Traditional 401ks and Roth 401ks are well-known employer benefit options. I’m a fan of both investment tools but one thing that drives me crazy is that investment options are limited. My new employer offers self-directed retirement brokerage accounts. Maybe this is a common workplace benefit, but I’ve never heard of it so I thought I would share it with all of you.
This investment option was not mentioned in my employment offer or in the retirement fund literature I was given during my orientation. I’m an explorer, so in typical fashion I clicked on every link on my employer retirement account website. By chance I found a non-imposing link titled “Self-Directed Brokerage Accounts.” Curiously, I went down the rabbit hole. Long story short, my employer allows up to 25% of my 401k funds to be self-directed. What does this mean? I can choose to invest up to 25% of my retirement account towards any stock, fund, bond, etc. that I please. This is awesome! 401Ks typically have 5-10 investment options, most of which have extremely high management fees. This new account has no fees other than $9.99 trading fees. For $9.99 I can buy any publicly traded security I want to using 401k funds.
Rules For Self-Directed Brokerage Accounts
There are a few rules that apply to this investment option. First, during the application phase, I had to agree and acknowledge a zillion times that I am risking my money, as if being invested in a high management fee mutual fund isn’t risky. Second, I can invest up to 25% of my total pre-tax account value; pre-tax is the key term here. Third, my self-directed retirement brokerage account is held to the same withdrawal standards as a traditional pre-tax 401k. These three stipulations are important to understand as it may make this type of investment unattractive for some. For me, this investment is awesome. I typically split my 401k 50-50; by this I mean that I put 50% of my money into my traditional pre-tax 401k. The second 50% goes to my after tax Roth 401k. In 2016, I will change my account contributions to 100% pre-tax. This will allow me to maximize this new account. I will add $4,500 a year and self-direct my investments.
I’ve already put this new account to work. I moved $4,000 to my new account. My last two purchases were not made with new money but with self-directed money. I sold portions of two of my 401k investments and moved the money to my new account. My first two purchases with this new account are: Archer Daniels Midland and Magna International.
In 2016, I’ll move over $1,125 each quarter to my new self-directed brokerage accounts and I will either buy stocks in new companies or reduce my cost basis on existing stocks.
Does your employer offer a self-directed brokerage accounts? If your employer did, would you take advantage of it?