Does it really help to turn off automatic div reinvestment

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muel87
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Does it really help to turn off automatic div reinvestment

Post by muel87 »

I know this has been answered, but Ive read some threads and I think Im still missing something.

I own VXUS in my taxable (2 different taxable accts). It pays dividends quarterly, next on 6/24-ish. Im accumulating and wouldnt want them out of the market for other uses. What's the wash sale risk of leaving dividends set to auto-reinvest, as long as I'm checking before these quarterly dates to see if I have any TLH to do, and if so, turning it off?

If auto-investment is on, and I forget to check for TLH before the reinvest dat, and subsequently notice the TLH opportunity, the automatically reinvested dividends would negate some losses in the amount of that dividend reinvestment.

If auto-invest is off, I never have to worry, but then I still need to remember to go in and manually re-invest 4 times a year, or I'll lose returns by having those dividends sitting in cash too long.

Seems either way I need to go in and check at least 4 times a year, and as long as I set a reminder to do that before dividend date, I will avoid any wash sales from automatic reinvestment.

If a TLH opportunity arises within 30 days after a reinvestment, that reinvested dividend tax lot would be part of my sale anyway so no wash sale risk there.

Am I missing an angle? Or is this all that turning off reinvestment gets you?
Also, does reinvestment need to be turned off before the ex-dividend date, the record date, or the payable date?
Last edited by muel87 on Tue May 30, 2023 12:04 pm, edited 2 times in total.
Mike Scott
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Re: Does it really help to turn off automatic div reinvestment

Post by Mike Scott »

It gives you the ability to decide what to do with the dividends; spend them, reinvest them or direct them to a different investment. I'm checking my accounts a minimum quarterly anyway so it's no problem.
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Re: Does it really help to turn off automatic div reinvestment

Post by pizzy »

muel87 wrote: Tue May 30, 2023 11:28 am I'll lose returns by having those dividends sitting in cash too long.
I wouldn't put too much weight in this claim.
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muel87
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Re: Does it really help to turn off automatic div reinvestment

Post by muel87 »

pizzy wrote: Tue May 30, 2023 11:43 am
muel87 wrote: Tue May 30, 2023 11:28 am I'll lose returns by having those dividends sitting in cash too long.
I wouldn't put too much weight in this claim.
Why not?
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Re: Does it really help to turn off automatic div reinvestment

Post by pizzy »

muel87 wrote: Tue May 30, 2023 11:48 am
pizzy wrote: Tue May 30, 2023 11:43 am
muel87 wrote: Tue May 30, 2023 11:28 am I'll lose returns by having those dividends sitting in cash too long.
I wouldn't put too much weight in this claim.
Why not?
1) The small amount of the dividends, relative to account balance.
2) You are checking your accounts more than once every 90 days.
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muel87
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Re: Does it really help to turn off automatic div reinvestment

Post by muel87 »

pizzy wrote: Tue May 30, 2023 11:51 am
muel87 wrote: Tue May 30, 2023 11:48 am
pizzy wrote: Tue May 30, 2023 11:43 am
muel87 wrote: Tue May 30, 2023 11:28 am I'll lose returns by having those dividends sitting in cash too long.
I wouldn't put too much weight in this claim.
Why not?
1) The small amount of the dividends, relative to account balance.
2) You are checking your accounts more than once every 90 days.
1 - True, but why have it sitting in cash for any length of time?
2- Not in the long term. Right now I am b/c I've just set everything up, and am about to attempt my first TLH. But my intent is to have a system in place that allows me to take a quarterly look. I plan to TLH anything over $1k (for now, unless that becomes burdensome) but I'm sure I can figure out some sort of price alert for that.
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goingup
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Re: Does it really help to turn off automatic div reinvestment

Post by goingup »

I always preferred to reinvest dividends in a taxable account. Doing that allowed that money to stay invested. It's automatic. No delay or decision required.

