Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Arguments for and against automatic reinvesting of dividends
Old 08-05-2014, 06:55 PM   #1
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Arguments for and against automatic reinvesting of dividends

I have generally re-invested dividends in my IRA and Roth, but taken them in cash in my taxable brokerage account. My taxable account holds mostly individual securities. I feel that in IRAs, re-investing is hands down better. My withdrawals for RMDs can easily be handled by drawing down an intermediate term bond fund that I have, or cash if I have any in the account.

I have rarely re-invested dividends in my taxable account, whether the security was a mutual fund or ETF or an individual security. The reason is to avoid extra work figuring out my gain when/if I might sell the security.

I get more dividends and other payouts than I need for expenses. I am unlikely to ever have to sell a security for cash flow, other than from the mutual fund to fund my RMDs that I mentioned above. I have some stocks that I am unlikely to ever sell, and for these I am considering re-investing dividends. One is WY, the timber REIT. They do not squander money. Extra cash goes to astute purchases of more high quality timberlands, paying down debt, or increasing the dividend, so I would not be worried about getting a large position.

If I do start re-investing, then later decide to sell, no way am I ever going to treat each quarterly dividend as a separate lot. Can I just do two groupings, one for all the long term, and another for all the short term?

This is the crux of my question, if I should decide to sell, how much hassle will it be?

Any comments appreciated.

Ha
__________________

__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 08-05-2014, 07:09 PM   #2
Thinks s/he gets paid by the post
Rustward's Avatar
 
Join Date: Apr 2006
Posts: 1,573
Quote:
Originally Posted by haha View Post
If I do start re-investing, then later decide to sell, no way am I ever going to treat each quarterly dividend as a separate lot. Can I just do two groupings, one for all the long term, and another for all the short term?

This is the crux of my question, if I should decide to sell, how much hassle will it be?

Any comments appreciated.

Ha
Seems like I tried to do that (two groupings) using Tax Act once and I had to document each sale separately. In this case, all of it was purchased in one or two relatively large lots, but sold off once per month over the year. You are right, automatic re-investments can create a lot of small lots.

I use FIFO and track it with Quicken, so it's no problem documenting basis. These were non-covered shares. Still have a ton of non-covered shares bought in the early 90's.

And, no, I am not saying everyone should use Quicken or FIFO.
__________________

__________________
Rustward is offline   Reply With Quote
Old 08-05-2014, 07:12 PM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,201
For individual stocks, average cost isn't an option like it is for mutual funds, if that's what you are asking.

You can group all the LT dividends in one line on a schedule D (and ST on another line) with purchase date "various" but you are still going to have to add up the basis for each reinvestment purchase. And you certainly want to do this. When the dividend is declared you have to pay tax on the dividend that year whether you reinvest it or not. Since you've paid the tax, you want to count it as the basis for the new shares you bought.

If you hang onto all of your dividend purchases and never sell, your heirs will get a stepped up basis so all the stock they get will have the current market price, so their job will be simplified.
__________________
RunningBum is offline   Reply With Quote
Old 08-05-2014, 07:41 PM   #4
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,627
All this worrying should be a thing of the past. There are two things that will assuage your mind:

1. Brokers must now track all this stuff and report it to the IRS on the 1099B if you sell.

2. Your tax software should download your 1099B from your broker's web site and fill out everything for you.

Your only task is to select the specific shares you wish to sell when you sell and broker web sites make that very very easy nowadays. And you may wish to take a quick glance at the filled out tax return to make sure it was done more or less correctly. You don't have to group or put down "various" or dates or amounts or anything else. The software does it all for you.

So automatically reinvest with confidence if that is what you want to do.
__________________
LOL! is offline   Reply With Quote
Old 08-05-2014, 09:25 PM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Mulligan's Avatar
 
Join Date: May 2009
Posts: 7,384
Quote:
Originally Posted by RunningBum View Post
For individual stocks, average cost isn't an option like it is for mutual funds, if that's what you are asking.

You can group all the LT dividends in one line on a schedule D (and ST on another line) with purchase date "various" but you are still going to have to add up the basis for each reinvestment purchase. And you certainly want to do this. When the dividend is declared you have to pay tax on the dividend that year whether you reinvest it or not. Since you've paid the tax, you want to count it as the basis for the new shares you bought.

If you hang onto all of your dividend purchases and never sell, your heirs will get a stepped up basis so all the stock they get will have the current market price, so their job will be simplified.

