Next Year Funding: Sell funds or Take Dividends

[bizlady]

We are within a year of when we will be eligible (without penalty) and need to start drawing from our retirement funds.

We think annual dividend amounts, along with other sources of income will fund our needs most years.

We are undecided if we will just take dividends, or if we will sell funds each year when we rebalance to fund our needs.

So, assuming that the income needed is approximately equal to what the dividends are- what do you do and why?

Our Vanguard advisor says reinvest dividends and sell what you need annually. Our portfolio is about 47-48-5

 

[eta2020]

We are within a year of when we will be eligible (without penalty) and need to start drawing from our retirement funds.

We think annual dividend amounts, along with other sources of income will fund our needs most years.

We are undecided if we will just take dividends, or if we will sell funds each year when we rebalance to fund our needs.

So, assuming that the income needed is approximately equal to what the dividends are- what do you do and why?

Our Vanguard advisor says reinvest dividends and sell what you need annually. Our portfolio is about 47-48-5

I would take dividend. That will mean that you will have income stream which will grows faster then inflation (since dividends usually grow faster).

That assumes that you well balanced portfolio of low cost index funds....

BTW this is exactly what I plan to do.

 

[LOL!]

So you only have tax-advantaged retirement funds? Nothing else? Are they split between Roth and traditional? No taxable accounts?

From tax-deferred accounts, it just doesn't matter all that much that dividends are reinvested. Indeed, it is probably a complication NOT to automatically re-invest them. So I think your question is kind of a moot point. I would just follow the Vanguard recommendation if these are really tax-deferred accounts and you don't have any taxable nor Roth accounts.

 

[jebmke]

We spend dividends and sell stuff in taxable. Everything in tax-deferred is reinvested.

 

[haha]

I live off my taxable account, and spend dividends. I always have some cash left over. It would be more tax efficient if I had chosen different securities (I have only individual stocks and a few etfs), but that didn't happen.

Ha

 

[bizlady]

Our accounts are all taxable. No Roth- unfortunately.

 

[eta2020]

Our accounts are all taxable. No Roth- unfortunately.

Well you will pay pretty low taxes on those dividends. IE if you had ONLY equity dividend income you would pay almost nothing in federal taxes all the way to about 90k.

It looks like you will also have bonds on which taxes will be higher.

BTW you should congratulate to yourself if you need to spend only income produced by portfolio. Many FI people "need" to sell as well......

 

[LOL!]

Now I am confused. A joint taxable account has not tax-deferred assets. An IRA or 401(k) is tax-deferred and withdrawals are taxable. But "Our account are all taxable" suggests the former, but there would be no penalties involved as mentioned in your opening post.

If you have a mix of taxable and tax-deferred, you might want to get on the Roth conversion band-wagon or at least look at that.

In taxable: Take dividends in cash. In tax-deferred: Reinvest dividends.

 

[bizlady]

Tax deferred is I suppose what I should have said. All money will be traditional IRA or rollover 401k-- all taxable (less the initial deposits).

I should have also said that it is the initial years that we have other funding. I sold a small business and have some income for the next 6 years. DH has a small non-cola pension.

If we wait til FRA for SS, then we will need to tap assets from 62-66-ish. DH hits 59.5 late next year, at which time we will have to decide what to do for 2016.

 

[LOL!]

Even the initial deposits of those things are taxable when withdrawn.

What are your thoughts on Roth conversions of some of it?

 

[fritz]

We are within a year of when we will be eligible (without penalty) and need to start drawing from our retirement funds.

We think annual dividend amounts, along with other sources of income will fund our needs most years.

We are undecided if we will just take dividends, or if we will sell funds each year when we rebalance to fund our needs.

So, assuming that the income needed is approximately equal to what the dividends are- what do you do and why?

Our Vanguard advisor says reinvest dividends and sell what you need annually. Our portfolio is about 47-48-5

We take only dividends from our Joint (taxable) and Roth accounts at Vanguard since we retired (reinvest capital gains). We were taking quarterly dividends from our rollover IRA accounts, until we started drawing Social Security. This is due to our retiring early and having to manipulate our income for tax and ACA subsidy purposes.

You can turn on/off this option at Vanguard anytime you wish online, by changing dividend distributions from/to reinvest, or electronic transfer to your bank (or a check by mail). You can also set up to take capital gains distributions this way. I am doing this for the end of this year on our Joint account to obtain a little cash. Will turn it off after it pays out at the end of the year.

