Reinvesting distributions becomes even dumber

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Nothing he talks about in that article is new. And only new thing coming up is the likely increase in the tax rate on long-term capital gains and dividends. Which has nothing to do with whether or not you reinvest distributions.

Further, whether or not you reinvest distributions has zero effect on your taxes.

Finally, a reinvestment is merely a purchase. It is treated for all purposes exactly the same as a purchase using "out of pocket" funds. So saying you consider it a bad idea to reinvest distributions isn't much different than saying you consider it a bad idea to make mutual fund purchases.

Reply to
Rich Carreiro

My take was that he was, in fact, suggesting that because of our messy tax system re: mutual funds, *and* the fact that the rules for tracking it (new purchases to be tracked by your broker or custodian), it's going to lead to a lot of people screwing it up. Ie. purchases previous to the new rules don't have any basis tracked. purchases since then do. Lazy or uneducated folks just assume that whatever basis is reported by the custodian is right and then they go and pay double on any reinvested distributions from before the new tracking/reporting rules.

Frankly, I think the whole thing is just a tempest in a teapot. If the rules for these funds were such that any gains internal to the fund were not distributed, then all mutual funds effectively become tax-deferred investment vehicles (maybe that's a good thing, but let's at least be honest about it).

It really is just that simple. If a traditional stock distributes a dividend, you can keep the cash or you can buy more shares. There's no reason a mutual fund should be any different, and in fact, every single mutual fund which gives you the option of automatic reinvestment also gives you the option to receive cash. Just because people often choose the automatic reinvestment doesn't absolve them of the responsibility to track basis and pay taxes.

The main reason I'm not a big fan of automatic reinvestments is because most folks should periodically be rebalancing anyway, and it's easier to do with cash.

Reply to
David S Meyers CFP

Ugh; you're right, it IS only a change in reporting rather than change in treatment (author was only 'advocating' a change in treatment). But sometimes just changing reporting can be a ghastly bombshell, such as this tax procedure recently dropped on Americans living abroad

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So back to not re-investing in taxable funds - I prefer to have a single, timeless, basis number that I don't have to track and update across the decades. If my purchase was 27 years ago, and I changed custodians... maybe I can only find basis info from 13 years ago because ink has evaporated from old paper. But then it will be correct and not need tracking of umpteen later revisions of

1.8757 shares and thus umpteen possibilities of mistakes.

Distributions can be swept and consolidated into a new fund that is more appropriate for your new environment or for your rebalance goals. I might allow a few chunked rebalance purchases but avoid partial selloffs due to possible fifo/lifo/average mismatches. You may have a system that supposedly handles this, but anything with pre-2012 purchases will be open to failure with a system glitch.

Anyway, I only use mutual funds for moribund bond funds now - I almost could just leave them in cash. Recent months have certainly been glory days for stock picking instead of etfs etc, and you can find many stocks that combine the golden triad of:

1) loved by fundamentalists (growing yet cheap) 2) loved by momentum traders (new highs most every day) 3) has low variance from a straight line slope (absolute or vs sp500 index)

Number 3 is key to me - don't chase S shape share price graphs which are either turning unsustainably up or conversely starting to get dumped by momentum traders. Only accept small and maybe medium oscillations that have been it's established pattern on otherwise straight line overachievement - otherwise sell.

Reply to
dumbstruck

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