ROTHs & REITs

(A) Maybe. I've never looked into that.

(B) That's only part of the reason. Part of the dividend is a return of capital - that is, money you paid to purchase the REIT. This isn't income and shouldn't be included in the calculation of yield.

(C) Not entirely. Some part of a REIT's dividends may be qualified. There are 5 possible components to a REIT distribution: ordinary (non-qualified) dividend, qualified dividend, return of capital, capital gain distribution, and Unrecaptured Section 1250 gain distribution. Each of these is treated differently on your income tax return.

(D) I don't understand this statement. There are taxes to pay each year and taxes to pay upon sale (assuming the REIT is held in a taxable account.)

Generally, you want your most highly "taxable" assets/income within your Roth because you paid your top marginal tax rate to fund the Roth vs. 0% to fund a taxable account. Any tax benefits from lower tax rate on a specific type of income/gain are lost within the Roth.

Ira Smilovitz, EA

My bad. I meant to say ROTH (not REIT). Assuming no withdrawals are made before age 59.5, ROTHs grow tax free regardless of the investment.

So, for example, unless the funds are necessary, it is best to leave a ROTH alone.

That makes more sense. Yes, it's generally best to leave a Roth to the last dollars used in retirement. Especially since under current tax law, a Roth IRA beneficiary can stretch the tax free character over his/her lifetime.

Ira Smilovitz, EA

Correct me if necessary: (A) REITs normally pay higher dividends that traditional stock funds. (B) This is because, the dividends are not taxed to the REIT. (C) This means that REIT dividends are NOT qualified and are fully taxable to the recipient. Under normal circumstances, the after-tax benefit would be about the same, depending on the taxpayers tax bracket. (D) Once funded by the taxpayer, REITs grow tax free.

This all leads to my conclusion: If a taxpayer has a ROTH IRA, and a portion of his assets in REITs, wouldn't it make sense to have all the ROTH contain as much of the REITs as possible? ======= You just had to spoil this for the rest of us by telling the world..... My Roth accounts have been invested in 98% REITs (by contribution amount) for 13 years now..... You are correct that despite being "ordinary income", as the dividend is paid to a ROTH account, there is no tax.