Do I have to pay taxes on dividends that I receive from stocks in my Roth IRA? I'm aware that I won't pay taxes on my money if I take it out after age 59.5 or if I take out less than or equal to the principal amount. Does this mean I can cash dividend checks and use this cash to make purchases from my Roth IRA without any taxes? Thanks in advance.
The dividends from assets within an IRA are still owned by the IRA. A dividend "check", if sent to you, is considered a distribution of funds. More important, it simply shouldn't happen. The dividend stays in the IRA, and if not automatically reinvested in additions shares, is available as funds to invest in another stock or other investment within the IRA.
By law, any distributions that you take from a Roth IRA are deemed have first come from your contributions and then from your accumulated earnings on those contributions. "But, but," you splutter, "I specifically instructed the IRA custodian to sell only those shares from my mutual fund that were purchased with dividends and to send me the cash from those. So I did withdraw the dividends and leave the contributions still in the Roth IRA! So there!" Bzzzt! Thanks for playing. What you told the IRA custodian to do is irrelevant because you can only deposit cash into an IRA and get back only cash from it, and the cash that you got out is deemed to be a withdrawal of contributions first (in the order that they went in), and only if the withdrawal exceeds the total contributions that you made are you deemed to have withdrawn some of the dividends. The latter part can incur a penalty for early withdrawal. Withdrawal of contributions is tax-free and penalty-free.
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protected by JoeTaxpayer♦ Mar 22 at 0:36
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