Smart Reasons to Save, Use and Invest Money

Roth IRA – The Dividend Shield

Yes, that is correct!  I’m planning on using my Roth IRA as a dividend shield (actually more of a dividend tax shield)!

You see, eventually the Tax cuts (from Bush’s Presidency) will expire in the future, and that means that for those of us that own shares in dividend stocks the following changes might happen (but these numbers are soft):

  • 25% fed income tax rate, our taxes on dividends could increase from 15% to 31%
  • 28% fed incometax rate, taxes on dividends could increase from 28% to 36%
  • 33% fed income tax rates and up could increase from 35% to 39.5%

Back in college, I learning that dividends are taxed twice, a process called “double taxation” (once at the corporate level, and then again at the shareholder level),  after understanding this double taxation, I have hated taxes on dividends since!  With such taxation of corporate earnings at both the corporate and personal levels, we just get a sliver of the real value of the dividends, and that just out-and-out sucks!

Well, not next year!  I’m going to put on my armor and donned my shield against the taxation of dividends!

So how am I going to do that?  I’m going to buy stocks that yield a dividend directly within my Roth IRA!

You see, if I buy the dividend yielding stock in my Roth IRA first, I can still receive the dividends minus the relatively high taxes on them!  That’s the beauty, once you put the money in the Roth IRA, the dividends are tax free too!

Now, what if you want that dividend money because you use it for something like my lunch experiment?  Well, it’s okay to take that money out as long as it’s contributions and not earnings!  As long as you subtract what you take out from the amounts that you have contributed into the Roth IRA!  That mean that you can take the dividend amount out by pulling that amount from the pool of money that you contributed over the years.  So you are really pulling out what you put in initially!


That’s the beauty of the Roth IRA!

You can take out the contributions at any time, both tax and penalty free!  If you ever get to the point where you dividend yield is greater than the amount you contributed then you can not pull out any more, at least not without it being taxed and incurring the penalty but still, wouldn’t that be great!  I would love it if my Roth IRA was pure earnings because I pulled all the money that I contributed over the years out!  Of course if it were pure profit, I wouldn’t touch it until it is time to retire.  The earliest I can touch the profits without taxes and the penalty would be when I’m 59 1/2 years old.

In fact, to be honest, I’m thinking of putting more money in my Roth IRA, so I’ll start contributing the full $5,000 to my account, and another $5,000 to my wife’s account!

What do you think of my strategy, and are you thinking about doing the same?



20 Responses to Roth IRA – The Dividend Shield

  1. Don’t you love not knowing what next year will bring?

    I think your plan sounds great. Have you thought of using your dividends to pay for vacation at all? You could get stung by jellyfish without feeling it in the wallet!

    • Words alone can not express the joy I have not knowing what next year will bring!!! (grrrrr).

      You know me way to well! I’d like my dividends to pay for my real estate tax and future vacations!

      I still have scars from the last time I was stung by jellyfish… Whatever type it was, it must have been heavy duty! At least I got my son out of there before he got stung for a 4th time!!! yay me!

  2. I Love my dividend stock portfolio that I am slowly building, however, I won’t be putting it in my qualified accounts just yet.

    It is my hope/dream that the dividends could be a stream of income way before I get to 59.5 (I am only 28). So to lock it up doesn’t seem exactly smart – just for my situation.

    • Sounds wise, since you are so young!

      I can’t move all of my dividend stocks to a Roth, but it makes sense to move as much as possible there, just to take out the bite of the tax cost (33% tax payment on dividends sucks).

      So let’s say your thirty, and you sock away 10,000 (both in your personal roth and your wife). After 10 years, that means you will have contributed $100,000, which means that you can take all of that out at once or spread out over the next (how many years you want). The beauty is if you investment did grow, oh lets say increasing by 100%, that can be considered house money. Let it ride while you take out your initial investment to spend on whatever, or invest in assets outside of your Roth…

      It makes sense to me, but I’m just a simple caveman pf blogger (lol)

      Avoiding taxes legally is a good thing in my opinion 🙂

    • We’re in exactly the same boat as Evan, which is why we painfully forgo the tax savings in favor of accessibility.

      I hate being taxed on the money but refuse to lose the cash flow from our dividend portfolio.

