Do you spend dividends in taxable accounts or reinvest

[mathjak107]

we have a cash bucket but we try to preserve as much of that for the down years or when we need to stay within the 15% bracket .

 

[bingybear]

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.


Sent from my iPad using Early Retirement Forum

Why the assumption that all divy and CG are taxable if in ER and you haven't taken SS or pension. Many of the posters on ER that post on ACA topic likely do not have taxable Q-divies.

Assume what you have in A is all of your income/inputs for taxes and filing MFJ. So you have $12.5k (50*0.25 is not 10) taxed as ordinary income and 50k taxed as qualified divy/LTCG. You could add 30k more and not have any of your Q-divies be taxable.
But with what you have, take off the standard deduction and exceptions (MFJ) 62.5k -20.6k =41.9k which is all qualified. thus taxes are 0 (fed)

If one has a dividend yield of 2.5%, it would tak $2MM to generate $50k

Your example assumes someone has other significant sources of income. Wild guess of $80k to get all the $50k Q divy to be taxable?

oops... made a mistake, I'll assume your CG were STCG and I think this is right. Same overall answer.

 

[RunningBum]

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.

Not every year. In scenario A, 25% of the $50,000 you left in the account will eventually have capital gains due. In scenario B, there is no unrealized capital gains on the $50,000 reinvested dividend. All you've done is deferred the cap gains tax--which does have a benefit since that deferred amount (hopefully) continues to grow, but it's not as much as you say.

 

[RE2Boys]

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

Same here. At first it was primarily to keep track of basis without having lots of relatively small purchases in a fund (which is what re-investing is!).
But even more, it gives me an opportunity to re-assess where I wish to invest "new" funds. It may be back into the same stock/mutual fund. It may be into other or new investments. I decide where I wish capital to be invested and I don't put that on automatic. Just because I purchased a particular investment years ago doesn't mean I wish to continue adding shares of that investment in the current time.

 

[tmm99]

I used to reinvest, but I will start taking dividends since I no longer w*rk.

 

[scrabbler1]

Over the years, I used a fund company's "dividend sweep" program as an informal account builder, using one fund's monthly dividends to buy shares in another fund.


Another thing I have been doing since I ERed has been to take dividends as cash (for my living expenses) while reinvesting any of the more irregular and erratic cap gain distributions back into the fund. I don't count on those distributions to cover my expenses, as they are gravy. So I reinvest them.

 

[Looking4Ward]

I've been sort of struggling with this myself. Two thirds of my portfolio are in taxable accounts and one third in a tax deferred account. So far into my ER (last year and this year) I've taken the capital gains distributions and dividends from my taxable account. In my tax deferred account both are set for reinvestment.

The amount so far has been enough to more than cover my expenses and it allows me to keep my share count constant. I do wonder, though, if it would be better to re-invest and then sell shares as needed especially when a large portion of the proceeds (CG distributions) come at the end of the year and much of that cash is just sitting there over the next year as I use it to cover expenses.

 

[mrfeh]

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.

THIS ^^^^

For this reason, we reinvest automatically in tax-advantaged accounts, but do not in our taxable accounts. That gives us the flexibility to direct the taxable dividends toward whatever makes sense.

 

[Cobra9777]

Prior to ER, we reinvested all dividends and CG distributions. After ER, we still reinvest in tax-deferred accounts. But in the taxable accounts, we take dividends in cash. It fills in part of the spending gap not covered by pensions and rentals.

 

[Danmar]

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

Same. Just seems the simplest approach. Although dividend tax treatment in Canada is not as advantageous as in the US. As such, if I were to start fresh might take a less income centric approach. But very expensive to change course now.

 

[Alan]

Same. Just seems the simplest approach. Although dividend tax treatment in Canada is not as advantageous as in the US. As such, if I were to start fresh might take a less income centric approach.

Interesting how different countries treat qualified dividends. In the UK they are completely tax free, although that is set to change next year (after April 5th), and the then for each person the first $7.5k will be tax free, then taxed at 5% for most tax payers.

 

[tmm99]

Same. Just seems the simplest approach. Although dividend tax treatment in Canada is not as advantageous as in the US. As such, if I were to start fresh might take a less income centric approach.

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...)

 

[Danmar]

Interesting how different countries treat qualified dividends. In the UK they are completely tax free, although that is set to change next year (after April 5th), and the then for each person the first $7.5k will be tax free, then taxed at 5% for most tax payers.

The dividend tax regime in Canada is integrated. Ie an individual pays tax on his divs but gets credit for what the corporation has already paid. This is handled through a gross up and credit mechanism. As such for people with under about $50,000 in annual income, divs are effectively tax free.

