REITs in Roth and Taxable Accounts

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REITs in Roth and Taxable Accounts

Postby forestlake » Thu Feb 02, 2012 3:26 pm

First post :D

I have a Vanguard Roth IRA. Is it better to hold VNQ or VGSIX there (if you had the choice and a $5,000 limit)? I'm a little confused as to the fee structure/advantages/disadvantages between an ETF and a mutual fund - especially when you're never selling.

I also hold VNQ in my Taxable Account - is this a mistake? I've seen it suggested here that I should sell this as soon as possible (which would be August of 2012 for capital gains) due to tax inefficiency of REITs. If this is true, would then moving into VGSIX or rather VGSLX be a wise choice for my Taxable Account or should one avoid REITs in Taxable Accounts all together? If so, why?
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Re: REITs in Roth and Taxable Accounts

Postby ObliviousInvestor » Thu Feb 02, 2012 5:12 pm

Welcome to the forum! :)

In a Roth, either the index fund or the ETF would be just fine -- it's just a matter of personal preference.

In general, REITs should be kept to tax-sheltered accounts though (regardless of whether they're held directly, via an index fund, via an actively managed fund, or via an ETF) due to the fact that they generate relatively large amounts of fully taxable income.

This wiki article may be helpful: http://www.bogleheads.org/wiki/Principl ... _Placement
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Re: REITs in Roth and Taxable Accounts

Postby forestlake » Thu Feb 02, 2012 6:01 pm

ObliviousInvestor wrote:In a Roth, either the index fund or the ETF would be just fine -- it's just a matter of personal preference.


But I see that the expense ratios for the VNQ ETF and Admiral Shares VGSLX are .12%, while Investor Shares VGSIX is .26% - so in this case, if you have just $5,000 to invest, what's going to make more sense in an IRA? Especially considering that perhaps next year with another $5,000 I would have enough to buy VGSLX.

My other question/problem still stands: I also hold VNQ in my Taxable Account. I understand this is a mistake. I've seen it suggested here that I should sell this as soon as possible (which would be August of 2012 for capital gains). If this is true, would then having any REIT such as VGSIX or rather VGSLX be a wise choice for my Taxable Account or should one avoid REITs in Taxable Accounts all together in my Taxable Account?
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Re: REITs in Roth and Taxable Accounts

Postby Kevin M » Thu Feb 02, 2012 6:32 pm

The difference in ERs, 0.14%, is $7 per year on $5,000 (edited to correct math). No big, especially if you get Admiral shares in a year.

Mutual funds are generally less complicated: no bid/ask spread, no premium/discount, no intra-day price change, no decision on market order or limit order, and if limit order, no decision on limit price.

I think Oblivious Investor did answer your question about holding REITs in taxable. It's preferable to hold them in tax-advantaged, but I'm not sure we can say bluntly that it's a mistake for you to continue to hold in taxable. You have to trade off paying the tax on the gain if you sell (and have a gain) vs. the longer-term benefit of sheltering the income in tax-advantaged. If you have a loss, I would definitely sell in taxable and buy in tax-advantaged.

I moved all of my REITs from taxable to tax-advantaged a few years ago when I learned enough about tax efficiency to understand it made sense for me.

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Re: REITs in Roth and Taxable Accounts

Postby ObliviousInvestor » Thu Feb 02, 2012 6:34 pm

Edit: Yes, what Kevin said. :)
forestlake wrote:
ObliviousInvestor wrote:In a Roth, either the index fund or the ETF would be just fine -- it's just a matter of personal preference.


But I see that the expense ratios for the VNQ ETF and Admiral Shares VGSLX are .12%, while Investor Shares VGSIX is .26% - so in this case, if you have just $5,000 to invest, what's going to make more sense in an IRA? Especially considering that perhaps next year with another $5,000 I would have enough to buy VGSLX.

With a $5,000 investment, we're talking about a difference of less than $10 per year in expenses. And as you mentioned, after the first year, you'd have access to admiral shares if you went the index fund route, after which point the expenses would be the same. In other words, I would not make this decision based on expense ratios -- the difference there is just too small to really matter. I'd base it on other things.

