Stop reinvest dividends on taxable?

[explanade]

Quote:

Originally Posted by RobbieB I always reinvested them during my working days and during the first year of retirement. Once the cash stash had depleted I took them as cash for expenses.

Ditto.

Main source of income now.

Enough that I haven't really sold much in over 8 years of retirement.

My AA is out of balance though, way higher in equities than at the start of retirement. Will get around to changing that.

[RunningBum]

Quote:

Originally Posted by jollystomper It is not a stupid question at all.

I didn't see anyone call this a stupid question. I got frustrated because a few people, myself included, asked specific questions to get more info to try to help, but the OP either ignored or dismissed them. It's the OP's right to do this, but I won't be spending any more time or effort on their questions.

[DawgMan]

I suppose I'm the contrarian here. I went back and forth with this when I retired last year and determined for my strategy, I would keep the reinvestment turned on. I have effectively a 10 yr bond ladder, including about 18 month's of cash (primarily money market account earning 4.3% today). My taxable account naturally spits out 1/3rd to 1/2 of my planned annual spend, but is not always predictable in terms of when and how much (mainly uncontrollable capital gains from 1 fund). Yes, I will taxes on this income, but I like the smoothness and predictability of my bucket/ladder system. It also keeps my dollars invested, a little continued DCA.

Whenever I finally sell this fund I have owned for many years that creates the bulk of capital gains, I may turn off the reinvestment and adjust my ladder down. TBD at a later date!

[JJpop]

Does it matter in terms of taxation of SS if you reinvest or take the dividends?

[audreyh1]

Quote:

Originally Posted by JJpop Does it matter in terms of taxation of SS if you reinvest or take the dividends?

Maybe not, but if you have to sell some of the recently reinvested shares for some reason it might increase your taxable income that year if they’ve appreciated. Anything that increases your income can increase your SS taxation unless you are already over the 85% threshold which is quite low.

I almost never invest my distributions where they were generated, so I find it easier to leave automatic reinvestment off. It also makes it easier to avoid a wash sale situation if I’m tax loss harvesting.

[HI Bill]

If you're planning to leave your brokerage investments to heirs who will receive a step-up basis, then by all means, reinvest. If you're planning to ever spend any of the reinvested $, I'd suggest that it matters which cost basis you've chosen for the account. If you've chosen "Average Cost", then you'll be paying taxes on the previously taxed income. Same with First In, First Out, but to a lesser extent. Specific Lots, if you can keep track of them, might be the best way. Personally, I'd move the $ to a separate brokerage account, and buy a new ETF. That way, the cost basis 'resets', and is easily tracked. Am I missing something?

[audreyh1]

Quote:

Originally Posted by HI Bill If you're planning to leave your brokerage investments to heirs who will receive a step-up basis, then by all means, reinvest. If you're planning to ever spend any of the reinvested $, I'd suggest that it matters which cost basis you've chosen for the account. If you've chosen "Average Cost", then you'll be paying taxes on the previously taxed income. Same with First In, First Out, but to a lesser extent. Specific Lots, if you can keep track of them, might be the best way. Personally, I'd move the $ to a separate brokerage account, and buy a new ETF. That way, the cost basis 'resets', and is easily tracked. Am I missing something?

You don’t have to move $ to a different brokerage to buy a different ETF and get some cost basis “reset”.

You do need to switch your taxable funds to specific lots if you plan to sell some in order to sell lots most tax efficiently. The sooner the better as older lots will be all saved at the prior average cost. Fidelity tracks specific lots for me just fine.

[Montecfo]

All investors in taxable accounts should use specific ID to determine basis.

It provides greatest control over tax outcomes.

[Gumby]

We have a variety of 401k, 403b and 457 accounts, as well as tIRAs and Roths. On the non-IRA accounts, we reinvest dividends. Mainly so we don't have to think about them that much. On the IRAs, we take the dividends in cash over the year and then convert that cash to our Roth. It keeps us from the regret of selling shares and converting at a bad time for the market. We also take our Roth dividends in cash. Right now, our pensions and social security exceed our ordinary living expenses by a decent margin. However, if we want to take a deluxe vacation with first class air travel (as we did to Egypt and Jordan in October), we can take cash out of the Roth as necessary. If there is more cash at the end of the year than we need, we can reinvest it within the Roth.

We don't have any stock or mutual funds in after tax accounts, just I-Bonds and cash in the bank, so we don't face the question of accounting for capital gains like you do.

Is our strategy the most tax optimal? No, but it is easy to do and worry free. We are at the bottom of the 22% bracket just on our regular income, so any capital gains would be taxed at 15% in any event. And I don't have the same atavistic dislike of taxes as many.

