Quote:
Originally Posted by bingybear
I'm at a loss as to what makes reinvesting dividends makes it less tax efficient in general. That said, I too don't reinvest many of my dividends in taxable accounts and reinvest very few in other accounts. I reinvest dividends in holdings that I'm trying to increase holdings.
I would think if your portfolio was balanced before the distribution, then reinvesting them would keep the portfolio balanced as the holding would drop by the amount of the distribution.
I can see that you would not want to reinvest shares if you have or plan to sell shares in such a way to create a wash sale. This is even more true if you might repurchase shares in an IRA and loose the the capital loss. I do not have holdings in IRAs and taxable accounts that are significantly identical for this reason.
I would agree in not reinvesting if you are going to use pull the $ for spending or harvesting losses which could create a wash sale. I could see not reinvesting if you are going to need to sell more when rebalancing. The only headache I see is having more purchases to track. However, rebalancing causes similar book keeping.
I feel I must be missing something. Note that I don't make a yearly separation of spending $ if that has any effect. I'd like to know what I'm missing... maybe I can improve.
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It simply that if you reinvest distributions, and later need to sell from the same fund for rebalancing and/or withdrawal, you create two taxable events, not just one. The first taxable event is the paid distribution. The second is the sale which may generate capital gains. If you reinvest the distribution just to turn around sell some of the mutual fund to fund your withdrawal, you will likely pay extra cap gains taxes, or if it turns out to be a capital loss, you also have to be careful about timing to avoid a wash sale.
It's pretty typical (but not a given) that mutual funds that gain the most during a given year pay out the most in cap gains distributions. So taking distributions in cash, for which I will already owe taxes anyway, helps take care of a big part of the rebalancing. After the dust settles - receiving distributions from all funds, taking my annual withdrawal - I can see if any additional trimming/rebalancing is required. Usually very little.