When I start considering a TLH, I'll turn off the reinvestment. That has been a rare occurrence, though.
02nz
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Re: Does it really help to turn off automatic div reinvestment

Post by 02nz »

muel87 wrote: Tue May 30, 2023 11:28 am Am I missing an angle? Or is this all that turning off reinvestment gets you?
I think the other consideration is that turning off auto reinvestment can allow you to have fewer tax lots. For example, you might choose to take all the dividend distributions from multiple funds and reinvest manually (in accordance with your asset allocation, into just one fund each quarter (e.g., reinvest into whichever fund has dipped most below its target percentage of your portfolio), rather than having all dividends reinvested automatically in all the funds that produced them.
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Re: Does it really help to turn off automatic div reinvestment

Post by stan1 »

I rebalance in taxable with new money coming in (cash flow), whether the source of those funds are dividends or from income, gift or inheritance doesn't matter.

I go in around 1 Apr, 1 Jul, 1 Oct, and 1 Jan and decide what to do with the cash after all the funds have paid out dividends. It is easy and to be honest it is just as likely that the market will be down as it will be higher compared to the dividend payout date a few days to weeks earlier.

It is a minor point though and mostly a personal preference I think. You should do what you are most comfortable with. It won't make a difference in your financial success whether you reinvest dividends automatically or once per quarter.
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muel87
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Re: Does it really help to turn off automatic div reinvestment

Post by muel87 »

02nz wrote: Tue May 30, 2023 12:01 pm
muel87 wrote: Tue May 30, 2023 11:28 am Am I missing an angle? Or is this all that turning off reinvestment gets you?
I think the other consideration is that turning off auto reinvestment can allow you to have fewer tax lots. For example, you might choose to take all the dividend distributions from multiple funds and reinvest manually (in accordance with your asset allocation, into just one fund each quarter (e.g., reinvest into whichever fund has dipped most below its target percentage of your portfolio), rather than having all dividends reinvested automatically in all the funds that produced them.
I get the rebalancing option, but dont they only distribute quarterly anyways? Or are you referring to bond funds who I assume distribute monthly? All my bond funds are in tax-advantaged, not sure how minimizing tax lots will benefit me there.
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Re: Does it really help to turn off automatic div reinvestment

Post by toddthebod »

muel87 wrote: Tue May 30, 2023 11:28 am I know this has been answered, but Ive read some threads and I think Im still missing something.

I own VXUS in my taxable (2 different taxable accts). It pays dividends quarterly, next on 6/24-ish. Im accumulating and wouldnt want them out of the market for other uses. What's the wash sale risk of leaving dividends set to auto-reinvest, as long as I'm checking before these quarterly dates to see if I have any TLH to do, and if so, turning it off?

If auto-investment is on, and I forget to check for TLH before the reinvest dat, and subsequently notice the TLH opportunity, the automatically reinvested dividends would negate some losses in the amount of that dividend reinvestment.

If auto-invest is off, I never have to worry, but then I still need to remember to go in and manually re-invest 4 times a year, or I'll lose returns by having those dividends sitting in cash too long.

Seems either way I need to go in and check at least 4 times a year, and as long as I set a reminder to do that before dividend date, I will avoid any wash sales from automatic reinvestment.

If a TLH opportunity arises within 30 days after a reinvestment, that reinvested dividend tax lot would be part of my sale anyway so no wash sale risk there.

Am I missing an angle? Or is this all that turning off reinvestment gets you?
Also, does reinvestment need to be turned off before the ex-dividend date, the record date, or the payable date?
I move extra cash from my checking account to my brokerage account monthly. At that time I choose what to do with all of the cash in my brokerage account all at once, whether it was freshly moved from my checking account or paid out as dividends since the last time. It is literally no extra work to reinvest those dividends manually.
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Re: Does it really help to turn off automatic div reinvestment

Post by Jack FFR1846 »

Depends on the account you're talking about. I have dividends reinvested in tax advantaged accounts. In taxable, over the last several years, I've been exiting dividend paying funds and taking whatever comes out (dividends, tax loss harvesting) and buying BRK/b. Why? I'm one of those who considers Berkshire to be close enough to the S&P or a total US market fund minus the tax spilling dividends. So whenever SCHB or VTI (what's in my taxable besides Berkshire) spills a dividend, I either take it out in cash or use it to buy a share of BRK/b.
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Re: Does it really help to turn off automatic div reinvestment

