In a Roth IRA, learn about the tax advantages of REITs. Because of its tax advantages, the Roth IRA is one of the most popular retirement savings vehicles. The money you put into a Roth IRA has already been taxed. As a result, while your investments are in the account, they grow tax-free. You can withdraw funds from the account without paying additional taxes on your earnings once you reach the age of 5912. A REIT, or real estate investment trust, is one of the many investments you can hold in your Roth IRA. A publicly traded company that owns and manages income-producing real estate and other assets is known as a real estate investment trust (REIT). Many of the advantages of real estate are available to REIT investors without needing to own or manage properties themselves. Both Roth IRAs and REITs offer tax advantages, which are amplified when the two are combined. Learn more about the advantages of buying REITs in a Roth IRA, as well as a few other things to keep in mind about this investment strategy.
Important Takeaways
- A Roth IRA provides significant tax benefits, such as tax-free investment growth and tax-free distributions.
- REITs have their own tax advantages, such as the fact that 90% of their taxable income is distributed to shareholders in the form of dividends.
- You won't have to pay capital gains or income taxes on your dividends and other investment earnings if you invest in REITs in your Roth IRA.
- REIT funds provide real estate exposure with increased diversification for investors who don't want to pick individual REITs to invest in.
The Advantages of Investing in REITs in Your Roth IRA
There are numerous advantages to investing in REITs. They pay dividends, which can be used as a recurring source of income. Because you can easily buy and sell REIT shares, they're also far more liquid than owning physical real estate. Finally, they help to diversify your investment portfolio. In addition, investing in REITs through a Roth IRA has more advantages than investing through a taxable brokerage account. When you earn money from a REIT investment, whether it's through dividends or capital gains, you'll almost always have to pay taxes on it. Depending on how long you hold the investment, capital gains are taxed at either your regular income tax rate or a special capital gains tax rate. REIT dividends are typically taxed as ordinary income. You can avoid paying taxes on investment growth and distributions from a Roth IRA because they are tax-free. REITs already enjoy a number of tax advantages. Unlike most publicly traded companies, REITs do not pay corporate taxes. They must also distribute at least 90% of their taxable income to their shareholders in the form of dividends. As a result, REIT dividends may be higher than those paid by other companies. When you combine that benefit with the Roth IRA's tax advantages, you get to keep a lot more of your earnings than you would otherwise.How to Invest in REITs With Your Roth IRA
Purchasing REITs through your Roth IRA is similar to purchasing any other investment in this type of account. From a technical standpoint, investing in a REIT is as simple as placing a buy order, just like any other investment. However, adding REIT exposure to your Roth IRA should be approached with caution. To begin, if you decide to invest in REITs through your Roth IRA, don't put too much of your money into them. Warning: You don't want to put all your money into REITs just for the sake of the tax benefits. One of the most important aspects of constructing an investment portfolio is diversification. Only a small portion of your portfolio, including REITs, should be allocated to any one investment. Doing your homework before deciding on a REIT to invest in is also crucial. There were 196 publicly traded REITs at the time of publication, according to Nareit, a national association that represents REITs and other investment trusts. However, not all REITs are created equal. Examine any REIT you're considering investing in thoroughly, including its earnings history and the types of projects it works on. Tip: If you don't want to pick a REIT yourself, you can invest in a REIT mutual fund or an exchange-traded fund (ETF).Real estate Cannot Be Invested Directly in Roth IRAs
Real estate can be a great addition to your overall retirement portfolio. Still, because you can't usually hold physical real estate in a Roth IRA, you may want to invest in it indirectly. In your Roth IRA, there is a specialized type of account that allows you to invest in a wider range of assets. A self-directed IRA is a retirement account that a traditional bank or brokerage firm does not hold. With this type of account, you can invest in alternative assets, such as real estate. A self-directed Roth IRA offers more flexibility than a traditional Roth IRA, allowing you to purchase physical real estate instead of REITs. Many of the same advantages, such as tax-free growth and distributions, are possible with a Roth IRA.REIT's Alternatives Putting money into a Roth IRA
REITs are one of many ways to include real estate in your retirement portfolio, but it's far from the only option. It is also possible that it is not the best option for all investors. Purchasing stock in a single REIT is similar to purchasing stock in a single company. It may add another sector to your portfolio, but diversification isn't guaranteed. You can invest in REIT mutual funds and ETFs instead of directly buying REITs in your Roth IRA. A REIT fund, like a stock fund, holds a variety of REITs that you can add to your portfolio with a single purchase. You can profit from the real estate sector's success without having to pick the most successful real estate company by investing in REIT funds.Most Commonly Asked Questions (FAQs)
What are the rules for investing in REITs in a Roth IRA?
REITs are frequently public companies, which means that investors can buy stock in them just like any other company. There are also private REITs, also known as non-traded REITs, that are not publicly traded. Accredited investors, defined as those with a net worth of at least $1 million and earned income of at least $200,000 (or $300,000 with a spouse) in each of the previous two years, are generally eligible for these private investments.How do you get started with a Roth IRA?
Many popular brokerage firms allow you to open a Roth IRA in just a few steps. However, before you apply for one, make sure you're eligible. Because of the powerful tax advantages of these accounts, the IRS only allows you to contribute to a Roth IRA if your income is below a certain threshold. If you earn $214,000 or more for married filers and $144,000 for single filers in 2022, you won't be able to contribute to a Roth IRA.