Invest Some Land in Your 401(k) Account

Physician's Money DigestApril15 2003
Volume 10
Issue 7

Self-employed physician-investors cannow buy real estate to put in their401(k) accounts. Single-participant 401(k)s,introduced with the 2002 tax code, giveself-employed individuals a retirement plansimilar to those available to employees.


An article in states thatsingle-participant 401(k) plans are thefastest-growing segment of the definedcontribution market. It wasn't until thepassage of the Economic Growth and TaxRelief Reconciliation Act of 2001 (EGTRRA)that they became an attractive investmentchoice for sole proprietorships.

The result is that more insurance andfund companies are introducing single-participant401(k) products. Not surprising,considering that according to ExpertPlan(, an Internet-basedprovider of retirement plans, there arealmost 18 million 1-person companies inthe United States. This past year, ScudderRetirement Services introduced ScudderPersonal(k); John Hancock Funds launchedTotal 401(k) for Owners; and CUSO FinancialServices debuted Solo 401(k) Your Way.

According to , the newEGTRRA rules on contribution limits anddeductibility for 401(k) plans allow highertotal contributions per employee thanwere permissible under the old law. Underprevious tax rules, total deductible contributionsto a 401(k) plan by an employerincluded both the employee's salary deferraland the employer's contribution, limitedto 15% of total compensation, up to$170,000. Under the new rules, totaldeductible contributions to a plan by anemployer exclude employee salary deferralsand are raised to a limit of 25% oftotal compensation, up to $200,000.

Wall Street Journal

The first step in this process is to open asingle-participant 401(k) account at a brokeragefirm that allows investors to put401(k) money into real estate. A report inthe says retirement savingsthat you may have from other investmentplans—such as corporate 401(k) accountsor other 1-person plans (excludingRoth IRAs)—can be rolled into the single-participant401(k). In fact, approximatelyhalf of single-participant 401(k) accountsare rollovers. The maximum amount thatcan be put in each year is $41,000. The followingexample illustrates the process ofputting 401(k) money into real estate:

An investor with $200,000 in a 1-person401(k) sees a property listed for $200,000,which they consider undervalued. With$10,000 of rental income, the annualreturn would be 5%, and any appreciationof the property's value would stay in the401(k) when the investor sells the property.If an investor buys it with cash, then therental income isn't subject to income taxesin the 401(k). If the property is mortgaged,income taxes apply to any rental incomeand are paid out of the 1-person 401(k).


Very few brokerage firms are allowingthis. Entrust Administration, Inc (800-392-9653; does.Salomon Smith Barney also allows individualsto invest in real estate in their single-participant401(k)s, but doesn't recommendit because of the potentially highadministrative costs that go along with therelatively low amount of money to be invested.That's also why real estate investmentsnormally aren't included in regular401(k)s. One-person 401(k) plans are self-run,which means that the responsibilityfor its administration goes to the investor.

Buying real estate for your 401(k) presentssome additional complications.Neither the investor nor any of their relativescan live in the building. Also, a separatechecking account in the name of the401(k) plan is required for a rental property.This account is used to pay for maintenanceand property taxes on the real estate.Owners are required to get an annualappraisal of the property's value and reportit to the IRS. If the assets exceed $100,000,the owner must file a Form 5500EZ.

Despite difficulties, including realestate in single-participant 401(k)accounts could be a good tax-protectedinvestment for self-employed investors.According to Gary Pokrant, a CPA withthe accounting firm of Reznick, Fedder &Silverman of Bethesda, Md, for thoseindividuals who know what they're gettinginto, real estate inclusions can providegood returns.

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