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I was just reading a post on another site where the poster seemed to suggest that after holding a stock for 5 years, the dividends are tax-free. I thought dividends were never tax-free (except in a qualified distribution from a Roth account).

But maybe that's what the poster was thinking of? In any case, he seemed to think that the 5 year period should go down to 2 years.

But if that's really what he meant, it seems to me that it's not really necessary to hold a stock for 5 years in order to reach this goal: you can reach the goal by immediately purchasing a dividend-paying stock in a Roth account that has been in existence for at least 5 years (and meeting an age requirement that I myself easily meet).

culcha
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I was just reading a post on another site where the poster seemed to suggest that after holding a stock for 5 years, the dividends are tax-free. I thought dividends were never tax-free (except in a qualified distribution from a Roth account).

I just love it when everyone's wrong. I won't try to speculate as to what the other poster was thinking of or trying to say. As for you, through this year qualified dividends are not taxed at the Federal level if you're in the 15% bracket or lower. As for Roth distributions, there's no segregated creature going by "dividends." The closest you'll get is "earnings," but that could be any kind of earnings, including cap gains and interest.

Without a change in the law dividends go back to being taxed as ordinary income in 2013. As always, anything that goes on wholely under the IRA umbrella, including payment of dividends, has no current effect on your taxes.

Phil
Rule Your Retirement Home Fool
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Thanks, Phil -- I was just trying to figure out what that other poster was saying. All I could think of was that you could let dividends accrue in your Roth, and then later actually take the money from the Roth (or actually any money from there) and not have to pay tax.

I was trying to figure out that 5 year thing though. Now -- I just remembered -- wasn't there something a few years ago where people could take their long term stocks and do a pretend sale of them (a deemed sale, I think it was called), and then they could hold the stock even longer for some extra long holding period. Was that 5 years? Whatever happened to that? Did the people who did a "deemed sale" have to pay capital gains tax right then? (I'm assuming that the stocks actually rose in value!) If so, it seems to me that, assuming again that the stocks rise in value, they will have to pay capital gains tax again. (Or was it that they didn't have to pay any tax the first time, but just had to start a new holding period?) Anyway, whatever happened to that longer term holding period?

culcha
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Now -- I just remembered -- wasn't there something a few years ago where people could take their long term stocks and do a pretend sale of them (a deemed sale, I think it was called), and then they could hold the stock even longer for some extra long holding period. Was that 5 years? Whatever happened to that?

Weeeeeeeeeeeeeeeeeeeeeeeeelllllllllllllllll.............

The "Bush Tax Cuts" came along and temporarily (for 10+ years) replaced it. But guess what? That "super" long-term category (holding period greater than 5 years) was back when tax law changes didn't sunset, and it was never repealed. So, unless the law changes before then, that category is back as of 1/1/2013. Anyone who did that "deemed" sale back when will have satisfied the 5 year holding period and then some. I don't remember the rates, but IIRC it's a couple of percentage points lower than the ordinary LTCG rate.

Phil
Rule Your Retirement Home Fool
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The "Bush Tax Cuts" came along and temporarily (for 10+ years) replaced it. But guess what? That "super" long-term category (holding period greater than 5 years) was back when tax law changes didn't sunset, and it was never repealed. So, unless the law changes before then, that category is back as of 1/1/2013. Anyone who did that "deemed" sale back when will have satisfied the 5 year holding period and then some. I don't remember the rates, but IIRC it's a couple of percentage points lower than the ordinary LTCG rate.

Correct. The 5-year rates are 8% and 18%.

Ira
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The "Bush Tax Cuts" came along and temporarily (for 10+ years) replaced it. But guess what? That "super" long-term category (holding period greater than 5 years) was back when tax law changes didn't sunset, and it was never repealed. So, unless the law changes before then, that category is back as of 1/1/2013. Anyone who did that "deemed" sale back when will have satisfied the 5 year holding period and then some. I don't remember the rates, but IIRC it's a couple of percentage points lower than the ordinary LTCG rate.

Correct. The 5-year rates are 8% and 18%.

Ira

So if I have some long term (5+ years) holdings with unrealized capital gains it might be to my advantage to hold until next year to sell?

Bob
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So if I have some long term (5+ years) holdings with unrealized capital gains it might be to my advantage to hold until next year to sell?

No. Remember that the max cap gain rate in 2012 is 15%.

Phil
Rule Your Retirement Home Fool
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