Do you do automatic reinvest of dividends/gains in your taxable account?

[lilybluerose]

I've been reading about this all morning and am having trouble deciding what to do.

I maxed out my roth ira and my solo 401k. I have extra money I'd like to invest. I am going to do a taxable brokerage with vanguard starting with vtsax. I have to choose if I'll reinvest or let it go to my money market account.

I've read pros and cons of both and am still torn and confused. What do you do and why?

Keep in mind I'm not very saavy with this. I read a ton but have a hard time grasping it all. Ty!

[guelphinvestor]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

[MustacheAndaHalf]

Last year I sold my last mutual fund, and now only hold ETFs.  But before that, I did not reinvest dividends.  I prefer to decide where the money gets reinvested - usually to a bond fund, since stocks tend to pull ahead of bonds over time.  It's also easier to avoid "wash sales", where your dividend gets reinvested in a fund, and then you sell that fund for a capital loss.

(Non-REIT) Stock mutual funds tend to issue dividends quarterly.  So another way to decide is based on how often you login to your account, to buy/sell.  If you do that every few weeks or months, that's often enough to do it yourself.  If you login 2-3 times a year, maybe the convenience of reinvested dividends is worthwhile.

How about you try without reinvested dividends for 4 months (Mar & June dividends), and see what you think.  If you don't like investing the dividends yourself, you'll find out and can switch the setting.

[lilybluerose]

Do you think that will be an issue for me if I have an accountant who handles all of my tax stuff? I own a business as an LLC filed as an Scorp. No employees. Thanks!

[lilybluerose]

Last year I sold my last mutual fund, and now only hold ETFs.  But before that, I did not reinvest dividends.  I prefer to decide where the money gets reinvested - usually to a bond fund, since stocks tend to pull ahead of bonds over time.  It's also easier to avoid "wash sales", where your dividend gets reinvested in a fund, and then you sell that fund for a capital loss.

(Non-REIT) Stock mutual funds tend to issue dividends quarterly.  So another way to decide is based on how often you login to your account, to buy/sell.  If you do that every few weeks or months, that's often enough to do it yourself.  If you login 2-3 times a year, maybe the convenience of reinvested dividends is worthwhile.

How about you try without reinvested dividends for 4 months (Mar & June dividends), and see what you think.  If you don't like investing the dividends yourself, you'll find out and can switch the setting.

thats a good idea! I could definitely try it out! How often do you personally reinvest? Is there a limit?

[marcus_aurelius]

I've been reading about this all morning and am having trouble deciding what to do.

I maxed out my roth ira and my solo 401k. I have extra money I'd like to invest. I am going to do a taxable brokerage with vanguard starting with vtsax. I have to choose if I'll reinvest or let it go to my money market account.

I've read pros and cons of both and am still torn and confused. What do you do and why?

Keep in mind I'm not very saavy with this. I read a ton but have a hard time grasping it all. Ty!

If you don't need the money immediately, you should reinvest. That's what I've done over the last few years and my taxable account has grown into a monster. TBH, I can't think of a single con. Can you mention a few?

[NotJen]

I don't reinvest dividends automatically in my taxable account.  I like having the flexibility to make other choices.  If I want to tax loss harvest, I don't have to worry about stopping reinvestments.  Or last year, I had unexpected earned income, so I used my taxable dividends to put in my Roth tax free (very low income).  In the future, I may want to spend the dividends.

Most quarters, though, I just manually reinvest.

[lilybluerose]

Sorry one more question, when I go to set up, the only option I have besides reinvesting the dividends is "Transfer to your money market settlement fund" is this what you guys do? And just keep the money there until ready to invest it where you want? Thanks!!
"

[NotJen]

Sorry one more question, when I go to set up, the only option I have besides reinvesting the dividends is "Transfer to your money market settlement fund" is this what you guys do? And just keep the money there until ready to invest it where you want? Thanks!!
"

Mine goes directly to my checking account, but I set it up several years ago, so the options could have changed since then.

[tawyer]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

[Villanelle]

I auto reinvest because it is the most simple and makes sure it gets done ASAP.

