Author Topic: Dividends in taxable accounts  (Read 2656 times)

RyanAtTanagra

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Dividends in taxable accounts
« on: February 15, 2016, 03:59:13 PM »
2015 was the first year I had enough in my taxable account to generate a noticeable amount of (qualified) dividend income.  I just want to verify I'm not doing something wrong.  The only thing in this account is an S&P500 index fund (PREIX), so according to the Bogleheads wiki (as I understand it), the allocation is appropriate.  Are dividends in the taxable account to be expected, or am I missing something with regards to basic tax strategy (yes my 401k and IRA gets maxed)?

Thanks

seattlecyclone

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Re: Dividends in taxable accounts
« Reply #1 on: February 15, 2016, 04:13:29 PM »
Pretty much any stock-based mutual fund will pay dividends, as is required when the stocks they hold pay dividends. This is to be expected.

MDM

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Re: Dividends in taxable accounts
« Reply #2 on: February 15, 2016, 04:17:05 PM »
Are dividends in the taxable account to be expected
Yes.

Quote
or am I missing something with regards to basic tax strategy (yes my 401k and IRA gets maxed)?
No.


Unless you are in a very high (e.g., >35%) tax bracket (in which case you might want to get more fanatical about minimizing taxable earnings), your allocations are fine.

RyanAtTanagra

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Re: Dividends in taxable accounts
« Reply #3 on: February 15, 2016, 04:20:29 PM »
Great, thanks!

PhysicianOnFIRE

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Re: Dividends in taxable accounts
« Reply #4 on: February 15, 2016, 04:43:45 PM »
I'll jump on the "yes, this is normal" pile.  Index funds such as S&P 500 have recently had dividends of about 2% per year.

If you are in the 15% tax bracket, with AGI < $74,900, qualified dividends are not taxed.  At higher brackets, they are taxed like long term capital gains (15% + state income tax for most, up to 20% + 3.8% medicare tax + state income tax for those in the top tax bracket).

It's common among the FIRE crowd to acquire high dividend stocks, ETFs and mutual funds for the "income" and the favorable tax treatment in early retirement.  If you are in the accumulation phase with a high income, dividends do nothing but produce "tax drag", reducing your returns.

MustacheAndaHalf

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Re: Dividends in taxable accounts
« Reply #5 on: February 16, 2016, 01:08:43 AM »
OP - consider the alternative.  Bonds in taxable make you pay ordinary income tax on the interest.  Stock dividends get better tax treatment.

If you put that S&P 500 fund in a Traditional IRA, the dividend adds to your Traditional IRA.  When you eventually make withdrawals, that dividend gets taxed at ordinary income tax rates just like everything else in a Traditional IRA.