You know the answer to the question already! Of course there are IRS and DOL rules that govern IRA and 401(k) plans…self-directed or not. Specifically, can an IRA or 401(k) be self-directed? What assets can an IRA or 401(k) invest into? The IRS and DOL have Prohibited Transaction regulations that govern both IRA and 401(k) plans as to what these plans specifically cannot do in the operation and investments made by the plan.
Your first question may be that you haven’t heard of permissibility of these types of plans and you are curious why you haven’t.
Why Haven’t You Heard About Self-Directed Plans?
Individuals are not as familiar with these self-directed options because, quite frankly, the custodians or financial service companies who typically hold IRA and 401(k) plans for clients cannot easily monetize a client’s self-directed investment activities. They cannot easily earn a commission on non-traditional asset investments you make from your plan. You don’t need them to execute these investment transactions and they are not established to easily facilitate these types of investments.
Unfortunately, the question is not “if” you can make these types of investments, but rather why won’t many custodians to permit you to invest in this manner. Now, you may have a clearer idea as to the “why”. Bottom line is that if custodians and financial services companies cannot make money from such investments, they have very little motivation to educate you of the permissibility of such investments.
In addition, some of these custodians and companies, correctly or incorrectly, believe that they may have some liability exposure related to IRS compliance issues. In simple terms, they take the path of least resistance as they do not make money on these types of investments and they perceive an liability risk as well.
Example: Custodians and financial service companies have a well-greased machine in making commissions on your investments of stocks, bonds and mutual funds. But, how can they benefit if your plan purchases real estate? They are not the broker or the buying or selling real estate agent hired on behalf the the property seller or buyer. It is easily understood why these custodians and companies would not have an interest in your plan purchasing non-traditional assets. The more appropriate question that should be asked is does the IRS or DOL take a position that an IRA or 401(k) plan investing into non-traditional is not permissible or not permissible.. Does the IRS address this in a easy-to-follow manner?
Let’s take a look at the IRS website and a quick excerpt related to IRA investments:
The IRS notes:
“The law does not permit IRA funds to be invested in life insurance or collectibles.
If you invest your IRA in collectibles, the amount invested is considered distributed in the year invested and you may have to pay a 10% additional tax on early distributions.
Here are some examples of collectibles:
- Metals – with exceptions for certain kinds of bullion,
- Coins – (but there are exceptions for certain coins),
- Alcoholic beverages, and
- Certain other tangible personal property.”
Further, the IRS notes, and this is specific to individuals interested in establishing their self-directed IRA or 401(k):
“IRA trustees are permitted to impose additional restrictions on investments. For example, because of administrative burdens, many IRA trustees do not permit IRA owners to invest IRA funds in real estate. IRA law does not prohibit investing in real estate but trustees are not required to offer real estate as an option.”
What About a 401(k)?
Great question! Similar to IRAs, a 401(k) cannot invest in collectibles either, but can invest into life insurance products. It is important to keep in mind that while IRS and DOL rules may not restrict a plan from investing into certain asset classes, a Trustee and participant of a plan can only invest in assets permitted by the plan documents for the 401(k) plan.
Example: A self-employed individual establishes an individual 401(k) plan at a large financial services company and then wishes to invest into real estate. This individual soon becomes dismayed when the financial services company will not permit the individual to make such an investment. As you can see, while the IRS and DOL would not preclude this type of asset investment, the individual must adhere and comply with the rules established for the plan. If the plan documents do not permit such investments, then the Trustee or participant cannot make such investments.
The IRS notes:
“In addition, under the Code, both participant-directed accounts and IRAs cannot invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages, and they can invest in certain precious metals only if they meet specific requirements. (IRC Section 408(m))
Individual retirement accounts also are not permitted to invest in life insurance. (IRC Section 408(a)(3))”
As you can see from the IRS’ statement, the 401(k), while not being able to invest into collectibles, is not prohibited from investing into any other asset class (including life insurance).
Why Fulcrum Self-Directed?
Fulcrum Self-Directed establishes IRS-compliant IRA and 401(k) plans that permit the account owner to invest in any asset class not prohibited by IRS and DOL Prohibited Transaction regulations. In this arrangement, you have the ability to directly control your investments. No more asking for permission! No more waiting on an individual or company to process your investment request! You have the freedom and flexibility to invest in how you see fit! Invest in both traditional and non-traditional assets….all from one account!
Yes, this is possible with your self-directed IRA LLC or 401(k) established by Fulcrum Self-Directed. Invest in: