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Should You Buy REITs in Your Roth IRA?


Real estate investing is a field that appeals to a lot of investors with diverse portfolios. Real estate investment trusts (REITs) are a great way to invest in real estate without having to own and manage physical property. But they can come with risks, too. Let’s break down what you should know before investing in REITs in your Roth IRA.

Consider speaking with a financial advisor about whether REITs are right for your investment portfolio. 

Tax Benefits of REITs and Roth IRAs

REITs are publicly traded companies that own real estate investment properties. Part of their structure requires them to pass on 90% of their taxable income to shareholders as dividends. While not a sure bet, in general, REIT dividends have a reputation for outperforming stock market dividends.

Roth IRAs are funded with after-tax dollars. As a result, you don’t have to pay taxes on your withdrawals, including your REIT dividends. If you invested in the REIT outside of your Roth IRA, the dividends would be taxed as income.

In many ways, investing in REITs in your Roth IRA is the ideal way to invest in a REIT. Their dividends greatly compound over time and you won’t have to pay taxes on them when you reach retirement age.

Why REITs Can Make Good Investments for Retirement

Should You Buy REITs in Your Roth IRA?

As you may have heard, diversification is a key component of a successful investment portfolio. REITs can be a vital part of the mix because they’re a simple way to expose your portfolio to real estate.

Previously, when most people considered investing in real estate, it meant owning physical property. Most people don’t have the capital to make investments like that, and even if they did, it doesn’t mean they’d want their money tied up in a property.

REITs have by-in-large solved this problem. Average Americans can invest in them for far less money than they would with buying property. This makes them great for those planning their retirement, as the dividends will compound gradually over time. In 2023, REIT dividends ranged from 3.96% to 5.01%, according to Nareit data.

As an example, let’s say you invest $10,000 in a REIT fund that yields 4.37% in dividends annually. You do this in your Roth IRA account and reinvest all of the dividends. After 30 years of growth at that rate, your $10,000 would grow to over $36,000. And since you invested it in your Roth IRA, you won’t have to pay taxes on it when you withdraw.

Risks of Investing in REITs

Should You Buy REITs in Your Roth IRA?

There are risks to investing in REITs, however. Since we’re talking about your retirement here, you’ll need to consider these risks and make the right decisions about where you invest so your money grows to the point where you can retire.

One big risk of REITs is that they’re directly tied to the health of the real estate market. While this can be a boon in some years, it can also mean they lose value in other years. When interest rates rise, there’s less investment capital for real estate, which can cause REITs to lose value.

Another risk is that you could choose the wrong REIT. REITs are companies, and just like trading company stocks, you run the risk of trends changing or the company not performing as well. For instance, if your REIT invests in high-density downtown apartment buildings and there’s a sudden trend to move out of the city, that could affect the value of the REIT.

Where REITs tend to have the most risk is when they don’t hold diverse real estate investments. If your REIT narrowly invests in resort hotels and there’s a recession that impacts people’s ability to vacation, that will likely affect the REIT’s performance. If you’re worried about risks, investigate investing in a REIT that’s hedged against risk.

Bottom Line

There are some major benefits of investing in a REIT in your Roth IRA. The big one is you won’t have to pay taxes on the REIT dividends. Plus, your holdings will grow and compound over time, so when you reach retirement age, you could have significantly more than what you started with. Of course, with any investment comes risk. That’s why you need to pick the right REITs for your portfolio.

Tips for Investing in Your Retirement

  • A financial advisor can help you build a diversified investment portfolio for retirement. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • How much money will you need to retire? If you’re unsure, give SmartAsset’s retirement calculator a try. Our tool can help you estimate how much you’ll need to save for the retirement lifestyle that you want.
  • REITs can be a nice way to diversify your assets. But they’re not the only way to do so. You can also invest in commodities like precious metals, energy resources or even livestock.

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