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[Video] What is a Self-Directed 401(k)?

by Financial Design Studio, Inc. / December 1, 2020

If you have a 401(k) through your employer you know that very commonly we actually have investment choices.  Let’s say you can choose between a bond fund, a stock fund that has some growth stocks or value stocks, and then an international stock fund.  Your plan provider is required to give you a variety of fund types to diversify between. This is very typical with your 401(k).  In addition to these choices you may have a self-directed 401(k) to choose from too.

A Self-Directed 401(k) is more common than you think.

We have been finding more and more plans that give you this additional investment option rather than choosing from the pre-picked funds.  These can be called different things such as a self-directed 401(k), or a self-directed brokerage account; it can be called different things.  

Normally you choose from a specific list of options and what percent you want you want to put in these funds.  I want to be clear that you do not need to be concerned if you only have a list to choose from, you just need to choose wisely.  For those of you who have this self-directed brokerage option you can choose from anything that is on the market whether its a specific stock or ETF’s. 

What are the benefits of the Self-directed 401(k)?  

What’s great about this is the ability to do investment as well as some tax planning.  Because when you put money into your 401(k) or Roth 401(k) you are setting funds for the future to let them grow.  If you contribute to a traditional 401(k) you decrease your taxable income so you receive the best of tax planning and also investment options that you have available to you.  If you contribute to a Roth 401(k) this ability to choose from more aggressive funds allows your retirement funds to grow tax-free!  When money comes out of your Roth 401(k) in the future it is not taxed, even the growth.  

Increased investment choice is so important to your financial plan.

Your investment choices can make a huge difference in your overall plan; so much so, that if you do not have great fund choices it might even make more sense to invest outside of your 401(k).  These are the pieces as investment and financial planning professionals that we can help you evaluate.  You need to have investment choices that are good enough to rebalance regularly between to reach your goals.  And if you are nearing retirement these choices become even more important in how long your funds last in retirement.

Investment Diversification Matters

Maintaining the discipline to stay diversified when one part of the market goes up like crazy can get the best of us. “If only I had put all my money in Apple, then I’d be retiring in Tahiti!”

But Mr. Market has shown us time and time again that what’s popular today doesn’t stay popular forever. Things change. And stocks in great companies can go through long periods of terrible performance.

That doesn’t mean you should get out of the market and invest in muni bonds like Buffett did 51 years ago. With rates near 0%, that can turn into a costly exercise. It simply means that diversification will work to your benefit over time if you stay patient with it.

Self-directed 401(k)

We always advise clients to remain focused on their time horizon when investing. Unless you’re planning on living off of Social Security alone, there’s going to be a day when you’ll be drawing down your investments so you can buy food, pay taxes, and fund your medical expenses. Staying disciplined and diversified with your investments not only makes sense financially, but also reduces stress and uncertainty as you get closer to your goal.

So what steps should you take with your Self-directed 401(k)?

If you have a self-directed 401(k) available to you we want to help you set an investment allocation. This is deciding what to invest in and how much in each investment choice.  You can get started by learning more about our services or reach out and contact us so we can get you started today.

Ready to find out more?

Contact us today for a free 30-minute consultation!

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Financial Design Studio, Inc.

We are financial advisors in Deer Park and Barrington, IL. A team with a passion for helping others design a path to financial success — whatever success means for you. Each of our unique insights fit together to create broad expertise, complete roadmaps, and creative solutions. We have seen the power of having a financial plan, and adjusting that plan to life. The result? Freedom from worrying about the future so you can enjoy today.