To dividend reinvest or not in taxable accounts?

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hiddenpower
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To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

Curious what most here do with respect to dividend reinvestment in taxable accounts. Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
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Re: To dividend reinvest or not in taxable accounts?

Post by homebuyer6426 »

I keep it on, except for investments that I'm trying to dial down and reduce my percentage in, or on the rare investments in things like trusts where you're expected to keep track of the cost basis manually come tax time.

I'm in the accumulation phase so I pay taxes out of my bank account. But I also have 5% in other liquid reserves that I could use if needed.
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climber2020
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Re: To dividend reinvest or not in taxable accounts?

Post by climber2020 »

Mine's set to auto. Minimizes the risk of behavioral errors.

I turn it off for 31 days if it's around distribution time when I tax loss harvest once every few years.

Extra taxes are withheld from my paycheck to cover the dividends.
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Re: To dividend reinvest or not in taxable accounts?

Post by 20cm »

hiddenpower wrote: Tue Jun 06, 2023 11:16 am or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
Regardless of whether your reinvest dividends or not, the tax impact is the same.

As for the title question, I never turn on automatic reinvestment. I prefer to use dividends for rebalancing as needed. Also, in taxable accounts dividends create the extra headache of creating more tax lots, and more opportunities to create wash sales.
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Re: To dividend reinvest or not in taxable accounts?

Post by livesoft »

In a taxable account whether one automatically reinvests dividends or takes them in cash and does something manually with them (reinvest manually, spend manually, whatever) there are no differences on one's tax return since the Form 1099-DIV will be the same and Form 1040 Schedule B will be the same in both cases.

We used to automatically reinvest when we were in our 20s and 30s, then switched to taking the dividends in cash. For one thing, we can manually reinvest ETF dividends a day sooner than our brokerages can automatically reinvest them.

As for taxes, when we had W-2 income then our paychecks had enough withheld to avoid any penalties each year. In retirement, just make a tax payment as needed from our checking account with IRS Direct Pay. It is just another bill to pay no different from paying a credit card bill. We've been doing our own tax returns for more than 50 years, so all this stuff is easy for us.
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Re: To dividend reinvest or not in taxable accounts?

Post by ThankYouJack »

I don't have it turned on. I don't see any advantage for me to have it on, but see some disadvantages (mentioned above).
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Re: To dividend reinvest or not in taxable accounts?

Post by JayDee37 »

I have mine set to distribute as cash so that I can reinvest them in whatever way makes sense given any drift from my desired AA. Sometimes I spend the cash instead of reinvesting it if an unexpected expense has recently come up.

I have set up my tax withholding on my paychecks to cover the additional dividend income I expect each year since that is the simplest way for me to deal with the taxes.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

climber2020 wrote: Tue Jun 06, 2023 11:29 am Mine's set to auto. Minimizes the risk of behavioral errors.

I turn it off for 31 days if it's around distribution time when I tax loss harvest once every few years.

Extra taxes are withheld from my paycheck to cover the dividends.
Are you only TLH-ing during small periods of the year? If so, curious which? Each quarter? Once a year? It seems vanguard and ishares' have some overlapping distribution months. Thanks!
livesoft wrote: Tue Jun 06, 2023 11:36 am In a taxable account whether one automatically reinvests dividends or takes them in cash and does something manually with them (reinvest manually, spend manually, whatever) there are no differences on one's tax return since the Form 1099-DIV will be the same and Form 1040 Schedule B will be the same in both cases.

We used to automatically reinvest when we were in our 20s and 30s, then switched to taking the dividends in cash. For one thing, we can manually reinvest ETF dividends a day sooner than our brokerages can automatically reinvest them.

As for taxes, when we had W-2 income then our paychecks had enough withheld to avoid any penalties each year. In retirement, just make a tax payment as needed from our checking account with IRS Direct Pay. It is just another bill to pay no different from paying a credit card bill. We've been doing our own tax returns for more than 50 years, so all this stuff is easy for us.
So do you just carve off 20-30% of the dividend and keep it to the side in a tbill etf or something?
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Re: To dividend reinvest or not in taxable accounts?

Post by steadyosmosis »

hiddenpower wrote: Tue Jun 06, 2023 11:16 am Curious what most here do with respect to dividend reinvestment in taxable accounts.
Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? Take it as cash, withhold nothing for taxes.
If not, how do you manage the amount owed come April the next year? If I owe tax come April, I just pay it.
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Re: To dividend reinvest or not in taxable accounts?

Post by climber2020 »

hiddenpower wrote: Tue Jun 06, 2023 11:59 am
climber2020 wrote: Tue Jun 06, 2023 11:29 am Mine's set to auto. Minimizes the risk of behavioral errors.

I turn it off for 31 days if it's around distribution time when I tax loss harvest once every few years.

