Author Topic: Taxable Investment account - Always Reinvest Dividends?  (Read 5519 times)

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Taxable Investment account - Always Reinvest Dividends?
« on: April 12, 2016, 07:37:52 AM »
Do you always reinvest your dividend in your taxable account? I know this may be a silly question, but as your investment grows on the taxable side, does anyone use it to fund lifestyle?  We have not taken a vacation since 2009, due to clearing debt and building up the war chest. Now that our financial position has steadied, I was thinking about turning off reinvesting dividends in the taxable account and using some of that to fund a modest vacation every year, and then reinvest the remainder, while still making contributions to the taxable account monthly like I normally do.

Is anyone doing anything like this or should I just set aside a modest amount of cash monthly for a vacation? Welcome any thoughts. 

seattlecyclone

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #1 on: April 12, 2016, 08:12:15 AM »
Money is fungible. You could spend some of your paycheck on a vacation while reinvesting dividends, or spend the dividends on a vacation while investing money out of your paycheck. There's no difference.

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #2 on: April 12, 2016, 08:14:41 AM »
Ok. Thanks for helping me to sort it out. Clearly over thinking on my end.

ZiziPB

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #3 on: April 12, 2016, 09:12:45 AM »
Whether you reinvest or not, the one thing I would strongly suggest is have your account set so that all dividends are paid in cash and not automatically reinvested.  It gives you a lot more control and doesn't cause inadvertent problems if you do tax loss harvesting.

Senor Smallchange Soulpatch

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #4 on: April 12, 2016, 09:37:47 AM »
I don't auto-reinvest dividends in my taxable account because you end up with a ton of small lots in each position which makes tax loss harvesting a pain in the ass.  Instead I just let them pile up in cash and a couple times a year allocate it in one chunk to whatever is most underweight relative to my target allocation.

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #5 on: April 12, 2016, 09:44:52 AM »
Auto reinvesting is nice because you're maximizing your time in the market. We pay for everything we do out of income from work (and still save on top of that every month) so there's no need to worry about using dividends.

Whether you reinvest or not, the one thing I would strongly suggest is have your account set so that all dividends are paid in cash and not automatically reinvested.  It gives you a lot more control and doesn't cause inadvertent problems if you do tax loss harvesting.

I don't need to TLH because of course I invest only in things that go up. ;)

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #6 on: April 12, 2016, 10:01:47 AM »
Most of my money is in tax advantaged accounts where tax loss harvesting is not possible, but I don't reinvested dividends automatically so I can use the $$ to rebalance my portfolio.

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #7 on: April 12, 2016, 10:08:32 AM »
I auto reinvest to keep the portfolio more automatic. I balance my allocations as I add new money. As many of the posters have already said though, there's really no wrong answer.

Were I in your position, I would probably reinvest everything and simply save money for your vacations out of regular income. That way you're ensured to maximize compounding. It's also good for developing the mental mindset that your investment portfolio is fairly sacred and unless you're at the point where you're relying on it for living income, it shouldn't be touched.

Just my 10 cents though. Do what works best for you given your situation.

acanthurus

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #8 on: April 12, 2016, 10:17:29 AM »
I don't auto-reinvest dividends in my taxable account because you end up with a ton of small lots in each position which makes tax loss harvesting a pain in the ass.  Instead I just let them pile up in cash and a couple times a year allocate it in one chunk to whatever is most underweight relative to my target allocation.

This is exactly what I do. I don't want an auto-reinvested quarterly dividend limiting my tax management strategies if the market tanks. I just let the cash stack up and maybe twice a year take the pooled dividends and buy whatever seems undervalued or gets me back to target allocation. Depending on my income next year I might start tax gain harvesting as well and consolidating smaller purchase lots into fewer, newer, higher cost basis lots. I'll just lump the pooled dividends into that as well.

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #9 on: April 12, 2016, 10:50:57 AM »

caveat: I've made a ton of "mistakes" over the years that I often learned were mistakes after reading this forum.  But the upside of the mistakes were that they were always just "less good" and not "bad".

That said: I always reinvested dividends.  Now, in retrospect I foresee this being a royal PITA sorting out the basis for a ton of small lots when I eventually sell them.  But what the hell, I've got records.

I'm now FIRE.  About a month before FIRE I switched it to NOT reinvest.  We now use that money as paycheck income. 

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #10 on: April 12, 2016, 10:54:21 AM »
That said: I always reinvested dividends.  Now, in retrospect I foresee this being a royal PITA sorting out the basis for a ton of small lots when I eventually sell them.  But what the hell, I've got records.

This is only a pain for dividends reinvested before 2011 (or whatever date brokerages were required to start keeping track for you). Going forward, the number of lots shouldn't make much of a difference. As long as you don't have a need to dispute the reported basis, you just transfer the total amounts from your 1099s to your Schedule D and call it good.

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #11 on: April 12, 2016, 10:56:48 AM »
I'll be the contrarian and say that I do reinvest dividends. My bank doesn't charge a fee for the reinvested sum and since I don't bother with tax loss harvesting it saves me a bit of money over the course of the year. 30 bucks is 30 bucks. 

