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Reinvesting Dividends
Old 04-06-2015, 11:53 AM   #1
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Reinvesting Dividends

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
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Old 04-06-2015, 11:56 AM   #2
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The only problem with reinvested dividends in a taxable account is you have to track each purchase for tax purposes.
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Old 04-06-2015, 12:21 PM   #3
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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.
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Old 04-06-2015, 12:45 PM   #4
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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.
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Old 04-06-2015, 12:49 PM   #5
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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 brokerage does that. Dont think that's how it always was.
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Old 04-06-2015, 12:52 PM   #6
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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.
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Old 04-06-2015, 12:55 PM   #7
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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.
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Old 04-06-2015, 12:55 PM   #8
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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.
+ 1
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Old 04-06-2015, 01:08 PM   #9
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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.
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Old 04-06-2015, 01:16 PM   #10
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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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Old 04-06-2015, 01:35 PM   #11
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Like other I have don't reinvest dividends in the taxable accounts, but do in the IRAs.
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Old 04-06-2015, 01:52 PM   #12
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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)
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Old 04-06-2015, 01:57 PM   #13
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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.
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Old 04-06-2015, 01:58 PM   #14
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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.
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Old 04-06-2015, 02:21 PM   #15
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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.
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Old 04-06-2015, 02:25 PM   #16
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Like other I have don't reinvest dividends in the taxable accounts, but do in the IRAs.
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Same here.....
+2 especially now that I am retired since I live on our taxable accounts.
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Old 04-06-2015, 03:06 PM   #17
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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.
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Old 04-06-2015, 03:37 PM   #18
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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.
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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.
Thanks guys, that makes perfect sense.
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Reinvesting Dividends
Old 04-06-2015, 03:39 PM   #19
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Reinvesting Dividends

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


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Old 04-06-2015, 04:06 PM   #20
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Originally Posted by Youngblood View Post

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.
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