Personal Finance

Be Smart About What You Hold in Your Roth IRA | Personal Finance

This extraordinary quirk makes the Roth IRA an excellent place to shelter what would otherwise be tax-inefficient investments, since interest, rent, capital gains, and dividend income earned by Roth holdings are all untaxed. Below are some great assets to hold in a Roth IRA.

Dividend stocks

Dividends paid by publicly traded companies are already tax-favored, as qualified dividends are subject to lower long-term capital gains tax rates — a maximum of 23.8%, inclusive of the 3.8% net investment income surtax.

However, that’s a far cry from 0%, and it puts a drag on the performance of investors who reinvest their dividends to enhance portfolio returns. If you choose to hold dividend stocks in a Roth IRA instead, you can DRIP away — participate in a dividend reinvestment program — without having to pay Uncle Sam first.

Real Estate Investment Trusts (REITs)

Because REITs are required by law to distribute at least 90% of their annual income to shareholders, many of them sport hefty yields and are appealing to investors who seek consistent portfolio income. Unfortunately, REIT distributions are usually taxed as ordinary income, which can be subject to rates as high as 40.8%, after including the 3.8% surtax.


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