Self Directed 401K and Its Two Main Dangers
401K in is a type of an investment plan where in it is established by the employers for the benefits of their employees. Employees can make a salary deferral or what they call as salary deduction shares on a post-tax or even pre-tax basis. Employers who are offering a 401K investment plan can also make matching or non-elective shares to the plan for the employees. Profit sharing may also be exercise on the future. Accrual of earning is based on tax deferral as well.
Self Directed 401K on a legal point of view is no different with that of the traditional 401K plan. Self Directed 401K only allows you to have wider choices of investments. So aside from the traditional way of investing like in stocks, bond and mutual funds; Self Directed 401K allow you now to invest as well on real estate. Bur even if you have a wide array of options under Self Directed 401K plan, it has also its two main disadvantages.
The main disadvantages of Self Directed 401K is governed by many rules and regulation. These disadvantages are its complex and complicated process to go through. Violations of the said rules which are imposed by the IRS (Internal Revenue Services) may result to a discontinuation of your 401K or some parts of it. Another is that people who have Self Directed 401K may end up losing everything and some may now be very vulnerable to scammers or crooks.
Self Directed 401K allows owners to control investments personally without being limited to the traditional way of investing. Many owners who are not satisfied on the results of such kind of investment are now shifting to Self Directed plans, for the main reason that they want higher returns.
Self Directed 401K allows owners to control investments personally without being limited to the traditional way of investing. Many owners who are not satisfied on the results of such kind of investment are now shifting to Self Directed plans, for the main reason that they want higher returns.
Aiming for a higher return on the use of Self Directed 401K is a complicated one. If the rules are not being followed, you can end up being disqualified of your 401K. Penalties, interests and taxes may apply on your part. Again you are not allowed to make investment on insurances and collectible using your Self Directed 401K. Anything aside from these two is applicable such as; tax liens, equipment leasing, and deed of trust or sale, business franchises, precious metals, stocks, bonds and currencies. Mostly anything that you can buy in exchange somewhere can be owned under your Self Directed 401K. But if the Self Directed 401K rules are not being obeyed, the IRS can terminate the whole 401K.
The other major danger that you will be facing in Self Directed 401K is being susceptible to scammers or con artist. These people will find a way to get into you funds. They will try separating you from your money. An example of which is; a person acting like a custodian will try to sell you an investment that will be very good on your part. They will give you what you want but in the end they are not registered custodians and they will drain you out of your funds. Yes many people choose a Self Directed 401K to increase their investment funds and many also are successful in this part. It's just that you should always be aware of these two dangers of taking Self Directed 401K as an investment plan. Just make sure you study all rules and regulations and follow them carefully.
