Retirement planning has always erred on the side of conservatism, with investors buying into investment vehicles that have been traditionally representative of retirement savings. Recently, however, a groundswell of entrepreneurship and risk-taking has brought a number of new 401k investment options to the forefront.

During the real estate boom, and in years since, investors have been lusting to use their 401k savings to buy rental property that can be used for income and equity. The idea itself is brilliant: use 401k savings to obtain loan on a home, find a tenant, and have someone over the course of many years buy you a home. While that idea is great in theory, it ignores a very basic part of 401k investing in tax-free growth.

Retirement Planning with a 401k

At its basis, the 401k is a very simple, tax advantaged retirement account that is used to corral assets in one box. This account, thanks to the 401k paragraph in the IRS code, receives certain tax benefits, and contrary to popular belief, a 401k isn’t inherently an investment vehicle; it’s just a chassis waiting for an engine.

There are certain investments which can and cannot be held in a 401k. While most plan for retirement with basic investments, many are getting creative. Real estate, for example, is commonly considered to be an asset that can be purchased with a 401k. However, real estate cannot be held in a 401k in its current form. Instead, 401k savings can be used to buy an investment home.

This is most commonly done by loaning yourself cash against your 401k retirement plan that is then used to finance a home. However, this does not mean that the home is part of your 401k; instead, your 401k cash is part of the home. Loans can be made for up to $50,000 or half your present balance, but must be repaid within five years.

Defaulting on a 401k loan might not hurt your credit score like other loans, but it does come at a cost. Failure to pay off a loan in five years turns the leftover balance into a withdrawal, creating a 10% penalty and requiring an immediate tax payment. Also, keep in mind that you cannot contribute to your 401k until this loan is repaid. Thus, you may miss out on many years of employer matching, which is often equal to several percentage points of total earned wages.

You could also go through an early withdrawal, but that generates a penalty of 10% on top of immediate taxation. Thus, someone in the 28% tax bracket would pay a whopping 38% of the amount withdrawn. Ouch!

All told, the process of borrowing against a 401k for speculative investment outside the walls of a 401k is difficult, costly, and often not worth the anticipated investment returns. In most cases, there are much better, less costly, and stressful methods for obtaining exposure to the investment of your choosing.

Exposure with Common Vehicles

Most often, people ignore the retirement investing opportunities that are already present in their 401k for more complicated investments perceived to be greener pastures. In fact, many 401k sponsors already offer so called Real Estate Investment Trusts, or through a self-directed brokerage account, almost any investment you can image. A self-directed brokerage account allows the purchase of any stock, bond. or mutual fund through your existing broker.

Exchange-Traded Funds

Ideally, 401k investors should start first with exchange-traded funds. These funds work much like mutual funds, but are instead bought and sold on the open stock market. However, unlike mutual funds. exchange-traded funds offer spectacularly low annual expense ratios rarely over 1% per year, with many index funds selling for less than 20 basis points annually.

Through an exchange-traded fund, 401k retirement investors can access the real estate market through the Vanguard REIT ETF (VNQ), a collection of popular real estate investment trusts for just .13% per year. Other more exotic investments like gold or silver can be purchased via the US Gold Shares (GLD) or iShares Silver Trust ETF (SLV). With those three exchange-traded funds, an investor can own gold, silver, and real estate without excessive withdrawals or complicated loan processes. Indeed, this is a win-win situation.

Income Investments

Few people even realize the opportunity for income investments with 401k cash, instead using post-tax earned income to make investments into popular, post-retirement income generators like annuities or other insurance products.

Through a 401k, investors can purchase annuities which operate very much like a classic pension program. Plus, with the employer match, your investment into your annuity can grow much quicker than it can in a post-tax, non-matched investment. To access these forms of income replacement may require a trip to your human resources division or a quick call to the fund sponsor. More than likely, they’ll be plenty happy to sell you an insurance product through your 401k with pre-tax dollars.

Classic Investments

Rounding out the list are the typical investments like target date mutual funds and basic stock or bond funds as well. These classic retirement investments are perhaps the most plain-vanilla, but have been used for decades to reach an investment sustained life post-retirement.

Mutual funds should be evaluated against their peers and compared as well to exchange-traded funds. Often, an exchange-traded fund can be found to replicate an already existing mutual fund, but do so at a fraction of the price.

While there have been perhaps hundreds of ill conceived 401k ideas since the retirement savings account was invented more than 30 years ago, there have been a number of new developments that allow investors exposure to new and exotic markets without the financial difficulty.

With the use of 401k funds, not only can investors involve themselves in other products, but they can do so without penalty and without putting their employer match in jeopardy. The 401k is one of the most versatile investing programs, but without proper structuring, or taxation due diligence, they can be half as much a blessing as they are a curse.