Post by siriusblack »

pizzy wrote: Tue May 30, 2023 11:51 am
muel87 wrote: Tue May 30, 2023 11:48 am
pizzy wrote: Tue May 30, 2023 11:43 am
muel87 wrote: Tue May 30, 2023 11:28 am I'll lose returns by having those dividends sitting in cash too long.
I wouldn't put too much weight in this claim.
Why not?
1) The small amount of the dividends, relative to account balance.
2) You are checking your accounts more than once every 90 days.
I agree. Here's some example math: Let's say you've got 1M invested, with average dividend of 2% ($20k annually), and you check quarterly to decide where to invest the dividends. That equates to a quarterly payout of $5,000. That means your cash balance will cycle between $0 and $5,000, so the "average" cash balance will be (for the sake of argument) $2,500. You will "lose" interest on that $2,500 ... so, the impact would be like $100 or $200 at the most annually. That's not nothing..... but it's not a big deal either.
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Re: Does it really help to turn off automatic div reinvestment

Post by pizzy »

siriusblack wrote: Tue May 30, 2023 12:55 pm
pizzy wrote: Tue May 30, 2023 11:51 am
muel87 wrote: Tue May 30, 2023 11:48 am
pizzy wrote: Tue May 30, 2023 11:43 am
muel87 wrote: Tue May 30, 2023 11:28 am I'll lose returns by having those dividends sitting in cash too long.
I wouldn't put too much weight in this claim.
Why not?
1) The small amount of the dividends, relative to account balance.
2) You are checking your accounts more than once every 90 days.
I agree. Here's some example math: Let's say you've got 1M invested, with average dividend of 2% ($20k annually), and you check quarterly to decide where to invest the dividends. That equates to a quarterly payout of $5,000. That means your cash balance will cycle between $0 and $5,000, so the "average" cash balance will be (for the sake of argument) $2,500. You will "lose" interest on that $2,500 ... so, the impact would be like $100 or $200 at the most annually. That's not nothing..... but it's not a big deal either.
And you wouldn’t even lose interest since the settlement fund pays.
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Re: Does it really help to turn off automatic div reinvestment

Post by suemarkp »

A few years ago, having money sitting in the settlement fund may have seemed like a waste with it paying less than 1%. But now, the settlement funds are up near 5%. That may end up being better than putting it the equity fund. Its not a bad place to park money right now while waiting to rebalance or buy something low instead of tax loss harvesting when funds drop.

We always hear that funds drop in value after a dividend is issued. I wonder how fast that happens? Would reinvesting dividends be more effective if you wait a day to reinvest (so the fund has dropped) instead of the auto reinvest which causes a lot of buying also dropping the price (and maybe your reinvestment will be run first when the fund costs the most)?
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pizzy
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Re: Does it really help to turn off automatic div reinvestment

Post by pizzy »

suemarkp wrote: Tue May 30, 2023 1:29 pm We always hear that funds drop in value after a dividend is issued. I wonder how fast that happens?
The same day.
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goingup
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Re: Does it really help to turn off automatic div reinvestment

Post by goingup »

Don't forget to account for your own financial behavior. Will you actually pull the trigger to reinvest that dividend cash? Or will you end up trying to time the market? Will that cash just languish while you try to make a decision?

I think some investors think they are dispassionate rational actors always acting in their own best interest. Likely they are not. Sometimes it's smart to automate investing so you don't have to find out just how indecisive, fretful, lazy or forgetful you might be. :D
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Re: Does it really help to turn off automatic div reinvestment

Post by Pepper11 »

I turn off auto reinvestment of dividends in my taxable account because I tax loss harvest and check my accounts just about every day.

But if you assume that over time, the general trajectory of the stock market is upward, and the cash dividend is money you consider part your 'stock' allocation - i.e. you dont want the cash now, there is a high probability you are lessening your returns if don't automatically reinvest. Probably not too significant if you reinvest the next day, but probably not insignificant if you are only checking your accounts once a quarter and your 'stock' allocation has a consistent 'cash' component.
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Re: Does it really help to turn off automatic div reinvestment

Post by livesoft »

I can reinvest ETF dividends one-day sooner than Vanguard, TDAmeritrade, and Wells Fargo can do it for me. You can, too.
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Re: Does it really help to turn off automatic div reinvestment

Post by montanagirl »

I thought it would be hard to keep track of basis with dividends reinvesting.

