Q. I want to invest in real estate, but all of my retirement money is in retirement accounts like 401(k)s and Roth IRAs. What are my options?

A. Retirement accounts are, in many respects, a physician’s delight. These accounts provide tax-protected growth, which allows for higher returns, enlarging your retirement nest egg. They also facilitate easy estate planning and excellent asset protection in most states. Doctors have sufficient income to be able to maximize these advantages and also generally have more tax-protected accounts available to them, including 401(k)s, 403(b)s, 457(b)s, 401(a)s, SEP-IRAs, individual 401(k)s, profit-sharing plans, defined benefit/cash balance plans, health savings accounts (HSAs), and backdoor Roth individual retirement arrangements (IRAs). They are also more likely than most to benefit from the tax rate arbitrage available by deferring taxes from their highly taxed peak earnings years to what is usually a much lower marginal tax rate during retirement.

These advantages should make a doctor very hesitant to pass on a retirement account contribution, much less actually withdraw money from an account before they have to in order to pay living expenses or meet federally mandated required minimum distributions beginning at age 72. In fact, any time I hear of an “adviser” trying to talk a physician investor into withdrawing money from a retirement account, my first assumption is that the adviser is selling something to a physician inappropriately.

Doctors are increasingly interested in real estate investing these days, especially after seeing just how fragile their earned income could be during the recent COVID-19–associated economic downturn. Passive income seems to be the cry of the day. Real estate has always been an attractive asset class, offering high returns, low correlation with both stocks and bonds, easy leverage, and some unique tax advantages (primarily depreciation). The fact that a large portion of its return comes in the form of regular income does not hurt either. I invest in real estate and think any doctor interested in it should include it in their portfolio.

However, a lot of doctors have the vast majority or even all of their long-term investment money inside retirement accounts or perhaps are not maxing out these accounts. How can they invest in real estate?

First, realize that there are many different ways to invest in real estate. Although most people think being a real estate investor means buying the house down the street and renting it out, there are many other ways to do it that often provide much more diversification and require far less hassle. One of the easiest is simply to invest in publicly traded real estate companies, either directly or through a mutual fund. Many of these companies are real estate investment trusts (REITs). One of the most popular mutual funds is the low-cost Vanguard REIT Index Fund, which essentially buys all of the publicly traded REITs in the United States. This fund or another similar to it is likely available in your 401(k) and is certainly available in your Roth IRA at the best mutual fund companies, such as Vanguard, Fidelity, or Charles Schwab. These funds are also available as exchange-traded funds that can be purchased at any brokerage firm, whether inside or outside a retirement account.

There are also private real estate investments, including syndications (where many investors combine funds to buy one large property, such as an apartment complex) and private funds. These investments are typically only available to accredited investors (although most emergency physicians qualify by virtue of their income) and offer a few tax advantages over a REIT mutual fund. Primarily, they pass through the depreciation from the property to shield some or all of its income from taxation. However, these investments can be purchased inside a retirement account—the account simply has to be a “self-directed” individual 401(k) or IRA. There are even self-directed HSAs these days. While these do charge more than you would pay for a non-self-directed account at a good mutual fund company or brokerage, the benefit may be worth the extra cost to you.

Can you just buy the house down the street with your self-directed IRA? Yes. Just remember that every dollar going into that house has to come from the IRA and every dollar coming out of it must go to the IRA. Unfortunately, if you have a mortgage on that house, you will run into the unrelated business income tax. Using a self-directed individual 401(k), available to independent contractor physicians, will avoid that tax.

Obviously, the cleanest option if you want to invest directly in real estate is simply doing it outside of your retirement accounts. If you work a little more or spend a little less, you may be able to max out those retirement accounts and still have something left over to invest in real estate. Another option is to use a 401(k) loan for the down payment on your property. You can borrow the lesser of $50,000 or 50% of the value in the 401(k) for up to five years. The interest you pay will go back into your 401(k) account, although you will miss out on the returns of whatever that money would have been invested in within the 401(k). Keep in mind that if you quit or are fired, that loan will have to be paid back by tax day (including extensions) for the year you separated from the employer or you will owe both taxes and penalties on it.

Still, a 401(k) loan is almost surely better than avoiding a contribution in the first place or, worse, making an early withdrawal from the account. When you withdraw money, you will not only pay taxes on it at your ordinary income marginal tax rate, you will also owe a 10 percent penalty on it. This means that 35 to 50 percent of the money you withdraw will go to the IRS rather than your new real estate investment. That is not a great idea, no matter how attractive an investment a property may seem.

Real estate can be a great investment option. It can provide solid returns and help diversify a stock and bond portfolio. It is best if your real estate investment represents an addition to your retirement account contributions rather than in place of them. You can also invest in real estate within your retirement accounts as long as you follow the applicable rules.