Extra taxes are withheld from my paycheck to cover the dividends.
Are you only TLH-ing during small periods of the year? If so, curious which? Each quarter? Once a year? It seems vanguard and ishares' have some overlapping distribution months. Thanks!
I wait until I can harvest a substantial amount. I did TLH in March 2020, summer 2022, and fall 2022.

Since I harvested losses all along the way, many of my shares were bought at super low prices and never exchanged back to the original fund, so even a 50% drop would still leave many of these shares with long term gains.

I don't consider distribution timing when I do this; if there's a dividend coming up, I turn off automatic reinvestments for a short time. If there's no dividend coming up, I don't do anything.
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Re: To dividend reinvest or not in taxable accounts?

Post by Morik »

I do not auto reinvest--instead I manually put dividends into whatever needs them most for rebalancing.
E.g., if I have an AA of:
A: 50%
B: 30%
C: 20%

And my account currently has:
A: 55%
B: 29%
C: 16%

Then I'll put dividends into C.
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Re: To dividend reinvest or not in taxable accounts?

Post by dbr »

hiddenpower wrote: Tue Jun 06, 2023 11:59 am

So do you just carve off 20-30% of the dividend and keep it to the side in a tbill etf or something?
I have dividend income, among other sources of income through the year. Being past the necessary age I also have RMDs from my 401k. I take the distribution at year end and withhold from it the total I expect to pay that year in state and federal taxes. It can happen that sometimes there is a large income item that justifies sending in an estimated tax payment.

If you have enough dividend income to worry about saving money to pay taxes at year end it is likely you should be paying estimated taxes every quarter. But you just look at your tax liabilities and work out a reasonable method of managing cash flow. It is always an exercise in detail.
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Re: To dividend reinvest or not in taxable accounts?

Post by vrr106 »

I wouldn't let the tail that is owed taxes wag the dog that is the real reason you invest. If you received a bonus for the amount that is your dividend, what would you do with it? If you would invest in the same funds, then reinvest. If you would invest in another fund, then redirect to that fund. If you need the cash for expenses, then don't reinvest - but let those be your guiding principles. Just my opinion.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

vrr106 wrote: Tue Jun 06, 2023 12:42 pm I wouldn't let the tail that is owed taxes wag the dog that is the real reason you invest. If you received a bonus for the amount that is your dividend, what would you do with it? If you would invest in the same funds, then reinvest. If you would invest in another fund, then redirect to that fund. If you need the cash for expenses, then don't reinvest - but let those be your guiding principles. Just my opinion.
You have to pay it from somewhere, so the heart of the question is if you carve off part of the dividend for later payment.

On a related note, do folks usually use the dividends as part of their 4% rule payment in retirement? I would assume so but I also know dividends can drop low throughout the year during volatile times.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

climber2020 wrote: Tue Jun 06, 2023 12:24 pm
hiddenpower wrote: Tue Jun 06, 2023 11:59 am
climber2020 wrote: Tue Jun 06, 2023 11:29 am Mine's set to auto. Minimizes the risk of behavioral errors.

I turn it off for 31 days if it's around distribution time when I tax loss harvest once every few years.

Extra taxes are withheld from my paycheck to cover the dividends.
Are you only TLH-ing during small periods of the year? If so, curious which? Each quarter? Once a year? It seems vanguard and ishares' have some overlapping distribution months. Thanks!
I wait until I can harvest a substantial amount. I did TLH in March 2020, summer 2022, and fall 2022.

Since I harvested losses all along the way, many of my shares were bought at super low prices and never exchanged back to the original fund, so even a 50% drop would still leave many of these shares with long term gains.

I don't consider distribution timing when I do this; if there's a dividend coming up, I turn off automatic reinvestments for a short time. If there's no dividend coming up, I don't do anything.
Nice. Not sure if you're aware, but if you buy a fund within 30 days of its dividend, then it's all going to be ordinary income. Gives me a little pause.
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Re: To dividend reinvest or not in taxable accounts?

Post by climber2020 »

hiddenpower wrote: Tue Jun 06, 2023 12:45 pm Nice. Not sure if you're aware, but if you buy a fund within 30 days of its dividend, then it's all going to be ordinary income. Gives me a little pause.
A good reason not to TLH too frequently.
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Re: To dividend reinvest or not in taxable accounts?