For example, do you care about being able to place orders other than market orders? Or do you care about being able to trade in the middle of the day? If so, the ETF version probably makes sense. Conversely, if you like the idea of setting up automatic investment of round dollar amounts, the index fund version likely makes sense.

forestlake wrote:My other question/problem still stands: I also hold VNQ in my Taxable Account. I understand this is a mistake. I've seen it suggested here that I should sell this as soon as possible (which would be August of 2012 for capital gains). If this is true, would then having any REIT such as VGSIX or rather VGSLX be a wise choice for my Taxable Account or should one avoid REITs in Taxable Accounts all together in my Taxable Account?

This question is what I was attempting to address when I wrote:
ObliviousInvestor wrote:In general, REITs should be kept to tax-sheltered accounts though (regardless of whether they're held directly, via an index fund, via an actively managed fund, or via an ETF) due to the fact that they generate relatively large amounts of fully taxable income.

In other words, if your REITs can be kept to your tax-sheltered accounts (e.g., Roth IRA, 401(k)), it's best to do so. And that applies regardless of whether we're talking about REIT index funds, REIT ETFs, or any other way to own REITs.
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Re: REITs in Roth and Taxable Accounts

Postby forestlake » Thu Feb 02, 2012 7:03 pm

forestlake wrote:My other question/problem still stands: I also hold VNQ in my Taxable Account. I understand this is a mistake. I've seen it suggested here that I should sell this as soon as possible (which would be August of 2012 for capital gains). If this is true, would then having any REIT such as VGSIX or rather VGSLX be a wise choice for my Taxable Account or should one avoid REITs in Taxable Accounts all together in my Taxable Account?

ObliviousInvestor wrote:This question is what I was attempting to address when I wrote:
ObliviousInvestor wrote:In general, REITs should be kept to tax-sheltered accounts though (regardless of whether they're held directly, via an index fund, via an actively managed fund, or via an ETF) due to the fact that they generate relatively large amounts of fully taxable income.

In other words, if your REITs can be kept to your tax-sheltered accounts (e.g., Roth IRA, 401(k)), it's best to do so. And that applies regardless of whether we're talking about REIT index funds, REIT ETFs, or any other way to own REITs.


Thanks, I really should have clarified on this second question. Maybe this will help:

I currently own roughly 500 shares in VNQ in my taxable account. At least as far as I understand, I just can't move those to a tax-advantaged account (right?).

So, while I really like the money-generating side of REITs for my regular (taxable) account, would I be better off:

A.) Selling all my VNQ at capital gains this year and then getting into something else (like maybe utilities).

B.) Keep all of my VNQ (for life), never buy any more and just live with the tax inefficiencies.

C.) Something else...?

Much appreciated. I guess it just comes down to that I'm a little spooked having this REIT in my taxable account (It was my favorite way to be "risky").
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Re: REITs in Roth and Taxable Accounts

Postby abuss368 » Thu Feb 02, 2012 7:13 pm

I also have REITS in both taxable and tax advantaged and are very happy with the results in all markets.
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Re: REITs in Roth and Taxable Accounts

Postby ObliviousInvestor » Thu Feb 02, 2012 7:14 pm

Ah, OK.

To back up a step, the general approach to designing a portfolio around here is as follows:

1) Determine the overall asset allocation you want -- how much in US stocks (potentially including specific allocation to certain sectors like REITs), how much in international stocks, how much in bonds, etc.
2) Implement that overall allocation in the lowest-cost way possible (with taxes being considered as a cost).

So the answer to your questions depends on the total amount of tax-sheltered space you have, as well as the total allocation that you want for REITs. It also depends on your tax bracket and the size of the capital gain.

Depending on your answers to the above questions, it might make sense to sell your REITs in taxable, invest that money in something more tax-efficient, and move some of your tax-sheltered holdings to REITs. Or, as Kevin mentioned, it might make sense to keep the REITs.
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Re: REITs in Roth and Taxable Accounts

Postby SpringMan » Thu Feb 02, 2012 7:27 pm

Without knowing more details, like your tax bracket and your total portfolio, not in absolute dollars but in percentages that add up to 100%, it is hard to make recommendations. REITs are best in tax advantaged accounts. It looks like you have over 31K in VNQ, generally REITS should should not be more than 5-10% of equities, maybe that applies. Utilities are not very tax efficient either, they are value stocks that spin off taxable dividends. Usually folks put total stock market or total international or both in their taxable accounts. High income folks might use muni-bonds in their taxable accounts.
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Re: REITs in Roth and Taxable Accounts

Postby forestlake » Thu Feb 02, 2012 7:30 pm

ObliviousInvestor wrote:So the answer to your questions depends on the total amount of tax-sheltered space you have, as well as the total allocation that you want for REITs. It also depends on your tax bracket and the size of the capital gain.


