Without a Roth, $60,000 in Dividend Income Costs $22,200 in Taxes
At the top federal tax bracket (37%), a portfolio yielding $60,000 in non-qualified dividend income incurs $22,200 in taxes each year, before state taxes and the 3.8% net investment income tax (NIIT). This is the cost of holding REITs, BDCs, and other ordinary-income dividend payers in taxable accounts.
Key Numbers
A recent analysis highlights the significant tax burden faced by investors holding non-qualified dividend stocks in taxable accounts. At the top federal tax bracket (37%), a portfolio generating $60,000 in non-qualified dividend income results in $22,200 owed to the IRS annually, before state taxes and the 3.8% net investment income tax (NIIT) surtax.
Details
Non-qualified dividends include distributions from real estate investment trusts (REITs), business development companies (BDCs), and certain other stocks. Unlike qualified dividends, which are taxed at long-term capital gains rates (up to 20%), non-qualified dividends are taxed at ordinary income rates, which can reach 37%. Additionally, high-income investors face the 3.8% NIIT.
Context
Investors holding stocks such as Johnson & Johnson (JNJ), Procter & Gamble (PG), and Coca-Cola (KO) may be subject to this tax if their dividends are non-qualified. However, this burden can be avoided by holding these stocks in tax-advantaged accounts like traditional IRAs or Roth IRAs.
What This Means for Investors
Investors should consider tax efficiency when building their portfolios. Placing non-qualified dividend stocks in tax-sheltered accounts can save thousands of dollars annually. Switching to stocks that pay qualified dividends may also reduce the tax bite.
Frequently Asked Questions
Found this useful? Share it