10

My broker has a program that I can participate in which can lend out my fully-paid stocks for others to borrow (typically for shorting.) In exchange for my borrowed stock, they provide cash collateral and pay me interest, which they describe as a sharing of the fees they charge the borrower of the stock. In addition, should my lent stock receive a dividend, the broker deposits "cash in lieu" of the dividend to my account (presumably having collected it from the borrower.)

The broker's description of that payment action warns that "cash in lieu" has different tax treatment than a qualified dividend would get. Meaning it's taxed at personal income rates rather than qualified dividend rates. My question is how does that latter fact interact with the fact that my account is an IRA and therefore tax-deferred?

Would I have no tax consequences because the IRA's tax-deferring nature overrides the cash vs dividend change? Or does the treatment of "cash in lieu" break through the tax deferment of the IRA somehow (maybe like how an MLP distribution could?)

  • 1
    I learned recently that IRAs can be taxed, as you mention, so I'm curious to see a definitive answer for your question. Related- money.stackexchange.com/q/81670/44414 – elmer007 Jul 26 '17 at 17:19
  • 1
    After a few days without an answer (one showing clarity in understanding cash in lieu vs regular dividends and not relying on "generally", sorry Nosrac), I may have to seek legal, expert, paid advice (gasp). If I do, I'll try to remember to come back with the answer I'm given. – davmp Aug 4 '17 at 16:46
  • I similarly "know" the answer is that the money stays in the IRA and thus isn't taxed until withdrawal, but wow is it hard to find an authoritative reference saying so. I'll keep looking, though. – user42405 Aug 25 '17 at 17:26
1

In a (not Roth) IRA, withdrawals are generally already taxed as regular income. So there should be no tax disadvantage to earning payment in lieu of dividends.

It's possible that there is an exception for IRAs but I was unable to find one and I cannot see the reason for one since the dividend tax rate is usually lower than the income tax rate (which is why some company owners elect to receive part of the company profits via dividend rather than all through their salary).

  • 1
    Yep. The IRA grows tax free, but withdrawals are always taxed as regular income anyway. So the difference in tax treatment for the dividends won't affect you. The IRA will grow tax free either way. And you'll pay regular income tax (not capital gains) when you withdraw either way. So no difference to you. – David Schwartz Jul 26 '17 at 16:15
  • 1
    I may be mistaken, but I don't see the OP mentioning or asking about withdrawals. Is there a reason why you have the bold text about withdrawals? – elmer007 Jul 26 '17 at 18:14
  • 2
    @Nosrac I don't yet know enough to give a definitive answer, unfortunately, but I have recently learned that IRAs can be taxed during normal course, prior to any withdrawals. I have a related question about it (money.stackexchange.com/q/81670/44414) for which I am still researching, albeit slowly. The OP's comment about an MLP is relevant to this- it can generate income tax in spite of it being in an IRA account (which, I think, is what the OP is asking about). – elmer007 Jul 26 '17 at 18:46
  • 1
    The question is NOT about withdrawal, but about any tax consequences at the time of receiving the "cash in lieu". As elmer007 indicates, I'm trying to confirm if my 2017 personal fed taxes have any impact from receiving "cash in lieu" in an IRA (Trad or Roth, don't think it matters) during calendar 2017. – davmp Jul 27 '17 at 21:53
  • 1
    @TripeHound, the "cash in lieu" is paid into the IRA account. Not confused nor worried about that being paid externally to a bank account. :-) – davmp Jul 27 '17 at 21:56

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.