Author Topic: do you pay taxes on dividends in "after-tax" accounts?  (Read 4880 times)

MVal

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do you pay taxes on dividends in "after-tax" accounts?
« on: September 22, 2016, 08:20:11 AM »
I have about $10K in my "emergency fund" that is currently sitting in a 1% yield savings account. I know many of you invest your liquid cash in Vanguard accounts and I'm wondering if I do the same, will I have to pay taxes on any earnings my account generates? Or is that only if I take the earnings out? If I reinvest all earnings, I shouldn't have to pay taxes on them until I "cash-out", right?

All I've done to this point is pre-tax accounts and a Roth, so that's why I'm asking.

FIPurpose

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #1 on: September 22, 2016, 08:51:29 AM »
You must taxes on all Dividends and interest earned outside of an IRA or other tax-advantaged account.

talltexan

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #2 on: September 22, 2016, 09:00:17 AM »
It's very difficult to get a dividend above 4.5% without significant capital risk in the current market. Suppose you have some fairly safe stocks that pay an average of 3.5% in dividends, the dividend tax rate is still 15%, so your yield is about 3% after taxes. Depending on your labor income, this might seem reasonable to you, but it will involve some risk to your principal. That extra 2% won't matter unless the money sits there for YEARS. In which case, it probably wasn't an emergency fund.

MVal

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #3 on: September 22, 2016, 09:30:10 AM »
You must taxes on all Dividends and interest earned outside of an IRA or other tax-advantaged account.

Right, but does that happen each year whether you take the dividends out of the account or not? Is it like a savings account where they send you a statement at the end of the year showing the interest you earned and then you have to include that on your taxable income?

TVRodriguez

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #4 on: September 22, 2016, 09:34:29 AM »
You must taxes on all Dividends and interest earned outside of an IRA or other tax-advantaged account.

Right, but does that happen each year whether you take the dividends out of the account or not? Is it like a savings account where they send you a statement at the end of the year showing the interest you earned and then you have to include that on your taxable income?

Dividends: yes, they show up on your statement and you have to report them and they are taxable.

Capital gains: Any increase in the value of your shares is not taxable until it is "realized."  "Realized" here means sold.  So if you just hold onto your shares, you do not pay taxes on the increase in value (until you sell those shares).

secondcor521

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #5 on: September 22, 2016, 10:04:01 AM »
A little bit of further information:

Interest payments are summarized on 1099-INTs, dividend payments are summarized on 1099-DIVs.  Both are taxable income, and are reported on lines 8 and 9 of your 1040 (and on schedule B if you have enough of either to require it).

*Qualified* dividends - which are ones where you held the stock long enough around the date the dividends were paid - receive preferential tax treatment.  You will see this when calculating your tax on line 44 of 1040; there is a worksheet in the instructions to fill out if you have income and qualified dividends.  Or tax software like Turbotax should figure it properly for you.

Also, dividends are taxable regardless of whether or not you reinvest them into additional shares.  If you do reinvest them into additional shares, the dividend amount becomes your basis in the additional shares purchased.

Frankies Girl

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #6 on: September 22, 2016, 10:18:32 AM »
Do I report all dividends earned on my taxes? Yes.

Do I pay taxes on my dividends? NO.

I'm under the 15% taxable bracket, so I don't owe any taxes on them. I can (and have) taken them out of my taxable account, and I've also left them in there to reinvest, same difference. I get the 1099-DIV to record them on my taxes (regardless of what I actually did with them).

robartsd

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #7 on: September 22, 2016, 10:20:59 AM »
If you invest through a mutual fund, you can receive both dividends and capital gains without selling mutual fund shares. Both are taxable income even if you reinvest them. Short term capital gains and non qualified dividends are "ordinary" income just like the interest on your savings account would be. Long-term capital gains and qualified dividends are taxed at the lower "capital gains" tax rate (usually 0% or 15% depending on your income level).

Shor

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #8 on: September 22, 2016, 10:26:22 AM »
If you're at or below the 15% tax bracket for ordinary income, qualified divs are taxed at 0%
Up to 35% is taxed at 15%
39.6% bracket is taxed at 20%

For money that is in a taxable account, the tax is counted toward the year that the dividend is paid out.
Withdrawing money from the account is not a taxable event. It's like pulling money from your checking account or savings account, the money is just moved around, but none was gained or lost.
Selling shares aka closing the position in a taxable account is the capital gains/loss taxable event.

