Should You Put Dividend Stocks in Your Roth IRA?

Should You Put Dividend Stocks in Your Roth IRA?

A Roth IRA is a powerful investment tool that you can use to save for retirement. Compounding alone can make a huge difference in how you grow your retirement savings over time. Here's a quick example of its magic: If you were to invest $1,000 at age 20 into a Roth IRA and contribute $1,000 per year thereafter until retirement, you'd have $465,000 saved by age 70. 

What about dividend stocks in a Roth IRA? Should you pursue dividend stocks in an IRA? If you're saving for retirement, you may want to seriously consider putting dividends into your Roth IRA for several reasons.

Let's take a look at the definition of Roth IRA, how dividends can work in a Roth IRA to your advantage and how to make it happen for you. We'll also go through the steps of how to put dividend stocks in your IRA.

What is a Roth IRA?

Let's do a quick refresh on a Roth IRA if you're toying with the idea of opening one but just haven't accessed the option. A Roth IRA is an individual retirement account that offers tax advantages. You invest in a Roth IRA and pull the money out tax free when you retire. 

You contribute after-tax dollars and your contributions and earnings grow tax-free and withdraw them tax- and penalty-free after age 59½ as long as your account has been open for at least five years. Let's take a quick look at the following benefits of a Roth IRA:

  • Tax-free growth and withdrawals: Tax-free growth and withdrawals lets you avoid tax on your contributions, as you might with a traditional IRA. In exchange, your money grows tax-free and you’ll be able to withdraw it tax-free at retirement, defined as age 59 ½ or older. 
  • Pass money tax-free to heirs: The Roth IRA is a great wealth transfer vehicle. You can make sure your account moves tax-free to your heirs and distributions are tax-free to recipients.
  • Penalty-free withdrawals: You can withdraw contributions tax- and penalty-free at any time, which is money you add. You can avoid penalties in the case of a first-time home purchase, qualified education expenses, birth or adoption expenses, death or disability (if you suffer a disability, you will be able to access money from your Roth IRA without penalty). If you pass away unexpectedly, your beneficiaries can also access money from your Roth IRA), unreimbursed medical expenses or health insurance. In addition, in the case of a substantially equal periodic payment (SEPP), you can receive a distribution of funds from Roth IRA or other qualified retirement plans prior to the age of 59½, which means you won't incur IRS penalties in the case of withdrawals. 
  • No age limit: Whether you're 16 or 56, you can contribute to a Roth IRA as long as you have earned income from working, you can contribute to the account and take advantage at any age. You may not contribute more than $6,000 but those over age 50 can contribute an extra $1,000 per year.
  • No required distributions: The Roth IRA does not have required minimum distributions (RMDs), or a minimum distribution from your account annually. Traditional IRAs require you to withdraw money whether you need it or not but Roth IRAs allow your money to grow and compound and even go to your heirs.

What Are Dividends in a Roth IRA?

A dividend is a payment that companies make to stockholders. Dividends are usually distributed to shareholders and paid quarterly, annually or even monthly, kind of like a bonus to investors. In this particular case, you'd purchase dividend stocks through your Roth IRA.

Dividends in a Roth IRA can have some major benefits — maybe even more so than investing in dividend payers with a regular investment account. In the next section, we'll give you an overview of the pros and cons of investing in dividends through a Roth IRA. 

Pros and Cons of Dividends in a Roth IRA

So, what are the pros and cons of adding dividends to your Roth IRA? Let's take a quick look.


  • Many options available to you: You can add many types of categories of dividend stocks you can add to your Roth IRA, including the Dividend Aristocrats, Dividend Kings and/or real estate investment trusts (REITs). You can generally choose anything you want to invest in for a Roth IRA except life insurance and collectibles.
  • Can avoid paying taxes: The Roth IRA is a tax-avoiding king. You can invest in dividend stocks without worrying about paying taxes on your income every year. In short, your investments can be withdrawn tax-free. Let's take a quick look at regular investment tax rates (investments not in a Roth IRA). Sure, you're taxed at a lower rate for long-term gains, which means that you hold your asset for more than one year at a tax rate of 0% to 20%, depending on your income. On the other hand, a short-term capital gains tax refers to a tax on profits from selling an asset that you hold for one year or less. You'll pay tax based on your ordinary income tax rate bracket — 10%, 12%, 24%, 32%, 35% or 37%. 


