When To Stop Dividend Reinvesting

[steelpony10]

     Evidently these are well established reasons:

             1. When you retire and are shifting from accumulating assets to spending down assets. 

             2  When an investment is doing poorly

             3. You need to rebalance a portfolio. 

             4. To diversify assets.

       My comments and I’d like others to see yours.

              1. I guess this means if/when you need the money. So maybe common sense.

              2. If I’m not switching to a better fit for my goals or what I think is better management, I keep mine on reinvestment to lower the cost basis. 

               3. I never understood “rebalancing”. There are amateurs that allocate 5%, 60/40 and 50/50 with personal rules etc. so I guess it lets them sleep well thinking they have some control and gives them something to do in retirement. Since I don’t know my future I wait until actual long term investment facts unfold or my personal facts change. I keep on reinvesting. I don’t even see how it helps spend down.

                4. Ditto for diversification. I know what I need to do when it happens. Every experienced investor should know no matter how you slice up your salad it’s still a salad. So an individual sleep well technique.

          We reinvest all yields unless needed for present goals.

[Chahta]

1. I reinvest everything in the IRAs. No RMDs yet so why not? More shares equal more income. So my plan is to give the IRS dividends not shares. I live from my   
    taxable  account.
2. Even if an investment is doing poorly divs are reinvested. I didn't buy it for sort term.
3. So far I have only rebalanced one time. That was when I went to a mix of bonds and equities 2 years before retirement (4 1/2 years ago). Things have stayed
    balanced close enough. Plus if something is doing well enough, why change? I have changed some funds along the way but plan to do as few as possible.
4. I have enough diversification. I'm never buying options or commodities.

[racqueteer]

Seems to me that this approaches a tautology. If your thesis is that generating an income stream through dividends is your goal, then reinvesting at least some of those dividends follows naturally. If the income stream is less primary, then all those other more transitory (perhaps) issues come into focus. You get some similar behavior from passive investors (unless they elect to alter their portfolio allocation ratio). That's where rebalancing tends to enter the picture. Otherwise, the 'active' investor may, as a consequence of their investing philosophy, elect to make changes in, well, almost anything! In short (too late?), people are going to come down on this in line with their personal investing philosophy...

[retiredat48]

racqueteer ,...geez, now I had to look up the word "tautology", as the professor/poster introduced this concept.

Per google, tautology: "the saying of the same thing twice in different words, generally considered to be a fault of style (e.g., they arrived one after the other in succession )." And: a statement that is true by necessity or by virtue of its logical form.  "all logical propositions are reducible to either tautologies or contradictions".

OK...Approaches a tautology!

R48

[archer]

In favor of continuing reinvestment, unless dividend yield as a % of total PF is increasing to keep up with inflation, it is important to continue building shares.

And, In a taxable account, don't divs need to sit a year b4 receiving better tax treatment? with that in mind, better to reinvest and set up auto withdraws that come from oldest shares first.

[Mustang]

Everyone knows this but its often forgotten, when an investor buys into a fund or an individual stock he no longer owns money. He owns shares.

1. In my IRA I automatically reinvest all distributions; LT capital gains, ST capital gains and dividends. None are taxable. RMDs force me to sell shares. Reinvested distributions buy shares. After three years of RMDs the number of shares owned has stayed about the same (last time I looked down 1% but we've not yet received the EOY capital gains. As a long term investor all through the bear market I looked at number of shares instead of asset value. Those shares are what builds back asset value during a recovery.

2. Since I'm not withdrawing anything except RMDs I reinvest all distributions in my taxable accounts. These distributions are taxable and I receive a 1099 every year. Most are LT capital gains which are taxed at a lower rate than dividends. The reinvestment not only increases the number of shares but, since taxes were paid, it also increases the cost basis. When those shares are eventually sold taxable income will be less and less taxes will be due. How much less depends upon the investor's inventory system (LIFO,FIFO or weighted average). I use weighted average. Everything withdrawn will be taxed at the lower LT capital gain rate.

