An individual retirement account is a long-term savings plan that offers tax advantages in investing for retirement. As long as you are younger than 70 1/2, you might be able to contribute to an IRA and take a tax deduction for your contribution, subject to amounts defined by the IRS. Earnings in the account are generally not taxable until distribution. Roth IRAs do not allow a tax deduction at the time of contribution, but money in Roth IRAs generally grows tax-free.
Treatment of Dividends Paid
As dividends are paid into your IRA account, they are tax-deferred and not currently taxable to you, unlike dividends in a regular taxable investment account. Recent legislation classifying some stock dividends as "qualified," and therefore eligible for a reduced tax rate, is irrelevant to IRA account holders.
The growth of all assets within an IRA, including the growth of dividends paid into and possibly reinvested in the account, is also tax-deferred. Even if a dividend is reinvested into shares of stock, and that stock is later sold, the income from the sale is still tax-deferred.
Taxation of Distributions
When distributions are taken from an IRA account, they are immediately taxable at ordinary income rates. Even if a dividend paid into an account was originally a "qualified" dividend, when it is withdrawn from an IRA, that special tax status vanishes and it is taxed at ordinary income tax rates.
Any withdrawals taken from an IRA account before age 59 1/2, including income from dividends, is subject to a 10 percent penalty tax in addition to ordinary income taxation. After age 70 1/2, if you do not take your required minimum distribution as specified in IRS tables, the amount not withdrawn is subject to a 50 percent penalty tax. This tax is renewed every year for which the distribution is not taken.
As contributions to a Roth are made with after-tax dollars, most distributions from Roth IRAs are tax-free. Dividends paid into a Roth account are never taxed, even when withdrawn.
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