Reinvest distributions or not?
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Reinvest distributions or not?
Hello Bogleheads....I’m a long time lurker and find the information and varying opinions in this forum to be invaluable in helping me make decisions.
After assessing our risk tolerance we’re at a 40/60 allocation. The part of our portfolio that we’re not planning on touching for at least 10 years looks like this:
50% VWIAX (already a 40/60 spilt)
Of the remaining funds:
40% VTSAX (for the diversity we’re missing in Wellesley)
60% VBILX (seems to be the best fit for duration and exposure)
My question is should we reinvest the monthly distributions from VBILX or have them buy more of either VTSAX or VWIAX over
the next 10 years? We will be reinvesting dividends in the other 2 funds. This is a taxable account.
Thanks!
Mike
After assessing our risk tolerance we’re at a 40/60 allocation. The part of our portfolio that we’re not planning on touching for at least 10 years looks like this:
50% VWIAX (already a 40/60 spilt)
Of the remaining funds:
40% VTSAX (for the diversity we’re missing in Wellesley)
60% VBILX (seems to be the best fit for duration and exposure)
My question is should we reinvest the monthly distributions from VBILX or have them buy more of either VTSAX or VWIAX over
the next 10 years? We will be reinvesting dividends in the other 2 funds. This is a taxable account.
Thanks!
Mike
Re: Reinvest distributions or not?
I suggest directing dividends towards whatever fund is below target
Re: Reinvest distributions or not?
Retired three years. Reinvest dividends in R/O Ira and Taxable. Take distributions from Roth IRA (VBILX Bond fund) as cash.
Marty
Marty
Re: Reinvest distributions or not?
I reinvest distributions in Tira, Rira, and taxable. I take taxable distributions when I need extra cash and have it sent direct to my bank account. That amounts to about half of my taxable account dividends being sent to the bank. I do not take any distributions from the tax deferred/free accounts at this time.
Dan
Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” |
— Warren Buffett
Re: Reinvest distributions or not?
We spend bond dividends in our retirement. Before we always reinvested them in all accounts. It seems to me to be a good time to reinvest bond dividends because of the price volatility currently. You're taxed on bond dividends in a taxable account regardless.
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Re: Reinvest distributions or not?
Thanks for the comments. I’ll reinvest dividends back into VBILX for now, then see if we need them for day to day living expenses. We’re newly retired (2 months) so it may take a year for us to gauge how much we really spend in retirement.
Thanks
Mike
Thanks
Mike
- climber2020
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Re: Reinvest distributions or not?
I automatically reinvest all dividends. It prevents me from making behavioral errors.
One exception: if I have recently done tax loss harvesting and the dividend declaration date is within 30 days, then I'll redirect dividends to my sweep account.
One exception: if I have recently done tax loss harvesting and the dividend declaration date is within 30 days, then I'll redirect dividends to my sweep account.
- Sandtrap
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Re: Reinvest distributions or not?
We automatically reinvest everything and withdraw as needed in retirement.
keeping it simple reduces behavioral errors, etc.
j
keeping it simple reduces behavioral errors, etc.
j
Re: Reinvest distributions or not?
I stopped reinvesting dividends due to the fear of a wash sale, but I don’t like having to think about them, so started reinvesting in my taxable. I don’t have a HUGE portfolio, so they don’t amount to a ton.
- ruralavalon
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Re: Reinvest distributions or not?
We have almost always automatically reinvested distributions, whether the fund was in our taxable or tax-advantaged accounts.sickofsnow wrote: ↑Thu Apr 22, 2021 7:50 am Hello Bogleheads....I’m a long time lurker and find the information and varying opinions in this forum to be invaluable in helping me make decisions.
After assessing our risk tolerance we’re at a 40/60 allocation. The part of our portfolio that we’re not planning on touching for at least 10 years looks like this:
50% VWIAX (already a 40/60 spilt)
Of the remaining funds:
40% VTSAX (for the diversity we’re missing in Wellesley)
60% VBILX (seems to be the best fit for duration and exposure)
My question is should we reinvest the monthly distributions from VBILX or have them buy more of either VTSAX or VWIAX over
the next 10 years? We will be reinvesting dividends in the other 2 funds. This is a taxable account.
Thanks!
Mike
The exception was in the last year before retirement, we stopped automatic reinvestment in our joint taxable account. We intended to withdraw from that account to fund living expenses in early retirement, and wanted to have only long-term capital gains in that account.