      • Yeah but the contributions to a Roth IRA can be withdrawn anytime tax and pentalty free.

        I’ll have the crunch the numbers and do another post later contrasting the 2 approaches. I have a gut feeling that they would be equivalent. except more money would exist in the Roth…

        • @MoneyReasons,
          The only time I am aware that the funds can be access tax and penalty free is if you are 59.5 or older or have one of the exceptions.


          The early withdrawal penalty does not apply to distributions that:

          1. Occur because of the IRA owner’s disability. (This can be a very narrow definition, so if you get a severe paper cut, don’t consider a Roth IRA distribution for a disability until you review IRS Code Section 72(m)(7) and IRS Publication 590.)
          2. Occur because of the IRA owner’s death.
          3. Are a series of “substantially equal periodic payments” made over the life expectancy of the IRA owner.
          4. Are used to pay for unreimbursed medical expenses that exceed 7 1/2% of adjusted gross income (AGI).
          5. Are used to pay medical insurance premiums after the IRA owner has received unemployment compensation for more than 12 weeks.
          6. Are used to pay the costs of a first-time home purchase (subject to a lifetime limit of $10,000).
          7. Are used to pay for the qualified expenses of higher education for the IRA owner and/or eligible family members.
          8. Are used to pay back taxes because of an Internal Revenue Service levy placed against the IRA.

          Do you have different info?

          • That’s the earnings, but the contributions can be withdrawn at anytime.

            so if you contributed $20,000 over a few years to an Roth IRA and it’s currently worth $30,000.

            You can take that $20,000 out of the Roth at any time tax and penalty free! But the rest ($10,000) is earnings and would be both taxed and you would pay a 10% penalty if you were to withdrawal it.

            The Roth IRA is very sweet!

            P.S. I’m a techie, but I work at a financial firm.

          • I see the difference. The only problem that I have is that we want access to the earnings too 🙂 IMO that’s our whole reason for having a dividend portfolio. I am still interested in seeing your comparison breakdown though to understand the true implications of forgoing the tax benefit for this part of our portfolio. Thanks!

    • Thanks Barb! That would be great 🙂

      Based on some of the earlier comments, I’m going to have to crunch the numbers. I’ll post a follow up sometime next week contrasting if I do va don’t put the money in a roth over a 10 year timeframe.

  3. That’s another interesting idea of yours.

    We’re planning on maxing out the Roth IRAs this year just in general (not as a dividend shield), but unless things change it will be the last year we can do that. I wasn’t planning on taking anything out of our IRAs for a long long time.

    At the moment we’re not doing any non-tax-advantaged new investing. Extra cash is going into the mortgage, retirement, or 529. We’re still playing catch-up from not having any retirement savings and looking forward to a time when one of us might not be earning income. We can always stop investing in retirement or education later if we need a cash stream.

    I am keeping some of our money in taxable accounts that was already in taxable accounts before we had retirement savings vehicles available. It’s sort of an extended emergency fund, I guess.

    • Sounds like you are fully taking advantage of your tax deductions, etc! Great work!

      Most of my money goes towards my 401k, then taxable investment (this use to be the mortgage), then 529s, then childs investments, then Roth.

      I know Roth should be #2, but I feel that I contribute enough to retirement. But if the dividend tax rate goes up to 31%, I’m bumping the Roth up to where it should be 😉

      • If you’re maxing your 401(k) there’s nothing saying that the Roth should be next instead of education. That depends on your income, desired retirement income etc. The 529 may be the next best choice… there is such a thing as putting too much away for retirement compared to other savings options! It’s just that more people are in the not enough retirement savings than in the too much category.

        We are definitely not putting away the full 76K that we could be putting away in our 403(b)/Roth/DCP options… you know, if we had an extra 76K. And we are contributing to the 529s. We’ll need that education money before we can tap the retirement accounts.

  4. i use my roth IRA to invest in rental properties and pay no tax on the transaction (and the appreciation upon sale of the property). it’s a great way to build some serious wealth.

    many don’t realize the roth is a privilege one can take advantage of while under a certain AGI.

    • Thanks!

      The level of my income is at, I don’t think they will raise it from me neither.

      But if they do, I would move them into my Roth, and perhaps other people would too. It would be funny if the net effect actually reduced the amount fo taxes they collected…