taxable account and reinvestment vs. distribute

[viking111]

At what point do you set your fund accounts in taxable to reinvest vs. distribute to settlement or bank account?

Retirement?
throughout investing?

What about capital gains? Do you always set that to reinvest in taxable?


Currently I've got my dividends to distribute to settlement fund. If I don't use it, I pay tax and reinvest the rest.

I only pay tax on stock funds when I sell stock on spec ID and pay long term tax and when the bond fund pays interest.

Am I doing this right?

 

[TheWizard]

Putting both types of distributions in your settlement fund is the best idea in a taxable account.
And paying tax on your dividends is a good idea whether you reinvest the balance or not.

Together with new contributions to your settlement fund, this allows you to put new money where you want, rather than defaulting to where it was...

 

[corn18]

I always set it to settle to cash so I could decide what to do with it. Sometimes I let it build up for a few years to help rebalance. I am a boglehead, so I hate dividends and capital gains distributions.

 

[PaunchyPirate]

In my 3 years of retirement, I’ve changed mine a couple times. In year 1, I didn’t need distributions to fund my spending. And my asset allocation was pretty much where I wanted it. So I had things set up to simply reinvest my distributions back into the same fund. About halfway thru year two, I had depleted my savings enough that I stated taking my distributions out (via direct deposit to my checking) to use for expenses (in conjunction with smaller savings withdrawals). Then I sold a second home and put half the proceeds into my savings to use for expenses. So I stopped taking the distributions out. However, due to the stock run up, my asset allocation was a little too heavy with stocks. So I steered all distributions to my money market fund and then purchased bonds with the proceeds from stock distributions. I left the distributions from my bond fund set to automatically reinvest. Right now, I’m letting all distributions go to money market for selective reinvestment. I think it will be that way for a while.

So in my case, I switch things around as needed to meet my goals. I have enough cash on hand for 2022. So I will be reinvesting everything into something. After the last month of stock drops, I’ll probably buy stocks with my next distributions collection.

 

[viking111]

I always set it to settle to cash so I could decide what to do with it. Sometimes I let it build up for a few years to help rebalance. I am a boglehead, so I hate dividends and capital gains distributions.

So to cash means it goes into your settlement fund and then you pay the taxes from it and then perhaps reinvest then?

 

[Closet_Gamer]

Pre-retirement here.

In my taxable accounts, I take dividends & cap gains as cash so I can decide where it goes next and have the cash available to pay necessary taxes.

I my tax deferred accounts, I set it to re-invest automatically b/c there is no cash requirement to pay taxes and I don't want dribs-and-drabs of cash buildng up un-used in the retirement accounts.

 

[FLSUnFIRE]

I always reinvested during my accumulation. In hindsight, I would have taken the distributions and invested them myself. Not a big deal but reduces all the small lots for cost basis calculation. A couple years from my FIRE date, I started taking the cash to build up to fund my first year of freedom.

 

[mrfeh]

I can't think of a good reason to ever automatically re-invest in a taxable account.

Pre-59.5, everything should be re-invested in tax-advantaged accounts. I don't know if that changes once you hit 59.5....I'm not there yet and haven't thought about it.

 

[steelyman]

taxable account and reinvestment vs. distriubte

I had a goal for rebalancing my retirement portfolio: not only between asset classes but also taxability (tax-free and tax-deferred).

Because my employer didn’t offer Roth until 2008 a lot of higher-growth funds had piled up over time in tax-deferred. I immediately stopped all tax-deferred contributions and went 100% Roth.

I didn’t want to do any Roth conversions so I turned off reinvestments for those higher-growth (stock) funds in tax-deferred and invested the cash from distributions in lower-growth (bond) funds. Took a while but I have the taxability split I want now. All funds (Roth and tIRA) have reinvestment on now.

[ADDED] I only have one fund in a taxable account (currently set to reinvest) and expect to close that in a year or two. I take dividends in cash in taxable brokerage that has individual stocks. That provides enough for Roth contributions and “whatever”.

