Arguments for and against automatic reinvesting of dividends

[haha]

I have generally re-invested dividends in my IRA and Roth, but taken them in cash in my taxable brokerage account. My taxable account holds mostly individual securities. I feel that in IRAs, re-investing is hands down better. My withdrawals for RMDs can easily be handled by drawing down an intermediate term bond fund that I have, or cash if I have any in the account.

I have rarely re-invested dividends in my taxable account, whether the security was a mutual fund or ETF or an individual security. The reason is to avoid extra work figuring out my gain when/if I might sell the security.

I get more dividends and other payouts than I need for expenses. I am unlikely to ever have to sell a security for cash flow, other than from the mutual fund to fund my RMDs that I mentioned above. I have some stocks that I am unlikely to ever sell, and for these I am considering re-investing dividends. One is WY, the timber REIT. They do not squander money. Extra cash goes to astute purchases of more high quality timberlands, paying down debt, or increasing the dividend, so I would not be worried about getting a large position.

If I do start re-investing, then later decide to sell, no way am I ever going to treat each quarterly dividend as a separate lot. Can I just do two groupings, one for all the long term, and another for all the short term?

This is the crux of my question, if I should decide to sell, how much hassle will it be?

Any comments appreciated.

Ha

[Rustward]

Quote:

Originally Posted by haha If I do start re-investing, then later decide to sell, no way am I ever going to treat each quarterly dividend as a separate lot. Can I just do two groupings, one for all the long term, and another for all the short term? This is the crux of my question, if I should decide to sell, how much hassle will it be? Any comments appreciated. Ha

Seems like I tried to do that (two groupings) using Tax Act once and I had to document each sale separately. In this case, all of it was purchased in one or two relatively large lots, but sold off once per month over the year. You are right, automatic re-investments can create a lot of small lots.

I use FIFO and track it with Quicken, so it's no problem documenting basis. These were non-covered shares. Still have a ton of non-covered shares bought in the early 90's.

And, no, I am not saying everyone should use Quicken or FIFO.

[RunningBum]

For individual stocks, average cost isn't an option like it is for mutual funds, if that's what you are asking.

You can group all the LT dividends in one line on a schedule D (and ST on another line) with purchase date "various" but you are still going to have to add up the basis for each reinvestment purchase. And you certainly want to do this. When the dividend is declared you have to pay tax on the dividend that year whether you reinvest it or not. Since you've paid the tax, you want to count it as the basis for the new shares you bought.

If you hang onto all of your dividend purchases and never sell, your heirs will get a stepped up basis so all the stock they get will have the current market price, so their job will be simplified.

[LOL!]

All this worrying should be a thing of the past. There are two things that will assuage your mind:

1. Brokers must now track all this stuff and report it to the IRS on the 1099B if you sell.

2. Your tax software should download your 1099B from your broker's web site and fill out everything for you.

Your only task is to select the specific shares you wish to sell when you sell and broker web sites make that very very easy nowadays. And you may wish to take a quick glance at the filled out tax return to make sure it was done more or less correctly. You don't have to group or put down "various" or dates or amounts or anything else. The software does it all for you.

So automatically reinvest with confidence if that is what you want to do.

[Mulligan]

Quote:

Originally Posted by RunningBum For individual stocks, average cost isn't an option like it is for mutual funds, if that's what you are asking. You can group all the LT dividends in one line on a schedule D (and ST on another line) with purchase date "various" but you are still going to have to add up the basis for each reinvestment purchase. And you certainly want to do this. When the dividend is declared you have to pay tax on the dividend that year whether you reinvest it or not. Since you've paid the tax, you want to count it as the basis for the new shares you bought. If you hang onto all of your dividend purchases and never sell, your heirs will get a stepped up basis so all the stock they get will have the current market price, so their job will be simplified.

I had a couple of small lumps of about 10k each in Pfizer and Exxon that were in those DRIP programs that had probably about 10 years worth of dividend reinvestments. I kept each yearly statement in a folder. I did what you said to do by writing "various" on that schedule D line. I must admit I was a little demoralized at the process of adding all these up with the various share amounts and price points to get an absolute correct number. So I "eye balled it" and put a number down. They didn't contest me on it.



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[ERD50]

I like to keep things simple. If I were in a position to re-invest divs in a taxable account, I think I would have all the various divs from various sources deposited in a checking/MM account, and a few times a year, put those divs in a single ETF purchased for this purpose.

That way, there is only one ETF that has any complication at all due to re-investing. You probably would only rarely sell this ETF (these are 'excess' funds after all), and if it came to that, you might liquidate the whole thing in one step, which also simplifies the cost basis.

LOL! is correct of course, for new funds the broker tracks all this, but I just prefer to not be dependent on that. What if their hard drive crashes, and someone recycles their backup tapes before they get a chance to recover the data? Stranger things have happened to very large financial organizations.

Or just spend the 'excess' on your lady friends? That may provide a nice ROI.

-ERD50

[Texas Proud]

ERD50, I like your reference to that large institution that lost that data.... but requires us to NOT lose any data or else...


