$250,000 in Golub Capital and Hercules Capital: Why BDC Income Belongs in a Roth IRA

At the 24% federal bracket, a $250,000 portfolio split between two business development companies brings in about $25,760 a year in regular distributions. In a taxable account, roughly $6,182 of that goes to the IRS every year. Inside a Roth IRA, you keep all of it.

Why BDC Payouts Get Taxed Like a Paycheck

A business development company (BDC) is a listed lender to private, mostly midsize businesses. As a regulated investment company, it avoids corporate tax by passing nearly all of its income to shareholders. Most of that income is loan interest. Only the piece a fund reports as qualified dividend income gets the lower capital gains rates under 26 U.S.C. § 854(b)(1)(B)^[1]. For most BDCs, that piece is small. The rest is taxed at your ordinary rate. For tax year 2026, the IRS applies the 24% rate to single filers with incomes over $105,700 ($211,400 for married couples filing jointly).

Roth Versus Taxable on $250,000

This portfolio holds $125,000 in each BDC, and the math below uses only the regular payouts. Supplemental distributions are left out.

Golub Capital BDC (NASDAQ:GBDC) pays a $1.32 annualized base distribution. At $12.54 a share, that works out to a 10.5% yield. Golub makes first-lien loans to middle-market companies backed by private equity sponsors. Nearly all of that interest income would be taxed as ordinary income for individual investors. On dividend safety: adjusted net investment income (NII) of $0.34 per share^[2] covered the $0.33 payout. Non-accruals stood at 1.9%^[2] of fair value, and net debt-to-equity was 1.23x. Golub cut its base distribution from $0.39 to $0.33^[3] earlier this year.

Hercules Capital (NYSE:HTGC) pays a $0.40^[4] quarterly base distribution plus a $0.07 supplemental. At $15.87, the base alone yields 10.1%, or 11.8% with the supplemental. Hercules lends to venture-backed technology and life sciences companies. Its third-quarter NII covered the base distribution at 118%^[4], and non-accruals were 0.3%^[5] of the portfolio. Total liabilities came to about 1.13x shareholders’ equity.

The Roth advantage is $6,182 a year. Over 10 years, with no new money and no growth, that adds up to $61,825.

How Much Each Bracket Gives Up

In 2026, the 32% rate starts above $201,775 for single filers, and the 37% rate starts above $640,600. Capital gains rates apply to qualified dividends, which caps how much tax they can cost. BDC income has no such cap, so the Roth advantage grows with every step up in bracket.

Compounding Turns $6,182 Into $184,000

The annual gap is only part of the cost. Inside the Roth, the $6,182 you would have paid in tax stays invested. Reinvest it at a modest 4% a year, and the gap reaches $74,227 after 10 years and $184,102 after 20. No share-price gains are assumed. It measures only the tax cost of holding this portfolio. Hercules’ supplemental payout adds more ordinary income on top, which only widens the gap.

Both payouts can change. Golub cut its base this year. Hercules says a 100bp^[5] drop in the Prime Rate would lower annualized net income by about $0.07 per share. Smaller payouts would shrink the Roth advantage, but the 24% tax bite on every dollar paid would stay the same.

What to Do Before Your Next Filing

• Pull your Form 1099-DIV for any BDC you hold outside a retirement account. Compare the qualified dividend box with total ordinary dividends, then multiply the nonqualified amount by your bracket.
• If you are thinking about a Roth conversion, test it against the annual Roth advantage on your actual BDC positions. Weigh the one-time conversion tax against that recurring gap before deciding the conversion costs too much.
• If you plan a phased conversion, consider moving your ordinary-income payers like GBDC and HTGC first. Keep holdings that pay qualified dividends in the taxable account.

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