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Reinvest Dividends & Capital Gains?

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  • Squints Squints 
    Participant
    Status: Physician
    Posts: 1
    Joined: 11/07/2018

    Hi everyone,

    I started my first attending job this summer, and am set to max out my and my wife’s 401ks and Roth IRAs for this year (no taxable yet, still a ways to go on student loans). After reading a PoF post today, I am wondering what the disadvantages and advantages are of reinvesting dividends and capital gains, and what most people prefer to do themselves. Our portfolio at this point consists solely of index funds, following the Three Fund Portfolio.

    I am using brokerage accounts to have access to better investment options for our 401ks. Each time I place an order to buy shares, it asks if we want to reinvest our dividends or capital gains.

    I would think that holding capital gains as cash would be beneficial in a taxable account in order to help pay capital gains taxes, but unsure about tax advantaged accounts.

    Thanks for any and all input!

    #172107 Reply
     Peds 
    Participant
    Status: Physician
    Posts: 2110
    Joined: 01/08/2016

    In tax advantaged reinvest. In taxable don’t

    #172110 Reply
     MaxPower 
    Participant
    Status: Physician
    Posts: 192
    Joined: 02/22/2016

    Agree with @peds. Part of the significant gains you’ll see over time in your tax deferred and Roth accounts is due to reinvestment of capital gains and dividends.

    For taxable, I have those go to cash, and then reinvest when I get a nice round number (usually $10,000 every couple of months) with combined dividends/capital gains and new money. Makes keeping track of lots for tax purposes simpler, IMHO.

    #172117 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2038
    Joined: 01/14/2017
    Earnest refinancing bonus

    Lots are tracked by the brokerages by law. Reinvest away. Plenty of good reasons to do so, including not missing out on returns.

    #172119 Reply
    Liked by Kamban
    Molar Mechanic Molar Mechanic 
    Participant
    Status: Dentist, Small Business Owner
    Posts: 242
    Joined: 10/29/2017

    Inconsequential gains for reinvesting.

    Significant reduction in complexity if you should need to TLH.

    I reinvest in 401k, Roth IRA, DB, TSP, 529, and FSA.

    In taxable I let it accrue till I make a new purchase.  That dollar amount has never grown past low 3 figuress.

    #172126 Reply
    ENT Doc ENT Doc 
    Participant
    Status: Physician
    Posts: 2038
    Joined: 01/14/2017

    Hard to say inconsequential gains unless you do the analysis. The longer your money is out of the market, on the average, the worse your performance. I agree that this isn’t the make or break factor with respect to getting you to FI, but I have a hard time buying the complexity argument when there are typically 4 dividend distributions per year in any given mutual fund. Want to TLH? Just look at the lots that are in the red. Pretty easy.

    #172145 Reply
     Larry Ragman 
    Participant
    Status: Other Professional
    Posts: 264
    Joined: 08/30/2018

    I am with ENT doc, but part of this for me is a bias towards simplifying my investment process. So, I auto invest and auto reinvest in both tax deferred and taxable.

    I readily admit that having dividends and capital gains go to a cash account has some nominal efficiency in terms of both avoiding wash for TLH and in redeploying for rebalancing, and I occasionally consider shifting to that approach. For now though, I am happy with the AA so no need to rebalance (most of the money is in tax deferred in target retirement funds) and I only TLH when there are significant downturns.

    One thing on TLH though. If you just sell the red lots, it is still good to look at when your next dividends are due for those funds. If you can choose a TLH opportunity that is not within 30 days of a payment that will avoid the wash issue.

    #172172 Reply
    Liked by ENT Doc
     Kamban 
    Participant
    Status: Physician
    Posts: 1718
    Joined: 08/01/2016

    Call me Mr. Procrastinator.

    If I let capital gains and dividends come to me as cash and I wait for a nice round number to invest then I will either forget about it or fall prey to market timing. I will be loathe to invest it when the market is climbing thinking that I will wait for a dip. And when the markets go down as it is doing now, I will again hesitate thinking what if the market goes down even lower and I miss the right point to make the move. I miss the bottom and a year later it still lies uninvested.

    All my taxable funds ( I hardly have any retirement funds) have their capital gains and dividends auto invested as soon as they are given, by the fund / brokerage companies. I do that with individual stocks too. I don’t do TLH and trying to hold back auto investing hoping that it might improve my chances of TLH means that I will miss both boats. So far the dollar cost averaging from  auto investing strategy has worked well for me for the past 25 years.

    YMMV

     

     

    #172177 Reply
    Liked by PhotonsRGR8
     Kamban 
    Participant
    Status: Physician
    Posts: 1718
    Joined: 08/01/2016
    I would think that holding capital gains as cash would be beneficial in a taxable account in order to help pay capital gains taxes, but unsure about tax advantaged accounts.

    Click to expand…

    In tax advantaged accounts you don’t pay capital gains taxes but rather income taxes when you finally take it out, since it has never been subject to income taxes.

    In taxable accounts, you hopefully should be earning from work sufficiently that you can put aside the money from that to pay the capital gains tax and taxes on dividends..

     

    #172178 Reply
    Liked by PhotonsRGR8

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