1st time investing outside of retirement accounts

[kongmen]

I know to buy only stock funds no reits no bond funds but what about returns from the funds (not from selling) should I accumulate then buy more or just dividend reinvest I read dividend reinvest can cause a tax nightmare.

Will I have to pay taxes every year on this account even without selling (wife does taxes with turbo tax)? Please advise. Thank you.

[pb4uski]

If the investment are in a taxable account (for example a brokerage account, and NOT in an IRA, 401k or some similar account) then any dividends that you receive would be included in income on your taxes in the year received whether you take them in cash or reinvest them.

Today, the mutual fund companies are required to track your basis and report sale and basis information to the IRS so reinvesting dividends is not the tax nightmare it was in the past.

[easysurfer]

No bond funds? Hmmm...the older I get, the more I am into bond funds instead of stock funds.

[Animorph]

Quote:

Originally Posted by pb4uski If the investment are in a taxable account (for example a brokerage account, and NOT in an IRA, 401k or some similar account) then any dividends that you receive would be included in income on your taxes in the year received whether you take them in cash or reinvest them. Today, the mutual fund companies are required to track your basis and report sale and basis information to the IRS so reinvesting dividends is not the tax nightmare it was in the past.

+1.

You may also get long-term or short-term capital gains distributions, all taxable. You can select funds to minimize distributions, but don't do that at the expense of gains.

Turbo Tax can download all the tax information you need from many brokers. You might want to make sure yours is on the list before committing to it. Easy enough, and it will walk you through it. But it is another thing to do and understand.

[steelyman]

pb4uski is right.

Yes, you do have to report and pay taxes on distributions annually in a taxable account. Not fun, but I think of it as spreading the "tax pain" out over a number of years rather than one huge lump when you sell.

[kongmen]

Yes this is outside of any type of retirement account.

I'm covering bonds in retirement accounts.

[pb4uski]

One other thing - if you are in the 10% or 15% tax brackets (roughly <$90k of income for a couple assuming standard deduction) then both qualified dividends and long-term capital gains are taxed at 0%.

If you in the 25% tax bracket then they are tax at a 15% preferential rate.

If you are above the 25% tax bracket, you can afford to pay someone to tell you how they are taxed.

[GoodWishes]

DH uses TurboTax. The brokerages are required to send you 1099s for dividends, capital gains with basis in January. You just need to enter the info into TurboTax or download the info. Pretty simple actually.

Before the brokerages are required to track and report, you have to track the basis yourself, it was much worse. In fact we have stocks we bought years ago that we don't think we know the basis. We will have to worry about that when we sell

[tuixiu]

Quote:

Originally Posted by kongmen Yes this is outside of any type of retirement account. I'm covering bonds in retirement accounts.

Sounds like you've got the main concepts for tax efficiency, it took me some trial and error and asking questions on this forum to get my stash straight.

Right now for taxable I've got all in total international stock index, everything else is in tax advantaged. It happens to work about right for our asset allocation with intl equities.

And TurboTax walks you thru it pretty easily, can often pull in the numbers for you from a major brokerage.

[kongmen]

So when a person starts taking distributions from a taxed account say 10 years after starting it and paying taxes annually along the way how does one approach taxes at that point?

[travelover]

Quote:

Originally Posted by kongmen So when a person starts taking distributions from a taxed account say 10 years after starting it and paying taxes annually along the way how does one approach taxes at that point?

At the end of the year, you will get a statement that tells you how much you withdrew and what portion was taxable.

[steelyman]

Quote:

Originally Posted by kongmen So when a person starts taking distributions from a taxed account say 10 years after starting it and paying taxes annually along the way how does one approach taxes at that point?

Hopefully, you'll have gains (increase in share price). The fund company/brokerage will send you a form listing them and you report them on your taxes. But you'll already have covered your earlier distributions as you've gone along.

If you have losses, you can deduct up to $3K from your income and carry excess losses to future years.

[RunningBum]

Quote:

Originally Posted by kongmen So when a person starts taking distributions from a taxed account say 10 years after starting it and paying taxes annually along the way how does one approach taxes at that point?

Not sure how all companies do it, but with the new tax reporting laws that started this year (or was it last year?) Vanguard allows the option to sell shares based on avg cost, FIFO, or specific ID, and with specific ID Vanguard presents me with all available blocks of shares. I use specific ID because it gives me the most flexibility. Based on my situation with respect to staying under a tax bracket or PPACA subsidy cap, I may choose to sell shares that give me a loss or smaller gain or I may have reason to choose to take a larger gain (primarily if my LTCGs are going to be 0%, though I'd usually want to do more Roth conversion instead).

At the end of the year Vanguard sends me a 1099 detailing the transactions and LT and ST gains and losses.

Once you do average cost you can't use the other methods. Not sure if the reverse is true, and whether you can switch between FIFO and specID.

[RunningBum]

One more note on how to look at it, which is basically what others have said: reinvesting dividends is no different than taking the dividends in cash and buying more of the same fund immediately, if you had the capability to buy as quickly as they do with reinvesting. The accounting is the same: the dividend is taxed, and you have a new purchase that must be tracked (basis for later sale). Fortunately the MF company will track it for you.

And yet another note: another reason to hang onto the lower priced shares is that if you die, your heirs get it at a stepped up basis. So let's say you had 1000 shares at $10 and 1000 shares at $20, and you sold 1000 shares at $30 and died with 1000 shares remaining at a value of $40/share.

If you had sold the $10 shares, you paid taxes on $20,000 capital gains (1000*($30-$10)), and your heirs get 1000 shares which now have a basis of $40,000.

If you had sold the $20 shares, you paid taxes on just $10,000 cap gains (1000*($30-$20)), and your heirs get 1000 shares which have the same basis of $40,000.

If you paid 15% LTCG taxes on the sale, you and your estate came out $1500 ahead in the second case.

[kongmen]

These replies have helped tremendously. Thank you guys so much I really do appreciate it. Taxes are really a big deal.