[G-Man]

Quote:

Originally Posted by Gumby We have a variety of 401k, 403b and 457 accounts, as well as tIRAs and Roths. On the non-IRA accounts, we reinvest dividends. Mainly so we don't have to think about them that much. On the IRAs, we take the dividends in cash over the year and then convert that cash to our Roth. It keeps us from the regret of selling shares and converting at a bad time for the market. We also take our Roth dividends in cash. Right now, our pensions and social security exceed our ordinary living expenses by a decent margin. However, if we want to take a deluxe vacation with first class air travel (as we did to Egypt and Jordan in October), we can take cash out of the Roth as necessary. If there is more cash at the end of the year than we need, we can reinvest it within the Roth. We don't have any stock or mutual funds in after tax accounts, just I-Bonds and cash in the bank, so we don't face the question of accounting for capital gains like you do. Is our strategy the most tax optimal? No, but it is easy to do and worry free. We are at the bottom of the 22% bracket just on our regular income, so any capital gains would be taxed at 15% in any event. And I don't have the same atavistic dislike of taxes as many.

Please explain your statement below:

"On the IRAs, we take the dividends in cash over the year and then convert that cash to our Roth."

I thought once you stop working, you can no longer contribute to a Roth IRA. Can you explain what is being done here.

[audreyh1]

You can convert from IRA to Roth regardless of earned income.

[G-Man]

Quote:

Originally Posted by audreyh1 You can convert from IRA to Roth regardless of earned income.

Ok. Got it. Doing Roth conversions from your TIRA or 401K.

[SunGuy]

You should always reinvest if you are not overweight in that dividend stock amount/allocation/sector.

Say you have each sector capped at 4%, and each sector is at least 3 companies.
Then you just make sure they stay in balance.

If you are not adding in any more funds each month, you can be a little looser, but still keep it in mind.

[Morgan22]

Quote:

Originally Posted by SunGuy You should always reinvest if you are not overweight in that dividend stock amount/allocation/sector.

Would your opinion be different for a retiree?

We are retired do not reinvest dividends. Turned off reinvestment as soon as we stopped w*rking. Dividends are conveniently and automatically sent to our checking account for spending. If we need additional funds then we sell shares.

Now if you didn't need cash for spending if you had a pension or SS that covered all expenses, then I could see the argument for auto reinvestment.

[Gotadimple]

Automatic reinvest creates additional shares at the dividend distribution price. It's nice to get more shares, but: (1) may not fit in with your asset allocation plan, and, (2) creates a bookkeeping nightmare.

In a taxable account you'll pay taxes on the dividend amount whether you get it automatically reinvested or you take cash and do what you want with it. The taxes may be at a lower rate (Qualified vs non-Qualified).

When you get ready to sell, you need to separate each set of shares 'bought' at the reinvest amount, and you need to add the reinvestment amount to your basis. This means if you get an dividend of $500, you paid taxes on that dividend in the year received AND you need to increase the total basis of the investment to reflect that. When you sell you want to pay taxes on any gains or losses but not the amount of the dividend received. So, it's a bookkeeping nightmare. Don't do it in a taxable account.

[mrfeh]

Quote:

Originally Posted by Morgan22 Now if you didn't need cash for spending if you had a pension or SS that covered all expenses, then I could see the argument for auto reinvestment.

It doesn't make sense in that situation either, as explained:

Quote:

Originally Posted by Gotadimple Automatic reinvest creates additional shares at the dividend distribution price. It's nice to get more shares, but: (1) may not fit in with your asset allocation plan, and, (2) creates a bookkeeping nightmare.

If taxable divs aren't needed for spending, allocate them according to your AA.

[audreyh1]

Quote:

Originally Posted by mrfeh It doesn't make sense in that situation either, as explained: Quote: Originally Posted by Gotadimple Automatic reinvest creates additional shares at the dividend distribution price. It's nice to get more shares, but: (1) may not fit in with your asset allocation plan, and, (2) creates a bookkeeping nightmare. If taxable divs aren't needed for spending, allocate them according to your AA.

Yep, my dividend and cap gains distributions are pretty much always reallocated when rebalancing my AA plus funding the annual withdrawal, so it’s far simpler to turn off auto-invest.

[MarieIG]

Because I divested myself of some (expensive) funds in 2022 year I tax loss harvested.

My account is at TD Ameritrade but the rep works for Schwab. When I went down to the office to meet with her, I asked her about tax loss harvesting. She showed me that the software program allowed me to choose a tax efficient choice. I didn't have to identify the specific lot myself; and bingo, more than enough losses to cover 2022 gains, and some for 2023.

[SunGuy]

My mother just realized that she never turned on DRIP in one of her accounts, had over $18k in the account unused last year. She missed out on some great buys/reinvestments.

I would hate to see that happen to someone.

Retirees can get better use out of not reinvesting, and I consider it too sometimes, but since I invest over 50% of my take home pay each month into mostly new stock buys, I want to reinvest everything I get from their dividends so they can grow over time.

Since I am 30 or so years away from 65.