Yes, that is correct!  I’m planning on using my Roth IRA as a dividend shield (actually more of a dividend tax shield)!

You see, eventually the Tax cuts (from Bush’s Presidency) will expire in the future, and that means that for those of us that own shares in dividend stocks the following changes might happen (but these numbers are soft):

• 25% fed income tax rate, our taxes on dividends could increase from 15% to 31%
• 28% fed incometax rate, taxes on dividends could increase from 28% to 36%
• 33% fed income tax rates and up could increase from 35% to 39.5%

Back in college, I learning that dividends are taxed twice, a process called “double taxation” (once at the corporate level, and then again at the shareholder level),  after understanding this double taxation, I have hated taxes on dividends since!  With such taxation of corporate earnings at both the corporate and personal levels, we just get a sliver of the real value of the dividends, and that just out-and-out sucks!

Well, not next year!  I’m going to put on my armor and donned my shield against the taxation of dividends!

So how am I going to do that?  I’m going to buy stocks that yield a dividend directly within my Roth IRA!

You see, if I buy the dividend yielding stock in my Roth IRA first, I can still receive the dividends minus the relatively high taxes on them!  That’s the beauty, once you put the money in the Roth IRA, the dividends are tax free too!

Now, what if you want that dividend money because you use it for something like my lunch experiment?  Well, it’s okay to take that money out as long as it’s contributions and not earnings!  As long as you subtract what you take out from the amounts that you have contributed into the Roth IRA!  That mean that you can take the dividend amount out by pulling that amount from the pool of money that you contributed over the years.  So you are really pulling out what you put in initially!

That’s the beauty of the Roth IRA!

You can take out the contributions at any time, both tax and penalty free!  If you ever get to the point where you dividend yield is greater than the amount you contributed then you can not pull out any more, at least not without it being taxed and incurring the penalty but still, wouldn’t that be great!  I would love it if my Roth IRA was pure earnings because I pulled all the money that I contributed over the years out!  Of course if it were pure profit, I wouldn’t touch it until it is time to retire.  The earliest I can touch the profits without taxes and the penalty would be when I’m 59 1/2 years old.

In fact, to be honest, I’m thinking of putting more money in my Roth IRA, so I’ll start contributing the full $5,000 to my account, and another $5,000 to my wife’s account!

What do you think of my strategy, and are you thinking about doing the same?

Cheers,

MR