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Dividends Re-invested

Gary R

When you receive a dividend and re-invest it, Quicken downloads the dividend amount and also the shares reinvested. The dividend increases the cost basis of the security when this happens. This is fine for taxable accounts. However, this is not correct for tax deferred accounts(IRA's and Roth) The brokerage services don't include the dividends in the cost basis for tax deferred accounts, only taxable.
Every time I get a reinvested dividend, I always have to delete the dividend amount and just show the shares amount.
I just want to check to see if anyone else is doing this also

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jacobs

@Gary R I'm not sure I understand your issue. In a retirement account, there is no cost basis which affects taxes.

In a traditional IRA account, all money added to the account has not been taxed, so all money later withdrawn from the IRA will be taxed as regular income. If you invested $5,000 and it grew in the account to $100,000, all $100,000 is taxable income when it is withdrawn; it doesn't matter what portion of that was the original investment, what portion was from dividends paid, and what portion is from appreciation of the investments.

In a Roth IRA account, the opposite is true: any money you withdraw is tax-free; the amount you invested has already been taxed, and the purpose of the Roth is for the investments to grow tax-free. So again, it doesn't matter what portion of the money you withdraw was the original investment, what portion was from dividends paid, and what portion is from appreciation of the investments.

(There are a couple exceptions where the tax basis of your IRA account — but not the individual securities — could be necessary, but these are extremely rare and don't affect the overwhelming majority of investors.)

So I'm not sure why you're deleting the reinvested dividends in Quicken, as Quicken's handling of them should accurately reflect your holdings and taxable income.

Gary R

I guess I did a poor job of explaining. I'm an accountant and fully aware of everything you stated above.
However, that was not my question. When you update the portfolio in Quicken, The dividend amount and shares are brought over from the brokerage. I'm simply saying that you really should delete the dividend amound and only show the shares .

jacobs

Gary R said:

I'm simply saying that you really should delete the dividend amount and only show the shares .

But why? The dividend transactions don't mess anything up. They could be something you want to look at if you want to see how much dividend income you received from a security or across your retirement account. Or you can ignore them. I'm just not understanding why you'd want to delete them. I've never done that, and I've never read about other Quicken users doing so.

NotACPA

But a downloaded Div that increases your cost basis in the security, correctly, DOES impact your performance reporting on that security. Don't delete the Div.

Gary R

The reason why I have always delete the dividend income and just keep the shares are simple.
The dividend income is added to cost basis in Quicken and affects the gain/loss of the security. You have not paid anything for the security, the brokerages don't add the dividend income when it's tax deferred, only when in a taxable account. When you go to security view, look at your stock, I want to see my actual gain/loss from that stock.

Gary R

"But a downloaded Div that increases your cost basis in the security, correctly, DOES impact your performance reporting on that security. Don't delete the Div."

Then why does Fidelity, Vanguard, TR Price exclude the dividend income in tax deferred accounts?
If it's a Roth, no taxes, If Traditional, it's all taxable.

volvogirl

WHAT? If the dividends were reinvested and you got shares for them you did pay the dividend $ for the shares. A reinvested dividend is really 2 transactions, a Dividend and then a Buy. Doesn't matter what kind of account it's in - taxable or not.

Gary R

Volvogirl
check your brokerage statements
you will see dividend reinvestment not added to cost basis

jacobs

Gary R said:
If it's a Roth, no taxes, If Traditional, it's all taxable.

Yes, this describes taking money out of a traditional or Roth IRA account — but cost basis has nothing to do with it.

Cost basis exists for calculating capital gains taxes. Neither Traditional nor Roth accounts are taxed as capital gains upon distribution. Roth accounts don't get taxed at all, while Traditional accounts get taxed as ordinary income. Cost basis doesn't matter in a retirement account*, whether Traditional or Roth.

