The Canadian dividend tax credit: Why is it that someone can earn a lot in dividends but pay no/little tax?
Basically, yes. That doesn't mean that it's easy to do. The government provides a dividend tax credit since an individual takes on more risk to invest in dividend-paying corporations rather than trading their human capital for an income. Thus, for the most part, $1 earned from dividends is taxed much less than $1 earned from income or interest. Finally, note that foreign dividends are not eligible for the dividend tax credit, and are not preferentially taxed. "The profits that the corporation had to earn to be able to pay you ""eligible"" dividends for the dividend tax credit were already taxed, and at a somewhat high corporate rate, in the case of large public companies with big profits. The dividend tax credit, which permits an individual to earn a lot from dividends and not pay any personal income tax, essentially recognizes that the profit making up the dividend was already highly taxed to begin with via corporate income tax.  It aims to eliminate double-taxation. FWIW, if you own and run a small private business in Canada and pay yourself a dividend, such dividends are considered ""non-eligible"", i.e. you don't get as much a benefit from the dividend tax credit, since small business corporate income tax rates are much lower."
Yes, you may make non-deductible contributions to an IRA. The main benefit of a non-deductible IRA is tax-deferred earnings. If the investment pays out dividends, they will be kept in the IRA (whether you take them in cash and put them in a Cash Management Account, or you automatically reinvest them). You do not get taxed on these earnings until you withdraw from the IRA during retirement. If your income at that time is significantly lower than your income while you're working, you will be in a lower tax bracket (unless tax rates change drastically between now and then), so the taxes you pay on these earnings will be lower than if you'd invested outside the IRA and paid taxes along the way. You also get the benefit of compounding of the tax-deferred earnings. There's one caveat -- when you withdraw from the IRA, all the growth is treated as ordinary income. Even if some of it is capital gains, it will be taxed at your ordinary income rate, not your capital gains rate. So this is most beneficial for investments that produce dividends.  If you have a mix of deductible and non-deductible contributions to your IRA, the tax on the principle portion of your withdrawals is pro-rated based on the ratio of deductible to total contributions. This ensures that you eventually get taxed for the deductible portion (it's not really tax-free, it's tax-deferred), but don't get taxed twice for the non-deductible portion. Another option, if your 401(k) plan allows it, is to make after-tax contributions to the 401(k). At the end of the year, you can make an in-service distribution of these contributions and their earnings from the 401(k) to a Roth Conversion IRA. This allows you to contribute to a Roth IRA even if you're above the income limit for normal Roth IRA contributions. You can also do this even if you're also making non-deductible contributions to your regular IRA. "I agree with Grade 'Eh' Bacon's answer, but there are a couple of ideas that are relevant to your particular situation: If I were you, I would invest at least half of the cash in growth ETFs because you're young enough that market variability doesn't affect you and long term growth is important. The rest should be invested in safer investments (value and dividend ETFs, bonds, cash) so that you have something to live off in the near term. You said you wanted to invest ethically.  The keyword to search is ""socially responsible ETFs"".  There are many, and if this is important to you, you'll have to read their prospectus to find one that matches your ethics. Since you're American, the way I understand it, you need to file taxes on income; selling stocks at a gain is income.  You want to make sure that as your stocks appreciate, you sell some every year and immediately rebuy them so that you pay a small tax bill every year rather than one huge tax bill 20 years from now.  Claiming about $20600 of capital gains every year would be tax free assuming you are not earning any other money.  I would claim a bit more in years where you make a lot. You can mitigate your long term capital gains tax exposure by opening a Roth IRA and maxing that out.  Capital gains in the Roth IRA are not taxable.  Even if you don't have income from working, you can have some income if you invest in stocks that pay dividends, which would allow you to contribute to a Roth IRA. You should figure where you're going to be living because you will want to minimize the currency risk of having your money in USD while you're living abroad.  If the exchange rate were to change by a lot, you might find yourself a lot poorer.  There are various hedging strategies, but the easiest one is to invest some of your money in securities of the country you'll be living in. You should look into how you'll be converting money into the foreign currency.  There are sometimes way of minimizing the spread when converting large amounts of money, e.g., Norbert's gambit.  Shaving off 1.5% when exchanging $100k saves $1500." Actually, share holder value is is better maximised by borrowing, and paying dividends is fairly irrelevant but a natural phase on a mature and stable company. Company finance is generally a balance between borrowing, and money raised from shares. It should be self evident with a little thought that if not now, then in the future, a company should be able to create earnings in excess of the cost of borrowing, or it's not a very valuable company to invest in! In fact what's the point of borrowing if the cost of the interest is greater than whatever wealth is being generated? The important thing about this is that money raised from shares is more expensive than borrowing. If a company doesn't pay dividends, and its share price goes up because of the increasing value of the business, and in your example the company is not borrowing more because of this, then the proportion of the value of the company that is based on the borrowing goes down. So, this means a higher and higher proportion of the finance of a company is provided by the more expensive share holders than the less expensive borrowing, and thus the company is actually providing LESS value to share holders than it might. Of course, if a company doesn't pay a dividend AND borrows more, this is not true, but that's not the scenario in your question, and generally mature companies with mature earnings may as well pay dividends as they aren't on a massive expansion drive in the same way. Now, this relative expense of share holders and borrowing is MORE true for a mature company with stable earnings, as they are less of a risk and can borrow at more favourable rates, AND such a company is LIKELY to be expanding less rapidly than a small new innovative company, so for both these reasons returning money to share holders and borrowing (or maintaining existing lending