Like many things in life, the self-directed 401(k) is attractive because it provides options. The variety of investment options available are only limited by your own creativity. We’ve seen investors revamp their boring old retirement portfolio with a number of new and promising investments. However, just because the grocery store carries a dozen candy brands doesn’t mean it’s wise to gorge yourself on all of them. We’ve narrowed down the list to three common investments and what you need to watch out for with each.
Self-Directed 401(k) Mutual Funds
We’ll start off with the traditional mutual fund. The self-directed 401(k) allows investors to diversify with both non-traditional and traditional investments. Mutual funds are what you’ll typically find in a standard, employer sponsored 401(k) plan. They will be listed along with other pre-selected investment options in an employer’s 401(k) plan welcome packet. Mutual funds are a collection of pooled securities like stocks and bonds. Because a mutual fund invests in a variety of securities, it’s a good option for increased diversity and potentially lower investment risk. However, while you can choose which mutual fund to include in your retirement plan, you can’t control which securities are bought and sold within that mutual fund. Keep in mind that the average mutual fund offers an annual return of between five to eight percent.
Self-Directed 401(k) Real Estate
Another common investment in self-directed 401(k)s are real estate and real estate related investments. Real estate is one of the most popular alternative investment types. Here are the different types of real estate and real estate related investment you can make with a self-directed 401(k) plan:
- Office Property
- Retail Property
- Industrial Property
- Multi-Family Residential Property
Passive Real Estate Options
These options all offer the advantage of tax deferred growth, without the maintenance and administrative hassle rental properties require.
- REITs (real estate investment trusts)
- Mortgage Notes
- Tax Liens
The main things to watch out for with all these real estate investments are “prohibited transactions.” These are transactions between the self-directed 401(k) plan and the plan owner or any of his family members/disqualified persons. Check out this article for a more detailed summary of who qualifies as a “disqualified person.”
Self-Directed 401(k) Business Investments
A great advantage of the self-directed 401(k) is that it opens up an entire world of private investment options including C corporations and other private ventures. I know firsthand from living in the heart of Silicon Valley how frequent these potential business investment opportunities arise. Digitalization is only going to expand the flood gates even further for those willing to take the risk. The self-directed 401(k) allows these private investment opportunities.
Review Your Self-Directed 401(k) Investment Options
As you can see, having a 401(k) doesn’t mean you’re stuck with traditional investment options. Private investment options such as rental property and passive real estate are available under a self-directed 401(k) plan. Also, for the more entrepreneurial investor, private business ventures are another option. Don’t limit yourself. We can go over your private self-directed 401(k) investment options and even set up your self-directed 401(k) plan today. Contact us to set up your consultation.