Those of you doing automatic dividend reinvesting may have found dealing with the new cost basis reporting issues created lots of extra work for your club treasurer this year.
Not that there was really anything new, you always should have been keeping your records accurately and making sure you were reporting your taxes correctly. The difference is that now there is a way for the IRS to cross check what you do, so past mistakes are coming out of the woodwork.
So I'm curious. Are there those of you who still think dividend reinvesting is worth the extra record keeping work? Are there reasons your club continues to do dividend reinvesting? It made a lot of sense when commissions were high, but I'm not so sure nowadays whether the benefits outweigh the hassles.
But, maybe I'm missing something. Anybody interested in sharing their clubs perspective?
Laurie Frederiksen Invest with your friends! www.bivio.com
Our club was previously enrolled in a dividend reinvestment program with our broker. We stopped participating last year for the exact reasons you reference. We had one holding that had a dividend that was reinvested throughout 5+ years that eventually had a spin off. It created a nightmare to properly reallocate the cost basis. The broker even had the cost information inaccurate.
The tracking and extra administrative work doesn't outweigh the potential fee savings.
On Thu, Apr 11, 2013 at 11:43 AM, Laurie Frederiksen <laurie@bivio.biz> wrote:
Those of you doing automatic dividend reinvesting may have found dealing with the new cost basis reporting issues created lots of extra work for your club treasurer this year.
Not that there was really anything new, you always should have been keeping your records accurately and making sure you were reporting your taxes correctly. The difference is that now there is a way for the IRS to cross check what you do, so past mistakes are coming out of the woodwork.
So I'm curious. Are there those of you who still think dividend reinvesting is worth the extra record keeping work? Are there reasons your club continues to do dividend reinvesting? It made a lot of sense when commissions were high, but I'm not so sure nowadays whether the benefits outweigh the hassles.
But, maybe I'm missing something. Anybody interested in sharing their clubs perspective?
Laurie Frederiksen Invest with your friends! www.bivio.com
Dividend reinvestment did make a lot
of sense pre-1975 when commissions were so high, but I don't have any shares
that old!
I see three areas where dividend reinvestment
continues to make sense; a dividend growth strategy, a tax preferred account,
(IRA, Roth or 401k,) where basis will not be an issue to report or for money
market funds where the NAV always remains $1.00. But unless you can guarantee that a stock will
absolutely,
positivelyalways be a "buy," you risk averaging up your
basis. The principle to "invest regularly" does not equate to
reinvest dividends. Now that we have
three possible locations for an error in recordkeeping (the investor, the
broker and the IRS,) the possibility of confusion and errors are magnified -
why do it.
I would be curious how many people
simply filed the information on the 1099 to avoid dealing with the
reconciliation.
Mark Eckman
On Thu, Apr 11, 2013 at 11:43 AM, Laurie Frederiksen <laurie@bivio.biz> wrote:
Those of you doing automatic dividend reinvesting may have found dealing with the new cost basis reporting issues created lots of extra work for your club treasurer this year.
Not that there was really anything new, you always should have been keeping your records accurately and making sure you were reporting your taxes correctly. The difference is that now there is a way for the IRS to cross check what you do, so past mistakes are coming out of the woodwork.
So I'm curious. Are there those of you who still think dividend reinvesting is worth the extra record keeping work? Are there reasons your club continues to do dividend reinvesting? It made a lot of sense when commissions were high, but I'm not so sure nowadays whether the benefits outweigh the hassles.
But, maybe I'm missing something. Anybody interested in sharing their clubs perspective?
Laurie Frederiksen Invest with your friends! www.bivio.com
Our Club and my own 401(K) accounts do not utilize Dividend Reinvesting (DRIP?). Loooooooong ago I decided as Treasurer for the Club and as Treasurer for the Family "Club" that I do not want any part of any process that further complicates the accounting.
Life is too short!
best regards,
Leo Cardillo
On Thu, Apr 11, 2013 at 1:57 PM, Mark Eckman <mark2459@gmail.com> wrote:
Dividend reinvestment did make a lot
of sense pre-1975 when commissions were so high, but I don't have any shares
that old!
I see three areas where dividend reinvestment
continues to make sense; a dividend growth strategy, a tax preferred account,
(IRA, Roth or 401k,) where basis will not be an issue to report or for money
market funds where the NAV always remains $1.00. But unless you can guarantee that a stock will
absolutely,
positivelyalways be a "buy," you risk averaging up your
basis. The principle to "invest regularly" does not equate to
reinvest dividends. Now that we have
three possible locations for an error in recordkeeping (the investor, the
broker and the IRS,) the possibility of confusion and errors are magnified -
why do it.
