If I put dividend-paying stocks in my IRA, where does the dividend go when paid?
The dividend goes into the IRA (either reinvested automatically or remains as cash until you invest it, per your choice). You're not taxed on this dividend (IRA is a taxed-deferred account - you're taxed on the distributions, but not on the capital gains within the account).
With a long enough time horizon, no matter when you buy, equities almost always outperform cash and bonds. There's an article here with some info: http://www.fool.co.uk/investing-basics/how-when-and-where-to-invest/ Holding period where shares have beaten cash  There was a similar study done which showed if you picked any day in the last 100 years, no matter if the market was at a high or low, after 1 year your probability of being in profit was only 0.5, but after 10-20 years it was almost certainly 1.0.  Equities compound dividends too, and the best place to invest is in diversified stock indices such as the S&P500, FTSE100, DOW30 or indices/funds which pay dividends. The best way to capture returns is to dollar cost average (e.g. place a lump sum, then add $x every month), to re-invest dividends, and oh, to forget about it in an IRA or SIPP (Self invested pension) or other vehicle which discourages tampering with your investment.  Yes, values rise and fall but we humans are so short sighted, if we had bought the S&P in 2007 and sold in 2009 in fear, we would have missed out on the 25% gain (excluding dividends) from 2007-2014. That's about 3% a year gain even if you bought the 2007 high -beating cash or bonds even after the financial crisis. Now imagine had you dollar cost averaged the entire period from 2007-2014 where your gain would be. Your equity curve would have the same shape as the S&P (with its drastic dip in 2009) but an accelerated growth after. There are studies if you dig that demonstrate the above. From experience I can tell you timing the market is nigh impossible and most fund managers are unable to beat the indices. Far better to DCA and re-invest dividends and not care about market gyrations! .. "Offtopic, but what do you think of the idea of the stock market being a ""ponzi scheme""? I've had this same idea that [Mark Cuban reiterated well by writing](http://blogmaverick.com/2008/09/08/talking-stocks-and-money/): &gt;Ive said a lot of this before. The stock market is by definition a ponzi scheme. As long as money keeps on coming in, then there is someone to take the stocks from the sellers. If the amount of money coming in is reduced, the stocks, indexes, et al go down. What if, for who knows whatever reason, the amount of money going into stocks declined significantly ? Who would buy stock from the sellers. I mean goodness gracious, you could see something disastrous happen. Like the Nasdaq dropping from 5000, to under 2000 in just a few years. Its happened before, it can happen again. &gt; &gt;Which is exactly why we get all these nonsensical commercials from brokerages. To keep the money coming in . I wish someone would index the amount of money spent on marketing by mutual funds and brokerages to the Nasdaq and Dow and see if it correlates. &gt; &gt;Money inflows drives the business. We can get all the economic data we ever dreamed of getting, but if money inflows declined significantly for an extended period of time, then every rule of thumb would go out the window until money started flowing in. Yes it would flow in eventually as prices dropped. From big investors like me who wouldnt have gotten hurt by a huge market decline and could come in and buy huge chunks, or companies outright. &gt; &gt;You ? You probably would be like Charles Ponzi’s customers. You wouldnt be able to get your money out of the fund when it went down, and by the time you did, it would be too late. You would have been crushed. &gt; &gt;Ive said it before, a stock that doesnt pay dividends is valued like a baseball card. Just whatever you can sell it for. The concept that you own “your share” of the company is a joke. You are completely at the whim of the CEO and board who will dilute you on a daily basis with stock options, then try to buy back stock to cover it up and push up the price, rewarding the shareholders who get out, rather than those that continue to hold the shares. Meaning you. &gt; &gt;Have you ever seen Warren Buffet talk about buying 100 shares of anything k shares ? or does he take control of , or purchase a material percentage of a company ? &gt; &gt;If you have enough money to have influence , take control or buy it outright, then the stock market can work for you. Thats why I buy stock in public companies that relate to my other business entities. When i pick up the phone and call the CEO of a company i own shares in, they call me back very quickly. When I ask if there are business opportunities that make sense for the company and another company of mine to work together, I wont always get the business, but I will always get a meeting. If Im smart about the investments I make, the more important returns come from the relationships with the companies than the action of the stock. &gt; &gt;If the best you can do is buy shares that are going to be continuously diluted, then you are merely a sucker. There is a good chance that the shares you bought came from shares an insider who got stock options. You just helped dilute yourself with your first share purchase. &gt; &gt;The wealthy can make the stockmarket work for them. Individuals buying shares of stock in non dividend paying stocks… they work for the stockmarket. &gt; &gt;I know Ive painted a pretty bleak picture. &gt; &gt;The stockmarket isnt going away. Would it shock me if the whole thing collapsed ? yes. it would. Its just too engrained in our way of life in the USA. What would change my mind is if a better investment vehicle came along. &gt; &gt;The stockmarket used to be about investing capital in companies that came public or did secondary offerings. That money was used to create amazing businesses and return dividends back to people who truly were investors. There once was a day where most companies paid dividends higher than the interest rates on their bonds. Why ? Because stocks are inherently more risky. If a company goes belly up, bondholders collect first, shareholders usually last. People could buy and hold stocks, and get paid real cash money for being a shareholder in the company at rates far higher than the divident yields we see today. If the company did well, the dividends went up. Investors who held, actually got all their money back in dividends at some point and the rest was gravy. The good ole days. &gt; &gt;But that changed when mutual