Do you spend dividends in taxable accounts or reinvest

[Alan]

Yikes, sorry to hear that (I am not sure how mine will be dealt with - US citizen in Canada for the first full year next year) - I've been told I will be taxed whichever is higher...

Do you know how Roth IRA is treated in Canada? (I hope they recognize it that it is after-tax contribution but I am getting the feeling they will tax the withdrawal somehow...)

Your Roth withdrawals will be tax free in Canada. But note the bit I underlined about contributions after you moved to Canada.

https://www.irs.gov/pub/irs-pdf/p597.pdf

Roth IRAs.
A distribution from a Roth IRA
is exempt from Canadian tax to the extent it
would be exempt from U.S. tax if paid to a U.S.
resident. In addition, you may elect to defer any
tax in Canada on income accrued within the
Roth IRA but not distributed by the Roth IRA.
However, you cannot defer tax on any accruals
due to contributions made after you become a
Canadian resident

 

[audreyh1]

I'm hoping we'll be in this situation ongoing as we have enough cash on hand for 2016's travel expenses, then the following year I start a DB pension from a firm I used to work for and DW starts collecting her SS.

Of course - someone could easily point out that my situation is not as tax efficient as having less in distributions than we need for withdrawal. And they would be right. Having to sell a few shares to complete a withdrawal, and selectively trimming to rebalance, is the most tax efficient way to handle it.

 

[youbet]

if you take the dividends and do not reinvest them the dollars you have compounding for you is reduced for the start of the next quarter when the opening bell rings .

We're not talking about removing the dollars from the portfolio. Rather, we're talking about taking divs in cash and either holding them in cash or reinvesting them in another opportunity. If the div dollars are taken as spendable income but this results in not selling something else in the portfolio, this amounts to the same thing.

The result of taking divs in cash and either reinvesting them in an alternative investment, or not selling another investment for living expenses and spending the divs instead, will depend of the relative performance of the div producing investment vs the other investment.

 

[Alan]

Of course - someone could easily point out that my situation is not as tax efficient as having less in distributions than we need for withdrawal. And they would be right. Having to sell a few shares to complete a withdrawal, and selectively trimming to rebalance, is the most tax efficient way to handle it.

Definitely a first world problem, I expect you don't stress out too much over the issue

 

[mathjak107]

We're not talking about removing the dollars from the portfolio. Rather, we're talking about taking divs in cash and either holding them in cash or reinvesting them in another opportunity. If the div dollars are taken as spendable income but this results in not selling something else in the portfolio, this amounts to the same thing.

The result of taking divs in cash and either reinvesting them in an alternative investment, or not selling another investment for living expenses and spending the divs instead, will depend of the relative performance of the div producing investment vs the other investment.

yes if you are trading in like kind then it doesn't matter . but if you are just taking the dollars in dividends out so you do not have to liquidate cash or bonds which have less growth ability then in effect you are reducing allocations to equity's since you will then have less dollars in the investment .

dollars in the portfolio may be he same but you would have less dollars in that equity investment compounding if you didn't replace it with another equity investment .


.

 

[audreyh1]

Definitely a first world problem, I expect you don't stress out too much over the issue

Well - in the last two years mutual fund distributions have been too "generous". There was a big jump in distributions from 2013 to 2014, and 2015 is coming in about the same as 2014. So our taxes took quite a jump.

It's our fault for owning so many active mutual funds. If a fund pays out what I consider to be an "out sized" distribution, I don't reinvest it so the fund shrinks in favor of one that is more tax efficient.

But that is a very, very slow process.

 

[mathjak107]

look at the bright side . if you sell or make changes down the road at least you paid taxes on some of the gains .

having decades of pent up taxable gains in an index fund can be very painful to deal with .

 

[youbet]

dollars in the portfolio may be he same but you would have less dollars in that equity investment compounding if you didn't replace it with another equity investment .


.