I would be curious how many people
simply filed the information on the 1099 to avoid dealing with the
reconciliation.
Mark Eckman
On Thu, Apr 11, 2013 at 11:43 AM, Laurie Frederiksen <laurie@bivio.biz> wrote:
Those of you doing automatic dividend reinvesting may have found dealing with the new cost basis reporting issues created lots of extra work for your club treasurer this year.
Not that there was really anything new, you always should have been keeping your records accurately and making sure you were reporting your taxes correctly. The difference is that now there is a way for the IRS to cross check what you do, so past mistakes are coming out of the woodwork.
So I'm curious. Are there those of you who still think dividend reinvesting is worth the extra record keeping work? Are there reasons your club continues to do dividend reinvesting? It made a lot of sense when commissions were high, but I'm not so sure nowadays whether the benefits outweigh the hassles.
But, maybe I'm missing something. Anybody interested in sharing their clubs perspective?
Laurie Frederiksen Invest with your friends! www.bivio.com
Through 2012, I used dividend re-investments in all my accounts. It worked out well for the mutual funds in my 401-K and thought it would be good elsewhere. In my mind, it was a mini dollar-cost-averaging. Not one to try and time the market, I didn't mind if I bought "high" in a particular quarter, because other purchases were when prices were down. But I sold some ETFs in a taxable 2012, and what a headache! So, for 2013, I changed to NO regarding reinvesting dividends.
But, in my IRAs, I continue to utilize dividend re-investments for the reasons stated above, and also to be able to accurately track total returns for my stocks. If I just took cash, all I could easily measure is changes in stock prices, which is misleading. I don't ignore Section 5 of the SSG, so why ignore total
return after I buy the stock?
Roy Chastain
"Little by little, I am learning the art of being quite content with doing very little slowly."
Lionel Hardcastle in "As Time Goes By"
--- On Thu, 4/11/13, Laurie Frederiksen <laurie@bivio.biz> wrote:
From: Laurie Frederiksen <laurie@bivio.biz> Subject: [club_cafe] Automatic Dividend Reinvesting To: "The Club Cafe" <club_cafe@bivio.com> Date: Thursday, April 11, 2013, 9:43 AM
Those of you doing automatic dividend reinvesting may have found dealing with the new cost basis reporting issues created lots of extra work for your club treasurer this year.
Not that there was really anything new, you always should have been keeping your records accurately and making sure you were reporting your taxes correctly. The difference is that now
there is a way for the IRS to cross check what you do, so past mistakes are coming out of the woodwork.
So I'm curious. Are there those of you who still think dividend reinvesting is worth the extra record keeping work? Are there reasons your club continues to do dividend reinvesting? It made a lot of sense when commissions were high, but I'm not so sure nowadays whether the benefits outweigh the hassles.
But, maybe I'm missing something. Anybody interested in sharing their clubs perspective?
Laurie Frederiksen Invest with your friends! www.bivio.com
While it is true that doing dividend reinvesting in a tax free account such as an IRA lets you off the hook for most of the tax tracking issues that cause headaches, there is still one thing to watch out for.
Many times the tax problem with DRIP's is that the sale of a position for a loss inadvertently triggers a wash sale because of a dividend reinvestment that happens 30 days before or after the sale. Since the reinvestment purchases are on automatic pilot, people tend to forget to watch out for them when considering a sale.
Many people don't realize that if you have a sale of a stock for a loss in a taxable account, it will still be a wash sale if you've purchased the same stock within 30 days in an IRA.
Laurie Frederiksen
Invest with your friends! www.bivio.com
Does anyone know whether my portfolio of stock sales includes what's in the club account. Would sales in a club account and dividend reinvestment in a personal account cancel out? I would think that it doesn't since earnings are reported under a different name.
Can anyone tell me whether I would have awful accounting nightmares if I were to hold commodities in an IRA? I know we were warned about holding commodity stocks in a club account.
Sent from my iPad
On Apr 12, 2013, at 6:57 AM, Laurie Frederiksen <laurie@bivio.biz> wrote:
While it is true that doing dividend reinvesting in a tax free account such as an IRA lets you off the hook for most of the tax tracking issues that cause headaches, there is still one thing to watch out for.
Many times the tax problem with DRIP's is that the sale of a position for a loss inadvertently triggers a wash sale because of a dividend reinvestment that happens 30 days before or after the sale. Since the reinvestment purchases are on automatic pilot, people tend to forget to watch out for them when considering a sale.
