Tax Question

[divigrow]

I am a 35 year old investor currently switching over to a DG strategy. My wife and I have both Traditional and Roth IRA's as well as a joint taxable account. What advantages/disadvantages exist in holding DG stocks in a taxable account? Same question for IRA accounts? Are the advantages/disadvantages simply those that are commonly known about IRA's vs. taxable accounts or am I missing anything that might sway me to emphasize my taxable account more? Are certain DG equities better suited for a retirement account as opposed to a taxable account?

[hendi_alex]

Over time I'm planning on positioning tax advantaged holdings in my cash account and holding investments such as REITS, preferred stocks, bonds, other non qualified in the IRA. It makes me sick to realize capital gains or receive tax advantaged dividends in the IRA, and then proceed to pay 32% combined Fed and State taxes on these gains (as opposed to tax advantaged 15% rate in the taxable account) when taking a distribution.

I think that situation will eventually apply to you for the traditional IRA. I'm assuming there are no taxes due on distributions from the Roth so no problem there.

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With what appears to be a very strong savings program, you are probably in a higher marginal tax bracket. IMO anyone who is not maxed out in 15% bracket would be better to pay the taxes and save in a taxable account. After deductions we often stayed inside the 15% bracket. I saved in a deferred account figuring that taxes would be lower at retirement. Now most often were are paying 32% to take those dollars out of the deferred account. So for that part of the savings that could have been taxed at the lower bracket, deferral was a losing game.

[divigrow]

Thank you very much for the thorough and sound advice. For your vindication. I posed the same question to my father today. He has been a corporate CPA for over 40 years, along with being a partner in his firm for practically just as long. His expertise is not necessarily in individual income taxes, but knowledgeable nonetheless, and without reading your response he came to the same conclusion, pointing to the same pitfalls. You know your stuff. Thank you again.

[benjamen]

Traditional IRA:
Pro: lowers your tax base now, no taxes on your dividends over the years
Con: For the most part, you cant touch it until you are 59.5 years old. You do get taxed on the distributions

Roth IRA:
Pro: While it is post tax money, you don't get hit with any other taxes on your capital gains and dividends
Con: For the most part, you cant touch it until you are 59.5 years old.

Taxable Account:
Pro: You can access it at any time if needed. You can sell losers for tax harvesting
Con: You are taxed at 15% (for most people) on your dividends. Harder to sell out from a winning stock unless you want to get hit with a big capital gains tax

[Rasec]

Great summary benjamen.

Why 15% for most ppl? I thought it was for everyone. Does it depend on tax brackets?

What about taxes in international stocks? How much is the % paid in dividends in international stocks?

[hendi_alex]

Inside or outside of an IRA you may or may not have to pay foreign taxes. Many countries have a reciprocal tax treaty with the U.S. and do not tax distributions to an IRA. For non treaty countries, the tax comes out whether in IRA or not. If taken out in an IRA, any foreign tax is non recoverable. For foreign holding in taxable accounts, the withholding amounts are all over the map. The following link has a list of rates, but the article is a little dated: http://www.dividend.com/dividend-educati...nd-stocks/. One other note, to get the favorable tax treaty rate on Canadian holdings, the investor must submit a verification form to the broker. At least in a taxable account foreign taxes can be applied to U.S. tax obligations for most of us, though it often requires filling out a separate form 1116.

If a person is fortunate enough to be in the upper tax bracket, dividends and long term capital gains are taxed at the 20% rate. For married filing jointly that starts at just under $465K, so no danger to me in this life time.

[benjamen]

(08-26-2015, 07:22 AM)Rasec Wrote: Great summary benjamen.

Why 15% for most ppl? I thought it was for everyone. Does it depend on tax brackets?

What about taxes in international stocks? How much is the % paid in dividends in international stocks?

Your tax rate on qualified dividends can be 20%, 15%, or 0%. This depends on your tax bracket, taxable income, and married versus single.

tax brackets:
https://en.wikipedia.org/wiki/Rate_sched...ncome_tax)

tax on qualified dividends by tax bracket:
https://en.wikipedia.org/wiki/Qualified_dividend