10 Reasons You Should Own REITs in Your Retirement Account

Competitive dividend payments on top of long-term growth opportunities from real estate investment trusts (REITs) can not only supercharge your retirement savings, but its unique taxation on dividends can also help relieve your taxes come tax time.

To help you truly grasp how powerful these investments can be, here are 10 reasons REITs are an ideal investment for growing a retirement account.

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REITs are one of the only stocks required to pay dividends. For REITs to benefit from the tax advantages of a REIT structure, which include paying zero corporate taxes, they must pay 90% or more of taxable income in the form of dividends. For investors, this means there is more money to be paid in dividends because the REIT isn't paying taxes twice.

ALSO READ: Real Estate Investment Trusts: What They Are and How to Invest in Them

The average dividend return for REITs, as tracked by the National Association of Real Estate Investment Trusts (NAREIT), is more than double that of the S&P 500. While this number fluctuates as the market moves, historically speaking, REITs continue to deliver higher dividend returns than traditional stocks, thanks to REITs benefiting from less taxation.

That means investors who purchase REITs -- whether in a retirement account or not -- can earn higher dividend income.

The real power of investing for income is that your income and return can grow significantly over time without having to reinvest your money. Dividend income paid by REITs usually grows as the company's performance grows.

That translates into more and more income earned each year. While dividend cuts do happen, REIT dividends are considered quite safe in most cases. And most REITs offer annual increases, leading to more income for your retirement years.

ALSO READ: 3 High Dividend REITs to Buy Now

Dividends paid by REITs have a complex taxation hierarchy. Certain percentages of the dividend can be taxed as ordinary income, which is taxed at a higher rate than a qualified dividend would be for a more traditional dividend stock.

To simplify your tax preparation come tax time, it's advantageous to hold REITs in a 401(k), individual retirement account (IRA), or another tax-sheltered retirement account, eliminating the need to claim dividend taxes at certain tax rates.

A Roth IRA taxes retirement contributions at the time they are made. This means any growth realized from an investment in a REIT or any income earned from its dividends is tax-free. Tax-free growth is only offered in a Roth retirement account and gives you more power to compound your earnings -- a major win if you're investing in high-paying dividend REITs.

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While dividend income is certainly a major pro to investing in REITs in your retirement account, REITs have major growth potential, too. Countless REITs have doubled, tripled, or even grown 10 times their share price since their initial public offerings (IPOs), which can grow your retirement savings considerably.

By investing in a REIT in a Roth IRA, as previously mentioned, that growth is achieved tax-free, leaving you with a lot more money for retirement down the road.

ALSO READ: What is a Roth IRA? How to Get Started

Diversification is the name of the game when it comes to investing. Having your money invested in different companies, industries, and commodities reduces risk exposure and can lead to superior returns. Real estate can have a high barrier to entry, requiring a lot of capital, time, and knowledge needed to invest -- that is, aside from REITs. REITs are by far the easiest way to diversify into real estate.

Traditional real estate investments, such as rental properties, are advantageous in their own right but aren't very liquid. If you need cash, it can take several months to get the cash you desired after listing the property for sale. REITs offer much more liquidity. If cash is needed, you can sell the shares in the REIT in your brokerage account in a matter of minutes.

ALSO READ: These 4 REITs Have Beaten the S&P 500 For Years And Should Keep Doing Just That

Real estate is one of the best asset classes for combatting inflation, particularly those that operate on short-term leases, which can be raised to adjust for rising costs. Hard-asset values, including real estate, increase as inflation rises, which is great in today's inflationary environment.

If you're not investing in REITs through a tax-favored retirement account, like an IRA or 401(k), there are still certain tax advantages to investing in REITs. The Tax Cuts and Jobs Act granted a special tax benefit allowing taxpayers to write off up to 20% of their pass-through income, which REIT dividends can qualify for depending on how the REIT income was earned.

Given the complex nature of REIT dividend taxation, it's best to consult a tax advisor to see whether this benefit is applicable to your situation, but it could help lead to extra tax savings and more money being put toward retirement.

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Retirement accounts are the preferred vehicle for owning a REIT, as no other vessel can offer the tax protection and benefits of tax-free or tax-deferred growth that retirement accounts can. Coupled with REITs' superior dividend returns and growth potential, it's easy to see why adding REITs to your retirement plan should be on your radar.

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