Non-taxable muni distributions

[Chahta]

I realize there will be no fed income tax on the distributions via a 1099, but once they are reinvested can the distribution amount be taken back out tax free? Said another way if I get a $100 distribution, reinvest it, then take a $100 in shares out is that tax free? Or can the distributions only be part of a cap gain or loss once they are reinvested?

[nromsted]

Yes, standard capital gain/loss rules apply to muni funds. If you reinvest, then that adds to your shares and basis, exposing those shares to gain/loss when withdrawn. Also capital gain distributions from muni funds are taxable.

[Chahta]

I understand all that but once the distributions are reinvested can they be taken out tax-free if exact shares are identified?

[yogibearbull]

With mutual funds, changing the cost-basis method is tricky. But if you have specified-share as cost-basis method on file with the broker, then realized gains/losses will apply on withdrawals of those reinvested muni shares.

[anitya]

When you reinvest, it is like you are adding new money and you receive new shares.  Whatever shares you receive from reinvestment will generate cap gain or loss when you sell / redeem those shares. The amount of gain/loss can vary e.g., based on whether you chose average cost basis, highest cost in, first out or some other method as your cost basis method. In Vanguard, once you click on cost basis tab and click on Change/View Cost Basis Method option on top of the table of holdings, in the next page you will see various choices and what you can select.  

"Vanguard offers the following cost basis methods for mutual funds: first in, first out (FIFO), highest in, first out (HIFO), specific identification (SpecID), and average cost (AvgCost).  Our default method for mutual funds is average cost."

I always happen to use HIFO.  If you use the default average cost at the time of sale of a mutual fund, I think you can not change the cost basis for later sales of that mutual fund.  But for all other methods, you can change prior to your later sales. 

If you want to redeem first reinvested dividends, then you would use specific identification to take out those specific shares.  

Pl check with your brokerage and make sure these answers are correct.

[FD1000]

When I sell/buy funds I don't see any options except one and whatever 1099 says is OK with me.  KISS.