Suppose you are advising a retiree who holds 2,000 shares of LargeDiv Corp. The company is largely held by tax-paying institutional investors and has announced that it will shortly be issuing a large dividend. Because the shares are held in the retiree's Roth IRA, she will not incur taxes on either capital gains or dividends. The retiree has decided to sell the shares sometime this year, and use the money for living expenses. You expect the only upcoming change in the stock price will result from the dividend. Ignoring any discounting for time, what advice should you give?

Question

Quizplus · Accepted Answer

The ex-dividend date is the date on which a stock starts trading without the value of its next dividend payment. At this point, the stock price usually decreases by the amount of the dividend. In this case, since the retiree holds the shares in a Roth IRA, she will not have to pay taxes on the dividend, so selling the shares on the ex-dividend date will result in getting the full benefit of the dividend payment while also reducing the tax liability. Thus, the best advice is to sell the stock ex-dividend.

Suppose You Are Advising a Retiree Who Holds 2,000 Shares