What's up everybody gen x dividend investor here in this video i'll explain what types of dividend stocks are better in taxable accounts versus what types are better for retirement accounts so if you appreciate me making this for you and you aren't an evil troll then please hit the thumbs up button.
Subscribe if you haven't yet and click that bell notification before i jump into what stocks go where i'll open this with a relevant question which is this is even worth it to invest in a retirement account if someone intends to retire early that's a fair question because some people understandably don't like the fact that.
They would get hit with a penalty if they wanted to withdraw money early from a retirement account but my generic answer is still yes it is worth investing in a retirement account like a roth even if you want to retire early because life happens and what you plan to do doesn't always play out like you think it will.
A key point to realize is that having a strong retirement portfolio can allow for decades of tax-free compounding which is very powerful and then if you have a roth you can also have tax-free withdrawals once you hit the appropriate retirement age what i'll tell my kids to do once they have a real job is to number one invest.
In your work 401k at least up to the amount that your employer will match and ideally more number two max out a personal roth if you can and number three invest as much as you have left over to invest into a taxable account anyways you can still probably do fine.
If you choose to only invest in a taxable account though it means that you'll most likely end up owing more in taxes each year which in turn will act as a drag on your overall returns a drag which magnifies as the years go on thus i'd recommend you invest in both rather than either or let's do an example to see how a.
Portfolio's growth could compare in a taxable account versus retirement account to understand the drag the taxes can have let's say you started with a ten thousand dollar portfolio in a retirement account and you invested a hundred dollars a month thirty years and you got a 10 per year return you would.
End an account value of 424 grand but now let's say you paid 10 in taxes each year so instead you got a nine percent per year returned in a taxable account that might come from tax on dividends or sometimes selling a stock or whatever well then you would end up with a portfolio worth 330 grand.
That means that only a 10 tax on your annual returns results in you having a portfolio that is 22 smaller over that time frame but beyond that once you hit retirement age and start doing withdrawals from your roth they would be tax-free i think most of us estimate that taxes will be higher in the future so the tax.
Implications of a roth are even more compelling granted taxes on qualified dividends and taxable accounts are better than wage income and can be zero at a federal level if you don't have other income but regardless i hope you see why i advocate for roths and why i'll tell my kids to maximize them if they can even if they.
Have aspirations of retiring early anyways if you're still thinking of only investing in a taxable account then i recommend that you look at yourself in the mirror make sure that you're someone who has enough self-control to not sell your portfolio when that cool new xbox comes out what i mean is that taxable accounts.
Make it easy to buy and sell and transfer cash out whereas the 10 penalty to early withdrawals that retirement accounts have often prevents people from cashing out early bottom line you've got to prepare for your future starting now as you never know what your tomorrow will be a very powerful thing to reflect on is.
This too shall pass if you're in a really tough spot just remember this too shall pass if you're doing awesome and everything is going your way then also remember this too shall pass please invest more during your good times as that will help even out your bad times.
So don't spend your annual bonus on that cool watch or expensive shoes just invest it i unfortunately know of too many people who kept putting off saving and investing for their futures and eventually they came to regret it one awesome thing about dividend investing is that each share you acquire.
Pushes you down a better financial path whether you're starting from zero or starting from a million so don't fret if you're behind the eight ball of investing just start going down that better path okay so my favorite type of dividend stock to hold in a taxable account are those that have qualified dividends.
Because they get lower long-term capital gains rates which are often at 0 15 or 20 depending on your income watch my video called how you make more with dividends where i show you how you can make over a hundred thousand dollars a year of qualified dividends as a married couple and not owe anything in federal taxes.
Gotta love those qualified dividends on the other hand ordinary non-qualified dividends are taxed at standard federal income tax rates which range from 10 percent all the way up to 37 percent for 2022. note i'm keeping state income taxes out of this discussion but you might have to deal with those as well so what makes a dividend qualified.
Well there are three main criteria that have to be met number one the dividend must have been paid out by a u.s company or a qualifying foreign company number two the dividends are not listed with the irs is those that do not qualify and number three you must have had the dividend paying stock for at least 61.
