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Can You Buy a REIT in an IRA? Understanding the Benefits and Rules of Investing in REITs Through Your IRA

Ben Carmona
July 12, 2024

Real Estate Investment Trusts (REITs) have become increasingly popular among investors looking to diversify their portfolios with real estate assets. A common question arises: Can you buy a REIT in an IRA? The answer is yes, and this blog post will explore the benefits and rules of investing in REITs through your Individual Retirement Account (IRA).

What is a REIT?

A REIT is a company that owns, operates, or finances income-producing real estate. These companies pool capital from numerous investors, making it possible for individuals to earn dividends from real estate investments without having to buy, manage, or finance any properties themselves. REITs are an attractive investment because they typically offer high dividend yields and can provide portfolio diversification.

Can You Buy a REIT in an IRA?

Yes, you can buy a REIT in an IRA. In fact, investing in REITs through an IRA can be a strategic move for many investors. This option allows you to enjoy the tax advantages of an IRA while benefiting from the income and potential growth that REITs can provide.

Benefits of Investing in REITs Through Your IRA

1. Tax-Deferred Growth

One of the primary benefits of investing in REITs through an IRA is the potential for tax-deferred growth. In a traditional IRA, your investment earnings grow tax-deferred until you take distributions, typically after age 59½. This means you can reinvest your dividends and capital gains without paying taxes on them each year, allowing your investment to grow more quickly.

2. Dividend Reinvestment

REITs are known for their high dividend payouts, as they are required to distribute at least 90% of their taxable income to shareholders. By holding REITs in your IRA, you can reinvest these dividends without paying taxes on them immediately, further compounding your investment returns over time.

3. Portfolio Diversification

Adding REITs to your IRA can provide diversification benefits. Real estate often performs differently from stocks and bonds, so including REITs in your retirement portfolio can help spread risk and reduce volatility. Diversification can enhance your portfolio’s overall stability and growth potential.

Rules and Considerations

1. Contribution Limits

Remember that IRA contribution limits apply to all investments within the account, including REITs. For 2024, the contribution limit for IRAs is $6,500, or $7,500 if you are age 50 or older. Be mindful of these limits when planning your investments.

2. Required Minimum Distributions (RMDs)

If you hold REITs in a traditional IRA, you will need to start taking required minimum distributions (RMDs) at age 72. These distributions are calculated based on the total value of your IRA and your life expectancy. Failure to take RMDs can result in significant tax penalties.

3. Liquidity Considerations

While publicly traded REITs are generally liquid and can be bought and sold easily, private or non-traded REITs can be less liquid. Ensure that you understand the liquidity of your REIT investments, especially if you may need access to funds for RMDs or other purposes.

Steps to Invest in REITs Through Your IRA

Open an IRA: If you don’t already have an IRA, you will need to open one. You can choose between a traditional IRA, which offers tax-deferred growth, and a Roth IRA, which offers tax-free growth on qualified distributions.
Fund Your IRA: Contribute funds to your IRA. Be mindful of the annual contribution limits.
Select Your REITs: Research and select the REITs you wish to invest in. Consider factors such as the REIT’s property types, geographic locations, dividend yield, and performance history.
Execute the Investment: Use your IRA account to purchase the chosen REITs. You can do this through your IRA custodian’s online platform or by contacting them directly.
Monitor and Rebalance: Regularly review your REIT investments and overall IRA portfolio. Rebalance as needed to maintain your desired asset allocation and investment goals.

Investing in REITs through your IRA can be a powerful strategy to enhance your retirement portfolio. The tax-deferred growth, high dividend yields, and diversification benefits make REITs an attractive option for many investors. By understanding the rules and considerations, you can effectively include REITs in your IRA and work towards achieving your long-term financial goals.

At Perch Wealth, we are dedicated to helping you navigate the complexities of retirement investing. Contact us today to learn more about incorporating REITs into your IRA and other strategies to optimize your retirement savings.

Investing in REITs through your IRA provides tax advantages, dividend reinvestment opportunities, and diversification benefits. Ensure you understand the rules and plan your investments strategically to maximize your retirement savings.

1031 Risk Disclosure:

There is no guarantee that any strategy will be successful or achieve investment objectives;
Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
Potential for foreclosure – All financed real estate investments have potential for foreclosure;
Illiquidity – Because 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits

General Disclosure

Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.

Ben Carmona

Ben Carmona is a Managing Partner at Perch Wealth. With over 20 years of applied experience, Ben is an expert in real estate investments, structures, and strategies.

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Not an offer to buy, nor a solicitation to sell securities. All investing involves risk of loss of some or all principal invested. Past performance is not indicative of future results. Speak to your finance and/or tax professional prior to investing. Any information provided is for informational purposes only. Securities offered through Arkadios Capital, member FINRA/SIPC. Advisory Services offered through Arkadios Wealth. Perch Wealth and Arkadios are not affiliated through any ownership.

Check the background of this firm/advisor on FINRA’s BrokerCheck.

Real Estate / 1031 Risk Disclosure:

There’s no guarantee any strategy will be successful or achieve investment objectives;
All real estate investments have the potential to lose value during the life of the investments;
The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
All financed real estate investments have potential for foreclosure;
These 1031 exchanges are offered through private placement offerings and are illiquid securities. There is no secondary market for these investments;
If a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits;
Tax benefits are not guaranteed and are subject to changes in the tax code.