Checkbook Control Facilities for Self-Directed 401(k)s

Saving for your retirement is one of the best ways to prepare yourself for the next phase of your life. Your investment choices can limit or enhance your portfolio. Different types of retirement accounts provide you with varying degrees of control and opportunities. A traditional individual retirement account (IRA), for example, puts your account primarily in the hands of a financial advisor. It limits your investment possibilities to bonds, stocks and mutual funds.

However, a self-directed 401(k) gives you complete control over your investments and an increased chance to diversify your portfolio. In fact, with a self-directed 401(k), you can invest in everything from real estate, to precious metals, commodities and more. This level of portfolio diversification has the potential to create enormous returns. While there are risks associated with such potential, some individuals prefer self-directed 401(k)’s to other retirement account options. In addition to the potential earnings and diversification, a self-directed 401(k) allows you to have checkbook control.

Checkbook Control Facilities

As the owner of your self-directed 401(k), you maintain full control of your plan. In fact, unlike a self-directed IRA, the Internal Revenue Service (IRS) does not require you to have a qualified trustee or custodian. As the plan’s owner, you are your own trustee. This allows you to open a trust account in the name of your self-directed 401(k) at any bank or credit union. Checkbook control enables you to act immediately on investment opportunities. Because you do not have to go through a custodian, you eliminate the approval process some firms require. You simply write a check from your self-directed 401(k) trust fund and the money will be transferred immediately upon receipt.

The Do’s and Don’ts of Checkbook Control

As with any checkbook account, there are a few do’s and don’ts you should be aware of.

Do:

• Make sure you do not use your personal name to open your self-directed 401(k) checkbook account. If you do, the IRS will consider the account to be a distribution and you will be subjected to taxes and penalties.
• If multiple people are trustees on the self-directed 401(k) account, or if trustees will make traditional and Roth contributions, you should open multiple checking accounts.
• Any gains received from self-directed 401(k) investments should be deposited back into the checking account.
• If there are expenses associated with your investments, use your self-directed 401(k) checkbook account to pay for them. (Example: If you invested in a rental property and the HVAC unit needs servicing, you need to pay for that through your 401(k) checkbook account.)

Don’t:

• Don’t deposit funds from your personal accounts into your self-directed 401(k) checkbook account. Deposits should come only from qualified contributions or investment returns and earnings.
• Don’t use this account to obtain a credit card.
• Don’t pay for personal expenses with funds in your self-directed 401(k). The IRS views this as a distribution and is considered taxable.

Royal Legal Solutions

While you are the owner of your self-directed 401(k) plan, you will need to open the account with a provider. At Royal Legal Solutions, we understand the nuances of investment portfolios and IRS regulations. Our goal is to help you increase your retirement fund without incurring penalties from the regulatory bodies.