Dear Dr. Don,

I’m currently laid off from work and I have about $60,000 in my 401(k) account with my previous employer. I would like to roll it over into a self-directed IRA account to do some investments. Can I purchase income property without paying penalties? Is this a wise thing to do?

— Judy Jump-start

Dear Judy,

You can use a self-directed IRA to purchase an income property. In this process, you would complete a rollover distribution from your previous employer’s 401(k) account into a self-directed IRA account. The Bankrate feature, “Self-directed IRA a good bet?” explains the basics of a self-directed IRA and the pros and cons of taking this approach.

As the feature explains, a key component is finding the right custodian for your IRA assets. It’s not as simple a process as it is for financial assets like stocks, bonds and mutual funds.

You really don’t want to take this path without professional tax advice. A little professional real estate advice wouldn’t hurt either. You can’t invest in your personal residence but you can invest in income property.

Is it a wise thing to do? That’s a tough call. Personally, I’d rather manage the real estate exposure in my investment portfolio, outside of my personal residence, by using real estate investment trusts, or REITs. You gain a measure of professional management and diversification that you just can’t get by buying individual properties.

By doing it your way, you’re saying you can effectively manage the risk and make a return on your investment commensurate with that risk. I wouldn’t feel comfortable with that risk/reward proposition, but you may be comfortable with it.

To ask a question of Dr. Don, go to the “Ask the Experts” page, and select one of these topics: “Financing a home,” “Saving & investing” or “Money.” Read more Dr. Don columns for additional personal finance advice.

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