As to reinvested dividends... I have been investing for a long time (probably not as long as you, but who knows).... and Vanguard knows what I paid for everything... if I sell anything, they send me a stmt of the gain...


I think other firms do the same thing... I remember when I had an Ameritrade account that I could go back 10 years and see what my gains were for that year...

Now, if you are using dividends and cap gains distributions (mutual funds) for current living expenses... then you should not reinvest..

[RunningBum]

Quote:

Originally Posted by LOL! All this worrying should be a thing of the past. There are two things that will assuage your mind: 1. Brokers must now track all this stuff and report it to the IRS on the 1099B if you sell. 2. Your tax software should download your 1099B from your broker's web site and fill out everything for you. Your only task is to select the specific shares you wish to sell when you sell and broker web sites make that very very easy nowadays. And you may wish to take a quick glance at the filled out tax return to make sure it was done more or less correctly. You don't have to group or put down "various" or dates or amounts or anything else. The software does it all for you. So automatically reinvest with confidence if that is what you want to do.

I hadn't bought any individual stocks and only sold a couple of old holdings since the new basis reporting rules went into effect, so I just wasn't thinking they were under the same rules as mutual funds, but they are. All new dividend reinvestments will be "covered" so they will track the basis for you.

Ha, it should be just as LOL says. It may even be slightly easier as you might be able to state that you want to sell shares as FIFO and not have to specify which ones to sell, letting your broker figure out it's the oldest ones and reporting that back to you. I think you'd be better off selecting the specific shares for the best tax management, but that's up to you.

[mrfeh]

I use taxable dividends to aid in rebalancing, so they are not automatically reinvested. Dividends in tax advantaged accounts are automatically reinvested.

[MichaelB]

Quote:

Originally Posted by haha If I do start re-investing, then later decide to sell, no way am I ever going to treat each quarterly dividend as a separate lot. Can I just do two groupings, one for all the long term, and another for all the short term? This is the crux of my question, if I should decide to sell, how much hassle will it be?

You can aggregate transactions. From form 8949

Quote:

Note. You may aggregate all short-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS and for which no adjustments or codes are required. Enter the total directly on Schedule D, line 1a; you are not required to report these transactions on Form 8949 (see instructions). Note. You may aggregate all long-term transactions reported on Form(s) 1099-B showing basis was reported to the IRS and for which no adjustments or codes are required. Enter the total directly on Schedule D, line 8a; you are not required to report these transactions on Form 8949 (see instructions).

As long as the basis was reported, one entry each for short and long term is sufficient.

[haha]

Thanks for all these well informed and helpful suggestions.
I will go to reinvestment on selected issues of very stable companies.

Ha

[scrabbler1]

For more than 20 years, whenever I sold shares of mutual funds in taxable accounts, I would simply specify the range of dates in the "date purchased" column of Schedule D or Form 8949. Sometimes, the number of lots I was selling was quite a few because they included months and months of small, reinvested dividends. However, because I keep everything tracked in a spreadsheet, it was not a big deal to determine the cost basis of the total number of shares I sold.

The only time it would get a bit more complicated would be if I made a sale which included some long-term shares and some short-term sales, such as if I liquidated all of my holdings in a fund. There, I would have to split up the sale into two parts and put the short-term portion in the short-term section of Schedule B/Form 8949 and the long-term portion in the long-term section of Schedule D/Form 8949. However, becaue I make few redemptions and have large holdings in all of my funds, and I use FIFO, it is pretty rare that I ever sell anything on a short-term basis.

[kaneohe]

Michael B.........thanks for this. Was not aware you could bypass F8949 and go
directly to Sch D. Probably won't do it myself since I like to see the detail but
good to know.
************************************************** *
Note. You may aggregate all short-term transactions reported on Form(s) 1099-B showing basis was
reported to the IRS and for which no adjustments or codes are required. Enter the total directly on
Schedule D, line 1a; you are not required to report these transactions on Form 8949 (see instructions).


************************************************** *************
Note. You may aggregate all long-term transactions reported on Form(s) 1099-B showing basis was reported
to the IRS and for which no adjustments or codes are required. Enter the total directly on Schedule D, line 8a;
you are not required to report these transactions on Form 8949 (see instructions).

[sengsational]

I just sold some stock that had dividend reinvesting turned on since 2001. Long ago I had mailed the DRP my certificates, so all of the stock was in one place.

Although I kept all of the statements (data was repeated, so only need 1 statement per year), I didn't end-up needing the paper, or keying anything!

I went to the web site that managed the DRP, selected the shares I wanted to sell, pressed a button, and $97 dollars later (fee), I got a check in the mail.

The web site had a button to download the transaction (into a spreadsheet) that showed the itty-bitty lots, original price, share quantity, cost basis, gain(loss), and if it was considered "covered" or "non-covered".

The "covered" / "non-covered" is whether the purchase took place before or after the IRS rule to report the gain(loss) to the IRS. It looks like starting in 2011 they started reporting to the IRS. I still have all those newer shares.