Drawing mutual fund dividends

[Stormy Kromer]

Since I started investing in mutual funds I have always chosen to reinvest dividends and capital gains.

I plan on drawing dividends from one of my funds, Vanguard Balanced VBIAX when I turn 62 in 4 years to supplement living expenses. My question for those of you who draw dividends, do you draw the entire dividend portion plus the Total Capital Gain distribution? or just the dividend portion?

Here is my example based on my 2023 1099 that I just received.

VBIAX

Total Ordinary Dividends $2,213 line 1a
Qualified Dividends $1,035 line 1b
Total Capital Gain Dist. $6,018 line 2a

My question is, how much should I draw ?

 

[Sunset]

I have nothing re-invested.

I'll either spend the cash or buy something else.

Not having things reinvested makes easier tax issues for non-tax sheltered accounts.

 

[Amethyst]

I stopped reinvesting most distributions some years ago, realizing that I was paying taxes on it either way, so I may as well spend the money.

The only negative is that the value of my un-reinvested investments seems to be declining, even though the number of shares stays the same.

 

[SecondCor521]

I do like the others; all the distributions in my taxable go into my checking account and get spent.

With a lot of mutual funds, there can be a larger amount of money distributed in December at year end. That's usually OK with me because I have some higher bills in December as well (property taxes, Christmas).

I spend more than my taxable distributions, so I don't really have to think about how much to take since I take all of them and then some. In your case, you might just look at how much taxable income you get compared to how much you need and then decide based on that. You can turn reinvestment on and off, and you can do it on a per holding basis, at least at Vanguard you can.

Another thing to think about is whether you want to own more or less of any particular holding relative to your overall AA. Reinvesting the distributions tends to maintain or slightly grow a holding; distributing it to you to be spent tends to reduce your allocation to that holding over time.

 

[explanade]

I stopped reinvesting a few years after retiring. I had had like over a year of estimated expenses in cash so I didn't need to draw any money or withdraw.

Now I've only been living on dividends and cap gains distributions, not touching most of the underlying shares.

I have done some sales of old stocks though, mostly tax loss harvesting.

But I'm reinvesting dividends in some bond funds, mostly because my AA is so heavily in equities that I want to balance it.

Overall though, my retirement assets have almost doubled -- currently at all-time highs -- since retiring.

So there's little incentive for me to reinvest dividends and try to grow my holdings, especially in equities.

It's a fortunate situation to be in but then again, we've been through a pandemic and the highest inflation in 40 years in the last few years.

So maybe reason to be wary that valuations may not hold at these levels.

 

[marko]

All my IRA dividends and cap gains automatically go into a MM fund (now earning 5.5%!). I take a monthly withdrawal from there.

All my after tax dividends and cap gains are sent directly to my checking account.

 

[homestead]

We use VTMFX for our after-tax nest egg.
There hasn't been any capital gains just dividends which we save or spend.

 

[N02L84ER]

Once we both retired we stopped all dividend and declared capital gain reinvesting in taxable accounts.

 

[marinauser]

When we quit working, we started taking all distributions in cash. Most of the big distributions are in December. The first of the next year, we decide how much cash we need for the year and any leftover gets invested based on our desired asset allocation.

 

[MarieIG]

The funds in my taxable accounts have very little capital gains. I sold those that did (and attempted to replace with similar ETFs without the capital gains).

Currently, I am taking some dividends from stock to pay taxes and use to invest in ETFs. (I may invest a portion of the dividends back in if I want more of that stock - but I am trying to invest more in funds for diversification purposes.)

I am reinvesting dividends and capital gains in my Roth IRA.

 

[CardsFan]

After tax: changed funds to eliminate CG, all div/int taken as cash and used for spending

tIRA: All re-invested. May change this closer to RMD time, so we just take out cash

Roth IRA: All re-invested. Designated for inheritance. Never intend to use this money, but it is available

 

[audreyh1]

When we quit working, we started taking all distributions in cash. Most of the big distributions are in December. The first of the next year, we decide how much cash we need for the year and any leftover gets invested based on our desired asset allocation.

Yep, exactly what I do.

 

[Wupot2020]

I don’t think it matters too much in regards to taking capital gains vs dividends. Dividends are definitely more predictable while capital gains can vary significantly from year to year. (This has been my experience.). Related question….when i turn 59.5, i am thinking of taking dividends and capital gains from my IRA as cash. Anything that I should be aware of when doing this?

 

[jollystomper]

Our capital gains are reinvested in all funds except for one which we do not need to grow anymore. Most of our dividends are not reinvested into the same fund -they are either part of our withdrawal rate, or used at times for any AA balancing we want to do.

 

[youbet]

I don’t think it matters too much in regards to taking capital gains vs dividends. Dividends are definitely more predictable while capital gains can vary significantly from year to year. (This has been my experience.). Related question….when i turn 59.5, i am thinking of taking dividends and capital gains from my IRA as cash. Anything that I should be aware of when doing this?

Just remember that your divs and LTCG's will be taxed as ordinary income when withdrawn from your TIRA.

