From 24/7 Wall St. · Chris Lange · · 2m
Where you hold dividend stocks costs thousands yearly
Parking high-yield dividend stocks in the wrong account quietly drains thousands in taxes each year, especially for REITs and MLPs.
In brief
Parking high-yield dividend stocks in the wrong account quietly drains thousands in taxes each year, especially for REITs and MLPs. Hold high-yield dividend stocks and REITs in Roth IRAs to eliminate annual tax drag that compounds over decades of retirement. Originally reported by 24/7 Wall St..
The Roth dividend advantage explained
A $500,000 position yielding 8% generates $40,000 annually. In a taxable account at 24% bracket, you keep $30,400. In a Roth, you keep all $40,000. That $9,600 yearly gap compounds tax-free for life.
REITs belong in Roth accounts first
Realty Income yields 5.66% with monthly distributions taxed as ordinary income in taxable accounts. At the 24% bracket, that's a 24% annual tax hit. Inside a Roth, distributions are completely tax-free.
MLPs carry steep tax complications
Energy Transfer LP yields 6.37% but MLP distributions generate K-1 forms and can trigger Unrelated Business Taxable Income inside IRAs if it exceeds $1,000 yearly. A Roth shields the ordinary-income portion from these tax complications.
Qualified dividends get smaller Roth boost
Altria, Philip Morris, and Southern Company pay qualified dividends taxed at long-term capital gains rates (0%, 15%, or 20%) instead of ordinary income rates. The Roth benefit is smaller but still meaningful over decades.
Higher tax brackets lose more to dividends
A 37% bracket investor loses 37 cents per dollar of ordinary dividend income to taxes. A 22% bracket investor loses 22 cents. A Roth wipes both to zero, making it especially valuable for high earners.
The permanent cost compounds over time
Giving up ordinary income tax on a 5% to 7% dividend stream for two or three decades creates a permanent, quantifiable haircut on retirement income. The annual tax delta reinvests tax-free inside a Roth every single year.
Prioritize ordinary-dividend stocks first
If converting to a Roth, sequence the highest-yielding ordinary-dividend positions like Realty Income and Energy Transfer ahead of qualified-dividend payers like Altria, Philip Morris, and Southern Company.
Calculate your annual tax cost now
If you hold any REIT or MLP in a taxable account, calculate your annual tax cost at your marginal bracket before your next filing. This reveals the true drag on your retirement income.
The big picture
Hold high-yield dividend stocks and REITs in Roth IRAs to eliminate annual tax drag that compounds over decades of retirement.
