Well, practically speaking and based on IRS and DOL regulations, the tax code for 401K plans apply to all 401K plans. However, most people are not familiar with the fact that there are some different 401K eligibility and 401K reporting requirements for 401K plans and that is what we are going to introduce.
Let’s take the 401K that most of you are familiar with only because you probably participated in one. We will call it an “Employer Sponsored Company 401K”. This is the type of plan where you are W-2 employee and you qualify to participate in the company’s 401 plan. Typically, you will have some type of employer match for your participation. You have the ability to invest your funds into stocks, bonds and mutual funds. Try asking for the 401K “checkbook” and you know what the answer to that request is….you got it. No to that. Try asking your employer if your funds can be invested into non-traditional assets such as real estate, precious metals and hard money loans….yep, you are right, you won’t be allowed to do that either.
The second type of 401K we will discuss is what many self-employed individuals have and that may be what is referred to as an I401K, a Solo K or Individual 401K plan. Many individuals will have these types of plans established for their retirement benefit and will house their accounts with various, nationally-recognized companies. Even though this is an individual 401K plan, the custodian of the plan will still be one of these financial services companies and, as such, they will not allow you to invest in any financial products other than what they sell….which is going to be stocks, bonds and mutual funds. Heck, they may even say that their 401K plans are self-directed….in most cases, their self-directed parlance is just another way of saying that they will offer you a wider menu choice of….you got it….stocks, bonds and mutual funds.
Now, imagine an individual self-directed 401K plan where YOU serve as the 401K trustee of your own plan and, as such, do not require or are forced to have a custodian? Can you do this? Yes, if your plan is correctly established. Can you invest in assets outside the assets of stocks, bonds and mutual funds? Yes, provided you comply with all IRS and DOL regulations and do not invest in IRS disqualified assets….this would constitute an IRS Prohibited Transaction. Unfortunately, most of us have been mentally conditioned (I guess a nicer way of saying brainwashed) into THINKING that we can only invest in traditional assets such as stocks, bonds and mutual funds. BUT, does the IRS disallow investments outside of this traditional world? No, in fact, a qualified 401K plan can invest in any asset class other than collectibles.
Further, since you are now your own trustee, can you in effect control that retirement checkbook? Yes, again, provided as legal trustee of the plan, you operate the plan in full compliance with the tax code for 401K plans.
Is a self-directed 401K in your best interests? Who knows. That is a decision you will have to make and a decison that should be seriously considered AND in consultation with your tax and/or legal professional. However, if you want greater control of your retirement assets AND want to invest as YOU see fit…versus being told what options you have from your 401K custodian, you many want to seriously consider this option.
And, one last benefit of this type of plan….how would you like to have checkbook control of your retirement assets AND invest in ANY traditional and non-traditional plan ALL from one account? You can!
As always, the information provided is intended to be educational and informative in nature and is not intended as, nor should it be interpreted as, any form of tax, legal, financial or investment advice. Always consult your respective tax or legal professional.