Reinvesting Dividends

[Youngblood]

Is there a thread about reinvesting dividends (on this site)? I did a quick search on my lunch break, but I couldn't find anything.

Basically, I want to know what the general consensus is about reinvesting your dividends. Currently, I just have mine go back into my funds (automatically), so I'm not paying taxes on them now; however, I want to begin setting up a taxable investment account.

Quick snap shot of what I' m doing now:
1. Vanguard 401K = 13% of income (not maxed out yet)
a. Company match 4.5%
b. Company stock 5% of yearly income
2. Roth IRA = $5500 every year.
3. Taxable account = 0%

I'm a spreadsheet guy, so I have stretched my dollars as much as I can or willing to (for now anyways). I was thinking I could take the dividends and begin a taxable account, or just wait until my house is paid off in about 8 years and start then. I would rather start sooner on the taxable account, but I just don't know what kind of pitfalls (if any at all) are out there with taking out dividends now and reinvesting them into taxable account.

Options for starting a taxable account:
1. Take any additional yearly raises and begin a Roth 401K (Vanguard) , with our without dividends ().
2. Wait until home is paid off in about 8 years and replace mortgage payments with investment payments to a taxable account.
a. My plan is to retire in 14 years, so that would only leave me about 6 years on investing
3. ? - any thoughts

 

[jim584672]

The only problem with reinvested dividends in a taxable account is you have to track each purchase for tax purposes.

 

[mrfeh]

I think you're asking 2 different questions; a) should I open a taxable account and b) when/where should dividends be reinvested.

I'll answer the second one - we reinvest dividends in tax advantaged (401K, IRAs) accounts and don't in taxable.

 

[W2R]

I'll answer the second one - we reinvest dividends in tax advantaged (401K, IRAs) accounts and don't in taxable.

Same here. In taxable, I have my dividends pointed to a money market account at Vanguard. Then, since I am retired, I eventually use them as part of my living expenses.

 

[MRG]

The only problem with reinvested dividends in a taxable account is you have to track each purchase for tax purposes.

My brokerage does that. Dont think that's how it always was.

 

[mrfeh]

My brokerage does that. Dont think that's how it always was.

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.

 

[calmloki]

We are so so tax exposed - not in 401k or Roth accounts. Did have dividends being reinvested and it made for stupidly complicated taxes with bunches of purchase dates for piddly sums. Now we take the money and purchase when and in amounts we want.

 

[MRG]

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.

+ 1

 

[jim584672]

Years ago I had a Treasury money market fund with dividends reinvested. I would report the dividends on my taxes. The fund was closed and the money moved.

The fund reported to the IRS a "proceeds of a security sale" amount. The IRS audits me about it. I had to reconstruct all purchases of by the fund, share amount, date, and price. Absurd since money markets are always $1.00. Luckily I kept all my statements and was able to account for all the shares.

 

[Mulligan]

We are so so tax exposed - not in 401k or Roth accounts. Did have dividends being reinvested and it made for stupidly complicated taxes with bunches of purchase dates for piddly sums. Now we take the money and purchase when and in amounts we want.

I remember that being a big old mess for me about 10 years ago when I sold all my drips. I looked at all the years and years of dividends and just gave up and gave it the old eye ball test and guesstimated it.
Now I reinvest and it is tracked by brokerage so it is a lot easier. I reinvest all mine in tax and tax deferred.


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[audreyh1]

Like other I have don't reinvest dividends in the taxable accounts, but do in the IRAs.

 

[Alan]

Like other I have don't reinvest dividends in the taxable accounts, but do in the IRAs.

Same here.

I didn't used to do this but some years ago I sold some shares from a fund forgetting that it was within 30 days of a quarterly dividend and ended up having to deal with a wash sale when I filed taxes.

Question - do wash sales apply within an IRA? (I do sometimes buy and sell shares within both my IRA and ROTH)

 

[Andre1969]

I have the capital gains and dividends in my mutual funds set to automatically reinvest. But for the individual stocks in my brokerage, I just let the dividends pile up in a money market account, and then when enough gets built up, and I feel the mood is right, I buy more shares of something. I'm with Scottrade, and I don't think they have a setting to let the dividends automatically reinvest. I'd imagine that would get sloppy, because in some cases, you might only be buying a partial share.

 

[MichaelB]

Question - do wash sales apply within an IRA? (I do sometimes buy and sell shares within both my IRA and ROTH)

No. Wash sales only apply when taking a tax loss, which you can't do inside an IRA.

We don't reinvest dividends, but only because we fund our yearly budget first from cash distributions. It also makes rebalancing easier.

 

[Animorph]

Question - do wash sales apply within an IRA? (I do sometimes buy and sell shares within both my IRA and ROTH)

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.

 

[pb4uski]

Like other I have don't reinvest dividends in the taxable accounts, but do in the IRAs.

Same here.....

+2 especially now that I am retired since I live on our taxable accounts.

 

[aaronc879]

I have the capital gains and dividends in my mutual funds set to automatically reinvest. But for the individual stocks in my brokerage, I just let the dividends pile up in a money market account, and then when enough gets built up, and I feel the mood is right, I buy more shares of something. I'm with Scottrade, and I don't think they have a setting to let the dividends automatically reinvest. I'd imagine that would get sloppy, because in some cases, you might only be buying a partial share.

TD Ameritrade allows Drips for individual stocks. The problem is if you have a partial share and you want to sell, you have to sell all shares for that stock. I just do what you do and let the dividends pile up in a money market within Ameritrade and when they get built up enough and there's a good buying opportunity then I buy more shares in one of my positions.

Tax deferred accounts I automatically reinvest dividends and capital gains.

 

[Alan]

No. Wash sales only apply when taking a tax loss, which you can't do inside an IRA.

We don't reinvest dividends, but only because we fund our yearly budget first from cash distributions. It also makes rebalancing easier.

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.

Thanks guys, that makes perfect sense.

 

[surferLife]

Bogleheads has a pretty comprehensive wiki on reinvesting dividends, to include tax loss and tax gain harvesting.


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[RunningBum]

Basically, I want to know what the general consensus is about reinvesting your dividends. Currently, I just have mine go back into my funds (automatically), so I'm not paying taxes on them now; however, I want to begin setting up a taxable investment account.

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.

 

[Youngblood]

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.

 

[Omalley]

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.

 

[Youngblood]

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?

 

[Omalley]

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.

Omalley

 

[youbet]

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.