Q&A: Reinvested Dividends?

Q:

I thought I had a handle on my TSP (thrift savings plan) and how it works, now I'm not sure because of what my wife said is her understanding of her Vanguard account. Her IRA was moved from American Funds to a Vanguard account and is set up in the funds you recommend with a 60/40 split.

I believe that on payday I purchase shares in specific funds of my TSP and the price of those shares fluctuate with the economy, this is how I make or lose money over the years. In retirement I will be selling shares and there maybe a need to rebalance my TSP account once a year. I don't believe there has been or ever will be any new money or shares added to my TSP account unless I or my employer purchases them.

My wife believes both of our accounts generate dividends that are automatically reinvested in our accounts in the form of shares which makes the accounts grow and compound.

Her understanding would mean that although we will be selling shares in our retirement our accounts would not be depleted as fast as I thought.

If she is right how do I track and learn more about the dividends that are being reinvested in our accounts?

A:

The good news is that you are both right about your respective plans.

In her Vanguard plan there will, at times, be distributed income, dividends, and capital gains. These are typically reinvested in new fund shares (unless the account holder chooses to have them distributed in cash).

In your TSP, dividends and income are retained within the respective funds and increase the net asset value (NAV) of the shares.

In your TSP, there will be no record of the reinvestment. In your wife’s IRA, the transactions will show up on her statements as small share purchases.