Despite the larger annual contribution limits that are available to participants of a 401(k) plan, there’s one essential aspect in which 401(k) plans fail to measure up to self-directed IRAs, and that’s in the area of investment options. Even if you consider participating in your employer’s plan in order to receive matching contributions from them, you’re likely to find yourself faced with a handful of investment options, likely in the form of mutual funds that come with above-market fees.
But even if you have the best 401(k) plan on the market, and have a wide range of options to choose from, you still aren’t likely to be able to invest in publicly traded stocks. Furthermore, there are going to be three key investment classes that certainly won’t be available in your employer’s plan.
Real estate investments are one of the most popular types of investments for self-directed IRAs. These types of assets allow investors to purchase virtually any type of investment property, including single family homes, condominiums, multi-family units, commercial properties, farm land, industrial property, and even undeveloped properties.
With a self-directed IRA you have freedom in your investment goals and approach with real estate as well. You can rent the property in order to generate an income stream, invest for capital gains, invest for speculative purposes, or some combination of these considerations. Note that you cannot use any of these properties yourself, nor can any members of your family use the properties. Doing so could subject you to financial penalties and taxes.
There are additional financial burdens if you seek to borrow money with your self-directed IRA in order to purchase the property, so many investors choose to limit themselves to properties or property interests for which they can pay cash from their account.
If you have an unusually broad-reaching 401(k) plan then you might have the option to choose a mutual fund that invests in precious metals. Unfortunately, this method of taking a financial interest in financial metals can make it quite difficult to target exactly the type of investment strategy you desire.
For example, with a self-directed IRA you can purchase precious metals directly, financial derivatives based on precious metals, or even investments in private companies that explore for precious metals. If you choose to invest in precious metals directly, take the time to learn more about the requirement that a third party hold those metals in safekeeping, and to understand that buying collectible or rare coins is not permitted.
Finally, you can use your self-directed IRA to make private loans to third parties. These loans can take the form of mortgages to prospective homebuyers, or to businesses looking to expand their operations. The basic concept of making private loans is easy to grasp, but preparing the necessary documentation and making sure the transaction is properly structured is essential.
While you may only choose to devote a part of your overall retirement nest egg to these retirement classes, it can be a great advantage to have access through them through a self-directed IRA.