We all know the economy has been rocked with the dealing of Wall Street and the virtual shutdown of the extension of credit to individuals and businesses. What needs to be bluntly addressed is how self-directing one’s retirement assets can be good for both the individual and the economy.
Let’s address a couple of questions that typically come up related to an individual’s interests in establishing a self-directed IRA or 401K.
1) “I want to invest in assets other than stocks, bonds and mutual funds, but my IRA/401K custodian says I cannot self-direct and I can only invest in the products that they offer…..which, surprise surprise, is only stocks, bonds and mutual funds. What can I do?”
Benefits of Self-Direction to the Individual -– Provided the funds are in an eligible retirement account, an individual can direct these assets and invest in practically any asset (as permitted under IRS Code 1408(a)), including real estate. This is not only legal, but has been permitted since the passing of ERISA by Congress in 1975. Obviously, the plan must be established in compliance with IRS and Department of Labor regulations but, once established, there is nothing prohibiting the retirement account from purchasing such “non-traditional” assets.
Benefits to the Economy –- From the investors standpoint, all one needs to do is read the newspaper to know that there are some incredible “buys” in the real estate market as a result of the brutal and ongoing market correction. Besides having a potentially incredible investment opportunity, this investment has a trickle down effect…that is positive for the economy.
2) I want to self-direct, but I also want to maintain diversification by way of holding some stocks and mutual funds. Can I do this without having money with one custodian for stocks and money with another custodian for assets such as real estate?
First of all the answer to both is ABSOLUTELY.
Benefits of Self-Direction to the Individual –- Yes, this is absolutely permissible and, probably, wise to do. True diversification is what it means to you, which isn’t necessarily what it might mean to the guy next door.
A word of caution, however…..many self-directed custodians and administrators charge ROI-defeating fees for the purchase of “traditional” assets. Be sure to utilize the services of an administrator, custodian or facilitator where you have not only the ease of purchasing these assets (if you choose), but it doesn’t include an ROI-defeating fee structure or structure that makes it more difficult than it should be to purchase such assets.
Benefits to the Economy –- As recent troubles have shown, there are some true disadvantages and problems for us, the general public, having all our financial eggs in one basket. As a result, the long-term economic benefit to our country or ourselves is not necessarily served. In theory, asset classification across a wider spectrum of asset classes other than just “traditional” assets may be wise.