Self Directed Retirement Plans Vs. Non-Self Directed Plans

If you're planning for retirement, you have to make decisions about how you'll be saving money and who will manage your assets. The tax rules allow you to deduct contributions to an individual retirement arrangement, or IRA, or to make "pre-tax" contributions to a 401(k) or a simplified employee pension, or SEP. Once the contribution is made, you may elect to handle the assets yourself or turn that responsibility over to someone else.

Opening an Account

A self-directed retirement plan allows you to make investment decisions and handle the assets in the plan as you see fit. You can buy and sell stocks, bonds, mutual funds and other investments and accept the risks of the financial markets. Or you can simply save with an interest-bearing savings account, certificate of deposit or money market account. The Internal Revenue Service will not tax income that the plan generates, but in a traditional IRA you will pay income tax when you withdraw from the account (Roth IRAs allow tax-free growth and withdrawals but they're funded with after-tax dollars). If you withdraw the money before you've reached a minimum age, the IRS will assess a penalty and tax the money as regular income.

Directed Accounts and Trustees

Whether your retirement plan is self-directed or not, you must set up the account with a custodian or trustee, who is responsible for holding the assets in your name and providing you with regular statements. If your account is "directed," the trustee will limit your investment options; in most cases, the trustee is a bank, broker, mutual fund or insurance company that offers a selection of stocks, bonds or funds and then makes new investments in those assets as you make contributions.

Asset Range and Prohibited Transactions

In general, self-directed plans offer a much wider range of asset types, including real estate, precious metals, partnerships, tax liens and franchises. In addition, the trustee may offer lower -- or no -- management fees for self-directed accounts. The IRS prohibits certain transactions, whether your account is self-directed or not. You can't borrow from a retirement plan, for example, or sell assets to it; you can't use an IRA as collateral for a loan or use IRA assets to buy personal property.

Risk of Fraud

The Securities and Exchange Commission has warned investors about the risk of fraud with self-directed retirement accounts. If you are considering the offer of a self-directed IRA account, research the prospective custodian. The trustee of such an account takes no responsibility for the suitability of retirement assets he might be promoting. These assets may not submit to regular independent auditing or issue financial reports. The custodian may guarantee unrealistic returns and may not even be a licensed broker or investment adviser. Self-directed IRAs have been used as vehicles for fraud, with investors losing most or all of their retirement savings.