Investing in real estate can be a lucrative endeavor, and one way to do it is by incorporating non-traded real estate investment trusts (REITs) within your Roth IRA. This approach allows you to reap the benefits of real estate investments, such as dividends, without the complexities of property ownership and management.
If you're unfamiliar with the concepts of non-traded REITs and Roth IRAs, it’s important to learn how this strategy works as well as potential advantages and considerations. A non-traded REIT is a company that acquires and manages income-generating properties — these could include senior housing, apartments, medical facilities, retail centers, warehouses and hotels.
When you invest in this type of REIT, you become a shareholder, but you're not responsible for the day-to-day property management or individual risks associated with property ownership. To qualify as a REIT, a company must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Utilizing your Roth IRA to invest in non-traded REITs
A Roth IRA is a popular choice for individual retirement savings because it offers tax-free growth on contributions leading to tax-free qualified withdrawals at full retirement age. Once you've established a Roth IRA, you have the flexibility to allocate your funds to various investment options, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs) and REITs.
Both Roth IRAs and REITs offer distinct tax advantages that can become even more advantageous when combined. Investing in these REITs within a Roth IRA is a relatively simple process — you purchase REIT shares just as you would with any other securities exchange investment.
As with any investment strategy, it's essential to carefully consider the implications. When investing in REITs, utilizing a Roth IRA can be more tax-efficient than a traditional IRA because contributions are made with after-tax dollars, meaning that any gains, including REIT dividends, can be withdrawn without taxation, provided you adhere to Roth IRA withdrawal requirements.
This approach allows you to prepay taxes and potentially avoid taxation on your investment gains in the future, particularly if you anticipate being in a higher tax bracket during retirement. Ultimately, the choice between paying taxes upfront or later depends on your individual preferences. Typically, REIT dividends are subject to individual taxation as ordinary income, but within a Roth IRA, your investment growth remains tax-free, including REIT dividends.
Benefits of REIT investments in your Roth IRA
One substantial benefit of investing in REITs is the potential to reduce risk by diversifying your overall investment portfolio. Since REITs provide exposure to the real estate market without the need for direct property ownership, investors can diversify their portfolios by choosing REITs that have holdings that are potentially varied among multiple properties, regions or industries, instead of investing in a single property or region, thereby achieving more balanced asset allocation.
Additionally, non-traded REITs can be beneficial for long-term financial goals. While publicly traded REITs offer higher liquidity, allowing investors to access their capital through share sales, non-traded REIT investors typically must await the REIT's liquidation of holdings.
Investors can also use share redemption programs to access their funds. These programs allow investors to redeem shares more quickly than waiting until REIT liquidation. However, these agreements are often only available with restrictions that limit liquidity. REITs can also discontinue share redemption programs without notice.
While the decreased liquidity is a con for many, it can also create more opportunities for long-term financial goals. Investors can plan long-term strategies for their assets instead of making abrupt decisions. Strategic planning could result in higher yields in the future.
Considerations and risks of non-traded REIT investments in a Roth IRA
Like any investment, it's crucial to weigh the pros and cons carefully. When considering adding a non-traded REIT investment, one key factor to ponder is the allocation of your investment portfolio. To maintain diversification and mitigate risk, it's generally advisable not to allocate too much of your portfolio to a single investment or strategy. Overcommitting to REITs may deviate from your initial diversification goals.
Another obvious consideration is that while stocks can be traded daily and easily liquidated, non-traded REITs are not traded on an exchange and are likely illiquid, and investors may not be able to access their funds for a period of time.
Your Roth IRA serves as a retirement savings fund, so it's vital to make investment decisions based on your specific needs and objectives for the long term. All investments entail a level of risk, and understanding the full spectrum of risks can help you make informed choices.
When choosing a non-traded REIT to invest in, thorough research and due diligence are important, whether you do the research yourself or consult a financial adviser or real estate investing platform for advice.
Related Content
- Publicly Traded REITs vs. Non-Traded REITs: What’s the Difference?
- What Would Accreditation Change Mean for Real Estate Investors?
- Are You Ready to ‘Rothify’ Your Retirement?
- How to Find the Best REIT Stocks
- REITs Unveiled: A Comprehensive Guide for Investors
-
Can the U.S. Break China's Stranglehold on Critical Minerals?The Letter China is using its near-monopoly on critical minerals to win trade concessions. Can the U.S. find alternate supplies?
-
Don't Let a "Clunker" Fund Drag Down Your 401(k)401(k) lineups are loaded with overpriced, underperforming fund options. Here's how you can dump the clunkers.
-
Do You Need Flood Insurance? I'm an Insurance Expert, and Here's Where You Can Get ItStandard homeowners insurance does not cover flood damage, so you might need separate flood insurance, which you can get either through FEMA or private companies. Here are the details.
-
I'm an Investment Professional: These Are the Three Money Tips I'm Giving My College GradCollege grads can help set themselves up for financial independence by focusing on emergency savings, opting into a 401(k) at work (if it's offered) and disciplined, long-term investing.
-
New SALT Cap Deduction: Unlock Massive Tax Savings with Non-Grantor TrustsThe One Big Beautiful Bill Act's increase of the state and local tax (SALT) deduction cap creates an opportunity to use multiple non-grantor trusts to maximize deductions and enhance estate planning.
-
Know Your ABDs? A Beginner's Guide to Medicare BasicsMedicare is an alphabet soup — and the rules can be just as confusing as the terminology. Conquer the system with this beginner's guide to Parts A, B and D.
-
I'm an Investment Adviser: Why Playing Defense Can Win the Investing GameChasing large returns through gold and other alternative investments might be thrilling, but playing defensive 'small ball' with your investments can be a winning formula.
-
Five Big Beautiful Bill Changes and How Wealthy Retirees Can BenefitHere's how wealthy retirees can plan for the changes in the new tax legislation, including what it means for tax rates, the SALT cap, charitable giving, estate taxes and other deductions and credits.
-
Portfolio Manager Busts Five Myths About International InvestingThese common misconceptions lead many investors to overlook international markets, but embracing global diversification can enhance portfolio resilience and unlock long-term growth.
-
I'm a Financial Planner: Here Are Five Smart Moves for DIY InvestorsYou'll go further as a DIY investor with a solid game plan. Here are five tips to help you put together a strategy you can rely on over the years to come.
