Self Directed 401k Rules
Understanding all of the self directed 401k rules is extremely important if you own or are considering one of these accounts. There are certain prohibitions and restrictions in place with this type of retirement plan that other options may not include. A self directed plan allows more flexibility in investment choices, but can also carry higher risks because the account holder can choose a wider range of investments and can incur increased risks. There are still 401k contribution limits in place, and withdrawal restrictions and penalties which may be involved. There are additional rules and regulations concerning what investments can be chosen for a self directed 401k as well, and these are very important.
Whether a 401k is one of the solo 401k plans or the plan covers numerous employees, many companies and plans offer a self directed option. With a typical plan the custodian, trustee, or manager will choose the allowable investment choices, and these normally consist only of more conservative choices like mutual funds, trusted stocks, Certificates of Deposit, and bonds. A self directed 401k will allow additional investment options considered more risky, and which can include real estate, tax lien certificates, notes, and many other choices as well. The 401k distribution rules are the same whether the plan is self directed or not, and can include penalties if the funds are withdrawn before retirement age.
As well as having 401k contribution limits and withdrawal restrictions, self directed plans are prohibited or restricted where certain investments are concerned. A self directed 401k is not allowed any investments which are considered self dealing, or which the account holder will benefit indirectly from. This is done to ensure that any transactions will be done at arms length, and there is no impropriety involved. This type of account can not be involved with any company or individual deemed disqualified, and disqualified persons can include anyone who has a fiduciary interest or is a family member of the account holder. Self dealing is prohibited in any form with a 401k that is self directed, because these transactions do not meet the arms length standard.