OK. We can just agree to disagree then. I prefer to take divs in cash and reinvestment them where I think they have the best opportunity for growth. You seem to be stuck with the concept of always having a fund reinvest in its own shares, whether the future of that fund is bright or not at that particular time.

 

[mathjak107]

not what i said at all . i said if you take the money and put it in like kind which means another growth vehicle then it is the same type of asset . but if you are taking the dividends instead of using cash or bonds for the income then you are decreasing your allocation to a growth vehicle .

 

[dtbach]

Everybody has 2 investing lives. W*rking and investing, vs FIRED and spending. In my first life, I reinvested all my dividends. In my much better 2nd life, I take all my dividends and buy what ever the hell I want!!!

 

[tmm99]

Your Roth withdrawals will be tax free in Canada. But note the bit I underlined about contributions after you moved to Canada.



https://www.irs.gov/pub/irs-pdf/p597.pdf

Thank you Alan. I will look at the doc later but it looks like I will no longer contribute to Roth IRA (Roth IRA conversion every year will make no sense if I get taxed.) but I am glad to see the withdrawal will stop be tax free.



Sent from my iPad using Early Retirement Forum

 

[pb4uski]

if you take the dividends and do not reinvest them the dollars you have compounding for you is reduced for the start of the next quarter when the opening bell rings .

what ever your investment dollars were the night before the reset on the price , they would be less if you pocket the dividend and the same if you reinvested it .the dollars compounding is what matters , number of shares that make up that value is a moot point .

all compounding is on dollars invested , always .

Perceptive glimpse of the obvious mathjak.

Go back an read the post that I was responding to. That poster stated that technically if you take dividends in cash you are not leaving your stock alone and that by taking dividends in cash that you are liquidating shares both of which are not true.

If you take dividends in cash you are simply deciding not to reinvest them in that ticker... you might well reinvest them in a different ticker that performs better or worse than the fund you received the dividends from... or you might use the cash to avoid selling shares for living expenses.

 

[mathjak107]

fact . if you don't reinvest the dividends you have less money in that investment than you had before the payout , compounding for you at the opening bell . .

what you do with the money is a different issue . if it is spent than overall you have less money in equity's then you had working for you . if you reinvest it in another growth vehicle then you have the same amount working for you again .

it also depends what you were going to liquidate if you reinvested the dividends . if it is cash or bonds and you used the dividend money instead then yes you have less in equity's taking that dividend money out and not reinvesting it . if you were going to liquidate equity's but spent the dividend instead then it is a wash and the same thing .

 

[youbet]

fact . if you don't reinvest the dividends you have less money in that investment than you had before the payout compounding .

what you do with the money is a different issue . if it is spent thn overall you have less money in equity's then you had working for you . if you reinvest it in another growth vehicle then you have the same amount working for you again .

"What you do with the money is a different issue....."

No, it's the only issue.

 

[mathjak107]

there are a few issues

not reinvesting the dividend means less dollars in that stock compounding .

so the next issue is if you do not reinvest the money in that stock what do you do with it .

if you reinvest it in something else with equal or better growth potential , great , you maintained your allocation in equity's


if you spend it , then you lowered your allocation in equity's .


but the next issue is if you spend those dividends and you were going to liquidate other equity's instead then you are even steven as far as what you would have .

but if you spent the dividend money instead of liquidating cash or bonds then you have less compounding in your higher growth investment .

 

[youbet]

Yep, what you do with the money is THE issue.......

 

[bingybear]

fact . if you don't reinvest the dividends you have less money in that investment than you had before the payout , compounding for you at the opening bell . .

what you do with the money is a different issue . if it is spent than overall you have less money in equity's then you had working for you . if you reinvest it in another growth vehicle then you have the same amount working for you again .

it also depends what you were going to liquidate if you reinvested the dividends . if it is cash or bonds and you used the dividend money instead then yes you have less in equity's taking that dividend money out and not reinvesting it . if you were going to liquidate equity's but spent the dividend instead then it is a wash and the same thing .