My Roth I just started it a little over a year ago. I contributed max each year (2010, 2011, 2012).

My Taxable Account has roughly:
~ 57% S&P
~ 26% REIT
~ 16% Bond
~ 1.5% Cash

I'm fine with the balance even though I'm in my early 40s.

And finally, my tax bracket will likely remain between 15% and 25%.
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Re: REITs in Roth and Taxable Accounts

Postby ObliviousInvestor » Thu Feb 02, 2012 8:01 pm

forestlake wrote:
ObliviousInvestor wrote:So the answer to your questions depends on the total amount of tax-sheltered space you have, as well as the total allocation that you want for REITs. It also depends on your tax bracket and the size of the capital gain.


My Roth I just started it a little over a year ago. I contributed max each year (2010, 2011, 2012).

My Taxable Account has roughly:
~ 57% S&P
~ 26% REIT
~ 16% Bond
~ 1.5% Cash

I'm fine with the balance even though I'm in my early 40s.

And finally, my tax bracket will likely remain between 15% and 25%.

So the Roth is somewhere around $15k? And the total taxable is ~$120k? Is there anything else?

And is that taxable account allocation what you desire for the overall allocation? (If so, that's one heck of an overweighting of REITs, while completely leaving out mid-caps, small-caps, and international stocks. And as you mentioned, it's pretty darned aggressive with < 20% in bonds/cash. But I'll refrain from discussing that for now in order to work through our discussion of how to implement an asset allocation.)

To the extent that you can do so while staying in the 15% tax bracket, I'd suggest looking into tax gain harvesting: http://www.bogleheads.org/wiki/Tax_gain_harvesting
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Re: REITs in Roth and Taxable Accounts

Postby Kevin M » Thu Feb 02, 2012 9:09 pm

forestlake wrote:I currently own roughly 500 shares in VNQ in my taxable account. At least as far as I understand, I just can't move those to a tax-advantaged account (right?).

You're getting good general advice from Mike, so I'll just respond to this. When I say "move", I mean exchange REITs for something more tax efficient in taxable (that you currently own in Roth), and do the opposite exchange in Roth on the same day.
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Re: REITs in Roth and Taxable Accounts

Postby forestlake » Thu Feb 02, 2012 9:42 pm

ObliviousInvestor wrote:So the Roth is somewhere around $15k? And the total taxable is ~$120k? Is there anything else?

And is that taxable account allocation what you desire for the overall allocation? (If so, that's one heck of an overweighting of REITs, while completely leaving out mid-caps, small-caps, and international stocks. And as you mentioned, it's pretty darned aggressive with < 20% in bonds/cash.


Yes, the amounts are roughly as you stated.

I wouldn't say it's necessarily what I desire, however, as I am only starting at putting money into the market (as opposed to where I normally invest which includes a couple of my companies and real estate), I wanted to play into what I knew. I also have not brought all cash into this yet (it's sitting in banks until I am more confident with market investing). That's why it's relatively simple albeit allocated in an apparently aggressive manner. Trying and attempting to learn before I'm more in.
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Re: REITs in Roth and Taxable Accounts

Postby ObliviousInvestor » Thu Feb 02, 2012 10:35 pm

forestlake wrote:Trying and attempting to learn before I'm more in.

This is good! And you're in the right place. I think you're wise to stay in cash until you've developed an allocation that you're confident in. There's no rush, and an asset allocation that you're not comfortable with is one that you're likely to bail out on when things go poorly. (And every allocation will have its periods of poor performance.)

I think the recommended book list might be a good place to start: http://www.bogleheads.org/wiki/Category ... nd_Authors

Or just the wiki homepage, as the wiki contains an abundance of information: http://www.bogleheads.org/wiki/Main_Page
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Re: REITs in Roth and Taxable Accounts

Postby abuss368 » Thu Feb 02, 2012 10:50 pm

David Swensen author of Unconventional Success recommends a 20% of the total portfolio to REITS.

