By These are the answers to some FAQs about self-directed retirement plans. Always keep this in mind that a retirement plan follows the rules that are followed by traditional plans sponsored by company. Many do not know that such plans allow you to invest in much more than stocks, bonds, mutual funds and other traditional types of savings.
Don’t forget that this is just an educational type of content, it is, therefore, intended for awareness purpose and FAQs regarding IRS rules and regulations regarding retirement plans; whether traditional or self-directed retirement plans, this information is general and should not be used for legal authority. The main objective is to provide people with some useful information regarding general problems. As it is said, for professional aid on specific tax questions and problems, you must always consult a tax professional, financial or institutional consulting professional or firm.
Not that in IRS manner of speaking, there are usual references to prohibited transactions, disallowed investments, and disqualified individuals. If you can remember this parlance, you will definitely be served properly. On the other hand if not be able to, it may at least help you to remember. What can’t be invested in, what kind of investment transactions are not legal and who is or not eligible to invest in it. In this article, we will look into what are disallowed investments and what cannot be invested into it.
As there are no approved series of investments, IRS prohibit some investments. Additionally, there are a few special rules for the passage of ERISA or Employee Retirement Security Act of 1974. It affects all the retirement plans.
Be it self-directed or company sponsored or any other type of retirement plan, wisdom is to plan administrators or remember their necessity in investing plan to practice the judgment of prudent investor used in investing. Some plans, like 401(k), that permits participant investment is avoided by some fiduciary responsibilities provided that participants are proposed at least 3 diversified choices for investments with different factors of risks and return as mentioned in Labor Regulation 2550.404c-1.
For disallowed investments whether 401(k) or participant directed or IRA, none of these can invest in collectibles like art, coins, antiques, alcoholic beverages or gems as it can only be invested in certain valuable metals that meet IRS Code 408(m). Nothing of the trust funds is invested in life insurance contracts.
Your average retirement plan probably consists of one or two mutual funds along with a couple of straight stocks and maybe some bonds. Surprisingly, exchange traded funds (ETFs) are relatively rare in retirement plans. Why this is so remains a mystery to financial experts who swear by the ETF as one of the primary ingredients of a successful retirement plan.
As a financial advisor, do you push ETFs? Does your dealer-broker firm even offer them? These are questions you need to ask yourself if for no other reason than the fiduciary rule now requires you to put the best interests of your client first. You may find that ETFs are one of the best tools you could put in their hands.
To get you thinking in that direction, here are five reasons to push ETFs in retirement plans:
1. They Are Tax Advantageous
One of your jobs as a retirement planner is to help clients maximize their tax positions. Therefore, you tend to look for investments that minimize tax liabilities. ETFs fit that bill. For starters, earnings from ETFs are taxed as capital gains. You know that. But here’s the kicker: unlike mutual funds, the capital gains from sales inside an ETF fund don’t get passed on to shareholders. Thus, there are no additional tax liabilities.
2. They Are Cost-Effective
The fiduciary rule you are now required to follow implies that you should be offering clients the most cost-effective solutions. Again, ETFs fit the bill. Your client can get into an ETF for as little as 0.3% annually. You will never get that kind of rate on mutual fund or bond. In fact, mutual funds tend to cost twice as much. The lower the annual fee, the more money the client is actually saving for retirement.
3. They Are Not Complicated
Some retirement plan options can be more complicated than they are worth. That is not true of ETFs. Exchange traded funds can bundle different kinds of investments from stocks to real estate, and most are indexed. An indexed ETF can hold a considerable chunk of a particular market.
4. They Are Easily Followed
People saving for retirement appreciate the ability to know how their investments are doing on-demand. If a retirement plan is overwhelmingly invested in mutual funds, such on-demand knowledge is impossible. The best a client can do is get a quarterly snapshot. ETFs are just the opposite. Clients can find out at the close of every market day how their investments are doing. All the information is there for the taking.
5. They Represent Another Choice
There are some retirement savers happy enough to invest in one or two mutual funds and then forget about it. But for those who want to be a bit more active, mutual funds just do not cut it. Pushing ETFs gives you yet another option to offer. Options are good for you, your clients, and the overall goal of creating a comfortable retirement nest egg.
Western International Securities, a Pasadena financial services company that partners with dealer-brokers and financial advisors, believes it is important to offer clients a full range of traditional and nontraditional investments. This includes ETFs. Their philosophy is one of making the most of every opportunity to ensure clients meet and exceed their financial goals.
As a broker-dealer or independent financial advisor, do you share that same philosophy? If so, offering ETFs as a retirement plan option should be a normal part of how you do business. ETFs are tax friendly, cost-effective, uncomplicated, easily followed, and one of the best choices for retirement planning.