We almost always automatically reinvested the distributions in whichever fund had made the distributions.
The one exception was when we wanted to reduce the international stock allocation in our joint taxable account, and had the distributions from Vanguard Total International Stock Index Fund (VTIAX) automatically invested in Vanguard Total Stock Market Fund (VTSAX) in that same account.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Reinvest distributions or not?
The magic of compounding only works if you keep re-investing distributions. That is, your interest can't earn interest if it's sitting in cash.
The two most common approaches are to:
1) Re-invest all distributions in whatever generated them. This is done as simply as checking the box to re-invest distributions. It will happen automatically.
2) Re-invest all distributions in the asset class that is most imbalanced. (In other words, use distributions to rebalance gradually.) This is done by paying distributions to cash, then using the cash to invest in the appropriate asset class.
It's actually a matter of debate as to which has the better return. On the face of it, method 2 sounds most flexible, and is constantly buying whatever is lowest. On a practical matter, it forces you to constantly make decisions with your portfolio. If the markets go south and you tune out for a while, your dividends will accumulate in cash. You also may hesitate on timely investment, choosing to delay purchases so you can "buy on a dip," and subjecting your portfolio to market timing errors. Method 1 is a pure automated method that eliminates human error.
Either works. Neither is really a wrong answer. I started with method 2, and caught myself market timing. I have now been using method 1 for over a decade.
I might interrupt the automatic re-investment on the taxable accounts only when doing tax loss harvesting. That's rare, because I'll only TLH if there's a significant drop.
Your approach may also change in retirement. If you're drawing from the portfolio, you might stop re-investing dividends.
The two most common approaches are to:
1) Re-invest all distributions in whatever generated them. This is done as simply as checking the box to re-invest distributions. It will happen automatically.
2) Re-invest all distributions in the asset class that is most imbalanced. (In other words, use distributions to rebalance gradually.) This is done by paying distributions to cash, then using the cash to invest in the appropriate asset class.
It's actually a matter of debate as to which has the better return. On the face of it, method 2 sounds most flexible, and is constantly buying whatever is lowest. On a practical matter, it forces you to constantly make decisions with your portfolio. If the markets go south and you tune out for a while, your dividends will accumulate in cash. You also may hesitate on timely investment, choosing to delay purchases so you can "buy on a dip," and subjecting your portfolio to market timing errors. Method 1 is a pure automated method that eliminates human error.
Either works. Neither is really a wrong answer. I started with method 2, and caught myself market timing. I have now been using method 1 for over a decade.
I might interrupt the automatic re-investment on the taxable accounts only when doing tax loss harvesting. That's rare, because I'll only TLH if there's a significant drop.
Your approach may also change in retirement. If you're drawing from the portfolio, you might stop re-investing dividends.
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Re: Reinvest distributions or not?
I reinvest all dividends. I prefer to set it and forget it whenever possible.
Re: Reinvest distributions or not?
We automatically reinvest everything and withdraw as needed in retirement.
"I started with nothing and I still have most of it left."
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Re: Reinvest distributions or not?
Reinvest everything but always to the asset class that is behind. It is a bit slower because I tend to wait until all dividends are paid out and not all pay on the same dates.
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Re: Reinvest distributions or not?
I thought the general consensus was to not reinvest distributions for a taxable account to reduce the number of tax lots?
I don't reinvest them myself and I don't see a downside to it but maybe I'm missing something?
I don't reinvest them myself and I don't see a downside to it but maybe I'm missing something?
Re: Reinvest distributions or not?
I prefer 1 lot a year, but there is a cost, I believe it is equivalent to 0.01% to 0.02% of principal every year, small but visible.
Re: Reinvest distributions or not?
The number of tax lots isn't an issue for me. Vanguard is tracking it for me, the system is computerized, and I'm rarely selling when I'm in accumulation mode. The rare times that I might sell something (usually associated with tax loss harvesting), I'm clearing out many of the tax lots anyways. I also already lost the tax lot battle -- I have a transaction every two weeks because of regular automated investing. Dividend reinvestment is only an extra entry every quarter or so.ThankYouJack wrote: ↑Fri Apr 23, 2021 11:25 am I thought the general consensus was to not reinvest distributions for a taxable account to reduce the number of tax lots?
I don't reinvest them myself and I don't see a downside to it but maybe I'm missing something?
The computerized comment is that I don't have to deal with the accounting from selling the tax lots. The buy/sell transaction details are transferred from Vanguard straight into the tax program worksheets.
