mathjak107
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- Jul 27, 2005
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we have a cash bucket but we try to preserve as much of that for the down years or when we need to stay within the 15% bracket .
It seems to me that if you are going to owe taxes on the dividends and you are going to have to sell something and generate taxable capital gains to generate enough money to live, or to rebalance, it makes no sense to reinvest. It raises your taxes and therefore costs you more money.
Example: Let's ignore the actual numbers needed for various brackets and exemptions amounts needed and only consider Federal taxes not state to just keep the math simple -assume the amount is enough to make CG and Div taxable)
A) I want $100,000- I get $50,000 from Dividends and I sell assets to get another $50,000 of which $10,000 (25%) is capital gains. So of my $100,000 -after I pay Uncle Sam his 15% - I have $91,000.
B) I reinvest my dividends so instead I sell assets to get my $100,000 - 25% of that is capital gains or $25,000. But even though I did not take the dividends to spend, Uncle Sam still wants his taxes on my $50000 of dividends. So after I pay taxes, of my $100,000, I now have $88,750.
I just reduced my "take home" pay by 2.4% every year.
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Not every year. In scenario A, 25% of the $50,000 you left in the account will eventually have capital gains due. In scenario B, there is no unrealized capital gains on the $50,000 reinvested dividend. All you've done is deferred the cap gains tax--which does have a benefit since that deferred amount (hopefully) continues to grow, but it's not as much as you say.It seems to me that if you are going to owe taxes on the dividends and you are going to have to sell something and generate taxable capital gains to generate enough money to live, or to rebalance, it makes no sense to reinvest. It raises your taxes and therefore costs you more money.
Example: Let's ignore the actual numbers needed for various brackets and exemptions amounts needed and only consider Federal taxes not state to just keep the math simple -assume the amount is enough to make CG and Div taxable)
A) I want $100,000- I get $50,000 from Dividends and I sell assets to get another $50,000 of which $10,000 (25%) is capital gains. So of my $100,000 -after I pay Uncle Sam his 15% - I have $91,000.
B) I reinvest my dividends so instead I sell assets to get my $100,000 - 25% of that is capital gains or $25,000. But even though I did not take the dividends to spend, Uncle Sam still wants his taxes on my $50000 of dividends. So after I pay taxes, of my $100,000, I now have $88,750.
I just reduced my "take home" pay by 2.4% every year.
In my taxable accounts, I take dividends in cash. I use them for rebalancing and living expenses.
Reinvesting dividends is no different than taking the cash and immediately rebuying, only it is done a day or two more quickly if you do it automatically. There is no tax advantage to reinvesting. You report the dividend income no matter what, at 0% or 15% depending on your bracket. Whether you reinvest has no bearing on the taxes.
Now that we are in draw-down I use the dividends in the taxable accounts for expenses.
Same. Just seems the simplest approach. Although dividend tax treatment in Canada is not as advantageous as in the US. As such, if I were to start fresh might take a less income centric approach.
Yikes, sorry to hear that (I am not sure how mine will be dealt with - US citizen in Canada for the first full year next year) - I've been told I will be taxed whichever is higher...Same. Just seems the simplest approach. Although dividend tax treatment in Canada is not as advantageous as in the US. As such, if I were to start fresh might take a less income centric approach.
Interesting how different countries treat qualified dividends. In the UK they are completely tax free, although that is set to change next year (after April 5th), and the then for each person the first $7.5k will be tax free, then taxed at 5% for most tax payers.
Yikes, sorry to hear that (I am not sure how mine will be dealt with - US citizen in Canada for the first full year next year) - I've been told I will be taxed whichever is higher...
Do you know how Roth IRA is treated in Canada? (I hope they recognize it that it is after-tax contribution but I am getting the feeling they will tax the withdrawal somehow...)
I take all my dividends. Between those, SS and pensions, I have enough to leave my investments alone. However at some point I may start taking up to 4% each year, though right now I don't know what I would spend the money one yet.
Reinvesting dividends is no different than taking the cash and immediately rebuying, only it is done a day or two more quickly if you do it automatically. There is no tax advantage to reinvesting. You report the dividend income no matter what, at 0% or 15% depending on your bracket. Whether you reinvest has no bearing on the taxes.
If you want to rebuy what you're getting dividends on, reinvesting is fine. If you want the flexibility to invest in whatever you want, or spend that cash and hold other investments, don't reinvest. I like the flexibility. If I really want more of the fund that gave dividends, I can rebalance.
It really doesn't matter that much. If you reinvest but decide that's not what you really wanted to do, you can quickly sell (with SpecID basis) and probably have very little short term gain or less.
I just prefer to keep it simple. I need a certain amount of cash throughout the year. I can get much of it with the dividends. Then I look at how I want my investments to be, and rebalance if needed.
I don't quite get the last sentence in the OP's post. Were short term bonds actually the best investment this year?
technically though (and the reason I questioned taking the dividends in cash in the first place) is you are NOT LEAVING YOUR STOCK ALONE.
The nav drops by the dividend distribution right? If you take those SHARES as cash, you have just liquidated some stock investment. In other words, if the dividend for the S&P is about 2%, by taking those dividends in cash, you are liquidating 2% of your stock holdings.
For those of us in the withdrawal stage, it is simply one of several choices of where to 'harvest' our portfolio.
technically though (and the reason I questioned taking the dividends in cash in the first place) is you are NOT LEAVING YOUR STOCK ALONE.
The nav drops by the dividend distribution right? If you take those SHARES as cash, you have just liquidated some stock investment. In other words, if the dividend for the S&P is about 2%, by taking those dividends in cash, you are liquidating 2% of your stock holdings.
For those of us in the withdrawal stage, it is simply one of several choices of where to 'harvest' our portfolio.
When I was working I reinvested. Once I retired I take them in cash.. in effect the reduce my withdrawals since what we need exceeds our dividends.
The distributions are usually more than sufficient to cover my annual withdrawal, plus a little for rebalancing. I may have to sell a few shares to do a full rebalance though.Exactly. Even after taking the dividends I need to sell some shares as well.
The distributions are usually more than sufficient to cover my annual withdrawal, plus a little for rebalancing. I may have to sell a few shares to do a full rebalance though.
You're wrong (technically that is). If you take dividends in cash you are leaving your stock alone since you have the same number of shares before and after.
If you take dividends in cash you are not liquidating (you have the same number of shares)... you are just electing not to buy more shares.
The NAV drops whether you take cash or reinvest. If everyone took cash then the fund would have assets that are lower by the amount of dividends paid but the number of shares outstanding would be the same so the NAV drops. If everyone reinvested then the funds assets would be unchanged but the number of shares outstanding would be higher and the NAV drops. And anything in-between.