Dividend reinvestment, I think I'm doing it wrong.

[Time2]

I'm curious as to your average dividend yield, and also whether you invest in individual stocks, ETF's, or mutual funds?

Probably 98% mutual funds or ETFs. VTSAX, VTI, VFIAX, VOO.
Only about $10k, but, still was doing it wrong, I could have Roth Converted another $30k over the last 3 years.

 

[Time2]

Yes. Most of us turned off reinvestment of dividends for taxable accounts as soon as we retired.

It doesn't really matter, just a little easier.

I've been here reading for 4 years and never picked up on the idea to turn off dividend reinvestment at retirement.
I want my money back!

 

[Lawrencewendall]

If you don't need it and have money to pay the taxes, why turn off DRIPing? It's hard to walk away from 12% dividends, especially for funds that give a discount for DRIPing.

 

[Time2]

If you don't need it and have money to pay the taxes, why turn off DRIPing? It's hard to walk away from 12% dividends, especially for funds that give a discount for DRIPing.

I do have to get living expenses from my savings, tax deferred or taxable accounts. If I take all my spending need from tax deferred accounts, I owe tax on it, plus tax on the dividends I didn't take. Or I can take the dividends and reduce what I take from tax deferred and have a lower tax bill.

 

[pb4uski]

Probably 98% mutual funds or ETFs. VTSAX, VTI, VFIAX, VOO.
Only about $10k, but, still was doing it wrong, I could have Roth Converted another $30k over the last 3 years.

If you're converting to the top of a particular tax bracket, not reinvesting dividends would have negligible impact on the amount of Roth conversion headroom that you would have so I'm not sure that you are right about this part that it reduced your Roth conversions.

 

[pb4uski]

If you don't need it and have money to pay the taxes, why turn off DRIPing? It's hard to walk away from 12% dividends, especially for funds that give a discount for DRIPing.

Where one would turn off reinvesting dividends is where you are withdrawing taxable funds for spending... why reinvest dividends rather than just reduce the amount of your withdrawal by the amount of the dividend if you take the dividend in cash.

Not a huge deal , but administratively easier.

To be clear, in a taxable account dividends are income whether taken in cash or reinvested.

 

[disneysteve]

I stopped dividend and CG reinvestment in taxable accounts last year when I cut my work hours. I also turned off reinvestment in my inherited IRA because I have to take RMDs from that. This way the dividends and CGs accumulate in the settlement fund and that's what I use for the RMD at the end of the year.

 

[badatmath]

I stopped dividend and CG reinvestment in taxable accounts last year when I cut my work hours. I also turned off reinvestment in my inherited IRA because I have to take RMDs from that. This way the dividends and CGs accumulate in the settlement fund and that's what I use for the RMD at the end of the year.

Oh that is an idea I never considered. I expect to get an inherited IRA some day and don't look forward to a 10 year period AND RMDs. Seems like one or the other would suffice.

 

[pb4uski]

I think it is one or the other. I read the below as being by the end of the 10th year if the decedent had not already begun taking RMDs but that RMDs may be required in years 1-9 if the decedent had already begun taking RMDs.

For an inherited IRA received from a decedent who passed away after December 31, 2019:

Generally, a designated beneficiary is required to liquidate the account by the end of the 10th year following the year of death of the IRA owner (this is known as the 10-year rule). An RMD may be required in years 1-9 when the decedent had already begun taking RMDs. There are exceptions for certain eligible designated beneficiaries, defined by the IRS, as someone who is either:

• The IRA owners' spouse.
• The IRA owner's minor child.**
• An individual who is not more than 10 years younger than the IRA owner.
• Disabled (as defined by the IRS).
• Chronically ill (as defined by the IRS).

https://investor.vanguard.com/inheriting-accounts/rmd-rules-for-inherited-iras

 

[disneysteve]

I think it is one or the other.

I qualify for the exception of being less than 10 years younger than the deceased, so I have RMDs based on my life expectancy. I don't have the 10-year requirement.

