There’s no straightforward rule on what type of account a REIT investor should open. If you intend to invest in the long term, it’s better to own REITs in your individual retirement account (IRA) because you can control the timing of your taxes. Once you invest in an IRA, the question becomes whether you would be better off paying lower taxes during the current period (on the front end) or if it’s better to defer taxes (on the back end).
Advantages of IRA Over Straight Brokerage Accounts
In a straight brokerage account, you are required to report taxes on an annual basis. Every year, your REIT stock earnings will be subject to taxes, along with your other taxable income. In an IRA account, your taxes are deferred, which means they are not subject to taxes until you make a withdrawal. Investors usually use IRAs to buy their REIT stocks.
Traditional IRA vs. Roth IRA
The big question is what tax bracket the investor is currently in and which one she/he expects to be in in the future. There are also limits to Roth IRA contributions for some income levels.
Traditional IRA contributions come from pre-tax income. They are tax deductible under some conditions, but the investor is required to pay taxes when the money is withdrawn. This is ideal for investors who think they will be in a lower tax bracket in the future.
Roth IRA contributions come from post-tax income. Withdrawals are tax free for anyone age 59 and a half or older who has held the account for more than five years. This is ideal for investors who believe they will be in a higher tax bracket when the money is withdrawn.
Prior to that age, you are allowed to make tax free withdrawals from a Roth IRA account up to the amount you contributed. That’s why it is so important to keep a record of all your contributions (cost basis). The IRS allows you to withdraw tax free money above cost for some special cases.
Source: CNNMoney, budgeting.thenest.com, RothIRA.com
Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision, or consult with your financial adviser. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.
