The Bottom Line EXTRA: Real estate options in public retirement plans

A reader of "The Bottom Line" column in The Oregonian daily newspaper e-mailed me with a question about 403(b) plans:

I have been teaching at Tualatin High School for nine years and am looking for ways to expand my retirement. Do I have any real estate investment options with my 403(b) plan, now held by ING Group and Vanguard?

Here's my answer:

Most 403(b) plans, which for school or government employees are the equivalent of 401(k) plans, offer only annuity insurance, so you're fortunate to be with companies such as ING Group and Vanguard. They offer mutual funds, money market funds and fixed accounts with guaranteed interest.

Both ING and Vanguard also offer real estate-related securities in the form of real estate investment trusts. But it's up to your school's plan administrator to decide whether to include it as one of your options.

REITs are funded from rental income and interest generated by large-scale investments in such commercial properties as shopping malls and office buildings or in mortgages or mortgage-backed securities. These investments averaged 12 percent annual returns over the past 20 years, according to Thomson Financial.

If you're set on owning property and have only your 403(b) funds to make that investment with, you have other options. You can borrow money from your 403(b) for real estate investments. You'll pay annual interest, at rates determined by your individual administrators, on whatever money you withdraw until it's paid back.

But there are caveats to consider about 403(b) loans. You may not be able to change to another plan until the loan is paid back, usually within five years on quarterly payments. "If you miss a payment, then the unpaid balance is treated as an early distribution, triggering taxes and a 10 percent penalty," says Vanguard's David Vasquez, registered representative for small organizations such as schools.

Dan Otter, an elementary school teacher who runs the 403(b) resource Web site 403bwise.com, thinks the risks outweigh the benefits when missing a payment can trigger a loan default that makes the loan ineligible for reinstatement. "I would be very cautious about borrowing 403(b) money," Otter says. "It's too risky and is simply borrowing against one's future."

The safest option is to wait to roll over your 403(b) funds to an IRA account that allows self-direction in real estate or start a new IRA account entirely.

If you're making less than $110,000 per year or $160,000 as a couple, your best bet would be to start a Roth IRA. You can contribute as much as $4,000 in 2006 or up to $5,000 if you're 50 or older, and more every year after, and you can rollover any amount from other retirement accounts. Gains or rental income made from the real estate investments purchased by the Roth are tax free as long as the property is held within that account.

-- Jennifer D. Meacham, "The Bottom Line" business and personal finance columnist, The Oregonian and Gather.com

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