But now I wonder if I shouldn't just go with average cost any time I sell. I want taxable to grow unaided the way tax deferred does.
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Re: Does it really help to turn off automatic div reinvestment

Post by Pepper11 »

montanagirl wrote: Tue May 30, 2023 8:14 pm I thought it would be hard to keep track of basis with dividends reinvesting.

But now I wonder if I shouldn't just go with average cost any time I sell. I want taxable to grow unaided the way tax deferred does.
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Re: Does it really help to turn off automatic div reinvestment

Post by 02nz »

muel87 wrote: Tue May 30, 2023 12:32 pm
02nz wrote: Tue May 30, 2023 12:01 pm
muel87 wrote: Tue May 30, 2023 11:28 am Am I missing an angle? Or is this all that turning off reinvestment gets you?
I think the other consideration is that turning off auto reinvestment can allow you to have fewer tax lots. For example, you might choose to take all the dividend distributions from multiple funds and reinvest manually (in accordance with your asset allocation, into just one fund each quarter (e.g., reinvest into whichever fund has dipped most below its target percentage of your portfolio), rather than having all dividends reinvested automatically in all the funds that produced them.
I get the rebalancing option, but dont they only distribute quarterly anyways? Or are you referring to bond funds who I assume distribute monthly? All my bond funds are in tax-advantaged, not sure how minimizing tax lots will benefit me there.
Let's say you have four stock funds that distribute dividends quarterly in taxable. Automatically reinvesting dividends will result in 16 new tax lots every year, while turning off auto-reinvestment and manually putting the cash toward just one fund quarterly will result in 4 new tax lots every year.
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Re: Does it really help to turn off automatic div reinvestment

Post by JediMisty »

montanagirl wrote: Tue May 30, 2023 8:14 pm I thought it would be hard to keep track of basis with dividends reinvesting.

But now I wonder if I shouldn't just go with average cost any time I sell. I want taxable to grow unaided the way tax deferred does.
There is great utility in having taxable have lots with different basis. I will tax gain harvest some lots and in another year, possibly tax loss harvest. The web site(s) will keep track of all your fairly recent basis of all your lots.
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Re: Does it really help to turn off automatic div reinvestment

Post by illumination »

My problem is not having it on dividend reinvestment is a "gateway drug" for me to start market timing. I think for me (and most investors) that's a bigger issue than potentially causing a wash sale.

Even if you don't set it for auto reinvestment, at what date do you decide it's "okay" to invest so you won't have a potential wash sale? At year end? I always find the 30 day window after a purchase to be the one that can make things tricky.

Even with automatic dividend reinvestment, I'm able to harvest losses during downturns. I might have to set a reminder on my phone, but it's not much of a problem.
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Re: Does it really help to turn off automatic div reinvestment

Post by muel87 »

illumination wrote: Thu Jun 01, 2023 6:56 pm My problem is not having it on dividend reinvestment is a "gateway drug" for me to start market timing. I think for me (and most investors) that's a bigger issue than potentially causing a wash sale.

Even if you don't set it for auto reinvestment, at what date do you decide it's "okay" to invest so you won't have a potential wash sale? At year end? I always find the 30 day window after a purchase to be the one that can make things tricky.

Even with automatic dividend reinvestment, I'm able to harvest losses during downturns. I might have to set a reminder on my phone, but it's not much of a problem.
Why would the 30 day after window make things tricky? If it's declined within 30 days, that purchase will be down and you can harvest it.
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Re: Does it really help to turn off automatic div reinvestment

Post by illumination »

muel87 wrote: Fri Jun 02, 2023 2:49 pm
illumination wrote: Thu Jun 01, 2023 6:56 pm My problem is not having it on dividend reinvestment is a "gateway drug" for me to start market timing. I think for me (and most investors) that's a bigger issue than potentially causing a wash sale.

Even if you don't set it for auto reinvestment, at what date do you decide it's "okay" to invest so you won't have a potential wash sale? At year end? I always find the 30 day window after a purchase to be the one that can make things tricky.

Even with automatic dividend reinvestment, I'm able to harvest losses during downturns. I might have to set a reminder on my phone, but it's not much of a problem.
Why would the 30 day after window make things tricky? If it's declined within 30 days, that purchase will be down and you can harvest it.

