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Re-investing dividends in taxable account

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  • Avatar treedoc4 
    Participant
    Status: Physician
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    Joined: 12/01/2018

    Currently I am re-investing dividends in my Vanguard taxable account and make regular monthly investments. I know this will create a lot of small tax lots, but how much of a problem is this really? I always assumed that the overall benefit of period and regular investment would overcome any tax issues created, however I have never really figured out the true cost or consequences. Is there a better strategy?

    #227395 Reply
    Lordosis Lordosis 
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    Status: Physician
    Posts: 1863
    Joined: 02/11/2019

    I read about this tax lot issue and when I started my taxable account I did not reinvest.  Someone on this forum set me straight a few months ago.  It is all tracked now by the brokerage companies so who cares.  Just reinvest and remember to turn it off if you are going to TLH if it it is going to cause a problem.

    “Never let your sense of morals prevent you from doing what is right.”

    #227398 Reply
    Avatar Panscan 
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    Status: Resident
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    Joined: 03/18/2017

    Not an issue. Company organizes all the tax crap

    #227401 Reply
    Faithful Steward Faithful Steward 
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    Status: Financial Advisor, Small Business Owner
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    Joined: 06/12/2017
    Splash Refinancing Bonus

    Small tax lots are not really an issue now that custodians provide such accurate tax lot information.

    Michael Peterson, CFP® | Faithful Steward Wealth Advisors
    https://ProsperousPhysician.com | (717) 496-0900

    #227411 Reply
    Liked by CordMcNally
    Avatar NutADuc 
    Participant
    Status: Other Professional
    Posts: 41
    Joined: 08/29/2016

    Been learning a lot about all these things just from reading WCI posts and forum questions and answers.

    I understand that it is better to have tax efficient funds in a taxable. Would, say, a vanguard total index fund be a good fund to have in a taxable or are there other mutual funds that are better?

    Say you buy and hold because you are not ever planning on touching your taxable investment until closer to retirement (20 yrs from now at least), and you have your dividends and gains reinvested, at the end of each year would you have to pay taxes on those gains/dividends? or would you pay taxes only once you sell (say at retirement, then get taxed as LTCGs)? Is that why it is called a taxable account?

    Where does tax lost harvesting play into this? would you have to keep your eye on your taxable account to see which ones are loosing and then sell those? How does that work if you only have 1 index fund in there like say an SnP 500 fund? How do you tax loss harvest on a fund like that?

    Also, what does TLH stand for?

    thanks so much!

    #227443 Reply
    Lithium Lithium 
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    Status: Physician
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    Joined: 02/15/2016

    Unable to quote on mobile:

    Vanguard Total US Stock is very tax efficient. You might do a little better with international, but it probably depends on your tax rate.

    Dividends are taxed annually, but capital gains are only taxed at time of sale.

    Small tax lots can be an issue with the wash sale rule in tax loss harvesting. One reason I don’t reinvest dividends. I just direct them all to rebalancing by buying whatever hasn’t been performing well lately.

    #227446 Reply
    Avatar Peds 
    Moderator
    Status: Physician
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    Joined: 01/08/2016
    You might do a little better with international,

    Click to expand…

    technically its worse. not a game changer, but still worse.

    Would, say, a vanguard total index fund be a good fund to have in a taxable or are there other mutual funds that are better?

    Click to expand…

    yes. few are better. many are worse.

    at the end of each year would you have to pay taxes on those gains/dividends?

    Click to expand…

    no. yes.

    or would you pay taxes only once you sell (say at retirement, then get taxed as LTCGs)? Is that why it is called a taxable account?

    Click to expand…

    taxes are a yearly ongoing issue. every move you make has tax implications. hence not tax advantaged.

    Where does tax lost harvesting play into this?

    Click to expand…

    if you have a loss you harvest it.

    would you have to keep your eye on your taxable account to see which ones are loosing and then sell those?

    Click to expand…

    yes

    How does that work if you only have 1 index fund in there like say an SnP 500 fund?

    Click to expand…

    if its at a loss you sell it and either sit out in cash or buy something not completely identical.

