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Self Directed 401(k) Investments

A traditional 401(k) account allows you to invest primarily in stocks, mutual funds, certificates of deposits and bonds. The investment company administering the plan limits the choices. On the other hand, a self directed 401(k) empowers a plan participant to invest in a diverse range of investment options at his discretion. Self directed 401 k’s provide investors who have the expertise of investing and knowledge of investment avenues to expand way beyond the traditional boxed products.

Benefits of a diverse choice of assets under a self directed 401(k)

We all know that the attractiveness of varied asset classes is not the same at all points in time. You may be in a situation, when equities have become very expensive, but real estate is available cheap and is an attractive investment avenue. In such a situation, a self directed 401(k) would allow you to place your bets on real estate, while a traditional 401(k) would not. Even within real estate, there are varieties of options and you can choose the one that you think is best poised.

Best 401K investment options within real estate under a self directed 401(k)

1) Residential real estate

  • Apartments
  • Single Family homes
  • Duplexes

2) Commercial real estate

  • Shops
  • Offices
  • Hotels / Restaurants
  • Sports facilities

3) Undeveloped or Raw Land

4) Real estate notes – Mortgages and deeds of trusts

Under a self directed 401(k), the investment options extend even beyond real estate and traditional ones and you may also invest in:

  • Promissory notes
  • Private equity
  • Tax lien certificate
  • Private limited partnerships, limited liability companies, and C corporations
  • Foreign currencies
  • Judgments/structured settlements
  • Gold, silver and other precious metals
  • Car paper
  • Account receivable factoring
  • Equipment leasing

Prohibited Transactions and Investments

Under sections 408 and 475, a participant in self directed 401(k) is prohibited from indulging in a transaction with a disqualified person. A disqualified person includes fiduciary and members of the participant’s family (spouse, ancestor, lineal descendant, and any spouse of lineal descendant.)

Thus, if you were looking to invest in a house where you or any member of your family is currently residing, it would be considered a prohibited investment. If the plan participant sells an interest in a partnership firm owned by the self directed 401(k) plan to his mother or any other close family member, this would constitute a prohibited transaction. Renting out a property owned by the plan to any of the family members (disqualified person) is also a prohibited investment under IRS rules.

At Self Directed Retirement Plans, we advise self directed 401(k) account holders to invest in most profitable avenues and guide them against making prohibited investments and transactions.