Post by livesoft »

hiddenpower wrote: Tue Jun 06, 2023 11:59 amAre you only TLH-ing during small periods of the year? If so, curious which? Each quarter? Once a year? It seems vanguard and ishares' have some overlapping distribution months. Thanks!
We tax-loss harvest when there are losses to tax-loss harvest. There is absolutely no predicting when that happen. Think about it: If we knew there were going to be losses, then we would probably sell beforehand to avoid losses, right? Tax-loss harvesting is a whole 'nuther topic, but lets just say that in 2000, 2009, 2020 there were some major drops in the stock market values, so that realizing a few hundred thousand dollars at those times was enough to have carryover losses past 2023. I can write that we have not tax-loss harvested since about 2016 mostly because any shares in our taxable account that we purchased after 2016 were sold for gains.
So do you just carve off 20-30% of the dividend and keep it to the side in a tbill etf or something?
No. Our qualified dividends are taxed at 0%, so that helps. Non-qualified dividends are offset by our Foreign Tax Credit and $3,000 applied from our realized losses. Since we are retired, if we need money for expenses that we don't have, then we sell some shares to get that money. Taxes are just an expense, so we don't carve out anything and do not have T-bill ETF, savings accounts, nor CDs. We keep our fixed income investments (basically Total US Bond Index) in our retirement account.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

livesoft wrote: Tue Jun 06, 2023 1:08 pm
hiddenpower wrote: Tue Jun 06, 2023 11:59 amAre you only TLH-ing during small periods of the year? If so, curious which? Each quarter? Once a year? It seems vanguard and ishares' have some overlapping distribution months. Thanks!
We tax-loss harvest when there are losses to tax-loss harvest. There is absolutely no predicting when that happen. Think about it: If we knew there were going to be losses, then we would probably sell beforehand to avoid losses, right? Tax-loss harvesting is a whole 'nuther topic, but lets just say that in 2000, 2009, 2020 there were some major drops in the stock market values, so that realizing a few hundred thousand dollars at those times was enough to have carryover losses past 2023. I can write that we have not tax-loss harvested since about 2016 mostly because any shares in our taxable account that we purchased after 2016 were sold for gains.
So do you just carve off 20-30% of the dividend and keep it to the side in a tbill etf or something?
No. Our qualified dividends are taxed at 0%, so that helps. Non-qualified dividends are offset by our Foreign Tax Credit and $3,000 applied from our realized losses. Since we are retired, if we need money for expenses that we don't have, then we sell some shares to get that money. Taxes are just an expense, so we don't carve out anything and do not have T-bill ETF, savings accounts, nor CDs. We keep our fixed income investments (basically Total US Bond Index) in our retirement account.
Thanks. So if the fund is down massively, you make the change even if it would result in higher ordinary income from the 30 day dividend rule. Maybe this is an over-optimization but one could systematically only do TLH-ing during windows between dividend yielding dates.

For the FTC my understanding is that the order of operations is that ordinary income is first taxed, then dividends are up next (and potentially starting at a higher bracket). FTC can offset it but not completely negate it right? I've heard that if income is low, it's difficult to take the full FTC. Can that be gamed by roth conversions somehow? Or would that too only be partial?
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Re: To dividend reinvest or not in taxable accounts?

Post by livesoft »

hiddenpower wrote: Tue Jun 06, 2023 1:45 pmThanks. So if the fund is down massively, you make the change even if it would result in higher ordinary income from the 30 day dividend rule. Maybe this is an over-optimization but one could systematically only do TLH-ing during windows between dividend yielding dates.
I am unaware of any 30-day dividend rule.

If a fund is down massively, then it would have had to happen suddenly because if it was slow, then I would have already tax-loss harvest it.

Don't forget that quarterly dividends are rather puny and changing their tax rate from 0% to 15% might be an extra $10 in taxes, so really nothing to worry about for me.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

livesoft wrote: Tue Jun 06, 2023 1:55 pm
hiddenpower wrote: Tue Jun 06, 2023 1:45 pmThanks. So if the fund is down massively, you make the change even if it would result in higher ordinary income from the 30 day dividend rule. Maybe this is an over-optimization but one could systematically only do TLH-ing during windows between dividend yielding dates.
I am unaware of any 30-day dividend rule.

If a fund is down massively, then it would have had to happen suddenly because if it was slow, then I would have already tax-loss harvest it.

Don't forget that quarterly dividends are rather puny and changing their tax rate from 0% to 15% might be an extra $10 in taxes, so really nothing to worry about for me.
Whoops what I meant was the 60 day rule outlined here https://www.whitecoatinvestor.com/the-6 ... dend-rule/
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Re: To dividend reinvest or not in taxable accounts?

Post by livesoft »

hiddenpower wrote: Tue Jun 06, 2023 1:58 pmWhoops what I meant was the 60 day rule outlined here https://www.whitecoatinvestor.com/the-6 ... dend-rule/
Consider this: If I have been tax-loss harvesting diligently all along, then I would rarely tax-loss harvest any shares that were not purchased recently because the older shares were bought a long time ago and have appreciated OR they were bought at a market low from a previous TLH and have appreciated from that point. So neither of those lots of shares would have losses to tax-loss harvest.

So once one has a portfolio going for a little while, any tax-loss harvesting is done on a small part of the portfolio consisting of mostly recently purchased shares. Only THOSE shares and NOT the bulk of the shares that one might own will thus be subject to any personal holding period for better dividend tax rate. I just would calculate the tax cost for it and make a decision. If the tax change was $10, then I wouldn't care. Maybe you can give me an example and show the tax change? I noticed that the WhiteCoatInvestor piece mentioned 20% change in tax rate, but 20% of $50 is only $10.
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Re: To dividend reinvest or not in taxable accounts?