 

[badatmath]

I have been thinking of this myself. I am waiting on the 1099 but I think I had 14K cap gains this year on my 1 taxable account which will f up my taxes. I think the dividends was about half that but really don't remember the specifics from the Dec statement where I cursed out loud. They vary so much year to year IDK how to plan for it anymore.

 

[jollystomper]

I have been thinking of this myself. I am waiting on the 1099 but I think I had 14K cap gains this year on my 1 taxable account which will f up my taxes. I think the dividends was about half that but really don't remember the specifics from the Dec statement where I cursed out loud. They vary so much year to year IDK how to plan for it anymore.

Sometimes the best you can do is to look out for the "estimated year end distributions" statements that come out between mid-October and mid-November, to at least see if you can balance things out with actions such as tax loss harvesting before year end.

 

[RobLJ]

I would like to scrape off the dividends, but one feature of my 403b Fidelity brokerage accounts are that dividends and capital gains must be reinvested. This is a pain in the ass, but I use Quicken, so I can see yearly gains, although you have to use a calculator to figure out the dividends, but it can be done. I did some of that to fund this year's withdrawals from my account.
Luckily, DW's IRA rollover does not require this, so in her account and the taxable brokerage (with a few exceptions) I do not reinvest dividends.

It is what it is. I could lose state health benefits if I rolled over the 403b, so it's just a first world annoyance of living.Poor, poor pitiful me.

 

[badatmath]

Our capital gains are reinvested in all funds except for one which we do not need to grow anymore. Most of our dividends are not reinvested into the same fund -they are either part of our withdrawal rate, or used at times for any AA balancing we want to do.

May I ask the logic in reinvesting one but not the other? I have seen this before but I can't grasp why unless you just randomly picked to take part of the money and not all (perfectly valid of course).

 

[SecondCor521]

May I ask the logic in reinvesting one but not the other? I have seen this before but I can't grasp why unless you just randomly picked to take part of the money and not all (perfectly valid of course).

Like I alluded to in my reply, if you own several funds but like one of them somewhat less, not reinvesting dividends in the disliked fund can end up reducing the percentage allocation to that fund over time.

 

[badatmath]

Yeah except I have only one fund and lack the money to buy more unless I start completely over so it would likely just be spent from checking account. I'm one of the poor folks here so limited options. I dislike how it interferes with my tax planning and it has modest growth but I have never sold any or anything. It is the capital gains which really hurt me tax wise because less consistent.

 

[jollystomper]

May I ask the logic in reinvesting one but not the other? I have seen this before but I can't grasp why unless you just randomly picked to take part of the money and not all (perfectly valid of course).

Like I alluded to in my reply, if you own several funds but like one of them somewhat less, not reinvesting dividends in the disliked fund can end up reducing the percentage allocation to that fund over time.

There no "logic", only preference for me . As SecondCor521 stated, some funds I like better than others, some I want to continue to grow while others I want to wind down.

For example, I own American Century Small-midcap value fund (ACMVX). I am consolidating institutions and would like to drop American Century, but this is a proprietary fund which cannot be moved. I do not want to that the capital gains hit on selling the shares yet, as I want income "room" for Roth conversions without going into the next tax bracket. So I do not reinvest the distributions. In this case I had been reinvesting them into VFIAX. No logic, just preference.

 

[rk911]

...Not having things reinvested makes easier tax issues for non-tax sheltered accounts.

Can you please explain your reasoning? Seems to me you get a 1099-DIV, B or INT either way.

 

[audreyh1]

Can you please explain your reasoning? Seems to me you get a 1099-DIV, B or INT either way.

Yes, you pay taxes either way. But if you take the distribution in cash you have a lot more flexibility. You have money to pay the tax incurred, you can use the proceeds to rebalance or draw on for spending. And a niggly thing about automatic reinvestments is that if you decide to grab those funds later you incur another taxable event because you have to sell some shares. If you’re smart about selling selected shares the resulting tax liability is minor.

Some people don’t like accumulating a bunch of extra tiny share lots that happen with reinvesting distributions.

Finally, and this can be a major issue, by buying some shares via reinvestment you invoke the wash sale rule clock. If you happened to sell some same shares at a loss within 30 days before, or 30 days after a wash sale occurs this eliminates some of your tax loss. I have been caught by this a time or two in the past.

In fact if you do some tax loss harvesting in your taxable account you had better not buy same shares +/-30 days in your IRAs either. If you own different securities in your IRAs versus taxable this is a non-issue.

In other words, in taxable accounts it can get messy, and you still have to be careful in tax-deferred for securities also held in taxable. I turned off reinvesting in all my accounts long ago and am careful about the timing whenever I sell to take a loss in taxable.

 

[Midpack]

Like others here, I always reinvested dividends and STCGs when I was working. When I stopped getting a paycheck, with no pension I had all dividends/CGs direct deposited into checking. When I start Soc Sec in Jun, we'll have more than we need coming in, so I will reinvest dividends/CGs on some of our mutual funds, and leave others coming into checking.