Frugalman19

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #9 on: September 23, 2016, 07:53:22 AM »


*Qualified* dividends - which are ones where you held the stock long enough around the date the dividends were paid - receive preferential tax treatment.  You will see this when calculating your tax on line 44 of 1040; there is a worksheet in the instructions to fill out if you have income and qualified dividends.  Or tax software like Turbotax should figure it properly for you.



More information, not all stocks can give qualified dividends even if held long enough. It also has to do with whether the company issuing the stock is incorporated in the US. So alot of foreign stocks dont pay qualified dividends. Just an FYI if youre a stock picker and care about that sort of thing.

simplified

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #10 on: September 23, 2016, 08:42:09 AM »
You have to pay taxes on the 1% you earn from the savings account as well. Just saying, in case you are trying to compare the two options.

MVal

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #11 on: September 23, 2016, 08:48:33 AM »
You have to pay taxes on the 1% you earn from the savings account as well. Just saying, in case you are trying to compare the two options.

Yes, I knew about that as I did it last year for the first time, but I just wasn't sure if after-tax investments worked the same way, or if they worked more like Roth IRAs or something.

MustacheAndaHalf

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #12 on: September 23, 2016, 08:54:33 AM »
An emergency fund should be sitting in a low-earning account where you can get at it quickly, like earning 1% in an online savings account.

If your Roth account has been around 5+ years, you can withdraw the contributions but not growth above your original contributions.  You can use a Roth account as an emergency fund, but if you buy stock funds you put money at risk that you might need quickly.  And money market funds earn a terrible interest rate (well under 1%).

If you park the money in S&P 500 fund at Vanguard, it earns 2% dividends right now.  Keep it there 60+ days and the dividends are qualified, and the tax rate improves (10-15% IRS tax bracket becomes 0%, 25-35% becomes 15%).  Even a 15% tax on a 2% dividend works out to 0.3% per year.

But again, for an emergency fund you aren't aiming for highest returns - you want safe money you can get at quickly.  Online savings is fine for that.

FIPurpose

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #13 on: September 23, 2016, 09:10:54 AM »
An emergency fund should be sitting in a low-earning account where you can get at it quickly, like earning 1% in an online savings account.

If your Roth account has been around 5+ years, you can withdraw the contributions but not growth above your original contributions.  You can use a Roth account as an emergency fund, but if you buy stock funds you put money at risk that you might need quickly.  And money market funds earn a terrible interest rate (well under 1%).

If you park the money in S&P 500 fund at Vanguard, it earns 2% dividends right now.  Keep it there 60+ days and the dividends are qualified, and the tax rate improves (10-15% IRS tax bracket becomes 0%, 25-35% becomes 15%).  Even a 15% tax on a 2% dividend works out to 0.3% per year.

But again, for an emergency fund you aren't aiming for highest returns - you want safe money you can get at quickly.  Online savings is fine for that.

There is not 5-year wait period on withdrawing Roth contributions. That is only for traditional to roth conversions.

robartsd

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #14 on: September 23, 2016, 09:18:28 AM »
There is not 5-year wait period on withdrawing Roth contributions. That is only for traditional to roth conversions.
Such a common misunderstanding of the Roth withdraw rules. So nice to have people who know that they're talking about here making corrections.

Rubic

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #15 on: September 23, 2016, 03:36:46 PM »
Do I report all dividends earned on my taxes? Yes.

Do I pay taxes on my dividends? NO.

I'm under the 15% taxable bracket, so I don't owe any taxes on them. I can (and have) taken them out of my taxable account, and I've also left them in there to reinvest, same difference. I get the 1099-DIV to record them on my taxes (regardless of what I actually did with them).

Tennessee has the "Hall Income Tax".  The current tax rate is 6 percent, applied to
all taxable interest and dividend income over $1250 per person ($2500 for married
couples filing jointly).

The tax is scheduled to be phased out at the rate of 1% per year over the next
5 years, starting in 2016.

Shor

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #16 on: September 23, 2016, 04:25:11 PM »
An emergency fund should be sitting in a low-earning account where you can get at it quickly, like earning 1% in an online savings account.

