Dividend Reinvesting vs. IRA investing (tax treatment)

[unaided]

I wanted to vet this idea with the forum. I know that readers of MJ are not in the save, slave and retire frame of mind. You build your wealth with a value-laden business that makes CENTS - and you use the market to maintain your wealth, and provide some 5% interest to live from, and you sit on cash to say "F U" to the slowlane and pay cash when opportunities come up or to avoid BS.

(Hey! BTW tax advice is very individualized, so follow a plan that's best for you, I'm not a tax advisor and don't play one on TV, and replies to this are not tax advice, and laws can change by the time you read this, do your own homework)

IRA:

You pay taxes at least once on this money. Roth, you pay your tax now, let's say 30% for state and federal. Traditional, you pay later...potentially 30-40% federal/state tax bracket. You're paying taxes on a higher amount because of the tax-free compounding. Overall, depending on where you are in your tax brackets, Let's say that net over net, money in an IRA will provide a 10+% net advantage depending your normal bracket.

Dividends:

You pay regular income tax on unqualified dividends and capital gains at 30-40% depending your tax treatment, and then generally 20% tax on qualified dividends. Still generally a 10% net advantage?

If you reinvest dividends and wait to pull them as income, from my understanding this is not taxed until you actually sell the reinvested principle. So if you don't plan on withdrawing principle unless you're taking significant gains or rebalancing at good reasons.

Doesn't long-term reinvested dividends wash out with the benefits of an IRA from a tax perspective? Except you can use the principle/ dividends at no penalty today vs. waiting until you're 59.5 years old?

You're still paying tax one way, and I tend to believe that with social security, medicaid, obamacare, student loan bailouts, car loan bailouts, that for my generation (I'm 32 going on 33 years old) taxes will be the same, or higher 20-30 years from now (or inflation will be higher which is usually answered with higher interest rates on dividend income/higher value of dividend-producing assets). Even if I make more, my write-offs may be more in terms of what is actually claimed, so I'm not counting on a higher tax rate either as per Roth treatment.

Am I missing something obvious with my analysis that they are essentailly a wash with one another? I figure this group would be the best to offer their critiques.

 

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[CareCPA]

You still had to earn the money (and pay tax on it) to invest in the stocks that pay dividends.

Say you have an extra $15,000 to play with, and you're averaging 30% in income taxes. You can put it either in the Roth (subject to limits) or brokerage stocks. Either way, you're going to pay the $4,500 in tax when you earned it, so net you're investing $10,500. If you invest in dividend-paying stock in a brokerage account, then you're going to pay tax on the dividends, and capital gains when you sell. If you have it in the Roth, you can invest in the same stocks, but not pay any taxes on the dividends or capital gains when you withdraw it as long as you're of the correct age (under current tax law).

Traditional vs Roth just has too many moving parts to be able to accurately analyze on the internet.

 

[unaided]

Thanks for your reply.

So let's call pot A = IRA and pot B = taxable brokerage account

$15,000, net $10,500 invested.

pot A = tax free dividends (until drawn as income) - at income tax table - ~30% (possibly 5-10% cheaper depending on Roth or IRA treatment)
Pot B = taxed dividends - at 20% when "qualified"
= reinvested dividends - (tax-free until the shares purchased by reinvested dividends are actually sold?)

So the wrinkle that I'm asking...

You buy and reinvest dividends until some future time when you decide to take on the dividends as cashflow. When you take the dividends as cashflow - they are given lower tax treatment than the standard income tax tables.

1.) you never have to take on capital gains if you don't want
2.) you can use this money today penalty-free vs. 59.5 years old.
3.) The "risk" is that when you occasionally want to take capital gains (such as MJ's "3 years in 3 months" rule) - you will pay taxes that otherwise could be saved and further compounded in a retirement.

When you automatically reinvest the dividends in a taxable brokerage account, do you still claim taxes on them the year they are earned, or the year that the reinvested shares of stocks are actually sold?

Example $100 for 1 share in stock A produces $5 in dividends a year, but reinvested, Now you own 1.02 shares of stock A worth $105 and producing $5.25 in dividends a year.

If you take the $5 as income, you pay ~20% on taxes, if you reinvest it, you don't pay taxes until you sell the extra 0.02 shares you own, right? So what if you never sell the shares, but just decide whether you are reinvesting dividends or taking them as income.

Doesn't this beat a retirement account in that:

1.) you still get preferred tax treatment (without guessing what tax rate will be 20-30 years from now) 2.) you can still choose to take dividends as income (taxed at lower rate) and choose not to take capital gains IF you're focused more on cashflow vs. growth.

Maybe there's some bold assumptions here but that's why I wanted to present it to this group.
If I have an extra $10,000, I can use that money today to make $500 a year in dividends, put it against debt, or turn it into equity, and get preferred tax treatment for doing so.

If I put it in an IRA, I'm sealing my fate of being forced to be "scripted" until I'm at least 59.5 years old, and I'm still guessing that my tax rate will be lower/higher depending on Roth/Traditional treatment.

Any thoughts on these wrinkles?