Reinvesting distributions becomes even dumber


D

dumbstruck

I have always considered it bad to reinvest distributions in mutual funds, and new tax rules will make it a worse nightmare: http://www.marketwatch.com/story/taxes-on-mutual-funds-are-a-mess-2012-04-15?siteid=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: marketwatch/pf (MarketWatch.com - Personal Finance News)&utm_content=My Yahoo (this link may become broken up and have to be reassembled by your pasting)

Figuring a basis can be so horrible once you cross some timespan boundaries - like from paper to pdf purchase records, switching custodians, or now straddling a change in the tax rules. This is completely needless if you simply direct the distributions into some new investment.
 
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J

JoeTaxpayer

I have always considered it bad to reinvest distributions in mutual funds, and new tax rules will make it a worse nightmare: http://www.marketwatch.com/story/taxes-on-mutual-funds-are-a-mess-2012-04-15?siteid=rss&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed: marketwatch/pf (MarketWatch.com - Personal Finance News)&utm_content=My Yahoo (this link may become broken up and have to be reassembled by your pasting)

Figuring a basis can be so horrible once you cross some timespan boundaries - like from paper to pdf purchase records, switching custodians, or now straddling a change in the tax rules. This is completely needless if you simply direct the distributions into some new investment.
In case the link breaks for others -
http://tinyurl.com/jtp120415

Your point is well taken. But. Those who read this NG are smarter than
the average investor who forgets year after year to up his cost basis by
the reinvested amount he just was taxed on. And with the broker basis
rules, this situation should resolve itself.
 
R

Rich Carreiro

dumbstruck said:
I have always considered it bad to reinvest distributions in mutual
funds, and new tax rules will make it a worse nightmare:
http://www.marketwatch.com/story/taxes-on-mutual-funds-are-a-mess-2012-04-15
Not sure how you're getting that from Jaffe's article.

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.
 
D

David S Meyers CFP

Not sure how you're getting that from Jaffe's article.

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

Finally, a reinvestment is merely a purchase.
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.



--
David S. Meyers, CFP®
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
 
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D

dumbstruck

Not sure how you're getting that from Jaffe's article.
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 http://www.nytimes.com/2012/04/16/business/global/for-americans-abroad-taxes-just-got-more-complicated.html

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.
 

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