Self-Directed IRAs and 401Ks — Oops, My Broker Wouldn’t Like This!

It doesn’t take empirical research to know that many people are currently losing value in their revered IRA and 401(k) accounts due to the current economic instability. While the “good times” in the markets should certainly return to some degree, many people are looking at what they “think” is a new and better alternative. What is this “new” alternative? Well, it isn’t new at all…..individuals taking charge of their own retirement assets by self-directing. And, the ability to use these self-directed accounts to invest in traditional (e.g., stocks, bonds and mutual funds) and non-traditional (e.g., real estate, hard money loans) assets from ONE account.

Self-directed IRA and 401K accounts let individuals determine what, when, and where to invest their retirement money. And all you have to do to see if they are catching on is visit your computer and google away. The ability to self-direct truly gives you what all financial “experts” always preach…..being diversified. Why only be diversified withing traditional assets…shouldn’t you be diversified among all assets classes?!

Some would argue that even when, for example, the real estate market is not experiencing riches, there is great validity in investing in non-traditional assets. Not only is such an investment a truer diversification of one’s assets, but most people will experience that assets, such as real estate, has been a significantly proven commodity in long-term investing.

Interestingly enough, real estate as well as other non-traditional assets have always been a permissible asset which can be held within an IRA or 401(k) plan. The problem is that most institutions and brokers that are selling the IRA and 401(k) investments are selling only stocks, bonds and mutual funds where they receive a commission….so, while it would be nice to think that they would direct you to such an opportunity, many in the financial services field either do not know that this is permissible OR have a selfish interest in not advising you about this possibility.

But what about if the individual is still employed at their company where their 401(k) currently sits? If your IRA is held in a company plan through your job, the plan’s guidelines may specify what type of investments can be made — and real estate is rarely among them. But this may be starting to change. If, however, this is the case, establishing a self-directed IRA or 401K isn’t an option until you and your employer part ways. Once you leave, you can roll over the funds in your IRA and 401(k) to a self-directed IRA or 401K.

This is very true. Typically, most employer (there are exceptions with some larger employers) 401(k) plan documents do not allow non-traditional asset investments, as a general rule, one cannot take current 401(k) assets and self-direct these investments. However, once you have left employment, this opportunity certainly exists for you. And, if you are self-employed (even IF you are also a W-2 employee elsewhere) you have, in my opinion, a better advantage….the opportunity to create a self-directed (traditional or Roth) 401(k) plan. This type of plan will give an individual more options than an IRA.

And, while this is a growing trend, it will only continue to grow as an option to individuals. A recent financial planner informed me that he has turned the corner, so to speak, and is now informing his clients about self-directed options. He was blunt when he stated that his clients had lost so much money in their accounts that he felt he needed to advise doing some self-direction JUST to maintain and keep his clients. He figured that his clients would still keep some money in “traditional” offerings of stocks, bonds and mutual funds, but he admitted that people want options…..and they need options.

But, people should be urged to consult a professional adviser before moving their money to see if self-direction makes sense for them, but to also be educated on IRS rules governing such investments….whether self-directed or not. Mistakes can be costly and no one wants to face a 10% excise tax for early distributions.

Welcome to the world of self-directing…..it is a journey that, for some, will be an extremely gratifying experience.

John R. Park is President of PGI SelfDirected.