Taxes on dividends earned in Taxable Account

[bornInFlorida]

I own mutual fund (VTSAX) in a taxable account at Vanguard. I have setup the dividends to be auto invested. I am aware that even though I have dividends to be be auto invested, I’ll still have to pay taxes on dividend earned. I wanted to know the best way to set aside cash (or at least budget this expense) so it doesn’t catch me off guard during tax time. One option is that I set aside about 33% of the dividend earned for taxes in my budget so I have the cash sitting aside come tax time. This should cover the federal and state portion of taxes for the dividend earned. Any other ideas or optimizations here? Also, is there any way to defer or avoid the tax?

Thank you in advance.

[RWD]

If you're a normal W2 employee you can just have more withheld from your paychecks to account for taxes on investment income. Do you have enough in a taxable account and a high enough income that the taxes are significant? Qualified dividends are taxed at a lower rate than your normal income bracket.

[bornInFlorida]

Thanks @RWD. Good suggestion. I do expect to receive about $10K a year in dividends. Will adjust my W2 accordingly.

[Much Fishing to Do]

Agree with RWD.  Nice thing about the W-4 withholding form is it has that line after the one where you put your number of allowances where you can have withheld an additional exact dollar amount withheld so this can be done very easily and precisely.

[bornInFlorida]

@Much Fishing to Do Thank you. Excellent point as well. Might use the option you mentioned.

[MustacheAndaHalf]

VTSAX will mostly generate "qualified dividends", which are taxed like long-term capital gains: 15% for most people (Federal).  So 20% might be a more accurate estimate of Federal and State taxes on dividends.

[bornInFlorida]

Thanks @MustacheAndaHalf