Prior to the regulation where the brokerages started tracking cost basis, I'd agree with you. Now it's not a big deal.
Re: Reinvest distributions or not?
While in our working years, my wife and I reinvested all dividends. During this time, we invested most of our tax-deferred contributions to bond funds to balance the fast-growing equity funds in our taxable and tax-deferred accounts. This kept our allocation at 70% equity/30% bonds until age 55 or so, and then 60/40 where it remains. The way the market is going we will soon have to only bond funds in our tax-deferred accounts. After retirement in 2019, we take most of our taxable dividends (~$50,000) in cash and will use that to rebalance. Without the dividend cash, we might be forced to sell taxable stock funds to rebalance and incur an unwanted taxable event.
Re: Reinvest distributions or not?
Yes, I learned about that on this forum.ThankYouJack wrote: ↑Fri Apr 23, 2021 11:25 am I thought the general consensus was to not reinvest distributions for a taxable account to reduce the number of tax lots?
I don't reinvest them myself and I don't see a downside to it but maybe I'm missing something?
My investments have grown quite well in taxable even though I've not reinvested the dividends.
I looked at my tax lots last week, and it will be fairly easy to figure that out when/if I need to sell from my ETFs.
Re: Reinvest distributions or not?
So if you invest in just one fund, you have 30 tax lots per year (26 different automatic investments, plus four dividend re-investments.) So, from 30 years of working and saving, you will have 900 tax lots to manage, and that's if you have invested in only one fund. (It could be 1800 tax lots or more if you invest in two funds per transaction.) When you begin your de-cumulation phase, when you factor in the different ways to determine cost basis, you will have LOTS of options for selling.wolf359 wrote: ↑Fri Apr 23, 2021 12:40 pmThe number of tax lots isn't an issue for me. Vanguard is tracking it for me, the system is computerized, and I'm rarely selling when I'm in accumulation mode. The rare times that I might sell something (usually associated with tax loss harvesting), I'm clearing out many of the tax lots anyways. I also already lost the tax lot battle -- I have a transaction every two weeks because of regular automated investing. Dividend reinvestment is only an extra entry every quarter or so.ThankYouJack wrote: ↑Fri Apr 23, 2021 11:25 am I thought the general consensus was to not reinvest distributions for a taxable account to reduce the number of tax lots?
I don't reinvest them myself and I don't see a downside to it but maybe I'm missing something?
The computerized comment is that I don't have to deal with the accounting from selling the tax lots. The buy/sell transaction details are transferred from Vanguard straight into the tax program worksheets.
Prior to the regulation where the brokerages started tracking cost basis, I'd agree with you. Now it's not a big deal.
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Re: Reinvest distributions or not?
I'm taking some dividends in my taxable brokerage account (to my sweep account) while reinvesting others.
My employer offers after tax contributions to the 401K plan and has "in plan" Roth conversions. I'm not that well paid that I could afford to max out the 401K, catch-up, and after-tax contributions from my salary plus cash bonuses.
But by using some of the dividends from my taxable brokerage account to "subsidize" my current living expenses, I can "peg" the IRS Section 415(c)(1)(A) plus "catch-up" limits. I see it as slowing the growth of my taxable savings in the interest of maximizing tax free retirement savings.
My employer offers after tax contributions to the 401K plan and has "in plan" Roth conversions. I'm not that well paid that I could afford to max out the 401K, catch-up, and after-tax contributions from my salary plus cash bonuses.
But by using some of the dividends from my taxable brokerage account to "subsidize" my current living expenses, I can "peg" the IRS Section 415(c)(1)(A) plus "catch-up" limits. I see it as slowing the growth of my taxable savings in the interest of maximizing tax free retirement savings.
Last edited by backpacker61 on Sat Apr 24, 2021 7:46 am, edited 1 time in total.
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Re: Reinvest distributions or not?
I auto reinvest all dividends into a single holding (to avoid wash sales for TLH) - last I heard you can only do this in Vanguard's older mutual fund platform (which I am still on) - brokerage accounts don't provide this capability.
Re: Reinvest distributions or not?
