Author Topic: Vanguard Dividends (Re-Invest)  (Read 787 times)

Getmeouttahere

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Vanguard Dividends (Re-Invest)
« on: April 01, 2020, 01:24:55 PM »
All,

First of all thank you for all of your advice, especially during this weird (for lack of a better term) time. I recently set up three Vanguard accounts which include a Roth IRA for both my wife and I as well as a taxable brokerage account. In those accounts I am invested in VTI, VXUS, BND at roughly a 60/30/10 AA. My question is this; I am starting to see dividends reinvested in my transaction history. Which is good, I want them to be reinvested as opposed to them sitting in my money market settlement account. Im slightly curious on how this works with taxes. Does anyone know how the tax implications side of things go with dividends? Iím thinking it varies between types of accounts (tax sheltered and not) but Iím pretty clueless on if this is going to impact my taxes on a yearly basis and if so to what effect? Total balances in these accounts are roughly 20k in each Roth and 30k int the taxable.

secondcor521

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Re: Vanguard Dividends (Re-Invest)
« Reply #1 on: April 01, 2020, 01:48:16 PM »
Lots of people know the tax implications. :-)

Anything activity inside the Roth IRA (with the possible exception of wash sales) doesn't matter for tax purposes.  Generally speaking, the only time taxable things happen with a Roth IRA (and a traditional IRA) is when money crosses into our out of the IRA itself.  So dividends, investment purchases and sales, capital gains distributions, and interest payments inside a Roth IRA don't matter for tax purposes.  Things like contributions, distributions, rollovers, recharacterizations, and later in life QCDs and RMDs can and usually do matter for tax purposes.

In a taxable account, a dividend is a form of taxable income.  You'll get a 1099-DIV from Vanguard next January, and that you'll report on your tax return on one of the earlier income lines (2 or 3 I think).  Dividends can be qualified under certain circumstances, so you'll see on your 1099-DIV a box with "ordinary dividends" in it, and then a second box with "qualified dividends" in it, which is the subset of your ordinary dividends that qualify.

Qualified dividends are taxed preferentially (i.e., better than wages and better than ordinary dividends); the details are calculated either by your tax software or, if you're doing it old school by hand, on a worksheet in the instructions workbook which you'll have to hunt down.

If your dividends get reinvested, you can think of it as - and it gets treated as - them paying you the dividend, which gets taxed as described above, then you turning around and buying an additional lot of whatever investment you've directed them to buy.  The amount of the dividend becomes your cost basis for that lot, and later when you sell, you'll have a capital gain or loss based on the difference between your cost basis for that lot and whatever you sell it for.  When you sell, you'll have to fill out Schedule D (and maybe a supplementary form) and pay capital gains taxes or take credit for the capital loss.  Lately the brokers are required to keep track of your basis for you; these are called "covered shares"; Vanguard can tell you if your shares are covered or not (they probably are).  If you sell, you'll get a 1099-B from Vanguard the following January which will generally have all of the information for covered shares for you to report the sale.  If you have uncovered shares for any reason (unlikely at this point), then you'll need to keep track of your own basis.

Getmeouttahere

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Re: Vanguard Dividends (Re-Invest)
« Reply #2 on: April 02, 2020, 08:37:12 AM »
Thank you!