A new tax law may pass this year. The proposal would exempt dividends from personal income tax. Such a proposal, if passed, would make dividend-paying stocks more attractive. The same is true for mutual funds that hold dividend-paying stocks. It’s by no means certain that such legislation will pass but for now you should be cautious about putting money into municipal bonds or muni funds. They’ll be hurt if dividend-paying stocks can offer comparable yields, tax-free, as well as appreciation potential.
In the meantime, should you put dividend-paying stocks and stock funds inside a tax-deferred retirement plan, such as an IRA or a 401(k)? After all, withdrawals from such plans are fully taxed so you might wind up converting tax-free dividends to taxable income.
Especially if you’re retired or near retirement, you may not want to have your dividend-paying stocks inside your retirement accounts. Instead, leave your fixed-income investments and non-dividend-paying stocks inside those accounts while holding dividend-paying stocks on the outside, where dividends may be tax-exempt.