Feeding the dividend-tax monster

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No mention of Option C: invest differently, so that less of value created annually gets distributed as dividends, and more is reinvested back into the company? There are, one hears, equity funds that specialize in doing this. But they tend to have higher expense ratios and rather lackluster cumulative progress.

As to the quip about trolling, I shall forebear from taking offense. But I do wish that folks would realize, that Financial Independence merely means having no literal necessity to work. It doesn't mean self-absolution to start enjoying one's money, or to conclude the stage of life, that made accumulation possible in the first place.
That is not the option you think it is.* Eventually, if you want to receive spending money from your investments, you have to either take dividends or sell and take capital gains. QDIVs and LTCGs are taxed the same. You seem like you want to let the tax tail wag the investment dog. I will always take more money, even if it means I have to pay taxes.

I didn't say anything about trolling in my earlier post. But, since you asked, maybe that was not your intent, but it comes across that way.

*and I will note that was one of the first things suggested to you by other members.
 
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-You invest for income in order to pay your expenses.
-Taxes are one of your expenses.

Not seeing the problem. 🤷‍♂️
Well, with all due respect, that's the disagreement right there. Why do we invest? Is it to sustain our lives? To improve our lives? Or for other reasons? Smith is a creature of my imagination, more determined, or more zealous - if that's the right term - than me personally. But yes, there are similarities. Smith is hell-bent on maximizing his wealth, whereas I'm more realistic and more chastened by life's vicissitudes. For Smith, the problem is that as he grows wealthier, his capacity to further his wealth, diminishes... and that's frustrating, is it not?
 
That may be so, but what's his cardinal mistake (and please don't say, living in California)? Remember, that he already maxed-out whatever IRAs or 401Ks were available to him. And he already uses index funds instead of mutual funds, to minimize the tax-drag.


The problem is that we're conditioned essentially from birth, to keep accumulating and saving. If Smith were 70, OK, relax and enjoy. 60? Not so clear. 50? Forget about it! So, Smith wants to save more, to keep adding to his portfolio.. but he can't, because the tax monster consumes the available resources from his W2.
Then the real problem is not a math/tax problem but one between Smith's ears. There's some weird circular argument going on up there.

Even for someone math challenged like myself, this is incredibly simple: stop reinvesting the dividends and use X% of them to pay the taxes. Then continue to save from the W2 if you want. That's it!
 
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Well, with all due respect, that's the disagreement right there. Why do we invest? Is it to sustain our lives? To improve our lives? Or for other reasons? Smith is a creature of my imagination, more determined, or more zealous - if that's the right term - than me personally. But yes, there are similarities. Smith is hell-bent on maximizing his wealth, whereas I'm more realistic and more chastened by life's vicissitudes. For Smith, the problem is that as he grows wealthier, his capacity to further his wealth, diminishes... and that's frustrating, is it not?
OK, so the more his wealth grows, the higher tax rate he pays on additional taxable income at the margin. What else is new?

He could have been slightly more tax efficient even though equity index funds are already quite efficient. Switching over to something that generates no income won’t be painless tax-wise assuming he has large unrealized gains. And new money can be invested in a more tax efficient way particularly by not reinvesting dividends in anything that generates income. And he’s maxed out IRAs etc. and with SS he might have set himself up for a big future tax torpedo so he’ll probably be even more unhappy. In spite of all of this he is still ahead in his game.

Frustration? Geez, get a life. Dividend tax monster indeed!
 
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Why can't Smith take the divs in cash rather than reinvest and pay the tax out of that?

Never mind, already asked and (poorly) answered before.
That’s what I did. Dividends went from reinvesting my working years to direct deposit when I retired. As others have said, growth stocks, muni’s, equities that don’t pay dividends - but lots of taxes to exchange into them. First world problem.
 
My Dad (enlisted military and not "traditionally wealthy") was listening to me gripe about taxes one day and told me in not so many words to "shut up, if you're paying lots of taxes, you're making lots of money". I started to have the myriad of discussions on tax minimization, etc, but then realized he was just giving me another of the many great lessons in life that he gave me so many times!

Just pay the 15% Div tax and live!

Flieger
 
My Dad (enlisted military and not "traditionally wealthy") was listening to me gripe about taxes one day and told me in not so many words to "shut up, if you're paying lots of taxes, you're making lots of money".

realized he was just giving me another of the many great lessons in life that he gave me so many times!
My dad was an accountant and said this many times, and I've repeated it in many situations. It's always better to make the money and pay the taxes than to not make the money.

