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Dividend reinvestment, I think I'm doing it wrong.
Old 09-22-2023, 08:21 AM   #1
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Dividend reinvestment, I think I'm doing it wrong.

We are retired living off of IRA withdrawals. I had a startled wake up about 4am, thinking, I'm doing this wrong!

I have my taxable account set to 'Reinvest Dividends' I'm pretty sure that leaves me paying tax on the dividends and that I don't receive for spending and then withdrawing more from IRAs to cover expenses, making my tax bill higher than it would be if I received the dividends and withdrew less from my IRAs. Add to this, a complicating issue, we are doing Roth Conversions.

Would I be better off receiving my dividends as added spendable income or at least money to pay the tax on our Roth Conversions?
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Old 09-22-2023, 08:52 AM   #2
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Yes, I believe you may be paying more taxes than you really need to. Here's what I've settled on which I think is pretty standard....
(1) Dividends from taxable account are used for living expenses (15% tax on dividends unless come from muni funds whose dividends are not taxed). To fill need for rest of living expenses, I will use taxable account until it runs out (taxed at 15% capital gain/dividend rate). If this causes higher than desired taxes, I may pull from Roth account to limit tax impact....for example if I need to pull a lot of money to buy a house or car in one year.
(2) Convert traditional IRA to Roth using taxable account to pay the taxes as long as I have funds left in the taxable account (pay ordinary income tax on amount converted).
(3) FWIW - dividends in IRA / Roth IRA are reinvested.

Note: If you income needs are very low so you are in very low tax brackets, it may make sense to take income from IRA. That is not my case.
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Old 09-22-2023, 08:55 AM   #3
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That’s what I’m doing. The only tweak for me is that I’m keeping the dividend reinvestment on for certain depressed stocks that I like (Why not acquire more shares on sale). Otherwise, all my investment withdrawals come from taxable dividend income. Tax deferred sources like 401ks and iras are left to grow for down the road. It makes the best tax sense to me.
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Old 09-22-2023, 09:34 AM   #4
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We've lived exclusively on dividends (and SS) for almost19 years now. We take and spend our after tax dividends first. Then the one's paid inside the IRAs.
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Old 09-22-2023, 09:47 AM   #5
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No.
You are taxed on dividends no matter what you do with them...
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Old 09-22-2023, 09:55 AM   #6
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No.
You are taxed on dividends no matter what you do with them...

That's the point! Why should I leave them in the fund and withdraw extra from the IRA to live on. I'm paying tax on the excess IRA withdrawals, that I could avoid if I took the dividends as income.
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Old 09-22-2023, 09:56 AM   #7
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No.
You are taxed on dividends no matter what you do with them...
Yes, the OP is taxed on the dividends, but wants to change it so they can be spent rather than reinvested in the taxable account.

That is what we do:
Dividends in taxable account are paid in cash, we decide then to spend it, or can even just buy more of whatever stock/treasury bill/CD that we desire.
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Old 09-22-2023, 09:57 AM   #8
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Yes, the light finally went on for me on this year too. Got tired of reinvesting at prices that I might not have purchased at, which causes wash sales in taxable accounts if you sell in that time period, and then forces me to take other actions in order to get free cash that I could have had from the dividend.

