A REIT is a Real Estate Investment Trust. These entities are essentially real estate holding companies with publicly traded ownership shares; they trade like stocks.
Adding REITs to your retirement savings may be a good idea. Here's why and how
1. REIT values go up and down much like stocks
Real estate prices tend to move relatively slowly as compared to stocks, but REIT prices move more like stocks than real estate. As a result, the appeal of a REIT is not tied to its price movement.
2. REITS generally pay generous dividends
This happens in part because the company is not taxed at all. All of the profits are distributed to the owners and the owners pay the taxes. That sounds terrible, doesn't it? You don't want to be paying the company's taxes, do you? If you hold the REIT in an IRA account, the tax liability will be deferred until you take the cash out. If you hold the REIT in a Roth IRA, you'll never pay the tax at all.
3. The key reason to be putting REITs into your retirement savings is that they take full advantage of the tax benefits of your IRA
In contrast, if you own a growth stock for 30 years that increases in value but pays no dividends, having that asset in your IRA could actually increase the tax you pay. All withdrawals from a traditional IRA will be taxed as ordinary income. Capital gains (the income from selling stocks at a profit) are presently and have generally been (though not always) subject to a lower tax rate.
Dividends on regular stocks are also taxed at the lower capital gains tax rate (this is a relatively new feature in the tax code and one may fairly wonder if it will persist). Inside an IRA, however, the tax rate on dividends is the same. In a traditional IRA, all the taxes are deferred until withdrawn during retirement. In a Roth IRA, neither divided is subject to tax ever.
What this means is that the appreciation and dividends on regular stocks do not benefit as much from the tax benefits of an IRA as do REITs. Of course, investing in assets that earn less won't help your retirement account either, so blindly or randomly choosing a REIT or two wouldn't be wise.
4. Buying a REIT fund, either a mutual fund or an ETF (exchange traded fund), would be a great way to get REITs into your IRA or 401k
(if a REIT fund is offered for your 401k by your employer). You get the benefit of a professional manager who invests not in one or two but in dozens of REITs, protects you from the risk that one particular REIT blows up due to mismanagement and leaves you with the expected returns on real estate investments over the long haul.
5. As with anything else in investing, a bit of moderation is in order
A retirement portfolio made up entirely of REITs would be over-concentrated. If real estate values fell or interest rates fluctuated "just so" at the time you wanted to retire, your entire portfolio could be reduced, forcing you to delay retirement or substantially adjust your retirement plans.
Keeping in mind that your retirement account should have a healthy balance of stocks and bonds (with some cash added in as you approach retirement), REITs fit into your savings as part of your stock investments.