The asterisk is because there are rare circumstances, not applicable to most people, where you need to know how much you have contributed to an IRA. One is you've made nondeductible contributions to a Traditional IRA, and if the total amount of such nondeductible contributions you've made is larger than the total value of the account, allowing you to claim the loss on your tax return — and only if you itemize deductions. All those "if's" are applicable to only a very small number of people. The other is if you take early distributions from a Roth IRA; in that case, you want to know how much you contributed to the Roth versus what it has earned, because withdrawing what you contributed is not taxable. Again, this isn't common. And that's why various investing websites state, like this article from The Motley Fool: "maintaining true cost-basis records for an IRA isn't necessary."

I can't tell you why Quicken was programmed the way it is, only that it's not generally problematic. I'd guess the developers felt they didn't need to build in different ways of handling dividends in retirement accounts because that information is only needed in fringe cases. And should you be one of the few who needs to see the amount your contributed to your IRA account, you can open the account register, filter by Type, and exclude the Dividend transactions.

So I guess if you anticipate being one of the exceptions, you can do as you have been doing to delete the dividend transactions. If not, you can simply let Quicken work the way it does, and not worry about the dividends. Your original question was "I just want to check to see if anyone else is doing this [deleting dividend transactions] also" and I expect the answer is almost uniformly no.

Gary R

Ok
got it

NotACPA

Gary R said:

"But a downloaded Div that increases your cost basis in the security, correctly, DOES impact your performance reporting on that security. Don't delete the Div."

Then why does Fidelity, Vanguard, TR Price exclude the dividend income in tax deferred accounts?
If it's a Roth, no taxes, If Traditional, it's all taxable.

Fidelity, I'm their customer also, is inconsistent in the matter. In a Taxable account, a ReinvDiv DOES increase your cost basis. In a non-taxable account, it doesn't.

When I point out to my Fidelity "Private Client Group" rep that the addition to cost basis, while not needed for tax reporting in a retirement account, IS needed for performance reporting on the security and account ... he goes silent and doesn't have a reply.

jacobs

I'm guessing Fidelity and others don't include dividends in cost basis in retirement accounts because the only times you'd need to know cost basis in such an account is one of the rare situations I mentioned above where you need to know how much you invested in your retirement accounts. There's no tax reason for including dividends in cost basis, so they apparently don't. As noted, this messes up comparing performance between retirement and non-retirement accounts, but it provides information a few investors might possibly need.

Gary R

I added a retirement rollover to my wife's Vanguard account yesterday. Her total cost of the position was $42,000. (Vanguard Dividend Growth) She bought the stock November, 2021 but I had not included it in Quicken till yesterday. Well, Quicken downloaded Dividends, Capital Gains, of $4,000 to give me a cost basis of $46,000 for the Fund. Quicken gains are based on the new cost basis of $46,000.
However, Vanguard Performance for the account since the inception shows only the $42,000 cost basis and my Percentage loss is only 2%. Quicken shows my performance loss 10% based on Total cost.
This is one of the reasons I prefer to only show the shares reinvested and delete the $$$$$$amounts for dividends, and capital gains received from the brokerage.
My Losses in Quicken are much higher than they really are since Quicken shows a much higher cost basis for each security.

jacobs

@Gary R It depends what information you're looking to glean from Quicken.

For tax purposes, as discussed above, the cost basis in the IRA account is irrelevant; you'll be taxed on what you withdraw, not what you invested.

So then the issue is what you're expecting Quicken to show you about the performance of your retirement holdings, right? I think Quicken is giving you an accurate evaluation of that. You invested $42,000 and received $4,000 in dividends and capital gains, right? So if this were a non-retirement account, your cost basis would be $46,000, right? But you want it to do something different — ignore the money you've received — because it's a retirement account. Other than for tax purposes, wouldn't you want to evaluate the performance of your retirement investments in the same way you evaluate the performance of your non-retirement investments?

Look at it this way: Let's say you bought 100 shares of a security in a retirement account and the same 100 shares of the same security in a non-retirement brokerage account. I would expect Quicken to show me that those two investments perform identically over time, with the same reinvested dividends and capital gains and same unrealized gains or losses. And it does. You want Quicken to show that you the identical investments performed differently over time because one was in a retirement account. To me, that wouldn't make sense, so I'm glad Quicken doesn't do that.

