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Self-Directed Retirement Plan Can Be for Anyone

July 27, 2015
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By Dmitriy Fomichenko

Learn more about Dmitriy on NerdWallet’s Ask an Advisor

For years, the average worker’s retirement savings have been building up inside a 401(k) account, invested mainly in the stock market. But self-directed retirement accounts such as Solo 401(k) plans and Checkbook IRAs are growing in popularity. Once considered an option primarily for wealthy, high-profile investors, self-directed retirement accounts are becoming more common among average investors as well.

The reason is simple: Self-directed retirement accounts give plan owners much more control and give them access to investment opportunities that are unavailable in typical retirement plans.

Even for smaller investors, the self-directed option can offer great advantages.

A hands-on approach

With a traditional 401(k), you have little to no say over your investment options. You get to pick from the funds offered by your employer’s plan, and that’s it. This isn’t the case with a self-directed retirement account.

Rather than limited control, you have nearly complete control to choose whatever investment options you want. Many investors use this opportunity to customize their portfolio to their specific goals and risk tolerance. Others bring in non-traditional assets, such as real estate, precious metals and more, which aren’t typically available in traditional retirement accounts.

Aside from the ability to build a customized portfolio, investors also enjoy better transparency and security. In the structure of a self-directed retirement account, the plan owner is the only one who has direct access to the account and transaction records. This essentially eliminates the potential conflict of interests that can arise in traditional custodial settings.

Tax-saving perks

The main point of setting up a dedicated retirement account rather than simply investing money in a brokerage account is to take advantage of the tax-saving benefits such plans can offer. This is the case with both traditional and self-directed options.

With a Solo 401(k) or self-directed IRA, your contributions and earnings are tax-deferred. Instead of paying taxes now on your earnings and on your investment returns along the way, you can put that money into investments and let it grow. Over the years, with the compounding effect, this extra amount can grow into a big sum. You will pay taxes only when you actually withdraw money later in life.

Some investors also go with the Roth option: With a Roth Solo 401(k) or Roth IRA, you pay taxes upfront on your contributions, but your earnings in the account are untaxed. You pay no taxes at withdrawal.

The choice between Roth and regular accounts depends on each investor’s tax situation and financial plan. But it’s safe to say that either tax treatment is still better than no tax benefit at all.

Self-directing a retirement account means you will have to take on certain responsibilities — responsibilities that someone else handles in a traditional account. It’s essential to know the rules and regulations that apply. However, if properly executed, the self-directed option can give you much more control and flexibility.

Image via iStock.


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