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Originally Posted by FromDC
I am a buy-and- hold investor while reinvesting dividends. Could you explain why it is more tax efficient to stop reinvesting dividends? Thanks!
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Dividends and capital gains distributions are taxable income regardless of whether or not you reinvest them. I direct the mutual fund to transfer all dividends and distributions into my cash reserve money market account. It doesn't reduce taxes, but it does ensure that you will have money available to pay the income tax. It reduces the stock portion of your portfolio over time, but you can always buy additional shares on your schedule. Sometimes, you can get a large capital gains distribution that you didn't expect. Also, you always have the same number of shares in the fund, and your cost basis is always the same, unless you manually buy or sell shares. That is helpful if you have one investment company tracking the value of funds from another company. To me, there is no advantage to automatically reinvesting unless the fund is giving you some type of discount. Buy shares on your schedule, not on the fund's schedule. It only takes about a minute to change your mutual fund distribution options from reinvest to cash for both dividends and capital gain distributions.