 

[donheff]

Before ER I reinvested mine and hand sufficient withholding at work to cover taxes. After ER I kept it in the sweep fund and used them for expenses. I still handle the taxes by withholding from my pension check.

 

[VanWinkle]

I can't think of a good reason to ever automatically re-invest in a taxable account.

Pre-59.5, everything should be re-invested in tax-advantaged accounts. I don't know if that changes once you hit 59.5....I'm not there yet and haven't thought about it.

There is one reason if you check the total return with dividends reinvested versus without dividends reinvested. I am not saying everyone should reinvest dividends, but there is a reason to do that if you choose that path. Money on the side in a money market is idle cash.... Reinvested goes to work immediately.

VW

 

[mrfeh]

There is one reason if you check the total return with dividends reinvested versus without dividends reinvested. I am not saying everyone should reinvest dividends, but there is a reason to do that if you choose that path. Money on the side in a money market is idle cash.... Reinvested goes to work immediately.

VW

Well, I didn't mean the resulting cash should be left to sit. Use them for living expenses, to buy according to your AA, etc.

 

[MBAustin]

I always reinvested during my accumulation. In hindsight, I would have taken the distributions and invested them myself. Not a big deal but reduces all the small lots for cost basis calculation. A couple years from my FIRE date, I started taking the cash to build up to fund my first year of freedom.

Similarly, I realized a few years before ER that taking dividends and cap gains from taxable accounts would be better than continuing to reinvest as I had always done. Should have done it a little sooner, but it has worked OK for us. I do reinvest in our IRAs.

 

[VanWinkle]

Well, I didn't mean the resulting cash should be left to sit. Use them for living expenses, to buy according to your AA, etc.

I agree, but like auto investing during your working years, auto investing with dividends works great if you don't need the cash for living.

Best to you,

VW

 

[marko]

Similarly, I realized a few years before ER that taking dividends and cap gains from taxable accounts would be better than continuing to reinvest as I had always done. Should have done it a little sooner, but it has worked OK for us. I do reinvest in our IRAs.

+1. As a dividend spender I wish I had set aside dividend cash before RE in order to build a better cushion. RE wasn’t my choice and kind of snuck up on me...but regardless, I wasn't so savvy back then.

 

[COcheesehead]

In retirement now. I don’t have capital gains currently in a taxable account because I do not hold managed funds there. Any dividends which usually are small are reinvested because I do not need the cash and likely will not need the cash for 10+ years so I would rather have the compounding.

I have index growth oriented ETFs in taxable as opposed to dividend oriented ETFs along with my muni ladder which throws off tax free income that funds all of our retirement needs. Most other distributions are in deferred accounts.

 

[scrabbler1]

Before ER, I reinvested everything because I didn't need the money to meet my expenses.

After ER, I have changed my options a few times but some elements have been unchanged over the 13 years I have been retired.

I am not old enough to collect a pension or SS or take RMDs from my IRA, so I live off these investment returns. The one big bond fund generates most of my monthly dividends, so I take that as cash. My other holdings generate less in dividends, so at times I have reinvested them but other times I took them as cash to supplement the main bond fund's monthly dividends.

Except for 2019, I reinvested cap gain distributions. In 2019, I had such a large year-end CGD that I lacked enough other cash laying around to pay the big tax bill on it. So, I took the whole CGD as cash, using some of it to pay the taxes, some of it to cover other unusual expenses, then (re)invested the rest somewhere.

I got out of that stock fund in late 2019 which was generating the big CGD, as it was costing me a growing ACA subsidy. I may still take as cash some year-end dividends to pay some unexpected expenses, but I only have to let the MF company know a short time before the distribution date.

 

[Graybeard]

I can't think of a good reason to ever automatically re-invest in a taxable account.

Pre-59.5, everything should be re-invested in tax-advantaged accounts. I don't know if that changes once you hit 59.5....I'm not there yet and haven't thought about it.

