Mutual Fund Capital Gains During FIRE: Reinvest?

[Trooper]

Hi,

Just want to see what other do with capital gains which are thrown off from mutual funds. Do you typically reinvest them or take them in cash to offset current year living expenses? We retired earlier this year.

However a small part of our portfolio is with Edward Jones due to an inheritance. The advisor said we should reinvest CGs for DCA and inflation protection purposes.

Thoughts?

 

[LOL!]

I use tax-efficient index funds in my taxable account and they do not pay cap gains distributions. That way I have control over my taxes.

Yes, they do pay dividends, but those are qualified dividends for the most part. I do not have those dividends automatically reinvested, but I decide when I get them whether to spend them or use them to buy more investments of my choosing in an act of rebalancing.

Ditch Edward Jones. The advice given to you by the sales rep was to increase their take from you. You should move those investments out of EJ and change to a cheaper place and cheaper investments before you are trapped by taxes.

 

[bingybear]

I don't typically own MF in taxable accounts and very few in IRAs. But I usually don't reinvest, but reinvest the dividend as part of rebalancing the accounts. Just reinvesting dividends may not help in keeping your allocation balanced.
The idea of reinvesting dividends is to keep the $ working for you. This is something you do want to do.. that is keep the money being productive.

 

[Katiek]

Not retired yet, so CG's are reinvested. Once I retire, I'll look at CG's in the context of my entire withdrawal plan. Are the distributions consistent with my planned withdrawal amount, or do they put me over? After the distribution, what is my allocation and is that consistent with my plan? If the answers to those questions are yes, then I'd keep the CG's. If not, I'd figure the most efficient way to rebalance to my plan.

 

[RunningBum]

I don't reinvest cap gains or dividends, unless it's a closed fund I want to invest more in (Vanguard Primecap, for example). If I want more money in any other fund I can easily just buy them myself. More likely I'll use it for living expenses, rather than selling something else for a potential taxable gain, or invest elsewhere to rebalance my portfolio.


Ditto what was said above, ditch Edward Jones. That was nonsense advice. You are no longer buying, so DCA makes no sense, and I have no idea what he means by inflation protection, at least not without knowing the fund. I suppose maybe he means that owning more in equities is good inflation protection, but keeping a sound asset allocation is better.

 

[RobbieB]

If you need the dough, keep it.

If you don't then re-invest it.

 

[scrabbler1]

I use the dividend income from most of my mutual funds to provide me with the cash to cover my expenses. But I use the more erratic cap gain distributions from those funds to buy more shares in those funds (i.e. reinvest) so my dividends will be a little higher. With the monthly dividends per share gradually declining in my main bond fund, having more shares has enabled me to somewhat offset that decline and keep my monthly income fairly stable.

 

[gcgang]

Since retired I've changed to take in cash all dividends and cap gains in taxable accounts.

If the market ever goes down ��, I'd consider redeploying into equities, if needed. For now, it's been a minor way of rebalancing.

 

[pb4uski]

Since retired I've changed to take in cash all dividends and cap gains in taxable accounts. ....

+1... it just reduces my cash withdrawals used for spending and is easier IMO.

 

[audreyh1]

We take all distributions in cash. Then after our annual withdrawal, rebalance - that takes care of reinvesting any excess. I'm a total return investors, using a fixed asset allocation, so I don't worry about dividend versus capital gain distributions. If someone is living off dividend income only, they should reinvest all capital gains distributions.

 

[OverThinkMuch]

I avoid reinvesting. Taking dividends in cash means I can either buy bonds (during current market) or help reduce the amount to sell for the next withdrawal.

When you inherit, your "basis" or profit is counted from you inheriting. So if you sell and switch, you only owe tax on the gains since then. I'd suggest looking at how much it will actually cost to sell Edward Jones holdings and buy something lower cost. You want to avoid high cost funds, and EJ has lots of those.

 

[Senator]

I reinvest all my dividends now, as my rental income more than pays my living expenses. Once I am 62, I may spend them as I hire more and more rental stuff out.

If you can live without the dividends, and live as you expected/wanted to, leave them to be reinvested. If you have to cut back your lifestyle, spend them.

 

[gerntz]

Use Cap Gains as part of living expenses as with dividends. If reinvest, it's in the preferred asset allocation, likely not same funds that produced them.

I try to estimate what MF cap gains distributions will be based on previous years, but typically wait on IRA withdraws & tax payments from them till I know exactly. Use Turbo Tax to figure what the tax payments need to be - which is why I buy TT early regardless if a have to pay an extra $20. Makes for a mad rush at end of year to make tax payments.

