Dividends - Reinvest or transfer to a Savings Account

[rkser]

I am 63 & will start withdrawals from the Vanguard Portfolio in a few years after first spending from the Cash/CDs.

So far I have been reinvesting all the dividends in the Vanguard Taxable Accounts, I see some Forum members getting the dividends transferred to their bank accounts.

Apart from the need to spend the dividends, are there other reasons to get the dividends transferred to the bank ??

Please help me understand.

Thanks & regards

 

[audreyh1]

I collect all dividends and capital gains distributions in cash - not reinvesting. But I don't transfer anything until the beginning of the next year when I make my annual withdrawal.

But until I was retired and needed funds, I reinvested everything automatically.

 

[RobbieB]

Qualified dividends are tax favored income, so I like to spend them first.

 

[RunningBum]

Think of a dividend as money going into your pocket. What would you do with that money? If reinvesting it in the same investment is your choice, reinvesting automatically is a quick, simple way to do it.

For those of us in draw-down mode, many of us choose to spend that money instead, which enables us to hold onto other investments. This way we're not, for example, paying tax on the dividend, but reinvesting that money and selling something else and paying an additional tax on the capital gain.

And if we decide this is the investment we'd sell from, decide whether you want to take short-term risk reinvesting until you need the money, or if you just want to keep the money in a safer place.

It can also be a good way to rebalance. You take the cash from the dividend, and invest the money wherever you are underweight.

 

[marko]

Think of a dividend as money going into your pocket. What would you do with that money? If reinvesting it in the same investment is your choice, reinvesting automatically is a quick, simple way to do it.

For those of us in draw-down mode, many of us choose to spend that money instead, which enables us to hold onto other investments. This way we're not, for example, paying tax on the dividend, but reinvesting that money and selling something else and paying an additional tax on the capital gain.

And if we decide this is the investment we'd sell from, decide whether you want to take short-term risk reinvesting until you need the money, or if you just want to keep the money in a safer place.

It can also be a good way to rebalance. You take the cash from the dividend, and invest the money wherever you are underweight.

This. Everything RB just said.
+1

 

[rkser]

Thanks for explaining clearly in simple terms for me to understand -

In my case, as I will not be using the dividends at least for a few years, it is better to just let them get reinvested for now.

When I need the funds for expenses, I spend the dividends first before withdrawing more taxable money from the portfolio.

Thanks

 

[pb4uski]

I am in the same situation and prefer to take dividends in cash.... it reduces any sales that I make to rebalance at year end to replenish cash to my 5% target (it goes down over the year as the result of withdrawals for living expenses)... I don't have a bunch of pesky small lots to deal with... most importantly, I don't have to worry about an automatic reinvestment triggering a wash sale.

For me it is just easier and simpler to take dividends in cash.

 

[rkser]

Thanks pb4uski, I understand it better now.

I had not thought of the wash sale issue.

Best

 

[Golden sunsets]

I collect all dividends and capital gains distributions in cash - not reinvesting. But I don't transfer anything until the beginning of the next year when I make my annual withdrawal.

But until I was retired and needed funds, I reinvested everything automatically.

+1. We always reinvested divys and CG’s in all accounts and continue to do so in taxable accounts, but once we hit RMD age DH and I changed our reinvestment strategy to accumulate divys and CG’s in a high yield prime reserve fund within our IRA’s to partially meet the RMD requirement which along with a bond ladder, fulfills our annual RMD withdrawals in December.

 

[Bruno]

Qualified dividends are tax favored income, so I like to spend them first.

How do you know if they are qualified?

 

[RunningBum]

I have a pretty good idea from fund history how much of my dividends are qualified and how much are not, and I'll find out at the end of the year what the actuals are.

The odd thing about that statement is, it's not like you can say "I need some spending money, I'll just take me some qualified dividends." You're going to get the dividends whether you want them or not, and whether you spend or reinvest them. Now you've got cash. I like to spend cash because it doesn't cause any extra taxable events.

 

[DektolMan]

I collect all dividends and capital gains distributions in cash - not reinvesting. But I don't transfer anything until the beginning of the next year when I make my annual withdrawal.

But until I was retired and needed funds, I reinvested everything automatically.

+1

 

[mrfeh]

This topic is raised often - a search may be useful.

In a taxable account, we don't reinvest for 2 reasons: 1) to avoid wash sales if we want to tax loss harvest and 2) so we can control how those proceeds are re-invested.

 

[rpguy4]

This topic is raised often - a search may be useful.

In a taxable account, we don't reinvest for 2 reasons: 1) to avoid wash sales if we want to tax loss harvest and 2) so we can control how those proceeds are re-invested.

