ETF choices for debt recycling

Question

Hey team. For the purpose of debt recycling is there any restriction on what etf can be use. Or is it the case that as long as it generates some income through a dividend it’s ok from an ATO perspective. I’m thinking of an all IVV option given the lower dividend as I don’t want the additional income. Thanks

Answer

Hey there! When it comes to debt recycling, the main idea is to use the income generated from investments, such as dividends from ETFs, to pay down non-deductible debt (like a home loan). From the perspective of the Australian Taxation Office (ATO), there aren’t specific restrictions on which ETFs can be used for this strategy. The key factor is that the investment should generate some form of income, typically dividends, which can then be used to effectively replace your non-deductible debt with deductible debt.

Choosing an ETF like IVV, which tracks the S&amp;P 500 and typically has a lower dividend yield, can be a strategic choice if you prefer less frequent or lower income distributions. This can be particularly useful if you’re aiming to minimize taxable income while still benefiting from potential capital growth. IVV’s lower dividend yield means you might have less income to redirect towards debt repayment initially, but this could align well with your strategy if you prefer lower immediate income for tax or other personal financial reasons.

It’s important to consider the overall suitability of the ETF in the context of your broader financial goals and risk tolerance. Each ETF has its own dividend policy, which will dictate how and when dividends are paid. Some ETFs might reinvest dividends automatically, while others distribute them directly to investors.

In the context of using Pearler for your investments, you can easily track and manage your ETF investments, including those like IVV. Pearler’s platform allows you to align your investment choices with your financial goals, such as debt recycling, by providing tools to automate investments and reinvest dividends according to your preferences. This can simplify the process of managing your investment strategy and financial planning.

You can find out more about this topic here: Do Etfs Pay Dividends

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

Hi Stuart.

The main restriction is the ETF must produce some taxable income, so IVV passes that test.

We actually did an episode of Aussie FIRE covering this question and a bunch more which you can listen to here (Episode 20): https://open.spotify.com/episode/2kAMVFUPetBA...

Hope you find it helpful.

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Stuart Hosford

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