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Old 04-06-2015, 05:34 PM   #21
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Yes you are (or should be) if this is not in a tax deferred/protected account. I'm guessing you are talking about your company stock and that is not within a 401K, because you are talking about creating a taxable account, and you couldn't do that with dividends from a 401K or any type of IRA (without going through a withdrawal).

Even though it looks like a single step because you never come into possession of the dividend money, it is really two steps:

1) Get the dividend. This is a taxable event if it's not in a 401K/IRA/tIRA.

2) Buy more of the same stock with the dividend money. This is a new stock purchase with a new basis.

Reinvesting dividends is good for an undisciplined investor who would likely take the dividend and put it in a checking account where it will be spent. It was also good in the days of high brokerage fees, because you could usually buy more stock with no commission. Commissions are so cheap these days this is less of an issue.

There can be other reasons to reinvest dividends, such as investing more money in a closed mutual fund.

Most of us don't like being too invested in the company you work for because in down times not only does the stock fall, but you might also lose your job, so it's a double whammy. Taking the dividends and investing them elsewhere provides some diversification. For the same reason, you might consider selling the company stock once you reach the holding period where you get favorable capital gains treatment.
Running Bum, I was referring to my tax deferred account dividends. If getting the dividends from a tax deferred account is not permissible, than that pretty much ends it for me right there. The dividends I get from company stock are extremely small, because I typically sell of the majority of my shares for index funds that I'm already investing in.

I want to start a taxable account, but I just don't have enough to stretch out to make any significant or consistent payments to one. I would like to max out the 401K, and I can probably do that in about 2 years (with 3% raises). Or, I could just start taking any future raises and apply it to a taxable account. I'll have to evaluate the pro's and con's of that strategy.

Thank you all for the insight and knowledge.
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Old 04-06-2015, 09:20 PM   #22
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You mention that you plan to retire in 14 years, but didn't mention the age you will be at that time. If you plan to retire before 59.5 you will need to fund those years with taxable accounts. I regret not beginning to fund our taxable accounts earlier. I am working 2-4 more years to adequately fund our taxable accounts which will be used for 13 years before tax advantaged accounts are tapped. If I had invested less in tax advantaged funds and more in taxable funds over the past 20 years, I may have been able to retire already.


I realize that there are options to use 72T withdrawals from tax advantaged accounts, but that seems like more recordkeeping than I want to manage.
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Old 04-07-2015, 11:33 AM   #23
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You mention that you plan to retire in 14 years, but didn't mention the age you will be at that time. If you plan to retire before 59.5 you will need to fund those years with taxable accounts. I regret not beginning to fund our taxable accounts earlier. I am working 2-4 more years to adequately fund our taxable accounts which will be used for 13 years before tax advantaged accounts are tapped. If I had invested less in tax advantaged funds and more in taxable funds over the past 20 years, I may have been able to retire already.

I realize that there are options to use 72T withdrawals from tax advantaged accounts, but that seems like more recordkeeping than I want to manage.
Omalley, I'm 38 right now and I would like to retire by the time I'm 52 (or just be FI). What you described to me is kind of why I'm looking at other avenues to start taxable account (besides just the Roth IRA).

You mentioned that you are working 2-4 more years. May I ask how old you are right now?
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Old 04-07-2015, 01:54 PM   #24
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Currently 43, looking to RE at 46/47. We keep adding new events that we want to have funded before beginning retirement. I get a little crazy with the budgeting.

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Old 04-07-2015, 02:06 PM   #25
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The only problem with reinvested dividends in a taxable account is you have to track each purchase for tax purposes.
My broker does that for me automatically.
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Old 04-07-2015, 02:48 PM   #26
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Running Bum, I was referring to my tax deferred account dividends. If getting the dividends from a tax deferred account is not permissible, than that pretty much ends it for me right there. The dividends I get from company stock are extremely small, because I typically sell of the majority of my shares for index funds that I'm already investing in.

I want to start a taxable account, but I just don't have enough to stretch out to make any significant or consistent payments to one. I would like to max out the 401K, and I can probably do that in about 2 years (with 3% raises). Or, I could just start taking any future raises and apply it to a taxable account. I'll have to evaluate the pro's and con's of that strategy.

Thank you all for the insight and knowledge.
If I'm reading your question correctly, you want to take your dividends and transfer them out of your tax deferred to a taxable account. You can only do that after age 59 1/2.

You CAN take your tax deferred dividends and deposit them into another account (savings/other funds) within the tax deferred account however.
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Old 04-08-2015, 07:27 AM   #27
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Yes, brokerages take care of this now. However, there's another reason to not reinvest divs in taxable - it can create landmines (wash sales) when rebalancing.
Not that I want to violate the wash sale rule, but how is a wash sale discovered in the first place?
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Old 04-08-2015, 07:33 AM   #28
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A sale in a taxable account and a purchase in an IRA can be matched up for a wash sale. This means the capital loss is disallowed on your taxes and the cost basis accrues to the shares in the IRA, where it is useless. A trap you don't want to fall into. A sale for loss in an IRA is all yours, so in that sense there is no wash sale in an IRA.
How is the wash sale when repurchased in an IRA detected?
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Old 04-08-2015, 07:42 AM   #29
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If you plan to retire before 59.5 you will need to fund those years with taxable accounts.
In addition to the 72T route you mentioned, don't forget that you can withdraw your >contributions< to Roth IRAs at any time without paying a penalty (or tax--because you already paid it). That can be another source of funds (in addition to taxable accounts) to bridge the gap until you reach 59.5.
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Old 04-08-2015, 03:18 PM   #30
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How is the wash sale when repurchased in an IRA detected?
I don't know. If it's not in a single account you're probably on the honor system.
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Old 04-08-2015, 05:00 PM   #31
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Not that I want to violate the wash sale rule, but how is a wash sale discovered in the first place?
If you buy and sell from the same brokerage, they can and will report the sale as a wash sale on the 1099. Not sure if they detect if you use the same brokerage but buy back in an IRA, but if you follow the rules that's a really bad way to take a wash sale. For wash sales not involving an IRA, you will eventually get the loss. If you buy back in an IRA, you lose the loss on the sale and since the repurchase is in a tax protected account, you have no way to get the loss later.

If you do it across different brokerages, or the brokerage doesn't recognize it across different accounts or doesn't recognize "substantially identical" funds, it's like a lot of things on your taxes, it's on your honor. If you get audited, you may get caught. Just like the IRS doesn't know if your charity deductions are accurate unless they audit you and ask for proof.
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