Kris Krohn: Using your 401K & IRA to Invest in Real Estate

Kris Krohn is a well-known real estate investor, investment coach and author. As the founder of Strongbrook, he developed real estate investment formulas that have helped people achieve financial stability by generating residual income. Here Kris Krohn answers questions about the viability of using 401(k) and IRA funds in real estate investment. Oceans 2003: Don’t many people find it unconventional to use retirement funds in real estate investment? Kris Krohn: Yes, they do. But the American public has been conditioned to believe that there is only one good way to prepare for retirement and that’s just not true. Oceans 2003: What do you mean?

Kris Krohn: The old three-legged retirement stool used to have a pension as one leg, social security as another, and savings as the third. In the last 25 years that stool has become a wobbly two-legged one. A 401(k) and the hope of Social Security is all most people have now.

Oceans 2003: You mean that companies no longer promise pensions?

Kris Krohn: That’s one leg of the stool gone. The other issue is that, as the 2008 financial crisis showed us, stocks are by no means stable.

Oceans 2003: What exactly is a 401(k)?

Kris Krohn: A 401(k) it is a tax-deferred account typically tied to the volatile stock market, and an account that the IRS grants a temporary tax-deferred status during your working years.

Oceans 2003: How did the 401(k) get its start?

Kris Krohn: The 401(k) was originally instituted to give employers tax write-offs and provide supplemental income for retirees, but it was not originally meant to fund retirement.

Oceans 2003: And are there fees associated with 401(k)s?

Kris Krohn: Yes—there are 17 different fees wrapped in to most 401(k) plans, all legal. They include wrap fees, finder fees, soft dollars, shelf space, revenue sharing, 12B-1 fees, and more.

Oceans 2003: Do the restrictions on contributions really make sense?

Kris Krohn: Not at all. If you contribute too much money to your individual retirement account (IRA) in a year, you are subject to penalties from the IRS.

Oceans 2003: What are those limits?

Kris Krohn: The maximum is $5,000 per year for those under age 50, $6,000 for those over 50. If you start saving at age 25, max out the contribution every year, and the investments in your IRA perform marginally well, you will only have saved a total of $215,000 come retirement.

Oceans 2003: What’s a viable alternative?

Kris Krohn: It’s called a self-directed IRA and allows investors to use contributions in a limited number of non-equity investments, including real estate.

Oceans 2003: What’s the real advantage?

 Kris Krohn: Self-directing an IRA or a 401(k) simply gives a person control over dictating where and how he or she wants to invest those IRA or 401K funds.

Oceans 2003: But this is not for everybody, correct?

Kris Krohn: No, but for many clients it makes sense to withdraw funds from a retirement plan and use the money to put down on property, when financing is an option. Real estate provides something the stock market generally does not and that is residual income in the form of rent.

Oceans 2003: And appreciation is still a factor, correct?

Kris Krohn: Yes, and the real estate market is coming back in a big way.

Oceans 2003: Investors should carefully think it through, right?

Kris Krohn: Of course. If someone feels any anxiety about using retirement plan monies to invest in real estate, it is important to do plenty of research. Also, investors will need to step outside of a traditional retirement plan mentality to consider qualified funds in a different way.

As founder of The Strongbrook Group, Kris Krohn specializes in helping Americans develop and manage wealth.