 

[Looking4Ward]

Into my third year of living off my investments and I take all distributions in cash. So far it's been more than I need to cover expenses and I don't have to sell any shares.

I can get a pretty good idea what CG distributions are going to be for a Vanguard fund by checking the "Realized capital gain/loss" for that fund on Vanguard's website.

 

[RunningBum]

I can get a pretty good idea what CG distributions are going to be for a Vanguard fund by checking the "Realized capital gain/loss" for that fund on Vanguard's website.

I don't think so. From what I see, that's the cap gains/losses I've incurred by selling that fund this year. I see nothing about what to expect for the distributions come December.

 

[Texas Proud]

Maybe should have done a poll.... then you could see what most do...

However, I think it makes a difference if you are actually RE or not... when I was working, reinvest.... now, have it deposited in my ST bond fund for expenses... and I still have to sell every once in awhile...

Edit

Just read walkinwood.... I am the same with IRAs etc... it is only my taxable account that I do what I posted above...

 

[walkinwood]

We take dividends in cash from funds in taxable accounts. That cash is part of our annual spending. Record keeping is easier too.

For funds in our IRA and ROTH IRA, we reinvest the dividends. Record keeping there is much easier since it will all be considered as income in the IRA and is non taxable in the ROTH. Also, we aren't taking distributions from those accounts yet.

 

[ejman]

Have been taking in cash all taxable account distributions (Dividends and Cap Gains) since ER in 2002. Most years this is sufficient to cover all living expenses. Reinvest all distributions in IRA accounts.

 

[Looking4Ward]

I don't think so. From what I see, that's the cap gains/losses I've incurred by selling that fund this year. I see nothing about what to expect for the distributions come December.

That's not the area of the website I'm referring to.

From the fund information page, click on "Distributions". You don't even have to be logged in to do so. For instance:

Vanguard Wellington Admiral Distributions Page

At the bottom of that page are both realized CG gains/losses for the current FY and unrealized appreciation/depreciation.

This is for the fund itself, not your personal account. Currently and as of 9/30/2016 the Wellington Admiral fund shows a net realized CG gain of .98 per share for the current fund fiscal year. That's much lower than it was this time last year so I suspect there was less churn within the fund and the total CG gain distribution for this year will be less than it was last year.

 

[Texas Proud]

That's not the area of the website I'm referring to.

From the fund information page, click on "Distributions". You don't even have to be logged in to do so. For instance:

Vanguard Wellington Admiral Distributions Page

At the bottom of that page are both realized CG gains/losses for the current FY and unrealized appreciation/depreciation.

This is for the fund itself, not your personal account. Currently and as of 9/30/2016 the Wellington Admiral fund shows a net realized CG gain of .98 per share for the current fund fiscal year. That's much lower than it was this time last year so I suspect there was less churn within the fund and the total CG gain distribution for this year will be less than it was last year.

.



WOW.... just learned this... thanks for posting.... now I can start to estimate earnings for the year and determine what I want to do....

Thanks a bunch!!!

 

[Cobra9777]

One of the main reasons we use ETFs is to avoid CG distributions. I prefer to control the timing of CGs more directly. In taxable accounts, we take dividends in cash but reinvest in tax-deferred. This is a simple method of generating regular cashflow to supplement our pensions and rental income. We won't touch tax-deferred for many years.

 

[Trooper]

Thanks everyone for your helpful responses!

If someone is living off dividend income only, they should reinvest all capital gains distributions.

Audreyh1...can you explain your statement above?

 

[grasshopper]

One of the main reasons we use ETFs is to avoid CG distributions. I prefer to control the timing of CGs more directly. In taxable accounts, we take dividends in cash but reinvest in tax-deferred. This is a simple method of generating regular cashflow to supplement our pensions and rental income. We won't touch tax-deferred for many years.

+ 1, I just use the equivalent ETF for equities and take the CG when I want to.
Like others we reinvest tax deferred and use taxable payouts for nice travel adventures.

 

[urn2bfree]

DUMP EDWARD JONES! If you are no longer earning a salary and are withdrawing from your portfolio that advice could be beyond stupid.

If the dividends and cap gains are taxable you have to come up with the money to pay those taxes someplace else. That might even mean having to sell something else and having to pay taxes on THAT Capital Gain. Now you just raised your tax bill!



Sent from my iPad using Early Retirement Forum

 

[audreyh1]

Thanks everyone for your helpful responses!



Audreyh1...can you explain your statement above?

Simple - capital gains are not dividends. They occurs because some stock was sold at a profit. That sold stock must be replaced to maintain the principal. Maintaining the principal (i.e. not dipping into it) is important to an income investor - someone who wants to live off only the interest and dividends generated by their portfolio.