REIT placement... Why not a Roth? Why tax-deferred?

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vpotus
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REIT placement... Why not a Roth? Why tax-deferred?

Post by vpotus » Sun Aug 12, 2018 7:58 am

Hi and thank you. I've been doing a lot a reading at the wiki and as well as within many books. I recently read that one should place a REIT within a Tax-deferred account. https://www.bogleheads.org/wiki/Real_es ... ment_trust Wouldn't one be better suited placing a REIT in a Roth IRA where the $ grows tax free? In contrast, a REIT in a tax-deferred account would be taxed once the money is withdrawn. What am I misunderstanding?

Thanks again,
vp

trueblueky
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by trueblueky » Sun Aug 12, 2018 8:11 am

Tax-deferred or Roth are ok.
Not taxable.

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iceport
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by iceport » Sun Aug 12, 2018 8:43 am

vpotus wrote:
Sun Aug 12, 2018 7:58 am
Hi and thank you. I've been doing a lot a reading at the wiki and as well as within many books. I recently read that one should place a REIT within a Tax-deferred account. https://www.bogleheads.org/wiki/Real_es ... ment_trust Wouldn't one be better suited placing a REIT in a Roth IRA where the $ grows tax free? In contrast, a REIT in a tax-deferred account would be taxed once the money is withdrawn. What am I misunderstanding?

Thanks again,
vp
You caught an oversight! I think the wiki article should say "tax-advantaged" instead of "tax-deferred." This wiki page is more precise:
Tax-efficient fund placement

But you might still be missing something. The term "tax-deferred" is a bit of a misnomer to begin with. In fact, for the vast majority of investors, all the growth occurs tax-free (or better) in a tax-deferred account also. This is true if the tax rate at withdrawal is the same (or lower) than at the time of contribution.

See this section: https://www.bogleheads.org/wiki/Traditi ... Roth#Taxes
"Discipline matters more than allocation.” ─William Bernstein

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vpotus
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by vpotus » Sun Aug 12, 2018 9:13 am

Thank you. Here are my thoughts: If I diversify with a REIT in Roth, this means I pay taxes upfront. Money grows untaxed. I keep all the gains when withdrawing. That sounds great.

In contrast, REIT placed in a 403b7 (I teach) = Money grows tax-free but I get taxed on the gains when I withdraw. Is it possible to say which placement is better? Or does this depend on my tax bracket at retirement. Or is it a wash? I've been overthinking this too much. Thanks.

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iceport
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by iceport » Sun Aug 12, 2018 9:46 am

vpotus wrote:
Sun Aug 12, 2018 9:13 am
Thank you. Here are my thoughts: If I diversify with a REIT in Roth, this means I pay taxes upfront. Money grows untaxed. I keep all the gains when withdrawing. That sounds great.

In contrast, REIT placed in a 403b7 (I teach) = Money grows tax-free but I get taxed on the gains when I withdraw. Is it possible to say which placement is better? Or does this depend on my tax bracket at retirement. Or is it a wash? I've been overthinking this too much. Thanks.
Which is better depends on your tax rate in retirement. Did you read this wiki section yet?

https://www.bogleheads.org/wiki/Traditi ... Roth#Taxes
"Discipline matters more than allocation.” ─William Bernstein

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vpotus
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by vpotus » Sun Aug 12, 2018 9:59 am

Yes, I have read it. Thank you for your help. Vp

livesoft
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by livesoft » Sun Aug 12, 2018 10:03 am

If I owned a REIT fund that was going to lose money, then I would want to own it in my tax-deferred accounts.

If I owned a REIT fund that was going to make lots of money, then I would want to own it in my Roth accounts.
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iceport
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by iceport » Sun Aug 12, 2018 10:05 am

vpotus wrote:
Sun Aug 12, 2018 9:59 am
Yes, I have read it. Thank you for your help. Vp
Does it make sense, or do you still have questions? I wasn't trying to be dismissive. Following through the example you can see that, given a constant tax rate (I know, big assumption) the traditional account gives you exactly the same result as the Roth. So if the Roth gives you tax-free growth, in essence, the traditional does also.

It also helps to conceptualize the money in the tax-deferred account as a combination of your contributions and those of Uncle Sam (in the form of the taxes he didn't collect when you earned them). If you're in the 25% tax bracket and contribute $4000 to a traditional account, the arrangement is like having $3000 of your own money growing for you, and $1000 of Uncle Sam's.