I don't remember ever re-balancing to a set asset allocation. I did gradually transition assets from around 80/20 to 60/40 as I approached retirement age. The accumulation phase and the withdrawal phase need to be viewed differently.

When accumulating, a market down turn gives the investor an opportunity to buy low. (I've always used the dollar cost averaging approach.) Since most retirees need some sort of stable income from their retirement portfolios selling during a market down turn can be a disaster causing the retiree to prematurely run out of money. Diversification is one way to reduce volatility. The highs might not be as high but the lows are definitely not as low.

Diversification isn't picking a variety of stocks or stock funds in different categories. Stocks regardless of category tend to move in the same direction. The best diversification is in something that moves in the opposite direction (negative correlation). Bonds have typically been the asset chosen to reduce volatility. Numerous researchers both using historical data and computer simulations have shown that portfolios that are 100% bonds or 100% stocks have a lower probability of success than a mixed allocation. These researchers have shown (over and over again) that portfolios having 50-75% stocks have the highest probability of success. So picking 60/40 wasn't an accident.  I also invest in balanced fund and let the fund manager with his team of analysts re-balance the stock/bond allocation if necessary.

For those who want to be more active with their investments other research shows that a minimum stock allocation (maybe 40/60) at retirement minimizes the risk of a sequence of return failure. The stock allocation is then slowly increased as time passes. If the retiree is managing his own investments this assumes a level of mental acuity that just might not be there. A 30-year payout period assumes a 65 year old retiree will still be making investment decisions at 95. I do not think this is likely. That is why I'm sticking with an overall 60/40 asset allocation (50-50 in my taxable accounts).

Some investors may point to the recent downturn where both stocks and bonds lost value as an indication that diversification doesn't work. I consider the recent downturn an anomaly. The Fed artificially held interest rates low while our government went on a spending binge. P/E ratios of 35-40 are not normal (I think the average is 17.) but investors (including myself) turned to stocks because bonds basically paid nothing. When inflation hit and the Fed raised rates it impacted the asset value of both stocks and bonds. I do not believe that is our future. I think P/E ratios of 30-40 are going to be a thing of the past and bonds are going to pay higher returns.

Only time will tell. I'll get back with you in 30 years or so to tell you if it worked.

[retiredat48]

Mustang,...are you making use of Exchange Traded Funds as investment wrappers in taxable accounts? ETFs have this special tax break where cap gains are minimized annually to the investor. You seem a good candidate for this.

R48

[Chahta]

Sept 13, 2023 19:06:28 GMT Mustang said:

................For those who want to be more active with their investments other research shows that a minimum stock allocation (maybe 40/60) at retirement minimizes the risk of a sequence of return failure. ..............

I would bet that the bond side minimizes sequence of return risk as well.  

[steelpony10]

Mustang ,

        This looks like it’s going to be a long anomaly then to me, 5-10 years out of a 15-20 year average retirement which is not for me.

         Reinvested dividends (way bigger back then) into more shares really helped old timers in the 1968-1982 period when values took a prolonged hit.

          Seasoned investors also told me if it was possible to diversify and allocate perfectly to handle all future market conditions and my future needs (the holy grail) my net gain would be zero anyway. In reality something is bought and something is sold. I can never know what or how much. 

[Mustang]

 retiredat48 , I've never used ETFs. I don't know much about them.  I thought that they were used to shelter capital gains for traders.  I understand that.  Frequent trades result in lots of short term gains taxed as ordinary income.  I don't foresee us making short term trades, just one withdrawal per month taxed as a long term capital gain.  

I have two goals for my retirement portfolio.  The first is a stable, inflation adjusted income.  The second is a simple withdrawal plan.  Simple plans are easy to implement and easier for a successor to manage.  What I have set up my wife can use. But out of curiosity I might look into ETFs a little more to see if they align with my goals.  I'm always looking for improvements as long as they don't add too much complexity.

steelpony10 ,  Your view of the future may be different from mine.  I don't think we will go back to zero interest rates. 

No one can diversify perfectly.  I have read the research, looked at the data and made the decisions I think will lead to a positive outcome.   Michael Kitces, writing about probability of successes, said that a 50% probability of success doesn't mean a 50% probability of failure.  It means there is a 50% probability adjustments will be needed.  

