The Roth Ira Mistake That Turns A 61-year-old’s $7,425 A Month In Tax-free Dividends Into A Tax Bill

The post The Roth IRA Mistake That Turns a 61-Year-Old’s $7,425 a Month in Tax-Free Dividends Into a Tax Bill appeared first on 24/7 Wall St..

Picture a 61-year-old who opened his first Roth IRA a few years ago and is past 59½, so he assumes every dividend he takes out is tax-free. Unfortunately, this assumption will cost him. His target is $7,425 a month, or $89,100 a year, from a six-holding income portfolio inside a Roth. Whether that money really comes out tax-free depends on a five-year rule many retirees skip.

Turning 59½ Only Passes Half the Test

A Roth withdrawal is “qualified,” meaning fully tax-free, only when two things are true. You’ve reached age 59½, and you’re past the 5-taxable-year period that starts with the first year you contributed to any Roth IRA. If you fail the second test, the earnings you pull out can be taxed at your regular income rate.

The IRS stacks every withdrawal in a fixed order. Regular contributions come out first, then conversions, then earnings. The money you put in comes back tax-free. At 61, the 10% early withdrawal penalty no longer applies either.

Dividends earned inside the Roth are not taxed when received. When money leaves the account, IRS rules treat withdrawals across all your Roth IRAs as regular contributions first, conversions and rollovers next, and earnings last, regardless of whether you withdraw dividend cash. At 61, only the portion classified as earnings is taxable before the five-year requirement is met.

Say his first contribution was for tax year 2024. The IRS counts 5 years from the beginning of the year of that first contribution, so his withdrawals become qualified on January 1, 2029. The fix costs almost nothing: open a Roth years early, even with a small fund. We featured a woman who opened one with $50 at 47 and forgot about it. The earlier contribution satisfied the five-year requirement for qualified withdrawals at 62, but it did not eliminate any income tax due when she converted pre-tax retirement money to Roth.

How Much $89,100 a Year Takes

The figures below use closing prices pulled on November 12, 2026, and each holding’s trailing 12 months of payouts. Together, the six positions yield about 7.8%. $89,100 divided by 0.078 equals roughly $1.14 million.

iShares U.S. Large Cap Premium Income Active ETF

iShares U.S. Large Cap Premium Income Active ETF (CBOE:BALI) owns large U.S. stocks and sells S&P 500 index call options. Those options pay cash up front, and in exchange, the fund gives up some upside. With 20% of the money, it yields about 7.9% and supplies about 20% of the income.

Worth noting: payouts vary. April’s was about $0.35 a share. November’s was about $0.18.

State Street SPDR Portfolio S&P 500 High Dividend ETF

State Street SPDR Portfolio S&P 500 High Dividend ETF (NYSEARCA:SPYD) tracks the high-dividend subset of the S&P 500. It gets 15% of the money, yields about 4.1%, and produces about 8% of the income. Worth noting: it spreads money across REITs, utilities, energy, and consumer names, and even Iron Mountain, one of its largest positions, is under 2% of assets. It’s the steadiest piece in the mix, and it makes the least.

Sabra Health Care REIT

Sabra Health Care REIT (NASDAQ:SBRA) owns skilled nursing facilities and senior housing. It holds 15%, yields about 5.8%, and supplies about 11% of the income. Worth noting: the quarterly dividend has held at $0.30 since 2020, after paying $0.45 before that. Sabra raised its 2026 guidance for normalized AFFO, a measure of the cash available to pay dividends, to $1.600-$1.610 a share. That sits well above the $1.20 annual payout.

Fidus Investment

Fidus Investment (NASDAQ:FDUS) is a business development company (BDC) that loans to smaller private U.S. businesses. It pays a base dividend and adds supplemental dividends when profits allow. It holds 15%, yields about 11.1% and produces about 21% of the income.

Worth noting: the extra payments shrink and grow. December’s payment is a $0.43 base plus a $0.11 supplemental. The December 2023 payment was $0.80. Third-quarter adjusted net investment income of $0.54 a share covered the base, and $0.95 a share of undistributed “spillover” income gives it some buffer.

British American Tobacco

British American Tobacco (NYSE:BTI) sells cigarettes, vapes, heated tobacco, and nicotine pouches in more than 170 markets. It holds 15%, yields about 5.3%, and supplies about 10% of the income. Worth noting: the company declares its dividend in British pounds, so the dollar amount changes with exchange rates. In 2026, the quarterly payment per U.S. share rose to about $0.83, up from about $0.75 in 2025.

Virtus InfraCap U.S. Preferred Stock ETF

Virtus InfraCap U.S. Preferred Stock ETF (NYSEARCA:PFFA) is actively managed. It buys preferred stock, which pays set dividends and gets paid ahead of common shareholders. It borrows money to buy more and pays out monthly. It holds 20%, yields about 11.4%, and produces about 29% of the income.

Worth noting: it’s the leveraged piece. Its last report showed about $706 million in liabilities against $2.45 billion in net assets. Preferreds trade a lot like long-term bonds, so rising rates push their prices down, and the borrowing makes that drop bigger. The monthly payout has edged up to about 17 cents a share.

Find This One Date Before Your First Withdrawal

Check your earliest Roth IRA contribution records, including Forms 5498, to identify the tax year that started your clock. As of November 2026, a first contribution for 2022 or later means the five-year requirement is not yet satisfied. For this 61-year-old, withdrawals can generally remain tax-free up to the remaining contribution and conversion amounts, after accounting for previous withdrawals across all Roth IRAs.

The post The Roth IRA Mistake That Turns a 61-Year-Old’s $7,425 a Month in Tax-Free Dividends Into a Tax Bill appeared first on 24/7 Wall St..