The multiple sorts of tax treatment don’t really matter if you own a REIT as part of a tax-advantaged retirement savings plan like an IRA or 401(k). This is due to the fact that investment returns in such plans are not taxed when they are earned.
When you take money from a regular IRA or 401k plan, you must pay income tax. You don’t pay any tax on withdrawals from a Roth IRA or Roth 401(k). It doesn’t matter if you took money out of one of these retirement accounts as a dividend, capital gain, or return of capital because all distributions are treated as ordinary income.
Can I hold a REIT in an IRA?
The response is frequently “yes.” According to financial journalist Reuben Gregg Brewer, “if you possess REITs in an IRA, you won’t have to pay taxes on that income until you pull money out of the IRA.”
What assets Cannot be held in an IRA?
- THE CHOICE OF HOW TO INVEST IRA ASSETS IS COMPLICATED BY THE FACT THAT TAXPAYERS ARE NOT ALLOWED TO HOLD CERTAIN INVESTMENTS IN IRAS. The IRS and the Department of Labor provide little formal advise on IRA investments to CPAs.
- IN GENERAL, IRA INVESTMENT GUIDELINES ARE LIMITED TO A LIST OF WHAT A TAXPAYER CANNOT PURCHASE, INCLUDING LIFE INSURANCE AND COLLECTIBLES LIKE ARTWORKS, ANTIQUES, AND MOST PRECIOUS METALS. ADRs and domestically sponsored mutual funds should be the only foreign investments allowed.
- REAL ESTATE, INCLUDING LEVERAGED REAL ESTATE, IS GENERALLY ALLOWED IN IRAS IF THE INVESTOR FOLLOWS SOME COMMONSENSE GUIDELINES, LIKE FINDING AN IRA TRUSTEE WHO SPECIALIZES IN HOLDING REAL ESTATE AND OTHER UNUSUAL IRA ASSETS. The CPA should also encourage the client to acquire an IRS letter ruling in advance.
- Any IRA transaction can be tainted by self-dealing or engaging in a prohibited transaction.
- The IRA owner or a member of his or her family cannot be involved in transactions that are made at arm’s length. To avoid such issues, the CPA should focus on investments that already have established markets.
- IRA OWNERS SHOULD ALSO BE AWARE OF UNRELATED BUSINESS INCOME. Sections 511–514 of the Internal Revenue Code empower the IRS to tax an exempt entity that engages in business that is unrelated to its original purpose.
RA investors now have access to literally hundreds of investment possibilities, ranging from Wall Street’s stock, bond, and mutual fund offerings to gold coins, real estate, and derivatives. An investor’s decision to buy one or more of them is frequently made with the help of his or her CPA. When a client plans to hold an investment in an IRA, investment decisions might become more challenging. Despite the fact that the law prohibits taxpayers from putting specific investments in an IRA, there are still some appealing, little-publicized, and lesser-known investing alternatives. CPAs should be conversant with them so that they can provide the best possible advise to clients on a complex and possibly dangerous subject.
Are REITs good for a Roth?
The notion is that “tax-inefficient” investments such as REITs (and, more typically, bonds) should be held in tax-advantaged accounts.
In the case of a REIT, instead of being taxed at a rate of 24 percent, your dividends are taxed at a rate of 0%.
Taxes should be factored into the stock market in order for it to be efficient. If everyone understands that REIT distributions would be subject to substantial income taxes, the price of REITs will be lower.
If you were reasonable, you’d pay less for Investment B because you’ll be paying twice as much in taxes.
As a result of everyone’s decision, the market as a whole lowers the cost of investing in tax-inefficient assets.
However, if you hold that tax-inefficient stuff (like REITs) in a tax-protected vehicle (like a Roth IRA), you’re effectively getting the lower price, with none of the downsides!
Why REITs in Roth is the ultimate loophole
Normally, a company that is exceptionally tax efficient is also extremely profitable, thus the stock price should be greater.
But, recall, REITs distribute over 90% of their profits before taxes are paid?
In other words, if you invest in REITs through a Roth IRA, you will be paid money that has never been taxed and will never have to pay taxes.
But, in principle, these minor tidbits should help your portfolio’s predicted lifetime return. However, it’s unclear how efficient the market is, particularly when dealing with multiple layers of taxation.
But, in any event, if there’s a free lunch to be had, I’m going to take it!
How are REITs taxed?
Dividend payments are assigned to ordinary income, capital gains, and return of capital for tax reasons for REITs, each of which may be taxed at a different rate. Early in the year, all public firms, including REITs, must furnish shareholders with information indicating how the prior year’s dividends should be allocated for tax purposes. The Industry Data section contains a historical record of the allocation of REIT distributions between regular income, return of capital, and capital gains.
The majority of REIT dividends are taxed as ordinary income up to a maximum rate of 37% (returning to 39.6% in 2026), plus a 3.8 percent surtax on investment income. Through December 31, 2025, taxpayers can deduct 20% of their combined qualifying business income, which includes Qualified REIT Dividends. When the 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is normally 29.6%.
REIT dividends, on the other hand, will be taxed at a lower rate in the following situations:
- When a REIT makes a capital gains distribution (tax rate of up to 20% plus a 3.8 percent surtax) or a return of capital dividend (tax rate of up to 20% plus a 3.8 percent surtax);
- When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from
- When allowed, a REIT pays corporation taxes and keeps the profits (20 percent maximum tax rate, plus the 3.8 percent surtax).
Furthermore, the maximum capital gains rate of 20% (plus the 3.8 percent surtax) applies to the sale of REIT stock in general.
The withholding tax rate on REIT ordinary dividends paid to non-US investors is depicted in this graph.
Are REITs good for retirement income?
