The new 15 percent tax rate applies only to dividends received outside of a tax-deferred retirement plan. The same condition is true for the new 15 percent rate on long-term capital gains. If dividends are received or gains are taken inside your IRA or tax-deferred retirement plan, they’ll eventually be taxed at ordinary tax rates, now up to 35 percent, when they’re withdrawn.
Thus, you may have to re-visit your “asset location” strategy. Formerly, dividend-producing assets often were held inside retirement plans, to shelter fully taxed dividends. Now you may want to re-think that strategy because dividend-paying stocks and stock funds may be best held in taxable accounts, where they’ll get the new tax breaks.
Ironically, high-payout real estate investment trusts (REITs) probably won’t qualify for the 15 percent tax rate. Most REIT dividends will be taxed at ordinary income rates, up to 35 percent, so they probably should be held inside a retirement plan, where the tax on those ample dividends can be deferred.
