Quick Read
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A $500,000 Roth IRA split across MO, O, ARCC, MPLX, and BTI keeps all $35,006 in annual dividends versus $29,858 in a taxable account.
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ARCC's 9.91% yield triggers the biggest tax bill as ordinary income, making it the strongest candidate for Roth placement.
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Reinvesting the $5,148 annual tax savings at 4% compounds to $153,000 after 20 years with no share price gains assumed.
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Hold high-yield dividend payers in a regular brokerage account at the 24% bracket and the IRS collects every year. Put $100,000 into each of Altria( NYSE:MO ), Realty Income( NYSE:O ), Ares Capital( NASDAQ:ARCC ), MPLX( NYSE:MPLX ) and British American Tobacco( NYSE:BTI ) and the group pays about $35,006 a year. A taxable account gives up $5,148 of that every year. The account you hold them in determines how much you keep.
Roth Versus Taxable on a $500,000 Five-Stock Portfolio
Each yield below is the annualized dividend divided by the current share price. Taxes follow the type of dividend each company pays. Ares Capital's distributions are ordinary income. Realty Income's REIT dividends are also ordinary income, but they qualify for a deduction of 20% of qualified REIT dividends under 26 U.S.C. § 199A(b)(1)(B). Altria and BAT pay qualified dividends, which are taxed at the 0%, 15%, or 20% capital gains rates. This model uses 15%. MPLX distributions are largely return of capital, so the tax is deferred rather than owed now.
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| Stock |
Yield |
Annual Income |
Taxable-Account Tax at 24% |
|---|---|---|---|
| MO |
5.79% |
$5,785 |
$868 |
| O |
5.66% |
$5,664 |
$1,088 |
| ARCC |
9.91% |
$9,912 |
$2,379 |
| MPLX |
8.22% |
$8,219 |
Deferred |
| BTI |
5.43% |
$5,426 |
$814 |
In a taxable account you keep $29,858 of that income. Inside a Roth you keep all $35,006. That is a $5,148 annual Roth advantage, or $51,480 over 10 years with no reinvestment.
You get tax-free withdrawals only if they are qualified distributions. Under IRS Publication 590-B (2025), a withdrawal qualifies if it comes after the 5-year period beginning with the first tax year a Roth contribution was made and also meets one of these tests: you are 59½ or older, you are disabled, it is distributed to a beneficiary or your estate after your death, or it pays for a first home (up to a $10,000 lifetime limit). If a withdrawal does not qualify, the portion allocable to earnings may be subject to tax and may be subject to the 10% additional tax.
Higher Brackets Widen the Roth Gap
| Bracket |
Taxable After-Tax Income |
The yearly Roth edge |
|---|---|---|
| 22% |
$30,147 |
$4,859 |
| 24% |
$29,858 |
$5,148 |
| 32% |
$28,703 |
$6,304 |
| 37% |
$27,420 |
$7,586 |
In the 37% row, qualified dividends are taxed at 20%.
Compounding Turns $5,148 a Year Into Six Figures
Reinvest the 24% bracket advantage each year at a conservative 4% and it grows to $61,808 after 10 years and $153,298 after 20. This assumes no share price gains. It is what holding these stocks outside a Roth costs over time.
Ares Capital: Biggest Tax Bill in the Group
This business development company lends to middle-market companies. At 9.91% it is ultra-high-yield, and its ordinary income produces the largest tax line in the table. Core EPS was $0.46 against a $0.48 dividend. That gap is backed by $1.37 per share of undistributed taxable income carried forward. Risk: non-accruals are at 2.4% of cost. A near-10% yield always invites the question of whether it is about to be cut, and we laid out the seven warning signs that answer it in a free dividend trap guide.
MPLX: Ultra-High Yield With a UBTI Catch
This midstream partnership raised its distribution 12.5% to $1.2111 per quarter, with 1.3x coverage. Risk: if an IRA has $1,000 or more of unrelated business gross income, the IRA must file a Form 990-T, and the account itself may owe tax. Because the tax is already deferred in a standard brokerage account, MPLX gains the least from Roth placement.
Realty Income: Monthly REIT Income Taxed at Ordinary Rates
This net-lease REIT pays monthly and reports 98.8% occupancy. Its dividend is about 73% of the center of its $4.45 to $4.46 AFFO guidance. Risk: net debt are at 5.4x adjusted EBITDA.
Altria: Qualified Dividends, High Payout
The tobacco maker's dividend equals about 78% of the center of its 2026 adjusted EPS guidance. Risk: the share price of $76.75 is above the $72.55 analyst target.
British American Tobacco: Foreign Payer Without the Withholding Trap
Foreign withholding tax cannot be reclaimed via foreign tax credit inside a Roth. The UK deducts 0% on dividends, so that trap does not apply here. BAT guides to 5-8% adjusted EPS growth. Risk: the dividend is set in pence, so the dollar amount moves with exchange rates.
Who This Suits and What to Do Next
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Work out what Ares Capital and Realty Income cost you in taxes at your bracket before you file this year.
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To model a phased Roth conversion, start with the ordinary-income payers.
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Check MPLX's expected UBTI before holding it in a Roth.
This approach suits investors who are 59½ or older, whose Roth has passed the five-year mark, and who hold BDCs or REITs outside a retirement account. For them, Roth placement is the most direct way to keep more of every distribution.
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