In the self-directed IRA and self-directed 401K industry, a very common marketing term often used to explain one’s potential to invest in assets other than stocks, bonds and mutual funds is “checkbook control IRAs or 401Ks” . You know what I am talking about…..the “big boys” will limit your investment options but you MIGHT have an interest in investing into assets that are permitted under IRS regulations, just not offered by your current custodian.
However, practically speaking, does the IRS refer to term “checkbook control” in the tax code? No (remember….marketing term). But, the IRS says plenty about Trustees of Qualified Plans (e.g., 401K plans).
So, is there any difference between the two? Well, maybe yes and maybe no. Now, before you get mad at me, this is not a post to tease, but the fact of the matter is that the terms can be synonymous or not. Why?
According to the IRS, the definition of a Trustee is:
“Someone who has the exclusive authority and discretion to manage and control the assets of the plan. The Trustee can be subject to the direction of a named fiduciary and the named fiduciary can appoint one or more investment managers for the plan’s assets.”
In this role, the Trustee not only has the responsibility but also the ability to affect the investment options of the plan for its employees. This is a powerful and significant responsibility of the Trustee. As the Trustee, one has a legal and and moral responsibility to operate the plan in the best interests of the participants. In this role, the Trustee has the ability to control the “checkbook” of the plan.
In the big picture, the Trustee of a major corporation will not actually “have” a checkbook. But, in the case of a small business or a self-employed individual, the business owner can actually possess the retirement checkbook. The Trustee has the ability to invest in any asset not disallowed under IRS and DOL regulations. Can the Trustee invest in real estate? Of course. Stocks, bonds and mutual funds? Of course. Precious metals? Sure. Hard money loans? Yes.
Now, more germane to why you may be reading is the fact that you may be a self-employed individual who is interested in a “checkbook controlled 401K”. You see, you could have an individual 401K plan at a financial services company, serve as the Trustee of the plan, but still not have full control of your retirement assets Do you have the same legal and moral responsibility to manage the assets of the plan….of course. However, one huge difference is that you are managing YOUR assets and not the assets of others. This doesn’t mean any less responsibility, only that you don’t have the legal responsibility of managing others’ funds. You must adhere to all IRS and DOL regulations pertaining to your plan, but, you are not only the participant of the plan but serve as the Trustee as well.
Because of this unique relationship of being the business owner, participant and Trustee, you have the ability to, so to speak, control that retirement checkbook. It is imperative that the plan is established and maintained in compliance with all IRS and DOL regulations, but you have this ability to invest as you see fit and within the regulations. Your mentality does not have to rotate around the belief that your funds have to be on deposit at a financial services company and be limited to stocks, bonds and mutual funds! There is the ability to manage the assets of your own plan in a manner that you may deem as desirable AND comply with regulations for the plan as well.
Is self-direction the best thing for you? Maybe yes, maybe no. But, if you qualify for the plan and have an interest in investing in non-traditional assets, a self-directed 401K (with checkbook control) may be something worth exploring.
As always, the information provided is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. You should at all times consult with your tax or legal professional.