Financial question

[wnied]

Hey Everyone

I am new to the stocks game, and I am curious as to whether I should reinvest capital gains and dividends or not. I have recently set up an INGDIRECT and Sharebuilder account, and they offer the option to reinvest or have them delivered in cash. I am curious as to what to do with these and why? I am purchasing stocks for long term ( 5-10 years )


All advice appreciated.
~wnied~

 

[SunnyD]

Yes. Money you never knew you had is better of staying money you never knew you had. Make it work for you, especially if you have no pressing need for it (eg: debt).

 

[sohcrates]

yes. key to building wealth is reinvesting dividends

 

[nickbits]

Is your account taxable? If so you might want to take cash because you'll owe taxes on the gains/dividends. You can always reinvest part of it manually.

 

[speg]

Yes, this is an easy way to build investments over time and without extra expenses.

 

[wnied]

Maybe this is a stupid question, but how would I know if my accounts are taxable?

~wnied~

 

[joeld]

Originally posted by: wnied
Maybe this is a stupid question, but how would I know if my accounts are taxable?

~wnied~

If it's a Roth IRA or something similar that has after-tax contributions, the earnings are not taxed. That's probably the most common tax-free investment vehicle.

 

[nickbits]

If it is not a retirement account (Roth/Traditional IRA) it is taxable.

 

[dullard]

You have three main choices:
1) You open a taxable account with money that was already taxed. You do this by going in person or online and buy stocks with money in your bank account. When you open the account, you tell them that it is not a retirement account. Your gains will be taxed (but not the original money since it was already taxed). For example, if you put in $5000 and eventually it is $8000, you would owe tax on that $3000 difference. But if you hold them long enough the tax is often quite minimal. With dividends, you owe the tax the year the dividends were paid.

2) You open a retirement account with money that has already been taxed (by purposely signing up for some form of an IRA on your own). In this case, you never pay a penny of further tax as long as they are US stocks. You probably will pay a bit of foreign tax if they are foreign stocks, but the company that you buy the stocks from will take care of all that for you.

3) You open a retirement account with money that has not yet been taxed (through your work with money that they would otherwise pay you). You never get the money from your work, so you don't pay income tax on it (yet). In this case, you pay tax on the original money when you withdraw it in retirement.

Usually people reinvest the dividends. That is one of the two ways that you make money in stocks. Either the stock goes up in value (usually exponentially), or the divends go up in value (usually exponentially) if they are reinvested. If you don't reinvest them, then the dividend is just a one time shot of cash - nice to have but nothing spectacular.

The case against reinvesting dividends is that you are now buying stocks that you might not have wanted to buy. For example, suppose you have too many large companies in your portfolio and not enough small companies. If a large company pays a dividend and it is reinvested into that company, you just bought more of that large company. That could be the opposite of what you intended to do. You basically lose a bit of flexibility with reinvested dividends.

If I were you, I'd reinvest them.

 

[spidey07]

If you like the stock then by all means do dividend reinvestment. It's a great way to grow your shares. They are taxed at long term capital gains unless as noted in a retirement or tax deferred account.

Think of dividend reinvestment as compound interest. The dividends are paid every quarter buying you more stock. The more shares you have the more dividends you are paid each quater. Win/win. The only reason to take the money instead is if the stock isn't performing to your expectation and think that cash could be better used elsewhere.

 

[maddogchen]

when reinvesting dividends in a taxable account you should also keep good records of how many shares and what dates you reinvested in. I think when you sell the stocks later on in life you need to calculate the capital gains you have made from your initial purchase and any subsequent dividends reinvested.

If it is in a retirement account then that doesn't matter.

 

[wnied]

Ah ha! I see said the blindman...

This is technically a retirement account. Though when I opened the account, I didnt specify that it was so. I had a bout of bad luck, followed by bad health which drained any monetary funds I had. At this point, I am slowly begining to purchase stocks that I research online and in the paper and holding them for the long term. i.e. solar, stem cells, composites, etc. Any monies gathered would be placed into a mutual fund, IRA account or CDs. I am literally starting from scratch at the ripe age of 40. But as disheartening as it can seem, I am blessed in that I have my health and a recognition of purpose that I didnt have before.

I appreciate everyones input on this thread, Thank You all very much.
~wnied~

 

[Drakkon]

I would look into creating a ROTH IRA through Sharbuilder - its pretty simple, just start a new account and they copy over your info and its all setup. Especially if this is for retirement purposes you are better first contributing to a Roth. I use both - once my roth contribution is maxxed ($5000 is your limit this year) you can contribute more to your regular account if you so wish. This was all your stocks/funds/etc are kept in the same place and they will all show together on the same screen which is very nice.