The Real Estate Blog

Self-Directed IRAs & 401(k)s — Invest in Real Estate and More

It doesn’t take empirical research to know that many people are currently losing value in their revered IRA and 401(k) accounts due to the current economic instability. While the “good times” in the markets should certainly return to some degree, many people are looking at what they “think” is a new alternative. What is this “new” alternative? Well, it isn’t new at all…..individuals taking charge of their own retirement assets by self-directing.

In a July 1, 2007 piece by Ann Brenoff titled “self-directed IRAs turn to real estate,” Brenoff states that such plans “…let individuals determine what, when, and where to invest their retirement money. And they are catching on — in no small part thanks to the stock market’s volatility and the real estate market’s recent riches.”

Some would argue that even when the real estate market is not experiencing riches, there is great validity in investing in non-traditional assets, such as real estate. Not only is such an investment a truer diversification of one’s assets, but most people will experience that real estate has been a significantly proven commodity in long-term investing.

Interestingly enough, real estate as well as other non-traditonal assets have always been a permissible asset which can be held within an IRA or 401(k) plan. The problem is that most institutions that are selling the IRA and 401(k) investments are selling only stocks, bonds and mutual funds where they receive a commission….so, while it would be nice to think that they would direct you to such an opportunity, many in the financial services field either do not know that this is permissible OR have a selfish interest in not advising you about this possibility.

But what about if the individual is still employed at their company where their 401(k) currently sits? As Ms. Brenoff states, “but ERISA or no, the other thing standing in your way may be your employer. If your IRA is held in a company plan through your job, the plan’s guidelines may specify what type of investments can be made — and real estate is rarely among them. If this is the case, establishing a self-directed IRA isn’t an option until you and your employer part ways. Once you leave, you can roll over the funds in your IRA and 401(k) to a self-directed IRA.”

This is very true. Typically, most employer (there are exceptions with some larger employers) 401(k) plan documents do not allow non-traditional asset investments, as a general rule, one cannot take current 401(k) assets and self-direct these investments. However, once you have left employment, this opportunity certainly exists for you. And, if you are self-employed (even IF you are also a W-2 employee elsewhere) you have, in my opinion, a better advantage….the opportunity to create a self-directed (traditional or Roth) 401(k) plan. This type of plan will give an individual more options than an IRA.

And, while this is a growing trend, it will only continue to grow as an option to individuals. As capital markets expert Steve Heideman states, “Not that all individuals should or will self-direct, but what I have seen with the clients that I work with who self-direct is that they have the option of having true checkbook control of their assets. Not only can they make the choice of what non-traditional investments they may choose to invest in, but can maintain their investments in the “traditional” offerings of stocks, bonds and mutual funds. We are finding that more and more of our clients are asking us to assist them in this process.”

But, Brenoff concludes in her piece, that experts such as Jeff Nabler of the IRA Association of America, strongly urge people to consult a professional adviser before moving their money into one. “For one thing, the tax laws concerning self-directed IRAs are complicated — and likely beyond a layman’s interpretation. Mistakes can be costly; early withdrawal penalties may be imposed if funds are misused,” Brenoff stated.

Welcome to the world of self-directing…..it is a journey that, for some, will be an extremely gratifying experience.

John R. Park is President of PGI SelfDirected and co-founding Partner of Fulcrum Investment Network

Self-Directed IRAs & 401(k)s — Invest in Real Estate and More

It doesn’t take empirical research to know that many people are currently losing value in their revered IRA and 401(k) accounts due to the current economic instability. While the “good times” in the markets should certainly return to some degree, many people are looking at what they “think” is a new alternative. What is this “new” alternative? Well, it isn’t new at all…..individuals taking charge of their own retirement assets by self-directing.

In a July 1, 2007 piece by Ann Brenoff titled “self-directed IRAs turn to real estate,” Brenoff states that such plans “…let individuals determine what, when, and where to invest their retirement money. And they are catching on — in no small part thanks to the stock market’s volatility and the real estate market’s recent riches.”

Some would argue that even when the real estate market is not experiencing riches, there is great validity in investing in non-traditional assets, such as real estate. Not only is such an investment a truer diversification of one’s assets, but most people will experience that real estate has been a significantly proven commodity in long-term investing.

Interestingly enough, real estate as well as other non-traditonal assets have always been a permissible asset which can be held within an IRA or 401(k) plan. The problem is that most institutions that are selling the IRA and 401(k) investments are selling only stocks, bonds and mutual funds where they receive a commission….so, while it would be nice to think that they would direct you to such an opportunity, many in the financial services field either do not know that this is permissible OR have a selfish interest in not advising you about this possibility.

But what about if the individual is still employed at their company where their 401(k) currently sits? As Ms. Brenoff states, “but ERISA or no, the other thing standing in your way may be your employer. If your IRA is held in a company plan through your job, the plan’s guidelines may specify what type of investments can be made — and real estate is rarely among them. If this is the case, establishing a self-directed IRA isn’t an option until you and your employer part ways. Once you leave, you can roll over the funds in your IRA and 401(k) to a self-directed IRA.”

This is very true. Typically, most employer (there are exceptions with some larger employers) 401(k) plan documents do not allow non-traditional asset investments, as a general rule, one cannot take current 401(k) assets and self-direct these investments. However, once you have left employment, this opportunity certainly exists for you. And, if you are self-employed (even IF you are also a W-2 employee elsewhere) you have, in my opinion, a better advantage….the opportunity to create a self-directed (traditional or Roth) 401(k) plan. This type of plan will give an individual more options than an IRA.

And, while this is a growing trend, it will only continue to grow as an option to individuals. As capital markets expert Steve Heideman states, “Not that all individuals should or will self-direct, but what I have seen with the clients that I work with who self-direct is that they have the option of having true checkbook control of their assets. Not only can they make the choice of what non-traditional investments they may choose to invest in, but can maintain their investments in the “traditional” offerings of stocks, bonds and mutual funds. We are finding that more and more of our clients are asking us to assist them in this process.”

But, Brenoff concludes in her piece, that experts such as Jeff Nabler of the IRA Association of America, strongly urge people to consult a professional adviser before moving their money into one. “For one thing, the tax laws concerning self-directed IRAs are complicated — and likely beyond a layman’s interpretation. Mistakes can be costly; early withdrawal penalties may be imposed if funds are misused,” Brenoff stated.

Welcome to the world of self-directing…..it is a journey that, for some, will be an extremely gratifying experience.

John R. Park is President of PGI SelfDirected and co-founding Partner of Fulcrum Investment Network