Should You Invest in REITs Through Your Roth IRA?

Learn the tax benefits of REITs in a Roth IRA

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Updated on December 11, 2022

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The Roth individual retirement account (IRA) is one of the most popular retirement savings vehicles due to its tax benefits. The money you contribute to a Roth IRA already has been taxed. As a result, your investments grow tax-free while in the account. And once you reach age 59½, you can withdraw funds from the account without paying additional taxes on your earnings.

One of the many investments you can hold in your Roth IRA is a real estate investment trust (REIT). A REIT is a publicly traded company that owns and manages income-producing real estate properties and similar assets. REIT investors get many of the benefits of real estate without having to own or manage properties of their own.

Roth IRAs and REITs both have some distinct tax benefits, and those benefits are even more pronounced when you pair the two. Find out more about the benefits of buying REITs in your Roth IRA along with a few other things you should know about this investment strategy.

Key Takeaways

A Roth IRA offers powerful tax advantages, including tax-free growth on your investments and tax-free distributions.
REITs offer tax benefits of their own, including the fact that 90% of their taxable income is passed along to shareholders as dividends.
When you invest in REITs in your Roth IRA, you won’t be subject to capital gains or income taxes on your dividends and other investment earnings.
For investors who don’t want to choose individual REITs to invest in, REIT funds offer exposure to real estate with increased diversification.

Benefits of REIT Investing in Your Roth IRA

There are plenty of benefits to investing in REITs. They provide dividend payments, which can serve as a source of recurring income. They’re also far more liquid than owning physical real estate, because you can easily buy and sell REIT shares. Finally, they provide diversification to your portfolio. And investing in REITs in your Roth IRA provides more benefits than doing so through a taxable brokerage account.

When you make money through a REIT investment—either from dividends or capital gains—you usually must pay taxes on your earnings. Capital gains are taxed at either your ordinary income tax rate or a special capital gains tax rate, depending on how long you held the investment. Dividends from REITs are usually taxed as ordinary income. However, because investment growth and distributions from a Roth IRA are tax-free, you can avoid that tax burden.

REITs already have some tax benefits of their own. Unlike most publicly traded companies, REITs don’t pay corporate taxes. They also must pay at least 90% of their taxable income as dividends to their shareholders. As a result, the dividends in a REIT might be higher than they would be on another stock. When you combine that perk with the tax benefits of the Roth IRA, you get to keep significantly more of your earnings than you otherwise might.

How To Use Your Roth IRA To Invest in REITs

The process of investing in REITs through your Roth IRA is just like buying any other investment in this type of account. From a technical standpoint, investing in a REIT is simply a matter of placing a buy order, as you would with any other investment.

But there’s more thought that should go into adding REIT exposure to your Roth IRA. First, if you decide to invest in REITs through your Roth IRA, be sure not to allocate too much of your portfolio to them.

Note

The last thing you want is to shift all your funds to REITs simply because of their benefits. Diversification is one of the most important parts of building an investment portfolio.

Only a portion of your portfolio should be allocated to any one investment, including REITs.

It’s also important to do your research into which REIT to invest in. According to Nareit, a national association that represents REITs and other investment trusts, there are more than 200 publicly traded REITs. But not all those REITs are created equal. Thoroughly scrutinize any REIT you decide to invest in, including its earnings history and the types of projects it works on.

Note

If you don’t feel comfortable choosing a REIT yourself, you can buy shares in a REIT mutual fund or exchange-traded fund (ETF).

Roth IRAs Can’t Invest Directly in Real Estate

Real estate can be an excellent addition to your overall retirement portfolio, but you may wish to invest in it indirectly, as you can’t usually hold physical real estate in your Roth IRA.

There is a specialized type of account that allows you to invest in a wider array of assets in your Roth IRA. A self-directed IRA is a retirement account held by a custodian other than your typical bank or brokerage firm. Using this type of account, you can invest in alternative assets, including real estate.

A self-directed Roth IRA has more flexibility than a typical Roth IRA, and it allows you to buy physical real estate rather than investing in REITs. You’ll potentially get many of the same benefits, including the tax-free growth and distributions a Roth IRA offers.

Alternatives to REIT Investing for a Roth IRA

Investing in REITs is one of the many ways you can add real estate exposure to your retirement portfolio, but it’s not the only one. And it may not be the right choice for all investors. Investing in a single REIT is like buying stock in a single company. It may add another sector to your portfolio, but doesn’t necessarily create diversification.

Instead of investing directly in REITs in your Roth IRA, you 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 your portfolio through a single investment. When you invest in REIT funds, you can benefit from the success of the real estate sector without having to pick the winningest real estate company.

Frequently Asked Questions (FAQs)

What are the restrictions on REIT investments in a Roth IRA?

REITs are often public companies, meaning investors can buy stock in them just as they would in any other company. And there are also private REITs, known as non-traded REITs, which aren’t traded publicly. These private investments are generally only available to accredited investors, meaning those with a net worth of at least $1 million or earned income of more than $200,000 (or $300,000 with a spouse) in each of the two prior years.

How do you open a Roth IRA?

You can open a Roth IRA in just a few steps through many popular brokerage firms. But before you open one, it’s important to make sure you’re eligible. Because of these accounts’ powerful tax advantages, the IRS only allows you to contribute to a Roth IRA if you have income below a certain amount. In 2022, you can no longer contribute to a Roth IRA if you earn $214,000 or more for married filers and $144,000 for single filers. In 2023, those limits are $228,000 for married filers and $153,000 for single filers.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

IRS. “Roth IRAs.”
U.S. Securities and Exchange Commission. “Real Estate Investment Trusts (REITs).”
U.S. Securities and Exchange Commission. “Investor Bulletin: Real Estate Investment Trusts (REITs),” Page 1.
U.S. Securities and Exchange Commission. “Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing.”
Nareit. “Frequently Asked Questions About REITs.”
U.S. Securities and Exchange Commission. “Investor Alert: Self-Directed IRAs and the Risk of Fraud.”
FINRA. “Public Non-Traded REITs—Perform a Careful Review Before Investing.”
U.S. Securities and Exchange Commission. “Accredited Investors —Updated Investor Bulletin.”
IRS. “Amount of Roth IRA Contributions That You Can Make for 2022.”
IRS. "Amount of Roth IRA Contributions That You Can Make For 2023."