REITs are a direct investment in real estate, offering income and potential capital appreciation with specific tax considerations. A Roth IRA is a tax-advantaged retirement account that can hold various investments, including REITs, providing tax-free growth and withdrawals in retirement, but with contribution limits and potential penalties for early withdrawals of earnings. The choice depends on individual investment goals, risk tolerance, and tax planning strategies.
| Attribute | Real Estate Investment Trusts (REITs) | Roth IRA |
|---|---|---|
| Investment Risk Level | REITs carry risks, including sensitivity to interest rates and market fluctuations. Risks can be amplified if a REIT concentrates in a specific sector. Non-traded REITs have additional risks due to lack of public trading and difficulty in determining their value. | Depends on the investments held within the account, ranging from low-risk (like certain bonds) to high-risk (like individual stocks or certain sector-specific funds). |
| Tax Advantages (Current vs. Future) | REITs can offer tax benefits. They are designed to pass income to investors, avoiding corporate income tax if they distribute at least 90% of their taxable income as dividends. A 20% deduction on pass-through income from REIT investments is available but is set to expire at the end of 2025. REIT shares also often qualify for a step-up in basis when inherited, potentially minimizing capital gains taxes for heirs. | Contributions are made with after-tax dollars, meaning no present tax deduction. Qualified withdrawals in retirement, including earnings, are completely tax-free at the federal level. Beneficial if future tax rate is expected to be higher than the current tax rate. |
| Contribution Limits | REITs do not have contribution limits like those associated with specific retirement accounts such as Roth IRAs. | For 2025, the contribution limit is $7,000 if under age 50, and $8,000 if age 50 or older. Single filers with a modified adjusted gross income (MAGI) of $150,000 or more cannot contribute. For those married filing jointly, the MAGI limit is $236,000. |
| Withdrawal Rules and Penalties | REITs themselves do not have specific withdrawal rules or penalties. However, if held within a retirement account like a Roth IRA, the IRA's withdrawal rules apply. | Contributions can be withdrawn at any time, at any age, tax-free and penalty-free. To withdraw earnings tax-free and penalty-free, must be at least 59 ½ years old, and the account must be open for at least five years. Early withdrawals of earnings may be subject to income tax and a 10% early withdrawal penalty. |
| Investment Options and Flexibility | REITs offer various investment options, including equity REITs (owning and managing properties), mortgage REITs (financing properties), and hybrid REITs (combining both strategies). You can invest in REITs through individual stocks, mutual funds, or ETFs. | Offers a wide range of investment options, including stocks, bonds, mutual funds, ETFs, and even real estate through REITs. A self-directed Roth IRA can expand these options to include alternative assets like real estate, private equity, and cryptocurrency. |
| Management Fees and Expenses | REITs have management fees built into their operating expenses, impacting overall returns. Fees can include property management fees (ranging from 0.0% to 6.0% of annual gross revenues), annual management fees (ranging from 1.25% to 2% of gross assets or NAV), and other expenses. | Vary depending on the brokerage and the investments chosen. Some brokerages offer Roth IRAs with no account opening fees or minimums. Investing in certain funds, like actively managed mutual funds, can result in higher expenses. |
| Potential for Capital Appreciation | REITs offer the potential for moderate, long-term capital appreciation. Real estate values tend to appreciate over the long term. | Depends on the investments selected. Investments in stocks, growth funds, and REITs can offer significant capital appreciation potential. |
| Income Generation Potential | REITs are required to distribute at least 90% of their taxable income to shareholders, providing a steady income stream through dividends. | Can generate income through dividends and interest, depending on the investments held. REITs, in particular, are known for their potential to generate income. |
| Diversification Benefits | REITs can enhance portfolio diversification due to their low to moderate correlation with other asset classes like stocks and bonds. | Can be diversified across various asset classes, including stocks, bonds, and real estate. Diversification can help reduce risk and improve overall portfolio stability. |
| Liquidity | Many REITs are publicly traded on major stock exchanges, offering investors liquidity. However, non-traded REITs are illiquid and may not be easily sold. | Contributions can be withdrawn at any time without penalty, making them relatively liquid. However, early withdrawals of earnings may be subject to taxes and penalties. Non-traded REITs held in a Roth IRA may have limited liquidity. |
| Estate Planning Implications | REITs can be a useful tool in estate planning, allowing for easier asset transfer and potentially minimizing taxes. REIT shares often qualify for a step-up in basis when inherited. | Can be a valuable estate planning tool, as they allow assets to be passed on to heirs tax-free. Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs) during the original owner's lifetime. |
| Regulatory Oversight and Compliance | REITs must meet requirements set by the IRS, including asset and income qualifications. Publicly traded REITs are regulated by the Securities and Exchange Board of India (SEBI) and listed on the National Stock Exchange. | Subject to IRS regulations and guidelines. Brokerages and financial institutions that offer Roth IRAs are also subject to regulatory oversight. |
| Price | Not available | Not available |
| Ratings | overall: Not available, performance: competitive total returns historically; long-term total returns similar to value stocks | Not available |