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Now that company pensions have become almost as rare as video rental stores, we're all essentially responsible for managing our own retirement plans. But on the good news front, at various times, our representatives in Washington have set up specialized, tax-advantaged accounts designed to encourage us to save. Prominent among them, the individual retirement account, or IRA. You probably know all that already, of course, but what you may not be as aware of -- unless you're doing particularly well in your career -- is that there's an income level above which those incentives stop applying.

In this segment from Motley Fool Answers, host Alison Southwick is joined by senior analyst Jason Moser and Motley Fool Wealth Management's Ross Anderson to talk about the ways a couple that previously focused on maxing out their IRAs with dividend payers should pivot their strategy in light of their new higher salaries.

A full transcript follows the video.

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Alison Southwick: The next question comes from Nicki. "My husband and I have always invested almost exclusively in our IRA accounts, maxing them out each year, and have been focused on solid dividend-paying stocks so that they can compound over time and we can use them to supplement our income in retirement.

"However, due to a promotion for me and a new job for him, it's likely we will be right at, if not over, the income limit for 2019 to be able to contribute to an IRA. We're hesitant to invest in those same stocks in a regular brokerage as it's not as tax-efficient. I've never done any real research on any non-dividend paying stocks since that was never really our strategy. Can you point us in the right direction when it comes to investing in non-dividend paying stocks, or at least how to invest in a regular brokerage in a tax-efficient way?"

More tax talk.

Ross Anderson: All right!

Southwick: Ross loves it.

Anderson: I do! The first thing I'll tell you is that no matter what you're making, you can generally make an IRA contribution, and it may be non-deductible so you may be earning out of that deductible IRA range, but you should be able to still make a non-deductible IRA contribution if you choose to.

But let's talk about investing in a taxable brokerage account, because I think this is something that people miss a lot. I see a lot of investors that come to us. They're getting ready to retire and it's all IRA money, or it's all 401(k) money, because that's been the easiest place to do their recurring savings.

A taxable brokerage account is actually a pretty tax-efficient place to invest. You get a couple of things that work for you. No. 1 is if you buy a stock and it goes up, and you've held it for more than a year, you're going to be paying capital gains rates on the gains [not your income tax rate]. So even as your stocks go up in an IRA, ultimately someday you're going to need to take money out of that and you're going to pay ordinary income taxes on all of that money coming out of a pre-tax IRA where I think you actually get a really nice benefit that is an attractive tax rate when you sell a stock for a gain in a taxable brokerage account.

No. 2 is there's two different types of dividends that can be paid. One is a qualified dividend and the other is an ordinary dividend, and the ordinary dividend is going to be taxable at your income rate, right now; but a qualified dividend is giving you the same tax preference that a long-term capital gain would.

Here's the bottom line for me. We've got a saying, "Don't let the tax tail wag the investment dog." If you have a company that you think is an attractive, overall, total return strategy, that's a great company to own whether it's going to be in an IRA or not. From a tax location perspective, you could say that a non-dividend paying stock may be a little bit more efficient in a taxable brokerage account; but ultimately if those are the companies you believe in, I'm not going to tell you to change your strategy.

But my personal favorite companies [things like Amazon, and like Alphabet and Google]; those are not dividend-paying companies. They are growth stocks. I think there's a lot of research that you can get to in terms of what growth stocks may be appropriate for you and that's something that I think you should at least explore; but don't necessarily feel like you have to change your strategy just to invest in a new account.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Alison Southwick owns shares of AMZN. Ross Anderson owns shares of GOOG and AMZN. Ross Anderson is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The information provided is intended to be educational only, and should not be construed as individualized advice. The Motley Fool owns shares of and recommends GOOGL, GOOG, and AMZN. The Motley Fool has a disclosure policy.

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