Back when I was a medical resident, we had endless opportunities to moonlight in doctors' offices for substantial compensation. Some of my fellow residents refused to moonlight because it would put them in a higher tax bracket. Me? I took every job I could handle. I was making $50/hour in 1991 which was a lot of money back then. Sure I had to pay taxes on it but who cares?

OP, count me among the others who have replied not understanding what problem exists here. If dividend income is so high that current income can't cover the taxes, that's an amazing problem to have and a clear sign that you're all set for retirement. Age is irrelevant.
 
The thing is: very few people, even those who are able to invest 50% of their W2 income, are able to achieve Massive Wealth from that source alone.
By Massive Wealth, I mean investible assets of 100x or more of your nominal salary.

So for someone making $200k of W2 income, that would mean $20M+ of investments.
To achieve that level, one typically gets a large inheritance or early ownership in a company that explodes in value.

I may use Taxcaster to examine what happens to a person with Massive Wealth who continues to work at a good paying W2 job...
 
My dad was an accountant and said this many times, and I've repeated it in many situations. It's always better to make the money and pay the taxes than to not make the money.
That's obvious, and I agree it's not worthy of complaining. But it doesn't negate the desire to be as tax efficient as possible with the money you make...it can make a significant difference.
 
No mention of Option C: invest differently, so that less of value created annually gets distributed as dividends, and more is reinvested back into the company? There are, one hears, equity funds that specialize in doing this. But they tend to have higher expense ratios and rather lackluster cumulative progress.

...
Smith just needs to turn off the reinvestment for the funds. Then take the cash that is generated and buy BRK.B each year, along with pay the taxes due. This will halt the dividend number from growing larger.

If Smith wants to reduce the dividend number, it means sell some fund, pay capital gains tax (and all the other extra taxes), and Buy BRK.B
 
Well, with all due respect, that's the disagreement right there. Why do we invest? Is it to sustain our lives? To improve our lives? Or for other reasons?
WADR back, if Smith doesn't know why he is investing, how am I supposed to?
 
Well, with all due respect, that's the disagreement right there. Why do we invest? Is it to sustain our lives? To improve our lives? Or for other reasons? Smith is a creature of my imagination, more determined, or more zealous - if that's the right term - than me personally. But yes, there are similarities. Smith is hell-bent on maximizing his wealth, whereas I'm more realistic and more chastened by life's vicissitudes. For Smith, the problem is that as he grows wealthier, his capacity to further his wealth, diminishes... and that's frustrating, is it not?
I think the issue many here are struggling with is that tax rates on wages are much higher than tax rates on capital, so if Smith is using most of his salary to pay taxes on investment, something is wrong. If he wants to reduce his relative tax load he needs to cut back on earned income.

Why do we invest? Well, here at ER Forum, it’s to replace salary with investment income.
 
That's obvious, and I agree it's not worthy of complaining. But it doesn't negate the desire to be as tax efficient as possible with the money you make...it can make a significant difference.
Agreed. And I'm really surprised by OP's hypothetical because if they are truly in 3 index funds, the dividends can't be that high unless they have many millions invested. One benefit of index funds is their inherent tax-efficiency. And if they do have many millions invested, that's great and it's time to start enjoying what they've accomplished.
 
Well, with all due respect, that's the disagreement right there. Why do we invest? Is it to sustain our lives? To improve our lives? Or for other reasons?
We have invested throughout our lives to secure our future and create a situation where I didn't have to work until I died. Once we achieved that amount in our portfolio, I retired.

If you are investing simply to see how much you can accumulate before you die, that's quite sad to me.
 
My Dad (enlisted military and not "traditionally wealthy") was listening to me gripe about taxes one day and told me in not so many words to "shut up, if you're paying lots of taxes, you're making lots of money". I started to have the myriad of discussions on tax minimization, etc, but then realized he was just giving me another of the many great lessons in life that he gave me so many times!

Just pay the 15% Div tax and live!

Flieger
If I were just paying the 15% div tax, it wouldn't be a problem. What is a problem is NIIT, yet another higher IRMAA bracket, 24% fed on ordinary, 6.75% state on most of my retirement income and on cap gains to go along with over 20K in property taxes on properties with an overall value of maybe 800K.

See, that's the problem here on ER.org. Some are sitting out there saying "what's the problem" while taking advantage of ACA or MFJ rates and sitting in million dollar + homes...all at the same time telling others to quit b*tching about their taxes.

I'm not saying that is you, but I am saying people typically look at things from their own perspective while not fully understanding where others are at.