I have always reinvested dividends and cap gains in my taxable account before retiring and since I have retired. I hold 3 funds, 2 index and 1 tax free bond. It makes no sense for me to not reinvest those, I don't need the money so why not reinvest it back into the 3 funds?

I also reinvest them in my rollover IRA and Roth IRA.

When I take my 1st RMD this year, I'll reinvest the amount after taxes as well since I don't need that money for anything.

 

[mrfeh]

I have always reinvested dividends and cap gains in my taxable account before retiring and since I have retired. I hold 3 funds, 2 index and 1 tax free bond. It makes no sense for me to not reinvest those, I don't need the money so why not reinvest it back into the 3 funds?

Some reasons:

• so you don't have an extremely long list of purchases to manage
• so you can use them to adjust your AA
• to help avoid wash sales

 

[Graybeard]

Some reasons:

• so you don't have an extremely long list of purchases to manage
• so you can use them to adjust your AA
• to help avoid wash sales

I can see the first two but if you sold something and at the end of the month (the tax exempt bond fund for example) posts a dividend and I reinvest the dividends automatically, is that a wash sale rule violation? I would not expect it to be so now I'm curious. I have sold some of that fund and at the end of the month I reinvested the dividend and the time frame was probably less than 30 days.

 

[COcheesehead]

I can see the first two but if you sold something and at the end of the month (the tax exempt bond fund for example) posts a dividend and I reinvest the dividends automatically, is that a wash sale rule violation? I would not expect it to be so now I'm curious. I have sold some of that fund and at the end of the month I reinvested the dividend and the time frame was probably less than 30 days.

It would be a wash sale. The rule is simple: if you buy and sell in the same 30 day window, it’s a wash. Dividends count as a buy.

If I am looking to tax loss harvest, I turn off dividends for awhile, then turn them back on.

 

[mrfeh]

I can see the first two but if you sold something and at the end of the month (the tax exempt bond fund for example) posts a dividend and I reinvest the dividends automatically, is that a wash sale rule violation? I would not expect it to be so now I'm curious. I have sold some of that fund and at the end of the month I reinvested the dividend and the time frame was probably less than 30 days.

If the sale was a loss, then yes, purchasing the same fund again within 30 days is a wash sale.

ETA - and it's not just after the sale; it's within 30 days of the sale (before or after)

 

[Graybeard]

So the Wash Sale Rule applies to not just the stock of an individual company but mutual funds and ETFs also? I would not have thought reinvesting dividends would be considered a violation, I thought it would have applied to me purchasing new shares of say the mutual fund. Now I realize reinvesting dividends back into the fund is purchasing the same thing, it is just that I didn't think it would apply to reinvesting the dividends. And yes, it is a 61 day time period, 30 before, 30 after and the day of, I always thought it was 30 days after the sale.

I thought selling shares of the tax exempt bond fund was a good way to offset any capital gains from the Total Stock and Total International Stock Market mutual funds since the vast majority of the tax exempt fund's shares were purchased at a higher nav than today's. This whole thing is not good news!

 

[COcheesehead]

So the Wash Sale Rule applies to not just the stock of an individual company but mutual funds and ETFs also? I would not have thought reinvesting dividends would be considered a violation, I thought it would have applied to me purchasing new shares of say the mutual fund. Now I realize reinvesting dividends back into the fund is purchasing the same thing, it is just that I didn't think it would apply to reinvesting the dividends. And yes, it is a 61 day time period, 30 before, 30 after and the day of, I always thought it was 30 days after the sale.

I thought selling shares of the tax exempt bond fund was a good way to offset any capital gains from the Total Stock and Total International Stock Market mutual funds since the vast majority of the tax exempt fund's shares were purchased at a higher nav than today's. This whole thing is not good news!

Yes.

 

[N02L84ER]

Yes, I got hit with the wash sales rules 20+ years ago when I first started my muni bond fund and sold to buy stock funds but had the muni dividends reinvested. I turned off reinvesting the dividends when I found out.