Please ensure Javascript is enabled for purposes of website accessibility

Should You Buy REITs in Your Roth IRA?

By Matthew Frankel, CFP® – Aug 23, 2021 at 7:17AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The short answer is yes, but there is more to the story.

On a recent episode of our Industry Focus show, Fool.com contributor Matt Frankel, a Certified Financial Planner, answered a listener question: Are Roth IRAs the best place to hold real estate investment trusts, or REITs? In this video clip from the show's August 16 Fool Live recording, hear what Matt and host Jason Moser had to say.

10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

They just revealed what they believe are the ten best stocks for investors to buy right now... and Walmart wasn't one of them! That's right -- they think these 10 stocks are even better buys.

See the 10 stocks

Stock Advisor returns as of 6/15/21

Matt Frankel: Basically, the big tax advantage to REITs is that they don't pay any corporate tax. Most companies like let's say you own Apple (AAPL 4.86%) stock, your dividends are effectively taxed twice. When Apple earns a profit, they are taxed at the corporate level. Then when they pay that out to individuals, those dividends are taxed again as income. Double taxation of dividends. REITs avoids that by essentially being treated as pass-through businesses, same as if you owned your own business. Because of that, they don't get the IRS' qualified dividend treatment, which is better tax rates than you would pay on ordinary income. REIT dividends are generally treated as income you got from work. They qualify generally for the 20% pass-through tax deduction but that gets a little complicated. They don't get the same tax advantages that normal dividends do in other words. If you own them in an IRA, whether a traditional or Roth, you avoid the individual tax, and don't pay any tax on until you sell in a traditional IRA or ever in a Roth IRA. If a Roth IRA makes sense for you, generally, a Roth IRA makes sense for people who are in a lower tax bracket now than they think they will be in retirement. For that reason, Roths often makes sense for people early on in their careers as a great rule of thumb. Your first few years of work, Roth IRAs make a lot of sense. Beyond that, you need to assess where you think you're going to be at retirement and see which one makes better sense for you. If a Roth IRA is the better of the two IRAs for you, REITs make a ton of sense in IRAs. I have a Roth IRA that I contributed to for a while. It's full of REITs. That should answer the question right there. Most of my REIT holdings are in retirement accounts, whether it'd be an IRA or a solo 401(k), which is what I use right now. But they're great retirement investments because of their unique tax advantage, you essentially get to avoid taxes forever on REITs.

Jason Moser: I like the sound of that; avoid taxes forever.

Matthew Frankel, CFP owns shares of Apple and has the following options: short November 2021 $140 calls on Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Apple Stock Quote
Apple
AAPL
$148.03 (4.86%) $6.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.