Not sure if I'm understanding your question correctly, but say you had an automatic dividend reinvestment less than 30 days ago and you then tried to tax loss harvest that security, that would trigger a wash sale. It's a 30 days window before and after you take the loss.

People usually understand you have to wait 30 days after the sale to buy back in, but you also have to look beforehand as well.

https://www.schwab.com/learn/story/prim ... x%20return.
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muel87
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Re: Does it really help to turn off automatic div reinvestment

Post by muel87 »

illumination wrote: Fri Jun 02, 2023 4:48 pm
muel87 wrote: Fri Jun 02, 2023 2:49 pm
illumination wrote: Thu Jun 01, 2023 6:56 pm My problem is not having it on dividend reinvestment is a "gateway drug" for me to start market timing. I think for me (and most investors) that's a bigger issue than potentially causing a wash sale.

Even if you don't set it for auto reinvestment, at what date do you decide it's "okay" to invest so you won't have a potential wash sale? At year end? I always find the 30 day window after a purchase to be the one that can make things tricky.

Even with automatic dividend reinvestment, I'm able to harvest losses during downturns. I might have to set a reminder on my phone, but it's not much of a problem.
Why would the 30 day after window make things tricky? If it's declined within 30 days, that purchase will be down and you can harvest it.

Not sure if I'm understanding your question correctly, but say you had an automatic dividend reinvestment less than 30 days ago and you then tried to tax loss harvest that security, that would trigger a wash sale. It's a 30 days window before and after you take the loss.

People usually understand you have to wait 30 days after the sale to buy back in, but you also have to look beforehand as well.

https://www.schwab.com/learn/story/prim ... x%20return.
If you dont have a loss to harvest before the dividend reinvestment, but sometime in the 30 days after the reinvestment you do, it means the tax lot associated w/ the dividend reinvestment is down, therefor you can sell that tax lot along with the rest, and it isnt a wash. That sale isn't a replacement for that dividend reinvestment, it's the reinvestment itself. Someone can correct me if I'm wrong, but I believe that's how it works.
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Re: Does it really help to turn off automatic div reinvestment

Post by tibbitts »

It seems that a reasonable choice would be to dividend reinvest automatically into a different but similar fund, which was always available until brokerage accounts replaced mutual fund accounts. I haven't kept track, so which brokerage accounts allow reinvesting mutual fund dividends automatically into other mutual funds, without any time out-of-market?
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Re: Does it really help to turn off automatic div reinvestment

Post by illumination »

muel87 wrote: Sat Jun 03, 2023 6:56 pm
illumination wrote: Fri Jun 02, 2023 4:48 pm
muel87 wrote: Fri Jun 02, 2023 2:49 pm
illumination wrote: Thu Jun 01, 2023 6:56 pm My problem is not having it on dividend reinvestment is a "gateway drug" for me to start market timing. I think for me (and most investors) that's a bigger issue than potentially causing a wash sale.

Even if you don't set it for auto reinvestment, at what date do you decide it's "okay" to invest so you won't have a potential wash sale? At year end? I always find the 30 day window after a purchase to be the one that can make things tricky.

Even with automatic dividend reinvestment, I'm able to harvest losses during downturns. I might have to set a reminder on my phone, but it's not much of a problem.
Why would the 30 day after window make things tricky? If it's declined within 30 days, that purchase will be down and you can harvest it.

Not sure if I'm understanding your question correctly, but say you had an automatic dividend reinvestment less than 30 days ago and you then tried to tax loss harvest that security, that would trigger a wash sale. It's a 30 days window before and after you take the loss.

People usually understand you have to wait 30 days after the sale to buy back in, but you also have to look beforehand as well.

https://www.schwab.com/learn/story/prim ... x%20return.
If you dont have a loss to harvest before the dividend reinvestment, but sometime in the 30 days after the reinvestment you do, it means the tax lot associated w/ the dividend reinvestment is down, therefor you can sell that tax lot along with the rest, and it isnt a wash. That sale isn't a replacement for that dividend reinvestment, it's the reinvestment itself. Someone can correct me if I'm wrong, but I believe that's how it works.

Usually people don't liquidate their entire position in order to harvest a loss for the year. It's the smaller purchase lots.

