I’m wondering if there’s an index that tracks the S&P 500 but doesn’t distribute dividends. When I reinvest my dividends, I get taxed and then have to put that same money back into the index, but at a loss. Is there an index that reinvests dividends before taxes? I’ve heard of indexes that give you an extra share instead of distributing dividends, so it doesn’t trigger a capital gains tax. The idea is that, when you sell, you only pay capital gains tax on the total appreciation instead of on the dividends. That way, I end up with more money, and so does the tax man.
These types of indexes are common in Europe, but they don’t exist in the US because of tax laws.
Lane said:
These types of indexes are common in Europe, but they don’t exist in the US because of tax laws.
I’ve seen 401k funds (both US and international) set up this way, where no dividends are actually paid out. Here’s one example: State Street U.S. Total Market Index Securities Lending Series Fund Class I. Since it’s a 401k, the dividend issue is a bit irrelevant because it’s not taxable within the account.
@Clay
Yes, these are structured differently because they’re in a tax-deferred account like a 401k.
I don’t think there’s anything like that, and I’m pretty sure it wouldn’t be legal.
What you’re describing isn’t a feature of the ETF or index itself. Some brokers offer a service where you can choose to reinvest your dividends automatically into the same ETF or stock, but that doesn’t change the fact that the dividends are still paid out and taxed. It just means the broker uses your dividends to buy more shares on your behalf.
The answer is no. Mutual funds and ETFs are required to distribute income to shareholders, and the tax is passed on to you, the shareholder. There’s no way around that.
Doesn’t the standard S&P 500 index that most brokers offer do this? They probably also have a separate version that specifies the dividend reinvestment?
Jael said:
Doesn’t the standard S&P 500 index that most brokers offer do this? They probably also have a separate version that specifies the dividend reinvestment?
The dividend reinvestment plans are where you get the dividend, pay tax on it (say 20%), and then use the remaining 80% to buy more shares. What I’m asking about is a way to get an extra share or partial share instead of getting a dividend, which won’t trigger a capital gains event, so I can reinvest 100% of the dividend without paying taxes on it upfront.
@Jade
Unfortunately, that’s not possible. Taxes are going to be paid on dividends no matter what. Companies pay out dividends, and they’re taxable events, so you can’t avoid them.
@Jade
You might be looking for accumulating ETFs. They automatically reinvest dividends without triggering tax events for you. While you don’t get extra shares per se, the value of your investment grows. You can also check out synthetic replication, which could be useful, though I’m not sure if these are available in the US.
@Howard
That’s how it works in the UK. With accumulating ETFs (ACC), the dividends are reinvested into new shares, but you still have to figure out the total dividends at the end of the year to report on your taxes. It can be a hassle. Not sure about other countries, though. OP didn’t mention where they’re from. If you don’t declare the reinvested dividends, you’ll be underpaying taxes (in the UK). Many individual investors don’t realize this, and it can come up in a tax audit. To answer OP’s question, I’m not aware of any ETF that avoids dividend-paying stocks, but they might exist.
@Wendell
That’s kind of strange because it makes it feel like a dividend ETF with extra steps for calculating taxes.
Howard said:
@Wendell
That’s kind of strange because it makes it feel like a dividend ETF with extra steps for calculating taxes.
The dividend tax is still paid when the dividend is received by the shareholder. It just doesn’t hit your account; it gets turned into a new share. With accumulating ETFs, they reinvest the dividends for you, saving you some effort. When I first discovered ACC ETFs, I thought I’d found a way around paying taxes on dividends. But my accountant set me straight. This question comes up a lot from people who invest outside tax-efficient accounts like pensions or ISAs.
@Wendell
In Poland, accumulating ETFs do help defer taxes. Even though the ETF pays taxes in the source country (like the US for a European S&P ETF), you don’t pay any taxes in Poland until you sell the shares. If I had dividend ETFs, I’d need to pay taxes on every dividend. So, for me, accumulating ETFs help delay some taxes.