Many people who are fortunate enough to have a 401k retirement plan through their employers never understand all the benefits associated with this versatile retirement savings option, particularly if their employer has granted them self-directed benefits. Employers who offer a self-directed 401k plan to their workers have given them the flexibility to invest in any asset, as long as it is legal according to the Internal Revenue Services and the self-directed 401k rules.
If your employer offers a self-directed 401k plan, consider yourself very fortunate. You have the ability to increase your retirement savings by investing in other assets besides stocks, bonds, and mutual funds. You can invest in real estate, tax liens, precious metals, foreign currency, private placements, and much more. Your options are expansive, giving you the chance to secure your future even further than what a traditional 401k or other type of retirement plan offers.
What are the Self-Directed 401k Rules?
Essentially, there are three main self-directed 401k rules, which mean it isn’t too complicated to use your 401k funds to invest in traditionally profitable assets. The three basic rules are:
- You may not do business with any disqualified person. Essentially, this is anyone with a direct or indirect relationship to you, the plan participant. Disqualified persons include your spouse, your mother or father, your son or daughter, your son or daughter’s spouse, the custodian or trustee of the plan, an investment manager or advisor, or any estate, trust or, partnership in which you have a 50 percent or greater interest. Your siblings, cousins, aunts, uncles, and friends are not disqualified persons.
- You may not invest in collectibles such as artwork, automobiles, rugs, antiques, stamps, and most coins. In addition, you are not allowed to invest in life insurance contracts or alcoholic beverages. Note that the IRS does allow you to invest in some American gold coins, including one-ounce, one-half-ounce, one-quarter-ounce, and one-tenth-ounce American Gold Eagle coins. You can also invest in one-ounce silver coins minted by the U.S. Treasury Department and gold, silver, platinum, or palladium bullion.
- All transactions must be made at an arm’s length, which means you must be acting in your own self-interest and not under duress from another party.
If you want to use your self-directed 401k funds to purchase an asset, all you have to do is ensure that you are following these basic rules. It’s really that simple. You can initiate the process of purchasing these assets by requesting, in writing, that your administrator contact the plan’s trustee to make the purchase.
What Are the Pros and Cons of a Self-Directed 401k?
The benefits of a self-directed 401k plan are clear. You have total control over what happens with your funds. You can simply write a check and take immediate action toward making an investment that could greatly impact your retirement savings. You do not have anyone telling you how to invest your money, although you can certainly take advantage of professional investment advice if you wish to. You are responsible for your own financial decisions both for the present and the future.
Of course, the exact feature that makes a self-directed 401k account a benefit can also make it a drawback. Having complete control of your 401k funds, even if you follow the self-directed 401k rules, can lead to financial ruin if you don’t make good investments. For this reason, it is always recommended that you seek professional financial advice before writing a check for any asset, particularly if you are new to these types of investment. With a self-directed 401k, you can make your financial future better, but only if you are careful and make the right decisions.
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