Vanguard doesn't include the dividends and capital gains in cost basis for retirement accounts because, as discussed above in this thread, cost basis really doesn't exist for retirement accounts. You're feeling that Vanguard is showing what's "real", and Quicken is showing a wrong value. I'd say Quicken is actually giving you a better understanding of your investment performance, showing both the $4,000 gain from dividends and capital gains and the $4,840 loss in the value of your investment, for a net $840 (2%) loss.

As you've said you "prefer" to show only the share change, without the cost, of the dividends and capital gains. If that's the way you prefer to look at it, then Quicken allows you to do that; I just wouldn't expect Quicken to change to do it the way you describe.

Gary R

I just checked my accounts at Fidelity. Fidelity does not add dividends and capital gains to tax deferred accounts, only taxable. Fidelity shows zero cost basis for dividend and capital gains received for tax deferred accounts.
This is why I made my argument for deleting the $$$$amount for dividends and cap. gains when you download your transactions to tax deferred accounts only. The way I look at it, you are not actually making additional cash investments out of your pocket for either taxable or tax deferred accounts.
Quicken gains/ losses and all the return reports are misleading since they include everything in the cost basis. This is why I have been deleting the $$$$ amount for years.

Gary R

Jacob---Vanguard DOES include dividends and Cap. Gains in cost basis. They don't include it in the performance reports. I actually have always deleted the $$$$$amount of the dividends and cap. gains for years, no matter if taxable or deferred accounts. The $4,000 that Vanguard paid me as Dividends and Capital Gains did not come out of my pocket. I didn't invest any additional money out of my pocket to buy those reinvested shares. MY only cost in the fund was $42,000. I'm simply saying that my Gains/Losses and Quicken reports are not reflecting my real gains/losses because of higher cost basis.

jacobs

Gary R said:

The way I look at it, you are not actually making additional cash investments out of your pocket for either taxable or tax deferred accounts.

Yet you want Quicken to show the dividends and capital gains for taxable accounts but not for retirement accounts.

Cost basis is not defined as "out-of-pocket" investments; it's the amount you have invested. When you reinvest a dividend or capital gain, you actually do receive cash in your pocket — and then turn around and spend the cash to buy more shares. And that's not different whether it occurs in a taxable or retirement account. If you want to ignore the money you earned from the dividends and capital gains in your retirement accounts, then you can keep doing what you've been doing. I'm only saying that doesn't make sense if you want to use Quicken to help you evaluate the performance of your investments — which should not be different depending on whether they're in a taxable or retirement account.

In your original post starting this thread, you described that you deleted the cost of reinvested dividends and capital gains in your retirement accounts, and asked if anyone else did the same. Several of us answered no, and explained why. I think we're both saying the same things over and over at this point, so I'll bow out of the conversation now. Best wishes!

Gary R

Jacobs----I just want to make one more point and then put this to rest. Morningstar shows my total return for Vanguard Dividend Growth from 11/5/21--7/31/22 with a 2.9% loss (Dividends are included)
I also checked these returns with several other sources and they agree.
However, Quicken is showing me a 9.2% loss for the same period. I did not lose 9.2% for this fund.
I have a realized loss of 2.9%. Now, I know Quicken is not going to adjust for this and that's why I originally asked how others are handling this. I will continue to delete the $$$$$$amounts for both taxable and tax deferred accounts to give me the correct Return % figures and also the correct gain/loss numbers. You all are free to choose what best works for you.

Gary R

You can see my Quicken loss is only 2.9% when I delete the $$$$$$amounts vs. 9.2& Loss

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Gary R

This is my taxable account at T Rowe Price. Returns are down 6.3% from inception
This agrees with my Quicken reports, Gains/losses, because I delete the $$$$$$$ amounts received
This gives you a true picture of your returns.

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