The Best Dividend Stocks And ETFs For A Roth IRA Contribution

It is that time of the year again for retirement-focused investors.

Any retirement contributions for tax-advantaged accounts must be in soon, or have likely just been made by many investors. But now that the cash is in the account, what are the best investments to make right now?

I personally like the area of dividend growth, though you cannot discount earnings growth either. Stocks that have shown an ability to grow earnings and pay solid yields can be impressive choices for long term investors. However, it is important to consider what type of account you have first, and to make sure that you are using this strategy in a Roth account for some of the reasons outlined below.

Dividends and Retirement Accounts

In a Roth account, a withdrawal isn’t taxed at all (assuming you wait long enough of course). You already paid the tax on that money when you initially put it in the account, so no need to pay taxes a second time. This means that any dividends that you were paid over the course of the holding period are not taxed, saving you on long-term capital gains taxes (Best Stocks and ETFs for Your IRA).

Consider these picks for a Roth IRA this year.

Meanwhile, for traditional IRAs, you are paying taxes at distribution. This definitely saves you in the beginning—and especially since contributions are often tax-deductible-- but consider the dividend situation. Instead of getting taxed on dividends at today’s long-term capital gains tax rate of 20% (for those in the higher brackets) or rates as low as zero (for those in lower brackets), you are getting taxed at regular income rates, which can be as high as 39.6% (see 5 ETFs for Your 2015 IRA Contribution).

In other words, you are paying nearly double—and in some cases far more—in taxes on any dividends accrued in traditional IRAs than if you had just held them in regular accounts. That is why putting dividend focused securities in a Roth account is really the way to go for investors who like income stocks and ETFs.

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