 

[badatmath]

I don't qualify for the exception and the person I may inherit from is already taking RMDs. I recall reading something that says the IRS has not totally worked out how this will work IRL yet. Seems it would have been nice if they did that FIRST.

 

[scrabbler1]

I reinvested all dividends and cap gains during my working years, sometimes investing them in other funds, like an automatic account builder.

When I ERed 15 years ago, I had to start living off these dividends, as I was only 45 at the time. I took as cash the monthly dividends from a big bond fund I had the majority of my taxable portfolio in, while sometimes taking as cash and sometimes reinvesting the dividends and cap gains in the other funds.

More closely related to the OP's question, at the end of the year I had to decide about the larger, year-end distributions. If my regular monthly dividends could cover the 4th quarter estimated taxes due, I would keep reinvesting the others. Otherwise, I would take some of those year-enders as cash.

 

[MarieIG]

We are retired living off of IRA withdrawals. I had a startled wake up about 4am, thinking, I'm doing this wrong!

I have my taxable account set to 'Reinvest Dividends' I'm pretty sure that leaves me paying tax on the dividends and that I don't receive for spending and then withdrawing more from IRAs to cover expenses, making my tax bill higher than it would be if I received the dividends and withdrew less from my IRAs. Add to this, a complicating issue, we are doing Roth Conversions.

Would I be better off receiving my dividends as added spendable income or at least money to pay the tax on our Roth Conversions?

Not exactly the same - but I'm paying taxes for Roth conversions out of my taxable account - to allow for the entire conversion to flow into the Roth - and to pay taxes out of an account that is - and always will as long as it exits - be generating taxes.

A have started having some of the dividends go into the sweep account (and from there buy ETFs) as I am trying to shift somewhat from individual stocks to ETFs - and am ok with a reduction in dividend income with some of those (i.e. from around 6% to 3.5%).

 

[Dreamer]

I stopped dividend and CG reinvestment in taxable accounts last year when I cut my work hours. I also turned off reinvestment in my inherited IRA because I have to take RMDs from that. This way the dividends and CGs accumulate in the settlement fund and that's what I use for the RMD at the end of the year.

My DH has to start RMDs next year. Should we stop the dividends and capital gains from reinvesting next year for him? Should we continue reinvesting in my account, since I don't start RMDs for awhile?

Thanks in advance.

 

[disneysteve]

My DH has to start RMDs next year. Should we stop the dividends and capital gains from reinvesting next year for him? Should we continue reinvesting in my account, since I don't start RMDs for awhile?

Thanks in advance.

You can go either way. I like the simplicity of being able to just draw out the RMD from the settlement account without having to sell anything. It helps that the settlement account is paying 5.28% currently. If rates fall I may change my approach.

 

[Rianne]

Question: Do you consider reinvesting taxable dividends as savings? Many RE calculators ask $$ savings monthly. Because we reinvest dividends I consider that savings. We're not taking it and spending but buying more funds.

 

[mrfeh]

Question: Do you consider reinvesting taxable dividends as savings? Many RE calculators ask $$ savings monthly. Because we reinvest dividends I consider that savings. We're not taking it and spending but buying more funds.

Definitely not. They are part of your portfolio's return.

Listing them as "savings" would be double counting them.

 

[Torrensl]

Converting Traditional IRA to Roth

(2) Convert traditional IRA to Roth using taxable account to pay the taxes as long as I have funds left in the taxable account (pay ordinary income tax on amount converted).


Is there an age where it doesn't make sense to convert from traditional to Roth, because it would take too long to recoup the taxes you're paying today on the conversion? (I am 60)...or ...are you just converting to get just below next tax bracket (we are in 24% bracket)

 

[Whisper66]

(2) Convert traditional IRA to Roth using taxable account to pay the taxes as long as I have funds left in the taxable account (pay ordinary income tax on amount converted).
Is there an age where it doesn't make sense to convert from traditional to Roth, because it would take too long to recoup the taxes you're paying today on the conversion? (I am 60)...or ...are you just converting to get just below next tax bracket (we are in 24% bracket)

