Drawing mutual fund dividends

[rk911]

Yes, you pay taxes either way. But if you take the distribution in cash you have a lot more flexibility. You have money to pay the tax incurred, you can use the proceeds to rebalance or draw on for spending. And a niggly thing about automatic reinvestments is that if you decide to grab those funds later you incur another taxable event because you have to sell some shares. If you’re smart about selling selected shares the resulting tax liability is minor.

Some people don’t like accumulating a bunch of extra tiny share lots that happen with reinvesting distributions.

Finally, and this can be a major issue, by buying some shares via reinvestment you invoke the wash sale rule clock. If you happened to sell some same shares at a loss within 30 days before, or 30 days after a wash sale occurs this eliminates some of your tax loss. I have been caught by this a time or two in the past.

In fact if you do some tax loss harvesting in your taxable account you had better not buy same shares +/-30 days in your IRAs either. If you own different securities in your IRAs versus taxable this is a non-issue.

In other words, in taxable accounts it can get messy, and you still have to be careful in tax-deferred for securities also held in taxable. I turned off reinvesting in all my accounts long ago and am careful about the timing whenever I sell to take a loss in taxable.

OK, understand. We have always re-invested gains as part of our buy & hold strategy. Plus, we didn't need the $ as we were living beneath our means and we have always had a KISS attitude. Since 1982 we've only sold shares three times, the last instance was last June when we bought a new car. We likely will be doing some tax harvesting in one or more of our taxable accounts this year to fund our DAF.

 

[audreyh1]

OK, understand. We have always re-invested gains as part of our buy & hold strategy. Plus, we didn't need the $ as we were living beneath our means and we have always had a KISS attitude. Since 1982 we've only sold shares three times, the last instance was last June when we bought a new car. We likely will be doing some tax harvesting in one or more of our taxable accounts this year to fund our DAF.

Funding a DAF transferring appreciated shares works well. Donte some of your lowest cost basis shares and you don’t have to even worry about any harvesting or additions to taxable income.

 

[TickTock]

In the earlier accumulation days we re-invested everything into the same funds (we rebalance once a year). As we neared retirement this changed to taking all distributions from the taxable account in cash. Still re-invest into the same funds in tax-deferred accounts, as no taxable events involved in rebalancing.

Taking the taxable distributions in cash gives more flexibility.

 

[meleana]

I stopped reinvesting finally this year and now everything goes into a Treasury Money Market.

 

[waynezo]

I used to reinvest everything. Later in the year when I needed money to live on I would sell shares and incur another taxable event. Since I am going to be taxed on Divs/CapGains anyway I take that money to live on. If I end up with more money than I need I can always reinvest. Kudos to audreyh1 for explaining this to me last year

 

[Dalton]

Don't forget that qualified dividends may fall into 0% LTCG bracket, depending on your income, so that would need to be factored into this decision (i.e., "I'm paying taxes on the CG & dividends anyway" may not apply to everyone or to all of that money).


I'm kind of in a weird place since I RE'd, because a windfall left me with a chunk of cash (currently in treasury MM), and an inherited IRA that I have to draw down, so I'll be working out my plan for a little while, but the plan for now is that I'll be spending the divs & CGs.

 

[waynezo]

Don't forget that qualified dividends may fall into 0% LTCG bracket, depending on your income, so that would need to be factored into this decision (i.e., "I'm paying taxes on the CG & dividends anyway" may not apply to everyone or to all of that money).


I'm kind of in a weird place since I RE'd, because a windfall left me with a chunk of cash (currently in treasury MM), and an inherited IRA that I have to draw down, so I'll be working out my plan for a little while, but the plan for now is that I'll be spending the divs & CGs.

"(i.e., "I'm paying taxes on the CG & dividends anyway" may not apply to everyone or to all of that money)"
Good Point, but in my case these taxable events affect my AGI whether or not I am in the 0% bracket. AGI in turn affects my Affordable Care Act subsidy.

 

[24601NoMore]

Don't forget that qualified dividends may fall into 0% LTCG bracket, depending on your income, so that would need to be factored into this decision (i.e., "I'm paying taxes on the CG & dividends anyway" may not apply to everyone or to all of that money).

If your Taxable Income is less than the top end of the 2nd lowest bracket (roughly $94K MFJ for 2024 IIRC), both Qualified Dividends and LT Cap Gains are not taxed at the Federal Level. They'll still impact MAGI, though, so you'll potentially pay State Income Tax on those distributions, depending on your state.

We stopped reinvesting dividends and cap gains in taxable accounts when we retired. And as the bulk of our taxable funds pay qualified dividends and few capital gains, I can keep most of that income "Federally tax free" if I actively manage the Taxable Income number.

Unfortunately, if you're managing MAGI for ACA Subsidy purposes, taxation of the LTCGs and Qualified Dividends really doesn't matter as both types of distributions will affect Taxable Income - unless you offset that "income" with Capital Losses.

 

[audreyh1]

"(i.e., "I'm paying taxes on the CG & dividends anyway" may not apply to everyone or to all of that money)"
Good Point, but in my case these taxable events affect my AGI whether or not I am in the 0% bracket. AGI in turn affects my Affordable Care Act subsidy.

Yep, some of us pay more attention to AGI than the tax liability.

Not just for ACA either. Once you or spouse reaches 63 AGI starts impacting IRMAA on your Medicare premiums. (~2 year look back)

 

[CardsFan]

Yep, some of us pay more attention to AGI than the tax liability.

Not just for ACA either. Once you or spouse reaches 63 AGI starts impacting IRMAA on your Medicare premiums. (~2 year look back)

And, if I recall correctly, they are NOT the same AGI's

 

[Dalton]

"(i.e., "I'm paying taxes on the CG & dividends anyway" may not apply to everyone or to all of that money)"
Good Point, but in my case these taxable events affect my AGI whether or not I am in the 0% bracket. AGI in turn affects my Affordable Care Act subsidy.

Yeah, I'm in the same boat now this year. My only point was as a reminder that people often say they take their dividends because they "are paying the tax on dividends whether they spend it or reinvest it" (I say it, too), but that it may not be the case in all circumstances. It's probably even better because you get the dividends with no LTCG taxes due .


This was pertinent to me at the end of last year, when I was working up my budget for this year, figuring out how the ACA works, and getting an idea of which accounts I should take money from this year, while also keeping my taxes low... that whole MAGI vs taxable iteration.

 

[audreyh1]

And, if I recall correctly, they are NOT the same AGI's

They are exactly the same AGI. They aren’t exactly the same MAGIs, but very close.

The ACA MAGI includes untaxed Social Security benefits. The IRMAA MAGI does not.

 

[CardsFan]

They are exactly the same AGI. They aren’t exactly the same MAGIs, but very close.

The ACA MAGI includes untaxed Social Security benefits. The IRMAA MAGI does not.

Yeah. I realized that right after I hit submit.

 

[DrRoy]

While saving I reinvested all. Now I draw all to minimize the need to sell off shares for spending money.

 

[VanWinkle]

They are exactly the same AGI. They aren’t exactly the same MAGIs, but very close.

The ACA MAGI includes untaxed Social Security benefits. The IRMAA MAGI does not.

Thanks audreyh1, I didn't realize that IRMAA only counts taxable SS into the MAGI calculation. That makes a difference in some cases.

Maybe I misunderstood-






VW

 

[audreyh1]

Thanks audreyh1, I didn't realize that IRMAA only counts taxable SS into the MAGI calculation. That makes a difference in some cases.

Maybe I misunderstood-

VW

Yes, it’s a little break for us 65+ folks.