Sorry if this has been addressed -- I couldn't find anything searching around.
On my upcoming re-balance, I'm finally going to start buying a market-wide index fund in a taxable account. For various tax reasons, I'd prefer not to get dividends.
Does anyone know of any market tracking ETFs or mutual funds that internally reinvest dividends without issuing them (i.e., no taxable events)? I'm guessing since I couldn't find any, they must run afoul of some securities law, but just thought I'd check it out.
S&P500 tracker that does not distribute dividends
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Re: S&P500 tracker that does not distribute dividends
Securities law is the correct answer.
An investment fund is required to distribute dividends received.
The way around it is to structure as a Chapter C corporation instead of an investment fund. This is how Berkshire Hathaway retains the dividends received from all the dividend paying companies in which Buffett has purchased shares. The disadvantage is that the C corp has to pay taxes on the dividends. Likely not as much tax as you or I would pay to receive them (unless you fall below the minimum income bracket) because they get to deduct some and pay taxes only on a portion of the dividend income. I don't recall the percentages (it is a sliding scale) but it tops off at only paying taxes on about 25% of receipts.
If you really want specifically an S&P 500 tracker I know of none.
If it is just that you do not like BRK there are a few other companies I've come across with similar structure and objectives and good performance. I don't have any idea who they are, that approach has never interested me except if I were to be forming the company.
An investment fund is required to distribute dividends received.
The way around it is to structure as a Chapter C corporation instead of an investment fund. This is how Berkshire Hathaway retains the dividends received from all the dividend paying companies in which Buffett has purchased shares. The disadvantage is that the C corp has to pay taxes on the dividends. Likely not as much tax as you or I would pay to receive them (unless you fall below the minimum income bracket) because they get to deduct some and pay taxes only on a portion of the dividend income. I don't recall the percentages (it is a sliding scale) but it tops off at only paying taxes on about 25% of receipts.
If you really want specifically an S&P 500 tracker I know of none.
If it is just that you do not like BRK there are a few other companies I've come across with similar structure and objectives and good performance. I don't have any idea who they are, that approach has never interested me except if I were to be forming the company.
Re: S&P500 tracker that does not distribute dividends
Thanks... I was just looking for a way to avoid dividends while accumulating for my stocks portion. BRK probably isn't diversified enough to substitute for VTI/SPY/etc. (I held it once but it underperformed really badly so I sold it... another example of why the PP is for me)
Re: S&P500 tracker that does not distribute dividends
They are managed to not pay out any or very few capital gains (by trading less frequently or by netting losses) but IIRC they can't avoid paying out any dividends unless they simply refuse to invest in dividend-paying stocks in the first place (which given what we know about dividend payers outperforming over the long run would be an unwise decision). Actually, as a regulated investment company, a mutual fund probably could choose to not pay out up to 10% of the dividends/interest/capital gains they receive (i.e. to retain them) under current securities and tax law and if it is 10% or less the investors will not receive a tax bill (although anything more than about 2 or 3 % of earnings retained and the fund itself may have to pay an excise tax on those earnings based on certain sections of the tax code governing RICs). Retaining some of the dividends and reinvesting them essentially lets the fund convert some of the dividends to capital gains (as the retained earnings increase the amount the fund is worth); I believe PRPFX used to do this and perhaps still does.MangoMan wrote: Look at Vanguard's Tax-Managed Growth Funds VTCIX / VTCLX. They are basically what you are asking for. Low expense, broadly diversified, and managed to not pay out any gains.
There are two ways I know of that could be used to retain dividends and basically convert them to capital gains without them being taxed as they were earned (taxes would still have to be paid upon sale but at least you have deferred taxation until then plus if dividends are ever taxed as ordinary income again you would have converted them into lower-taxed cap gains) but both would probably require millions of $ invested to set up and might not even be legal under current tax law. One involves a "blocker corporation" (similar to a UBTI blocker) set up somewhere like the Cayman Islands and the other involves reductions in basis in lieu of dividends. I'll explain in another post if anyone is interested.
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Re: S&P500 tracker that does not distribute dividends
What about splitting between growth in taxable and value in non-taxable? I think grabiner mentioned this once at the bogleheads forum.
The cons:
- Expense ratio would be a bit higher than a single S&P index
- You'd still have to reserve some space in non-taxable for stocks.
- It's not as simple a single index.
However, the ER can still be pretty low, you'd be diversified, it's still pretty simple, you'd have half of your stocks in taxable and you'd be minimizing your dividends in taxable.
The cons:
- Expense ratio would be a bit higher than a single S&P index
- You'd still have to reserve some space in non-taxable for stocks.
- It's not as simple a single index.
However, the ER can still be pretty low, you'd be diversified, it's still pretty simple, you'd have half of your stocks in taxable and you'd be minimizing your dividends in taxable.
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Re: S&P500 tracker that does not distribute dividends
I'm just now reading "Keep What You Earn" by Terry Coxon (BH's old business partner and the first president of the PP mutual fund). He mentions tax-advantaged funds and how they minimize generating a taxation event due to dividends. I don't have his book in front of me, but he says it requires careful structuring of the fund and complex management issues, but if properly executed they wind up only needing to report 1/3 of the dividends, thus shielding 2/3 of the dividends from taxes.
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Re: S&P500 tracker that does not distribute dividends
You should also look into "tax loss harvesting" strategies. That is a simple technique that takes a little bit of watching but it can be an effective tool to reduce the taxes you pay today.
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