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Am I doing it wrong?
Old 03-03-2012, 12:30 PM   #1
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Am I doing it wrong?

Still in accumulation phase, most of the holdings are in VG -- Wellsley, Total Stock Market Index, etc.

Doing my taxes, I see dividend income has grown, about doubled since last year.

I didn't sell anything, other than maybe exchanging into Admiral funds or having to move from Roth to traditional IRA because of income.

So it's great to get all the dividend income but paying a lot of taxes for these unrealized gains.

Of course if the market goes south, than the value of the shares purchased with these dividends (I am reinvesting dividends on all funds), then I will have paid taxes for losses.

Of course there are tax-exempt instruments, but with the discussion in the other thread about 100% equity AA for some retired or near-retirement folks, they have to be paying a lot of dividend taxes, right?
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Old 03-03-2012, 12:44 PM   #2
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I don't hear anything I would think of as wrong. Most of those dividends are probably qualified so you are only paying 15% on them anyway which is probably a deal compared on your marginal tax rate on earned income.

These are not unrealized gains because reinvesting the dividends is the same as taking the dividends in cash and reinvesting them in shares.

Your comment on having to move from Roth to tIRA due to income - I assume that was because you made a Roth contribution earlier in the year and later determined tht your were not eligible to make a Roth contribution.
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Old 03-03-2012, 12:45 PM   #3
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The dividends were realized gains, you just chose to re-invest them.

One thing many folks do is not reinvest the dividends in your taxable account funds. Have them sent to a money market fund, then use them at the end of the year (or whenever) to do your rebalancing. You still have to pay tax on them (because they were paid to you), but at least you don't inadvertently have them re-invested in a fund in which you're already overweight, generating more CG taxes when you sell the shares to rebalance. As a side benefit, this makes your number of purchased "lots" a lot smaller, so it's easier to keep track of the prices you paid when it's time to sell them.

Also, if there are no changes to tax law, your problems get worse in 2013 since all dividends will be taxed at your regular income rate (not the significantly reduced rates we have right now).

It's usually a good idea to put the funds paying highest dividends in your tax-deferred (or tax-free) accounts.

Also, for your holdings in taxable accounts, consider Vanguard's series of Tax Managed funds. They do a good job of reducing your tax bill.
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Old 03-03-2012, 12:45 PM   #4
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If the price drops you'll be able to claim a loss, but only when you sell the fund.

Some people get around this problem by buying and holding growth stocks: no dividend, presumably the company is reinvesting that money in a way to boost share price, and no taxes until you sell.
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Old 03-03-2012, 12:57 PM   #5
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So I did the free financial plan exercise with VG a couple of years ago and they recommended 100% of my 401k in VBTIX and my IRA in VTIAX.

They recommended VWIAX (which I was already in), VTSAX, VTIAX, VFWAX and a couple of others for my taxable account. All are equities except for a couple of bond funds.

Are most people not reinvesting dividends in the accumulation phase?
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Old 03-03-2012, 01:10 PM   #6
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Originally Posted by explanade View Post
Are most people not reinvesting dividends in the accumulation phase?
I think most people do re-invest dividends. But I'm suggesting you don't just automatically re-invest them directly in the fund they came from. Use them as an "I already paid tax on these" source of funds for rebalancing rather than selling more of something else (generating CG taxes).
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Old 03-03-2012, 02:18 PM   #7
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Well here's a confession that will make most people here blanch but I haven't rebalanced yet.

I was under 50% equities since I opened up my VG account and now am up to around 55% but have more cash still to invest.

So I guess that's something to keep in mind, not reinvesting some dividends.
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Old 03-03-2012, 09:12 PM   #8
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I try to keep much of my dividend-producing funds in a 401k/IRA/Roth account, but sometimes you have to pay the taxes earlier instead of later. May be a good thing until dividend tax rates go up.
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