If your Roth account has been around 5+ years, you can withdraw the contributions but not growth above your original contributions.  You can use a Roth account as an emergency fund, but if you buy stock funds you put money at risk that you might need quickly.  And money market funds earn a terrible interest rate (well under 1%).

If you park the money in S&P 500 fund at Vanguard, it earns 2% dividends right now.  Keep it there 60+ days and the dividends are qualified, and the tax rate improves (10-15% IRS tax bracket becomes 0%, 25-35% becomes 15%).  Even a 15% tax on a 2% dividend works out to 0.3% per year.

But again, for an emergency fund you aren't aiming for highest returns - you want safe money you can get at quickly.  Online savings is fine for that.

There is not 5-year wait period on withdrawing Roth contributions. That is only for traditional to roth conversions.
There is also a different 5 year rule from when you first set up and contributed to a Roth IRA.
https://www.irs.gov/publications/p590b/ch02.html#en_US_2015_publink1000231061

robartsd

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #17 on: September 23, 2016, 05:11:54 PM »
An emergency fund should be sitting in a low-earning account where you can get at it quickly, like earning 1% in an online savings account.

If your Roth account has been around 5+ years, you can withdraw the contributions but not growth above your original contributions.  You can use a Roth account as an emergency fund, but if you buy stock funds you put money at risk that you might need quickly.  And money market funds earn a terrible interest rate (well under 1%).

If you park the money in S&P 500 fund at Vanguard, it earns 2% dividends right now.  Keep it there 60+ days and the dividends are qualified, and the tax rate improves (10-15% IRS tax bracket becomes 0%, 25-35% becomes 15%).  Even a 15% tax on a 2% dividend works out to 0.3% per year.

But again, for an emergency fund you aren't aiming for highest returns - you want safe money you can get at quickly.  Online savings is fine for that.

There is not 5-year wait period on withdrawing Roth contributions. That is only for traditional to roth conversions.
There is also a different 5 year rule from when you first set up and contributed to a Roth IRA.
https://www.irs.gov/publications/p590b/ch02.html#en_US_2015_publink1000231061
That 5 year rule only applies to determining if distributions are qualified. Your regular contributions come out first and are not taxed (again, they were taxed before going in) regardless of whether or not the distribution is "qualified".

Shor

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #18 on: September 28, 2016, 01:59:24 PM »
An emergency fund should be sitting in a low-earning account where you can get at it quickly, like earning 1% in an online savings account.

If your Roth account has been around 5+ years, you can withdraw the contributions but not growth above your original contributions.  You can use a Roth account as an emergency fund, but if you buy stock funds you put money at risk that you might need quickly.  And money market funds earn a terrible interest rate (well under 1%).

If you park the money in S&P 500 fund at Vanguard, it earns 2% dividends right now.  Keep it there 60+ days and the dividends are qualified, and the tax rate improves (10-15% IRS tax bracket becomes 0%, 25-35% becomes 15%).  Even a 15% tax on a 2% dividend works out to 0.3% per year.

But again, for an emergency fund you aren't aiming for highest returns - you want safe money you can get at quickly.  Online savings is fine for that.

There is not 5-year wait period on withdrawing Roth contributions. That is only for traditional to roth conversions.
There is also a different 5 year rule from when you first set up and contributed to a Roth IRA.
https://www.irs.gov/publications/p590b/ch02.html#en_US_2015_publink1000231061
That 5 year rule only applies to determining if distributions are qualified. Your regular contributions come out first and are not taxed (again, they were taxed before going in) regardless of whether or not the distribution is "qualified".
Ugh, head spinning from reading and re-reading legal-lite documents trying to understand it all. Yes, you're correct. Here's what I think I learned:
Apparently, that other 5 year rule I was mentioning only applies when attempting to withdraw amounts that exceed the total contributions (any net gains which gets drawn out last anyway).
So withdrawing regular contributions and rolledover contributions (which come out before gains) does not have any 5 year rule.

This will only really come in to play if a person never had a Roth IRA before, then put money in to one, made some gains, withdrew all contributions, and only then when trying to withdraw the leftover gain before the account had been opened for 5 years, only then does it apply. *sigh*

MustacheAndaHalf

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #19 on: October 01, 2016, 07:57:57 AM »
An emergency fund should be sitting in a low-earning account where you can get at it quickly, like earning 1% in an online savings account.

