Fund for retirement income?

[MarieIG]

Hello,

I am looking for a fund in a taxable account to generate income in retirement. I would be interested in having the dividends deposited into a checking account. I was looking at Vanguard Dividend Appreciation and Vanguard High Dividend Yield ETFs. I understand the value will go up and down, but if I am just taking out dividends, will that matter?

Pros/ Cons/ suggestions?

Thank you

 

[pb4uski]

....I understand the value will go up and down, but if I am just taking out dividends, will that matter?

Pros/ Cons/ suggestions?

Thank you

I invest my taxable accounts for tax efficiency rather than income... I look at total return across all accounts.

I hold international and domestic equities in my taxable accounts. They generate qualified dividends that are 0% or 15% for most people, and the small amount of ordinary tax on non-qualified dividends are offset by the foreign tax credit. All together, my effective tax rate on these holdings is negative because the foreign tax credit exceeds the ordinary tax on non-qualified dividends.

 

[VanWinkle]

If you live on dividends, the fund controls your tax situation. If you live on total return, you control your tax situation by selling assets with the lowest gains and only paying tax if your income exceeds the 0% threshold for capital gains. I like dividends also, but I don't attempt to maximize dividend income.
If your stock values go down, there always is a risk of reduced dividends due to cuts by affected companies. You will get many different opinions on this subject, but do what works best for you.

 

[MarieIG]

Thank you both. I will look at the international as well.

I am not a sophisticated investor. I finally figured out that I was in two very bad funds (for me) in Dreyfus, and called about having my dividends and capital gains not reinvested. They put me on the phone with an advisor who recommended switching me to a basket of 50 stocks as that would better allow them to control capital gains. I asked how much that would cost and was told 1.5% so at this point I can't get away from Dreyfus fast enough! (I may not be great at math, but even I can tell 1.5% is a large portion of 4%).

 

[RunningBum]

If you live on dividends, the fund controls your tax situation. If you live on total return, you control your tax situation by selling assets with the lowest gains and only paying tax if your income exceeds the 0% threshold for capital gains. I like dividends also, but I don't attempt to maximize dividend income.

I like that way of putting it.

 

[gwraigty]

Between the 2 you're considering, VYM vs. VIG, I'd go with VYM for the higher income. If you're just taking out the dividends, no, the share price doesn't matter.

 

[Montecfo]

I invest my taxable accounts for tax efficiency rather than income... I look at total return across all accounts.

I hold international and domestic equities in my taxable accounts. They generate qualified dividends that are 0% or 15% for most people, and the small amount of ordinary tax on non-qualified dividends are offset by the foreign tax credit. All together, my effective tax rate on these holdings is negative because the foreign tax credit exceeds the ordinary tax on non-qualified dividends.

Good points on tax efficiency. Only nit is FTC cannot exceed the lesser of creditable foreign taxes or your US tax attributable to your foreign source income. So your tax rate would not be negative. But I can usually accept zero.

 

[VanWinkle]

Thank you both. I will look at the international as well.

I am not a sophisticated investor. I finally figured out that I was in two very bad funds (for me) in Dreyfus, and called about having my dividends and capital gains not reinvested. They put me on the phone with an advisor who recommended switching me to a basket of 50 stocks as that would better allow them to control capital gains. I asked how much that would cost and was told 1.5% so at this point I can't get away from Dreyfus fast enough! (I may not be great at math, but even I can tell 1.5% is a large portion of 4%).

Great post MarieIG and you are very smart to see the 1.5% for what it is(35% of your income). Vanguard, Fidelity, or Schwab will be a much better choice for low expenses.

Best to you,

VW

 

[RunningBum]

Good points on tax efficiency. Only nit is FTC cannot exceed the lesser of creditable foreign taxes or your US tax attributable to your foreign source income. So your tax rate would not be negative. But I can usually accept zero.

You can carry FTC back one year and forward 10 years. Once I'm past the ACA subsidy games I'll be converting more of my tIRA, collecting my pension, and eventually getting SS so I expect I'll be able to use it.

 

[scrabbler1]

Hello,

I am looking for a fund in a taxable account to generate income in retirement. I would be interested in having the dividends deposited into a checking account. I was looking at Vanguard Dividend Appreciation and Vanguard High Dividend Yield ETFs. I understand the value will go up and down, but if I am just taking out dividends, will that matter?

Pros/ Cons/ suggestions?

Thank you

Marie, are bond funds on your radar? My main bond fund earns between 4% and 5% taxable although half of the dividend income is taxed at 0% (Standard Deduction). Most of the remainder is taxed at 10% with a small part taxed at 12%. I have some stock fund dividends, too, which are usually taxed at 0%. My muni bond fund holdings, which are smaller, are taxed at 0. My effective tax rate, as a % of AGI, is a hair over 5%, and that is as high as it is because of a large LT cap gain distribution which was partially taxable at 0% and partially at 15%.

