Author Topic: Do IRA dividend payouts count as withdrawal?  (Read 498 times)

marktbaldridge

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Do IRA dividend payouts count as withdrawal?
« on: July 23, 2017, 08:24:09 PM »
Very very young moustachian here. (Peach fuzz sort of 'stache at this point.)

My question is: If I have an IRA at early retirement (either Roth or Traditional) and my holdings earn dividends. If I were to choose to keep those dividends rather than re-invest in the IRA (is that even possible?), does that count as a withdrawal?  And is it subject to a penalty if I'm under 59.5?

I hope the question makes sense. Basically, if I'm dumping money into an IRA now (I'm 23) will I be able to live off those dividends in 10 years? Without penalty?

marktbaldridge

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Re: Do IRA dividend payouts count as withdrawal?
« Reply #1 on: July 23, 2017, 08:29:27 PM »
I'm sorry I had a browser glitch, and we now have two of these.

sirdoug007

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Re: Do IRA dividend payouts count as withdrawal?
« Reply #2 on: July 23, 2017, 08:33:25 PM »
Yes, dividends are earnings which are subject to the age rules.

However, IRAs work on a first in, first out principle. In a Roth IRA, the first out would be your contributions  which you can take out anytime without penalty.  If you took out the value of all your contributions, you would then be taking taxable (and subject to the 10% extra tax) earnings.


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marktbaldridge

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Re: Do IRA dividend payouts count as withdrawal?
« Reply #3 on: July 23, 2017, 08:45:13 PM »
So should I keep contributing to my Betterment Traditional IRA? (I plan to do the trad-roth conversion at some point down the road per MadFientist.)

Current situation:
  • IN COLLEGE (Studying engineering.) Two more years till graduation. (And a real job!!!)
  • Married, we have one daughter.
  • Bring in about $23k/yr, live on about 75% of that.
  • No debt. No college loans, nothing. (In-state tuition and grants are great!)
  • Work also has a 401(k). I contribute 6% to get their max match.

MDM

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Re: Do IRA dividend payouts count as withdrawal?
« Reply #4 on: July 24, 2017, 12:57:20 AM »
Repeat from the "other" thread:

My question is: If I have an IRA at early retirement (either Roth or Traditional) and my holdings earn dividends. If I were to choose to keep those dividends rather than re-invest in the IRA (is that even possible?), does that count as a withdrawal?
If you take money out and don't roll that money over to another IRA (or similar), it's a withdrawal.  Doesn't matter whether it is dividends, capital gains, or some part of your original contribution.

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And is it subject to a penalty if I'm under 59.5?
Yes, unless the withdrawn amount was part of a Roth contribution or conversion*. 

*See Two 5-Year Rules For Roth IRA Contributions & Conversions and the sticky thread linked below for qualifiers.

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I hope the question makes sense. Basically, if I'm dumping money into an IRA now (I'm 23) will I be able to live off those dividends in 10 years? Without penalty?
See How to withdraw funds from your IRA and 401k without penalty before age 59.5.

seattlecyclone

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Re: Do IRA dividend payouts count as withdrawal?
« Reply #5 on: July 24, 2017, 01:01:34 AM »
In response to your original question, there's no way to "keep" IRA dividends without withdrawing from the IRA. If you did do so, it would be taxed the same as any other early withdrawal.

But in response to your current situations, I strongly recommend switching to Roth contributions until you find a higher-paying job. With your income and family size I would be surprised if you would owe any federal income tax at all before retirement contributions, which means you're not deferring any tax at all by making traditional contributions.
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The Roth IRA was named after William Roth, who represented Delaware in the US senate from 1971-2001. "Roth" is a name, not an acronym. There's no need to capitalize the final three letters.

MDM

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Re: Do IRA dividend payouts count as withdrawal?
« Reply #6 on: July 24, 2017, 01:17:14 AM »
So should I keep contributing to my Betterment Traditional IRA? (I plan to do the trad-roth conversion at some point down the road per MadFientist.)

Current situation:
  • IN COLLEGE (Studying engineering.) Two more years till graduation. (And a real job!!!)
  • Married, we have one daughter.
  • Bring in about $23k/yr, live on about 75% of that.
  • No debt. No college loans, nothing. (In-state tuition and grants are great!)
  • Work also has a 401(k). I contribute 6% to get their max match.
Taking those numbers at face value, as seattlecyclone noted your federal income tax should be -$1K (a refund due to the child tax credit) for any reasonable amount of traditional contributions.  That means you save no tax now on traditional contributions but will probably have to pay tax if you wait and withdraw them and years from now.

Consider an IRA recharacterization to change any 2016 and 2017 contributions to Roth now.  Note "recharacterization" not "conversion".

If your combined income goes much above the "standard deduction and personal exemptions" amount while you are still a student, consider having your spouse contribute to a traditional IRA (if your spouse is not a student) so the spouse can take a saver's credit.