  • May pay penalties: If you decide to take out money prior to the age of 59½, you may also owe a 10% penalty on any gains you withdraw, unless the withdrawal qualified for a special exception. 
  • Contribution limits: Contribution limits may drastically reduce the amount you're able to invest. If you can only invest $6,000 for 2022 if you're under 50 and $7,000 at age 50 or over, that can severely limit the amount of money you can invest. If you want to invest $10,000, for example, you can't invest all of it in a Roth IRA. You'll have more flexibility if you invest directly in an exchange-traded fund (ETF) directly, for example.
  • Income limits: You may not be able to benefit from dividend companies in your Roth IRA at all if you make too much money. As a single filer, your Modified Adjusted Gross Income (MAGI) must be under $144,000 for the tax year 2022 to contribute to a Roth IRA. If you're married and file jointly, your MAGI must be under $214,000 for the tax year 2022. Therefore, you might be exempt from putting dividend stocks into your Roth from the get-go based on your income.
  • Delay in dividend payments: If you need the money now, you'll be out of luck if you haven't reached age 59 ½ or meet other specific requirements (such as the five-year contribution rule). If you want tax-free dividends right now, you may want to bypass the dividends-in-a-Roth option. Going straight for a brokerage account might make more sense in this situation. However, it's important to remember that you'll owe either short-term or long-term capital gains taxes annually on that money. However, if you qualify for the 0% rates, it could be a major benefit.

How to Choose Dividend Stocks for Your Roth IRA

Ready to choose dividend stocks for your Roth IRA? Here are three simple steps you can take to add dividend stocks to your Roth IRA.

Step 1: Research potential dividend stocks. 

You'll want to do your research as you consider the types of dividend stocks you want in your portfolio. Consider stock fundamentals, dividend yield, contents of balance sheets quarterly earnings updates, recent news and more. Consider the dividend yield of several companies (the annual dividend per share divided by the stock's price per share). For example, a 4% dividend yield could be the result of an annual dividend of $1.25 by $30. Looking at dividend yields between 2% to 4% could be a great buy but anything more could signal issues with the companies.

Step 2: Choose a brokerage account. 

Fidelity or Vanguard? M1 Finance or Ally? Look into a wide variety of brokerages and land on the one that has the most reliability and fewest account minimums and fees. Look into a brokerage account that offers ample education and an easy-to-use platform. A financial advisor can help you set up an account if you don't want to invest on your own.

Step 3: Buy and reinvest.

Consider investing in a wide variety of industries and sectors to diversify your portfolio. A stock screener can help you identify which stocks you want. Identify the number of shares you plan to purchase and keep watch over them. Reinvest in dividends so you continue to benefit from your stocks from years to come. 

Should You Put Dividend Stocks into Your Roth IRA?

If you want to invest and bypass the taxes you must pay on dividend-paying stocks, a Roth IRA can be a great option because it allows you to ease your tax bill.

However, if you want to benefit from dividend income sooner, you're not going to be able to rely on a Roth IRA alone, because in general, you can't withdraw without penalty until you're age 59 ½ or older. Plopping some dividend payers in a taxable brokerage account may give you the best of both worlds — dividend income now and tax-free enjoyment later.  

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Melissa Brock

About Melissa Brock


Melissa Brock worked as an associate editor & contributing writer for from 2021 to 2024.

She currently works as a full-time freelance writer and financial editor covering higher education, investing, personal finance, mortgages, college savings, insurance, and more. 

Areas of Expertise

Dividend Stocks, Retirement


Bachelor of Arts in Communication Studies, Central College, Pella, Iowa

Past Experience

Melissa graduated summa cum laude with a bachelor of arts in communication studies with minors in psychology and Spanish from Central College. She's a longtime member of the National Association of College Admission Counseling (NACAC). While working in college admission, Melissa Brock pursued a freelance writing and editing career. 

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