This past year we have had changes in Government both in my province (Alberta) and federally. Alberta raised the max marg personal tax rate from10% to 15% and the Feds went from 29% to 33% . This will take the max marg tax on divs to about 30% from 20% for high incomes. Onerous indeed. Most provinces have max marg tax rates on regular income over 50% now with Alberta being the lowest at 48%. Cap gains are taxed at half the normal income rates so now are a better source of retirement cash flow than divs.

 

[Danmar]

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...)

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

 

[Quantum Sufficit]

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.

technically though (and the reason I questioned taking the dividends in cash in the first place) is you are NOT LEAVING YOUR STOCK ALONE.

The nav drops by the dividend distribution right? If you take those SHARES as cash, you have just liquidated some stock investment. In other words, if the dividend for the S&P is about 2%, by taking those dividends in cash, you are liquidating 2% of your stock holdings.

 

[Quantum Sufficit]

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?

Running bum,

Believe it or not (unfortunately) they were!

 

[REWahoo]

technically though (and the reason I questioned taking the dividends in cash in the first place) is you are NOT LEAVING YOUR STOCK ALONE.

The nav drops by the dividend distribution right? If you take those SHARES as cash, you have just liquidated some stock investment. In other words, if the dividend for the S&P is about 2%, by taking those dividends in cash, you are liquidating 2% of your stock holdings.

For those of us in the withdrawal stage, it is simply one of several choices of where to 'harvest' our portfolio.

 

[Alan]

For those of us in the withdrawal stage, it is simply one of several choices of where to 'harvest' our portfolio.

Exactly. Even after taking the dividends I need to sell some shares as well.

 

[pb4uski]

technically though (and the reason I questioned taking the dividends in cash in the first place) is you are NOT LEAVING YOUR STOCK ALONE.

The nav drops by the dividend distribution right? If you take those SHARES as cash, you have just liquidated some stock investment. In other words, if the dividend for the S&P is about 2%, by taking those dividends in cash, you are liquidating 2% of your stock holdings.

You're wrong (technically that is). If you take dividends in cash you are leaving your stock alone since you have the same number of shares before and after.

If you take dividends in cash you are not liquidating (you have the same number of shares)... you are just electing not to buy more shares.

The NAV drops whether you take cash or reinvest. If everyone took cash then the fund would have assets that are lower by the amount of dividends paid but the number of shares outstanding would be the same so the NAV drops. If everyone reinvested then the funds assets would be unchanged but the number of shares outstanding would be higher and the NAV drops. And anything in-between.

 

[youbet]

For those of us in the withdrawal stage, it is simply one of several choices of where to 'harvest' our portfolio.

Yes.

Although there is one exception to just generic harvesting of money to be blown on household expenses. Craft beers purchased with dividend money always taste the best! Who knew? When I buy them with dividend money instead of SS money or DW's pension money, they always taste emmmm, emmmm good!

When my JNJ stock pooped out a $375 dividend recently, I rushed to Sal's Liquor Emporium and bought everything I needed to restock both my own booze supply and also my son's (where I've been known to mooch a beer to two). I put a little round sticker on each bottle so I know they're special. Bought with dividend bux, they'll be extra tasty!

 

[GTFan]

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.

And even more important if you're trying to max out ACA subsidies, because the less you have to W/D the less MAGI you have to report. Dividends count as income no matter what for MAGI purposes, so if you want subsidies take as much as you need for expenses as cash.

 

[mickeyd]

I do both. Dividends from my TSM go to my checking account. If I do not spend them, I transfer them to my Ally online account until needed in the future. Dividends from my STB fund are reinvested in hopes of taking advantage of the 2.6 year Duration.

 

[audreyh1]

Exactly. Even after taking the dividends I need to sell some shares as well.

The distributions are usually more than sufficient to cover my annual withdrawal, plus a little for rebalancing. I may have to sell a few shares to do a full rebalance though.

In some years the best performing funds pay the highest distributions, so I end up amazingly close to my target allocation after distributions anyway.

But other years (like this one) in which nothing has appreciated, the distributions are all over the map and I will probably have to make several adjustments to rebalance.

 

[Alan]

The distributions are usually more than sufficient to cover my annual withdrawal, plus a little for rebalancing. I may have to sell a few shares to do a full rebalance though.

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.

 

[mathjak107]

You're wrong (technically that is). If you take dividends in cash you are leaving your stock alone since you have the same number of shares before and after.

If you take dividends in cash you are not liquidating (you have the same number of shares)... you are just electing not to buy more shares.

The NAV drops whether you take cash or reinvest. If everyone took cash then the fund would have assets that are lower by the amount of dividends paid but the number of shares outstanding would be the same so the NAV drops. If everyone reinvested then the funds assets would be unchanged but the number of shares outstanding would be higher and the NAV drops. And anything in-between.

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 .