Both parties should be glad to maximize the growth in the account. You get more tax-free growth, and Uncle Same gets more tax revenue.
Last edited by iceport on Sun Aug 12, 2018 10:18 am, edited 1 time in total.
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by danaht » Sun Aug 12, 2018 10:15 am

Due to recent tax reform - taxable is not a bad place for an individual REIT stock since you now get up to a 20% tax deduction. It's still preferred to put all REITs in a tax advantaged account because REITs pay large dividends. Also, if your buying a REIT index fund (or ETF) like VNQ - definitely put that in a tax advantaged account - since there is no 20% deduction for an index fund's REIT dividend.

warning: this new 20% REIT tax deduction could expire on December 31, 2025 with some of the other personal income tax deductions unless the government makes it permanent.

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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by MotoTrojan » Sun Aug 12, 2018 10:19 am

If the income used to fund the Roth is taxed at the same rate as the 403 withdrawal, it is a wash.

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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by retiredjg » Sun Aug 12, 2018 10:51 am

vpotus wrote:
Sun Aug 12, 2018 9:13 am
Thank you. Here are my thoughts: If I diversify with a REIT in Roth, this means I pay taxes upfront. Money grows untaxed. I keep all the gains when withdrawing. That sounds great.

In contrast, REIT placed in a 403b7 (I teach) = Money grows tax-free but I get taxed on the gains when I withdraw. Is it possible to say which placement is better? Or does this depend on my tax bracket at retirement. Or is it a wash? I've been overthinking this too much. Thanks.
I agree with iceport that the Wiki should say "tax-advantaged" instead of "tax-deferred". REIT is perfectly fine in either type of account.

Yes, you are overthinking this. There are decisions of more importance - decisions that come sooner on the decision tree - that will likely make it more convenient to hold your REIT in one place or the other. For example, costs come before worrying about this placement. How money flows into your portfolio is a more important determining factor than placement of REITS between these two funds.

If it simply comes down to all other things being equal, either flip a coin or do what Livesoft said and only hold the REIT in Roth IRA if it is going to make money.

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FiveK
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by FiveK » Sun Aug 12, 2018 12:45 pm

iceport wrote:
Sun Aug 12, 2018 8:43 am
You caught an oversight! I think the wiki article should say "tax-advantaged" instead of "tax-deferred."
And now it does - good catch!

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iceport
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by iceport » Sun Aug 12, 2018 1:53 pm

FiveK wrote:
Sun Aug 12, 2018 12:45 pm
iceport wrote:
Sun Aug 12, 2018 8:43 am
You caught an oversight! I think the wiki article should say "tax-advantaged" instead of "tax-deferred."
And now it does - good catch!
Nice! Now that's service, FiveK.
livesoft wrote:
Sun Aug 12, 2018 10:03 am
If I owned a REIT fund that was going to lose money, then I would want to own it in my tax-deferred accounts.
If the OP owned a REIT fund that was going to lose money, I'd advise them to do the sensible thing: just dump it and buy a REIT fund that's going to make lots of money!

Seriously, your point is, I think, that there is an advantage to having assets with lower expected returns in the pre-tax account, relative to what's owned in the after-tax account. To the extent that this might give one an added measure of control over marginal tax rates in retirement, I agree completely. Smaller pre-tax accounts means possibly a lower marginal retirement tax rate, more control over spikes in withdrawals for big expenditures (and thus spikes in tax rates), lower RMDs, etc.

So for a given portfolio and a given mix of pre-tax and after-tax accounts, it's probably best to position the assets to favor the highest expected growth in the after-tax account.

But I don't think it should control the decision about where to direct savings in the first place. That, to me, comes down primarily to a comparison of working vs. retirement tax rates. (And also, possibly, the due consideration of tax diversification to address the significant uncertainty in future tax rates.) Does that make sense?
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by livesoft » Sun Aug 12, 2018 2:07 pm

iceport wrote:
Sun Aug 12, 2018 1:53 pm
Does that make sense?
That makes sense.

