Author Topic: Reinvest dividends in taxable account?  (Read 5324 times)

Brawndo Salesman

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Reinvest dividends in taxable account?
« on: January 26, 2015, 10:20:30 PM »
I've read the Bogleheads Wiki article and I understand the merits of not reinvesting dividends in a taxable account.

My question is, for those who redirect dividends to a separate account (e.g. money market, bank account, etc.) with what frequency do you then use those funds to make new purchases in and/or rebalance your taxable account?

Is the strategy an annual one so as to limit additional tax lots?

What cost basis method do you suggest and/or use?

Initially, I had assumed that automatically reinvesting dividends would allow me the most worry-free method to deal with my taxable account but now, since I have learned a bit more, I'm not so sure.

I would appreciate some perspective on the issue.


MDM

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Re: Reinvest dividends in taxable account?
« Reply #1 on: January 26, 2015, 11:25:33 PM »
I've read the Bogleheads Wiki article and I understand the merits of not reinvesting dividends in a taxable account.

Which article is that?

One can understand a preference for holding income producing investments in a non-taxable account, but given that you have dividends in a taxable account why not simply reinvest them?

Presumably they will then generate more dividends, on which you pay a lower tax rate than on interest from a bank account.


MDM

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Re: Reinvest dividends in taxable account?
« Reply #3 on: January 26, 2015, 11:54:28 PM »
That is a good summary, although starting 01/01/2012 (google "covered shares") brokerages are required to keep track of the cost basis for all your lots so the first bullet point in the wiki isn't much of a bother.

The item "If you have difficulty maxing out tax-advantaged accounts from your paycheck, and taking dividends from your taxable account would allow you to max out your tax-advantaged accounts, you may want to take dividends in cash and use the cash to max out your tax-advantaged accounts" seems the most compelling.  If it applies to you, then not reinvesting makes sense. 

Otherwise, Keep It Simple and go for automatic reinvesting seems best, particularly for someone getting started.  YMMV.

For cost basis when selling, "identifying specific lots" will always allow you to make the best choice.  Usually that choice should be to sell the lots with the highest bases.  With the "covered shares" rule in effect, that should require no more than a few mouse clicks to select the desired lots.

Brawndo Salesman

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Re: Reinvest dividends in taxable account?
« Reply #4 on: January 27, 2015, 08:39:56 AM »
Ok so just to clarify identifying certain lots of shares based upon their original purchase value is only important when selling, correct?

In my taxable accounts I currently have a total US stock market index fund, an international stock index fund, and in another taxable account at another financial institution an S&P 500 index fund.

Total value of taxable ~$15,000 and less than 1.5 years of purchase history/reinvested dividends to account for.

I don't plan on completely parting ways with any of the funds anytime soon so am I correct in thinking that automatically reinvesting dividends won't make life too complicated?
« Last Edit: January 27, 2015, 08:42:34 AM by LW710 »

skyrefuge

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Re: Reinvest dividends in taxable account?
« Reply #5 on: January 27, 2015, 09:25:51 AM »
Ok so just to clarify identifying certain lots of shares based upon their original purchase value is only important when selling, correct?

Correct. Well, it's also nice if you're doing your own calculation of your personal rate-of-return, but that's just a vanity thing.

I don't plan on completely parting ways with any of the funds anytime soon so am I correct in thinking that automatically reinvesting dividends won't make life too complicated?

Yep, I think automatically reinvesting would make your life *less* complicated, since then you don't have to figure out what to do with every dividend payment.

In my case, I make a purchase in my taxable account every two weeks. Since my funds (and your funds) only distribute dividends four times a year (at most), the vast majority of tax lots in my account history are from new money rather than dividends. So the Bogleheads negative of "taking dividends in cash avoids creating a lot of small tax lots" doesn't make any sense in my case; the dividends have no substantial effect on the size of my transaction history list, because it's already quite large. Also, at this point with my relatively large account balance, my quarterly dividend payments are larger than my biweekly contributions. So my dividend reinvestments are neither "small" nor are there "a lot" of them.

GGNoob

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Re: Reinvest dividends in taxable account?
« Reply #6 on: January 27, 2015, 10:39:44 AM »
I invest in ETFs in most of my accounts. I use dividends in all accounts to rebalance, so dividends always go to my money market account. I'll make purchases with that money as soon as I have enough to buy another share of something.

With Vanguards new $1 minimum purchase for additional investments, I can see it being really easy to rebalance with dividends when you invest in several funds.

seattlecyclone

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Re: Reinvest dividends in taxable account?
« Reply #7 on: January 27, 2015, 01:25:45 PM »
I manually reinvest dividends. It lets me "rebalance" by putting the money toward funds that are underweight according to my desired asset allocation, rather than blindly plowing that money back into the fund from whence it came. I agree that avoiding multiple small tax lots is much less of a concern now that brokers have to track and report your basis.

Brawndo Salesman

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Re: Reinvest dividends in taxable account?
« Reply #8 on: January 27, 2015, 08:13:51 PM »
Thanks everyone for the advice! I'm not even 12 months into my self education in personal finance and investing so it's good to learn information and strategies like this.

While my taxable account will be useful, my immediate goal is to gradually max out my tax-advantaged accounts. Still I feel it's important to know how to use and have a purpose for every tool in my toolbox otherwise...why do I have it, right?