIFO, Tax Optimizer, and designations like that as a Cost Basis Method. They are just fancy names for "Specific Identification" with a computer algorithm Specifically Identifying the shares to sell for you.
Wiki This signature message sponsored by sscritic: Learn to fish.
User avatar
firebirdparts
Posts: 2804
Joined: Thu Jun 13, 2019 4:21 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by firebirdparts »

If we’re voting I do not. I don’t like creating those tiny taxable transactions. If you tax loss harvest you might even create a tiny wash sale. When I moved accounts from Ameritrade to Fido I even created a tiny fund position after the account closed. What a bummer. If I want to buy something with 0.5% of my money I will pick something.
A fool and your money are soon partners
Juice3
Posts: 338
Joined: Sun Nov 05, 2017 7:40 am

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Juice3 »

goingup wrote: Mon Sep 13, 2021 4:55 pm Always reinvested divs/cap gains distributions in all accounts until retirement. Now we direct dividends in taxable accounts to our checking.
This is a simplification. I am semi-retired (still working full time but not accumulating) and dividends in my taxable accounts are redirected tax advantaged accounts. My tax advantaged accounts are reinvested. Life is more complicated than accumulate/retire/decumulate/

Even during my accumulation years, taxable dividends were not reinvested but rather used to rebalance AA. I guess that is reinvested in a way of speaking but not back into the same equity.
User avatar
goingup
Posts: 4216
Joined: Tue Jan 26, 2010 1:02 pm

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by goingup »

Juice3 wrote: Tue Sep 14, 2021 11:46 am
goingup wrote: Mon Sep 13, 2021 4:55 pm Always reinvested divs/cap gains distributions in all accounts until retirement. Now we direct dividends in taxable accounts to our checking.
This is a simplification. I am semi-retired (still working full time but not accumulating) and dividends in my taxable accounts are redirected tax advantaged accounts. My tax advantaged accounts are reinvested. Life is more complicated than accumulate/retire/decumulate/

Even during my accumulation years, taxable dividends were not reinvested but rather used to rebalance AA. I guess that is reinvested in a way of speaking but not back into the same equity.
I'm saying that we always reinvested dividends and cap gains in all accounts. You may have done it differently. Reinvesting is a very easy and immediate way to stay invested. Like Charlie Munger says, "Don't interrupt the compounding unnecessarily.". As retirees, we now spend taxable dividends.
Juice3
Posts: 338
Joined: Sun Nov 05, 2017 7:40 am

Re: Reinvesting Dividends & Capitol Gains in my brokerage account

Post by Juice3 »

goingup wrote: Tue Sep 14, 2021 1:11 pm
Juice3 wrote: Tue Sep 14, 2021 11:46 am
goingup wrote: Mon Sep 13, 2021 4:55 pm Always reinvested divs/cap gains distributions in all accounts until retirement. Now we direct dividends in taxable accounts to our checking.
This is a simplification. I am semi-retired (still working full time but not accumulating) and dividends in my taxable accounts are redirected tax advantaged accounts. My tax advantaged accounts are reinvested. Life is more complicated than accumulate/retire/decumulate/

Even during my accumulation years, taxable dividends were not reinvested but rather used to rebalance AA. I guess that is reinvested in a way of speaking but not back into the same equity.
I'm saying that we always reinvested dividends and cap gains in all accounts. You may have done it differently. Reinvesting is a very easy and immediate way to stay invested. Like Charlie Munger says, "Don't interrupt the compounding unnecessarily.". As retirees, we now spend taxable dividends.
Got it. You left the "I" off your sentence. I assumed you meant "we/us/BH". Especially because you used we in the next sentence, which upon re-reading referred to you and your partner. Pronouns are rough, especially when missing.
FactualFran
Posts: 1439
Joined: Sat Feb 21, 2015 2:29 pm

Re: Reinvesting Dividends & Capital Gains in my brokerage account

Post by FactualFran »

livesoft wrote: Tue Sep 14, 2021 11:36 am Please do not confuse HIFO, LIFO, Tax Optimizer, and designations like that as a Cost Basis Method. They are just fancy names for "Specific Identification" with a computer algorithm Specifically Identifying the shares to sell for you.
A standard term is "Standard Order". According to the regulations that required brokers to report the basis and gain of sales to the IRS, "A standing order or instruction for the specific identification of stock is treated as an adequate identification made at the time of sale, transfer, delivery, or distribution."
Post Reply