$500,000 in Realty Income and NNN REIT: How Much More You Keep in a Roth IRA

At the 24% federal bracket, the $28,100 a year that a $500,000 Realty Income (NYSE:O) and NNN REIT (NYSE:NNN) portfolio pays out costs $6,744 in federal tax when held outside a tax-advantaged account. The type of income matters as much as the payout size. REIT payouts face your full ordinary rate, and that makes Roth placement worth more for REITs than for most dividend stocks.

Why REIT Dividends Get Taxed Like Wages

Qualified dividends get the lower 0%, 15%, or 20% rates that apply to capital gains. A REIT can deduct the dividends it pays, so it pays little corporate tax of its own. Because of that, most of what it distributes comes to you as ordinary income, reported in Form 1099-DIV, box 1a, and taxed at your bracket rate. For tax year 2026, the 24% rate applies to taxable income over $105,700 for single filers ($211,400 for married couples filing jointly).

Two details work in a taxable investor’s favor. First, Section 199A, which is still active in the current Code, allows a deduction equal to 20% of qualified REIT dividends^[1] (26 U.S.C. § 199A(b)(1)(B)). Second, part of a distribution can be a nondividend distribution, reported in box 3. That portion lowers your cost basis now and is taxed later, when you sell. Every distribution is tax-free in a Roth, so both details become irrelevant.

$500,000 Split Two Ways: Roth Versus Taxable

Realty Income currently yields 5.18%. In September, it announced its 116th consecutive quarterly dividend increase^[2]. Third-quarter dividends paid of $0.813^[2] per share came to about 73% of AFFO of $1.12, and management raised 2026 AFFO guidance to $4.45 to $4.46. Because it pays monthly, a taxable account has an ordinary-income bill 12 times a year.

NNN REIT pays $2.48 a year. At the current price of $40.95, that works out to a 6.06% yield. Its AFFO payout ratio is 68%^[3], occupancy is 99.2%, and it has raised its dividend for 37 consecutive years. Of the two, it has the higher yield, so moving it into a Roth saves more tax.

At 24%, the Roth keeps all $28,100. The taxable account keeps $21,356. The gap is $6,744 a year, or $67,440 over 10 years with no growth assumed. An investor who takes the full Section 199A deduction cuts the tax to about $5,395, and the Roth still comes out ahead by that amount every year.

Higher Brackets Pay a Steeper Price for Taxable Placement

For 2026, the 32% rate starts above $201,775 ($403,550 joint), and 37% starts above $640,600 ($768,700 joint). In the top bracket, holding these two REITs outside a tax-advantaged account costs more than a third of their income.

What the Gap Grows to After 20 Years

The yearly figure understates the gap. If the $6,744 annual difference is reinvested tax-free at a conservative 4%, it grows to about $81,000 after 10 years and about $200,800 after 20. Those totals leave out share price gains and dividend increases. They measure only what the taxable account gives up by paying tax on the payouts. The cheapest time to shift REITs into a Roth is often the low-bracket window between your last paycheck and your first required withdrawal, which we explored in our free Roth conversion guide.

Three Moves Before Your Next Tax Filing

1. Check box 1a and box 3 on each REIT’s 2026 Form 1099-DIV. Box 1a shows how much counts as ordinary income, and box 3 shows how much reduced your cost basis.
2. Calculate the tax on your REIT dividends at your own 2026 bracket, then compare it with what converting those positions to a Roth would cost in tax this year.
3. In a phased conversion model, the highest-yielding ordinary-income holding creates the largest tax savings per dollar moved. In this portfolio, that is NNN REIT.

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