We have alerts set up on our designated bank (credit union savings) accounts to automatically notify us when they go over a certain amount. We're automatically notified when the Vanguard transfers hit our accounts (as well as our Social Security deposits). I move the money out of the savings accounts to either money market or checking - depending on the need to reset the alerts.

This scenario works very well with our Wellington and Wellesley accounts, as part of my long term retirement income stream scenario. Taking only the dividends on Roth and IRA accounts must not be a common scenario with Vanguard - they originally managed to screw up the Roth dividend distributions and did Federal tax withholding

 

[explanade]

With low interest rates on bank accounts, would it make more sense to reinvest dividends and sell to fund expenses?

Rather than taking dividends quarterly and having them sit in bank accounts which aren't earning much?

 

[Animorph]

The standard approach should be to live off your taxable accounts (that's non-retirement accounts with no tax advantages) and Roth convert whatever makes sense from a minimum tax over your lifetime standpoint. When taxable funds run out, the withdraw from your tIRA/401k up to the top of a tax bracket and fill in the rest of your expenses with Roth withdrawals.

You can do whatever is easiest with your dividends and capital gains distributions. Cash or reinvested you will probably still need to rebalance. So either way you will be buying and selling eventually. One reason I don't reinvest dividends is because of wash sale rules, which I don't think you will have a problem with since you don't appear to have equity or bond investments in a taxable account.

 

[fritz]

With low interest rates on bank accounts, would it make more sense to reinvest dividends and sell to fund expenses?

Rather than taking dividends quarterly and having them sit in bank accounts which aren't earning much?

On taxable accounts - dividends (and realized capital gains) are taxed whether reinvested or distributed. Selling shares of those accounts on a specific date exposes capital gains which are also taxable. This mainly affects state income taxes for us.

We have our cash account at our credit union for retirement living expenses. We keep a year of budgeted basic living expenses on hand. Our yearly expenses don't flow as evenly as we would like, but quarterly dividends help replenish that account effortlessly and automatically. The dividend amounts are pretty much known in advance on our mutual fund accounts where we have it set up to pay out. We aren't "building up" the living expense account by taking quarterly dividends, but rather replenishing/maintaining the expense account. It takes the timing of selling shares out of the equation and everything is automatic. My luck would have me selling shares at the most inopportune time....

 

[marko]

I like the idea of setting aside dividends (rather than reinvest) for later withdrawal.

It prevents you from having to sell at a bad time (low price) or when you'd rather not (rally). In the end, it comes out the same, but for me it's nice to just have those dividends in the bank waiting to be withdrawn.

 

[dtbach]

We take the dividends in both taxable and IRA (leave the ROTH alone). We fund the majority of our expenses out of the IRA's vs taxable as right now I have deductions (mortgage interest and kids) that I can use for taxes.

I don't like the idea of spending down our taxable account. I can control what I take out of that more than the RMD's I will have on the IRA's come 70.5 years old.

 

[jerome len]

I would look at what/how dividends vs selling affects your taxes. You should avoid any short term gains which triggers the highest taxes.....unless your taxable income is in a low bracket. For me, I can live off of dividends.....I don't touch my Roth since its growth is tax free and DW most likely will outlive me and can use it in the future. Also, taxes will go up in the future.....so a Roth in the future will save you money in your later years. But, we've all saved in different ways.....so you might want a CPA to give you a little advice....my does every year when we complete the previous years taxes.

 

[2B]

It's somewhat irrelevant where money comes from. Every year when you move your annual cash into the "spending bucket" it doesn't make any difference if you have been reinvesting dividends or letting them pile up in a MM account. You go through the rebalancing as needed. Letting the dividends sit as cash will be slightly better in a down market but slightly worse in an up market. I doubt either would make much of a difference.

Since most funds pay quarterly, you could pull out the dividends then for spending. This would make the dividend flow have to be balanced against your spending. I'm pretty sure you either get too little or too much from the dividend flow. Somewhere along the line you will be buying or selling funds.

 

[pb4uski]

I take dividends from taxable accounts in cash as it simplifies my taxes and reduces the monthly "paycheck" I need to draw from my retirement investments to provide cash flow for living expenses. Dividends for tax-deferred and tax-free accounts are reinvested.

Most of my taxable accounts are domestic and international equities. About 3/4 of my dividends are qualified dividends and tax-free since we are in the 15% tax bracket. Also, I get a nice foreign tax credit from my international equities that more than offsets any tax on unqualified dividends, so at the end of the day, all my dividends are tax free (federal).