Post by secondopinion »

hiddenpower wrote: Tue Jun 06, 2023 11:16 am Curious what most here do with respect to dividend reinvestment in taxable accounts. Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
I do not reinvest my dividends. If I need the cash for anything, I just take it. Otherwise, it gets invested where it needs to (which often is not the same investment).
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Re: To dividend reinvest or not in taxable accounts?

Post by muffins14 »

I invest it per my AA, I don’t auto-reinvest in the same ETF because it might be not the correct rebalancing action.

I save nothing during the year for taxes in April, and then just pay the bill when sue.
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Re: To dividend reinvest or not in taxable accounts?

Post by radiowave »

I turn on/off taxable reinvest like a spigot if I need to bulk up cash or make a major purchase or currently off as we are in transition between two houses buy/sell so have duplicate expenses.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

livesoft wrote: Tue Jun 06, 2023 2:07 pm
hiddenpower wrote: Tue Jun 06, 2023 1:58 pmWhoops what I meant was the 60 day rule outlined here https://www.whitecoatinvestor.com/the-6 ... dend-rule/
Consider this: If I have been tax-loss harvesting diligently all along, then I would rarely tax-loss harvest any shares that were not purchased recently because the older shares were bought a long time ago and have appreciated OR they were bought at a market low from a previous TLH and have appreciated from that point. So neither of those lots of shares would have losses to tax-loss harvest.

So once one has a portfolio going for a little while, any tax-loss harvesting is done on a small part of the portfolio consisting of mostly recently purchased shares. Only THOSE shares and NOT the bulk of the shares that one might own will thus be subject to any personal holding period for better dividend tax rate. I just would calculate the tax cost for it and make a decision. If the tax change was $10, then I wouldn't care. Maybe you can give me an example and show the tax change? I noticed that the WhiteCoatInvestor piece mentioned 20% change in tax rate, but 20% of $50 is only $10.
Thanks makes sense! Do you have to hand pick out each lot or can you setup your broker to sell the right lots with some preferential ordering within its settings?

Do you also have rules in place, such as only sell if >20% decline for asset A?

As an example living in california with a high braket could push the qualified dividend + state tax from ~35% to ~50%.

From what I can tell, TLHing is a no brainer. It muddies up the account with more assets but if you do any sort of trading in a side account or use an SMA, it will defer those gains (and alpha, if you ultimately achieve any)
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Re: To dividend reinvest or not in taxable accounts?

Post by livesoft »

hiddenpower wrote: Tue Jun 06, 2023 4:26 pmThanks makes sense! Do you have to hand pick out each lot or can you setup your broker to sell the right lots with some preferential ordering within its settings?
I use Specific Identification and pick myself. Some brokerages have "highest cost" option which should give least gain (aka most loss), but I find it trivial to select oneself.

Do you also have rules in place, such as only sell if >20% decline for asset A?
No rules which would unnecessarily constrain me.
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Re: To dividend reinvest or not in taxable accounts?

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livesoft wrote: Tue Jun 06, 2023 4:32 pm
hiddenpower wrote: Tue Jun 06, 2023 4:26 pmThanks makes sense! Do you have to hand pick out each lot or can you setup your broker to sell the right lots with some preferential ordering within its settings?
I use Specific Identification and pick myself. Some brokerages have "highest cost" option which should give least gain (aka most loss), but I find it trivial to select oneself.

Do you also have rules in place, such as only sell if >20% decline for asset A?
No rules which would unnecessarily constrain me.
Awesome, thanks for the perspective.

Based on the feedback from everyone here, I'll take my dividends as cash and reinvest a portion and put the taxes owed into SGOV or make an estimated payment at that time.
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Re: To dividend reinvest or not in taxable accounts?

Post by placeholder »

My portfolio outside of the 401k is all etfs and I don't like fractional shares so that's one reason I don't reinvest the other being that I use the dividends to perform inline rebalancing.
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Re: To dividend reinvest or not in taxable accounts?

Post by Hacksawdave »

In my taxable account, some of both. It would be a decision based upon the individual’s needs and stategy.

• I always reinvest dividends from the S&P index fund
• I take the cash dividends (and CGs if applicable) from the three CA tax-exempt funds
• I take the dividends, but reinvest the CGs from the STAR fund

I am in the zero percent QD/LTCG rate, so taxes are not an issue. I don’t TLH as it would be counterproductive.
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Re: To dividend reinvest or not in taxable accounts?

Post by bertilak »

hiddenpower wrote: Tue Jun 06, 2023 11:16 am Curious what most here do with respect to dividend reinvestment in taxable accounts. Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
Whether or not to reinvest dividends depends on whether or not you have something better to do with the money.

