Including REITs in your IRA
REITs aren't taxed at the corporate level but are instead taxed like limited liability corporations (LLCs).2 This means their income isn't taxed until it's paid to the shareholders. Because of this specialized tax structure, REITs often pay 100% of its taxable income to shareholders.
Including REITs in your traditional IRA account means you won't pay taxes on income earned until you take money out of your IRA. This is different from holding your REITs in a non-retirement account, where you'd need to pay taxes on your dividends every year. If you include REITs in a Roth IRA, you won't get a tax deduction for the contribution as you would with a traditional IRA, but neither your dividends nor the proceeds of your sales from any REITs will be taxed upon withdrawal.6
Different Types of REITs
There are two main types of REITs: equity REITs and mortgage REITS (called mREITs). Equity REITs, which represent most REITs, produce income from rents and from the sale of properties. mREITs invest in mortgages and mortgage securities from commercial and residential properties and produce income from interest earned.
Some examples of equity REITs include the following:
- Shopping centers and malls
- Health care facilities
- Golf courses
- Manufactured (mobile) home communities
- Life science buildings
- Movie theaters
- Gas stations
- Single-family rental housing.
How to invest in REITs
To invest in REITs, you can buy shares in real estate companies that are listed on the major stock exchanges. Alternatively, you can buy shares in a REIT index fund, mutual fund, or exchange-traded fund (ETF), which allow you to invest in multiple companies at once. These can be either funds that focus on a specific type of property (like office buildings or residential real estate), or they can include a broader range of property types.
To minimize volatility in your REIT portfolio and achieve a more typical rate of return, a solid strategy is to diversify your portfolio by investing in more than one property type.7 You can do this on your own, by selecting a variety of individual REITs. Or you select a REIT mutual fund or ETF that owns shares in a broad range of properties.
For more information on how to invest in REITs, talk with your Synovus financial advisor. They can help guide you in choosing the investments that make the most sense for you.