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #12 on: April 12, 2016, 10:58:50 AM »
That said: I always reinvested dividends.  Now, in retrospect I foresee this being a royal PITA sorting out the basis for a ton of small lots when I eventually sell them.  But what the hell, I've got records.

This is only a pain for dividends reinvested before 2011 (or whatever date brokerages were required to start keeping track for you). Going forward, the number of lots shouldn't make much of a difference. As long as you don't have a need to dispute the reported basis, you just transfer the total amounts from your 1099s to your Schedule D and call it good.

Yeah, but they go way back before that.  Mine go back into the 90s.

This does bring up a side question... For my taxable index funds, I've always heard (and never followed the advice) to switch the accounting to "specified lots" instead of the default "average cost".  I've actually never sold any of my taxable index funds... so so far it hasn't ever mattered.  I'm just wondering how much of a pain it is to specify lots for pre-2011 purchases. 

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #13 on: April 12, 2016, 11:08:25 AM »
Wow. Seems like a definite mix of opinion. I guess the consensus is, that no matter what, to eventually reinvest the dividends until we are FIRE to avoid lifestyle creep or shenanigans with the dividends. I like the idea of it being disciplined.   

Senor Smallchange Soulpatch

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #14 on: April 13, 2016, 08:33:34 AM »

Yeah, but they go way back before that.  Mine go back into the 90s.

This does bring up a side question... For my taxable index funds, I've always heard (and never followed the advice) to switch the accounting to "specified lots" instead of the default "average cost".  I've actually never sold any of my taxable index funds... so so far it hasn't ever mattered.  I'm just wondering how much of a pain it is to specify lots for pre-2011 purchases.

If you were diligent in documenting each purchase and you have all of the information required to fill out Form 8949 it's a piece of cake.  Just use a new line for each lot and you're good to go.  It takes like 30 seconds per lot. 

If you're me, your bookkeeping from 20 years ago is shit, you were auto-reinvesting dividends back then, and you've transferred custodians a half dozen times between original purchase and sale... Then you get to spend hours digging though old paper statements, scouring the internet for historical quotes and dividend payout dates for those cases where you can't locate the necessary piece of paper, and manually fucking around with spreadsheets and such trying to reconstruct a halfway believable cost basis for the original purchase and the follow on reinvestments, all while praying that the IRS doesn't come knocking on your door at some point.

https://www.irs.gov/pub/irs-pdf/f8949.pdf

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #15 on: April 13, 2016, 09:14:21 AM »
Would ETFs be any easier for tax loss harvesting given that everything is in whole shares or does just the lot that you buy at a time matter for this?

Senor Smallchange Soulpatch

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #16 on: April 13, 2016, 09:49:22 AM »
Would ETFs be any easier for tax loss harvesting given that everything is in whole shares or does just the lot that you buy at a time matter for this?

Doesn't matter.

Sale proceeds = (# of shares * sale price) - commission
Cost basis = (# of shares * purchase price) + commission

Gain/loss = sale proceeds - cost basis

The # of shares can be 1, or 100, or 3.14159, or whatever... it doesn't have to be an integer.

Fractional ETF shares are absolutely a thing.  I have them in my IRA and Roth accounts because I am automatically reinvesting dividends there.  Every broker I've ever dealt with handles dividend reinvestment in ETFs by issuing fractional shares.

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #17 on: April 13, 2016, 10:44:10 AM »

Yeah, but they go way back before that.  Mine go back into the 90s.

This does bring up a side question... For my taxable index funds, I've always heard (and never followed the advice) to switch the accounting to "specified lots" instead of the default "average cost".  I've actually never sold any of my taxable index funds... so so far it hasn't ever mattered.  I'm just wondering how much of a pain it is to specify lots for pre-2011 purchases.

If you were diligent in documenting each purchase and you have all of the information required to fill out Form 8949 it's a piece of cake.  Just use a new line for each lot and you're good to go.  It takes like 30 seconds per lot. 

If you're me, your bookkeeping from 20 years ago is shit, you were auto-reinvesting dividends back then, and you've transferred custodians a half dozen times between original purchase and sale... Then you get to spend hours digging though old paper statements, scouring the internet for historical quotes and dividend payout dates for those cases where you can't locate the necessary piece of paper, and manually fucking around with spreadsheets and such trying to reconstruct a halfway believable cost basis for the original purchase and the follow on reinvestments, all while praying that the IRS doesn't come knocking on your door at some point.

https://www.irs.gov/pub/irs-pdf/f8949.pdf

I'm probably somewhere in the middle.  I have electronic records going back... but my diligence has been ever increasing since the beginning of time.  I also had some naivety that it was all just handled by the investment house back in the start.  It's taken me a while to learn that required accounting for basis is really a very recent thing for funds.

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Re: Taxable Investment account - Always Reinvest Dividends?
« Reply #18 on: April 13, 2016, 12:33:10 PM »
For someone starting out, where contributions can be used to rebalance, I'd favor reinvesting dividends because it's easier.

Once someone has assets approaching retirement levels, rebalancing with contributions becomes harder.  Then it might be time to stop reinvesting dividends.  You can then use dividends to purchase whatever has fallen, which helps keep your portfolio in the percentages you want.