facilities) maintains a relatively more efficient financing ratio. Of course all this means that in theory, a company should be more efficient if it has no share holders at all and borrows ALL of the money it needs. Yes. In practise though, lenders aren't so keen on that scenario, they would rather have shareholders sharing the risk, and lending a less than 100% proportion of the total of a companies finance means they are much more likely to get their money back if things go horribly wrong. To take a small start up company by comparison, lenders will be leary of lending at all, and will certainly impose high rates if they do, or ask for guarantors, or demand security (and security is only available if there is other investment besides the loan). So this is why a small start up is likely to be much more heavily or exclusively funded by share holders. Also the start up is likely not to pay a dividend, because for a start it's probably not making any profit, but even if it is and could pay a dividend, in this situation borrowing is unavailable or very expensive and this is a rapidly growing business that wants to keep its hands on all the cash it can to accelerate itself. Once it starts making money of course a start up is on its way to making the transition, it becomes able to borrow money at sensible rates, it becomes bigger and more valuable on the back of the borrowing. Another important point is that dividend income is more stable, at least for the mature companies with stable earnings of your scenario, and investors like stability. If all the income from a portfolio has to be generated by sales, what happens when there is a market crash? Suddenly the investor has to pay, where as with dividends, the company pays, at least for a while. If a company's earnings are hit by market conditions of course it's likely the dividend will eventually be cut, but short term volatility should be largely eliminated. Each way you go is a little bit of a gamble.   Owning equity in the company is best in situations where you can trade and sell that equity, or where the dilution of your royalty product would affect your returns, or if you can maintain a certain equity stake without working at the company or if you can hold out on taking equity to reinvest profits for the purposes of growth.   The royalty is best in situations where you're getting a portion of the gross, since you get paid as a creditor, no matter how the company is performing, or if you intend to collect royalties after you leave the company. Now for your situation: if your royalties are fluctuating with profit instead of gross and your equity is tied to your continued partnership and not subject to potential growth... then they're pretty much both workarounds for the same thing, you've removed the particular advantages for each way of receiving payment. If the company ever does buy out or go public, how much of your additional X earning a month would you have to then re-invest to get an equity stake?  And for royalties, if another developer came aboard, or your company bought another company, how much would this dilute your IP contribution? So, aside from the gambling nature of the issue, I'm not sure your tax calculation is right.  You can take equity profit as dividend, as long as you're collecting a sufficient salary (this prevents a business from declaring all profits as a dividend).  This would put those profits into a different tax bracket, 15% capital gains. Or if all profits are equitably split, you could take part as salary, part as dividend.  As well, as someone who's making active income off of their IP, not passive income, you're supposed to file a Schedule C, not a Schedule E, so your royalties would include your self employment taxes.  The schedule E is for royalties where the author isn't actively in the field or actually self employed in that area, or if you own royalties on something you didn't create.  Should you keep the royalties then go to another job field or retire then your royalties could go on a Schedule E.  Now, a tax advantage may exist on a Schedule C if you can write off certain health and business expenses reducing your income that you can't on a Schedule E, though it'd probably be difficult to write off more than the adjusted self employment cost savings of a Schedule E. Not sure how this has got this far with no obvious discussion about the huge tax advantages of share buy backs vs dividend paying.  Companies face a very simple choice with excess capital - pay to shareholders in the form of a taxable dividend, invest in future growth where they expect to make more than $1 for every $1 invested, or buy back the equivalent amount of stock on the market, thus concentrating the value of each share the equivalent amount with no tax issues. Of these, dividends are often by far the worst choice. Virtually all sane shareholders would just rather the company put the capital to work or concentrate the value of their shares by taking many off the market rather than paying a taxable dividend. Well, you could probably say that the modern tax &amp; regulatory system is the main cause.  ...for instance, in 2001-02, the Bush tax cuts reduced the dividend tax rate from 28% to 15-20%, which is pretty substantial, at least, if you pay yourself that way from owning a company.  So, as he said, if dividend tax rates are low, then well, people will pay themselves more dividends.  Of course, there are many other factors, such as deregulation &amp; anti-trust, etc., but the dividend &amp; capital gains is a big factor. "Well, I'm not an expert and you sound pretty credible however I still don't see anything to back up what your saying in the sources that I've found:  &gt; Active business income can still be earned by [foreign] subsidiaries (if you can prove to Revenue Canada that it is a ""real"" corporation) and taxed at better offshore rates if 90% or more of its income comes from third party transactions.   This seems to be consistent with my definition.  &gt;Active business profits earned by a foreign sub are taxed when profits are repatriated. Certain tax credits are available for foreign taxes paid and certain dividends out of surplus are tax free to the corporation (not individuals).   http://www.can-offshore.com/tax-planning/reporting-rule1-ccra.htm  So when foreign sub pays dividends to the parent corp they are still charged repatriation - just like in the US.  Again, this sounds consistent with my previous comment. Canada has a corporate tax rate that is over 10% lower than the US so this is still a very good deal in its own right.   Maybe you can explain in more detail or provide a source that has some additional detail? I also can't find any pieces on this or the Valeant deal that suggests beneficial repatriation rules." There are many stocks that don't have dividends. Their revenue, growth, and reinvestment help these companies to grow, and my share of such companies represent say, one billionth of a growing company, and therefore worth more over time.  Look up the details of Berkshire Hathaway. No dividend, but a value of over $100,000. Not a typo, over one hundred thousand dollars per share.