Under new tax rules, is it still profitable to buy a dividend in assets held in an IRA? (March 30, 2004)

  It is still profitable, but the relative adantage over buying in a non-tax exempt account has diminished. The new tax rules create an advantage, but then take away one of the best advantages of capturing dividends in a taxable account.

The tax rate has been reduced from the taxpayer's bracket to 15%. Depending upon your tax bracket that makes buying dividend paying stocks in a taxable account more advantageous than before. When a dividend is 4% and you have to pay 35% tax on it, and also factor in the transaction costs of buying and selling the stock in order to capture the dividend, the resulting gain is not worht the effort.. In short, you can make better money elsewhere with the same or less effort.

By lowering the tax rate to 15% that made dividend capturing much more advantageous. Or did it? As part of the new tax rules, in order to get the special 15% rate, you have to hold the stock for 61 days. That means if you want to capture dividends as a primary income source, you can only do it every 61 days if you have just one block of money to work with, or you have to throw a whole lot of money at it if you want to capture more dividends and actually use it as a strategy to make any real money at it.

What you want to do when dividend capturing is make a play a week, buying the stock at the close the day before the record date and selling it the next session so you are not subject to ups and downs in the stock that can wipe out your dividend gain. You can then use the float to move into another dividend play using the same block of money. You can do this over and over with the same block of money and roll the dividends in consistently and thus make some decent money. With the new tax rule, however, you cannot use the same block of money over and over but have to hold the stock for 61 days. Effectively that limits you to at best 6 captures per year using the same block of money IF you want the 15% tax rate. To make it worthwhile in a taxable account, however, you need the 15% rate. So the taxk law gave but it also took away WITH THE INTENT to keep people from doing this. That is why it was written the way it was.

You can still capture dividends in a tax free account just as we did in the old days because you are not worried about the 15% versus 28%, 35%, etc. tax rates. Thus for serious dividend capturers, the tax law offered no change.

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