How Are IRA Stock Dividends Taxed?
An individual retirement account is a long-term savings plan that offers tax advantages in investing for retirement. As long as you are younger than 70 1/2, you might be able to contribute to an IRA and take a tax deduction for your contribution, subject to amounts defined by the IRS. Earnings in the account are generally not taxable until distribution. Roth IRAs do not allow a tax deduction at the time of contribution, but money in Roth IRAs generally grows tax-free.
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Treatment of Dividends Paid
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As dividends are paid into your IRA account, they are tax-deferred and not currently taxable to you, unlike dividends in a regular taxable investment account. Recent legislation classifying some stock dividends as "qualified," and therefore eligible for a reduced tax rate, is irrelevant to IRA account holders.
Tax-Deferred Growth
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The growth of all assets within an IRA, including the growth of dividends paid into and possibly reinvested in the account, is also tax-deferred. Even if a dividend is reinvested into shares of stock, and that stock is later sold, the income from the sale is still tax-deferred.
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Taxation of Distributions
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When distributions are taken from an IRA account, they are immediately taxable at ordinary income rates. Even if a dividend paid into an account was originally a "qualified" dividend, when it is withdrawn from an IRA, that special tax status vanishes and it is taxed at ordinary income tax rates.
Penalties
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Any withdrawals taken from an IRA account before age 59 1/2, including income from dividends, is subject to a 10 percent penalty tax in addition to ordinary income taxation. After age 70 1/2, if you do not take your required minimum distribution as specified in IRS tables, the amount not withdrawn is subject to a 50 percent penalty tax. This tax is renewed every year for which the distribution is not taken.
Roth IRAs
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As contributions to a Roth are made with after-tax dollars, most distributions from Roth IRAs are tax-free. Dividends paid into a Roth account are never taxed, even when withdrawn.
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References
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