Many people don't realize that if you have a sale of a stock for a loss in a taxable account, it will still be a wash sale if you've purchased the same stock within 30 days in an IRA.
Laurie Frederiksen
Invest with your friends! www.bivio.com
I'm not sure what your first question is. If you are wondering about wash sales, then I believe that the possibility of a wash sale exists if you control more than 50% of the voting power of the club.
As to owning commodities in an IRA account, you need to be very careful. There are a lot of things that an IRA cannot invest in. Commodities are generally acceptable, but collectibles (as defined by the tax code) are generally not. Precious metals are collectibles, but certain forms are specifically allowed as investments in IRAs. More likely than not, your custodian won't tell you if you make a prohibited investment. If you do, your entire IRA is terminated and deemed distributed to you as of the first day of the year you make the prohibited investment. If the value of the IRA account exceeds your cost basis (total of non-deductible contributions), you will have taxable income which may also be subject to the 10% early distribution penalty. As of now, investments in GLD, SLV and SGOL are permitted investments.
All the rules regarding IRAs can be found in IRS Pub. 590.
Does anyone know whether my portfolio of stock sales includes what's in the club account. Would sales in a club account and dividend reinvestment in a personal account cancel out? I would think that it doesn't since earnings are reported under a different name.
Can anyone tell me whether I would have awful accounting nightmares if I were to hold commodities in an IRA? I know we were warned about holding commodity stocks in a club account.
Sent from my iPad
On Apr 12, 2013, at 6:57 AM, Laurie Frederiksen <laurie@bivio.biz> wrote:
While it is true that doing dividend reinvesting in a tax free account such as an IRA lets you off the hook for most of the tax tracking issues that cause headaches, there is still one thing to watch out for.
Many times the tax problem with DRIP's is that the sale of a position for a loss inadvertently triggers a wash sale because of a dividend reinvestment that happens 30 days before or after the sale. Since the reinvestment purchases are on automatic pilot, people tend to forget to watch out for them when considering a sale.
Many people don't realize that if you have a sale of a stock for a loss in a taxable account, it will still be a wash sale if you've purchased the same stock within 30 days in an IRA.
Laurie Frederiksen
Invest with your friends! www.bivio.com
Yes. It's actually based on constructive ownership. Remember those "Who is related to who" questions when you do your club taxes? If you and related parties together own 50% or more of your partnership, there could be wash sale issues that arise.
Another thing to realize is that if your wash sale loss is triggered by a re-purchase within an IRA, you lose the loss completely in your taxable account. It is not just deferred like it would be if the wash sale and the repurchase had all occurred in the taxable account.
I'm not sure what your first question is. If you are wondering about wash sales, then I believe that the possibility of a wash sale exists if you control more than 50% of the voting power of the club.
Linda Lee on
Ira, you answered both questions. I wanted to know whether the club stock reinvestments would be considered along with sales in personal accounts for purposes of wash sales. The second question was whether purchases of GLD, SLV and SGOL in an IRA account would complicate my taxes. I know that MLPs would.
From: ira smilovitz <ira.smilovitz@gmail.com> To: club_cafe@bivio.com Sent: Friday, April 12, 2013 8:58 AM Subject: Re: [club_cafe] Automatic Dividend Reinvesting
I'm not sure what your first question is. If you are wondering about wash sales, then I believe that the possibility of a wash sale exists if you control more than 50% of the voting power of the club.
As to owning commodities in an IRA account, you need to be very careful. There are a lot of things that an IRA cannot invest in. Commodities are generally acceptable, but collectibles (as defined by the tax code) are generally not. Precious metals are collectibles, but certain forms are specifically allowed as investments in IRAs. More likely than not, your custodian won't tell you if you make a prohibited investment. If you do, your entire IRA is terminated and deemed distributed to you as of the first day of the year you make the prohibited investment. If the value of the IRA account exceeds your cost basis (total of non-deductible contributions), you will have taxable income which may also be subject to the 10% early distribution penalty. As of now, investments in GLD, SLV and SGOL are permitted investments.
All the rules regarding IRAs can be found in IRS Pub. 590.
Does anyone know whether my portfolio of stock sales includes what's in the club account. Would sales in a club account and dividend reinvestment in a personal account cancel out? I would think that it doesn't since earnings are reported under a different name.
Can anyone tell me whether I would have awful accounting nightmares if I were to hold commodities in an IRA? I know we were warned about holding commodity stocks in a club account.
Sent from my iPad
On Apr 12, 2013, at 6:57 AM, Laurie Frederiksen <laurie@bivio.biz> wrote:
While it is true that doing dividend reinvesting in a tax free account such as an IRA lets you off the hook for most of the tax tracking issues that cause headaches, there is still one thing to watch out for.
