According to IRS publication 590, earnings and capital gains realized within an Individual Retirement Account aren't taxable until the time of distribution, nor do they count against the annual contribution limit. This includes all dividends paid on stocks or mutual funds. Taxes owed at the time of withdrawal or distribution are calculated based on the type of retirement account owned, the age of the owner and whether the distribution is considered to be qualified.
Dividend Reinvestment Programs
One of the most effective methods to maximize the earning potential of dividends is through a dividend reinvestment program. Coupled with the tax saving benefits of an IRA, these programs are extremely effective investment tools. Through these programs, the dividend paid on a particular stock is automatically reinvested into shares of that company. In the event the dividends aren't equal to the dollar value of a share of stock, partial shares are purchased. These purchases are made without incurring any brokerage fees. Most investment brokerage houses, including discount brokerages, offer some type of dividend reinvestment program.
Investing in Stocks Within an IRA
Investors may open an IRA at any financial institution or investment brokerage house. If the investor chooses a brokerage firm to manage his IRA, he may make any type of investment he desires as long as the investment is offered by that firm. Investment examples include stocks, bonds or mutual funds. Trading fees apply to these transactions. For example, if an investor decided to purchase 100 shares of a stock that costs $20 and that purchase incurred a $75 trade fee, the total stock investment would be $2,075.
Individuals under the age of 50 may contribute $5,000 to an Individual Retirement Account. This contribution can be invested in either a traditional or Roth IRA or may be invested in a combination of both, provided the total investment doesn't exceed the $5,000 limit. For individuals over 50, the limit is raised to $6,000. In the event that an individual earns less than $5,000, the contribution is limited to the total amount of earned income. As of 2013, these limits will increase to $5,500 and $6,500, respectively.
Individuals who deposit more than the contribution limit in a single or multiple IRAs are assessed a 6 percent tax on the additional contribution amount per year for as long as the excessive amount remains in the IRA. Excessive contributions may occur if an individual improperly rolls over another retirement account into an IRA, continues to make contributions in a traditional IRA after age 70 1/2 or miscalculates the total annual contribution for that year. To avoid the 6 percent tax, an individual must withdraw the excessive amount prior to the filing date for that year.
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