    Also, what does TLH stand for?

    Click to expand…

    you already wrote it out above.

    #227448 Reply
    Liked by G
    Avatar NutADuc 
    Participant
    Status: Other Professional
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    Joined: 08/29/2016

    Hahaha. Peds, thanks so much for the clarification.

    For the TLH, what if i want to keep things very simple and just invest in the vanguard total stock fund and set my gains/dividends to reinvest and not tax loss harvest because i don’t like selling even when i have losses because i just want to keep buying the same index fund even during down turns and go long (essentially dollar cost averaging) and then just paying taxes each year on the dividends that i get, would that be a bad move? if so, how bad?

    Thanks!

    #227454 Reply
    Lithium Lithium 
    Participant
    Status: Physician
    Posts: 1177
    Joined: 02/15/2016
    You might do a little better with international, 

    Click to expand…

    technically its worse. not a game changer, but still worse.

    Click to expand…

    I agree that for most people, VTI>VXUS.  I’ve kept a spreadsheet modeled after this one from bogleheads that I’ve customized for my own purposes and updated at least twice a year.

    I’ve made the following conclusions in regards to asset location:

    – Vanguard international funds aren’t great in a taxable account because of their QDI ratios.  I’m partial to the Schwab alternatives.

    – The higher the income/tax brackets, the less tax efficient international becomes because of the ordinary dividends.

    – TSM generally comes out ahead of international, but if you are a tilter, once you get done with TSM, what is most tax efficient (US value, international, EM, etc) is pretty variable from year to year and depends on the particular fund or ETF.  The size factor doesn’t seem to affect tax efficiency very much.

     

    #227458 Reply
    Liked by Peds
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1863
    Joined: 02/11/2019

    Hahaha. Peds, thanks so much for the clarification.

    For the TLH, what if i want to keep things very simple and just invest in the vanguard total stock fund and set my gains/dividends to reinvest and not tax loss harvest because i don’t like selling even when i have losses because i just want to keep buying the same index fund even during down turns and go long (essentially dollar cost averaging) and then just paying taxes each year on the dividends that i get, would that be a bad move? if so, how bad?

    Thanks!

    Click to expand…

    Tax loss harvesting is not going to budge the needle much.  At most you are going to save a couple of grand a year and even then the tax is just deferred not really prevented.  Yes it is beneficial to do but if you ignored it completely you would still be better off then 90% of others.

    Read this.  Just load up VTSAX

    https://jlcollinsnh.com/stock-series/

    “Never let your sense of morals prevent you from doing what is right.”

    #227466 Reply
    Liked by RocDoc
    Avatar NutADuc 
    Participant
    Status: Other Professional
    Posts: 41
    Joined: 08/29/2016

    Thanks so much Lordosis. I feel more prepared now!

    #227468 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1800
    Joined: 01/08/2016

    ” even then the tax is just deferred not really prevented”

    huh?

    #227518 Reply
    Lordosis Lordosis 
    Participant
    Status: Physician
    Posts: 1863
    Joined: 02/11/2019

    ” even then the tax is just deferred not really prevented”

    huh?

    Click to expand…

    Tax loss harvesting just lowers your basis.  You will need to pay that tax when you sell those funds.

    “Never let your sense of morals prevent you from doing what is right.”

    #227521 Reply
    Avatar NutADuc 
    Participant
    Status: Other Professional
    Posts: 41
    Joined: 08/29/2016

    Another question. What is a tax lot? Does that have to do with keeping track of the dividends you get then calculating how much in taxes you will have to pay at tax time for that year?

    #227525 Reply
    Avatar G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1800
    Joined: 01/08/2016

    ” even then the tax is just deferred not really prevented”

    huh?

    Click to expand…

    Tax loss harvesting just lowers your basis.  You will need to pay that tax when you sell those funds.

    Click to expand…

    Right, but it also lowers your taxable income or lets you pay less tax on other realized gains.

    I’m not one of the folks who does micro-managing of TLH partners, but if there’s a significant pullback, I’ll take the time to save some money.

    #227540 Reply

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