Hi, new member ruminating on reinvesting dividends/capital gains vs. taking cash

[freed2012]

Hi, I am 56 and coming up on 2 years of ER bliss. Just found this site and it is fantastic - a great deal of individual and collective wisdom, not to mention wit!

Here's my situation: Currently tapping cash reserves for living expenses which allows me to stay in 15% tax bracket (0% capital gains) and be eligible for ACA subsidy (I'm also interested in opinions on using taxable income "capacity" for Roth conversion versus taking the ACA subsidy, but it seems to me like the latter is the better course). After the cash is used, I will tap taxable investments and so should still be able to manage the tax bracket situation via gains/losses on the sales. I have always reinvested mutual fund distributions, but am now thinking about taking them in cash for the following reasons:

Will extend the time I can control my taxable income by using cash, which would now be supplemented by the distributions to cover my living expenses. This of course also delays the day when I have to start selling taxable investment (incurring capital gains) and ultimately, taking IRAs and SS (with the attendant benefits of waiting). Seems like the way to go but my concern is that the whole plan (expected return on portfolio, withdrawal rte, etc.) is based on assumptions about asset class returns, which for equities, reinvested dividends and capital gains are an important component of (dangling participle?). On the other hand, taking the distributions in cash will delay the day when I have to liquidate the funds, allowing more time to earn a lower rate of return (making it kind of a wash?). I am probably overthinking this, but I'm sure others have noodled on it extensively. Would love to hear your views.

Thanks!

 

[omni550]

freed2012,

(Love your moniker, btw). Welcome aboard.

Have you played around with i-ORP? Retirement Calculator - Parameter Form

It doesn't get into ACA, but it is a heavy-duty linear programming optimizer that you might enjoy using.

omni

 

[clifp]

Welcome Freed

I always take dividends or distributions in a taxable account, but often have them reinvested in tax deferred. Now there is no right or wrong answer and it isn't something that makes a big difference.

In my case it is part practical and part psychological.
The psychological part for me is I treat dividends/distributions as paychecks. So when UPS raises its dividend by $.05 a quarter. I say woot I got a $200/year raise, with no brown nosing the boss required.

The practical part is makes taxes simpler and possibly more efficient. Since you can identify I want to sell 200 shares of VTI that I bought at $60 on such and such date rather than a bunch of fractional share bought each and every quarter.

Finally, it also makes rebalancing somewhat less volatile. A typical $1,000,000 portfolio will generate about $20K in interest + dividends and say you need $40K. Lets say the portfolio is 60% stocks 40% bonds and the stocks are up 10% this year while bonds are flat. With regular annual rebalancing, you sell $48K worth stocks, put 40K in your checking accountand buy $8K worth bonds. If you uses the distributions. You only need to sell ~28K worth stock, put $20K in your checking account and buy $8K worth of bonds. If you happen to rebalance on day that market drops 300 points you'll be happier if you sold less.

 

[haha]

I always take dividends or distributions in a taxable account, but often have them reinvested in tax deferred.

This is also my method, solely for ease of tax accounting.

Ha

 

[BigE]

Welcome freed2012 and congratulations on two years. You seem to have a good grasp of finances as it applies to early retirement. Got a kick out of "dangling participle"....haven't heard that one in a while. Look forward to your contributions.

 

[haha]

On the other hand, taking the distributions in cash will delay the day when I have to liquidate the funds, allowing more time to earn a lower rate of return (making it kind of a wash?). I am probably overthinking this, but I'm sure others have noodled on it extensively.

Dunno. I am not even sure what you are talking about.

 

[Milton]

I too have no real idea what s/he means. Too much jargon.

 

[racy]

Freed,
The most tax-efficient way to spend from a retirement portfolio is:
1. Required Minimum Distributions from IRAs at 70.5 years old, then
2. taxable assets' cash flow; when more is needed then sell assets
3. tax-deferred cash flow; when more is needed then sell assets
4. tax-free assets.