Dividends/Capital Gains

[OldShooter]

Is that really true? ...

@rayvt is basically explaining that the goal is total return and the dividends and capital gains are just money, as is the money you could get by selling an equivalent amount of a non-dividend-paying stock.

Kenneth French is Nobel-winner Eugene Fama's long time research partner and general purpose investment guru. Here he explains: https://famafrench.dimensional.com/videos/homemade-dividends.aspx It's well worth spending the 6 minutes.

 

[donheff]

Thanks OldShooter, that was a good video.

 

[rayvt]

Maybe some of the spread sheet gurus have run the numbers. ...Having a cash buffer large enough to weather the steepest part of a typical downturn probably makes it even more immaterial.

I have indeed run the numbers in a spreadsheet, which is why I said that there's nothing magical or special about dividends.

Have also run the numbers on a "cash buffer"....and that is a terrible bad nogood strategy. The failure comes when you go to replenish the cash bucket after you've drawn from it.
https://www.dropbox.com/s/xf4ma5blug27aws/SPY_Withdraw_by_CashBucket_rules.xls

 

[donheff]

I have indeed run the numbers in a spreadsheet, which is why I said that there's nothing magical or special about dividends.

Have also run the numbers on a "cash buffer"....and that is a terrible bad nogood strategy. The failure comes when you go to replenish the cash bucket after you've drawn from it.
https://www.dropbox.com/s/xf4ma5blug27aws/SPY_Withdraw_by_CashBucket_rules.xls

I usually have 6 or so months in a money market account to cover current expenses. I also have a portion of my bonds in the Federal TSP that can't lose principle and thus serves as a bond component and a cash buffer. If we were to enter a recession that knocked equities way down (and potentially bond funds to a degree) I would plan to spend my current cash, then G Funds - hopefully until a recovery was well underway. Only after we were back well into the green would I look to switch TSP equities back into the G Fund to re-establish that "buffer." I don't see that as any different in practice than periodic re-balancing. I would spend from the funds that did the best as I do in good times (in the event of a massive downturn that would almost certainly be the G Fund).

 

[jesaco]

Been doing the same thing when I retired. Used div/cap gains in taxable account as part of my budget. All div/gains in IRA's are reinvested.

Income strategy. Being retired, minimize W2 income of course.

I accept both dividends, cap gains, along with SS and pension.

Do not reinvest div/cap gains in any funds within a taxable accounts.

Reinvest div/cap gains if the funds are in a retirement account.

I don't need the funds at this time and not yet subject to RMDs

Were you looking for something else?? Investing for div or investing for cap gains??

 

[mwetter]

Best to take interest income in 401k and IRA as they will be taxed as ordinary income anyway. Dividends and capital gains are better in a taxed account depending on income tax bracket.

 

[rk911]

as we currently have no need to realize gains in our post tax or retirement accounts we reinvest them. the exception being our checking and savings accts.

 

[DrRoy]

Since they are taxed annually anyway, I take all non-sheltered dividends and cap gains for spending.

 

[Amethyst]

We do too. It took a long time to grasp that dividends and CG distros are not truly "income" "earned" by your investments, especially given we pay taxes on them.

Since they are taxed annually anyway, I take all non-sheltered dividends and cap gains for spending.

 

[scrabbler1]

One reason I prefer to take dividends as cash in my taxable account instead of reinvesting them and later selling shares for roughly the same amount is the added paperwork the latter generates at tax time. Many years, I make no sales of shares so I don't need to complete Form 8949 and Schedule D. If I didn't need to file Schedule A as well, then I could file the much simpler Form 1040A (this was before the recent tax law change which mucked things up a lot). Even after the recent crummy tax law change, one redemption of shares would still require me to complete both of those cap gains-related forms. although there is no more Short Form (1040A) I can benefit from.

 

[pb4uski]

+1 It just reduces the amount of investments that I need to sell to replenish cash at the end of the year... and it makes my taxes easier.

 

[jazz4cash]

Since they are taxed annually anyway, I take all non-sheltered dividends and cap gains for spending.

But they are not taxed annually in a 401k account which I think is the subject of this thread. I would go so far as to say capital gains and dividends do not exist for IRA/ 401k accounts so the initial question is.

Edit: I wanted to say the original question was misleading, not legit or something like that.

 

[OldShooter]

... I would go so far as to say capital gains and dividends do not exist for IRA/ 401k accounts ...

That is a very insightful comment and I think that is a good way of looking at them. It is all, eventually, ordinary income.

Thanks.

 

[OnTheAve]

If you are an income investor, you want qualified dividends/capital gains in a taxable account not nontaxable. For 401k/IRAs, it is really growth that you are after until you have reached the capital preservation stage. From a tax perspective, it doesn't really matter there as nothing is taxable until withdrawal at which time it is ordinary income only and you cannot do a damn thing about that.

