Buying REITs in a Roth IRA

Adam Johnson

Buying REITs in a Roth IRA is featured in this guide, along with explaining why the two go so well together.

Read why Roth IRAs are an ideal place to hold real estate investment trusts (REITs). Both REITs and Roth IRAs can be useful if they are understood properly by investors.

Buying REITs in a Roth IRA: What is a Roth IRA? 

The Roth IRA is one of the most popular individual retirement savings vehicles for an individual to contribute after-tax dollars. The money contributed to the account grows tax-free. In addition, retirement withdrawals are tax-free.

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 can be opened at a brokerage or bank. Once the account is open, an 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. Currently, investors can contribute up to $6,000 ($7,000 if age 50 or older).

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 wants.

Buying REITs in a Roth IRA: What is a REIT?

If an investor is looking to invest in real estate in their Roth IRA in the simplest, easiest way possible, a REIT may be the way to go. A REIT is a pooled investment resource that buys, manages and finances income-producing properties.

There are REITs that specialize in residential, industrial, commercial and agricultural real estate of varying densities. A REIT allows investors to diversify into real estate without taking on the individual risks and tasks associated with buying and managing property as a landlord.

REITs primarily pay through dividends and generally don’t appreciate in value significantly. They are also far more liquid than owning physical real estate, because investors can easily buy and sell shares.

Buying REITs in a Roth IRA: The Benefits

There are a number of reasons that REITs are an especially attractive investment option within a Roth IRA.

When an investor makes money through a REIT investment, either from dividends or capital gains, they usually must pay taxes on their earnings. Capital gains are taxed at either the investor’s ordinary income tax rate or a special capital gains tax rate depending on how long the investment was held.

However, in any tax-advantaged retirement savings account such as a Roth IRA, 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 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. 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.

Furthermore, REITs historically have high dividend yields due to the requirement to pay out 90% of their income to investors in the form of dividends yearly. Therefore, holding REITs in a Roth IRA is generally the most tax-efficient strategy.

Buying REITs in a Roth IRA: REITs and Direct Real Estate Investing in an IRA

Real estate can be an excellent investment option within an investor’s overall retirement portfolio. However, investors cannot usually hold physical real estate within a Roth IRA.

There is a specialized type of account that allows investors to purchase a wider array of assets in their Roth IRA. A self-directed IRA is a retirement account held by a custodian other than a typical bank or brokerage firm.

A self-directed Roth IRA has more flexibility than a typical Roth IRA and it allows investors to buy physical real estate rather than only REITs. It is possible to get many of the same benefits as a more typical Roth IRA.

Buying REITs in a Roth IRA: Alternatives

Investing in REITs is one of the many ways investors can gain real estate exposure to their retirement portfolio. However, investing in a single REIT is like buying stock in a single company. It may add another sector to their portfolio, but does not necessarily create diversification.

Instead of investing directly in REITs within a Roth IRA, an investor can choose to invest in REIT mutual funds and ETFs. Just like a stock fund holds many different stocks, a REIT fund holds many different REITs that get added to the portfolio through a single investment.

Therefore, an investor can benefit from the success of the real estate sector without having to pick the winningest real estate company.

The Bottom Line 

A Roth IRA is an ideal place to hold REIT investments. However, deciding whether or not to hold a real estate investment depends on the investor’s personal risk tolerance and desire to invest in real estate. There are multiple ways to invest in real estate. They include doing so through a self-directed Roth IRA, individual REITs and REIT funds.

If investors hold REITs in their portfolio, keeping them in their Roth IRA is a better place to keep them for tax optimization. In general, REITs tend to pay out high dividends, which are taxed heavily, so keeping them in the account you’ll never have to pay taxes on is smart.

Adam Johnson is an editorial intern for and


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