It is no issue at all come tax time (and we do our own returns). 

[NotJen]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

It's all the same on your tax return.

It does potentially simplify your "tax lots" if you choose to lump in reinvestments with other contributions.  This was never a concern for me.

[lilybluerose]

Thanks so much everyone! I decided to try out reinvesting it myself for a few months. I think it will be helpful for me to actually see how this all works, and be a bit more hands on to learn, then eventually will probably go to automatic!

[celerystalks]

It sounds like you are in the accumulation phase. Better to reinvest. That way you don’t forget to invest the money.

Not sure about vanguard but at Fidelity it is possible to change from reinvestment to not reinvesting easily.  So it might be nbd to change it later.

[Much Fishing to Do]

In the accumulation phase I'd say reinvest unless you take an active roll in rebalancing.  I tried different ways and ended up automatically reinvesting the stuff that paid monthly/quarterly dividends, so it stayed invested, but not the stuff that generally just paid a single dividend at year end, plus I did not reinvest the end of year distributions from anything.  This way, toward the end of DEc I would end up getting a little pile of cash from all that that I would then turn around and use to help rebalance without having to sell anything creating a second taxable event on top of the dividend/distribution. 

I have all dividends and year end distributions going into the money market now just to build up cash as I close in on RE.

[MustacheAndaHalf]

How often do you personally reinvest? Is there a limit?

Since the pandemic began I check my investments most days.  For stocks/ETFs bought at Vanguard, the smallest investment is 1 share.  For example, iShares Total Stock Market ETF (ITOT) is $92.58/share, so the minimum investment is $92.58.

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

It's all the same on your tax return.

Someone who decides to sell a fund at a loss will have slightly lower taxes than someone who keeps automatic reinvestment going, and winds up triggering a wash sale.  Since quarterly dividends, when reinvested, would cause wash sales 8 months out of 12, it can be annoying to avoid.

[Morning Glory]

I am still working so I have mine set up to automatically reinvest when I can. I have a couple of funds that it doesn't work on (ones that got transferred in to vanguard from another brokerage) and the dividend goes to my settlement fund, but the amount is tiny.  Much easier than keeping track of it all.  I have some ETFs and individual stocks at Robinhood and Sofi and they both allow dividend reinvesting with partial shares.    Once I hit fire I will change it to withdraw the dividends and that will be about half of my SWR.

[bigblock440]

I just have it re-invest because you can't buy partial shares of ETFs otherwise, and my accounts are small enough that the dividends are all partial shares.

[seattlecyclone]

I'm FIREd and my taxable dividends tend to be less than I spend in a quarter, so I just let the dividends go straight to my checking account.

Even before that, I'd prefer to invest manually to have better control over wash sales, rebalancing, and not have millions of tiny tax lots to deal with.

[markbike528CBX]

When I was working and accumulating, all my index funds reinvested. Just set it and forget it.  I did (and still do) have some individual stocks that I sent the dividends to the cash sweep account.

As my last deposit to those funds was a long time ago, I don't have to worry about short-term,or long term holding.

In FIRE, I just take the taxable dividends for expenses.

[Telecaster]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

When you sell you have to calculate the cost basis.  It isn't that big of a deal these days, but back in the day--or if you switch brokers--you have to figure in all the purchases from the dividend reinvestments so you have to keep track of it.  I didn't know this, and have a stock that is basically unsellable because of it.

[markbike528CBX]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

When you sell you have to calculate the cost basis.  It isn't that big of a deal these days, but back in the day--or if you switch brokers--you have to figure in all the purchases from the dividend reinvestments so you have to keep track of it.  I didn't know this, and have a stock that is basically unsellable because of it.

Telecaster, you could assume cost basis 0, have all of it taxable, the IRS will gladly believe THAT  :-)   
if you are in or  will be in the 10 or 12% brackets, you are only taxed after 80,800 of capital gains.
If your are not in those brackets now, wait till you are, as in FIRE, you can adjust you taxable income to be in those brackets.

[tawyer]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

It's all the same on your tax return.

