Dividends in a Roth IRA are not taxed as long as the money is not withdrawn before the owner reaches the age of 59½ and the 5-year holding period requirement is met. If the money is withdrawn before such time, the owner must pay tax on the profits (dividends in this case) and may be subject to a 10% penalty tax for early withdrawal.
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How are dividends taxed?
Dividends are the payments companies make to their investors as a way of sharing profits. The way dividends are taxed is determined by your tax bracket, the type of dividends you receive, and how long you’ve owned the investment. This article covers general information about dividend taxation. New York Life agents do not offer tax or legal advice. Please consult a qualified tax or legal advisor to discuss your specific circumstances.
Key takeaways:
- Corporations use dividends to distribute profits to their shareholders.
- Dividends are considered income and must be reported.
- The type of dividend, qualified or non-qualified, affects the amount of taxes you pay.
- The type of dividend you receive will be disclosed by the issuing company.
What are dividends?
Corporations can use their profits in many ways. Research and development, acquiring other businesses, upgrading facilities, and paying off debts are just a few examples. Sometimes, companies pay out a portion of the profits to their investors. These payments are called dividends and are often paid quarterly.
Types of dividend income
Dividends can be paid in the form of cash or stocks where the company gives the investor additional shares in the corporation. Cash dividends are the most common type, and for tax purposes, the IRS classifies them as qualified or non-qualified. This distinction determines the amount you will owe in taxes and should be kept in mind when formulating your investment tax strategy.
Qualified vs. non-qualified (ordinary) dividends
Qualified dividends: Three criteria must be met for a dividend to be considered qualified:
Domestic status – The corporation paying the dividend must be a U.S. corporation or a qualifying foreign entity.
Holding period – You must have held the underlying stock for a sufficient period of time. If an investor holds shares of common stock 61 days of the 121-day period that began 60 days before the company declared the dividend, the holding time is adequate. Preferred stock has different holding requirements. Because of the complexity involved, it’s a good idea to work with a tax professional and a qualified financial professional to ensure correct filing.
IRS criteria – The payment must be classified as a dividend by the IRS.
Non-qualified dividends: Also known as ordinary dividends, non-qualified dividends are taxed as ordinary income—up to 37%. Dividends are considered non-qualified if the following apply:
Foreign status – Companies that are not part of an income tax treaty with the U.S., have shares that are not easily traded on NASDAQ or NYSE, or pay dividends from a passive foreign investment company.
Type of entity – Real estate investment trusts (REITs) or master limited partnerships (MLPs).
Special one-time dividends – Dividends that are non-recurring and usually tied to a specific purpose.
Holding period – Dividends are also non-qualified if the underlying security (stock, mutual fund, etc.) is not held long enough to satisfy the holding period for qualified dividends described above.
How are qualified and non-qualified dividends taxed?
Non-qualified dividends are taxed as ordinary income—up to 37%. Qualified dividends, on the other hand, are taxed at a more favorable rate. They are taxed at the long-term capital gains rates of 0%, 15%, or 20% depending on your income bracket.
Dividends that usually aren’t taxed
It’s important to note that some forms of corporate distribution are technically considered dividends but are generally not taxed. Life insurance policy dividends are usually not taxed because distributions from cash value life insurance are seen as a return of premiums.
Dividend tax rates
The 2025 dividend rates1 have remained the same as the 2024 dividend tax rates,2 but the threshold for each income bracket has increased to keep pace with inflation.
| 0% Tax Rate | ||
|---|---|---|
| Filing Status | 2025 | 2026 |
| Single | $0 - $48,350 | $0 - $49,450 |
| Head of Household | $0 - $64,750 | $0 - $66,200 |
| Married Filing Jointly | $0 - $96,700 | $0 - $98,900 |
| Married Filing Separately | $0 - $48,350 | $0 - $49,450 |
| 15% Tax Rate | ||
|---|---|---|
| Filing Status | 2025 | 2026 |
| Single | > $48,350 - $533,400 | > $49,450 - $545,500 |
| Head of Household | > $64,750 - $566,700 | > $66,200 - $579,600 |
| Married Filing Jointly | > $96,700 - $600,050 | > $98,900 - $613,700 |
| Married Filing Separately | > $48,350 - $300,000 | > $49,450 - $306,850 |
| 20% Tax Rate | ||
|---|---|---|
| Filing Status | 2025 | 2026 |
| Single | > $533,400 | >$545,500 |
| Head of Household | > $566,700 | > $579,600 |
| Married Filing Jointly | > $600,050 | > $613,700 |
| Married Filing Separately | > $300,000 | > $306,850 |
Individuals who are considered high earners may also be subject to the net investment income tax (NIIT), which requires an individual to pay an additional 3.8% tax on the lesser of:
The net investment income, or
The excess of modified adjusted gross income over the following threshold amounts.3
$250,000 for married filing jointly or qualifying surviving spouse
$125,000 for married filing separately
$200,000 for single or head of household
Reporting dividend income
Dividends are considered income and must be reported on your tax return. Determining whether a dividend is qualified or non-qualified is the responsibility of the corporation that issues it. A Form 1099-DIV is generally issued by the issuing company or your broker when at least $10 in dividends are distributed. The form contains the dividend information needed to file your income taxes. Even if you don’t receive a 1099-DIV, you must report your dividend income. Tax filings can be complex. It’s recommended that you consult a tax professional to ensure that you file accurately according to current tax laws.
Impact of state taxes on dividends
States that don’t have state income tax do not tax dividend income. Other states, however, may tax dividends as ordinary income. Some states even tax dividends that are generally exempt from federal taxes such as those issued by municipal bonds.
Dividend taxation FAQs
Capital gains are the profits an investor receives from selling an asset. Dividends, on the other hand, are the payments an investor receives when a company they own shares in distributes some of its profits to shareholders.
Dividend withholding tax is the tax levied against a corporation on the dividends it pays out to foreign nationals and non-resident aliens. This tax is withheld or paid immediately by the corporation rather than after the fact through self-reporting.
Exempt-interest dividends are dividends paid by mutual funds that are not subject to federal income tax. These mutual funds often invest in municipal bonds. Municipal bonds are issued by entities such as state and local governments, and public institutions like water or school districts.
Most dividends are not completely tax free. Distributions paid from mutual funds that invest in municipal bonds are generally considered exempt-interest dividends, and no federal taxes are owed on them. However, they may be subject to alternative minimum tax (AMT). AMT is a tax the U.S. government levies against high earners to make sure they pay a minimum amount of tax. Dividends from life insurance companies are also generally exempt.
Although dividends are taxed either as regular income or at a more favorable rate if they are qualified, you may be able to withdraw them tax free in certain circumstances. If you withdraw money from a qualified 529 college savings fund and use the money for qualified education expenses, you will not have to pay taxes, even if dividends were paid from any of the securities that make up the 529 fund. Similarly, if any of the funds in a Roth IRA pay dividends, you won’t pay taxes on the distributions if you withdraw after reaching the age of 59½ and you’ve satisfied the Roth IRA holding period requirement, since Roth IRAs are funded with after-tax dollars.
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Want to learn more?
A New York Life financial professional can answer your questions and help you meet your financial goals.
1“Revenue Procedure 2024-40” IRS, October 2024
2“Topic no. 409, Capital gains and losses” IRS, September 2025
3“Topic no. 559, Net investment income tax” IRS, July 2025