There are a number of reasons why people like to put their money into Dividend Reinvestment Plans (DRIPs). Through these plans, shareholders can reinvest variable amounts in a particular company within the span of a long-term investment.
When you reinvest dividends as a shareholder, you can purchase shares or parts of shares of some of the most recognized publicly-traded companies for as little as 10 dollars a time. You invest fractions of shares in cases where the amount of a dividend is less than the value of a single share.
These plans are run a little differently compared to the normal shares. Where an investor would typically be given a quarterly dividend check, the transfer agent, company, or brokerage firm running the DRIP will use the money so realized to purchase more of the company’s shares in the name of the investor.
This is a process that happens whether you are aware or not. As long as you go into the DRIP arrangement, you tacitly consent to having the party running the DRIP handle your share of the money realized from your investment on the business.
Many people get it wrong when it comes to these Dividend Reinvestment Plans. They may therefore go into the plans blindly guided by a misconception.
It is no secret that everyone wants to cut their tax bill by all available means. Investors will therefore look for anything that is not subject to taxation so they can pull off a deduction. But reinvested dividends are just not one of these.
Contrary to popular belief, the fact that the investor is not receiving a cash dividend per se does not mean that they are not taxed. They are. But with a little help from a tax expert such as The Neal Group LLC in Greenfield, WI, you may be able to save tons of cash. Not by exemption from tax, but by utilizing the perks provided within the law safeguarding such taxation.
Here is one lesson from The Neal Group LLC in Greenfield, WI; while dividends reinvested in any Dividend Reinvested Plans are subject to tax just like any other form of investment, this arrangement is far more beneficial for those who want to save. In essence, they are increasingly an essential part of the regular person's portfolio.
For starters, the arrangement is a cost effective approach to investing. It is considered as an income and thus taxable because there was an actual cash dividend although reinvested. But, any capital gains from shares held in a Dividend Reinvestment Plan are never calculated until the stock is finally sold. This normally happens after several years. And here is the sweet part: no returns on this invest are filed until the calculation is made. Meaning that you will not be taxed until then.
It may sound like a small gain because you have to eventually file returns and pay tax. But while that may sound as such, this alternative can be an easy way for an investor to get more shares of the invested funds or company stock they already own normally at a lower cost than could often be paid when buying new ones through the investor’s trading account.
So, at the time you are taxed, the marginal gain is more sizeable compared to what you get from a similar investment as a regular stockholder.
Beware, reinvesting dividends through these dividend reinvestment plans can sometimes drain your savings if you do not handle payouts properly. The help of a professional like The Neal Group LLC in Greenfield, WI is therefore invaluable.
A lot of people do not know what happens to their dividends when they land in their accounts as cash. The Neal Group LLC in Greenfield, WI are keen to help such people not only understand how they can manage fees and optimize payouts to add up to good amounts of cash in the long run. Rather, they offer financial counsel regarding taxation and the various deductions or privileges in each category.
The bottom line is, even though reinvested dividends are taxed, there are a lot of benefits you stand to realize from them. That is not to say that they have no downsides. They do, but when managed correctly, the pros far outweigh their cons. Simply, they are a worthwhile investment.
THE NEAL GROUP, LLC