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Taxable Investment Fund - Capital Gain and Divdend Reinvestment?

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  • Taxable Investment Fund - Capital Gain and Divdend Reinvestment?

    Hello and thank you for taking the time to respond.

     

    I have recently opened up an individual Taxable Investment Fund with Schwab due to their low cost index funds.

    Question: Should I have the dividends and capital gains be automatically reinvested in the fund? I vaguely remember that this makes a difference when it pertains to a taxable vs tax-deferred account but can't remember where I read about that.

  • #2


    Question: Should I have the dividends and capital gains be automatically reinvested in the fund?
    Click to expand...


    It depends on your goals. Do you want to use the income for some other purpose or do you just want the investment to grow? If you reinvest, the reinvested amounts will increase your "basis" in the account, meaning you will have less gain to report when you sell it. That is because you will already have paid taxes on the dividends and CG you elected to have reinvested.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      I think his question is specific to 'automatic' reinvestment of dividends. For someone in the accumulation phase, the question is only relevant in a taxable account; for tax deferred / Roth accounts, automatic reinvestment seems like a good plan.

      Per my recollection, WCI suggests not doing it because it will generate a small SpecID lot to keep track of, and also might accidentally trigger a wash sale if you attempt tax loss harvesting.

      PoF and I discussed this briefly, as I recall that he didn't mind multiple small lots (since the brokerage firm tracks these reliably). But I'm sure he'd agree with the hassle of remembering when a dividend payout is due, and having to tax loss harvest accordingly.

      I hope this makes sense. Otherwise, an example might be easier to understand.

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      • #4




        I think his question is specific to ‘automatic’ reinvestment of dividends. For someone in the accumulation phase, the question is only relevant in a taxable account; for tax deferred / Roth accounts, automatic reinvestment seems like a good plan.

        Per my recollection, WCI suggests not doing it because it will generate a small SpecID lot to keep track of, and also might accidentally trigger a wash sale if you attempt tax loss harvesting.

        PoF and I discussed this briefly, as I recall that he didn’t mind multiple small lots (since the brokerage firm tracks these reliably). But I’m sure he’d agree with the hassle of remembering when a dividend payout is due, and having to tax loss harvest accordingly.

        I hope this makes sense. Otherwise, an example might be easier to understand.
        Click to expand...


        Ah, I see! In the overall scheme of things, I would not recommend such minute focus on TLH. But TLH rarely figures into our planning process, anyway, so I probably wasn't the right person to answer this question.
        Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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        • #5
          I reinvest dividends manually for TLH reasons mentioned above. And, as @TheAbacus said, use Specific ID or whatever Schwab calls it to have them track the cost of each purchase individually.

          I need to write up a through TLH post. I've been waiting for a good opportunity to do some TLH so I can grab screenshots, but the darned markets keep going up for the most part. I might just have to take a loss for a few hundred dollars to show how it's done.

          Cheers!

          -PoF

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          • #6
            I try to avoid dividends at all in any taxable account, its just a drag that isnt very useful at our income levels.

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            • #7




              I try to avoid dividends at all in any taxable account, its just a drag that isnt very useful at our income levels.
              Click to expand...


              Please excuse my ignorance, but I thought the only way to do that would be individual stocks?

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              • #8
                Sort of. Could hold BRK which one might argue is inherently diversified, being a massive holding company. Also could just not hold stocks at all and stick to municipal bonds.

                Also could use funds like VTCLX which are specifically designed to minimize dividend-paying stocks and minimize turnover (though nearly all passive index funds minimize turnover). VTCLX has a 5-yr tax drag of 0.67%, compared to 0.74% for VFIAX...so nothing really earth-shattering there.

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                • #9
                  Or pick etfs that have low/no dividends. Im sure there are "smart" beta etfs that will reliably track the market beta wise yet have no dividends at all or low enough it doesnt matter. QQQ is under 1%.

                   

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                  • #10


                    Could hold BRK
                    Click to expand...


                    That's the only individual stock I own. Bought it for the Zero dividend (although there's been talk that may change) and for the tickets to Buffettpalooza in Omaha every spring. I was on call this year, but might try to make it next year if my schedule allows.

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                    • #11


                      I need to write up a through TLH post. I’ve been waiting for a good opportunity to do some TLH so I can grab screenshots, but the darned markets keep going up for the most part. I might just have to take a loss for a few hundred dollars to show how it’s done.
                      Click to expand...


                      Yet another first world problem hah!

                      Also PoF I have to ask do you say cheers all the time IRL?

                      OP: I do not reinvest in taxable for purposes of TLH.  Dividends go to money market.

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                      • #12





                        I need to write up a through TLH post. I’ve been waiting for a good opportunity to do some TLH so I can grab screenshots, but the darned markets keep going up for the most part. I might just have to take a loss for a few hundred dollars to show how it’s done. 
                        Click to expand…


                        Yet another first world problem hah!

                        Also PoF I have to ask do you say cheers all the time IRL?
                        Click to expand...


                        Only when I'm drinking.

                        So... yes. Cheers!

                        But no, not really. Just sometimes. I'm on call this weekend, so I guess, ummm... see ya later.

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                        • #13
                          With covered shares and costs bases automatically tracked, automatic reinvesting of distributions is my default. TLH rarely gets in the way; the reinvested distributions are relatively small compared to any TLH I would do.

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