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How does the 4% rule work if you are invested in index funds that yield a dividend? Let's say you have a 2% dividend. Do you let the dividend reinvest and then

How does the 4% rule work if you are invested in index funds that yield a dividend? Let's say you have a 2% dividend. Do you let the dividend reinvest and then trigger a sale for 1% of your portfolio quarterly (4 quarters * 1 % = 4% a year) or do you make the dividends not reinvest, they pay you 0.5% a quarter, you need to pull the other 0.5% a quarter by selling off? Does it really matter from a tax perspective?

PopAlongKid 3y ago
>Does it really matter from a tax perspective? Most likely, no. If you are in a tax-deferred account (IRA/401k) then all the money distributed is going to be taxed at ordinary income tax rates. If you are in a regular brokerage investment account, then both your long term capital gains and qualified dividends are taxed at the same favorable rate. I don't see the point in re-investing dividends if you are going to take out cash in the same amount within less than a year.
ghaff 3y ago
If dividends are earned, they'll be recorded on your 1099. From a tax perspective, it shouldn't matter if you use use them to automatically buy more shares in the same index fund, have them flow to a money market account at the broker, or transfer the amount to your checking account. The difference is cash flow. Obviously if your only income source is dividends, at some point you'll have to sell some of the underlying asset for the cash. 4% is just a rule of thumb to give you an idea of what your savings should be relative to annual spending.
throw0101b 3y ago
> How does the 4% rule work if you are invested in index funds that yield a dividend? The simplest method: look at your portfolio's worth on January 1, and take out the appropriate amount. Let the remainder ride. So roughly: * Year 1: take out 4% * Year 2: Year 1 amount + inflation from Year 1 * Year 3: Year 2 amount + inflation from Year 2 * […] * Year N: Year (N-1) amount + inflation from Year (N-1)

PopAlongKid 3y ago

>Does it really matter from a tax perspective? Most likely, no. If you are in a tax-deferred account (IRA/401k) then all the money distributed is going to be taxed at ordinary income tax rates. If you are in a regular brokerage investment account, then both your long term capital gains and qualified dividends are taxed at the same favorable rate. I don't see the point in re-investing dividends if you are going to take out cash in the same amount within less than a year.

ghaff 3y ago

If dividends are earned, they'll be recorded on your 1099. From a tax perspective, it shouldn't matter if you use use them to automatically buy more shares in the same index fund, have them flow to a money market account at the broker, or transfer the amount to your checking account. The difference is cash flow. Obviously if your only income source is dividends, at some point you'll have to sell some of the underlying asset for the cash. 4% is just a rule of thumb to give you an idea of what your savings should be relative to annual spending.

throw0101b 3y ago

> How does the 4% rule work if you are invested in index funds that yield a dividend? The simplest method: look at your portfolio's worth on January 1, and take out the appropriate amount. Let the remainder ride. So roughly: * Year 1: take out 4% * Year 2: Year 1 amount + inflation from Year 1 * Year 3: Year 2 amount + inflation from Year 2 * […] * Year N: Year (N-1) amount + inflation from Year (N-1)