Do You Pay Taxes on Dividends Reinvested? (2024)

FAQs

Do You Pay Taxes on Dividends Reinvested? ›

Whether or not you reinvest dividends has no impact on the taxes you'll pay. If you hold securities in a taxable account, you'll pay taxes on the dividend amount regardless of whether you reinvest or not.

To do this, simply hold the dividend-paying securities in a tax-deferred retirement account such as a 401(k) or IRA. Contributions to these accounts may be tax-deductible, so your dividend reinvestments escape taxation at the time you make them. After that, your money grows tax-free over time.

You would not owe tax on dividends from stocks held in a retirement account, such as a Roth IRA or 401(k), or a college savings plan, such as a 529 plan or Coverdell ESA. There are exceptions to this tax immunity, though.

As long as a company continues to thrive and your portfolio is well-balanced, reinvesting dividends will benefit you more than taking the cash will. But when a company is struggling or when your portfolio becomes unbalanced, taking the cash and investing the money elsewhere may make more sense.

However, even when you don't receive dividends as cash payouts and reinvest them in additional shares, you still must pay taxes on them. For personalized tax planning assistance, work with a financial advisor.

Qualified and ordinary dividends have different tax implications that impact a return.3 The tax rate is 0% on qualified dividends if taxable income is less than $44,625 for singles and $89,250 for joint-married filers in the 2023 tax year.

You can reduce taxes while you're working by building your dividend portfolio within a tax-advantaged retirement account. The dividends themselves won't be taxable, but you will pay taxes on withdrawals from traditional IRA and 401(k) accounts. Roth account withdrawals are not taxable.

If the company decides to pay out dividends, the government taxes the earnings twice because the money is transferred from the company to the shareholders.

Nontaxable dividends are dividends from a mutual fund or some other regulated investment company that are not subject to taxes. These funds are often not taxed because they invest in municipal or other tax-exempt securities.

Is there a downside to dividend investing? ›

Despite their storied histories, they cut their dividends. 9 In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another downside to dividend-paying stocks is that companies that pay dividends are not usually high-growth leaders.

Dividend reinvestment plans

Crucially, if you reinvest a dividend in this way, your income tax liability on the dividend is calculated in exactly the same way as if you'd received a cash dividend. That means you may have an income tax liability – and no cash to settle it with because the cash was all reinvested.

With dividend reinvestment, you buy more shares in the company or fund that paid the dividend, typically when the dividend is paid. Over time, dividend reinvestment can help you compound your gains by buying more stock and reducing your risk through dollar-cost averaging.

Qualified dividends are taxed at lower rates than ordinary dividends, which are considered ordinary income. Reinvested dividends are treated as if you actually received the cash and are taxed accordingly.

You may be able to avoid all income taxes on dividends if your income is low enough to qualify for zero capital gains if you invest in a Roth retirement account or buy dividend stocks in a tax-advantaged education account.

Dividend tax basics

Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). Before 6 April 2022, these rates were: 7.5%, 32.5%, and 38.1%.

If your losses are greater than your gains

Up to $3,000 in net losses can be used to offset your ordinary income (including income from dividends or interest). Note that you can also "carry forward" losses to future tax years.

If a DRIP is active in a non-retirement account, the dividend income is a taxable event and will be reported on your 1099-DIV as if it was received in cash.

A simple and straightforward way to reinvest the dividends that you earn from your investments is to set up an automatic dividend reinvestment plan (DRIP), either through your broker or with the issuing fund company itself.

Do you have to pay tax on stocks if you sell and reinvest? Yes. But there's a way to effectively execute a similar transaction with similar positive outcomes through an exchange fund.