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Author: cplincoln Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121097  
Subject: Dividend Investing in non Retirement Account Date: 11/25/2013 5:04 PM
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Hello, I've got one quick question regarding dividend investing in non retirement accounts.

I want to do a little bit of dividend aristocrats investing to reap the benefits of automatic dividend reinvestment. This is a long term growth strategy for my personal goals within the next 10-15 years. So this means I don't want the money locked up in a Roth IRA until I'm 59 1/2 years old (I've already got my retirement accounts up and running). I understand there are ways to withdraw from retirement accounts without incurring a penalty, but I'd rather not be obligated to meet those requirements, as some of my goals don't exactly qualify.

I'm looking to use a regular brokerage account for this strategy. I'd rather not get a few years into this strategy and find myself unable to continue because the taxes on dividends are to great.

So my question is, what is the best strategy to go about this? At the end of each tax year, sell a portion of the portfolio to cover taxes and press on? Is there some obscure tax code I'm not aware of?

Thanks in advance for your advice.
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119586 of 121097
Subject: Re: Dividend Investing in non Retirement Account Date: 11/25/2013 5:47 PM
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I'm looking to use a regular brokerage account for this strategy. I'd rather not get a few years into this strategy and find myself unable to continue because the taxes on dividends are to great.

So my question is, what is the best strategy to go about this? At the end of each tax year, sell a portion of the portfolio to cover taxes and press on?


That's certainly one source, but remember that all this cash is fungible. It really doesn't matter if you sell blood to pay your tax bill that in your mind is due to your dividends. So, if you find yourself in need of funds to pay the taxes, get the cash from the source that makes the most sense when you need the cash.

I don't know about your state rates, but the Federal is going to cost at most 20%, and maybe nothing. Even if you wind up selling some of your dividend-paying stock to generate the cash for taxes, you'll still be ahead on your investment.

Phil
Rule Your Retirement Home Fool

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Author: cplincoln Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119587 of 121097
Subject: Re: Dividend Investing in non Retirement Account Date: 11/26/2013 6:42 AM
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Thanks for the quick reply. I appreciate the advice.

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119588 of 121097
Subject: Re: Dividend Investing in non Retirement Account Date: 11/26/2013 11:49 AM
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Just to further emphasize that other poster's idea…

IF you have an emergency fund (which I'd suggest building up before starting non-retirement account investing), why not just dip into it for any extra taxes due because of the dividends.

If you sell from that portfolio to cover taxes, you could possibly be creating more taxes due because of capital gains.

JLC

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 119593 of 121097
Subject: Re: Dividend Investing in non Retirement Account Date: 11/26/2013 1:32 PM
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The generally accepted approach to managing tax deferred accounts (employer retirement plans, IRAs, deferred variable annuities) along with taxable accounts, is to hold tax inefficient investments in the former and tax efficient investments in the latter. Assuming both taxable and tax deferred accounts are being held for retirement (or long term financial goals), then you treat them as one holding and asset allocate (stock/bond mix) as a whole.

So examples of investments you'd want to hold in tax deferred accounts are (held as individual securities, mutual funds or ETFs):

- Interest paying bonds
- REITs
- Dividend paying stocks (incl. utilities and financial stocks)
- preferred stock

Examples you'd hold in taxable accounts are

- Growth stocks (paying no or little in dividends)
- Small or micro cap stocks
- Foreign emerging market stocks
- Most technology growth stocks
- Municipal bonds

This kind of careful allocation is particularly important in high income tax rate states such as Oregon (9%), where an individual in the 15% marginal Fed tax rate would pay 24% of realized gains on interest and non-qualifying dividend income in tax...and 34% if in the 25% Fed bracket.

BruceM

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