As many noted earlier that they did not auto reinvest, but used dividends to for re-balancing or buying some other investment. Yes if you take dividends and don't reinvest them in the equity they came from, then you have less $ in that equity. But if the goal is to re-balance, the you are trying to shift the dollar weighting back to your desired allocation, then that is what you are trying to do.
On a side note -- non-qualified dividends can come from fixed income securities... so all dividend may not be coming from equities. Remember that standard deductions and exemptions can offset a bit of non-Qdiv distribution in a taxable account.

 

[kcowan]

Sorry, no idea. Don't even know what a Roth IRA is. Will depend on the tax treaty.

Roth is the similar TFSA once you are in Canada.

 

[gerntz]

Have to have something to live on. When RMD's come around & full SS kicks in, maybe not.

 

[Danmar]

Roth is the similar TFSA once you are in Canada.

Thanks. Yes, I have been told how the US retirement accounts work many times, but always forget which one is which.

 

[starry night]

Auto reinvest continues the benefits of DCA

I auto-reinvest for two additional reasons:
1. Doing so continues the benefits of Dollar Cost Averaging in the fund, rather than keeping the number of shares static by withdrawing the income, and
2. Doing so, since it grows the number of shares in the holding, means the next dividend is paid on a greater number of shares, so dividend income is compounding over time.
I schedule withdrawal for income from whichever fund I am rebalancing.

 

[Chuckanut]

I find it simpler to reinvest all dividends and capital gains. At the end of the year, I re-balance taking out next year's money from whatever asset needs to be reduced the most.

 

[hesperus]

Reinvesting dividends is no different than taking the cash and immediately rebuying, only it is done a day or two more quickly if you do it automatically. There is no tax advantage to reinvesting. You report the dividend income no matter what, at 0% or 15% depending on your bracket. Whether you reinvest has no bearing on the taxes.

If you want to rebuy what you're getting dividends on, reinvesting is fine. If you want the flexibility to invest in whatever you want, or spend that cash and hold other investments, don't reinvest. I like the flexibility. If I really want more of the fund that gave dividends, I can rebalance.

It really doesn't matter that much. If you reinvest but decide that's not what you really wanted to do, you can quickly sell (with SpecID basis) and probably have very little short term gain or less.

I just prefer to keep it simple. I need a certain amount of cash throughout the year. I can get much of it with the dividends. Then I look at how I want my investments to be, and rebalance if needed.

+1 for Simplicity
Based on our asset allocation, I will auto reinvest dividends in areas that require it, otherwise take the cash to invest as we wish, or just spend it. Most of our dividends go right back into portfolio, as we keep a large cash bucket. The one thing that I do like about auto reinvesting (at fido at least) is that there are no trade charges, as there would be if I took it all in cash and then reinvested myself.

 

[mathjak107]

I auto-reinvest for two additional reasons:
1. Doing so continues the benefits of Dollar Cost Averaging in the fund, rather than keeping the number of shares static by withdrawing the income, and
2. Doing so, since it grows the number of shares in the holding, means the next dividend is paid on a greater number of shares, so dividend income is compounding over time.
I schedule withdrawal for income from whichever fund I am rebalancing.

The dividends do nothing for dollar cost averaging .

You have the same dollars and value in the investment both before and after reinvesting the dividend. The compounding is all on dollars invested not number of shares.

More shares at a lower value at the ring of the bell is a wash.

Your cost basis is the adjusted lower share price plus the dividend which pretty much equals what you had the night before.

 

[starry night]

The dividends do nothing for dollar cost averaging .


Ah, but it does. Your reinvested div buys shares, or fractional shares, at the strike price on the transaction date. That purchase price will vary throughout the quarters so sometimes your reinvest transaction is buying at high closing price, sometimes at low = DCA
You are right that it does not change your internal fund balance, but it does affect the price at which you gain shares.
And gaining additional shares will earn you divs on those new shares at the next div distribution.