Mutual fund: better to reinvest cap gains/dividend

[soupcxan]

Hi all,
Recently started investing in mutual funds, and when I placed the orders I had the options to reinvest capital gains and dividends. I said yes to both. But now I am wondering about the long term implications of that decision.

1) Is reinvesting going to make my tax returns a nightmare down the road? Are lots of little contributions from the reinvestment going to make it hard to figure a cost basis when I do sell (hopefully many years down the road)?

2) For those mutual funds in a taxable account, do I need to pay taxes on gains and dividends each year, even if they're reinvested?

3) Is reinvesting going to make it harder to do my annual rebalancing...that is to say, would it be easier if I had the dividends/gains paid as cash and then could move them whereever I wanted, versus having to sell some of one fund that went above its allocation % to buy another fund whose % had dropped?

Thanks for any input! I found this thread while searching but it didn't quite answer my questions. http://early-retirement.org/cgi-bin/yabb/YaBB.pl?board=misc;action=display;num=1096916258;start=2

 

[azanon]

Re: Mutual fund: better to reinvest cap gains/divi

1) Nah. Are you using a program like quicken to track your investments? When i sell mutual funds, i just use the method the IRS prefers (cause it makes them the most money) which is FIFO (first in, first out). That method is also easier on you because the other methods can make keeping track of which ones you sold more complicated (such as average balance method).

2) You'll pay taxes on any distributions, be it dividends ST or LT capital gains, and that isnt affected by whether you reinvest them or not. ST and LT gains are generated cause the fund manager sold stock in the fund, not cause anything you did. With dividends, the companies that comprise the mutual fund paid those to the fund, and those were pass to you which are also taxed.

3) No, because the fund should go up in value anyway just due to appreciation of the companies that comprise the fund. If the fund manager just held everything (thus no LT/ST gains), you'd still have to deal with the rise.

Consider as much as possible the way I rebalance. I rebalance by just making new investments in the fund that's lagging, percentage wise. Usually I can keep them fairly well balanced just doing it that way, and that way triggers no taxable events .

 

[gindie]

Re: Mutual fund: better to reinvest cap gains/divi

1) Basis calculation - Just treat shares received via reinvestment as if you had paid cash for them. It's that simple.

Also, try not to purchase share of a fund right before its distribution date (many are nearing that time now). Wait until after the distribution.

 

[WilliamG]

Re: Mutual fund: better to reinvest cap gains/divi

Some mutual fund companies (i'm certain Vanguard) will supply you with average cost basis calculation when you sell fund shares. bill

 

[cute fuzzy bunny]

Re: Mutual fund: better to reinvest cap gains/divi

I *have* had some PITA situations where I had to pull out 5 years worth of statements and manually add up all the reinvested dividends, but that was when I was with ameritrade, who gives you nothing on average cost or gains information. I sold six funds all in one fund family in 2001 and had to go through a stack of paper a foot high over a 2 day period.

Quicken wouldnt have helped me with that either, as ameritrade's electronic reporting to quicken reports dividends and capital gains incorrectly sometimes.

As a good rule of thumb, while still working and portfolio building, you might consider reinvestment and dealing with the paperwork. It helps towards building the portfolio, and you're paying little bits of the taxes while you have an income stream. While retired you might consider taking the dividends and gains in cash, since you're going to pay taxes on them anyhow, and using that to reduce your capital withdrawals to make up your overall withdrawal rate.

In some cases (like mine), the dividends and gains thrown off by the funds might make up your whole withdrawal rate.