Many times the tax problem with DRIP's is that the sale of a position for a loss inadvertently triggers a wash sale because of a dividend reinvestment that happens 30 days before or after the sale. Since the reinvestment purchases are on automatic pilot, people tend to forget to watch out for them when considering a sale.
Many people don't realize that if you have a sale of a stock for a loss in a taxable account, it will still be a wash sale if you've purchased the same stock within 30 days in an IRA.
Does "you and related parties" refer to filing on the same tax return?
From: Laurie Frederiksen <laurie@bivio.biz> To: club_cafe@bivio.com Sent: Friday, April 12, 2013 9:30 AM Subject: Re: [club_cafe]
Automatic Dividend Reinvesting
Yes. It's actually based on constructive ownership. Remember those "Who is related to who" questions when you do your club taxes? If you and related parties together own 50% or more of your partnership, there could be wash sale issues that arise.
Another thing to realize is that if your wash sale loss is triggered by a re-purchase within an IRA, you lose the loss completely in your taxable account. It is not just deferred like it would be if the wash sale and the repurchase had all occurred in the taxable account.
I'm not sure what your first question is. If you are wondering about wash sales, then I believe that the possibility of a wash sale exists if you control more than 50% of the voting power of the club.
Laurie Frederiksen on
Hi Linda,
No. For purposes of this, you use the "constructive ownership" rules. Related parties are spouses, brothers and sisters and lineal ancestors and decedents. So not cousins or in-laws, but parents and children.
Laurie Frederiksen Invest with your friends! www.bivio.com
Yes. It's actually based on constructive ownership. Remember those "Who is related to who" questions when you do your club taxes? If you and related parties together own 50% or more of your partnership, there could be wash sale issues that arise.
Another thing to realize is that if your wash sale loss is triggered by a re-purchase within an IRA, you lose the loss completely in your taxable account. It is not just deferred like it would be if the wash sale and the repurchase had all occurred in the taxable account.
I'm not sure what your first question is. If you are wondering about wash sales, then I believe that the possibility of a wash sale exists if you control more than 50% of the voting power of the club.
Carole Jansen on
Laurie, can you explain what the extra recordkeeping would be, or direct me to some literature that explains it? I know about the new cost basis reporting rules and the wash sale rules, but I still don't understand what the issue is now.
Thanks,
Carole Jansen Treasurer ("for life"), Wise Investment Club
From: Laurie Frederiksen <laurie@bivio.biz> To: The Club Cafe
<club_cafe@bivio.com> Sent: Thursday, April 11, 2013 11:43 AM Subject: [club_cafe] Automatic Dividend Reinvesting
Those of you doing automatic dividend reinvesting may have found dealing with the new cost basis reporting issues created lots of extra work for your club treasurer this year.
Not that there was really anything new, you always should have been keeping your records accurately and making sure you were reporting your taxes correctly. The difference is that now there is a way for the IRS to cross check what you do, so past mistakes are coming out of the woodwork.
So I'm curious. Are there those of you who still think dividend reinvesting is worth the extra record keeping work? Are there reasons your club continues to do dividend reinvesting? It made a lot of sense when commissions were high, but I'm not so sure nowadays whether the benefits outweigh the hassles.
But, maybe I'm missing something. Anybody interested in sharing their clubs perspective?
Laurie Frederiksen Invest with your friends! www.bivio.com
The issue has to do with accurate record keeping. Each purchase when you reinvest a dividend is a separate lot of stock and needs to have it's cost basis tracked correctly. Having an accurate cost basis over the years will depend on things like this:
Accurate entry of the original purchase (There are lots of numbers that can become typos when fractional shares are being purchased.
Complete entry of all reinvestments - We frequently see records where entries have been missed completely
Proper adjustments for historical reorganizations such as splits, spinoffs, mergers etc. These can get very complicated. When there are lots of lots, there are lots of things to adjust and lots of opportunities for mistakes.
Proper adjustments for re-classification of dividends. Sometimes dividends are re-classified after the end of the year, this requires proper adjustment of cost basis for all prior purchases.
Supporting Documentation- Clubs often ask how long they should keep records from their brokers. If you need to substantiate or check historical entries, you may need lots of old statements to justify the information you are using to calculate cost basis.
Proper lot selection identification for prior year sales. If you've entered any sales using a different lot selection than you used at your broker, all your current sale entries will be wrong.
Wash sales- It's easy to forget that you've just made or are about to make another purchase when you decide to sell some of your holding. Proper wash sale adjustments over multiple lots can become extremely, extremely difficult.
