Quick Read – VNQ distributions are taxed as ordinary income, costing a 24% bracket investor $3,420 annually on a $500,000 position held in a taxable account. – Suze Orman recommends placing REITs inside Roth IRAs, where a $500K VNQ position avoids roughly $90,000 in cumulative…
xes over 20 years. – At the 37% bracket, every $1,000 of VNQ distributions costs $370 in annual federal tax outside a Roth, making account placement critical for high earners. – At the 24% federal bracket, a Vanguard Real Estate ETF (NYSEARCA: VNQ) generating 2.85% in distributions hands roughly a quarter of that income to the IRS every year it sits in a taxable account. Real estate investment trust (REIT) payouts skip the qualified-dividend rate, which means VNQ’s quarterly distributions are taxed as ordinary income at your marginal rate
That is the tax cost most VNQ holders never run the numbers on. The Tax Cost Most Investors Miss VNQ tracks the MSCI U.S. Investable Market Real Estate 25/50 Index, with weightings across Health Care REITs (16.4%), Retail REITs (14.2%), Industrial REITs (11.4%), Data Center REITs (10.9%) and Telecom Tower REITs (9.2%).
Because REITs pass through earnings to avoid corporate tax, the distributions they pass to shareholders generally do not qualify for the favorable long-term capital gains rate. They land on your 1099-DIV as non-qualified ordinary income. Suze Orman frames the placement decision directly: “REITs should be in retirement accounts … especially if it’s in a Roth retirement account, then all of a sudden you’re getting that income within the Roth retirement account and you’re not paying taxes on it.” The Tax Delta: Roth Versus Taxable at 24% Take a $500,000 VNQ position at the current 2.85% yield.