I had a couple of small lumps of about 10k each in Pfizer and Exxon that were in those DRIP programs that had probably about 10 years worth of dividend reinvestments. I kept each yearly statement in a folder. I did what you said to do by writing "various" on that schedule D line. I must admit I was a little demoralized at the process of adding all these up with the various share amounts and price points to get an absolute correct number. So I "eye balled it" and put a number down. They didn't contest me on it.



Sent from my iPad using Tapatalk
__________________
Mulligan is offline   Reply With Quote
Old 08-05-2014, 10:08 PM   #6
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,299
I like to keep things simple. If I were in a position to re-invest divs in a taxable account, I think I would have all the various divs from various sources deposited in a checking/MM account, and a few times a year, put those divs in a single ETF purchased for this purpose.

That way, there is only one ETF that has any complication at all due to re-investing. You probably would only rarely sell this ETF (these are 'excess' funds after all), and if it came to that, you might liquidate the whole thing in one step, which also simplifies the cost basis.

LOL! is correct of course, for new funds the broker tracks all this, but I just prefer to not be dependent on that. What if their hard drive crashes, and someone recycles their backup tapes before they get a chance to recover the data? Stranger things have happened to very large financial organizations.

Or just spend the 'excess' on your lady friends? That may provide a nice ROI.

-ERD50
__________________
ERD50 is offline   Reply With Quote
Old 08-05-2014, 10:46 PM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: May 2005
Posts: 13,291
ERD50, I like your reference to that large institution that lost that data.... but requires us to NOT lose any data or else...


As to reinvested dividends... I have been investing for a long time (probably not as long as you, but who knows).... and Vanguard knows what I paid for everything... if I sell anything, they send me a stmt of the gain...


I think other firms do the same thing... I remember when I had an Ameritrade account that I could go back 10 years and see what my gains were for that year...

Now, if you are using dividends and cap gains distributions (mutual funds) for current living expenses... then you should not reinvest..
__________________
Texas Proud is offline   Reply With Quote
Old 08-06-2014, 08:28 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 5,201
Quote:
Originally Posted by LOL! View Post
All this worrying should be a thing of the past. There are two things that will assuage your mind:

1. Brokers must now track all this stuff and report it to the IRS on the 1099B if you sell.

2. Your tax software should download your 1099B from your broker's web site and fill out everything for you.

Your only task is to select the specific shares you wish to sell when you sell and broker web sites make that very very easy nowadays. And you may wish to take a quick glance at the filled out tax return to make sure it was done more or less correctly. You don't have to group or put down "various" or dates or amounts or anything else. The software does it all for you.

So automatically reinvest with confidence if that is what you want to do.
I hadn't bought any individual stocks and only sold a couple of old holdings since the new basis reporting rules went into effect, so I just wasn't thinking they were under the same rules as mutual funds, but they are. All new dividend reinvestments will be "covered" so they will track the basis for you.

Ha, it should be just as LOL says. It may even be slightly easier as you might be able to state that you want to sell shares as FIFO and not have to specify which ones to sell, letting your broker figure out it's the oldest ones and reporting that back to you. I think you'd be better off selecting the specific shares for the best tax management, but that's up to you.
__________________
RunningBum is offline   Reply With Quote
Old 08-06-2014, 09:53 AM   #9
Recycles dryer sheets
 
Join Date: Jul 2013
Posts: 389
I use taxable dividends to aid in rebalancing, so they are not automatically reinvested. Dividends in tax advantaged accounts are automatically reinvested.
__________________
mrfeh is offline   Reply With Quote
Old 08-06-2014, 10:05 AM   #10
Moderator
MichaelB's Avatar
 
Join Date: Jan 2008
Location: Rocky Inlets
Posts: 24,492
Quote:
Originally Posted by haha View Post

If I do start re-investing, then later decide to sell, no way am I ever going to treat each quarterly dividend as a separate lot. Can I just do two groupings, one for all the long term, and another for all the short term?

This is the crux of my question, if I should decide to sell, how much hassle will it be?
You can aggregate transactions. From form 8949
Quote:
Note. You may aggregate all short-term transactions reported on Form(s) 1099-B showing basis was
reported to the IRS and for which no adjustments or codes are required. Enter the total directly on
Schedule D, line 1a; you are not required to report these transactions on Form 8949 (see instructions).

