Friday, January 11, 2013

Dividend stocks in IRAs, HSAs, and taxable accounts

If you hold dividend stocks in a traditional IRA, you do not have to pay taxes on your dividends but you do have to pay income taxes when you withdraw your money.

If your income tax rate is higher than your dividend tax rate, the savings that you gain from not paying taxes on your dividends today -- even after letting those tax savings compound -- may not be enough to offset what you lose in income taxes later on.

In such cases, depending on how long you hold the stock in the traditional IRA, and this may sound sacrilegious, but it may be better to hold your dividend stocks in a regular taxable account.

For example, if you had the stock for exactly one year in a traditional IRA, you'd pay (say) 25 percent in income taxes when you take the money out. On the other hand, if you had the same stock in a regular taxable account, you'd pay just (say) 15 percent in dividend taxes.

By contrast, because you avoid paying taxes on your dividends forever, you can hold dividend stocks in Roth IRAs and HSAs with impunity.

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