At the 24% federal bracket, a portfolio throwing off $42,000 in dividend income hands roughly $10,080 to the IRS every year. Inside a Roth, that number goes to zero. The math is identical on both sides of the fence. The wrapper is the only variable.
That is the entire premise of asset location: put the highest-yielding, ordinary-income-character distributions inside the Roth, and the federal tax line on those dollars permanently disappears.
The Tax Delta: Roth Versus Taxable at 24%
A $500,000 basket targeting roughly an 8% blended yield produces about $42,000 of gross annual income. In a taxable account at 24%, the after-tax take is about $31,920. In a Roth, the take is the full $42,000. The annual delta is roughly $10,080. Held for ten years with no growth and no reinvestment, that gap totals more than $100,000 in taxes never paid.
The Basket
Yields below are based on recent distribution data. The allocation tilts toward the higher-yielding sleeves (ARCC, JEPQ, JEPI) to reach the 8% blended yield needed for the $42,000 headline figure. Lower-yielding names (MO, EPD, BTI, O) are underweighted accordingly.
- Ares Capital (NASDAQ:ARCC | ARCC Price Prediction): 10% yield, $0.48 quarterly. BDC paying ordinary-income dividends. Top-priority Roth candidate. Q1 2026 NII of $0.55/share comfortably covered the $0.48 dividend.
- Main Street Capital (NYSE:MAIN): 6% yield. Monthly $0.26 regular plus $0.30 quarterly supplemental, now the 19th consecutive quarter of supplementals. Ordinary income.
- JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ): 13% yield. Option-premium income is ordinary. Ideal Roth holding.
- JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI): 8% yield. Same ordinary-income mechanics as JEPQ on a S&P 500 sleeve.
- MPLX (NYSE:MPLX): 8% yield. MLP issuing a K-1; UBTI considerations apply inside an IRA depending on custodian and ownership levels. Distribution stepped up to $1.0765 per unit quarterly.
- Altria (NYSE:MO): 6% yield, $1.06 quarterly. Qualified dividend status, so Roth urgency is lower, but the yield still benefits from sheltering.
- Enterprise Products Partners (NYSE:EPD): 6% yield. MLP issuing a K-1; same UBTI considerations as MPLX apply inside an IRA.
- British American Tobacco (NYSE:BTI): 5% yield. 2026 quarterly distribution raised 12% to $0.834851. ADR with 15% UK withholding that the Roth structure cannot recover, a meaningful drag worth flagging.
- Realty Income (NYSE:O): 5% yield, 114th consecutive quarterly increase and 670 consecutive monthly dividends. REIT distributions are ordinary income.
The Bracket Multiplier
Same $42,000 of gross dividend income. Different brackets. Different damage.
| Bracket | Federal Tax | Taxable Net | Roth Net | Annual Roth Advantage |
|---|---|---|---|---|
| 22% | $9,240 | $32,760 | $42,000 | $9,240 |
| 24% | $10,080 | $31,920 | $42,000 | $10,080 |
| 32% | $13,440 | $28,560 | $42,000 | $13,440 |
| 37% | $15,540 | $26,460 | $42,000 | $15,540 |
For context, the 10-year Treasury yields 5%, so the basket’s yield sits roughly 373 basis points above the risk-free benchmark.
The Compounding Insight
The annual delta is only the first layer. Reinvested inside the Roth at a conservative 5% rate, the 24%-bracket investor’s $10,080 of annual tax savings compounds into roughly $127,000 over ten years and roughly $333,000 over twenty. None of it is taxed on the way in, the way through, or the way out. That is the permanent cost of holding this basket in a taxable account.
The Risks Worth Naming
- Distributions are ordinary income. The Roth shelter is the reason this basket works.
- EPD and MPLX issue K-1s, with UBTI considerations inside an IRA depending on custodian and ownership levels.
- BDCs ride the credit cycle. ARCC non-accruals rose to 2.1% in Q1 2026 from 1.8% at year-end 2025.
- JEPI and JEPQ cap upside through written calls. JEPI returned 8% over the last year while JEPQ tracked the Nasdaq more aggressively.
- Concentration in one income theme leaves the portfolio exposed to a rate or credit shock hitting multiple sleeves at once.
What To Do
- If any BDC or REIT in this basket is sitting in a taxable account, calculate the annual tax cost at your bracket before the next filing.
- Model a phased Roth conversion that starts with the ordinary-income names (ARCC, MAIN, JEPI, JEPQ, O) ahead of the qualified-dividend names.
- Confirm with your custodian whether the MLPs (EPD, MPLX) are appropriate to hold inside an IRA given UBTI rules before adding them to the Roth sleeve.
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