Harvard Law Attorney George Blower reviews top compliance items for Self-directed 401k plans. For more information, email us at business@mysolo401k.net or call us at (800) 489-7571….(read more)

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A self-directed 401(k) is a retirement savings plan that gives the account holder more control over their investments. This type of plan allows individuals to invest in a wide range of assets, including real estate, private equity, and precious metals, in addition to traditional stocks and bonds.

While self-directed 401(k)s offer greater investment flexibility, they also come with added responsibility. Account holders are required to ensure that their investments comply with the regulations set forth by the Internal Revenue Service (IRS) and the Department of Labor (DOL). Failing to comply with these regulations can result in severe tax consequences and penalties.

Here are some of the top compliance items that self-directed 401(k) account holders should be aware of:

Prohibited Transactions: One of the most important compliance items for self-directed 401(k) account holders to be aware of is the prohibition on certain transactions. The IRS prohibits account holders from engaging in transactions with disqualified persons, which include the account holder, their spouse, children, and parents. Engaging in prohibited transactions can result in the disqualification of the 401(k) plan and the imposition of excise taxes.

Diversification: While self-directed 401(k) account holders have the ability to invest in a wide range of assets, it’s important to ensure that the investments are adequately diversified. Failing to diversify the investments can result in a violation of the Employee Retirement Income Security Act (ERISA), which requires 401(k) plans to operate for the exclusive benefit of the participants.

Valuation: Proper valuation of the assets held within the self-directed 401(k) is crucial for compliance. The IRS requires that all assets held within the plan be valued at fair market value. Failure to properly value the assets can result in inaccurate reporting and potential tax implications.

Annual Compliance Testing: Self-directed 401(k) plans are subject to annual compliance testing to ensure that they meet the requirements set forth by the IRS. This testing includes ensuring that the plan does not discriminate in favor of highly compensated employees and that the plan assets are not used for non-qualified purposes.

Record-Keeping: Proper record-keeping is essential for self-directed 401(k) compliance. Account holders are required to maintain accurate records of all plan transactions, including investments, distributions, and contributions. These records must be readily available for inspection by the IRS and other regulatory authorities.

In conclusion, while self-directed 401(k) plans offer account holders additional investment flexibility, they also come with added compliance responsibilities. It’s crucial for account holders to understand and adhere to the regulations set forth by the IRS and the DOL to avoid potential tax consequences and penalties. Working with a qualified financial professional or retirement plan administrator can help ensure that the self-directed 401(k) remains compliant with all regulatory requirements.