 

[Montecfo]

You can carry FTC back one year and forward 10 years. Once I'm past the ACA subsidy games I'll be converting more of my tIRA, collecting my pension, and eventually getting SS so I expect I'll be able to use it.

It is still subject to the same limits. It is not a refundable credit so does not reduce your tax on foreign source income below zero. Also, it cannot be used to offset tax on US-source income.

 

[Chuckanut]

Great post MarieIG and you are very smart to see the 1.5% for what it is(35% of your income). Vanguard, Fidelity, or Schwab will be a much better choice for low expenses.

Best to you,

VW

+1

Looking at that fee as a percentage of income rather than a percentage of total assets is a real eye opener for many people.

 

[pb4uski]

Good points on tax efficiency. Only nit is FTC cannot exceed the lesser of creditable foreign taxes or your US tax attributable to your foreign source income. So your tax rate would not be negative. But I can usually accept zero.

Actually, in my case it is negative because the limitation that you refer to above does not apply.

You will not be subject to the foreign tax credit limit and will be able to claim the foreign tax credit without using Form 1116 if all of the following requirements are met.

• Your only foreign source gross income for the tax year is passive income, as defined in Publication 514 under Separate Limit Income.
• Your qualified foreign taxes for the tax year are not more than $300 ($600 if filing a joint return).
• All of your gross foreign income and the foreign taxes are reported to you on a payee statement (such as a Form 1099-DIV or 1099-INT).
• You elect this procedure for the tax year.

So for example for my international holdings for 2018 (base of 100):

Ordinary dividends:...............100
Qualified dividends:.................75
Non-qualified dividends:...........25
Tax at 12%:.............................3
FTC:........................................7
Net tax...................................-4 -4% effective tax rate

 

[RunningBum]

Glad this came up because I forgot about the carry back. I had more income last year, so I can carry back about half of what I could not take this year.

 

[MarieIG]

Great post MarieIG and you are very smart to see the 1.5% for what it is(35% of your income). Vanguard, Fidelity, or Schwab will be a much better choice for low expenses.

Best to you,

VW

Thank you. I believe I owe thanks to this board for that!

 

[MarieIG]

Marie, are bond funds on your radar? My main bond fund earns between 4% and 5% taxable although half of the dividend income is taxed at 0% (Standard Deduction). Most of the remainder is taxed at 10% with a small part taxed at 12%. I have some stock fund dividends, too, which are usually taxed at 0%. My muni bond fund holdings, which are smaller, are taxed at 0. My effective tax rate, as a % of AGI, is a hair over 5%, and that is as high as it is because of a large LT cap gain distribution which was partially taxable at 0% and partially at 15%.

Hi Scrabbler/ Neighbor! I had bought a bond fund in my IRA. It is a Vanguard Total Bond fund. I read a book a while back by Jim Collins (it is currently missing so I can't reference it) which recommended a total stock fund and total bond fund so I did that in my Vanguard IRA (75/25).

It sounds like you have a GREAT handle on your income. We are both still working, so we are in a high tax bracket right now; but when we stop our income will drop sharply. I am trying to prepare, and balance income needs with tax awareness. DH and I both have highly stressful jobs and we're both tittering on the brink.

 

[kgtest]

I like that way of putting it.

+1, more control a as a total investor...which subjectively might be a little more active than a dividend investor...with less? metrics to parse to manage the latter strategy.

Maximum Control is a total return investor who understands current and future state (of course nobody can anticipate tax code change) of tax consequences, lives in a state 51% or more that does not tax income, invests for growth with a risk averse strategy (not to say you don't take risks, calculated risks) that has complete access to a multitude of investments while being diversified enough to maintain control throughout time with regard to things like when and how to take income, when and how to pay taxes etc.

And of course, to each there own...YMMV with either idea.

I would say having no dividends would probably be equally risky as having just a dividend producing strategy, DW and I will try and find the middle ground as we accumulate and withdraw.

EDIT to add it looks like my dividends are around 8-10% of my total return on any given year past few years

 

[Montecfo]

Actually, in my case it is negative because the limitation that you refer to above does not apply.



So for example for my international holdings for 2018 (base of 100):

Ordinary dividends:...............100
Qualified dividends:.................75
Non-qualified dividends:...........25
Tax at 12%:.............................3
FTC:........................................7
Net tax...................................-4 -4% effective tax rate

You have paid foreign tax of $7. Your credit is limited to 7 (ignoring US tax limit). If you get a credit of 7, your tax is zero. It is not negative.

 

[pb4uski]

You have paid foreign tax of $7. Your credit is limited to 7 (ignoring US tax limit). If you get a credit of 7, your tax is zero. It is not negative.

The full $7 credit is shown on my return because I'm not subject to the limitation. In isolation, perhaps you're right..... but in aggregate, no. That dangling $4 credit means that the last $33 of ordinary income is not taxed rather than taxed at 12%.

 

[bingybear]

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