I did spreadsheet tests on my funds trying to find the simplest, most effective way of making withdrawals from our portfolio.  Our withdrawal plan fits on a one page checklist.  RMDs from traditional IRAs and the 4% Rule from taxable accounts.  The IRA has one fund.  The taxable accounts two. Cash is withdrawn from the fund with the highest previous EOY balance. In January, the inflation adjustment is based on the social security increase.  The January adjustment will be one percentage point less than social security's.  That is another way of reducing longevity risk (the risk of running out of money).  Since the 4% Rule was based on the worst retirement date in history increases greater than inflation are likely to be available.  Again, research has shown the maximum safe withdrawal rate for various payout periods.  Every five years a special review will be made to see if adjustment in withdrawals need to be made for the shorter remaining payout period.

P.S.  The withdrawal plan is set up for a 30 year payout but it is highly unlikely to be used that long.  I would be over 100 and my wife just under.  Before reaching that point it is fairly certain that the kids will be managing our retirement.

[retiredat48]

Sept 14, 2023 0:42:45 GMT Mustang said:

 retiredat48 , I've never used ETFs. I don't know much about them.  I thought that they were used to shelter capital gains for traders.  I understand that.  Frequent trades result in lots of short term gains taxed as ordinary income.  I don't foresee us making short term trades, just one withdrawal per month taxed as a long term capital gain.  

I have two goals for my retirement portfolio.  The first is a stable, inflation adjusted income.  The second is a simple withdrawal plan.  Simple plans are easy to implement and easier for a successor to manage.  What I have set up my wife can use. But out of curiosity I might look into ETFs a little more to see if they align with my goals.  I'm always looking for improvements as long as they don't add too much complexity.

_@steelpony10

Mustang,...I'm surprised at your lack of familiarity with ETFs.  Basically, most are  no different than open ended funds, except you can trade them during the entire day, not just the close.  More importantly, many places such as Vanguard now provide ETFs that are either sisters or duplicates of their mutual funds.  And even more importantly, many now offer indexed ETFs, meaning the etf will invest in the index, just like indexed oef funds.  Like, S&P 500 ETF, or open ended S&P500 fund.  In many cases ETFs have lower expense ratios.

But the beauty is the IRS treatment of ETF fund internal buys/sells(a daily occurrence in adjusting portfolios for net daily purchases or redemptions.)  Has to do with what is called handling of "creation  units".  These do not trigger cap gains like open ended funds do.  So the cap gains distributed to the investor are de minimus each year.  Seems like a good fit for your situation; your taxable accounts that will not be tapped for a long time.

R48

[Mustang]

Sept 14, 2023 1:33:42 GMT retiredat48 said:

Mustang ,...I'm surprised at your lack of familiarity with ETFs.  Basically, most are  no different than open ended funds, except you can trade them during the entire day, not just the close.  More importantly, many places such as Vanguard now provide ETFs that are either sisters or duplicates of their mutual funds.  And even more importantly, many now offer indexed ETFs, meaning the etf will invest in the index, just like indexed oef funds.  Like, S&P 500 ETF, or open ended S&P500 fund.  In many cases ETFs have lower expense ratios.

But the beauty is the IRS treatment of ETF fund internal buys/sells(a daily occurrence in adjusting portfolios for net daily purchases or redemptions.)  Has to do with what is called handling of "creation  units".  These do not trigger cap gains like open ended funds do.  So the cap gains distributed to the investor are de minimus each year.  Seems like a good fit for your situation; your taxable accounts that will not be tapped for a long time.

R48

I know ETFs are the current rage but when I looked at ETFs several years ago I decided they were not anything I wanted to own.  When I looked them up today I confirmed my opinion.  Other investors situations may be different but I'm not afraid of LT capital gain taxes.  The only reason to defer taxes is if the taxes in the future will be less than the taxes today.  If they are estimated to be higher then an investor shouldn't do it.  He should pay the taxes now, increasing the cost basis of the investment so that future capital gains are lower.  Almost all of the withdrawals from our portfolio will be made by my wife after I am gone. Even though my pension and social security will be gone (she has her own social security) if investments do well her income will go up not down and she will be taxed at the single rate instead of the married rate which is a lot higher..

