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Author: BruceCM Big red star, 1000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76079  
Subject: Re: Roth IRA Date: 3/26/2012 4:28 PM
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I have been investing in mutual funds for my Roth IRA. Instead of mutual funds, can I invest in dividend paying stocks such as JNJ and PG....and in REITs like NLY? Would there be any problems, such as in taxes, in investing in dividend stocks..

All gains from dividends, interest or capital gains, that hapens inside of a tax deferred account such as an IRA, retirement plan or deferred annuity, are deferred until you make withdrawals, at which time these untaxed dollars will be taxed as ordinary income..

is this a good idea rather than mutual funds

Individual stock investing is something the average individual should not do. Yes, there's lots of press right now on dividend paying stocks...but remember there was lots of press in the 90s on technology companies and lots of press in the early 2000s on real estate. Where would you be today if you'd invested primarily in individual companies back when these stocks were 'hot'?

MLPs are another story.
Yes you can hold these in a tax deferred account, but any earnings for the year that exceeds $1,000 must be reported by the Roth IRA custodian and will be taxed at trust rates. This is because the IRS treats tax deferred accounts as they treat non-profit organizations, who, if they profit from operating a business that is not consistent with their non-profit business, those profits will be subject to taxation. Directly owning units of an energy limited partnership are generally considered by the IRS to be Unrelated Business Taxable Income to the IRA custodian. And on top of this, if sold, the personal property depreciation taken by the MLP on the energy piplelines, storage tanks, tanker trucks, etc., must be 'recaptured' as ordinary income, which again may well be subject to taxation as UBTI.

MLP units, in my opinion, should be held only in taxable accounts and should be purchased indefinitely for the income they can generate. MLP tax accounting, for most, can be daunting.

BruceM
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