Odds are good that if you're considering the self-directed 401(k) as an investment vehicle for your retirement funds, you have at least heard the term "Checkbook Control." You may even already have a grasp of checkbook control and know that you want this feature for your solo 401(k).
But many investors who start researching online quickly learn that the IRS doesn't actually mention the words "Checkbook Control." They do, however, discuss Trustees, and the great deal of control that the Trustee has over the plan.
It's no wonder that this language can be a source of confusion for many investors. Read on to get some clarity on this subject and learn how trustees and checkbook control influence your self-directed 401(k).
Checkbook control is actually a term that came about from providers of 401(k)s. Rarely is there a literal checkbook involved, but it can be helpful to think of the checkbook as a metaphor for how your plan's assets are managed.
Checkbook control for self-directed 401(k)s simply refers to the ability to invest in anything that the IRS allows, including a broad range of nontraditional investments. It's a highly desirable feature, and likely the reason you're considering a self-directed 401(k) in the first place.
Essentially, Checkbook control is the aspect of your account that allows you to break free from the shackles of custodians and traditional investments. If you want the freedom to control how your retirement assets are invested and the ability to diversify these investments, then you need this feature.
But as we mentioned, the IRS does not use this terminology. If you read through the regulations on self-directed 401(k)s, you'll actually see that most of the "control" of the account goes to the trustee. This brings us to the obvious question.
Uncle Sam defines the trustee of a 401(k) as the person who has the power to manage and control the plan and its assets. This person will also make decisions about which kinds of investments your plan's funds are going to. The trustee can make or break the self-directed account because they're the one holding that metaphorical checkbook.
The good news is, you can easily get the checkbook control you want and serve as a Trustee. In fact, you can self-direct your account while serving as the trustee. Doing so has many advantages. Remember that metaphorical checkbook? By taking on the trustee's responsibilities while also being the plan's participant, you take total possession of the plan's "checkbook."
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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