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Dividend Stocks in IRAs: Don't Let This Tax Trap Snare You

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.

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Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2014, at 5:10 PM, maisymc wrote:

    Hi Dan, good article, thank you. Can you comment on Roth IRA in that same situation. Also, the one thing I get confused with in a Roth IRA that for me is maxed at $6500 a year is, once you max out what you can invest in a year in a Roth, can you invest in any other type of tax deferred IRA (regular IRA or Annuity) or is the $6500 the max of all IRA types combined. Thank you much.

  • Report this Comment On June 20, 2014, at 6:16 PM, qfactor007 wrote:

    It probably won't matter a few years from now anyway because the reduced rate on dividends won't be an option. The government already tried to strip us of that benefit, so there's no reason to doubt they will succeed, and most likely before we retire.

  • Report this Comment On June 21, 2014, at 5:09 PM, KBecks wrote:

    Is this only for Traditional IRAs and not ROTH IRAS?

  • Report this Comment On June 22, 2014, at 8:37 AM, gskinner75006 wrote:

    I would rather have the deferred compounding effect of dividends then worry about what my effective tax rate will be at retirement.

  • Report this Comment On June 22, 2014, at 12:08 PM, SkepikI wrote:

    Dan: Oh piffle.... this is one of the most "wonky" arguments and esoteric "revelations" I've ever repeatedly seen in print. As a PRACTICAL matter, WHO CARES!!! As if it would be important to me at all that I could get a lesser tax rate by holding dividend stocks in a taxable account and holding only non-dividend stocks in my IRA.

    All I really care about is making money in my IRAs. If the best path for diversification and investment returns in my IRAs include dividend stocks and I thereby "miss out" on a little tidbit because it gets taxed at ordinary rates instead of dividend rates when I take it out, I can (fake sob) live with that. ON THE OTHER HAND, if I take pains to not use dividend stocks in my IRA and end up making less because of it, defeating the purpose of my IRA, I am very sad (real sob).

    Odds are I will be paying lower tax rates when I take my money out of IRAs anyway... And if I am wrong about that in the future, because I made so much money in IRAs my tax rates are up at mandatory distribution time (70.5 years), then broken-hearted I will cheerfully admit you were right all along, as laugh all the way to the bank....

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DocumentId: 3001873, ~/Articles/ArticleHandler.aspx, 11/26/2014 10:26:44 AM

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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Related Tickers

11/26/2014 10:11 AM
AGNC $23.06 Up +0.09 +0.37%
American Capital A… CAPS Rating: ****
MO $49.49 Up +0.03 +0.06%
Altria Group, Inc. CAPS Rating: ****
NLY $11.56 Down -0.01 -0.04%
Annaly Capital Man… CAPS Rating: ****
T $34.99 Up +0.17 +0.47%
AT&T CAPS Rating: ***

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