IRAs are individual retirement accounts. My preference of choice for socking away retirement dollars right now is a roth IRA. A roth IRA is a type of retirement account where you essentially contribute after tax dollars in return for your investments growing tax-free and being able to withdraw them later on without incurring additional taxes.
Since I’m young and work essentially part-time, my income is taxed at the lowest brackets. Therefore contributing after-tax dollars to a roth IRA makes a lot of sense for me. People with higher incomes may not be eligible for contributions to a roth IRA and in certain circumstances wouldn’t be the right choice for them.
Certain investments are more tax efficient with an tax advantaged account. For example, generally REITs (real estate investment trusts) pay out nice dividends, however these dividends are taxed as ordinary income, not at the 15% reduced dividend tax rate. In my opinion, REITs should be held in your IRA since each dividend payout would normally incur a tax liability. My roth IRA is heavy in REITs right now through Vanguard’s REIT index fund (VNQ) and various other REIT holdings. This allows more income to compound tax-free.
How has that been working out for you? I just started my Roth IRA and it seems that these REIT’s are a good fit.
Would you hold REIT in a Rollover (or Traditional) IRA as well or only in a Roth IRA. It appears to me that the benefit is great in Traditional IRA as well. Roth IRA is not an option for me since my income is high.
Although not ideal, investing in a REIT through a traditional IRA is probably better than using your regular brokerage account. It all depends on your current tax bracket and what it will be at retirement.
Specifically, you want to avoid your current high tax bracket and pull the money out of your IRA when you are in a lower bracket in retirement (hopefully). Since you don’t qualify for a ROTH, I assume you are in the 28% and above, so it would be prudent to invest through your traditional IRA.
Will dividends paid out from REITs be taxed as ordinary income in a Roth IRA account? Or anything in a Roth IRA would never be taxed as long as I do not withdraw before 60?