Someone who decides to sell a fund at a loss will have slightly lower taxes than someone who keeps automatic reinvestment going, and winds up triggering a wash sale.  Since quarterly dividends, when reinvested, would cause wash sales 8 months out of 12, it can be annoying to avoid.

I don't disagree that avoiding wash sales is annoying, even if it is only a few clicks. Nonetheless, someone who delays reinvestment is going to have slightly worse returns than someone who doesn't.

[tawyer]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

When you sell you have to calculate the cost basis.  It isn't that big of a deal these days, but back in the day--or if you switch brokers--you have to figure in all the purchases from the dividend reinvestments so you have to keep track of it.  I didn't know this, and have a stock that is basically unsellable because of it.

Fair enough. I had a similar problem with non-covered share lots, so it just made most sense to use those to set up my donor advised fund.

[seattlecyclone]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

It's all the same on your tax return.

Someone who decides to sell a fund at a loss will have slightly lower taxes than someone who keeps automatic reinvestment going, and winds up triggering a wash sale.  Since quarterly dividends, when reinvested, would cause wash sales 8 months out of 12, it can be annoying to avoid.

I don't disagree that avoiding wash sales is annoying, even if it is only a few clicks. Nonetheless, someone who delays reinvestment is going to have slightly worse returns than someone who doesn't.

Sure, but manual reinvestment gives you more control. If you own more than one fund, they're constantly moving away from your desired asset allocation. Instead of automatically reinvesting each dividend back into the fund from which it came, you can manually reinvest into whichever fund is underweight at the moment. That helps you rebalance without actually selling anything, and also leaves the funds you didn't reinvest into open for potential loss harvesting opportunities.

[tawyer]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

It's all the same on your tax return.

Someone who decides to sell a fund at a loss will have slightly lower taxes than someone who keeps automatic reinvestment going, and winds up triggering a wash sale.  Since quarterly dividends, when reinvested, would cause wash sales 8 months out of 12, it can be annoying to avoid.

I don't disagree that avoiding wash sales is annoying, even if it is only a few clicks. Nonetheless, someone who delays reinvestment is going to have slightly worse returns than someone who doesn't.

Sure, but manual reinvestment gives you more control. If you own more than one fund, they're constantly moving away from your desired asset allocation. Instead of automatically reinvesting each dividend back into the fund from which it came, you can manually reinvest into whichever fund is underweight at the moment. That helps you rebalance without actually selling anything, and also leaves the funds you didn't reinvest into open for potential loss harvesting opportunities.

Interesting point about rebalancing and TLH, thanks. "More control" sounds an awful lot like timing the market, as compared with set and forget.

So now we're comparing the merits of rebalancing once a month instead of once a year (some research shows rebalancing more frequently than annually doesn't improve performance) against leaving the money on the sidelines (research is pretty conclusive that the best time to buy was 30 years ago, second best time is today). I think leaving money on the sidelines and timing the market is the bigger risk.

[seattlecyclone]

Who said anything about timing the market or leaving money on the sidelines? All my taxable funds pay dividends in the last week of each quarter. I can log in on the first trading day after dividends are paid, invest in whatever my spreadsheet tells me is underweight at the moment, and no money is out of the market more than a couple of days. I'll believe the studies that show frequent rebalancing doesn't make much difference, but also why would I want to invest in a way that would de-balance my portfolio? Automatic reinvestment often does exactly that.

[yachi]

I used to reinvest my dividends, but I switched to getting the cash to simplify taxes

How does this simplify taxes?

When you sell you have to calculate the cost basis.  It isn't that big of a deal these days, but back in the day--or if you switch brokers--you have to figure in all the purchases from the dividend reinvestments so you have to keep track of it.  I didn't know this, and have a stock that is basically unsellable because of it.

Telecaster, you could assume cost basis 0, have all of it taxable, the IRS will gladly believe THAT  :-)   
if you are in or  will be in the 10 or 12% brackets, you are only taxed after 80,800 of capital gains.
If your are not in those brackets now, wait till you are, as in FIRE, you can adjust you taxable income to be in those brackets.