funds came along and started marketing the concept of growth as a way to attract investors. &gt; &gt;Its not inconceivable that the old mindset could comeback. That a new market of stocks could be created where companies didnt continuously dilute shareholders by issuing stock and options to themselves. Where earnings were earned for the same reason they are in private companies, to not only fund growth, but also provide cash back to investors. Now if that market existed today. Where I could buy 100 shares of stock, and even if it represented just 1/100000 of ownership in the company, I could have confidence that year after year, I would still own 1/100000th of that company, and if that company generated earnings , I would have at least some of that money returned to me. Well then, that wouldnt be a ponzi scheme. That would be a true market of stocks, and I would be happy to recommend to anyone to be careful, but buying stocks in that market could be something worth considering if your appetite for risk canhandle it." First of all, there are some differences between the retirement accounts that you mentioned regarding taxes.  Traditional IRA and 401(k) accounts allow you to make pre-tax contributions, giving you an immediate tax deduction when you contribute.  Roth IRA, Roth 401(k) are funded with after tax money, and a non-retirement account is, of course, also funded with after tax money.  So if you are looking for the immediate tax deduction, this is a point in favor of the retirement accounts. Roth IRA & Roth 401(k) accounts allow the investment to grow tax-free, which means that the growth is not taxed, even when taking the investment out at retirement.  With Traditional IRA and 401(k) accounts, you need to pay tax on the gains realized in the account when you withdraw the money, just as you do with a non-retirement account.  This is a point in favor of the Roth retirement accounts. To answer your question about capital gains, yes, it is true that you do not have a capital gain until an investment is sold.  So, discounting the contribution tax deductions of the retirement accounts, if you only bought individual stocks that never paid a dividend, and never sold them until retirement, you are correct that it really wouldn't matter if you had it in a regular brokerage account or in a traditional IRA.  However, even people dedicated to buy-and-hold rarely actually buy only individual stocks and hold them for 30 years. There are several different circumstances that will generally happen in the time between now and when you want to withdraw the money in retirement that would be taxable events if you are not in a retirement account: If you sell an investment and buy a different one, the gains would be taxable. If you want to rebalance your holdings, this also involves selling a portion of your investments.  For example, if you want to maintain an 80% stock/20% bond ratio, and your stock values have gone up to 90%, you might want to sell some stock and buy bonds.  Or if you are getting closer to retirement, you might decide to go with a higher percentage of bonds.  This would trigger capital gains. Inside a mutual fund, anytime the management sells investments inside the fund and realizes capital gains, these gains are passed on to the investors, and are taxable.  (This happens more often with managed funds than index funds, but still happens occasionally with index funds.) Dividends earned by the investments are taxable.  Any of these events in a non-retirement account would trigger taxes that need to be paid immediately, even if you don't withdraw a cent from your account. 1)  You ignore dividends. You can hold your 10 million shares and never sell them and still get cash to live on if the security pays dividends. McDonalds stock pays 3% in dividends (a year). If you owned 10 million shares of McDonalds you would get 75,000 every three months. I am sure you could live on 25,000 a month.  2)  Enron was an energy company. They sold energy and made a profit (or rather were supposed to). Enron didn't make their money by selling stock. McDonalds makes their money by selling hamburgers (and other food). The income of a company comes from their customers, not from selling stock.  3)  IF you sold all of your 10 million shares within a short time frame it, likely, would drive the price of the stock down. But you do not need a billion dollars to live on. If you sold 1000 shares each month you would have plenty for buying cars and pizza. Selling 1000 shares may drive the price of the stock down for a minute or two. But the rest of the transactions, for that security made the same day, would quickly obscure the effect you had on the stock.  4)  When you buy stock your money does not (usualy) go to the company. If I were to buy 100 shares of McDonalds, McDonalds would not get $11670.That money is (usually) paid to a 'Market Maker' who, in turn, will use the cash to buy MCD from other individual shareholders (presumably for less than 116.70 a share). I see a false assumption that you are making.  (Almost always) When you buy stock the cash you spend does not go to the company. Instead it goes to someone else who is selling their shares.  The exception to this is when you buy shares in an IPO.  Those of us who have saved all our lives for retirement want income producing investments once we retire. (Hopefully) We have saved up quite a bit of money. To have us purchase their stock companies have to offer us dividends. You report what you contributed (sum of monthly investments that you made) to the bond fund. Distributions are the earnings in the account that stay in the account and have no tax consequences (in particular, you don't report them as income on your tax returns) until you withdraw the money later. Is that basically it? Trading off between withdrawing-anytime vs paying-capital-gain-tax? No. Another significant factor is dividends. In an IRA they incur no immediate tax and can be reinvested. This causes the account value to compound over the years. Historically, this compounding of dividends provides about half of the total return on investments. In a non-IRA account you have to pay taxes each year on all dividends received, whether you reinvest them or not. So outside of an IRA you have a tax drag on both capital gains and dividends. The reinvestment of dividends and capital gains is a very significant portion of investment gains over the years. This creates a compounding effect on your gains. You should almost certainly reinvest to help the account grow, until you are retired and want to withdraw some cash. Placing them in a money market account just builds a pile of uninvested cash.