Should You Buy Dividend Stocks in Your Roth IRA?

Dividend stocks are a great way to earn an extra stream of income without taking on another job. The best part is that you can earn dividend income from various accounts, including a Roth IRA (individual retirement account). If you are thinking about loading your Roth IRA with dividend-paying assets, make sure you understand how these accounts work and your limitations.

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The beauty of dividends in a Roth IRA

A Roth IRA allows you to contribute after-tax dollars to your account and invest in assets that can grow tax-free. Your contributions can be used to invest in dividend stocks without worrying about paying taxes on your income every year.

There are many categories of dividend stocks you can add to your Roth IRA, including:

Dividend Aristocrats
Dividend Kings
Real estate investment trusts (REITs)

After you reach 59 1/2 and have satisfied the requirements of the five-year rule, you can withdraw your dividend income 100% tax-free.

If you want to get a head start on your dividend portfolio, you are free to open a Roth IRA at any age, as long as you have earned income. There’s also no such thing as being late to the game, because the Roth IRA doesn’t restrict contributions at a certain age. In fact, you’ll qualify for a contribution boost after you turn 50.

Your dividend potential may be limited

A Roth IRA makes it easy to build your dividend portfolio, but there are contribution limits that can cap the amount of assets you’re abler to add to your portfolio.

Let’s say you contribute $6,000 for 2022. That’s the maximum amount you can contribute to your account if you’re under 50. You can contribute an extra $1,000 if you are 50 or over. Since diversification is key, there are limitations on how many shares of stocks you can buy in different companies with your annual contribution.

Maxing out your Roth IRA is a great way to unlock more tax-free earnings during retirement. The more money you contribute to your Roth IRA, the more money you’ll have available to invest in your favorite dividend assets. But don’t be afraid to sprinkle some growth stocks into your portfolio so you can benefit from capital appreciation. This type of diversification is also helpful if your income takes a hit due to dividend suspensions or cuts.

Do you need your dividend income now?

Buying dividend stocks in a Roth IRA can be a great way to bypass annual taxes on your extra income. But if you need your dividend income now, you may run into a little trouble. You can’t take advantage of the tax-free dividend income perks until you reach 59 1/2 and have met other requirements.

If you plan to retire early and want to benefit from the power of dividends, a taxable brokerage account may be a better option. There are no restrictions on when you can touch the earnings in your account. You’ll just have to pay taxes on the dividend income you earn every year. If your income is low enough, you might qualify for the 0% long-term capital gains rates. This benefit is available if you have qualified dividends in your account.

Here’s a look at the tax rates you need to know if you earn qualified dividends in a taxable brokerage account.

2022 qualified dividend tax rates

For Single Filers With Taxable Income of…

For Married Joint Filers With Taxable Income of…

For Heads of Households With Taxable Income of…

… Is the Qualified Dividends Tax Rate

$0 to $41,675

$0 to $83,350

$0 to $55,800


$41,676 to $459,750

$83,351 to $517,200

$55,801 to $488,500


Over $459,750

Over $517,200

Over $488,500


Earn extra income in a Roth IRA

The Roth IRA offers a sweet deal that’s too good to pass up if you’re looking for ways to rack up extra money. By adding dividend-paying stocks to a Roth IRA, you can increase your income while eliminating your future tax bill if you follow the rules.

But if you’re far away from retirement age and you want to benefit from dividend income sooner, you may want to add a taxable brokerage account to your game plan. This account gives you the freedom to withdraw dividend income whenever you want, but you’ll also have to pay taxes on dividends. There’s no rule saying that you can’t earn dividends in a Roth IRA in addition to a taxable brokerage account, so this is the perfect time to scoop up extra income everywhere you can.

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