Do you spend dividends in taxable accounts or reinvest

[Quantum Sufficit]

Hi,

We retired in march of this year. Our luck would have the market falter but fortunately, despite building a new house and outfitting it, I was able to live on only a 9k draw from short term bonds because of other income. I would think it advantageous to reinvest dividends in a taxable acct as they are qualified dividends (vanguard total stock) and should incur a 0% tax rate. I would gladly take them as cash and spend if the market was up from our cost basis but alas, it is not. Therefore, why not reinvest the dividends and draw down more from short term bonds? (ie, spend from what has done the best this year?)

Thanks.

 

[Souschef]

IMO, reinvesting dividends is a good idea. I have been doing all my investing life. The power of compounding is awesome

 

[LOL!]

Vanguard Total Stock this year is only 95% qualified dividends. Large-cap index is 100% qualified dividends.

But why have any bonds in a taxable accounts? That's generally not tax-efficient. So look at the big overall pictures. If your bonds were in tax-advantaged accounts, you could spend the stock dividends and even sell stock held long-term to get the 0% LTCG tax rate. If your asset allocation was messed up by selling too much stock, then exchange from bonds to stocks in your tax-advantaged account.

So tax-efficient equities in a taxable account can be tax-free. It is like having more money in your Roth IRA when it is done right.

 

[Car-Guy]

Burns a hold in my pocket. Dividends are deposited into my checking account and just "go" for "whatever". Just another source of cash flow. I only know how much my dividends add up to when I do my taxes the following year.

 

[KB]

I take all my dividends. Between those, SS and pensions, I have enough to leave my investments alone. However at some point I may start taking up to 4% each year, though right now I don't know what I would spend the money one yet.

 

[gcgang]

IMO, reinvesting dividends is a good idea. I have been doing all my investing life. The power of compounding is awesome

I reinvested dividends all my (accumulation) investing life, also. Now, in the decumulation(?) phase, I take the cash.

 

[RunningBum]

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.

I don't quite get the last sentence in the OP's post. Were short term bonds actually the best investment this year?

 

[bingybear]

I don't auto reinvest any distribution in taxable accounts, but do in most cases in tax free or deferred accounts. That doesn't mean I spend the distributions. Most are reinvested as part of re-balancing or in new investments.
In retirement you do have to get your spending cash from somewhere. If you have a pension or are taking SS...that might do it. For people like me (too young for SS and no pension), we take it from cash or distributions.
But in retirement some of the rules may change for some. Assume you have no income source, so you take from cash, distributions or selling assets. Assuming taxes being filed MFJ with $2MM distributing 2% would give us $40k. With MFJ there is about $20k between the standard deduction and exemptions. What this means is that you can handle some bond or non-qualified distributions as you can offset at least $20k.

I would suggest validating the standard rules based on your own situation as to where different assets belong.
To auto reinvest or to just invest distributions based on other factors (like re-balancing) is a matter of choice.

 

[big-papa]

I reinvest - automatically.


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[W2R]

In my taxable accounts, I take dividends in cash. I use them for rebalancing and living expenses.

 

[audreyh1]

In my taxable accounts, I take dividends in cash. I use them for rebalancing and living expenses.

Same here.

 

[RockyMtn]

I reinvested dividends all my (accumulation) investing life, also. Now, in the decumulation(?) phase, I take the cash.

+1. Those dividends are my paycheck!

 

[Fedup]

Reinvest. I'm in a process of shifting some funds in taxable account that pay high dividend to Roth IRA.


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[Mulligan]

I let it build up in my money market and then I find something else to buy.


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[scrabbler1]

I take dividends as cash if they are going to be used to pay my expenses. Otherwise I reinvest them. Pretty simple.

 

[karen1972]

I've been re-investing for the last decade, but thinking this year I may switch a few to cash to help pay the tax bill. Seems easier than worrying about what to sell.

 

[sheehs1]

I don't reinvest either and allow the dividends to go to the cash account. I use it to buy other positions or more of the same if I chose to do so. I have not started taking them as cash to bolster my living expenses….yet.

 

[Alan]

Now that we are in draw-down I use the dividends in the taxable accounts for expenses.

 

[pb4uski]

When I was working I reinvested. Once I retired I take them in cash.. in effect the reduce my withdrawals since what we need exceeds our dividends.

 

[ejman]

When I was working I reinvested. Once I retired I take them in cash.. in effect the reduce my withdrawals since what we need exceeds our dividends.

+ 1 Same here

 

[Texas Proud]

I used to have them reinvested.... now that I need cash I will have them deposited in a ST bond fund which is what I use to store my cash....

I still have to sell funds every once in awhile to build up the cash account which is why I decided to not reinvest anymore...

IMO, there is no right way and there is no wrong way.... there is only a way that feels OK to you and one that does not...

 

[walkinwood]

Same here.

+2

Before ER, I reinvested.

 

[urn2bfree]

It seems to me that if you are going to owe taxes on the dividends and you are going to have to sell something and generate taxable capital gains to generate enough money to live, or to rebalance, it makes no sense to reinvest. It raises your taxes and therefore costs you more money.
Example: Let's ignore the actual numbers needed for various brackets and exemptions amounts needed and only consider Federal taxes not state to just keep the math simple -assume the amount is enough to make CG and Div taxable)

A) I want $100,000- I get $50,000 from Dividends and I sell assets to get another $50,000 of which $10,000 (25%) is capital gains. So of my $100,000 -after I pay Uncle Sam his 15% - I have $91,000.

B) I reinvest my dividends so instead I sell assets to get my $100,000 - 25% of that is capital gains or $25,000. But even though I did not take the dividends to spend, Uncle Sam still wants his taxes on my $50000 of dividends. So after I pay taxes, of my $100,000, I now have $88,750.
I just reduced my "take home" pay by 2.4% every year.



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[mathjak107]

i agree 100% .

we spend dividends in our taxable account and reinvest dividends in the deferred accounts . no point paying taxes on the dividend and on any sales .

 

[urn2bfree]

I suppose if one has a cash bucket to draw down in bad years-there may be years when stocks are down and rebalancing demands reinvesting the dividends rather than taking them.
The transaction costs could be lower to draw down the cash bucket and automatically reinvest the dividends in those years. And as Jack Bogle says about investing-- you get what you don't pay for. But most years stocks are up, so this should be rare. (I hope)


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