But it seems like many folks think that one can make a decision of where to put something and then they can never change the location ever again I think one can change things around when other things have changed.
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by iceport » Sun Aug 12, 2018 2:16 pm

livesoft wrote:
Sun Aug 12, 2018 2:07 pm
iceport wrote:
Sun Aug 12, 2018 1:53 pm
Does that make sense?
That makes sense.

But it seems like many folks think that one can make a decision of where to put something and then they can never change the location ever again I think one can change things around when other things have changed.
You're so right! That's one of the many splendid things about all types of tax-advantaged accounts: the ease with which you can "move" things around with no concern about triggering taxable events.
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by retiredjg » Sun Aug 12, 2018 2:42 pm

iceport wrote:
Sun Aug 12, 2018 1:53 pm
But I don't think it should control the decision about where to direct savings in the first place. That, to me, comes down primarily to a comparison of working vs. retirement tax rates. (And also, possibly, the due consideration of tax diversification to address the significant uncertainty in future tax rates.) Does that make sense?
It certainly makes sense to me.

So many people think that "asset location" is highly important. But there are so many decisions to make before that, asset location is actually way down the list of important things that need to be decided.

As you mentioned, the first decision should be where to direct savings in the first place. Next is usually cost and picking the best funds in the accounts you decided to use in the previous step. After that, fit things where you can, paying attention to things like tax-efficiency. Frequently, there are few decisions to make because the portfolio structure has already been decided by the previous steps.

Occasionally, that means that extras like REIT may not get put in the portfolio at all because there is no good place to put it. Oh well....

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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by johnra » Sun Aug 12, 2018 3:00 pm

I put stock funds (including a few stocks I am rolling the dice on) in my Roth, and what bond funds and REITs I have in my traditional IRA. I am not planning on using my Roth for the most part, at least any time soon and therefore aimed for growth.

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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by vpotus » Sun Aug 12, 2018 3:01 pm

Thank you all very much for your help. I do tend to overthink things at times and all explanations were very helpful. vp

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telemark
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by telemark » Mon Aug 13, 2018 11:25 am

First, I recommend studying the arguments in Bernstein's essay Do Your Asset Classes Care Where They Are?

Second, "tax free growth" is one of those phrases that advisors love to pull out when they want to convince you of something. Since it doesn't actually mean much of anything*, it can be applied almost anywhere. Hint: after you consider opportunity costs, growth in a Roth is anything but tax free.

* There is some extra drag in a taxable account since dividends are taxed, and this is avoided in tax-advantaged accounts, and REITs are particularly subject to this, but that's almost never what advisors want you to think about.

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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by iceport » Mon Aug 13, 2018 1:15 pm

telemark wrote:
Mon Aug 13, 2018 11:25 am
First, I recommend studying the arguments in Bernstein's essay Do Your Asset Classes Care Where They Are?
I could be wrong, but I don't think the question of whether to adjust asset allocation based on asset location has anything to do with the OP's question, and a foray into that discussion will likely confuse things even more.
"Discipline matters more than allocation.” ─William Bernstein

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Earl Lemongrab
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by Earl Lemongrab » Mon Aug 13, 2018 3:28 pm

livesoft wrote:
Sun Aug 12, 2018 10:03 am
If I owned a REIT fund that was going to lose money, then I would want to own it in my tax-deferred accounts.
Wouldn't you want it in taxable?
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by retiredjg » Mon Aug 13, 2018 3:34 pm

Tee hee....yes, he probably would. :happy

livesoft
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by livesoft » Mon Aug 13, 2018 3:43 pm

I was waiting for that question. No, because the dividends would not be qualified while I was waiting for the darn thing to lose money.
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Earl Lemongrab
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by Earl Lemongrab » Mon Aug 13, 2018 4:07 pm

livesoft wrote:
Mon Aug 13, 2018 3:43 pm
I was waiting for that question. No, because the dividends would not be qualified while I was waiting for the darn thing to lose money.
Excellent. You get a gold star this time.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

retiredjg
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by retiredjg » Mon Aug 13, 2018 4:11 pm

Don't be stingy. He deserves at least 2 gold stars. :P

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iceport
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Re: REIT placement... Why not a Roth? Why tax-deferred?

Post by iceport » Mon Aug 13, 2018 4:46 pm

I still say that's the wrong answer.

"Don’t gamble"; take all your savings and buy some good REIT, and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.
"Discipline matters more than allocation.” ─William Bernstein

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