ETA: If I were offered the ability to convert ALL of my tIRA and cap gains at a 20 or even 25% rate (all in), I would just do so and be happy about it, and would not come here to complain about it.
 
See, that's the problem here on ER.org. Some are sitting out there saying "what's the problem" while taking advantage of ACA or MFJ rates and sitting in million dollar + homes...all at the same time telling others to quit b*tching about their taxes.
I don't think responders here are sitting here like fat cats saying "what's the problem" in the context that you describe.

I think we (at least myself) are honestly having a hard time seeing any problem at all. OP is presenting a situation almost as if he's never heard of having to pay taxes on income before, yet the solution is quite simple.

I keep thinking this is some kind of trick question but it sounds more like some sort of circular logic or willful blind- spot.
 
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If I were just paying the 15% div tax, it wouldn't be a problem. What is a problem is NIIT, yet another higher IRMAA bracket, 24% fed on ordinary, 6.75% state on most of my retirement income and on cap gains to go along with over 20K in property taxes on properties with an overall value of maybe 800K.

See, that's the problem here on ER.org. Some are sitting out there saying "what's the problem" while taking advantage of ACA or MFJ rates and sitting in million dollar + homes...all at the same time telling others to quit b*tching about their taxes.
Thank you for noting this. Not all index-fund proceeds are qualifying dividends. Then there's the state income tax, which doesn't distinguish between dividends and earned income. Then there's the international equity index (part of the BH 3-fund portfolio), where one can get back the foreign taxes paid (mostly), but the dividend rate is high, and quite a bit of it is non-qualifying. Finally, most folks here are married, and consequently enjoy the marital tax benefits (recognizing that this is varied and contentious... I don't mean to stir that pot!).

And to your point, wise people bought houses in growing areas n-number of years ago, and are sitting on handsome housing-gains, often with annual caps on property tax increases. Not all of us are wise. Smith likely isn't. I'm certainly not. The most painful tax of all, is the stupidity tax.

So the lament isn't wha-wha-wha, woe-is-me, I darn gotta pay that thar them taxes... but that Jones and Smith have comparable net worth, but Smith pays 3X/year more than Jones. Can we blame Smith for getting peeved and frustrated?
 
Smith should buy a house, so Smith can join us in complaining about paying real estate taxes @ 2% of the unrealized value of the house ( Illinois ). :banghead:

Smith should also move that international fund to a taxable account, so get a foreign tax credit that can be used.

Smith should advertise the wealth (high) , and the marriage issue will be solved due to the number of suitors suddenly appearing out of the woodwork ;) 🤣
 
So the lament isn't wha-wha-wha, woe-is-me, I darn gotta pay that thar them taxes... but that Jones and Smith have comparable net worth, but Smith pays 3X/year more than Jones. Can we blame Smith for getting peeved and frustrated?
This is new, not the problem you brought up in the OP. The OP was “working just to pay taxes on dividends”, this is “Smith pays more than Jones”.

Smith is confused, and now so am I. Maybe you should lay out this problem with some numbers so we all can have a more thorough discussion.
 
Perhaps part of Mr. Smith's dilemma is that he apparently thinks there should be a wealth tax rather than a tax on realized income. The solution is easy - if he doesn't want to pay income tax, he should arrange his affairs so as to minimize taxable income. That means trading the mutual funds for ETFs and keeping all investments in the most tax efficient locations. The rules of the game are clear, and the resolution is easy. If he is unwilling to do that, I'm unwilling to sympathize.

P.S. - In my state of CT, as I believe is common in most of the states in the USA, we pay real property tax (which is a wealth tax) on the current assessed value of the house. It doesn't matter if I bought it 30 years ago or yesterday. Property is reassessed every 5 years, but the mill rate changes every year. Currently, the mill rate in my town is 29.14 The assessed value of my house is supposed to be 70% of current market value, so that means I pay about 2.04% of the market value of my house every year. And, unlike financial assets, my house does not generate any income that I can use to pay that tax. So Mr. Smith should not be so jealous of homeowners.
 
Smith is paying what some people would call a "Success Tax". Like becoming a senior citizen, it usually beats the heck out of the alternative.
 
Huh? Why not? Sure it can. If someone doesn’t need to work anymore then it’s time to open one’s eyes and see what else our life can offer!
Hear, hear!

And if "not w*rking" anymore bothers you, you can always volunteer your time at the homeless shelter or help the disadvantaged do their taxes or a thousand other non-paid gigs. Lots of stuff to do to help others for no salary. (Heh, heh, not to say that's what I do.) :cool:
 
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