Author Topic: Is is stupid to live off dividends if you are in the 15% tax bracket?  (Read 4517 times)

meteor

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I just read an article that people who are in the 15% tax bracket (under about $36,000) pay 0% taxes on long term capitol gains.  http://www.kiplinger.com/article/taxes/T055-C000-S002-limit-taxes-on-capital-gains-in-retirement.html

I also read another article that say Dividends income is always taxed at 15% for this same bracket.

Is this true?

 Then I must have really made a big mistake when I bought mutual funds with dividend distributions. If I'm going to live off this income, it seems like I should instead cash out the mutual funds to live off of, since I won't have to pay any tax on this. Then I should phase out mutual funds with large dividends. Right? This sounds unbelievable.  Am I missing something?

daverobev

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #1 on: February 14, 2014, 06:12:26 PM »
I think there are special rules for dividends - https://en.wikipedia.org/wiki/Qualified_dividend

So if your divis are qualified, you're fine.

meteor

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #2 on: February 14, 2014, 06:56:22 PM »
I think there are special rules for dividends - https://en.wikipedia.org/wiki/Qualified_dividend

So if your divis are qualified, you're fine.

wow!  Thanks for pointing that out.  I never would have found this needle in a haystack.  None of the article I read mentioned this.

TreeTired

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #3 on: February 14, 2014, 07:30:56 PM »
It also can seem stupid to have dividend paying stocks or capital gains in an IRA account.  You are converting preferenced income into ordinary income.

foobar

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #4 on: February 14, 2014, 09:26:07 PM »
Sure but you are doing that from a 15%+ larger pile of money.   Throw in the low taxes on the first 50k of income most people will come out ahead in most cases by using the IRA. There are exceptions though.

It also can seem stupid to have dividend paying stocks or capital gains in an IRA account.  You are converting preferenced income into ordinary income.

meteor

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #5 on: February 14, 2014, 10:23:52 PM »
It also can seem stupid to have dividend paying stocks or capital gains in an IRA account.  You are converting preferenced income into ordinary income.

So what do you think IRAS should have in them?

Nords

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #6 on: February 14, 2014, 10:37:00 PM »
Then I must have really made a big mistake when I bought mutual funds with dividend distributions. If I'm going to live off this income, it seems like I should instead cash out the mutual funds to live off of, since I won't have to pay any tax on this. Then I should phase out mutual funds with large dividends. Right? This sounds unbelievable.  Am I missing something?
You're letting taxes drive your investment decisions.

One advantage of equity dividends is that they invoke a measure of truth on a company's financial statements.  When a business has to maintain its dividend payout ratio (and grow its dividends) then it's more difficult for them to finagle their accounting. 

As nice as dividends may be, it's also a good idea to diversify with some growth equities and other assets.

Leisured

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #7 on: February 15, 2014, 10:49:31 PM »
I agree with Nords that you should not let taxes drive your investment decisions.

foobar

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #8 on: February 17, 2014, 06:46:11 AM »
Actually a bunch of companies do finagle their finances to pay dividends.  There are a lot of companies that take out loans in order to pay the dividend.  The good companies bet they can make more money than the interest rate. The bad companies are trying to prop up their stock.

Then I must have really made a big mistake when I bought mutual funds with dividend distributions. If I'm going to live off this income, it seems like I should instead cash out the mutual funds to live off of, since I won't have to pay any tax on this. Then I should phase out mutual funds with large dividends. Right? This sounds unbelievable.  Am I missing something?
You're letting taxes drive your investment decisions.

One advantage of equity dividends is that they invoke a measure of truth on a company's financial statements.  When a business has to maintain its dividend payout ratio (and grow its dividends) then it's more difficult for them to finagle their accounting. 

As nice as dividends may be, it's also a good idea to diversify with some growth equities and other assets.

Nords

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Re: Is is stupid to live off dividends if you are in the 15% tax bracket?
« Reply #9 on: February 17, 2014, 11:03:49 PM »
Actually a bunch of companies do finagle their finances to pay dividends.  There are a lot of companies that take out loans in order to pay the dividend.  The good companies bet they can make more money than the interest rate. The bad companies are trying to prop up their stock.

Then I must have really made a big mistake when I bought mutual funds with dividend distributions. If I'm going to live off this income, it seems like I should instead cash out the mutual funds to live off of, since I won't have to pay any tax on this. Then I should phase out mutual funds with large dividends. Right? This sounds unbelievable.  Am I missing something?
You're letting taxes drive your investment decisions.

One advantage of equity dividends is that they invoke a measure of truth on a company's financial statements.  When a business has to maintain its dividend payout ratio (and grow its dividends) then it's more difficult for them to finagle their accounting. 

As nice as dividends may be, it's also a good idea to diversify with some growth equities and other assets.
What part of the phrase "more difficult" is causing confusion in my characterization of the degrees of finagling?

The accounting rules for a dividend-paying company are more transparent than those for companies which are not paying dividends.  I'm not holding up dividend payers as a shining pillar of integrity, just pointing out that it's generally easier to figure out where their money is going.  Of course people might avoid investing in a dividend-paying company that was taking out loans to fund its dividend-- the whole point of my comment is that it's easier to figure out when a dividend-paying company is doing that versus when a non-dividend-paying company is borrowing excessively. 

I also know that mathematically (and tax-wise) it's better to take profits in a stock by selling shares rather than by taking dividends in cash.  But again the companies which pay dividends are generally able to obtain a higher ROE with their cash because they're less likely to do stupid things with their assets like acquisitions or share buybacks. 

I don't invest all of my assets in dividend-paying companies, and neither should anyone else.  I'm just suggesting that dividend-paying companies (in general) are a better deal than growth companies which don't pay dividends.  One of the most attractive features of dividend-paying companies was demonstrated during the Great Recession when everyone's stock prices got hammered.  This was a bad time to be selling shares, but a portfolio of diversified equity dividends paid out nearly the same amount amount of dividends during the recession as before-- a big comfort to investors who didn't want to sell shares during a bear market.