Keeping taxes simple?

[humandraydel]

I am considering, for the first time, investing a fair amount of money in a taxable account. I would like to keep my life simple as far as taxes are concerned. What should I consider as far as investing in a taxable account?

For example - what do you do with dividends? Just have them automatically reinvested? Or is it easier to have the money deposited in a sweep account and reinvest the dividends once per year?

[cutecitygirl]

The best way to get a dividend experienced wise is thru bonds. A bit risky but rewarding especially when you are in the right company.

[bjl584]

I am considering, for the first time, investing a fair amount of money in a taxable account. I would like to keep my life simple as far as taxes are concerned. What should I consider as far as investing in a taxable account?

For example - what do you do with dividends? Just have them automatically reinvested? Or is it easier to have the money deposited in a sweep account and reinvest the dividends once per year?

I buy most of my high dividend yielding stocks and funds within my Roth IRA. There are no taxes to worry about then. If you have the ability to start a ROTH IRA, then I would do so.

[disneysteve]

I am considering, for the first time, investing a fair amount of money in a taxable account. I would like to keep my life simple as far as taxes are concerned. What should I consider as far as investing in a taxable account?

For example - what do you do with dividends? Just have them automatically reinvested? Or is it easier to have the money deposited in a sweep account and reinvest the dividends once per year?

What you do with the dividends will have no effect on your tax situation. You'll have to pay taxes on the dividends whether you reinvest them or pull them out. In a taxable account, what you want to try to focus on is tax-efficient funds.

[humandraydel]

I buy most of my high dividend yielding stocks and funds within my Roth IRA. There are no taxes to worry about then. If you have the ability to start a ROTH IRA, then I would do so.

Even ETFs like Vanguard's Total Stock Market Index will produce dividends. I'm just trying to keep record keeping simple. Is this a stupid question? I just don't want 100 different lots each with a different basis.

What you do with the dividends will have no effect on your tax situation. You'll have to pay taxes on the dividends whether you reinvest them or pull them out. In a taxable account, what you want to try to focus on is tax-efficient funds.

Yes, I know this, but I'm trying to keep record keeping as simple as possible.

[Petunia 100]

Your broker will track your basis for you. The trick is to choose one broker and stick with them. If you switch at some point, your new broker will not know your basis and it will be up to you to determine it. That can get complicated, but if you have all of your statements it is possible to determine.

[disneysteve]

Yes, I know this, but I'm trying to keep record keeping as simple as possible.

Record keeping is simple. Your broker or fund company will send you a 1099 each year with all the info needed to file your taxes. If you have multiple investments in different places, you'll just get multiple 1099s. I get a stack of them every year.

[Like2Plan]

Even ETFs like Vanguard's Total Stock Market Index will produce dividends. I'm just trying to keep record keeping simple. Is this a stupid question? I just don't want 100 different lots each with a different basis.

Yes, I know this, but I'm trying to keep record keeping as simple as possible.

It's not a stupid question. Old rules were you had to keep track of the basis yourself and it could be a real pain on a DRP stock held over many years (when you sell it). New rules were put in place that should make this a simpler process. The new rules are being phased in. It requires the basis be reported on the 1099.

Cost Basis Reporting Overview and FAQs

[disneysteve]

I just don't want 100 different lots each with a different basis..

Sorry. I missed this before. This doesn't deal with dividends. It deals with capital gains. Cost basis has nothing to do with dividends. It is a valid concern for gains (or losses) but I believe the new rules mentioned take care of that.

[kv968]

Sorry. I missed this before. This doesn't deal with dividends. It deals with capital gains. Cost basis has nothing to do with dividends. It is a valid concern for gains (or losses) but I believe the new rules mentioned take care of that.

If you take the dividends then it does't affect your cost basis but if you have them reinvested it does.

[disneysteve]

If you take the dividends then it does't affect your cost basis but if you have them reinvested it does.

True. i wasn't thinking in those terms.

So let's summarize for OP:

1. Whether or not you reinvest your dividends will not affect how those dividends are taxed.
2. Whether or not you reinvest your capital gains will not affect how those gains are taxed.
3. If you reinvest your dividends and/or reinvest your capital gains, that will affect your cost basis which will have tax implications later when you sell those holdings.

Your broker or fund company should track your cost basis, dividends and gains (or losses) and report that to you so that you have the data needed to file your taxes for those transactions. Still, it is a good idea to track it yourself, save your statements, etc. just in case anything happens to their records.

[kv968]

True. i wasn't thinking in those terms.

So let's summarize for OP:

1. Whether or not you reinvest your dividends will not affect how those dividends are taxed.
2. Whether or not you reinvest your capital gains will not affect how those gains are taxed.
3. If you reinvest your dividends and/or reinvest your capital gains, that will affect your cost basis which will have tax implications later when you sell those holdings.

Your broker or fund company should track your cost basis, dividends and gains (or losses) and report that to you so that you have the data needed to file your taxes for those transactions. Still, it is a good idea to track it yourself, save your statements, etc. just in case anything happens to their records.

Nice summation but just to take it one step further...

1. Whether or not you reinvest your dividends will not affect how those dividends are taxed.

Dividends are taxed at your marginal tax rate whereas qualified dividends are taxed at 15% (if in the 25% tax bracket or higher).

2. Whether or not you reinvest your capital gains will not affect how those gains are taxed.

Short-term capital gains are taxed at marginal rate and long-term (held over one year) are at 15% (if in the 25% tax bracket or higher).

Granted, these are subject to us not falling off the fiscal cliff at the end of the year

[EEinNJ]

Dividend payouts, reinvesting dividends,and adjusted cost basis all make taxes more difficult. Yes, the new rules mean your broker "should" calculate things like stepped up basis and reporting short/long term gains on sales for you. But they don't sign your tax return, so you better make sure they didn't screw it up.

Dividend & capital gain payouts, especially from funds, can cause an under-witholding problem, especially since distribution amounts can vary quite a bit from year to year.

If you can keep your trades and most of your investment in retirement accounts, you'll save a lot of trouble. If you really want to keep it simple tax-wise, just go for one balanced, do-all fund in a taxable account, and don't re-invest. But there's a saying about not letting the tax tail wag the investing dog...

[humandraydel]

If you take the dividends then it does't affect your cost basis but if you have them reinvested it does.

Exactly - hence the potential for having 100+ lots within 3-4 years if you reinvest all dividends quarterly. I guess no one else worries about this?

[MonkeyMama]

Exactly - hence the potential for having 100+ lots within 3-4 years if you reinvest all dividends quarterly. I guess no one else worries about this?

I keep everything *complicated* in tax-deferred spaces.