Reinvesting Dividends

[marko]

Running Bum, I was referring to my tax deferred account dividends. If getting the dividends from a tax deferred account is not permissible, than that pretty much ends it for me right there. The dividends I get from company stock are extremely small, because I typically sell of the majority of my shares for index funds that I'm already investing in.

I want to start a taxable account, but I just don't have enough to stretch out to make any significant or consistent payments to one. I would like to max out the 401K, and I can probably do that in about 2 years (with 3% raises). Or, I could just start taking any future raises and apply it to a taxable account. I'll have to evaluate the pro's and con's of that strategy.

Thank you all for the insight and knowledge.

If I'm reading your question correctly, you want to take your dividends and transfer them out of your tax deferred to a taxable account. You can only do that after age 59 1/2.

You CAN take your tax deferred dividends and deposit them into another account (savings/other funds) within the tax deferred account however.

 

[Golden sunsets]

Yes, brokerages take care of this now. However, there's another reason to not reinvest divs in taxable - it can create landmines (wash sales) when rebalancing.

Not that I want to violate the wash sale rule, but how is a wash sale discovered in the first place?

 

[Golden sunsets]

A sale in a taxable account and a purchase in an IRA can be matched up for a wash sale. This means the capital loss is disallowed on your taxes and the cost basis accrues to the shares in the IRA, where it is useless. A trap you don't want to fall into. A sale for loss in an IRA is all yours, so in that sense there is no wash sale in an IRA.

How is the wash sale when repurchased in an IRA detected?

 

[samclem]

If you plan to retire before 59.5 you will need to fund those years with taxable accounts.

In addition to the 72T route you mentioned, don't forget that you can withdraw your >contributions< to Roth IRAs at any time without paying a penalty (or tax--because you already paid it). That can be another source of funds (in addition to taxable accounts) to bridge the gap until you reach 59.5.

 

[Animorph]

How is the wash sale when repurchased in an IRA detected?

I don't know. If it's not in a single account you're probably on the honor system.

 

[RunningBum]

Not that I want to violate the wash sale rule, but how is a wash sale discovered in the first place?

If you buy and sell from the same brokerage, they can and will report the sale as a wash sale on the 1099. Not sure if they detect if you use the same brokerage but buy back in an IRA, but if you follow the rules that's a really bad way to take a wash sale. For wash sales not involving an IRA, you will eventually get the loss. If you buy back in an IRA, you lose the loss on the sale and since the repurchase is in a tax protected account, you have no way to get the loss later.

If you do it across different brokerages, or the brokerage doesn't recognize it across different accounts or doesn't recognize "substantially identical" funds, it's like a lot of things on your taxes, it's on your honor. If you get audited, you may get caught. Just like the IRS doesn't know if your charity deductions are accurate unless they audit you and ask for proof.