The IRS Hates This: 2 High-Yield Stocks to Hide in Your Roth IRA Immediately
Holding certain high-yield stocks in a taxable account quietly hands the IRS a five-figure check every single year, and two popular BDCs sitting in the wrong account type are likely costing investors far more than they realize.
At the 24% federal bracket, $500,000 split equally between two of the largest business development companies (BDCs) produces about $45,332 in annual distributions. In a taxable account, about $10,880 goes to the IRS each year. In a Roth IRA, the full amount stays in the account and continues working.
Two stocks to consider stashing in a Roth IRA are Ares Capital (NASDAQ:ARCC | ARCC Price Prediction) and Main Street Capital (NYSE:MAIN). Most BDC distributions count as ordinary income. They don’t get the lower qualified dividend rates, so you pay tax at your full marginal rate. That makes them some of the most expensive income streams to hold in a taxable account.
Roth vs. Taxable: $10,880 a Year Lost to Taxes
For 2026, the 24% bracket covers single filers with taxable income above $105,700 and joint filers above $211,400. The model below puts $250,000 into each stock at current prices and current distribution rates.
| Stock | Yield | Annual Income on $250K | Tax at 24% |
|---|---|---|---|
| Ares Capital | 10.28% | $25,696 | $6,167 |
| Main Street Capital | 7.85% | $19,636 | $4,713 |
Taxable Brokerage Account versus Roth IRA
| Scenario | Gross Income | Federal Tax | Net Income |
|---|---|---|---|
| Taxable account | $45,332 | $10,880 | $34,452 |
| Roth IRA | $45,332 | $0 | $45,332 |
Holding the Roth gives you about $10,880 more income each year. Over 10 years, with no new contributions and no growth, that adds up to roughly $108,800 kept away from the IRS.
Ares Capital: A Double-Digit Yield Taxed as Ordinary Income
Ares Capital pays $0.48 per quarter, or $1.92 a year. At a share price of $18.68, that’s a 10.28% yield. The company has maintained its regular dividend, which has held steady or increased, for 17 consecutive years. Because the yield is above 10%, Ares produces the larger tax bill of the two. It accounts for most of this portfolio’s annual tax cost.
Second-quarter core EPS of $0.47 fell just short of the dividend. To cover gaps like that, management points to about $1.38 per share of extra income. Chief Executive Kort Schnabel said the “significant spillover income provides an additional layer of flexibility and can help bridge during periods of slower transaction activity.” Non-accruals (loans that have stopped paying interest) rose to 2.4% of the portfolio at cost.
Main Street Capital: Monthly Payments Plus a Quarterly Supplemental
Main Street pays a regular monthly dividend of $0.265. In September, it paid a $0.30 supplemental dividend, its 20th consecutive quarterly supplemental. Trailing 12-month distributions total $4.32, a 7.85% yield at $55. Counting only the regular dividends, the yield is 5.78%. In a taxable account, every monthly payment and every supplemental payment adds to your ordinary income. In a Roth, you can reinvest without a tax bill.
Results support the payout so far. Annualized return on equity was 18.9% last quarter, and non-accruals were 1.1%. Supplemental dividends are not guaranteed. Management says they depend on distributable net investment income running well above the regular dividend, on realized gains, and on a stable net asset value.
Higher Brackets Mean a Bigger Roth Advantage
Here is the same $500,000 portfolio across the four main federal brackets:
| Bracket | |||
|---|---|---|---|
| 37% | $640,600 | $28,559 | $16,773 |
| 32% | $201,775 | $30,826 | $14,506 |
| 24% | $105,700 | $34,452 | $10,880 |
| 22% | $50,400 | $35,359 | $9,973 |
Annual tax savings compound over time. Inside a Roth, the $10,880 you would have paid in tax stays invested. Say those savings are reinvested each year at a conservative 4% return, with no gain in either stock’s share price. After 10 years, the accumulated advantage is about $130,600. After 20 years, it is about $324,000. Without any reinvestment, the 20-year total would be $217,595.
Think of these figures as the cost of holding these stocks in a taxable account over time. The cost comes entirely from the tax code. It holds regardless of market returns and grows with every year the income remains exposed.
Three Steps to Take Before Your Next Tax Filing
- Figure out what your BDC holdings cost you in tax. For each BDC in a taxable account, multiply its annual distributions by your marginal rate. Then compare that number with the figures above for your bracket.
- Run the Roth conversion math on Ares and Main Street specifically. Compare the one-time conversion tax with the annual tax savings in the bracket table. Then decide whether the upfront cost outweighs the ongoing savings.
- Consider how a staged conversion could work for higher-yielding ordinary-income holdings. Ares’s 10.28% yield has the higher tax cost per dollar invested. Spreading conversions over several years can help keep each year’s added income within your current bracket.
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Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad, diverse career, including a stint as creative services director at an NBC affiliate in Austin, Texas, gives him unique insight into the financial industry.
Lee Jackson's journey in the financial industry spans more than 30 years, including nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career spanned pivotal sell-side Wall Street events, from the dot-com rise and bubble to the Long-Term Capital Management debacle, 9/11, and the Great Recession of 2008. This reflects his resilience and adaptability amid market volatility.
Lee Jackson’s practical financial industry experience, gained through a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing across various platforms. This unique combination allows him to shed light on the intricacies of Wall Street in a way only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.
Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.
