The self-directed IRA can be invested in any investment the IRA custodian and the IRS allow.
Q: I recently spoke with a colleague about her strategy to take a non-taxable withdrawal from her 401(k) plan and deposit it into an individual retirement account. She plans to self-direct her IRA and says she has a virtual universe of investment choices available to her. Is this a legally approved strategy available in all states, and how do I do this for myself?
In contrast, an employer plan usually is limited to the package of mutual fund or variable annuity choices that are typically a proprietary menu from the custodian that was selected by the employer. If done properly, the transfer will not create taxable income and the money inside the IRA will continue to grow tax-deferred as it had inside the employer plan. The employer summary plan document must also allow ISDs, and the agreement with the custodian of the plan assets must also allow for an ISD. The ISD can be done while still keeping the account open within the employer plan to continue to accumulate employee contributions and employer matches.
Dan Deighan, CLU, CFC (left), is founder and principal of Deighan Financial Advisers in Melbourne, Florida. He has counseled clients since the firm's inception in 1974. Learn more by visiting http://www.deighanfa.com.