Qualified dividends must meet three criteria. The dividend must be paid by a U.S. corporation or qualified foreign corporation. You must have owned the stock for more than 60 days during the holding period, which is the 60 days before the dividend is paid, the day of the dividend payment and the 60 days after that date. And the dividend can't be a type of payment the Internal Revenue Service automatically excludes as a qualified dividend, such as a capital gains distribution. You won't pay taxes on the qualified dividends in your individual retirement arrangement when you earn them, but you won't be able to escape the applicable taxes forever.
Dividends Remaining in IRA
All IRAs allow tax-sheltered growth, which means that any dividends earned in the account aren't taxed in the year you earn them. As long as you leave the money in the IRA, it continues to grow tax free. For example, if you receive $500 in qualified dividends in your IRA, you get to reinvest that entire amount, rather than sharing it with Uncle Sam, so your account grows faster.
Distributions From Traditional IRAs
When you're taking money out of a traditional IRA, in most cases you have to pay taxes on the entire distribution, including qualified dividends. The only way out of a portion of them is if you've made nondeductible contributions -- money you put in that you didn't deduct on your taxes. If so, you prorate your withdrawal between the nondeductible contributions portion, which comes out tax free, and the rest of the account, which is taxable. For example, if 27 percent of your traditional IRA value represents nondeductible contributions, 27 percent of your withdrawal comes out tax free.
Distributions From Roth IRAs
If you're withdrawing money from your Roth IRA, it all comes out tax free if you take a qualified withdrawal. However, that requires that you be at least 59 1/2, permanently disabled, taking out up to $10,000 for a first home or taking distributions from an inherited IRA. And your account must be at least five years old. If you don't meet the criteria, you can still take out your contributions tax free, but any earnings withdrawn count as taxable income.
Tax Rates and Penalties
If any of your withdrawal does count as taxable income, it's taxed at ordinary income tax rates, not the lower capital gains rates. This holds true even if the money you're taking out would have counted as qualified dividends -- and therefore been subject to the lower capital gains rates -- if not in the IRA. Worse, if you're taking a nonqualified withdrawal, the taxable portion of your withdrawal gets hit with an extra 10 percent tax penalty. Nonqualified withdrawals include any distribution that doesn't meet both sets of Roth IRA qualified withdrawal criteria or any distribution from your traditional IRA when you're under 59 1/2 years old.
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