Changing brokers or treasurers- If you change brokers or club treasurers, historical cost information can easily be lost.
Cost basis method- The rules have just changed because of the new cost basis reporting rules. Average cost was not allowed for dividend reinvesting in stocks prior to 2012. It is now allowed if the dividend reinvesting is done as part of a company run DRIP program. It is not supposed to be allowed for brokerage dividend reinvesting though there seems to be some confusion about this.
In any case, if you do not stay with FIFO lot selection on sales, you will have to track cost basis for pre-2012 reinvestments differently than post 2012 reinvestments and make extra adjustments in your club accounting to handle sales.
Extra taxes- If you can't properly substantiate the cost basis for your lots, you will have to assign them a basis of 0 and pay gains on the total proceeds you received in a sale.
Of course, any of these things done incorrectly may mean that all your historical club accounting was inaccurate. This can mean things like needing club and members to amend old tax returns, and incorrect determination of payout amounts for withdrawals paid.
These are all real life issues we've run into with clubs. This all adds a lot of work and responsibility to the club treasurer. It's not that you can't track all these things accurately, it just depends on how much work and attention you want to give to it.
Hope that helps.
Laurie Frederiksen Invest with your friends! www.bivio.com
Laurie, can you explain what the extra recordkeeping would be, or direct me to some literature that explains it? I know about the new cost basis reporting rules and the wash sale rules, but I still don't understand what the issue is now.
Thanks,
Carole Jansen Treasurer ("for life"), Wise Investment Club
John Rice on
Doesn't AccountSync do all of this as long as you stay with FIFO method and avoid any washes?
John
From: Laurie Frederiksen <laurie@bivio.biz> To: club_cafe@bivio.com Sent: Sat, April 13, 2013 10:50:30 AM Subject: Re: [club_cafe] Automatic Dividend Reinvesting
The issue has to do with accurate record keeping. Each purchase when you reinvest a dividend is a separate lot of stock and needs to have it's cost basis tracked correctly. Having an accurate cost basis over the years will depend on things like this:
Accurate entry of the original purchase (There are lots of numbers that can become typos when fractional shares are being purchased.
Complete entry of all reinvestments - We frequently see records where entries have been missed completely
Proper adjustments for historical reorganizations such as splits, spinoffs, mergers etc. These can get very complicated. When there are lots of lots, there are lots of things to adjust and lots of opportunities for mistakes.
Proper adjustments for re-classification of dividends. Sometimes dividends are re-classified after the end of the year, this requires proper adjustment of cost basis for all prior purchases.
Supporting Documentation- Clubs often ask how long they should keep records from their brokers. If you need to substantiate or check historical entries, you may need lots of old statements to justify the information you are using to calculate cost basis.
Proper lot selection identification for prior year sales. If you've entered any sales using a different lot selection than you used at your broker, all your current sale entries will be wrong.
Wash sales- It's easy to forget that you've just made or are about to make another purchase when you decide to sell some of your holding. Proper wash sale adjustments over multiple lots can become extremely, extremely difficult.
Changing brokers or treasurers- If you change brokers or club treasurers, historical cost information can easily be lost.
Cost basis method- The rules have just changed because of the new cost basis reporting rules. Average cost was not allowed for dividend reinvesting in stocks prior to 2012. It is now allowed if the dividend reinvesting is done as part of a company run DRIP program. It is not supposed to be allowed for brokerage dividend reinvesting though there seems to be some confusion about this. In any case, if you do not stay with FIFO lot selection on sales, you will have to track cost basis for pre-2012 reinvestments differently than post 2012 reinvestments and make extra adjustments in your club accounting to handle sales.
Extra taxes- If you can't properly substantiate the cost basis for your lots, you will have to assign them a basis of 0 and pay gains on the total proceeds you received in a sale.
Of course, any of these things done incorrectly may mean that all your historical club accounting was inaccurate. This can mean things like needing club and members to amend old tax returns, and incorrect determination of payout amounts for withdrawals paid.
These are all real life issues we've run into with clubs. This all adds a lot of work and responsibility to the club treasurer. It's not that you can't track all these things accurately, it just depends on how much work and attention you want to give to it.
Hope that helps.
Laurie Frederiksen Invest with your friends! www.bivio.com
Laurie, can you explain what the extra recordkeeping would be, or direct me to some literature that explains it? I know about the new cost basis reporting rules and the wash sale rules, but I still don't understand what the issue is now.
Thanks,
Carole Jansen Treasurer ("for life"), Wise Investment Club