Days during the 121 day period beginning 60 days before the ex-dividend date so generically i'll just say the qualified dividends or dividends of common stocks bought on u.s stock exchanges and held by the investor for at least 60 days which means they are qualified for the lower taxation rate almost all of my stocks are qualified.
Special one-time dividends are considered unqualified also qualified dividends must come from shares that are not associated with hedging such as those used for short sales puts and call options realty income my real estate investment trust aka reit has dividends that are not treated as qualified dividends and.
Are instead classified as ordinary income which is taxable at my marginal tax rate which is one reason why i prefer to hold reits in retirement accounts but the recent tax cut and jobs act aka tcgaa reduced the effective top marginal rate on ordinary reit dividends from 39.5 percent down to 29.6 percent and it allows you to deduct up to twenty.
Percent of ordinary reit dividends so now holding reits in a taxable account might make more sense note i've not personally done the math nor talked to my accountant about this so always talk to a professional before taking a youtuber's video is accurate beyond that realize that it's possible that some portion of a reit's dividends.
Can be qualified and some can be considered return on capital return on capital aka roc occurs when an investor receives a portion of their original investment that is not considered income or capital gains from the investment note that a return on capital reduces your adjusted cost basis or to say that differently roc basically means that.
They're handing back to you some of the money that you invested with them and since it's your money you don't get tax on it right then for example let's say you invest a hundred dollars into an asset i you hand someone 100 one dollar bills and then the people who manage that asset give you one dollar monthly distributions.
Which they treat as return on capital so basically they're just handing back one of your dollars each month since you already paid taxes on those dollars that you originally had to them which they are now handing back you don't get tax on them again but it also lowers your cost basis as you get distributions as return on.
Capital and that means that if you ever sell those shares you would have larger taxable gains okay so we covered where reits should go but what about mlp's aka master limited partnerships popular mlps include companies like enterprise products partners energy transfer and magellan midstream partners and are known for.
Having a higher yield but their dividends or distributions aren't qualified common advice is that it's usually a good idea to hold mlps in a taxable account instead of a retirement account because there are some potentially unfavorable tax consequences to doing so iras are subject to taxes on a special.
Type of income called unrelated business taxable income or ubti and the distributions paid by mlps are likely to be considered ubti if a roth ira earns a thousand dollars or more of upti annually the ubti income of above a thousand dollars is subject to tax even if the securities are held in a retirement account which is.
Typically not taxed so if your retirement account earns a thousand dollars or more per year in ubti you have just eliminated that tax advantage of that stock being in your retirement account one way to get around that may be to invest in etfs that have mlps and some other things in them as then you.
Probably don't have to worry about ubti if you do want to buy mlps then realize you are actually buying units in your brokerage not shares which is why you become a unit holder and not a shareholder and instead of dividends you get distributions which are treated as return on capital.
If you decide to sell your mlp units then you'll pay taxes based on the difference between the sales price and your adjusted cost basis which was changed due to your distributions and potentially other things thus selling can result in both a capital gain and an ordinary income gain for you if you hold an mlp for long enough and.
Gotten enough distributions then your bases could eventually reach zero and once that happens many future mlp distributions are treated as capital gains in the year in which they are received which is still better than ordinary income taxation finally if you own mlps then you get to deal with k1 schedules at tax time to.
Figure out how much was capital gains or ordinary income or whatever all of which can complicate your taxes but hey you get all that sweet income so you can figure out what makes sense for you okay another type of stock that i'd rather hold in my taxable account than in my retirement accounts are international dividend stocks because if.
You hold most international stocks in retirement accounts you might face up to a loss of 35 percent from international tax withholdings with no way to get it back watch my video called european dividend aristocrats where i explain all that canada is an exception to the rule for retirement accounts because the 15.
Withholding tax that is normally imposed by canada towards americans is waived when canadian securities are held within us retirement accounts and if you do choose to own international stocks in your taxable account make sure to look into any potential tax withholding issues before you buy.
