REIT in a ROTH

[Anonymous]

First time poster in this specific section of the forum.  Maybe this has been discussed in the past here and I apologize if that is the case.

For retirement savers, is buying shares of a REIT within a ROTH IRA or similar vehicle a legal loophole that is a golden opportunity?

As I understand it, REITs pay generous dividends, partly because REITs get a big tax break when they pay most of their profit out as dividends.  This means share holders don't get to pay the smaller, dividend/capital gains tax rate on these dividends but instead have to pay normal income tax rates.  This hurts the return and the appeal of these big dividends for many investors, but if the shares are held in a roth, there is no tax to pay on these big dividends at any time.  It almost sounds too good to be true.

I would appreciate any feedback if I am missing something or do not understand the situation properly.

[wasCB14]

REIT tax implications aren't always so bad. True, ordinary dividend income from a REIT is taxed at ordinary rate when held in a taxable account.

However, some REITs may designate a portion of the dividend not as ordinary, but instead as:

- Capital gain distribution

- Return of capital

- Sect. 1250 gain

- Qualified dividend

Depending on your income, you may also qualify for a deduction of 20% of 199A income.

I don't know the REITs you're talking about, and even if I knew their past tax implications I can't know their future ones. Don't take this as tax advice.

I'm just saying REITs can sometimes pay out a mix of income types, and not all are taxed at ordinary rates.

[iced]

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@Anonymous wrote:

First time poster in this specific section of the forum.  Maybe this has been discussed in the past here and I apologize if that is the case.

For retirement savers, is buying shares of a REIT within a ROTH IRA or similar vehicle a legal loophole that is a golden opportunity?

As I understand it, REITs pay generous dividends, partly because REITs get a big tax break when they pay most of their profit out as dividends.  This means share holders don't get to pay the smaller, dividend/capital gains tax rate on these dividends but instead have to pay normal income tax rates.  This hurts the return and the appeal of these big dividends for many investors, but if the shares are held in a roth, there is no tax to pay on these big dividends at any time.  It almost sounds too good to be true.

I would appreciate any feedback if I am missing something or do not understand the situation properly.

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There's many REITs available to Roth IRAs, and even some 401K accounts. Now, there may be restrictions on which REITs are made available, but I would imagine if your IRA brokerage has made that fund available to your IRA account, they've got what they need in place to handle it, whether it's pre-withholding any excess tax that the law may require for special dividends before depositing the balance of the dividend/payout into your IRA or some other process by which they must follow by law for those payments. This isn't breaking any new ground or exploiting something that hasn't been tried before.

There's similar funniness with international stocks and payouts, but those are handled just fine by IRA brokerages. I would expect similar here. It's also worth noting that special dividends, which can sometimes follow the same guidelines that REIT payouts do, happen regularly on stocks, many of which are in people's 401Ks, IRAs, and other tax-advantaged vehicles already and without them even knowing. Those are also handled without issue.

The best place to ask is your brokerage, since they can tell you how it affects you directly with your specific REITs of choice.