I am curious of his thoughts on International REITS now that they are available.
Last edited by abuss368 on Thu Jan 09, 2014 8:05 pm, edited 1 time in total.
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Re: REITs in Roth and Taxable Accounts

Postby abuss368 » Fri Feb 03, 2012 10:18 am

Thoughts:

* Mr. Bogle did say the above quote regarding Sam Zell. However, he also conducted an interview with NAREIT a few years back where he stated he did not like the other sector funds (i.e. healthcare, metals, energy, technology, etc.) but could see a 10% of equity allocation to REITS. This interview is available online.

* Read "Unconventional Success" by David Swensen. He has an excellent section on REITS and why he recommends a 20% of the total portfolio allocation. I have been increasing our % of equity allocation to 20% and am quite aware of the potential rewards and risks.

* Excluding section 1031, it is difficult to compare taxes between REITS and direct ownership. If the direct ownership is during the early years (i.e. debt present and potential future depreciation), you may be operating at a "loss" for tax purposes. You are able to deduct passive losses against ordinary income, and depending on your AGI, up to $25,000. However, I have many clients that have owned real estate for a long time, are debt and depreciation free, and are incurring the tax bite. This is not a concern, but rather the cost of "doing business". The properties produce a very nice cash flow that the clients retired early from and live off of.

* I have also posted numerous times on this forum, that I have other clients with substantial and very material REIT investments, that have retired early and are living off of the cash flow.

* REITS also have favorable tax implications regardless of many folks opinions on this forum. For starters, approximately 50% of the REITS "dividend" is taxed as ordinary income, much like direct ownership. If qualified dividends are gone in one year, and that is looking like a high probability, all income is taxed at the same rate again. About 25% of a REITS "dividend" is taxed at the 15% capital gains rate, and the remaining 25% of the "dividend" is a return of capital (i.e. not taxed, but a reduction of your cost basis - when you sell, depending on the holding period, at favorable long term capital gains rates). Any additional return of capital that exceeds your cost basis is taxed as income. Read Random Walk Down Wall Street where these tax benefits are also explained.

* REITS have their days in the sun and the doghouse just like any asset class. I have been a REIT investor for many years in all types of markets and am very happy with the return, diversification, and nice income stream.

* Vanguard produced a research paper a few years back comparing REITS to direct ownership with a much more favorable few of REITS due to better liquidity, diversification, much lower costs, etc.

* David Swensen recommends the separate REIT allocation. The theory is the REIT percentage in the Total Stock Market fund of 1% - 3% is not representative of the broader economy due to the huge amount of properties that are privately owned (i.e. not on the stock exchange).

* If you go with REITS or increase your allocations, I recommend that you read many books, reports, etc. just to be aware of this asset class and the advantages and disadvantages. A great resource is http://www.reit.com
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Re: REITs in Roth and Taxable Accounts

Postby bru » Fri Feb 03, 2012 10:42 am

Did anyone mention that REIT's issue their tax statements later than typical? Usually sometime in February. I used to have REIT's in taxable and this was one of the reasons I moved it. Now it's probably not as big a deal as I typically file close to the deadline :wink: .
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Re: REITs in Roth and Taxable Accounts

Postby abuss368 » Fri Feb 03, 2012 12:38 pm

They issue the 1099-Div later due to the underlying REIT companies needing additional time to porpoerly classify the "dividend" paid during the year as 1) dividend, 2) capital gains, 3) return of capital.

Vanguard files for an extension every year in an attempt to cut down on reissuing 1099-DIV forms.

The form is due out over the next week or two.
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Re: REITs in Roth and Taxable Accounts

Postby Barry Barnitz » Fri Feb 03, 2012 4:09 pm

Hi:

We have a page on the Vanguard REIT index fund's tax attribute in the wiki. Please see Vanguard REIT Index Tax Distributions - Bogleheads.

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Re: REITs in Roth and Taxable Accounts

Postby Liquid » Fri Feb 03, 2012 4:35 pm

abuss368 wrote:David Swensen author of Unconventional Success recommends a 20% of equity allocation to REITS.

I am curious of his thoughts on International REITS now that they are available.


While I can not provide his thoughts, international REITS do not provide the protection of 90% passthrough that we enjoy, I would advise caution.
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Re: REITs in Roth and Taxable Accounts

Postby abuss368 » Sat Feb 04, 2012 12:12 am

International REITs do not provide the "protection" of pass-thru?

Can you explain?
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