How do I account for interest and dividends in brokerage accounts?
When you set up your brokerage account as an after-tax account, you may want to account for your dividends. The software does not currently feature a granular accounting for dividends. You may follow the steps below to account for dividends in after-tax accounts.
(Dividends in tax deferred accounts such as 401ks and IRAs should be included in your growth rates for the account. All distributions/withdrawals from these accounts are taxed as ordinary income, whether they are principal, capital appreciation, or dividends.)
You’ll need to know the answer to these 3 questions about your dividends to enter this information accurately.
Is your plan modeling withdrawals from the account?
What is your annual dividend?
% yield if you are reinvesting your dividends
$ total dollar amount if you are taking your dividends as income
Are you reinvesting dividends or withdrawing them as income?
No drawdowns, reinvesting dividends
If you are reinvesting your dividends they increase your cost basis. Increase your growth rates by the annual % of dividends you receive. If you’ve already included dividends in your total return, make sure not to double count them. For example, if you anticipate the account will grow at 4% and yield 1% of dividends, enter a growth assumption of 5%.
Then, add the same percentage of dividend growth to the turnover rate. Learn more about your turnover rate here.
If your plan is modeling drawdowns from the account you may consider this an accounting for dividend income. You may wish to head over to Insights > Taxes > Gross Taxable Income by Source to view the realized gains. If they appear accurate and inclusive of dividends, there is no further action needed. If they seem to low, you may increase your turnover rate.
Increasing Realized Gains and Income
If you would like to model your dividends increasing income, you may wish to enter the dividends as Passive Income. When you do this the income will incur state and federal income tax.
If you would like to model your dividends flowing into a cash account and increase your realized gains and capital tax modeled, you may wish to enter transfers from the after-tax account to another after tax account. Gains will be realized on the difference between the cost basis and the transfer.