Stop reinvest dividends on taxable?

[big-papa]

This whole situation really depends on one’s financial situation and income needs.

If one is retiring early, say 55, and they could use the dividends/capital gains for a source of income, then doesn’t it make perfect sense to stop reinvesting them? You are already paying the taxes on them, so put them to use.
One thing that I haven’t heard about and maybe because you can’t do it, is if you are younger than 59 &1/2, can you stop reinvesting dividends/capital gains from IRAs or would this be considered a distribution?

It would not. Anything you do inside an IRA or 401K is not a taxable event except for explicitly making a withdrawal from it. People rebalance IRA portfolios all the time by not reinvesting the distribution and only after the distribution is made, they then decide where to reinvest the money inside the IRA based on whatever asset is below the target allocation.


Cheers
Big-Papa

 

[gayl]

So who do I hire to explain what I have and how much tax I would pay if I sold it. I have no idea of cost basis it is not tracked in a way that is visible to me and I have had it 30 years. Once upon a time I was doing $20 purchases . . . and no I don't have the statements nor does the original seller. Has had more than one administrator and it is nothing major like Fidelity or Vanguard.

Pretty hard to say without any clue on what "it" is.

As RunningBum said: we'd love to help but need the financial institution and investment symbol.

Then I personally might suggest (1) walking into a Schwab or Fidelity so that (2) they can transfer it there, explain what you have, take advantage of their free 1 hr seminars and (3) you can discover if that's what you really want to do with your investment. You might not want this investment at all!!

Why do I suggest Fidelity or Schwab? Because they both have free inperson 1 hr long seminars to guide a person towards becoming an informed investor.

Especially since:

Okay, so I don't really write checks at the grocery store but that is my level of financial knowledge. . . so I guess to avoid any more public embarrassment it is time to shut up. Thank you though for replying.

Don't be embarrassed. Aren't anonymous boards wonderful!

 

[sengsational]

I'm not sure knowing what the specific thing is would help. There's no statements over the 30 years of purchases, and unless the basis has been continually migrated to each successive administrator, there's likely no way to ascertain the exact basis.

If my mom got into this situation, I'd look-up the price over time and rough-in purchases just by interviewing her. Those purchases would be forced to the current total, then use that to estimate the basis.

 

[badatmath]

I don't think it is big enough to impress a "real" broker maybe 275K

 

[RunningBum]

I'm not sure knowing what the specific thing is would help. There's no statements over the 30 years of purchases, and unless the basis has been continually migrated to each successive administrator, there's likely no way to ascertain the exact basis.

If my mom got into this situation, I'd look-up the price over time and rough-in purchases just by interviewing her. Those purchases would be forced to the current total, then use that to estimate the basis.

Getting the exact basis won't happen, but one could get something reasonable with your method. But we don't know if this is a publicly traded stock or fund, or some kind of private offering or partnership or what. OP doesn't seem interested in giving that info so I'm out of here. I don't mind trying to help people a little bit here but I'm not going to pull teeth to get basic info.

 

[badatmath]

Sorry to offend anyone with my stupidity. Thanks all for your time.

 

[gayl]

I don't think it is big enough to impress a "real" broker maybe 275K

Big enough for Fidelity or Schwab.

Sorry to offend anyone with my stupidity. Thanks all for your time.

There are no stupid questions so pls stop beating yourself up (says someone with almost 0 knowledge of cash investments ... but learning.)

 

[RetiredAndLovingIt]

Don't get discouraged, you keep asking questions, it's the only way to learn

Some people on here get impatient if you don't provide or even know how to provide the info they need to help you but most of us are happy to help if we can and willing to talk you through it. Cathy and SecondCor come to mind, they were extremely patient with some of my dumb questions when I was laid off a few years ago and I'm very grateful to them.

 

[mickeyd]

I agree that taking taxable divs in cash is the way to ride. Spend the cash now or redirect it back to my CRFMMF for future fun and games.

 

[jollystomper]

Sorry to offend anyone with my stupidity. Thanks all for your time.

It is not a stupid question at all. I reminded me this is something I may have to look at. Right now in this area I am in "just don't do something, stand there" mode. I have stopped reinvesting in just one of my mutual funds, one I no longer wish to grow and will eventually eliminate (can't do it now as I have 30+ years of gains in it and and am using my income headroom now for Roth conversions). But for this and the other 7 funds in my taxable account I do not need the dividends so I have just kept reinvesting them. Perhaps when my current cash falls below some threshold (which I have not figured out yet) that will trigger me to stop reinvesting the dividends.

 

[explanade]

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]

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]

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]

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]

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]

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]

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.