How to Take Dividend Payments From an IRA

IRAs are typically set up for long-term investment, not immediate income.

IRAs are typically set up for long-term investment, not immediate income.

One of the main advantages of an individual retirement arrangement is that taxes on earnings are deferred until they are distributed. In the case of a Roth IRA, even distributions are usually tax-free. Because of these tax advantages, it can make sense to put dividend-paying investments in an IRA. If you want to take your dividend payments out of your IRA, you can withdraw them at any time. However, you may face taxes or penalties, depending on your age and the type of IRA you own.

Purchase dividend-paying investments in your IRA. Some common stocks pay dividends, as do preferred stocks. Bonds pay interest, not dividends, so you'll want to avoid bonds if you only want to withdraw dividends from your IRA. However, both dividends and interest payments are taxed the same when you withdraw them from an IRA, so the distinction may not make a difference from a tax perspective.

Keep track of your dividends. You'll need to tell your IRA custodian the exact amount that you want to withdraw from. If you only want to withdraw your dividend payments, record the total amount so you can avoid taking out money in excess of the dividends paid into your IRA.

Contact your IRA custodian and request a distribution form. You must complete the form so that your custodian can report your distribution to the Internal Revenue Service.

Choose your distribution frequency. Some custodians will allow you to set up regular payments from an IRA with one distribution form, while others may want additional paperwork for each successive withdrawal.

Indicate on the distribution form how you want to be paid. Your IRA custodian can usually either send you a check or transfer your money electronically to another financial institution, such as a bank. For the latter option, you'll need to provide identifying information about your bank, including its routing number and your account number.

Collect your Forms 1099-R. Whenever you take dividends or other payments out of an IRA, you must report the income to the IRS. Your custodian will send both you and the IRS a Form 1099-R if you take any money out of your IRA.

Pay your taxes. Your dividend withdrawals from your IRA will be taxed at your ordinary income tax rate. Transfer the information from boxes 1 and 2 on your Form 1099-R to your Form 1040 or Form 1040A.

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