Tax-deferred accounts such as IRAs are a great way to save for retirement. But if you like to invest in dividend stocks, there's a tax trap that you need to understand in deciding how to invest your IRA assets.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at an often-overlooked aspect of IRA taxation. Dan notes that IRAs offer the valuable benefit of tax deferral, meaning you don't have to pay taxes on dividends so long as you don't make withdrawals from your IRA. But Dan warns that when you take money out of the IRA, it all gets taxed at your ordinary income tax rate -- even if lower dividend tax rates would ordinarily have applied in a regular taxable account. Dan says there's no reason to worry about having in an IRA Annaly Capital Management (NYSE:NLY), American Capital Agency (NASDAQ:AGNC), and other dividend-paying investments that typically don't qualify for lower tax rates on their payouts. But for Altria Group (NYSE:MO), AT&T (NYSE:T), and other popular stocks that do generally qualify for lower dividend tax rates, you should determine whether the benefits of tax deferral outweigh the added tax you might pay in retirement.
Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.