I would suggest using a tool such as Optimal Retirement Planner - Extended Parameter Form to explore your specific situation. In our (my wife and me are around 62) case, the program projects we will be in 28+% tax bracket when RMDs start if no conversions are done now. It will be even worse if one of us passes early as the other will have to use the Singles tax table. As a better alterntative, it suggests converting to the top of the 24% tax bracket through at least age 67. However, we never spend as much as I-ORP assumes. So we rerun our I-ORP analysis each year. Each year it tells us to convert to the top of the 24% tax bracket. We recognize we will likely need to convert for many years after age 67 to keep our tax bracket to the 24/25% bracket. In addition, we see our assets at multigenerational. This means we expect our kids will inherit a lot of our assets. So either we pay taxes now at our tax rates or they will pay taxes at their future tax rates. And remember, they will need to empty out any IRA accounts within 10 years and pay any taxes owed within that time. We expect tax rates to rise (just a guess) so are happy to pay taxes now...at least up to the 24% tax bracket maximum.

 

[FLJim]

Better yet, keep your dividend stocks in your taxable account. If your dividend income is less than $89,250 then you don’t pay any federal taxes on it according to https://smartasset.com/taxes/dividend-tax-rate

No. If your taxable income (not your dividend income) is less than $89250 you pay no income tax on your dividends.

 

[pb4uski]

No. If your taxable income (not your dividend income) is less than $89250 you pay no income tax on your dividends.

So you get to add your deductions to the $89,250, which would be $30,700 for a married couple over 65 yo, so a total of $119,950 of qualified dividends and LTCG... or $89,250 of qualified dividends and LTCG and $30,700 of ordinary income like interest and in both cases your federal income tax would be $0 on $119,950 of income.

IMO it's really a bit ridiculous that a senior married couple can have so much income and pay $0 tax.

 

[RunningBum]

So you get to add your deductions to the $89,250, which would be $30,700 for a married couple over 65 yo, so a total of $119,950 of qualified dividends and LTCG... or $89,250 of qualified dividends and LTCG and $30,700 of ordinary income like interest and in both cases your federal income tax would be $0 on $119,950 of income.

IMO it's really a bit ridiculous that a senior married couple can have so much income and pay $0 tax.

You can't just take a snapshot of a year and call it ridiculous. You might consider how much that couple paid in taxes in the past to get to that state.

In the last 5 years, I've barely paid $1000 in fed income tax total. But I've had 5 years where I've paid over $100K in FIT...one year over half a mill. I'm not complaining about that, but nor should anyone complain about me paying virtually nothing now.

Likewise I can take as much out of my Roth for free. That sounds incredibly that I could take out $400K right now and pay zero tax on it. It doesn't even affect the taxing of my other income, including a social security benefit if I were taking it now. Seems absurd...but I paid the taxes on the conversion to the Roth, or on my income before I contributed some of it to my Roth.

 

[pb4uski]

You can't just take a snapshot of a year and call it ridiculous. ...

Sure I can. And I did. Where the heck does it say that I can't?

I actually think that it is ridiculous to look at numerous years together, but ya gotta love the first amendment... anybody can have an opinion.

 

[Time2]

So you get to add your deductions to the $89,250, which would be $30,700 for a married couple over 65 yo, so a total of $119,950 of qualified dividends and LTCG... or $89,250 of qualified dividends and LTCG and $30,700 of ordinary income like interest and in both cases your federal income tax would be $0 on $119,950 of income.

IMO it's really a bit ridiculous that a senior married couple can have so much income and pay $0 tax.

So did I, when I did it, the first year we retired. I sold about $160k from a mutual fund, about 50% was LTCGs and I also had dividends, This put my income at about $109k.after the standard deduction, I was just below the cutoff. I paid zero taxes. I put about $90k back into a different mutual fund, with a new cost basis.
There are also other subsidies that FIRE people take that I think are ridiculous, but that is how the laws are written.

 

[RunningBum]

Sure I can. And I did. Where the heck does it say that I can't?

I actually think that it is ridiculous to look at numerous years together, but ya gotta love the first amendment... anybody can have an opinion.

OK. Then it's ridiculous to call it ridiculous.