This is Part 3 of our “Home Alone” tribute and your “w00f woof” IRA or self-directed IRA. You may remember from the first two posts that we outlined that while an IRA is never a bad thing, compared to a 401K it is like dog food….thus, woof woof. And, similarly, the self-directed 401K clearly outpaces the self-directed IRA.
That being said, what is a third reason of why the 401K is a clearly more preferred retirement plan of choice for your retirement plan savings…provided you qualify for the plan? Penalties Associated with Prohibited Transactions.
It is not as important to explain what each Prohibited Transaction is, but PT’s are commonly broken down into 1) Disqualifed Assets, 2) Disqualified Individuals, and 3) Self-Dealing. Since this post is not so much on what the transactions are rather as why the 401K is better, it is important to know that the penalties for a PT within an IRA is, pretty much, a death sentence for the plan. Full distribution, full taxation, potential additional penalties if the event occurs prior t 59 1/2. In contrast, the 401K penalties are not as crippling and, in many cases, taxes owed may be able to be reduced or eliminated.
Moral of the story……it is just one more reason why, if you qualify, you should strongly consider the 401K over the IRA.
As always, the information provided is for educational purposes only and is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You must always consult with your respective professional in all matters.