How to Take Dividend Payments From an IRA
As you save for retirement, the dividends earned in your IRA are reinvested to produce growth and earn more dividends. When you are ready to draw money from your accumulated IRA value, taking the dividends as earned from the account is one way to receive a steady income and leave the value intact or even continue to grow.
Dividend-Earning IRA Investments
You may own one or more of several types of dividend-earning investments in your IRA. If the retirement account is also a mutual fund account, the fund sponsor is the custodian and dividends will be reinvested into additional fund shares as your IRA grows. Individual stocks, exchange-traded funds and closed-end funds would be owned in an IRA-designated brokerage account. With a brokerage IRA, earned dividends typically accumulate in the account's cash balance, allowing you to use that money to buy more stock or fund shares.
Mutual Fund Dividends
To have your mutual fund dividends paid out as cash, you need to change the dividend election on the account from reinvest to cash. Contact the fund sponsor company to ask for the form to change your dividend election. Make sure you let the company know the fund is also an IRA to keep the tax reporting accurate. Depending on the type of fund, after sending in the form you will start to receive dividends either quarterly or monthly. Most bond funds pay monthly distributions while stock funds usually pay every three months.
Brokerage Account Dividends
The brokerage firm holding your IRA account can set up the account to send you the dividends earned on your retirement plan investments. Usually a broker allows you to set up automatic, repeating cash withdrawals on a schedule you select. You may want to have the accumulated cash balance sent to you every two weeks, monthly or quarterly. Check with the brokerage firm to see if there is a paper form to complete or if you set up the withdrawals online.
Electing to receive the dividends earned in your IRA will be claimed as IRA withdrawals for tax purposes. The dividends would not be reported as investment dividends. IRA withdrawals are taxed as regular income, with the possibility of an extra 10 percent tax penalty if you start receiving the dividends before age 59 1/2. The IRA sponsor will send you a Form 1099 at year-end that shows the income nature of your IRA dividend withdrawals.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.