Basic Tax Question on LTG/Reinvested Dividends

[pmac]

Thanks in advance for the collective wisdom of the forum.

This is a pretty basic question, but I'm not sure of the answer. We have reached retirement and will need to finally start withdrawing from our nest egg in 2018. I understand and appreciate the pros/cons regarding order of withdrawal from taxable, tax-deferred and Roth funds as discussed in some threads and I-orp. I also understand that all funds withdrawn from tax-deferred accounts are taxed as ordinary income.

But I am unclear as to exactly what is taxed on withdrawals from taxable accounts. Among other taxable assets, we have some long-term taxable MF accounts, with approximately $53,325 in LTGs and approximately $50,650 in reinvested dividends, with a relatively small initial principal investment over many years. Due to the fees on these MFs we will be consuming these accounts first from our taxable funds withdrawals.

I understand that LTGs are taxable (once the taxable threshold for LTGs is met). But I assuming that the taxes due on reinvested dividends were taxed and paid annually when the divs were reinvested, as noted on Line 9a of the 1040. Therefore, I believe those dividends would not be taxed on withdrawal of funds. Is that correct?

Assuming that is correct, how would the withdrawals, taxable LTG vs non-taxable reinvested divs vs original capital investment, be reflected on your return?

Is there a way to reflect withdrawals as a taxable withdrawal of a LTG or a non-taxable withdrawal of either original principal or previously taxed dividend?

Can you instruct the MF to only withdraw LTGs (if your income is low enough) or only withdraw original principal or reinvested divs?

 

[kaneohe]

Your taxable accounts consist of basis and gains. Your basis is what you have invested.....either in new contributions or in reinvested dividends/capital gains.
You should have selected a cost basis method.....if not, the broker has a default method. The most flexible is specific shares ID where you can select the shares you want to sell. Pick high cost basis shares if you want to minimize gain or maximize loss. Do the opposite if you want the opposite result. The broker is supposed to keep track of the basis (and gains) for for more recent (covered)shares (2011 for stocks/2012 for mutual funds?) For earlier (non-covered) shares, you are responsible for keeping track of the gains/basis ......typically you can use the default average cost basis used by brokers if you do not elect specific shares (and must use average basis if you have used average basis in the past w/o getting IRS permission to switch).

Note that when using the specific shares ID method, you must specify at the time of sale which shares you are selling and must get written confirmation from the broker of the same info.

 

[RunningBum]

The reinvested dividends are just like if you got the cash, then bought new shares with the cash, only they did it in one step for you. When you sell those new shares, you only pay CG tax on the gain after you purchased those shares, just like you only pay CG tax on the gain on the original shares.


When you start liquidating the account, you should have 3 choices for cost basis: Average cost, FIFO, or specific ID. You cannot just skim the dividends or gains off. You are selling actual shares, and those shares have a basis. With those three choices, your basis could be the average cost of all shares, selling the oldest shares first, or you specifying which shares to sell. I prefer the last option, so I can decide whether to sell shares with a higher basis (less CG) or lower basis (more CG) as appropriate for my tax situation.


You probably also want to stop reinvesting dividends so you can just take the cash instead, since you plan to liquidate the fund anyway.

 

[pmac]

Thanks guys. Very helpful.