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better in a cash account or IRA account?
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better in a cash account or IRA account?

I assume you are asking about this from a tax perspective on the income, and that the IRA that you are talking about is a Traditional, not a Roth account. If that's the case, then it depends on the type of dividends that the stock produces. If the preferred stock produces qualified dividends, which are taxed at capital gains rates (assuming you hold the stock for a period of at least 90 days during the 181 day period beginning 90 days before the ex-dividend date), then it's best to use a taxable (cash) account.

If you're not going to meet the holding period (say you buy just for the dividend, and then plan to sell), or if the preferred stocks are ones that produce non-qualified dividends, then they will be taxed at ordinary income rates. Since you will already be taxed at ordinary income rates, then you won't be paying more in taxes on the dividends by holding the preferred stocks in a Traditional IRA.

If you are comparing from a tax perspective between a taxable (cash) account and a Roth IRA, then holding in the Roth would always win, because of the ability to take tax-free withdrawals from the Roth IRA.

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In addition to the preceding reply

When you say "for income", I assume then that you are taking these preferred stock dividends as required household income as they are produced. If so, then any preferred stock held in a Traditional IRA will produce dividends that will be treated as ordinary income, regardless of the stock's holding period. If held in a taxable account and the preferred stock is issued by a business development company or REIT, most to all of the dividend will be ordinary income. If the preferred stock is really Exchange Traded Debt (they look very similar) or a trust preferred (issued by a bank), then its dividends will be ordinary income. But if issued by a C-Corporation, such as a Utility, Insurance company or bank, the dividend will be qualifying, meaning that if you've met the stock holding period (as described previously), then it will be a tax favored qualified dividend, taxed the same as net long term capital gains.

Another factor with the recent tax law change is REIT dividends, common and preferred, when held in a taxable account, are eligible for the Sec. 199A 20% deduction on the qualifying part of the dividend as shown in Box 5 of the form 1099-DIV. This deduction is not available to those preferred stock held in a tax deferred (IRA or retirement plan) account.

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You wrote, ... or a trust preferred (issued by a bank) ...

Nit: A trust preferred doesn't have to be issued by a bank - it's just that investment banks and other financial institutions are usually the ones with the legal expertise to create them. Also they're called "Trust preferreds" because they are issued by a Trust that has been separately incorporated and not the entity that needed the funding. This can be an important detail if the company that created or runs the Trust becomes bankrupt. (See the Lehman Brother's Trust preferreds that are still on-going concerns and still paying dividends.)

In general such a Trust is considered an investment trust - much like a mutual fund - and holds some set of underlying securities that generate the revenue that pays the dividends to the preferred shareholders. The common stock is basically worthless, but usually held by the issuer so as to retain functional control of the Trust. It's usually worthwhile to understand the type of securities the Trust preferred actually holds and what security interests secure the payments before you buy a trust preferred, because that's really what you are investing in.

Also there are so-called Capital Trust Preferreds. Capital trust preferreds are so-called because the trust was used to raise capital required by a regulator. (Usually bank, but not always.) You should be careful about participating in capital trusts. They usually hold junior debt so are usually worthless if the issuer files for bankruptcy. They can also usually be liquidated ahead of the preferred's call date given certain regulatory events. This can make it impossible to calculate a reliable yield to worst for a Capital trust preferred.

- Joel
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