If your Roth account has been around 5+ years, you can withdraw the contributions but not growth above your original contributions.  You can use a Roth account as an emergency fund, but if you buy stock funds you put money at risk that you might need quickly.  And money market funds earn a terrible interest rate (well under 1%).

If you park the money in S&P 500 fund at Vanguard, it earns 2% dividends right now.  Keep it there 60+ days and the dividends are qualified, and the tax rate improves (10-15% IRS tax bracket becomes 0%, 25-35% becomes 15%).  Even a 15% tax on a 2% dividend works out to 0.3% per year.

But again, for an emergency fund you aren't aiming for highest returns - you want safe money you can get at quickly.  Online savings is fine for that.

There is not 5-year wait period on withdrawing Roth contributions. That is only for traditional to roth conversions.
Maybe I'm misreading, but the IRS seems to state a 5 year rule:

"A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, ..."

https://www.irs.gov/publications/p590b/ch02.html#en_US_2015_publink1000231061

SnackDog

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #20 on: October 01, 2016, 09:41:46 AM »
Keep in mind if your dividends are significant (generate a tax of over $1000) you are required to pay quarterly estimated taxes on them or you will owe interest and a penalty come tax time.

seattlecyclone

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #21 on: October 01, 2016, 09:57:00 AM »
An emergency fund should be sitting in a low-earning account where you can get at it quickly, like earning 1% in an online savings account.

If your Roth account has been around 5+ years, you can withdraw the contributions but not growth above your original contributions.  You can use a Roth account as an emergency fund, but if you buy stock funds you put money at risk that you might need quickly.  And money market funds earn a terrible interest rate (well under 1%).

If you park the money in S&P 500 fund at Vanguard, it earns 2% dividends right now.  Keep it there 60+ days and the dividends are qualified, and the tax rate improves (10-15% IRS tax bracket becomes 0%, 25-35% becomes 15%).  Even a 15% tax on a 2% dividend works out to 0.3% per year.

But again, for an emergency fund you aren't aiming for highest returns - you want safe money you can get at quickly.  Online savings is fine for that.

There is not 5-year wait period on withdrawing Roth contributions. That is only for traditional to roth conversions.
Maybe I'm misreading, but the IRS seems to state a 5 year rule:

"A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.

It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, ..."

https://www.irs.gov/publications/p590b/ch02.html#en_US_2015_publink1000231061


You're not misreading, you're just misunderstanding. ;-)

Yes, you need to wait until your IRA has been active for five years before you can make a qualified distribution. You know what else has to be the case before you can make a qualified distribution? You need to be 59, disabled, or dead.

Most of the withdrawals we talk about in the context of early retirement are not qualified distributions anyway because we're not old enough. This five-year rule is then irrelevant. The taxation (if any) then comes down to the rules for non-qualified distributions. Non-qualified distributions of contributions are never taxed.

I'm a red panda

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #22 on: October 01, 2016, 11:31:51 AM »
That extra 2% won't matter unless the money sits there for YEARS. In which case, it probably wasn't an emergency fund.

Won't most emergency funds go untouched for years? How often do people have true emergencies? It seems like you should expect to probably never use it, but have it just in case.

MVal

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #23 on: October 05, 2016, 01:32:29 PM »
What I'm calling my emergency fund right now is perhaps more than that...it is my liquid money for sorts of purposes including emergencies, but not limited to having to buy a new car (mine might be on the ropes soon), funds to help me make unexpected but non emergency purchases, such as used furniture or other household items for when I get my own place, or FU-money to take a several months break from working if needed. I want to keep this money in a place it won't lose value, but could still be accessed fairly easily without penalties.

spud1987

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #24 on: October 05, 2016, 02:04:33 PM »
Keep in mind if your dividends are significant (generate a tax of over $1000) you are required to pay quarterly estimated taxes on them or you will owe interest and a penalty come tax time.

This is only true if you nail your wage withholding exactly so that you don't get any refund when filing your return. I over withhold a little from my w2 wages so that I'm covered for the 23.8% dividend tax.

seattlecyclone

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Re: do you pay taxes on dividends in "after-tax" accounts?
« Reply #25 on: October 05, 2016, 05:18:54 PM »
Yep, if you have enough withheld from your paychecks to pay all of your taxes (including taxes from dividends or other income), you don't need to worry about quarterly payments.