Financial Literacy

Dividends paid on common and preferred stocks that have been held for more than 60 days generally qualify for a special tax rate. A longer holding period may apply to certain preferred stock dividends or if the shareholder's risk of loss was protected. In 2020 the following tax rates apply:

For the 2020 tax year (which you’ll file in early 2021) the dividend tax rates are as follows.

Investments that yield ordinary income (such as bonds and deferred gains from variable annuities, 401(k) plans, and IRAs) may need to be evaluated against investment opportunities that yield dividend income and long-term capital gain.

Since the dividend and capital gains tax rate may be lower than ordinary income tax rates, it may be beneficial to evaluate your investment philosophy regarding what assets should be held inside tax-deferred plans. For instance, it may be more tax efficient to hold your taxable bond portfolio inside a tax-deferred plan (since taxable bonds are taxed at ordinary income rates) and hold your dividend paying stock portfolio and appreciating asset portfolio outside of your tax-deferred plans since the income generated by these assets may be taxed at a lower rate. Note that distributions from tax-deferred plans are generally taxed at ordinary income tax rates.