Generally, there will be something better. It would be quite a coincidence if the best place to put the money just happened to be back into the investment it came from. You can at least use it to beef up whatever asset is below it's target allocation.

If you need income to cover expenses, spend ithe dividend where most needed (taxes, mortgage, food, clothing, shelter, new car, etc.). After all, you are already committed to paying any taxes on the dividend. Don't get needed money in a way to generate more taxes.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

bertilak wrote: Thu Jun 08, 2023 10:22 am
hiddenpower wrote: Tue Jun 06, 2023 11:16 am Curious what most here do with respect to dividend reinvestment in taxable accounts. Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
Whether or not to reinvest dividends depends on whether or not you have something better to do with the money.

Generally, there will be something better. It would be quite a coincidence if the best place to put the money just happened to be back into the investment it came from. You can at least use it to beef up whatever asset is below it's target allocation.

If you need income to cover expenses, spend ithe dividend where most needed (taxes, mortgage, food, clothing, shelter, new car, etc.). After all, you are already committed to paying any taxes on the dividend. Don't get needed money in a way to generate more taxes.
fwiw i was mainly talking about it from the perspective of withholding for cap gains and if folks do it continuously throughout the year or through other means.
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Re: To dividend reinvest or not in taxable accounts?

Post by barnaclebob »

Im a keep it simple fan. On one account that is solely in my name from an inheritance I have them set to pay in cash and funnel that money into a 529. For our joint account that is still accumulating I have them set to reinvest and use new contributions to re-balance. A small wash sale or multiple lots doesnt really bother me, the tax software handles all of that.
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Re: To dividend reinvest or not in taxable accounts?

Post by Booper »

hiddenpower wrote: Tue Jun 06, 2023 11:16 am Curious what most here do with respect to dividend reinvestment in taxable accounts. Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
This is an issue that I face too. Due to an inheritance that I chose to invest in a Brokerage account, I just learned that my portfolios' tax liability is substantial. I was very surprised at how much I owed, and I just sold shares to pay the liability.

In my case, I view the portfolio as a long-term investment, so reinvesting the dividends just makes the most sense for me. In terms of how I pay for the liability, this is what I've decided to do:
* Start paying taxes on a quarterly basis. This will reduce the surprise, and the numbers are also smaller.
* I'm actually in a position where I can contribute to the portfolio on a monthly basis. After maxing out my 401k, there's money left over, and I've been investing it. Now instead of investing that money each month in long-term investments (e.g. total stock and total bond funds), I'm first setting aside money in a money market fund to pay next quarter's estimated tax payment. I just thought that buying funds one month because I have extra money left over, and then selling funds the next month to pay an estimated tax liability, felt funny.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

1) If you have a wash, does it exist as a marker in your broker forever? I believe they mark the wash sales but was wondering if this is temporary until you file taxes that year?

2) I assume people use dividends as part of their 4% SWR plans?
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Re: To dividend reinvest or not in taxable accounts?

Post by solarcub »

hiddenpower wrote: Thu Jun 08, 2023 10:24 am
bertilak wrote: Thu Jun 08, 2023 10:22 am
hiddenpower wrote: Tue Jun 06, 2023 11:16 am Curious what most here do with respect to dividend reinvestment in taxable accounts. Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
Whether or not to reinvest dividends depends on whether or not you have something better to do with the money.

Generally, there will be something better. It would be quite a coincidence if the best place to put the money just happened to be back into the investment it came from. You can at least use it to beef up whatever asset is below it's target allocation.

If you need income to cover expenses, spend ithe dividend where most needed (taxes, mortgage, food, clothing, shelter, new car, etc.). After all, you are already committed to paying any taxes on the dividend. Don't get needed money in a way to generate more taxes.
fwiw i was mainly talking about it from the perspective of withholding for cap gains and if folks do it continuously throughout the year or through other means.
I had this "problem" due to high cap gains from the Wellington fund. I solved it by increasing my withholding at work to cover the taxes, then I solved it more by directing the dividends to Total Stock instead of Wellington, slowly reducing the amount of dividends and cap gains.
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hiddenpower
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

solarcub wrote: Thu Jun 08, 2023 12:09 pm
hiddenpower wrote: Thu Jun 08, 2023 10:24 am
bertilak wrote: Thu Jun 08, 2023 10:22 am
hiddenpower wrote: Tue Jun 06, 2023 11:16 am Curious what most here do with respect to dividend reinvestment in taxable accounts. Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
Whether or not to reinvest dividends depends on whether or not you have something better to do with the money.

Generally, there will be something better. It would be quite a coincidence if the best place to put the money just happened to be back into the investment it came from. You can at least use it to beef up whatever asset is below it's target allocation.