Here are a couple of things I pulled off of Investopedia:  www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp

"Limited Capital Gains Tax:  ETFs can be more tax-efficient than mutual funds. As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds. Mutual funds, on the other hand, are required to distribute capital gains to shareholders if the manager sells securities for a profit. This distribution amount is made according to the proportion of the holders' investment and is taxable. If other mutual fund holders sell before the date of record, the remaining holders divide up the capital gain and thus pay taxes even if the fund overall went down in value."

Comment:  As a long term investor I ride out short term dips.  Again, until it is time to sell I look and shares not asset value.  If the overall value went down, that is great.  The distribution came to me.  It was re-invested allowing be to buy more shares. Paying the taxes now increases the cost basis making for lower taxes later.

"Intraday Pricing Might Be Overkill: Longer-term investors could have a time horizon of 10 to 15 years, so they may not benefit from the intraday pricing changes. Some investors may trade more due to these lagged swings in hourly prices. A high swing over a couple of hours could induce a trade where pricing at the end of the day could keep irrational fears from distorting an investment objective.  When it comes to diversification and dividends, the options may be more limited. Vehicles like ETFs that live by an index can also die by an index—with no nimble manager to shield performance from a downward move."

Comment:   For stock funds indexes seem to work.  For balanced funds the jury is still out.  VBINX has both 10 year and 15 year returns of 7.6%.  My two managed comparable funds beat that.  ABALX has a 10 year return of 7.8% and a 15 year return of 7.9%.  VWENX has a 10 year return of 8.0% and a 15 year return of 8.1%.  For me, I just don't see the advantage of an index fund.  I also want professional managers backed by teams of analysts deciding when to trade.  Since they are beating the comparable index fund it seems that they are fairly nimble.

More from Investopedia concerning taxes.  www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp

"Taxes on ETFs:  ETFs enjoy a more favorable tax treatment than mutual funds due to their unique structure. ETFs create and redeem shares with in-kind transactions that are not considered sales. As a result, they do not create taxable events. However, when you sell an ETF, the trade triggers a taxable event.

Comment:  The only in-kind transaction I make are within IRAs which are not taxable at all.  When an investor sells an ETF the trade triggers a taxable event--same as a mutual fund.

"Dividends and Interest Payment Taxes: Dividends and interest payments from ETFs are taxed similarly to income from the underlying stocks or bonds inside them. The income needs to be reported on your 1099 statement. If you earn a profit by selling an ETF, they are taxed like the underlying stocks or bonds as well.  Many ETFs generate dividends from the stocks they hold. Ordinary (taxable) dividends are the most common type of distribution from a corporation. According to the IRS, you can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation tells you otherwise. These dividends are taxed when paid by the ETF."

Question:  How is that different from a mutual fund?

"Tax Strategies Using ETFs:  ETFs lend themselves to effective tax-planning strategies, especially if you have a blend of stocks and ETFs in your portfolio. One common strategy is to close out positions that have losses before their one-year anniversary. You then keep positions that have gains for more than one year. This way, your gains receive long-term capital gains treatment, lowering your tax liability. Of course, this applies for stocks as well as ETFs.  In another situation, you might own an ETF in a sector you believe will perform well, but the market has pulled all sectors down, giving you a small loss. You are reluctant to sell because you think the sector will rebound and you could miss the gain due to wash-sale rules. In this case, you can sell the current ETF and buy another that uses a similar but different index. This way, you still have exposure to the favorable sector, but you can take the loss on the original ETF for tax purposes.   ETFs are a useful tool for year-end tax planning. For example, you own a collection of stocks in the materials and healthcare sectors that are at a loss. However, you believe that these sectors are poised to beat the market during the next year. The strategy is to sell the stocks for a loss and then purchase sector ETFs which still give you exposure to the sector."

