Tax on dividends in IRA vs Investment Acct.

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Hugh Prolly-Wright
Posts: 94
Joined: Thu Sep 15, 2016 8:10 pm

Tax on dividends in IRA vs Investment Acct.

Post by Hugh Prolly-Wright »

I think I know the answer to this, but if I take dividends from my taxable investment account, as well as from my IRA or 401k, the tax I'm paying is the same for either, correct?
jebmke
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Location: Delmarva Peninsula

Re: Tax on dividends in IRA vs Investment Acct.

Post by jebmke »

Not necessarily.

Qualified dividends in taxable accounts for most people will be taxed at 15 or zero percent.

Distributions from IRAs are taxed at your ordinary income rate, which could be higher.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
doobiedoo
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Joined: Fri Jul 23, 2021 1:10 pm
Location: Southern CA

Re: Tax on dividends in IRA vs Investment Acct.

Post by doobiedoo »

Hugh Prolly-Wright wrote: Sun Feb 02, 2025 5:18 pm .. if I take dividends from my taxable .. account [and] from my IRA or 401k, the tax I'm paying is the same for either, correct?
No.
Trad IRA dividends are taxed as ordinary income, but only upon distribution from the IRA.
Qualified dividends in taxable accounts are taxed at 0%, 15%, 20% depending on your taxable income.
This link explains dividend tax rates and qualified dividends. https://www.nerdwallet.com/article/taxe ... d-tax-rate

If you want/need to spend dividends, start spending the dividends from the taxable account.
Because you are already paying the taxes on those taxable dividends whether or not you withdraw the money!
And turn off dividend reinvestment in that taxable account.
dbr
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Joined: Sun Mar 04, 2007 8:50 am

Re: Tax on dividends in IRA vs Investment Acct.

Post by dbr »

It is important to recognize that anything distributed from a 401k or IRA is taxed as ordinary income when distributed, NUA treatment of company stock in a 401k being the exception.

Interest, dividends, capital gains distributions, and capital gains in a taxable account are taxed at various rates for the different items and depending on income. Capital gains in a taxable account can even be tax free in the case of heirs getting a basis step up.

It is probably a good idea to scan a good book on personal income tax.

A good resource is here: https://fairmark.com/
rkhusky
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Re: Tax on dividends in IRA vs Investment Acct.

Post by rkhusky »

Dividends in a taxable account are taxed no matter what you do with them. Tax rates vary depending on your income and whether qualified or not.

Dividends in an IRA or 401K are not taxed, unless you withdraw them. Income tax rates apply to withdrawals from Traditional accounts, but not to Roth.
bonesly
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Location: WA

Re: Tax on dividends in IRA vs Investment Acct.

Post by bonesly »

Hugh Prolly-Wright wrote: Sun Feb 02, 2025 5:18 pm I think I know the answer to this, but if I take dividends from my taxable investment account, as well as from my IRA or 401k, the tax I'm paying is the same for either, correct?
Others have accurately answered this question, but I always think an example helps.

Let's say your marginal Federal tax rate is 22%, so your LTCG/Qualified Stock Dividends tax rate is 15%.

You take "dividends" from Taxable as follows:
Stock Dividends: $1,000
MoneyMarket or Bond Dividends: $500

You take "dividends" from your Trad IRA and/or Trad 401k from any type of funds equal to $2,500

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Assuming you've used up the 0% and 12% brackets with pensions and SocSec, all future income is at the marginal rate...

The stock dividends from Taxable are "qualified" so you owe $1,000 x 15% = $150

The MMF and/or Bond Fund from Taxable is not qualified (it's "interest" despite it perhaps saying "dividends" on your statement), so you owe $500 x 22% = $110

Regardless of the source of the funds (stocks, bonds, or cash are all the same), withdrawals from a Trad IRA/401k/403b/457 are treated like ordinary income, so you owe $2,500 x 22% = $550 (which is not the same rate as the qualified stock dividend from Taxable (22% vs 15%)).
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Engaging Data's Tax Visualizer can be a reasonable "quick-look" at how your income is going to fall into different tax brackets. If you need more than a quick look then a mock tax return like Intuit's TaxCaster might be a better estimate.
Don't do what Bogleheads tell you. Listen to what we say, consider other sources, and make your own decisions, since you have to live with the risks & rewards (not us or anyone else).
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