What's your proposed alternative? Hold everything in cash and buy everything in one transaction per year? The opportunity cost of not being invested isn't worth it. Keeping things automated eliminates investor psychology factors.LilyFleur wrote: ↑Sat Apr 24, 2021 12:28 amSo if you invest in just one fund, you have 30 tax lots per year (26 different automatic investments, plus four dividend re-investments.) So, from 30 years of working and saving, you will have 900 tax lots to manage, and that's if you have invested in only one fund. (It could be 1800 tax lots or more if you invest in two funds per transaction.) When you begin your de-cumulation phase, when you factor in the different ways to determine cost basis, you will have LOTS of options for selling.wolf359 wrote: ↑Fri Apr 23, 2021 12:40 pmThe number of tax lots isn't an issue for me. Vanguard is tracking it for me, the system is computerized, and I'm rarely selling when I'm in accumulation mode. The rare times that I might sell something (usually associated with tax loss harvesting), I'm clearing out many of the tax lots anyways. I also already lost the tax lot battle -- I have a transaction every two weeks because of regular automated investing. Dividend reinvestment is only an extra entry every quarter or so.ThankYouJack wrote: ↑Fri Apr 23, 2021 11:25 am I thought the general consensus was to not reinvest distributions for a taxable account to reduce the number of tax lots?
I don't reinvest them myself and I don't see a downside to it but maybe I'm missing something?
The computerized comment is that I don't have to deal with the accounting from selling the tax lots. The buy/sell transaction details are transferred from Vanguard straight into the tax program worksheets.
Prior to the regulation where the brokerages started tracking cost basis, I'd agree with you. Now it's not a big deal.
Holding back on re-investing dividends so that I have 4 less tax lots per year makes no sense when I'm already going to have 26 of them. That's my point.
When selling, I only tend to look at two classes of tax lots: 1) Short-term vs long-term; 2) loss versus gain (and how much).
Depending upon my intent for the sale, I'll be selecting based on those two factors. It doesn't matter if I have 100 or 1,000 to pick from. You don't need to evaluate each one individually. Dealing with a lot of tax lots is only an issue if I were doing this all manually, or if I'm making an unusually large withdrawal (like to buy a car or replace a roof).
So, how are YOU doing this?
- ruralavalon
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Re: Reinvest distributions or not?
We have always used average cost basis, so there is no tax lots dilemma.wolf359 wrote: ↑Sat Apr 24, 2021 7:42 amWhat's your proposed alternative? Hold everything in cash and buy everything in one transaction per year? The opportunity cost of not being invested isn't worth it. Keeping things automated eliminates investor psychology factors.LilyFleur wrote: ↑Sat Apr 24, 2021 12:28 amSo if you invest in just one fund, you have 30 tax lots per year (26 different automatic investments, plus four dividend re-investments.) So, from 30 years of working and saving, you will have 900 tax lots to manage, and that's if you have invested in only one fund. (It could be 1800 tax lots or more if you invest in two funds per transaction.) When you begin your de-cumulation phase, when you factor in the different ways to determine cost basis, you will have LOTS of options for selling.wolf359 wrote: ↑Fri Apr 23, 2021 12:40 pmThe number of tax lots isn't an issue for me. Vanguard is tracking it for me, the system is computerized, and I'm rarely selling when I'm in accumulation mode. The rare times that I might sell something (usually associated with tax loss harvesting), I'm clearing out many of the tax lots anyways. I also already lost the tax lot battle -- I have a transaction every two weeks because of regular automated investing. Dividend reinvestment is only an extra entry every quarter or so.ThankYouJack wrote: ↑Fri Apr 23, 2021 11:25 am I thought the general consensus was to not reinvest distributions for a taxable account to reduce the number of tax lots?
I don't reinvest them myself and I don't see a downside to it but maybe I'm missing something?
The computerized comment is that I don't have to deal with the accounting from selling the tax lots. The buy/sell transaction details are transferred from Vanguard straight into the tax program worksheets.
Prior to the regulation where the brokerages started tracking cost basis, I'd agree with you. Now it's not a big deal.
Holding back on re-investing dividends so that I have 4 less tax lots per year makes no sense when I'm already going to have 26 of them. That's my point.
When selling, I only tend to look at two classes of tax lots: 1) Short-term vs long-term; 2) loss versus gain (and how much).
Depending upon my intent for the sale, I'll be selecting based on those two factors. It doesn't matter if I have 100 or 1,000 to pick from. You don't need to evaluate each one individually. Dealing with a lot of tax lots is only an issue if I were doing this all manually, or if I'm making an unusually large withdrawal (like to buy a car or replace a roof).
So, how are YOU doing this?
The opportunity cost of delaying reinvestment for a year in order to create fewer tax lots is just too high in my opinion. I like to have everything as automated as possible.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Reinvest distributions or not?