Comment:  Simplification is one of my goals.  I plan to own three balanced funds not a basket of individual stocks and ETFs.  None of these tax strategies are of any interest to me.  And I most certainly would not set up a succession plan forcing my wife to use them.  Every investor has there own set of goals.  I didn't see the benefit of ETFs when I looked at them before and still don't.

[yakers]

Pretty simple for me. In tax favored dividends * CGs are reinvested and RMDs withdrawan as necessary. In taxable dividends & CGs are sent to my checking account for spending cash or reinvestment as appropriate. Occasionally buy or sell some shared as funds are needed or too much cash is collected in checking.

[archer]

It is easy to find before and after tax returns on mutual funds. Figure the before and after to be same in an ETF.

Lets compare to funds which have substantial payouts FBALX and SCHD. FBALX most years shows more income paid than SCHD. However, most of FBALX income is in a large capital gains payment at the end of the year. My understanding is that this is taxed as ordinary income prior to being reinvested and doesn't receive LTCG tax treatment.

[Mustang]

Sept 14, 2023 15:42:31 GMT archer said:

It is easy to find before and after tax returns on mutual funds. Figure the before and after to be same in an ETF.

Lets compare to funds which have substantial payouts FBALX and SCHD. FBALX most years shows more income paid than SCHD. However, most of FBALX income is in a large capital gains payment at the end of the year. My understanding is that this is taxed as ordinary income prior to being reinvested and doesn't receive LTCG tax treatment.

You might want to check on this.  This has not been my experience.  

Yes there is typically a large Long-Term Capital Gain distribution at the end of the year.  But, there are very, very few Short-Term capital gain distributions (taxed as ordinary income).  From last year's 1099 Wellington's distributions were:  Ordinary dividends 24%, Qualified dividends 13%, Long term capital gains 62%.  These percentage vary from year to year but this is fairly representative of what I have experienced. Since Qualified dividends are taxed like long-term capital gains only 24% of the 2022 distributions were taxed at the ordinary income rate. 75% were taxed at the LT capital gain rate.

A day trader will have a different experience.  Since they are constantly jumping in and out of securities they can accumulate a lot of short-term capital gains (taxed as ordinary income).  That is why a lot of day traders use tax deferred accounts, like an IRA, for their trades  If they use a taxable account they then have to search for short-term losses to offset the gains. Depending on the fund, a buy and hold investor has very few to no ST cap gains.  Different goals, different strategies lead to different results. 

I do not believe buy and hold investors need ETFs.  The advantages of ETFs described in Investopedia  only materializes if the investor jumps in and out of funds and securities frequently.  Buy and hold investors don't do that.

[Fearchar]

I don't believe the average day trader actually earns enough to be concerned with taxes.

www.zippia.com/day-trader-jobs/

[archer]

Mustang, I didn't know that the large EOY distribution were taxed as LTCGs. Investopedia agrees with you, so thanks for the correction. In looking into it further it seems the tax difference is perhaps too small to concern oneself with unless you're one of those people that will wait in line for 20 minutes or more to save $.20/ a gal for gas. Believe me, I've seen it! LOL

[steelpony10]

       ETF index funds outperform over 90% of their OEF competitors over the long term, are much less expensive plus also are somewhat more tax friendly. As a buy and hold investor I’ll stick with VTI. I have the U.S. covered. It’s on reinvestment as stated in the OP. I no longer have any compulsion to overthink or tinker. As our largest single holding my wife should be good with that part anyway.

       If you are a young investor I would seriously check these types of products out rather then chase recent performance or current headlines. They offer ease of management, low fees, transparency for successors with some offering a long record of high returns. 

       Ha. Ha. So much for a discussion to offer better explanations about dividend reinvesting then the drivel I found on the net.
       
 MY ANSWER HERE:

        Basically every time I hit my cost basis I turn that position off. Like individual faucets. Every time income is offered below my cost basis I invest more.

         As an example our muni is below our cost basis so it’s larger dividend is churned back in and some extra cash can be directed there. VTI is above our cost basis so some of those smaller dividends go to the muni because reinvesting has been stopped.

