Follow the dividend investment decisions of a person who has no background in financial investment and wishes to take control of their financial future.

DG Investing in a Taxable or Deferred Account? - 05 Feb 2014 15:23

Tags: 401k inflation ira roth taxes

I occasionally get asked if using a tax deferred account (such as an IRA) is better than a taxable account for dividend growth investing and my answer is always the same; it depends.

There is no absolute right answer and much depends on your goals and where you are in life. If your goal is to create an income flow during retirement then a Roth IRA or Roth 401K is your best solution.

If you are saving to build an emergency fund then a taxable account is your best solution as you can easily access your income stream without paying early withdrawal penalties. But this all depends on your age and how far along you are towards your goal. The closer you are to your goal or nearing retirement age (within 10 years) it would make sense to start placing all or some of your future investments into a tax deferred account while you still qualify. The ability to grow dividends at an even faster rate would be yet another tool to help combat inflation during your retirement years.

Besides growing your earnings in a tax free or deferred IRA or 401K there is an additional benefit that may be realized that investors should not overlook. Some U.S. States have a classification of being “tax friendly”. Tax friendly states, such as Pennsylvania, do not tax distributions from 401(k)s, IRAs, deferred-compensation plans or other retirement accounts. If you think a Roth account solves this think again. A Roth may help with federal taxes but States are under no obligation so “tax un-friendly” states such as Connecticut are not shy about taxing Roth distributions. If you are fortunate enough to live in or plan to move to a tax friendly State then consider having some of your investments in a tax deferred account.

Not sure if your state is tax friendly? Check out this neat tool from Kiplinger’s that summarizes all 50 States. Kiplinger's State by State Tax Guide Link - Comments: 0

Dividend Tax Considerations - 17 Aug 2013 13:26

Tags: irs tax taxes


One of the best tax moves in the U.S. has been the reduction in qualified dividend payments to a standard rate of 15% (20% for those in the highest in tax bracket).

Initiated during the Bush Presidency in 2003 and extend throughout President Obama’s terms, the change in the dividend tax rate policy has motivated more companies to issue dividends during that time period rewarding shareholders. Of course there are the counter arguments that the dividend tax rate only benefits the rich but as interest rates on savings have remained near zero and the constant reminder people are struggling to fund retirements this argument has been slowly dying off.

Over the years more dividend paying companies have led to the increase in popularity of dividend growth investing. And retirees are learning to embrace a new income stream at a lower tax bracket which has helped provide another solution to funding retirement. A lower tax rate may have been one of the motivators why you became a growth investor but if you are new to this investment style you should be aware that there may be other countries that can tax your dividend.

Just because a stock is listed on a U.S. stock exchange does not mean that all dividends are only taxed by the U.S. There are quite a few foreign stocks also traded and the originating countries may have a tax rate that can hurt you dividend growth. Some countries such as the U.K. have a 0% rate while others such as Switzerland have a rate as high as 35%. Understanding a foreign countries tax rate is essential when evaluating both a dividend payment as well as growth potential, to assist here is a link to a table of dividend tax rates by country.

Additionally, if you are not careful when filing your income tax you could be double taxed (once by the foreign country and once by the U.S.). When filing your annual income tax return there is a credit allowed for foreign taxes to avoid the double taxation (IRS tax credit link - Comments: 0

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