Should I invest in real estate in my defined benefit plan or an IRA or 401(k)?

You can use a defined benefit plan to invest in what’s called non-qualified assets, such as real estate. But as a general rule, we recommend against it for several reasons.

First of all, there is added plan complexity. This involves valuations at the end of the year, bonding requirements, and a more complex form 5500 filing. As a result of the increased compliance and complexity, we charge an additional $500 annual fee when a plan has non-qualified assets.

Second, most people have IRAs or 401(k)s. These plans also allow for self-directed assets. However, because they’re defined contribution plans and not defined benefit plans, they do not have valuation issues or funding problems like a defined benefit plan. So they are much better structures for investing in real estate.

Third, defined benefit plans are great when the goal is to make significant tax-deductible contributions. But real estate and other investments can lead to riskier and more volatile returns. This can make your plan funding very inconsistent. In fact, having very high investment returns might restrict or severely limit you from contributing to the defined benefit plan in the future. However, if you had those higher returns in an IRA or 401(k), you would not have the same restrictions.

I have seen clients who want to do real estate in a retirement plan, but when I ask them about their portfolio mix they often have qualified assets (stocks, bonds, mutual funds, etc.) in an IRA or 401(k). So generally, I would advise you to use those plans first for real estate. Once that is addressed, you can make subsequent non-qualified investments in a defined benefit plan. This assumes you want virtually all your assets in real estate and other non-qualified investments.

But again, you certainly can have their real estate in a defined benefit plan if it meets your goals and you understand its risks.