          Rules, allocations and diversification get in my way offering too many moving parts and choices to what should be a simple way to gain income immediately or hopefully cap gains in the future.
       
          45 years of base hits. Another tool out of the investing tool box. You have to work for it youngsters.

       

[Mustang]

steelpony10 ,

VTI is a good fund but I gave up 100% stock funds (VTI is 99% equity) for a little more diversification. Looking at the numbers VTI is pretty much an average fund in large blend category. www.morningstar.com/etfs/arcx/vti/performance

It only finished in the top 25% (top quartile) twice in the last 10-years, 2016 and 2020. Its best year was 2020 when it was ranked at the 17th percentile. That is pretty good. But, most of the years its performance was just above the halfway mark. It had pretty bad performance in 2021 and 2022 where it fell into the lower half with 63% and then 74% of the funds beating it. Looking at the 3-, 5-, 10-, and 15 year ratings it looks like its performance wass trending downward dipping into the lower half. This is most likely because of 2021 and 2022. YTD shows signs that it is coming back a little. If it is a fund you like then you should keep it. I'm not someone who seeks the best performance. I just want long term good performance.

All funds have ups and downs. My favorite, VWENX has been in the top quartile seven of the last 10 years. It did not do well in 2020 when it fell into the lower half with 62% of the funds in the moderate-allocation category beating it. But it bounced back into the top quartile in 2021 then it fell back almost to the halfway mark. I've owned the fund long enough to expect it to come back so I intend to keep it in my portfolio. www.morningstar.com/funds/xnas/vwenx/performance

We have different goals and different strategies. The best we can hope for is if our strategies successfully meet our goals.

Edit: I finally found an ETF alternative to VWENX.  It's VBAL.  www.morningstar.com/etfs/xtse/vbal/performance

It only has four full years of data.  Here is a comparison: Its 2019- 2022 returns were 14.9%, 10.3%, 10.2% and a loss of 11.4%. YTD it's return is 7.06%.  VWENX's 2019-2022 returns were 22.6%, 10.7%, 19.1% and a loss of 14.3%. YTD it's retund is 7.65%.   In this instance the ETF is not outperforming the mutual fund.

[Deleted]

"Edit: I finally found an ETF alternative to VWENX. It's VBAL. www.morningstar.com/etfs/xtse/vbal/performance"
VBAL is a Canadian ETF and performance is measured in loonies.

[Mustang]

Sept 15, 2023 0:19:44 GMT @django said:

"Edit: I finally found an ETF alternative to VWENX. It's VBAL. www.morningstar.com/etfs/xtse/vbal/performance"
VBAL is a Canadian ETF and performance is measured in loonies.

I had to look up loonies.  Its a Canadian dollar.  Since we are talking in percentages I doubt that it matters.  And while it is moderate-allocation its asset mix is different.  That could make a difference.

So, I went looking for a different moderate-allocation ETF.  Vanguard doesn't show one.  The only thing I found was AOM which in reality isn't moderate-allocation at all.  Its conservative-allocation. 

VBAL is the closest comparison I've found.  If someone has a good ETF comparison to VWENX I would be glad to take a look at it.  But I'm still not convinced a buy and hold investor needs ETFs.  All of the advantages listed relate to frequent traders.

[fishingrod]

Mustang , AOR falls short but it is a comparison. Perhaps the reason AOR fell short was its' gov't bonds instead of corporate.

[mnfish]

Found an article from Forbes - 7 best Balanced ETFs of 2023 - checked all of them with PortVis and none came close to VWENX.

[Chahta]

Mustang , I believe you are comparing VWENX (a managed allocation fund) to VTI (a total market equity index fund). Two different animals. They are in different quartile universes.

ETFs are not only for trading investors. They work in taxable accounts since they are tax efficient. Also i bank at Schwab and will not pay fees to buy Vanguard products, so I buy the ETF wrapper if I want a Vanguard fund. While SCHD has suffered this year, I doubt there is a decent mutual fund equivalent. 

I would suggest that ETFs are a "lazy" simple way to get equity exposure and allocation funds are a "lazy" simple way of getting equity and bond exposure.