 

[jebmke]

From a tax perspective, it doesn't really matter there as nothing is taxable until withdrawal at which time it is ordinary income only and you cannot do a damn thing about that.

If it in an IRA, once you turn 70.5 you can use Qualified Charitable Distributions to reduce the amount of your RMD which is reported as taxable income.

 

[rayvt]

A QCD is not taxable income, nor is it actually income for you. The money just goes directly from the IRA to the charity.

 

[OnTheAve]

I have been trying to tell folks who are still in the work force to diversify from putting everything in TIRAs mainly because of the tax implications at withdrawal time. Do enough to get the company match, and then the rest to RIRA, municipal bonds, and qualified-dividend investments for income. Capital gains geared investments round out the diversification also with a bit in investments that generate non-destructive ROC (AMLP used to be like that). Gabelli Asset Trust is perhaps though one of the best examples of the latter as its payout has been 10% as long as I can remember -- mostly ROC and some capital gains.

 

[ERD50]

I have been trying to tell folks who are still in the work force to diversify from putting everything in TIRAs mainly because of the tax implications at withdrawal time. Do enough to get the company match, and then the rest to RIRA, municipal bonds, and qualified-dividend investments for income. Capital gains geared investments round out the diversification also with a bit in investments that generate non-destructive ROC (AMLP used to be like that). Gabelli Asset Trust is perhaps though one of the best examples of the latter as its payout has been 10% as long as I can remember -- mostly ROC and some capital gains.

What is the ticker for "Gabelli Asset Trust "? A search on the terms didn't turn up anything specific, unless I just missed it.

-ERD50

 

[OldShooter]

I have been trying to tell folks who are still in the work force to diversify from putting everything in TIRAs mainly because of the tax implications at withdrawal time. ...

Consider this thought experiment:

Invest a sum of money in a TIRA but mentally segregate it into "Roth Money" and a "Taxman's Money" categories, base on your current tax rate. Now fast-forward twenty or thirty years and withdraw all the money. The "Roth Money" and the "Taxman's Money" will have grown at identical rates, so they are still in the same proportion. If your tax rate is the same, you'll hand the tax man his money and what you have left is the "Roth money."
​

IOW, the only reason to choose between the Roth and the TIRA is if you expect to be in a lower tax bracket when you cash in. For an aggressive saver and an aggressively-spending government I don't think that this bet is anything like a sure thing.

So you makes your bet and you waits to see if you win or lose. Tax rate arbitrage.

 

[jebmke]

A QCD is not taxable income, nor is it actually income for you. The money just goes directly from the IRA to the charity.

yes; is a good way to avoid having your RMD taxed.

 

[bingybear]

yes; is a good way to avoid having your RMD taxed.

as long as you are giving it away in a way that does not benefit you.

 

[pb4uski]

Consider this thought experiment:

Invest a sum of money in a TIRA but mentally segregate it into "Roth Money" and a "Taxman's Money" categories, base on your current tax rate. Now fast-forward twenty or thirty years and withdraw all the money. The "Roth Money" and the "Taxman's Money" will have grown at identical rates, so they are still in the same proportion. If your tax rate is the same, you'll hand the tax man his money and what you have left is the "Roth money."
​

IOW, the only reason to choose between the Roth and the TIRA is if you expect to be in a lower tax bracket when you cash in. For an aggressive saver and an aggressively-spending government I don't think that this bet is anything like a sure thing.

So you makes your bet and you waits to see if you win or lose. Tax rate arbitrage.

+1... I contend that you win either way.

If your tax rate is lower in retirement than when you were working then you save the difference in taxes.

OTOH, if your tax rate in retirement is higher than when you were working, then it ends up that you were much more successful than you expected you would be when you deferred that income and thought you would be in a lower tax bracket in retirement... so that is a win too!

 

[OnTheAve]

Apologies, two things: 1) I should have said Gabelli Equity Trust, and 2) It is a closed-end fund. The ticker is GAB.

Here's the website. Mario Gabelli is an old hand. When he steps down, I will probably exit the fund.

https://www.gabelli.com/funds/closed_ends/-111

 

[jebmke]

as long as you are giving it away in a way that does not benefit you.

yes; you have to want to be giving it away to charity - that is why it is called a charitable distribution. It caps out at $100K but it has no AGI limit and it doesn't impact your AGI so it is better than Schedule A donations in most cases. It also has an unfortunate flaw inasmuch as you can't make the donations anonymously, as far as I know.

 

[OldShooter]

yes; is a good way to avoid having your RMD taxed.

True, but there is another benefit for some -- including ourselves last year.

It was our first year of RMD and we switched all of our charitables to QCDs. Formerly these donations were enough to put us solidly into itemized deductions, comprising maybe half or more of our deductions.

By moving the charitables to QCDs, and because of the tax law changes, we were able to use the standard deduction for the first time in decades. Itemized deductions totaled only about half of the standard deduction so effectively we got a "free" deduction to the extent the QCDs let us underrun the standard deduction amount.