I need help - I have a traditional IRA with a mix of regular stocks that I am considering changing over to mreits (mainly AGNC). Are there percent holding limits of a particular mreit stock in a traditional IRA? Can I hold the whole IRA in mreits and not run afoul of traditional IRA rules? Are the dividends of mreits tax exempt when held in a traditional IRA? Any help will be greatly appreciated.
My response should give you an idea why it may very foolish to obtain this type of advice from a msg board.
Futures (Financial and Commodities) and Section 1256 investments can be in a self directed IRA. A US issued gold coin can be in a self directed IRA__can have numismatic (collectible value). Investment plans through an employer would probably restrict these.
There are nine (yes nine) ways to withdraw money from an IRA without penalty (normally 10%) before 59.5 years of age. Most like medical expenses are common knowledge. Within that nine is a lesser known distribution method of annuitization. There are three different methods to do this. They all require a contractual agreement of sorts with the IRS. The easiest and most common is reaching agreement with the IRS on your own life expectancy and equal distribution over that life expectancy. This almost anyone can achieve. The other two are referred to as “fixed amortization method” and the “fixed annuitization method.” These are more involved and will probably require a tax professional.
These are glossed over in Publication 590 but the meat is in Revenue Ruling 2002-62, Internal Revenue Bulletin 2002-42.
Also it is not necessarily correct that all distributions become ‘ordinary income’ If you never took a tax deduction for contribution amounts that you were entitled to there is a method to keep some of that coin out of the IRS hands. I get paid very well to implement these strategies. It is this hidden gem in the Treasury Regulations that was basis for Roth IRAs.
Also, the comment ask the IRS. Even if you receive advice from IRS personnel (even in writing) it does not negate your responsibility if it is incorrect. That is not the same as a tax ruling.
You also have to be careful using a CPA for advance tax advice. If a CPA specializes in taxes they may provide good advice. But it is an Enrolled Agent (EA) that is the tax professional. Anyways only an EA or Tax Attorney can represent you in front of the IRS in court or hearings. They also have to be registered (a licensing of sorts) for the district and jurisdictional branch.
CPA, CPP, EA, CHFC, CTA, PMP
An IRA is an excellent place to hold mREITs since mREIT dividends get taxed at the full rate just like a short term capital gains. Normally I would not put a dividend stock in an IRA because it makes no since tax wise but in this case it makes perfect sense.
Not to be snippy or anything, but having an IRA and obviously having had your earnings put into it, your company should have clearly explained how IRAs work, I'm sure your HR department has brochures or something.
But, to be helpful - you can hold most anything you want, in any proportion, within an IRA, with (and this is not fully inclusive), exceptions like collectibles, certain options, maybe futures(?), but in general, regular stocks, bonds, are all fair game.
Anything your IRA makes OR looses has NO immediate tax consequences, no matter what kind of dividends, interest, capital gains or losses. Nothing you do is reported on any tax forms to the IRS until you withdraw.
Assuming you are referring to a traditional fully-deductible IRA, when you take a distribution, 100% of that is taxed as ordinary income, regardless of whether the gains (or losses) came from capital, interest, dividends, etc.
So, all depending on how close you are to taking money out (have to be 59.5 to avoid penalty), it's important to figure out what kind of things to put into it; problem with investments that generate 'qualified' dividends or capital gains, is that you don't get to take advantage of the lower tax rates (now, anyway) on such gains.
That's one good reason that mREITs such as AGNC are good for IRAs, even though the current dividend is NOT qualified, thus taxable at full rates, that doesn't matter for an IRA, again you're going to pay full rates on distributions anyway.
I'd say, if you have that option, high-income payers are even better in a ROTH IRA, where although you don't get a tax deduction up front for your contribution, ALL proceeds can be withdrawn totally tax-free, regardless of how the gains were made. So once you have a Roth IRA funded, the money can just grow, compound, go crazy for itself and you'll never pay any tax on it. Well, can't speak for all STATE tax rules, and there are some odd rules about how long you've had a Roth IRA, so even if you can't dedicate much money into one right now, it's a good idea to get an account established early.
"Are there percent holding limits of a particular mreit stock in a traditional IRA?" - No
"Can I hold the whole IRA in mreits and not run afoul of traditional IRA rules?" - Yes
"Are the dividends of mreits tax exempt when held in a traditional IRA?" - Yes
I would just like to add that the dividends are not tax exempt, but rather tax deferred until you start taking distributions. But it would be the same for any distribution taken from the IRA.