The OP is 34 years old, so about thirty years of growth and capital gains could go untaxed in a Roth IRA.
Well sure, but how much is $25K going to grow in 25 years to age 59? Let’s be generous and say 10x. So that’s $250K at the moment of retirement.
Let’s say you plan to live to age 84, or 25 more years. Divide your $250K of capital by 25, and you get $10K of income per year. This is almost certainly much less than the OP’s present-day income. So why eat the taxes now, at the higher rate, when he could defer taxes for higher growth and pay a lower rate on it in retirement?
For a Roth to make sense, you need to expect a lot of retirement income, which means you need a lot more capital than we’re talking about here. Or (for some reason) expect much higher wages in retirement (a period when most people don’t work at all).
Note that even with a Roth, which is an account designation, one must still make choices on the actual investment.
Passive income, when you’re only 34 and working, isn’t probably the most useful thing.
At the top, you might have something like Stone Harbor’s EDF that pays around 10% (e.g. about $208 a month) - but, it’s set up for people who are planning to die before too long. On average, the price of the fund goes down so over time that monthly payment will shrink and, with inflation going up year over year, it’s going to be shrinking a bit faster than the math would say that it would.
The general rule of dividends is that the higher the dividend, the sharper the decline in the price of the fund.
Companies which are growing tend to not pay dividends because they need that extra money to grow. A company like Amazon operates at a loss on the eternal expectation that they’ll be big enough next year to pay off what they borrowed in the pervious year.
At your age, you’ve got time to let compounding start working for you. If your investments do bupkis for a decade or two, that’s fine because you don’t really need it until after then but, at that point, you’ll really need it and you’ll need it to be a lot more than $25k. If you’re going to be retired from 65 to 100, stretching $25k out to buy everything you need and pay medical costs is going to be impossible.
If you absolutely want dividends, go to Fidelity and find their fund/etf research tool. It’s a pain in the ass to find on the site - I think you need to have an account - but you can set in things like a Total Market Return over five years greater than inflation (2%) and then find the highest dividend available among what’s left. But I’d really recommend focusing on growing that $25k.
It’s not hard to find a fund returning over 10% growth per year. USMV is real reliable, as well as PKW. If you do the math to compound those out for 20 years, you’ll be pretty happy that you went that route. And then once you’re older and you need a check every month, after you’ve retired, invest in a REIT, as well as some bonds and maybe still some growth funds, to diversify.
I wouldn’t recommend trading stocks - actual individual companies - unless you want to buy several dozen, keep up on the news for all of them, and trade actively - making a few changes once or twice a year, no more no less. A company can seem like it’s sailing for the sky and suddenly tumble down like a lead shot.
Feel free to play around with stocks but, it’s really just easier and safer to “buy it and forget it” with funds. Put the majority in funds.
That, of course, requires you have a tax-deferred option.
Most likely, the order of “uses” for that 25k would be:
- Establish an emergency fund (3-6 months of expenses)
- Fund any retirement account up to an employer match (if available) - 401k, either tax-deferred or Roth (depending on tax considerations)
- Pay off any high-interest debt
- Fully fund an HSA if that’s an option for you (high-deductible plan required)
- Fund a tax-deductable IRA, or Roth IRA, or backdoor Roth IRA (depending on income level)
- Finish fully funding employer plan to the limit (either tax-deferred or Roth, depending on tax considerations)
- Pay off medium-interest debt
- Fund a taxable account
- Pay off low-interest debt
You can find more here: Prioritizing investments - Bogleheads
Note that this is just about where to put the money (what type of account) not what to buy, which depends largely on your need and willingness to take risk in the markets.
Whether to buy REITs or a REIT fund depends on your overall investment plan. It should not be a decision made independently.
Well, obviously. If we’re assuming the option for a self-directed Roth, then we can assume the option for a self-directed standard IRA. I was contrasting those options.
Your point about tax-deferred versus non tax-deferred investing is valid, but I think the important thing is to invest the money (assuming immediate needs like debt and an emergency fund are taken care of) rather than just spending the money on frivolous stuff.
I didn’t have a job with a 401(k) in my twenties, so I only started investing once I turned 30. So while I have a decent sum now, I could have had more had I started earlier.
I think inaction is the biggest stumbling block.
I’m just responding to all the knee-jerk suggestions of “put it in a Roth” without any other qualifying context. A Roth isn’t always the best tax strategy for investing. It’s really important to contrast your current and forecasted tax situation.