But here is a 10-year comparison of VWENX and VTI anyway.

[FD1000]

There are plenty of ways to do it in retirement. See the attachment below from this article (www.schwab.com/learn/story/tax-efficient-investing-why-is-it-important). Each person and situation is different.  
If you are a typical retiree
1) I would not stop Div reinvest anywhere
2) Taxable accounts: Invest in an efficient simple stock ETF (VOO,VTI) + Munis. 
3) Convert from T-IRA to Roth to age 73 without increasing your taxes too much. Use your taxable account to pay for taxes for the conversion. Most will deplete their taxable account.
4) You can invest anywhere you want in your IRA, taxes are the same.
5) You can achieve all the above with just 3-5 funds. While I like Mustang generic idea of using just 2-3 funds, some can benefit a bit by using stock ETF + Munis in taxable until the account depletes.

BTW, the median portfolio size(www.nerdwallet.com/article/finance/average-net-worth-by-age)  at age 65-74 is $266K. No need to worry too much about paying high taxes.

Attachments:

[retiredat48]

Mustang ,...Hi. I'm going to withdraw from this discussion re ETFs, for it is clear you see it differently re tax savings.

But note throughout your post above you stated from other sources: " ETFs enjoy a more favorable tax treatment than mutual funds due to their unique structure." Indeed, that is the bottom line.

Further, you stated " As a long term investor I ride out short term dips. Again, until it is time to sell I look and shares not asset value. If the overall value went down, that is great. The distribution came to me. It was re-invested allowing be to buy more shares. Paying the taxes now increases the cost basis making for lower taxes later."

This tells me you are not fully  understanding the benefit.  Whether you ride out the short term dips is not relevant; a mutual fund with cap gains that year must pay a distribution of same by years end.  An ETF may not have to.  If one has to pay taxes on this gain, then you have LESS MONEY to reinvest in your portfolio.  Lastly, you state paying taxes now increases the cost basis making for lower taxes later.  ??.  IMO investors should always avoid paying taxes now, if they can.  You are a long term holder...you can defer taxes for decades. 

Finally, if in zero tax bracket for cap gains, one can sell ETFs, when at high dollar prices, rebuy IMMEDIATELY  back in (THROUGHOUT DAY PRICING), creating the cap gain, declaring it in tax returns, pay no taxes, and will have successfully REESTABLISHED  a new HIGHER cost basis.  I am currently doing this now. 

Now, some investors (like me) have low enough incomes that they currently pay zero in taxes on cap gains, up to a threshold income limit.  However, this tax benefit is not yet permanent, and I suspect by year 2026 it will be gone (eliminated)by congress, especially if Dems in charge.  Thus use ETFs now.

Bottom line: For most investors, especially young accumulators, consider using ETF wrappers  in lieu of OEF Mutual funds, for investments in taxable accounts.  Minimize annual cap gain taxes, to your advantage.  This saved money can grow to considerable amounts.

R48

[archer]

Sept 15, 2023 15:09:42 GMT retiredat48 said:

Finally, if in zero tax bracket for cap gains, one can sell ETFs, when at high dollar prices, rebuy IMMEDIATELY  back in (THROUGHOUT DAY PRICING), creating the cap gain, declaring it in tax returns, pay no taxes, and will have successfully REESTABLISHED  a new HIGHER cost basis.  I am currently doing this now. 

Interesting idea! I would add though that while capital gains tax might be $0 it is wise to check on total tax impact. While capital gains tax doesn't kick in until $50K total taxable income, it is still contributing to total taxable income, and taxes increase accordingly. I have played with this using online tax calculators, and while capital gains income is not paid on the sales themselves, the added capital gains income shows up as an increase in Fed tax. For example, say you earn $35K from SS, withdraw $20K from your IRA, and add $1K of LT cap gains, total fed tax increases about $100, or 10% of the capital gains, even though no capital gains tax is being paid. (Note that while these amounts are more than $50K, only a portion of SS is counted as taxable income).

Here is a calculator if you want to check.

