At the 24% federal bracket, a $1 million dividend portfolio generating roughly $45,000 in annual income can hand the IRS between $6,750 and $10,800 every year, depending on how much of that income is qualified versus ordinary.
Inside a Roth IRA, that same income lands in your account untouched. This article walks through exactly what that delta looks like on six named holdings using verified 2026 federal brackets and current yields.
The $1 Million Portfolio and Its Blended Yield
Here is the construction: Six holdings, allocated to produce a realistic blended yield in the 4% to 5% range, weighted toward income generation rather than growth.
| Holding | Allocation | Current Yield | Annual Income | Tax Character |
|---|---|---|---|---|
| Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD | SCHD Price Prediction) | $300,000 | ~4% | $10,500 | Qualified |
| Johnson & Johnson (NYSE:JNJ) | $100,000 | 2% | $2,250 | Qualified |
| Altria (NYSE: MO) | $150,000 | 6% | $8,760 | Qualified |
| Verizon (NYSE:VZ) | $150,000 | 6% | $8,640 | Qualified |
| AbbVie (NYSE:ABBV) | $100,000 | 3% | $3,080 | Qualified |
| Realty Income (NYSE:O) | $200,000 | 5% | $10,540 | Ordinary (REIT) |
For the example portfolio above, the gross annual income is approximately $43,770. Of that, roughly $10,540 from Realty Income flows through as ordinary income, while the remaining $33,230 from the other five holdings qualifies for long-term capital gains rates.
The Tax Delta: Roth vs. Taxable at 24%
At the 24% bracket, single filers with income between $50,400 and $105,700 pay 15% on qualified dividends and the full 24% on ordinary REIT distributions.
- Taxable account: Qualified portion of $33,230 taxed at 15% costs about $4,985. The Realty Income ordinary income of $10,540 taxed at 24% costs about $2,530. Total tax drag: roughly $7,515. Net income: approximately $36,255.
- Roth IRA: Full $43,770 stays in the account. Net income: $43,770.
- Annual Roth advantage: roughly $7,515.
- 10-year Roth advantage (no reinvestment): approximately $75,150.
Why each name belongs here matters. Realty Income is the priority Roth holding: as a REIT, distributions are taxed as ordinary income at your full marginal rate. Its $0.2705 monthly dividend compounds inside a Roth with zero leakage. Altria and Verizon pay qualified dividends, but their absolute yields make the dollar advantage meaningful. SCHD, JNJ, and AbbVie pay qualified dividends with lower yields, so the per-dollar Roth lift is smaller, but the compounding still matters across decades.
The Bracket Multiplier
The same portfolio looks very different across brackets. Qualified dividend rates step from 15% to 20%, and the top 37% bracket kicks in above $640,600 for single filers in 2026. High earners also face the 4% net investment income tax.
| Bracket | Qualified Rate | Ordinary Rate | Annual Tax Cost | Roth Advantage |
|---|---|---|---|---|
| 22% | 15% | 22% | ~$7,304 | ~$7,304 |
| 24% | 15% | 24% | ~$7,515 | ~$7,515 |
| 32% | 15% | 32% | ~$8,357 | ~$8,357 |
| 37% | 24% | 41% | ~$12,209 | ~$12,209 |
A 37% bracket investor loses nearly double what a 22% bracket investor loses on the identical portfolio.
The Insight Most Readers Miss
The Roth advantage compounds year after year. At the 24% bracket, the $7,515 annual delta reinvested at a conservative 4% compounding rate becomes roughly $90,000 over 10 years and roughly $225,000 over 20 years. That is the permanent cost of holding these specific positions outside a Roth, before any share price appreciation. With the 10-year Treasury at 4%, that reinvestment assumption is grounded in current rates.
What to Do
- Calculate the annual tax cost on any REIT holding at your bracket before your next filing. Realty Income’s 5% yield as ordinary income is the highest-friction position in this portfolio.
- Run the Roth conversion math on the highest-yielding ordinary-dividend positions first. REITs and BDCs carry the largest per-dollar lift.
- Model a phased conversion that prioritizes ordinary-income payers, then high-yield qualified payers like Altria and Verizon, before touching lower-yield qualified holdings like AbbVie and Johnson & Johnson.
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