Dividends - Reinvest or transfer to a Savings Account

[jollystomper]

I we transition from a pre-retirement accumulation stage to a post-retirement spending stage, I am evaluating our funds and have started to take dividends in cash (flowing into a money market account) for some of them. I have started to do this with a couple of non-index funds that I have owned for a while and do not feel a need to keep accumulating shares in them. While doing this I am also managing how much cash I get from dividends, as part of my current overall strategy of maintaining enough cash for our SWR before SS to not worry about being forced to sell in times of market volatility.

 

[scrabbler1]

I have been living off the dividends from a bond fund and stock fund since I retired 10.5 years ago. The bond fund dividends are monthly and are most of my total dividends. The stock fund's dividends are quarterly and supplement the bond fund's dividends. Until 2014, the bond fund's dividends alone were enough to cover my expenses. I have two smaller bond funds whose dividends I reinvest unless I know I would need them to pay some expenses, too.


What I seek to avoid is reinvesting dividends then having to sell some shares of a fund later on because doing that becomes a minor PITA reporting it on my tax forms.


When I had a large cap gains distribution late last year, I took it in cash instead of reinvesting it because I would have had trouble covering the added taxes solely from my other dividend income.

 

[mrfeh]

When I had a large cap gains distribution late last year, I took it in cash instead of reinvesting it because I would have had trouble covering the added taxes solely from my other dividend income.

Please explain - I think you need to pay taxes on the gains either way.

 

[RobbieB]

not sure I understand this..........your taxes will be the same whether you spend them or not.

First before I sell some stuff.

 

[RenoJay]

I take out the dividends because, regardless of whether they’re reinvested or not, I need to pay taxes on them. Therefore I use them to help with my living expenses.

 

[scrabbler1]

Please explain - I think you need to pay taxes on the gains either way.

I didn't want to have to sell something new to generate the cash to pay the taxes on the large CG distribution (and add to the work for the following year's taxes). By simply taking the CG distribution in cash, I was assured of having cash available to pay the taxes, some of them 4th Qtr estimated and the rest in April.

 

[mrfeh]

I didn't want to have to sell something new to generate the cash to pay the taxes on the large CG distribution (and add to the work for the following year's taxes). By simply taking the CG distribution in cash, I was assured of having cash available to pay the taxes, some of them 4th Qtr estimated and the rest in April.

Ah, I see what you meant. Thanks for clarifying.

 

[haha]

If the dividend-paying stocks in my acount seem pretty cheap, I generally re-invest. I have enough cash at all times to pay my ordinary expenses with existing cash. IF the stock seems fully priced, I take the dividend in cash.

Ha

 

[RxMan]

I’ve been automatically reinventing all dividends for my individual stocks as well as mutual funds. I’m still in the accumulation phase so I’d rather build my positions. When I get closer to my retirement date and have a more firmly mapped out exit plan I’ll take all those distributions as cash and put them into the money market funds. That will supplement my living expenses in retirement.

I’d like to transfer the dividends and capital gains from the previous year into my checking account early the next year to be part of the money I’ll use in retirement to pay living expenses and cover taxes as some have mentioned.

I thought about switching to taking dividends in cash sooner so I could strategically buy based on valuation. I haven’t done that yet but I’m tempted to try it especially as the stock market gets more expensive.

 

[target2019]

We are accumulating a bit longer, maybe 3 years for her, 6 months for me.

In IRA, SEP-IRA, 401k and Roth it has always been re-investing dividends to goose the share count. I expect that strategy will remain steady into the foreseeable future for tax-advantaged account. When we draw down from tax advantaged, it will mean selling shares.

In taxable accounts, the dividends and capital gains distribute to a cash account. In the brokerages, I decide which investments merit additional shares, and do that every 3-6 months. That strategy will likely change when we need to seriously tap investments. At that time, the dividends will go to an account from which we can pay bills.

 

[Rianne]

You can't just push them into a Roth willy-nilly... you have to have earned income in order to make Roth contributions and even then there are limits. I'm retired and have no earned income so I can't make Roth contributions.

For now, we reinvest all dividends, that will change when we reach 65, we're 62 now. Regarding Roth, I have no earned income but DH has LLC from home, so he earns @ $42K. It's 100X better than megacorp, so he feels RE. We file married jointly and I still contribute to Roth. Accountant didn't say I should not contribute to Roth. I've been contributing for 4 years with no earned income.