Note. You may aggregate all long-term transactions reported on Form(s) 1099-B showing basis was reported
to the IRS and for which no adjustments or codes are required. Enter the total directly on Schedule D, line 8a;
you are not required to report these transactions on Form 8949 (see instructions).
As long as the basis was reported, one entry each for short and long term is sufficient.
__________________
MichaelB is offline   Reply With Quote
Old 08-06-2014, 10:22 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
haha's Avatar
 
Join Date: Apr 2003
Location: Hooverville
Posts: 22,387
Thanks for all these well informed and helpful suggestions.
I will go to reinvestment on selected issues of very stable companies.

Ha
__________________
"As a general rule, the more dangerous or inappropriate a conversation, the more interesting it is."-Scott Adams
haha is offline   Reply With Quote
Old 08-06-2014, 12:03 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Nov 2009
Posts: 3,873
For more than 20 years, whenever I sold shares of mutual funds in taxable accounts, I would simply specify the range of dates in the "date purchased" column of Schedule D or Form 8949. Sometimes, the number of lots I was selling was quite a few because they included months and months of small, reinvested dividends. However, because I keep everything tracked in a spreadsheet, it was not a big deal to determine the cost basis of the total number of shares I sold.

The only time it would get a bit more complicated would be if I made a sale which included some long-term shares and some short-term sales, such as if I liquidated all of my holdings in a fund. There, I would have to split up the sale into two parts and put the short-term portion in the short-term section of Schedule B/Form 8949 and the long-term portion in the long-term section of Schedule D/Form 8949. However, becaue I make few redemptions and have large holdings in all of my funds, and I use FIFO, it is pretty rare that I ever sell anything on a short-term basis.
__________________
Retired in late 2008 at age 45. Cashed in company stock, bought a lot of shares in a big bond fund and am living nicely off its dividends. IRA, SS, and a pension await me at age 60 and later. No kids, no debts.

"I want my money working for me instead of me working for my money!"
scrabbler1 is offline   Reply With Quote
Old 08-06-2014, 12:04 PM   #13
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,936
Michael B.........thanks for this. Was not aware you could bypass F8949 and go
directly to Sch D. Probably won't do it myself since I like to see the detail but
good to know.
************************************************** *
Note. You may aggregate all short-term transactions reported on Form(s) 1099-B showing basis was
reported to the IRS and for which no adjustments or codes are required. Enter the total directly on
Schedule D, line 1a; you are not required to report these transactions on Form 8949 (see instructions).


************************************************** *************
Note. You may aggregate all long-term transactions reported on Form(s) 1099-B showing basis was reported
to the IRS and for which no adjustments or codes are required. Enter the total directly on Schedule D, line 8a;
you are not required to report these transactions on Form 8949 (see instructions).
__________________
kaneohe is offline   Reply With Quote
Old 08-06-2014, 12:26 PM   #14
Thinks s/he gets paid by the post
sengsational's Avatar
 
Join Date: Oct 2010
Posts: 3,849
I just sold some stock that had dividend reinvesting turned on since 2001. Long ago I had mailed the DRP my certificates, so all of the stock was in one place.

Although I kept all of the statements (data was repeated, so only need 1 statement per year), I didn't end-up needing the paper, or keying anything!

I went to the web site that managed the DRP, selected the shares I wanted to sell, pressed a button, and $97 dollars later (fee), I got a check in the mail.

The web site had a button to download the transaction (into a spreadsheet) that showed the itty-bitty lots, original price, share quantity, cost basis, gain(loss), and if it was considered "covered" or "non-covered".

The "covered" / "non-covered" is whether the purchase took place before or after the IRS rule to report the gain(loss) to the IRS. It looks like starting in 2011 they started reporting to the IRS. I still have all those newer shares.
__________________

__________________
sengsational is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Long term dividend reinvesting Damienqwerty Stock Picking and Market Strategy 16 01-02-2014 10:25 AM
Hi, new member ruminating on reinvesting dividends/capital gains vs. taking cash freed2012 Hi, I am... 7 11-15-2013 08:33 AM
Moms: Why Toddlers Ultimately Win All Arguments... Midpack Other topics 5 03-10-2013 10:10 PM
Protesting against Freedom - Rally against Gay marriage............. Cut-Throat Other topics 203 03-26-2006 08:04 PM

 

 
All times are GMT -6. The time now is 03:29 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.