[Mustang]

Chahta ,  Yes, a comparison between VTI and VWENX is comparing apples to oranges.  VTI is 99% stock while VWENX is only 60-65% stock. I only used VTI because it was previously mentioned as an alternative. In discussing their performances I was only comparing each fund's performance within its own category: VTI Large Blend, VWENX moderate-allocation.  As far as the last 10 years the market has clearly favored stocks so an investor should expect a 100% stock fund to outperform a balanced fund.  History has shown this is not always true.

FD1000 ,  I was looking at your attachment.  It says that taxable accounts are ideal for stocks or mutual funds that pay qualified dividends.  Qualified dividends at taxed as LT capital gains so I would assume that they are also ideal for funds that pay mostly LT capital gains.

retiredat48 ,  You are correct.  I don't fully understand the tax efficiencies of ETFs.  Saying they are more tax efficient doesn't explain how they are more tax efficient.  The part I understand is they are more tax efficient for frequent traders.  You are a frequent trader.  Also, the only reason to defer taxes is if taxes will be lower later.  That is not always true and, for most of us, it is not possible to defer taxes forever. If an investor has to withdraw money to live on taxes become due.   My wife will need to withdraw money to live on.  We are currently taxed at the married rate.  She will be taxed at the single rate.   Deferring taxes now will mean higher taxes later.  Taxes that reduce her livable income. This is most likely true for all investors whose spouses will need the withdrawals to live on.

People say ETFs save on taxes.  How?  People also say index funds out perform managed funds but his isn't true. It may be true for stock funds but it isn't true for balanced funds.  Writers have mentioned this and I have shown that VBINX significantly under performs its managed counterpart (VWENX).

The best investing advice I've ever heard is do not invest in something you don't understand.  I would think that should be first rule of investing in a category called Investing 101.

[Chahta]

Mustang , yes LT CGs and qualified Divs are taxed the same. The problem is that CG distributions are not known until the EOY and vary a lot depending on sales, redemptions etc. ETF Divs are steady and known. I have never received an ETF CG distribution. But ETFs are mostly indexed and provide index returns. Managed funds can do better but it depends on how successful the manager is. I have all equity index funds except 1 managed fund that pays no Divs and rare small CG distributions. I can manage realizing CGs when and if I want them.

And you are correct. I had a learning curve investing in bond funds. I think that allocation funds were created for investors to own equities and bonds to avoid allocating and deciding which to own at any given time. Most investors are not like those of us that post on investing websites. Advisors tell them what to buy and keep it simple. JMHO.

[Mustang]

Sept 15, 2023 17:29:18 GMT Chahta said:

Mustang , yes LT CGs and qualified Divs are taxed the same. The problem is that CG distributions are not known until the EOY and vary a lot depending on sales, redemptions etc. ETF Divs are steady and known. I have never received an ETF CG distribution. But ETFs are mostly indexed and provide index returns. Managed funds can do better but it depends on how successful the manager is. I have all equity index funds except 1 managed fund that pays no Divs and rare small CG distributions. I can manage realizing CGs when and if I want them.

Thanks for the explanation.  I didn't think index funds traded securities unless the index changed.  That by itself means that there would be very few capital gain distributions.  That is the advantage of an index fund not an ETF.  Those same securities are making dividend distributions which do pass through to the investor.  

I understand why not getting a capital gain distribution from a mutual fund is a problem for those who are living off distributions. But why is it a problem for those who re-invest distributions?

Writers have said that stock index funds typically beat actively managed stock funds but they have also said that isn't true for balanced funds.  My funds must have some very good managers because both VWENX and ABALX beat the balance index fund.  I do think they have excellent management teams but I also suspect it is because a balanced index fund is based on two indexes and has a set allocation when actively managed funds not only determines the securities but also the allocation (within a given range).  If the managers believe stocks are going to do better they can increase the proportion of stocks above that of the index fund.

I'm still missing something.  Are the only advantages of an ETF tied to indexing and frequent trading? Investors who don't trade can buy index funds outside of ETFs.  That leads us back to the only advantage of ETFs is the avoidance of short-term capital gains due to frequent trading.  What am I missing?