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Reinvesting dividends in taxable account? distributions of capital gains reinvested?

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  • Reinvesting dividends in taxable account? distributions of capital gains reinvested?

    My taxable accounts have a lot of stock index funds. I wish to increase my bond and cash allocation.  One way I wish to do this is to change my distribution option of my taxable account with vanguard.

    Currently I have my stock dividends automatically reinvested. I want to change this to have the dividends go directly into a money market and then I can either put this money into bonds or keep in cash = MM.

    My questions are:

    1. is it ok to simply select in vaguard to have the dividends automatically go into a money market? (distributed to MM)

    2. Will this hurt me in any way (taxes?) I think the taxes should be unchanged but I was not sure (asking accountant also).

    3. When I was looking online at the options it also looked as if there was a distribution option to change capital gains from automatically reinvested to distributed to a money market etc. What should I do here? My inclination is to leave this alone as I am worried this might generate taxes, but I don't know what this means exactly? I know you generate a capital gain if you sell shares of the stock index fund but I don't fully understand the distribution option for capital gains?

     

    Sorry for the dumb questions. I know I should know this by now and I am ignorant but I want to avoid errors. Thanks!

     

  • #2
    1.) This is fine. A lot of people (including me) do this to make TLH and re-balancing a little easier.

    2.) No change besides what small amount of interest you may earn from the MM.

    3.) If capital gains are distributed then the taxable event has already occurred. There are a few funds that will distribute capital gains. This is different than the capital gains you're thinking of when you sell a fund. Look at your 1099-DIV from last year and see if you had a number in Box 2a. If you do and you didn't sell any funds then one (or more) of your funds are distributing capital gains.

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    • #3
      Everything to money market.
      Or your bank if you don't usually hold a money market fund

      Comment


      • #4
        Thanks! I just got an email from my accountant and he agrees with CordMcNally and Peds. Here is his response:

        I asked if I should reinvest capital gains and he said this:
        "It won’t matter
        You will still be taxed on capital gain distributions regardless whether you reinvest them or take them in cash
        So if you are trying to be more conservative, you might take the capital gain distributions in cash as well as the dividends"
        Done! Thanks!

        Comment


        • #5
          Yeah, common question.
          Reinvestment should always be turned off.
          One you get to rebalance with new money.
          Two you avoid any potential wash sales when tax loss harvesting.

          Comment


          • #6


            1. is it ok to simply select in vaguard to have the dividends automatically go into a money market? (distributed to MM)
            Click to expand...


            Make sure that one of these occurs when you take distributions as cash

            1. You invest it in bonds.

            2. You use it to build emergency expense.

            3. You use it for day to day expenses.

            4. You buy additional equities or real estate or some other investment.

            5. You are active in TLH

            If you do not do anything then the cash accumulates and piles up and loses value due to inflation ( the bank interest rate is terrible and falling) while you miss out on market gains.

            I am a procrastinator and sometimes let cash pile up and do nothing till the time comes to invest it. This works well for my alternative investments where cash at hand is important but not in stocks where it sits idle and loses value. I don't do TLH so I have decided I would rather stay in the market all the time. Hence I have set up to automatically reinvest all my index funds as well as my single stock distributions, which occurs every 3 months. So have a clear plan of action before you make changes to your distributions.

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            • #7
              Thanks Kamban,

              yes, you are right. Too much cash risks underperformance, and that might be bad for some folks, but right now I have > 80% stock allocation and I really want this to be closer to 60-70% by the time I am a geezer.

              I hope to get to 70% stocks 30% cash/bonds gradually over the next 4 years + kill most of the mortgage and then possibly hit the eject button on the day job.

              But.......we will see what happens.

              Peds, CordMcNally and my accountant have the right option for me. I don't have a procrastination problem, I have a lack of cash/bonds problem.

              Most of our assets are in taxable stock index funds. Need tax-intelligent plan to increase cash/bonds. Reinvestment turned off = good for this doc.

              This forum is awesome by the way. Really nice to get a second, third opinion for FREE!

              Thanks!

              Comment


              • #8


                Most of our assets are in taxable stock index funds. Need tax-intelligent plan to increase cash/bonds.
                Click to expand...


                do you still have space in your 401k? put FI there until 100%.

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                • #9





                  Most of our assets are in taxable stock index funds. Need tax-intelligent plan to increase cash/bonds. 
                  Click to expand…


                  do you still have space in your 401k? put FI there until 100%.
                  Click to expand...


                  Nope. IRAs almost 100% bonds. Taxable savings >> IRAs

                  So, need some cash/bonds in taxable.

                  Thanks

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                  • #10
                    Not rIRA right?

                    then yes, munis in taxable.

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                    • #11




                      Not rIRA right?

                      then yes, munis in taxable.
                      Click to expand...


                      Correct!  Roth IRA has mostly stocks (small cap value index funds, REITs and value index funds). The Non-Roth IRAs are all bonds but this is a small percentage of overall portfolio.

                      Thanks

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