Better that this is if you can figure out approximately when the purchases were made (like, what decade).  When you fill out your taxes, you put "various" in the purchase date, and the average or maximum selling price during that decade.  I mean, you're honestly trying to tell them what you paid for it although you can't remember.  It sounds like this predates when brokerages were forced to report sales and cost basis, so no one has better information than you do about your cost basis.

[Telecaster]

Better that this is if you can figure out approximately when the purchases were made (like, what decade).  When you fill out your taxes, you put "various" in the purchase date, and the average or maximum selling price during that decade.  I mean, you're honestly trying to tell them what you paid for it although you can't remember.  It sounds like this predates when brokerages were forced to report sales and cost basis, so no one has better information than you do about your cost basis.

I can remember about when I got it, the shares were a gift from my grandfather.  I remember the dividend was $100, so I can probably back calculate the number of shares.   The company had a dividend reinvestment plan,  and I was smart enough to sign up for it.  However, I honestly didn't know you had to know your cost basis when you sold so I didn't save any statements.  To make things even more complicated, the first company got bought by a second company, which in turn was bought by a third company.   Along the way, the first company got sold and I no longer have any financial interest in it. 

[The 585]

I always was an automatic re-investor until last year when I switched dividends in taxable brokerage to go to my checking account. Love being able to avoid wash sales for tax harvesting (which I did big-time last March) and having the flexibility to choose which other bins to invest the dividends in... even if that may be to throw into an IRA you haven't yet maxed out.

Additionally, I've heard many people have the misconception about reinvesting dividends that you won't get taxed on them. That's not true. Dividends are taxed the same whether automatically reinvested or sent to your checking account.

[alcon835]

At the moment, yes I reinvest. Over time I suspect I'll eventually start taking those out to live off of.

[citizen24128]

I have about $200k in taxable investments in funds that I picked long ago, before I learned about low-fee index funds. I would not choose to purchase these investments again, but I have not sold them because I don't want to pay the taxes on those transactions.

Right now I have dividends reinvested, but this conversation is making me reconsider that. Should I instead divert dividends to my checking account and then reinvest that money in funds I actually WANT to hold (according to my investment plan)?

It sounds like a no-brainer, yet for some reason I've never thought of doing that before. Is there any tax (or other) consequence involved in this decision? The funds in question are: CWGIX, ANWPX, SMCWX, and NEWFX, in case that affects anyone's opinion. I would draw down these funds first during early retirement, but that time may be three or five years away.

[seattlecyclone]

I have about $200k in taxable investments in funds that I picked long ago, before I learned about low-fee index funds. I would not choose to purchase these investments again, but I have not sold them because I don't want to pay the taxes on those transactions.

Right now I have dividends reinvested, but this conversation is making me reconsider that. Should I instead divert dividends to my checking account and then reinvest that money in funds I actually WANT to hold (according to my investment plan)?

Yes. No reason to automatically purchase shares that you have made a conscious decision not to purchase anymore.

It sounds like a no-brainer, yet for some reason I've never thought of doing that before. Is there any tax (or other) consequence involved in this decision?

As long as you actually do invest the money instead of spending it, no real negative consequence. The tax code doesn't care whether shares you purchased were a result of automatic dividend reinvestment, manual dividend reinvestment, or anything else. The eventual capital gains you'll pay when you sell is the same either way.

A tiny exception would be if you're using average cost basis with those funds. The reinvestment will cause the average basis in your position to rise a bit, making the capital gains per share sold be less. The tradeoff is you'll have more shares to sell. The total amount of unrealized gain embedded in the fund on the dividend date will be the same whether you reinvest or not.

[citizen24128]

Thanks for these thoughts, seattlecyclone. I actually don't know offhand whether I'm "using average cost basis with those funds." I'll look into that. I'm still in the accumulation phase and have very limited understanding of cost basis; this will be a good excuse for me to learn.

It looks like unenrolling from automatic reinvestment requires a phone call to my broker. It doesn't look like I can make the change myself online. It also seems like what I need to request is for dividends AND capital gains to be diverted to my bank instead of reinvested. Just noting those things here in case they are useful to someone else or in case they spark further advice.