Do you lose the benefit of the lower tax rate on qualified dividends when the investment is held in an IRA?
Do you lose the benefit of the lower tax rate on qualified dividends when the investment is held in an IRA? For example, when you are withdrawing funds from an IRA and your normal tax rate is 20 percent, are the qualified dividends taxed at 20 percent or 15 percent?
All distributions from a traditional IRA or IRA Rollover are taxed at your ordinary income tax rate as you received a deduction on contributions. Now any non-deductible contributions are not taxed and considered a return of principal, but the growth or income from the non-deductible contributions are taxed at your ordinary income tax rate when distributions are made. This is because they were able to grow tax deferred, possibly for many years.
For this reason, you may need to plan which investments go into which accounts going forward. Assets producing income (interest) could be purchased in the IRA while qualified dividend stocks you intend to hold could be purchased in a taxable account. A stock or stocks that you may think have very high long term growth potential would also be purchase outside the IRA (if possible) for the long term capital gains tax rate. All that said, nothing is as important as strategy and growing your accounts regardless of the type of account. Also, if you do proper tax planning and loss harvesting near year-end in taxable accounts, you will pay a lot less in tax than you might think. This is known as a tax alpha. Many advisors don't like to discuss this because booking losses "feels bad."
Many people have most of their assets in their retirement accounts and don't have the luxury of being real flexible. This is when the actual strategy of simply making money alone regardless of the tax. If that is the case, you simply need to pick the best stocks, dividends or not, for the best risk-adjusted reward possible based upon you.
Hope this helps and best of luck, Dan Stewart CFA®
The answer is technically yes, but it's essentially a non-factor.
Any distributions taken from an IRA is taxed at your income rate in the year you receive the distribution; however, the dividends are re-invested and grow over time without paying taxes on them. If you view it from this perspective, you're actually making much more money over a period of time than you are saving by paying the qualified dividend rate in say a brokerage account.
Hope this helps!
Yes, the lower tax rate on qualified dividends is lost when the investment is held in an IRA account.
Typically, the qualified dividend rate will be lower than your ordinary income tax rate. They are usually not the same.