 

[pb4uski]

For now, we reinvest all dividends, that will change when we reach 65, we're 62 now. Regarding Roth, I have no earned income but DH has LLC from home, so he earns @ $42K. It's 100X better than megacorp, so he feels RE. We file married jointly and I still contribute to Roth. Accountant didn't say I should not contribute to Roth. I've been contributing for 4 years with no earned income.

As long as as a couple you have earned income that is equal to or exceeds your IRA contributions then you are all set... your contribution is a spousal contribution even though you have no earned income.

For an individual to be eligible to make a spousal Roth IRA contribution, the following requirements must be met:

• The couple must be married and file a joint tax return.
• The individual making the spousal Roth IRA contribution must have eligible compensation.
• The total contribution for both spouses must not exceed the taxable compensation reported on their joint tax return.
• Contributions to one Roth IRA cannot exceed the contribution limits for one IRA (however, together the two accounts allow the family to double their annual savings).

 

[RunningBum]

For now, we reinvest all dividends, that will change when we reach 65, we're 62 now. Regarding Roth, I have no earned income but DH has LLC from home, so he earns @ $42K. It's 100X better than megacorp, so he feels RE. We file married jointly and I still contribute to Roth. Accountant didn't say I should not contribute to Roth. I've been contributing for 4 years with no earned income.

I assume your spouse's income counts as earned income, and that's why you are allowed to make a Roth contribution. Without that earned income, you would not be allowed.

 

[2177V]

Check your tax consequences

I use my Turbo tax program to verify any tax consequences.

I have last year's Turbo Tax return and I modify it by inputting many different "what ifs" into the Turbo Tax program to get a better understanding on how much the federal government will get and how much the state government will get during my IRA withdrawals or IRA re-investment of my dividends.

This way there will be no surprises when I make a major decision regarding withdrawal or re-investments.

In my specific case, I found out my federal taxes remain the same percentage wise until you which a certain point....and then the percentages increases due to my tax bracket increase. I now know how much money I can withdraw to avoid this. I also found out that the state of California really sock it to you if you withdraw too much money. Other states may be different.

 

[Rdub]

I have been retired a couple years now. Several years ago Schwab had a really good article on tax efficient retirement withdrawal strategies. Below is the hierarchy they recommended. I can’t locate the article, but this is pretty much what I use. In my taxable accounts I move all interest/dividends and distributions to my cash account. I reinvest all interest/dividends/distributions in my tax deferred/free acts. When I have excess short term cash, i invest in short term treasuries or CDs, whichever produces the highest aftertax return. I rebalance my portfolio 1x per year. Hopefully this helps.

Cash
Rental Income
Muni Bond Income
Interest in Taxable Accounts
Dividends in Taxable Accounts
Sell overweight assets from TAXABLE accounts:
Unrealized S/T Losses
Unrealized L/T Losses
Unrealized L/T Gains
Unrealized S/T Gains
Sell other assets from TAXABLE accounts (if nothing is overweight):
Unrealized S/T Losses
Unrealized L/T Losses
Unrealized L/T Gains
Unrealized S/T Gains
Sell from tax-preferred accounts
Minimum required distributions
Traditional IRAs (401ks)
Social Security (later)
Roth IRAs

 

[2177V]

I have been retired a couple years now. Several years ago Schwab had a really good article on tax efficient retirement withdrawal strategies. Below is the hierarchy they recommended. I can’t locate the article, but this is pretty much what I use. In my taxable accounts I move all interest/dividends and distributions to my cash account. I reinvest all interest/dividends/distributions in my tax deferred/free acts. When I have excess short term cash, i invest in short term treasuries or CDs, whichever produces the highest aftertax return. I rebalance my portfolio 1x per year. Hopefully this helps.

Cash
.......
Roth IRAs

I do something similar which is no surprise since my daughter works for Charles Schwab. That is...all interest/dividends/distributions from my taxible M Funds goes to my cash account since I have to pay taxes.

I reinvest all interest/dividends/distributions in my IRA which is tax deferred since that money is not realized. My RMD will also go to my cash account and I use my cash account to enjoy my retirement.

Specifically I am hooked on 6 months Airbnb rentals in Hawaii, Europe and other exotic vacation hotspots. 6 days of overseas vacations while I was working was not enough. 6 months of overseas vacations while I am retired works for me.

 

[FIREarly]

As long as the money from the dividends are not required then continue reinvesting it. How amazing is your money making more money for you!?!