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Automatic Reinvestment of Dividends

Posted: Fri Oct 26, 2012 3:15 pm
by Tortoise
In the new Permanent Portfolio book, Craig and MT said that in taxable accounts it's usually simpler not to do automatic reinvestment of dividends and capital gains distributions since that way there will be fewer share purchases to keep track of for tax purposes. That makes sense to me, so I want to turn off automatic reinvestment in my taxable accounts.

My question is this: If I direct all of those dividends and capital gains distributions to go into my money market account, will that avoid the tax headache described above? Or do I need them to be deposited into my bank account? I'm kind of a dunce when it comes to taxes, so I'm just not sure if MMF share purchases need to be tracked for tax purposes like stock and bond fund shares do.

Re: Automatic Reinvestment of Dividends

Posted: Fri Oct 26, 2012 5:08 pm
by WildAboutHarry
Tortoise,

In the situation you describe (accrue dividends as cash in a money market fund) you simply have fewer stock transactions to keep track of (i.e. you do not have one transaction per reinvested dividend).  Money Market purchases and sales don't have gains or losses (unless they "break the buck" :)), so no need to track them for tax purposes.

I think the concern about reinvestment of dividends and capital gains is a bit overblown.  Most mutual fund houses do a pretty good job of tracking gains and losses (the IRS makes them), and you can elect to realize gains/losses on an individual share or average cost basis.

And if you sell all your shares it doesn't matter if you have 1 or 100 transactions.

Re: Automatic Reinvestment of Dividends

Posted: Fri Oct 26, 2012 5:16 pm
by MediumTex
WildAboutHarry wrote: I think the concern about reinvestment of dividends and capital gains is a bit overblown.  Most mutual fund houses do a pretty good job of tracking gains and losses (the IRS makes them), and you can elect to realize gains/losses on an individual share or average cost basis.
I think that's probably right.

A bigger question may be whether you are in accumulation or drawdown mode.  If accumulating I might say reinvest everything, and if in drawdown I might say have everything go into cash.

IMHO, it doesn't matter a lot either way, though the point we make in the book is accurate that it is easier to track fewer large purchases of an asset, as opposed to a greater number of small purchases.

I don't really have a strong preference either way.  I would say do what you're comfortable with.

Re: Automatic Reinvestment of Dividends

Posted: Fri Oct 26, 2012 7:00 pm
by Tortoise
Thanks for the help, guys!