Diversifying Your Investment Retirement Account with Real Estate Investment Trusts

Real Estate is consistently the favorite asset class for investors as it is recognized as the core to building wealth.  Real estate investment trusts (REIT) offer a low barrier to entry to owning real estate, giving access to investors who may not be able to attain the required capital for their own private real estate deals.

With two ways to earn returns–dividends and appreciation—some REITs allow you to realize value in a third way: by leveraging the power of compounding returns through reinvesting your dividends in Dividend Reinvestment Plans (DRIP).

If you have an investment retirement account (IRA), REIT investing provides additional value. Many investors do not realize that REITs are an investment option for their retirement accounts. Retirement account holders can invest in a REIT just as easily as purchasing publicly traded stocks or bonds, using their IRAs, 401ks, pension plans, and any other retirement account arrangement. This ability to invest using retirement money extends to any type of REIT, including private REITs that are not publicly listed.

Kelsey Dineen from Midland Trust explains that, “Harnessing retirement money for REIT investing has a huge upside.” She gives two reasons for this:

  1. Retirement accounts give investors another source of cash beyond personal funds for REIT investing.
  2. Retirement accounts provide investors with a tax shelter in which they can fully protect all profit produced by the REIT investment and to avoid paying taxes on gains until a later date. REIT investing within a tax-sheltered retirement account provides a wealth compounding effect. Retirement accounts allow investors to preserve the full amount of their investment yields and reinvest a larger principal amount to produce even more returns.

How tax-efficient are REITs?

The goal with tax-efficient investing is to reduce your overall tax liability. REITs can help investors lower their tax burden in a couple of ways.

First, since REITs are required to distribute 90 percent of their annual taxable income to investors, REITs avoid taxation at the fund level. Because of this, investors avoid double taxation and the maximum amount of capital is returned as investment income.

Second, depending on how you invest in a REIT, the earnings you receive from the REIT could be tax-deferred, meaning you are able to invest your income pre-tax into the REIT. If you choose to invest using the IRA option, you can withdraw your earnings tax-free.


Are REITs the right choice for your IRA or SDIRA investment?

REITs are an attractive option for investors who want to use a tax-advantaged way to build wealth in real estate and build long term growth. They are a way for you to realize the earning potential of real estate without the high up-front costs associated with buying real estate outright. You can see your Individual Retirement Account or Self-Directed Retirement Account investment grow through dividends (the monthly earnings of the real estate itself), appreciation (the growth in value of the property), and compound returns through reinvesting your dividends.

Ask your financial advisor or tax professional if investing your IRA or SDIRA in a REIT like Upside Avenue is the right choice for your personal financial situation. The information presented here is provided as educational only and should not be taken as a recommendation.