If you need income to cover expenses, spend ithe dividend where most needed (taxes, mortgage, food, clothing, shelter, new car, etc.). After all, you are already committed to paying any taxes on the dividend. Don't get needed money in a way to generate more taxes.
fwiw i was mainly talking about it from the perspective of withholding for cap gains and if folks do it continuously throughout the year or through other means.
I had this "problem" due to high cap gains from the Wellington fund. I solved it by increasing my withholding at work to cover the taxes, then I solved it more by directing the dividends to Total Stock instead of Wellington, slowly reducing the amount of dividends and cap gains.
2-3% yields on total stock ought to cause this problem for many accumulators. Was wellington 5%+ or something? I don't follow.
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Re: To dividend reinvest or not in taxable accounts?

Post by Hacksawdave »

hiddenpower wrote: Thu Jun 08, 2023 11:45 am I assume people use dividends as part of their 4% SWR plans?
I'm an early retiree. I don’t use a multiple, percentage or a SWR factor. I use forward budgeting and cashflows to position multiple “buckets” to move spending funds to and draw income from. I already have 2024’s draw positioned regardless of what stocks or bonds do this year. It's all about the cashflow for the budget. So, some people do and some people don't.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

Hacksawdave wrote: Thu Jun 08, 2023 12:21 pm
hiddenpower wrote: Thu Jun 08, 2023 11:45 am I assume people use dividends as part of their 4% SWR plans?
I'm an early retiree. I don’t use a multiple, percentage or a SWR factor. I use forward budgeting and cashflows to position multiple “buckets” to move spending funds to and draw income from. I already have 2024’s draw positioned regardless of what stocks or bonds do this year. It's all about the cashflow for the budget. So, some people do and some people don't.
That seems inefficient if you have to eat the yields next year anyway, unless you are able to tax gain harvest through that.
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Re: To dividend reinvest or not in taxable accounts?

Post by Hacksawdave »

hiddenpower wrote: Thu Jun 08, 2023 12:23 pm
Hacksawdave wrote: Thu Jun 08, 2023 12:21 pm
hiddenpower wrote: Thu Jun 08, 2023 11:45 am I assume people use dividends as part of their 4% SWR plans?
I'm an early retiree. I don’t use a multiple, percentage or a SWR factor. I use forward budgeting and cashflows to position multiple “buckets” to move spending funds to and draw income from. I already have 2024’s draw positioned regardless of what stocks or bonds do this year. It's all about the cashflow for the budget. So, some people do and some people don't.
That seems inefficient if you have to eat the yields next year anyway, unless you are able to tax gain harvest through that.
Not at all and it works great. I use Vanguard’s CA tax-exempt funds so my QD/ LTCG tax rate is zero. My effective federal and state combined tax rate will be 3.15% this year. Reinvesting the VFINX dividends and STAR LTCGs provide extra growth and more income producing shares at a near zero tax when you factor in CA tax rates.

It’s not that much work and I still have the MF platform on my account to make them simple clicks. TLH makes no sense as I would have to realize a loss to cancel out a zero-taxed gain with no real benefit taxwise to show for it.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

Hacksawdave wrote: Thu Jun 08, 2023 12:41 pm
hiddenpower wrote: Thu Jun 08, 2023 12:23 pm
Hacksawdave wrote: Thu Jun 08, 2023 12:21 pm
hiddenpower wrote: Thu Jun 08, 2023 11:45 am I assume people use dividends as part of their 4% SWR plans?
I'm an early retiree. I don’t use a multiple, percentage or a SWR factor. I use forward budgeting and cashflows to position multiple “buckets” to move spending funds to and draw income from. I already have 2024’s draw positioned regardless of what stocks or bonds do this year. It's all about the cashflow for the budget. So, some people do and some people don't.
That seems inefficient if you have to eat the yields next year anyway, unless you are able to tax gain harvest through that.
Not at all and it works great. I use Vanguard’s CA tax-exempt funds so my QD/ LTCG tax rate is zero. My effective federal and state combined tax rate will be 3.15% this year. Reinvesting the VFINX dividends and STAR LTCGs provide extra growth and more income producing shares at a near zero tax when you factor in CA tax rates.

It’s not that much work and I still have the MF platform on my account to make them simple clicks. TLH makes no sense as I would have to realize a loss to cancel out a zero-taxed gain with no real benefit taxwise to show for it.
Got it! That's basically tax gain harvesting.
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Re: To dividend reinvest or not in taxable accounts?

Post by Booper »

hiddenpower wrote: Thu Jun 08, 2023 11:45 am ...

2) I assume people use dividends as part of their 4% SWR plans?
The answer to this question is "yes".
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Re: To dividend reinvest or not in taxable accounts?

Post by dbr »

hiddenpower wrote: Thu Jun 08, 2023 11:45 am
2) I assume people use dividends as part of their 4% SWR plans?
Not so simple. SWR means "safe withdrawal rate" so dividends are part of the withdrawal if you in fact withdraw them and not if you don't. Exactly where the boundary falls that defines that you have withdrawn is a cash flow management issue and also a matter of consistent bookkeeping regarding what is counted as portfolio assets and what is not.

