If you own stocks or mutual funds in your individual retirement account, you quite possibly receive distributions in the form of capital gains or dividends. In either case, you may elect to receive dividend payments and other distributions as cash. The way you set this up with your IRA custodian, your age and the type of IRA account you own dictate the tax consequences of your decision.
1. Contact your IRA custodian. This is the bank, brokerage, mutual fund company or other financial institution that manages your IRA.
2. Instruct your custodian to pay out any dividends that your IRA holdings generate in cash. Generally, investors choose to have dividends (or capital gains) reinvested in the stock or mutual fund that produced them. Some custodians reinvest dividends on an account holder's behalf by default.
3. Inform your custodian of how you would like to receive the dividend payments. This is crucial from a tax standpoint. You may elect to keep the dividend payments in your IRA account as cash. This is not a taxable event because the funds never leave your IRA. If, however, you ask to receive the dividend payments via check, bank transfer or other method, you have taken an IRA distribution. This could result in tax consequences, which may include tax penalties imposed by the IRS.
- Refer to IRS Publication 590 for details specific to your situation. Generally, if you take dividends (or any other earnings) from a Roth IRA prior to age 59 1/2, the IRS imposes regular income tax plus a 10 percent tax penalty. Tax must be paid on all proceeds, including dividends, removed from a traditional IRA, regardless of your age. Distributions prior to age 59 1/2 also trigger the 10 percent penalty. Exceptions exist in both cases, so consult the IRS or your tax adviser to review your circumstances.