Okay so my high level strategy is to usually hold my qualified dividend stocks in both taxable and retirement accounts now that i'm actually retired and using dividends to pay all my bills i've stopped contributing to retirement accounts and instead only invest in my taxable the younger you are the more i'd.
Focus on investing in companies and industries that you think can keep growing thus tech probably makes more sense than oil you can still make money in oil but i bet over the long run that tech will outperform what about high yield stocks.
Is it better to hold a high yield stock in a taxable or on a retirement account if it's a normal qualified dividend stock well again that depends on your needs and goals if you need income now or soon then holding it in your taxable account makes sense.
Just realize that if you have a job then as you get dividends in a taxable account you probably owe some taxes on them so factor that into your decision making so what are the other types of things that you take into consideration as you're evaluating where to put your stock.
Well if you think tax rates will keep getting worse and that you might be in a higher tax bracket in retirement then using a roth would make even more sense the more tax inefficient your asset is the more you want to figure out how you can optimize your taxes the longer you can keep your assets invested and untouched the more tax deferral or.
Avoidance accounts should be used and in general you probably need to invest for at least 10 years to really see the value here's a nice chart from fidelity which shows you which assets are appropriate for the different types of brokerage accounts on the left are the types of assets like.
Stocks or etfs or reits or whatever then the middle column tells you some federal u.s tax info for those assets then the remaining three columns are the types of brokerage accounts that are appropriate to hold the asset in so standard brokerage taxable accounts tax-deferred retirement accounts like traditional iras and 401ks and then.
Tax-exempt retirement accounts like roths they put a dark check mark based on which account it's more appropriate to hold the acid in a lighter blue check mark for accounts it's still okay to hold the asset in and finally a light gray checkmark for accounts that are generally less appropriate to hold the.
Asset in so tax-free municipal securities and municipal mutual funds are exempt from taxes and are more appropriate to hold in taxable accounts and are less appropriate for tax-deferred retirement accounts or in tax-free retirement accounts equity securities aka stocks that are.
Held long-term for growth are taxed at long-term capital gains rates and are more appropriate in a taxable account though are still appropriate in tax-deferred and tax-exempt accounts equity index funds and etfs other than reits are taxed at long-term capital gains rates and are more appropriate in a taxable account though are still.
Appropriate in tax deferred and in tax-exempt accounts tax managed mutual funds and managed accounts are taxed at long-term capital gains and are more appropriate for taxable accounts and less appropriate for other account types real estate investment trusts are next and it says generally 80 of income is taxed at ordinary rates 20 is tax exempt.
And are appropriate to hold in taxable accounts but are more appropriate to hold in retirement accounts then we have high turnover stock mutual funds that deliver effectively all returns with short-term capital gains and those are taxed at ordinary income rates and are less appropriate for taxable and are more appropriate for.
Retirement accounts and finally we have fully taxable bonds and bond funds i.e corporate bonds which are taxed at ordinary income rates and are less appropriate for taxable accounts and are more appropriate for retirement accounts okay so what about income funds like chepy or qild.
Well i'm guessing you're in them because you want the income now so i personally hold them in a taxable if you didn't need the income now then i'd probably look to stocks which you think have great growth potential regardless think about all your needs before firing off that stock buy like if you plan to hold a stock for.
Less than a year then using a retirement account can be nice to avoid dealing with taxes but if you are holding for less than a year because you might need access to the cash then a taxable account makes more sense though ask yourself if you should really be buying a stock when you know you'll need the cash in such a short time.
Anyways hopefully this all helps you when figuring out what stocks go where in your portfolio speaking of portfolios m1 brokerage has a promotion running for a free 50 cash bonus for new users the way it works is you click on my m1 referral link in the description of this video and then either open a brokerage.
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That bell notification finally i highly recommend that you join my free dividend discord chat server which has thousands of dividend investors on it and is growing all the time thanks for watching stay positive and i'll talk to you again real soon i am not a financial advisor and these videos are for entertainment inspiration.
And educational purposes only investing of any kind involves risk i am only sharing my opinion with no guarantee of gains or losses on investments