Got it. I wasn’t assuming that a tax-deductible IRA contribution was an option, because it isn’t for many people. I think a traditional IRA without the tax deduction is pretty dumb (unless you do the immediate Roth conversion back door).
If you can do a tax-deductible contribution to a traditional IRA, that is probably best ($66k income limit in 2021 for single filers). Although if your are still in the 12% marginal tax rate then that’s a tougher call - I might just pay the tax now at that rate. But yes, if you are in the sweet spot of the 22% rate but below the IRA deduction limit then that is likely the way to go.
If you can’t because you are over the AGI deduction limit, then a Roth is probably better (but not guaranteed). The Roth has much loser withdrawal rules and no Required Minimum Distributions. Of course there is an AGI limit on Roth contributions, but Congress did not close the backdoor yet (it’s coming though…).
Either way, OP needs to consider emergency fund, loan repayment, and possibly HSA before worrying about how to buy REITs. More generally, a comprehensive investment plan needs to be made before sweating small details like what type of REIT to buy.
I don’t understand what you’re saying here, because all traditional IRAs feature tax-deductible contributions. It’s an option for most people because anybody who makes less than $109,000K AGI can open a self-directed traditional IRA.
Fidelity Investments offers “Fidelity Go” accounts where you put in money, select a strategy (Moderate, Growth, Growth with Income, Agressive, Extremely Agressive, etc) and let Fidelity invest your money in a spread of instruments that match your risk tolerance. They automatically rebalance your portfolio. Any new money you put in is also automatically invested. I think they have a small fee.
I find it far more convenient to let the pros take care of my portfolio than do it myself. I have burnt my fingers badly trading individual stocks myself, and have neither time nor appetite for it anymore.
A profit is by no means guaranteed, but over the long-term you should certainly see some upside.
If you are a super riskophile, go ahead and buy Bitcoin with it. If anything can turn $25K into a million it’s Bitcoin. It might also turn your $25K into dust. But then you are a risk-taker, aren’t you?
I guess it depends on your definitions of “many” and “most”. I think at least 25% of households are over that AGI limit. I would think a person casually thinking of tossing 25k in REITs might just be in that category.
But only the OP knows for sure. Either way I think we have covered all of his options.
I’m not sure what Fidelity Go entails, but I’ve tried robo-investing before in a taxable account.
My gripe was that they did a lot of asset rebalancing, sometimes in amounts that I would not consciously bother with if I were doing it myself. I had to report all these tiny gains and losses on my taxes at the end of the year, which quickly filled up a Schedule D with a lot of tedious bookkeeping.
Not saying it’s a bad strategy, just… watch out for the trading frequency and consider the tax implications. You could end up doing a lot of paperwork on small gains. I personally think mutuals or ETFs are preferable if you want someone else managing it.
I’m surprised that isn’t done in a fund-of-funds to minimize that impact.
Take a European trip! 
Well, if you’re just looking to secure a bit of beer money, US 10 year fixed is 2% right now, which would net you a whopping $500 / year on your $25,000 of principal. And then you get to pay federal taxes on that $500 to boot. Yay?
If you’re targeting $1,000-$2,000 / year, near-risk-free isn’t going to cut it, and you’ll have to expose your money to some form of loss. Junk bond rates are something on the order of 4.5% ($1,125 / year on your $25,000 principal), for example. An 8% / year investment is going to expose your principal to meaningful risk of loss over say, a 10-year or less time horizon.
You need to understand your risk tolerance and how much that extra $1.000 - $2,000 is worth to you.
Don’t you use an online filing service like TurboTax that lets you upload your 1099? I am still waiting on filing because Fidelity will provide me one 1099 for each account I have with them - which I presume takes care of every tiny profit and loss arising from their rebalancing operations. Am I mistaken?
Just for completeness here - although Treasuries have no credit risk, buying a 10-year Treasury exposes you to substantial interest rate risk (mark-to-market loss) if you are not committed to holding it to maturity. There’s significant risk of an inflation shock. It’s not clear to anyone to what extent the recent nutty inflation numbers are a temporary aberration. Look at VGIT, a proxy for 5-year Treasuries - it has dropped 7% in the past 12 months, over 4% in the past 2 months. And yields are still below 2%, at the low end of the long term historical range.
At the time that I did this, with the brokerage where I did it, there was no automatic upload of 1099. That’s why I say look into this before pulling the trigger.
You should consider that REIT dividends are mostly non-qualified and are taxed as ordinary income, while qualified dividends are taxed at the long term capital gains rate and receive more favorable treatment. If you’re doing both an IRA and taxable investments, make sure the REIT goes in the tax free portfolio.