Say you've been buying VTI over the last 15 years. It should have a a huge amount of capital gains in total, but some individual purchases over that time period (like from dividend reinvestment) may have a loss. You just want to sell those specific units, not everything (because you then couldn't take a loss because the whole lot has a gain).
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Re: Does it really help to turn off automatic div reinvestment

Post by muel87 »

illumination wrote: Sat Jun 03, 2023 9:33 pm
muel87 wrote: Sat Jun 03, 2023 6:56 pm
illumination wrote: Fri Jun 02, 2023 4:48 pm
muel87 wrote: Fri Jun 02, 2023 2:49 pm
illumination wrote: Thu Jun 01, 2023 6:56 pm My problem is not having it on dividend reinvestment is a "gateway drug" for me to start market timing. I think for me (and most investors) that's a bigger issue than potentially causing a wash sale.

Even if you don't set it for auto reinvestment, at what date do you decide it's "okay" to invest so you won't have a potential wash sale? At year end? I always find the 30 day window after a purchase to be the one that can make things tricky.

Even with automatic dividend reinvestment, I'm able to harvest losses during downturns. I might have to set a reminder on my phone, but it's not much of a problem.
Why would the 30 day after window make things tricky? If it's declined within 30 days, that purchase will be down and you can harvest it.

Not sure if I'm understanding your question correctly, but say you had an automatic dividend reinvestment less than 30 days ago and you then tried to tax loss harvest that security, that would trigger a wash sale. It's a 30 days window before and after you take the loss.

People usually understand you have to wait 30 days after the sale to buy back in, but you also have to look beforehand as well.

https://www.schwab.com/learn/story/prim ... x%20return.
If you dont have a loss to harvest before the dividend reinvestment, but sometime in the 30 days after the reinvestment you do, it means the tax lot associated w/ the dividend reinvestment is down, therefor you can sell that tax lot along with the rest, and it isnt a wash. That sale isn't a replacement for that dividend reinvestment, it's the reinvestment itself. Someone can correct me if I'm wrong, but I believe that's how it works.

Usually people don't liquidate their entire position in order to harvest a loss for the year. It's the smaller purchase lots.

Say you've been buying VTI over the last 15 years. It should have a a huge amount of capital gains in total, but some individual purchases over that time period (like from dividend reinvestment) may have a loss. You just want to sell those specific units, not everything (because you then couldn't take a loss because the whole lot has a gain).
Yes, but the lot in question, the one reinvested from dividends, should be one of those lots being sold. So wouldnt that remove its purchase from any wash transactions?
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Re: Does it really help to turn off automatic div reinvestment

Post by zaplunken »

illumination wrote: Fri Jun 02, 2023 4:48 pm
muel87 wrote: Fri Jun 02, 2023 2:49 pm
illumination wrote: Thu Jun 01, 2023 6:56 pm My problem is not having it on dividend reinvestment is a "gateway drug" for me to start market timing. I think for me (and most investors) that's a bigger issue than potentially causing a wash sale.

Even if you don't set it for auto reinvestment, at what date do you decide it's "okay" to invest so you won't have a potential wash sale? At year end? I always find the 30 day window after a purchase to be the one that can make things tricky.

Even with automatic dividend reinvestment, I'm able to harvest losses during downturns. I might have to set a reminder on my phone, but it's not much of a problem.
Why would the 30 day after window make things tricky? If it's declined within 30 days, that purchase will be down and you can harvest it.

Not sure if I'm understanding your question correctly, but say you had an automatic dividend reinvestment less than 30 days ago and you then tried to tax loss harvest that security, that would trigger a wash sale. It's a 30 days window before and after you take the loss.

People usually understand you have to wait 30 days after the sale to buy back in, but you also have to look beforehand as well.


https://www.schwab.com/learn/story/prim ... x%20return.
Exactly.

Also, if the OP holds VXUS in any other account whether at Vanguard or anywhere else, those other accounts can't be buying VXUS 30 days before or after too. Wash sale rules are tricky, it is not as straight forwards as it may appear.

I have dozens of reinvestments for total stock and total international MF in my taxable account, perhaps over a hundred, many of those lots are pretty small. So what. I can sell the specific ID lots that are losses against the ones that have gains and get it to net out close to zero and then do whatever with the money if I want to clean up the taxable account. I have a few years of TLH carry over from 2022 so I have no need to create a loss for a few years.
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