So, yes, a person can easily have dividends sent to a checking account and if considering the checking account to not be part of the portfolio, there is a withdrawal. A person could send the dividends to some other asset, such as a money market fund that is a cash holding inside the portfolio and then the dividends are not withdrawals as such. I send my dividends to a checking account but define the checking account to be inside the portfolio. For that reason withdrawals happen whenever a check is cashed or a debit is taken on the account from outside, such as auto bill pay. My dividends never are withdrawals as such.

The actual bottom line is that dividends for the most part don't signify in either portfolio management or cash management. In a portfolio they are part of return along with all the other elements of return and not distinguished from all the rest. A dividend may involve a transaction, such as being invested in a different asset or reinvested in the original asset, but that is just a transaction not different from any other means of taking money from one asset and putting it in another one. A dividend may be sent somewhere that is considered a withdrawal, but that is not different from any other transaction that constitutes a withdrawal.


Dividends are sometimes significant in that they are counted by the IRS as taxable income if not in a tax protected account. But which of one's transactions are income on a tax return is not really the same accounting as what is a portfolio withdrawal.
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Re: To dividend reinvest or not in taxable accounts?

Post by mikejuss »

This isn't a tax issue: dividends are going to be taxed whether you reinvest them or not. I personally don't reinvest them; I have them swept into my money market account and then use the cash to buy whatever asset in my 3-fund portfolio is lagging. I don't always have new cash to keep my asset allocation in balance, so dividends are helpful in this respect.
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Re: To dividend reinvest or not in taxable accounts?

Post by Hacksawdave »

hiddenpower wrote: Thu Jun 08, 2023 12:43 pm
Hacksawdave wrote: Thu Jun 08, 2023 12:41 pm
hiddenpower wrote: Thu Jun 08, 2023 12:23 pm
Hacksawdave wrote: Thu Jun 08, 2023 12:21 pm
hiddenpower wrote: Thu Jun 08, 2023 11:45 am I assume people use dividends as part of their 4% SWR plans?
I'm an early retiree. I don’t use a multiple, percentage or a SWR factor. I use forward budgeting and cashflows to position multiple “buckets” to move spending funds to and draw income from. I already have 2024’s draw positioned regardless of what stocks or bonds do this year. It's all about the cashflow for the budget. So, some people do and some people don't.
That seems inefficient if you have to eat the yields next year anyway, unless you are able to tax gain harvest through that.
Not at all and it works great. I use Vanguard’s CA tax-exempt funds so my QD/ LTCG tax rate is zero. My effective federal and state combined tax rate will be 3.15% this year. Reinvesting the VFINX dividends and STAR LTCGs provide extra growth and more income producing shares at a near zero tax when you factor in CA tax rates.

It’s not that much work and I still have the MF platform on my account to make them simple clicks. TLH makes no sense as I would have to realize a loss to cancel out a zero-taxed gain with no real benefit taxwise to show for it.
Got it! That's basically tax gain harvesting.
Exactly! I also get a great 'tax arbitrage' from my small $17K 401k distribution. I averaged deferment at 37.57 percent for combined federal and state rates over 31 years and realized the income at a combined 3.15% tax rate.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

mikejuss wrote: Thu Jun 08, 2023 1:02 pm This isn't a tax issue: dividends are going to be taxed whether you reinvest them or not. I personally don't reinvest them; I have them swept into my money market account and then use the cash to buy whatever asset in my 3-fund portfolio is lagging. I don't always have new cash to keep my asset allocation in balance, so dividends are helpful in this respect.
It's more of a tax issue than a balancing issue, since if you reinvested dividends, the 3 fund portfolio should float accordingly with world market cap weights.
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Re: To dividend reinvest or not in taxable accounts?

Post by mikejuss »

hiddenpower wrote: Thu Jun 08, 2023 2:36 pm
mikejuss wrote: Thu Jun 08, 2023 1:02 pm This isn't a tax issue: dividends are going to be taxed whether you reinvest them or not. I personally don't reinvest them; I have them swept into my money market account and then use the cash to buy whatever asset in my 3-fund portfolio is lagging. I don't always have new cash to keep my asset allocation in balance, so dividends are helpful in this respect.
It's more of a tax issue than a balancing issue, since if you reinvested dividends, the 3 fund portfolio should float accordingly with world market cap weights.
I don't see the tax issue. Dividends are taxed regardless of what you do with them. Asset allocation drift may be more or less acceptable to someone according to his or her willingness to take on more or less risk.
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

mikejuss wrote: Thu Jun 08, 2023 2:38 pm
hiddenpower wrote: Thu Jun 08, 2023 2:36 pm
mikejuss wrote: Thu Jun 08, 2023 1:02 pm This isn't a tax issue: dividends are going to be taxed whether you reinvest them or not. I personally don't reinvest them; I have them swept into my money market account and then use the cash to buy whatever asset in my 3-fund portfolio is lagging. I don't always have new cash to keep my asset allocation in balance, so dividends are helpful in this respect.
It's more of a tax issue than a balancing issue, since if you reinvested dividends, the 3 fund portfolio should float accordingly with world market cap weights.
I don't see the tax issue. Dividends are taxed regardless of what you do with them. Asset allocation drift may be more or less acceptable to someone according to his or her willingness to take on more or less risk.
But you have to pay it somehow and from somewhere. It’s just as much decision making as determining how to reinvest.
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Re: To dividend reinvest or not in taxable accounts?

