Congressional leaders have indicated that the current 15 percent tax on corporate dividends may expire in 2011. If that’s the case, investors’ dividends from stocks and stock funds may be taxed as ordinary income. The top tax rate on ordinary income, now 35 percent, might move up to 39.6 percent.
If this is a likely future, placing high-dividend-paying stocks and dividend-paying stock funds in a tax-deferred IRA may make sense. Under present law, those stocks and funds work well in taxable accounts, where long-term capital gains and dividends are taxed no higher than 15 percent. However, for future purchases of dividend-paying stocks and stock funds, your IRA might be the better choice.
While you put dividend-paying stocks and stock funds in your IRA, you can use your taxable account for stocks and funds that pay little or no dividends. Such holdings probably won’t generate much in the way of income tax each year. Tax-exempt municipal bonds and muni funds also may be good investments for your taxable account.