I think you're doing great! Your discipline in saving is commendable. And, the number of lots is a very nice problem to have. And it seems like you are managing it very efficiently.wolf359 wrote: ↑Sat Apr 24, 2021 7:42 amWhat's your proposed alternative? Hold everything in cash and buy everything in one transaction per year? The opportunity cost of not being invested isn't worth it. Keeping things automated eliminates investor psychology factors.LilyFleur wrote: ↑Sat Apr 24, 2021 12:28 amSo if you invest in just one fund, you have 30 tax lots per year (26 different automatic investments, plus four dividend re-investments.) So, from 30 years of working and saving, you will have 900 tax lots to manage, and that's if you have invested in only one fund. (It could be 1800 tax lots or more if you invest in two funds per transaction.) When you begin your de-cumulation phase, when you factor in the different ways to determine cost basis, you will have LOTS of options for selling.wolf359 wrote: ↑Fri Apr 23, 2021 12:40 pmThe number of tax lots isn't an issue for me. Vanguard is tracking it for me, the system is computerized, and I'm rarely selling when I'm in accumulation mode. The rare times that I might sell something (usually associated with tax loss harvesting), I'm clearing out many of the tax lots anyways. I also already lost the tax lot battle -- I have a transaction every two weeks because of regular automated investing. Dividend reinvestment is only an extra entry every quarter or so.ThankYouJack wrote: ↑Fri Apr 23, 2021 11:25 am I thought the general consensus was to not reinvest distributions for a taxable account to reduce the number of tax lots?
I don't reinvest them myself and I don't see a downside to it but maybe I'm missing something?
The computerized comment is that I don't have to deal with the accounting from selling the tax lots. The buy/sell transaction details are transferred from Vanguard straight into the tax program worksheets.
Prior to the regulation where the brokerages started tracking cost basis, I'd agree with you. Now it's not a big deal.
Holding back on re-investing dividends so that I have 4 less tax lots per year makes no sense when I'm already going to have 26 of them. That's my point.
When selling, I only tend to look at two classes of tax lots: 1) Short-term vs long-term; 2) loss versus gain (and how much).
Depending upon my intent for the sale, I'll be selecting based on those two factors. It doesn't matter if I have 100 or 1,000 to pick from. You don't need to evaluate each one individually. Dealing with a lot of tax lots is only an issue if I were doing this all manually, or if I'm making an unusually large withdrawal (like to buy a car or replace a roof).
So, how are YOU doing this?
I am semi-retired.
I did not even have a brokerage account until I received an inheritance a few years ago, and I don't have a lot of tax lots because I invested in lump sums.
Most of my savings is in a 401k, and the tax strategy on that is my largest concern for financial planning at the moment.
Re: Reinvest distributions or not?
I dump all dividends to the settlement account. At the end of each quarter after all funds have payed out, I decide what to buy. Im not putting money in every paycheck, but if i was i would consider perhaps monthly purchases instead of quarterly. I try to purchase only one thing per quarter, whatever is most out of balance.
Since I'm nearing retirement, I could also pull from the settlement fund if needed instead of reinvesting.
Im old school and still track my purchases and basis. Last year was the first time I let turbotax go into vanguard and grab my statement. That was nice and much less work.
Since I'm nearing retirement, I could also pull from the settlement fund if needed instead of reinvesting.
Im old school and still track my purchases and basis. Last year was the first time I let turbotax go into vanguard and grab my statement. That was nice and much less work.
Mark |
Somewhere in WA State
- bertilak
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Re: Reinvest distributions or not?
I do not, automatically.
Like suemarkp, I take them to the settlement fund and occasionally re-invest where needed to nudge my AA back to it's target. It also avoids conflict with Tax Los Harvesting (TLH).
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Re: Reinvest distributions or not?
Again...like I said in my opening post, the knowledge and varying opinions are invaluable to me. Thanks everyone for the input!
I’m sure as we work our way through this retirement journey, I’ll have more questions and know that I have a seasoned team to fall back on for logical feedback
Mike
I’m sure as we work our way through this retirement journey, I’ll have more questions and know that I have a seasoned team to fall back on for logical feedback
Mike
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Re: Reinvest distributions or not?
I don't because I use etfs and don't want fractional shares plus I use distributions for inline rebalancing.
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Re: Reinvest distributions or not?
Retired 10 years and always reinvested dividends.
“Those who move forward with a happy spirit will find that things always work out.” -Retired 13 years 😀