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Happy Monday readers, and welcome to Part 3 in a 3 part series on getting started with investing in ETFs. Missed Part 1 and 2? Head over to stayfrostyfinance.beehiiv.com to catch up!

On today’s newsletter:

• Managing your Taxes with ETFs

• Account Considerations

• Are Dividends Really That Great?

Let’s get to it!

Ah, yes — the inevitable things in life: death, taxes, and your favorite sports team never winning a freakin’ thing. However, taxes don’t have to be an inevitable pain with ETFs. Here in this 3 part finale, learn how to maintain tax efficiency while investing in ETFs.

ETF Tax Considerations

Thankfully, ETFs are fairly tax efficient. Much more so than mutual funds, but that’s a conversation for another day. Here’s when a taxable event can potentially occur when buying and selling ETFs:

• Selling Shares at a Gain

• Receiving Dividends

• The Fund Realizes a gain without you selling.

You’ll only pay up if you are holding an ETF in a taxable account. If you’re in an HSA, Roth IRA, or Roth 401k, simply put, there’s never any taxes to pay. Neat huh? However, if you’re in a regular IRA or 401k, you won’t pay any taxes on the gains, but you will pay taxes when you withdraw later on. There are some other niche situations, but that’s beyond the scope here.

So, the big question is: What account should I hold my investments in? Well, it depends on your situation and needs. Do you need the option to sell easily and turn your ETF into cash ASAP without a penalty? Might want to do taxable. Playing the long game? Probably want to max those tax-free accounts first.

The Curious Case of Dividends

Dividends. Responsible for 84% of the S&P 500’s total return from 1960 to 2021. Whoa. Yeah. That’s a lot. Compounding at work baby.

But what is a dividend exactly? A dividend is a payment (either in cash or reinvestment into the fund/stock) made to a shareholder on a certain basis) The payment is from the company’s earnings. Meaning, business pay out dividends instead of retaining the earnings and seeing capital appreciation of the company. Want a good example? Look at AT&T and their dividend and share price. The share price is relatively unchanged since 1994. The magic of dividends!

BUT — Dividends are taxable events. Meaning, even if you reinvested those dividends from the S&P 500 mentioned above, you’d have to pay tax on those dividend payments provided you were holding it in a taxable account. Something to keep in mind. That would lower your overall return significantly. Solve this problem by moving to a tax-advantaged account.

If you’re already a Top-G and maxing out those advantaged accounts, good for you. Invest that money in a taxable account. Know Uncle Sam will get his way somehow, someway. There are other ways to minimize taxes, but we’ll take a look at that a different time.

Dividend or no dividend, the investment is compounding - Either via a dividend (and reinvestment) or capital appreciation of the fund. Dividends are very nice in aiding in that. Dividends and capital appreciation are not guaranteed though! Investing carries risk after all.

Takeaway

I’m hopeful that in this past three weeks, you’ve been exposed to a simple, yet proven strategy in investing. It’s not hard to start, and it’s simple to maintain.

Next week, I’ll be back with regular personal finance adjacent musings, but if you, the reader, have any suggestions, I’m all ears. Happy ETF hunting and get started investing! Hope you liked this mini series.

Want to try tracking your cash flow, transactions, and assets, intentionally? I’ve developed a spreadsheet-based tool that works great manually, by dropping in your financial account data or use a service like Tiller and go the automatic route. → I do the automated one with Tiller and it’s awesome! Check it out below and use my discount code to get it for FREE!

Stay Frosty My Friends,

Andrew

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