Here are some answers to frequently asked questions about self-directed retirement plans. Remember, a self-directed retirement plan must follow the same rules as the traditional "company sponsored" retirement plan. What many don't know is that their self-directed plan can invest in so much more than the traditional offerings of stocks, bonds and mutual funds.

Remember, this is educational in nature so as such it is intended for educational purposes only and are frequently asked questions regarding IRS regulations related to retirement plans...whether self-directed or traditional. It is information that is general in nature and should not be viewed as legal authority. But the goal is to provide you with some helpful (hopefully) information related to general issues. As they say, for professional assistance on specific tax questions and issues, you should always consult a tax professional.  Now, on to the fun stuff.

Please note that in IRS parlance, there are typical references to: Disallowed Investments, Prohibited Transactions and Disqualified Individuals. If you can always remember this parlance, you will be well served. If not, it may help to remember: a) What Can't I Invest In, What Type of Investment Transactions aren't Legal and Who Can't I Invest Into or With. For this article/post (Part 1) we will be addressing Disallowed Investments/What Can't I Invest In.

1. What are the Disallowed/Permitted Investments?

While there is not an "approved" list of investments, the IRS does prohibit certain investments. In addition, there are special rules emmanating from the passage of the Employee Retirement Income Security Act of 1974 (see ERISA) that affect ALL retirement plans.

Whether self-directed or not, it is wise for the plan administrator to remember that they are required, in investing plan assets, to exercise the judgment that a prudent investor would use in investing their own retirement plans.  Certain plans, such as 401(k) plans, that permit participant-directed investment can avoid some fiduciary responsibilities if participants are offered at least three diversified options for investment, each with different risk/return factors. See Labor Regulation §2550.404c-1.

Disallowed Investments? Whether 401(k) (participant directed) or IRA, neither can invest in collectibles, such as art, antiques, gems, coins, or alcoholic beverages. They can invest in certain precious metals, but only if they meet IRS Code 408(m).

Oh, and you didn't think I forgot the other Disallowed Investment did you? -- Life Insurance Contracts under IRS Code §408(a)(3), which states:

No part of the trust funds will be invested in life insurance contracts.
 

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