Post by mikejuss »

hiddenpower wrote: Thu Jun 08, 2023 2:56 pm
mikejuss wrote: Thu Jun 08, 2023 2:38 pm
hiddenpower wrote: Thu Jun 08, 2023 2:36 pm
mikejuss wrote: Thu Jun 08, 2023 1:02 pm This isn't a tax issue: dividends are going to be taxed whether you reinvest them or not. I personally don't reinvest them; I have them swept into my money market account and then use the cash to buy whatever asset in my 3-fund portfolio is lagging. I don't always have new cash to keep my asset allocation in balance, so dividends are helpful in this respect.
It's more of a tax issue than a balancing issue, since if you reinvested dividends, the 3 fund portfolio should float accordingly with world market cap weights.
I don't see the tax issue. Dividends are taxed regardless of what you do with them. Asset allocation drift may be more or less acceptable to someone according to his or her willingness to take on more or less risk.
But you have to pay it somehow and from somewhere. It’s just as much decision making as determining how to reinvest.
Not really, if you have an asset allocation you're sticking to.
50% VTSAX | 25% VTIAX | 25% VBTLX (retirement), 25% VTEAX (taxable)
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Re: To dividend reinvest or not in taxable accounts?

Post by hiddenpower »

mikejuss wrote: Thu Jun 08, 2023 3:10 pm
hiddenpower wrote: Thu Jun 08, 2023 2:56 pm
mikejuss wrote: Thu Jun 08, 2023 2:38 pm
hiddenpower wrote: Thu Jun 08, 2023 2:36 pm
mikejuss wrote: Thu Jun 08, 2023 1:02 pm This isn't a tax issue: dividends are going to be taxed whether you reinvest them or not. I personally don't reinvest them; I have them swept into my money market account and then use the cash to buy whatever asset in my 3-fund portfolio is lagging. I don't always have new cash to keep my asset allocation in balance, so dividends are helpful in this respect.
It's more of a tax issue than a balancing issue, since if you reinvested dividends, the 3 fund portfolio should float accordingly with world market cap weights.
I don't see the tax issue. Dividends are taxed regardless of what you do with them. Asset allocation drift may be more or less acceptable to someone according to his or her willingness to take on more or less risk.
But you have to pay it somehow and from somewhere. It’s just as much decision making as determining how to reinvest.
Not really, if you have an asset allocation you're sticking to.
Then the taxation part is more of an issue ;).
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Re: To dividend reinvest or not in taxable accounts?

Post by solarcub »

hiddenpower wrote: Thu Jun 08, 2023 12:11 pm
solarcub wrote: Thu Jun 08, 2023 12:09 pm
hiddenpower wrote: Thu Jun 08, 2023 10:24 am
bertilak wrote: Thu Jun 08, 2023 10:22 am
hiddenpower wrote: Tue Jun 06, 2023 11:16 am Curious what most here do with respect to dividend reinvestment in taxable accounts. Do you just automatically reinvest, or do you take it as cash and withhold a certain % for taxes? If not, how do you manage the amount owed come April the next year?
Whether or not to reinvest dividends depends on whether or not you have something better to do with the money.

Generally, there will be something better. It would be quite a coincidence if the best place to put the money just happened to be back into the investment it came from. You can at least use it to beef up whatever asset is below it's target allocation.

If you need income to cover expenses, spend ithe dividend where most needed (taxes, mortgage, food, clothing, shelter, new car, etc.). After all, you are already committed to paying any taxes on the dividend. Don't get needed money in a way to generate more taxes.
fwiw i was mainly talking about it from the perspective of withholding for cap gains and if folks do it continuously throughout the year or through other means.
I had this "problem" due to high cap gains from the Wellington fund. I solved it by increasing my withholding at work to cover the taxes, then I solved it more by directing the dividends to Total Stock instead of Wellington, slowly reducing the amount of dividends and cap gains.
2-3% yields on total stock ought to cause this problem for many accumulators. Was wellington 5%+ or something? I don't follow.
I don't remember the exact numbers, but if you have $100k in Wellington you will have higher dividends and capital gains than if you have $100k in Total Stock. Part of that is the fact that Wellington has bonds, but I think even if you go $65k Total Stock and $35k Total Bonds, you end up with lower taxable income, since Wellington is actively managed.
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