If you reinvest them in a taxable account, and they make more dividends and CG, then aren't you basically having to pay taxes twice on the same money ? Why not push those dividends into a ROTH ? (or maybe you don't have a ROTH available)

 

[mrfeh]

If you reinvest them in a taxable account, and they make more dividends and CG, then aren't you basically having to pay taxes twice on the same money ?

No. You only ever pay taxes on gains/dividends. When you reinvest, those proceeds become part of the basis.

Why not push those dividends into a ROTH ?

That's certainly an option. We already max out our Roths, so for mental accounting purposes, we do.

Money is fungible.

 

[RunningBum]

If you reinvest them in a taxable account, and they make more dividends and CG, then aren't you basically having to pay taxes twice on the same money ? Why not push those dividends into a ROTH ? (or maybe you don't have a ROTH available)

No, they aren't taxed twice.

If I have $100K, and it makes $2K in dividends, I pay taxes on that $2K. If I reinvest that $2K in the same fund, or elsewhere (doesn't matter), and it makes $40, I'm paying taxes on that new $40. I'm not paying taxes on the $2K a second time.

As far as the Roth goes, if a Roth is an option, you should probably be investing in it if you can regardless of whether you get dividends or not. Remember what I said earlier. Dividends just become money in your account. You can do whatever you want with that money. It doesn't matter if it came from dividends, interest, wages, whatever.

 

[pb4uski]

^^^ No, you are not paying taxes twice on the same money... you are paying tax on future earnings from having invested the dividend... no different from any other investment decision. Also, many here manage their income to be in the 0% capital gains tax bracket so we are not paying taxes on them at all!

You can't just push them into a Roth willy-nilly... you have to have earned income in order to make Roth contributions and even then there are limits. I'm retired and have no earned income so I can't make Roth contributions.

 

[rpguy4]

Got it - Thanks for clarifying.

 

[kaneohe]

Qualified dividends are tax favored income, so I like to spend them first.

not sure I understand this..........your taxes will be the same whether you spend them or not.

 

[W2R]

I collect all dividends and capital gains distributions in cash - not reinvesting. But I don't transfer anything until the beginning of the next year when I make my annual withdrawal.

But until I was retired and needed funds, I reinvested everything automatically.

+3

I take my dividends in cash. They just sit at Vanguard in Money Market until the first week in January, when I transfer what I need for the following year to my checking account. Then I rebalance right after doing that and any remaining dividends are reinvested in that process.

Before I retired, I relied on my job for spending money, not dividends. I reinvested them to grow my retirement nest egg.

 

[Cobra9777]

In our taxable brokerage account, we take dividends in cash. They are automatically transferred to our cash management account, where they are immediately available for spending. This regular cashflow nicely complements our other income (2 pensions and some rental income) to cover all ongoing non-discretionary spend. We only sell shares, as needed, for large discretionary items, like travel and home improvements.

In our tax-deferred accounts, we still reinvest. Once RMDs start, we will also have SS coming in, which (with other sources) should cover ALL expenses. So the basic plan is to continue reinvesting, take the RMDs at year-end, pay tax, reinvest the net proceeds in the taxable brokerage account, and collect larger taxable dividends going forward. Or at least, that's how my spreadsheet is currently set up. I fully expect things will change many times along the way.

 

[Alan]

+3

I take my dividends in cash. They just sit at Vanguard in Money Market until the first week in January, when I transfer what I need for the following year to my checking account. Then I rebalance right after doing that and any remaining dividends are reinvested in that process.

Before I retired, I relied on my job for spending money, not dividends. I reinvested them to grow my retirement nest egg.

+4
In the drawdown phase I let all the dividends go into the VG MM account as that is the place all our withdrawal money goes initially. (I usually have to sell some ETF shares as well)

 

[gwraigty]

I don't reinvest dividends when I have the option to take them in cash. I prefer to decide when/what they get reinvested in.

 

[foxfirev5]

I collect all dividends and capital gains distributions in cash - not reinvesting. But I don't transfer anything until the beginning of the next year when I make my annual withdrawal.

But until I was retired and needed funds, I reinvested everything automatically.

+5. That's also my plan. However if mm rates fall to those .00% something rates of a few years ago I may resort to using maturing CD's for spending and stay fully invested putting interest and dividends into open rungs on my CD ladder.

 

[big-papa]

Not retired yet. And to be clear, I'm a "total returns" type of guy - I don't invest for the purpose of creating dividends - when they happen, they just come along for the ride.

Today, I let dividends/cap gains go to a cash account. I then manually reinvest them to help maintain my desired asset allocation.

Upon retirement, in my taxable accounts, dividends/cap gains will most likely be sent to my checking account and will be considered part of my overall annual withdrawal. Rebalancing will happen manually if that unbalances my AA too much. Otherwise, rebalancing will happen when manual withdrawals occur.