Buying REITs in a Roth IRA
By: Olivia Faucher,
This Guide to Buying REITs in a Roth IRA will provide potential investors with insight about real estate investment trusts (REITs), Roth IRAs and why the two go so well together.
Read to learn why Roth IRAs are an ideal place to hold REIT investments. Both REITs and Roth IRAs can be useful if they are understood properly by investors.
Buying REITs in a Roth IRA: What is a REIT?
A REIT is a company that owns, operates, or finances income-producing real estate. There are a wide range of property types that REITs invest in, including apartment buildings, warehouses, offices, retail centers, medical facilities, data centers, hotels, cell towers, timber and farmland.
Generally, REITs follow a simple business model: the company buys or develops properties and then leases them out to collect rent as its primary source of income. Investors can buy shares in a REIT company, the same way shares can be purchased in any other public company. Investors further can buy publicly traded REIT shares on major stock exchanges such as the NYSE or NASDAQ.
Buying REITs in a Roth IRA: What is a Roth IRA?
A Roth IRA is an individual retirement savings account to which the individual contributes after-tax dollars. The money contributed to the account grows tax-free and retirement withdrawals are tax-free.
Roth IRAs can be opened at a brokerage or bank. Once the account is open, the individual can start investing after-tax dollars. The individual can choose whether to invest the money in mutual funds, stocks, bonds, REITs or exchange-traded funds (ETFs).
There are annual limits on Roth IRA contributions. In 2021, investors can contribute up to $6,000 ($7,000 if age 50 or older).
While there are no current-year tax benefits, contributions and earnings can grow tax-free. The individual can withdraw money tax-and penalty-free after age 59½ and once the account has been open for five years.
Roth IRAs do not have required minimum distributions. There is also no age limit associated with Roth IRAs, meaning the investor can continue to contribute money to the account for as many years as he or she would like.
Buying REITs in a Roth IRA: The Benefits
Individuals who hold Roth IRAs can decide to invest in REITs within the IRA. There are a number of reasons that REITs are an attractive investment option, and REITs are especially attractive within a Roth IRA.
The tax treatment of REITs in a regular taxable account is a drawback for investors. However the tax benefits of Roth IRAs essentially allow investors to bypass the less than ideal tax treatment that is typically associated with REITs.
In any tax-advantaged retirement savings account, investments grow on a tax-deferred basis. This means that the investor does not have to pay capital gains tax if he or she sells investments for a profit, and the investor will not have to include dividends in his or her taxable income.
With regard to REIT dividends, these tax rules provide a big advantage. REITs are not taxable at the corporate level, and therefore the tax burden falls onto individual investors. However, in a Roth IRA, investors are not taxed on their REIT dividends at the individual level either. Since qualified Roth IRA withdrawals are completely tax-free, investors won’t ever have to pay taxes on REIT dividends, or on the profits made when selling REIT stock. This can make a significant difference in the long run.
Additionally, REIT dividends can be complex when it comes to tax treatment, and holding REITs in a Roth IRA allows investors to avoid that complication.
The Bottom Line
A Roth IRA is an ideal place to hold REIT investments, as the IRA allows investors to avoid the large tax obligation that is typically associated with REIT dividends. Given that REITs provide above-average yields, investors who hold REITs in a Roth IRA will accumulate outstanding returns over time.
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