I think dividend reinvestment made more sense when we were all paying much more for each trade (and DRIP had no fees)......in today's modern trading ecosystem where I haven't paid a trading fee in over a decade, no reason to automate any purchasing decisions IMO (especially now that my free cash sweeps to a money market earning 5% while analyzing for the next best purchase).
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Old 09-22-2023, 10:34 AM   #9
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OK, I have went to my account and made sure the dividends now will be sent to my checking account.
Thanks all.
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Old 09-22-2023, 10:57 AM   #10
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Better yet, keep your dividend stocks in your taxable account. If your dividend income is less than $89,250 then you don’t pay any federal taxes on it according to https://smartasset.com/taxes/dividend-tax-rate
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Old 09-22-2023, 11:16 AM   #11
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Better yet, keep your dividend stocks in your taxable account. If your dividend income is less than $89,250 then you donít pay any federal taxes on it according to https://smartasset.com/taxes/dividend-tax-rate
But dividend income cuts into Roth conversions. - ERD50
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Old 09-22-2023, 12:34 PM   #12
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Another Question from the OP.
When you have dividends paid out when received from an IRA, are they taxed as regular income or are they taxed as dividends?
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Old 09-22-2023, 12:37 PM   #13
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Another Question from the OP.
When you have dividends paid out when received from an IRA, are they taxed as regular income or are they taxed as dividends?
Ordinary income.
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Old 09-22-2023, 12:51 PM   #14
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I use dividends in after tax account for living, along with other sources. Therefore, they are automatically withdrawn by Fidelity to Alliant CU checking account which I use for everyday expenses. Regular checking deposit is required to keep their credit card cash back at highest tier. All dividends in TIRA and Roth IRA are reinvested.
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Old 09-22-2023, 12:55 PM   #15
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OK, I have went to my account and made sure the dividends now will be sent to my checking account.
Thanks all.
One optimization you might consider if your dividends exceed your immediate needs..... I am at Vanguard and the dividends from my taxable account roll into my settlement fund where they stay until I need them to replenish my bank checking account. The default Vanguard settlement account is the VMFXX Federal money market fund earning 5.28% (7 day SEC Yield). VMFXX's has a stable share price of $1/shr and is invested in very safe government securities / cash. This is much better for me than immediately routing those funds to my bank account which earns basically nothing.
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Old 09-22-2023, 01:03 PM   #16
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Better yet, keep your dividend stocks in your taxable account. If your dividend income is less than $89,250 then you don’t pay any federal taxes on it according to https://smartasset.com/taxes/dividend-tax-rate
I could be wrong, but I believe that if your total income is below $89,250, you don't pay taxes on dividends.

If your total income is $90k and you made $10K in dividends, you'd pay 15% on those dividends.

If your total income is $80K and you made $10K in dividends, you wouldn't pay any taxes on the dividends but on everything else.
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Old 09-23-2023, 06:34 AM   #17
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Dividends/cap gains in taxable accounts should never be auto-reinvested, regardless of age.

OP - do a search for this topic. It's been covered many times.

There are other implied issues in your original post, such as asset location, and what type of account you should pull living expenses from. Those are other topics that I suggest you start new threads for.
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Old 09-23-2023, 07:08 AM   #18
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We've lived exclusively on dividends (and SS) for almost19 years now. We take and spend our after tax dividends first. Then the one's paid inside the IRAs.
I'm curious as to your average dividend yield, and also whether you invest in individual stocks, ETF's, or mutual funds?
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Old 09-23-2023, 07:32 AM   #19
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I'm curious as to your average dividend yield, and also whether you invest in individual stocks, ETF's, or mutual funds?
We have about 15 MFs and a few individual stocks. Some pay around 2% with others, higher on the risk plane, as much as 12% and everything in between.

Full disclosure : when I say "dividends " I'm also including Year End MF cap gains. Dividends alone pay ~2.7% but when cap gains are included, the number is ~7.5%. MF cap gains represent about half of our annual income, but unlike the dividends, can vary widely yoy. We bank (5% in a T Bill fund!!) what we don't spend to smooth the variances.

My strategy has been to never touch the core, dividend creating balance. Over the past 19 years, I've withdrawn my starting balance ( from my first year of ER) via dividends, yet my current balance is double from what I started with.
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Old 09-23-2023, 11:06 AM   #20
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The decision on where to get the money to live for any given year can have some nuance to it. For instance, if you don’t have enough in taxable to get all the way to SS or RMDs, then possibly making small withdrawals from your IRA on a steady basis avoids a future problem by always keeping you in about the same tax bracket. With a larger taxable account, then in general, using your dividends makes sense as you’ve already paid taxes on them. If you also have a substantial tax deferred balance, then doing some Roth Conversions might be a good use to fill up low tax brackets.

Note that it’s generally useful to avoid automatic re-investing of dividends in retirement. You can always invest manually if you don’t need the cash and having the money accumulate in the settlement account also gives you a way to invest differently or rebalance your stocks/bonds if needed. Automatic dividend re-investment is also a pain if you are trying to harvest some tax losses, it can create wash sale out of part of your losses if you forget (dividend re-investment in your IRA can trigger a wash sale in taxable as well).
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