Nareit commissioned Wilshire Funds Management to investigate the function of REITs in Target Date Funds (TDFs). REITs, according to Wilshire, play a crucial role in boosting investment returns and lowering risk in these popular investment vehicles.
Individuals can use TDFs to make portfolio planning easier. Over the next few decades, it is predicted that the bulk of new 401(k) and IRA assets will be put in TDFs, and millions of Americans’ retirement security will be dependent on their investment performance.
REITs Important Across the Target Date Fund Lifecycle
For workers with various retirement horizons, the figure below highlights the recommended proportion of US REITs in a retirement portfolio.
- REIT allocations range from 15.3 percent of a young worker’s portfolio with 40 years till retirement to over 10% for an investor nearing retirement age.
- The REIT allocation drops with other equities throughout retirement, but it still exceeds 6% for an investor nearly ten years later.
REIT Attributes: High and Stable Income, Long-term Capital Appreciation, Diversification and Inflation Protection
Because they provide income, capital appreciation, diversification, and inflation protection, REITs are a significant aspect of retirement portfolios.
Adding assets with low correlations to the current assets in the portfolio can reduce portfolio volatility. The long-term correlations of equity REITs with the other major asset classes studied range from 0.19 to 0.65, indicating that adding REITs to an investing portfolio can provide diversification benefits.
Table 1 compares asset allocations for an optimal portfolio in the glide path for the 15-year-to-retirement cohort, excluding and incorporating REITs in the set of possible investments.
U.S. TIPS, U.S. High Yield Bonds, and U.S. Small Cap Equities have much lower or nil allocations in the REIT-based portfolio. REITs are a more efficient asset class for combining the investing features of high and consistent income, long-term capital appreciation, and inflation protection since they take “shelf space” in the optimal allocation from these assets.
REITS Improve Retirement Readiness
Incorporating REITs into the TDF portfolio boosts returns while lowering risk. Over the 44-year period 1975 to 2019, Table 2 compares risk and return for optimal portfolios in the middle of the glide path, excluding and incorporating REITs. A TDF portfolio that includes REITs has a higher return and lower risk than one that does not. With an average portfolio risk of 9.33 percent, the TDF REIT portfolio returned 10.49 percent annually. Without REITs, the return would be 10.02 percent and the annualized portfolio risk would be 9.50 percent. The TDF portfolio using Surplus Optimization would have had a portfolio value at the end of 2019 that was 20.4 percent higher than a portfolio without REITs over the 44-year investment period.
*The Wilshire study detailed on this page is an updated version of a 2012 Wilshire study.
Can IRA be pledged?
Most of us have a loan of some kind, whether it’s a home mortgage, a car loan, a college loan, or something else. Perhaps you’re considering applying for a new loan. The bank or other lending institution may demand you to have some collateral or pledge certain assets as security for the loan in order to obtain it. You can’t use an IRA as security for a personal loan if you have one.
You can’t use any part of your IRA as collateral for a personal loan, according to IRS rules. This regulation applies whether the loan is for you or for someone else, such as a college tuition loan for your son or a home mortgage for your daughter.
If you use part or all of your IRA as collateral for a loan, the amount you pledged will be considered a distribution to you. That implies you’ll be taxed on the amount if it’s a regular, SIMPLE, or SEP IRA. A copy of IRS Form 1099-R indicating a withdrawal should be sent to you by the IRA custodian. It’s treated as though you took that money out of your IRA and spent it. As a result, you’ll have to pay federal income taxes on the amount. If you’re under the age of 59 1/2, you’ll additionally have to pay a 10% penalty for taking an early distribution from your IRA. As a result, in addition to the loan’s interest, you’ll repay Uncle Sam for the taxes and penalties associated with incorrectly pledging your IRA — hardly a smart financial choice.
In an ideal world, you wouldn’t be able to use your IRA as collateral for a loan from a bank, credit union, or other lending organization. When they realize the account is an IRA, they should be able to prevent you from pledging it. But don’t count on the lender to know the regulations; it’s up to you to figure it out. If you argue the bank was at fault, the IRS will not grant you a reprieve on paying the taxes on the presumed IRA withdrawal.
Can I trade stocks in my IRA?
Stocks, bonds, mutual funds, annuities, unit investment trusts (UITs), exchange-traded funds (ETFs), and even real estate are all permitted investments in an IRA. Even eligible plans are allowed to carry nearly any sort of security, albeit for various reasons, mutual funds, annuities, and business stock are the three most common vehicles used in these plans.
Can I trade stocks in my traditional IRA?
Whether you have a standard IRA or a Roth IRA, you can trade stocks within your retirement account. Although you will still have to pay brokerage fees and commissions, the stock trade within your IRA will not be taxable. You won’t have to pay taxes on any profit you make from a transaction, and you won’t be able to lower your taxable income by claiming a stock trade loss in your IRA.
How many ETFs should I have in my Roth IRA?
According to Rich Messina, a senior vice president of investment production management at E-Trade, a New York-based brokerage firm, buying between six and nine ETFs can provide “enough diversification for the long-term investor wanting moderate gain.”
Can you own a MLP in a Roth IRA?
MLP shares can be held in a Roth IRA or other retirement plan. However, unlike other IRA assets, MLP income can be taxed immediately if it exceeds $1,000.
Can you day trade in a Roth IRA?
Capital gains taxes and trading fees might reduce day-trading profits. Tax-protected accounts, particularly Roth IRAs, are very enticing since they allow capital gains and other income to grow tax-free in the account. In addition, assuming tax laws are followed, the money in a Roth account can be taken without incurring further taxes. However, while day trading is not prohibited in Roth IRAs, requirements make regular day trading difficult.
Why are REITs a bad investment?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.