Many of those reading this article will hopefully know what a self-directed IRA is, but we’re here to talk about what exactly the lesser-known self-directed 401K is, and why you should think about opting in for one.
A self-directed 401K is essentially the same thing as a regular 401K, but the main difference is that you are able to invest in non-traditional investments, so it opens up your 401K in the same way a self-directed IRA opens up a regular IRA.
The way that a 401K plan works is that your company serves as the “plan sponsor” for the 401K, but it doesn’t have anything to do with investing the money. Instead, the plan sponsor (The company you work for) hires another company to administer the plan and its investments. The plan administrator may be a mutual fund company, a brokerage firm, or even an insurance company.
A self-directed 401K gives you thousands of options, so for a seasoned investor who is used to doing financial research, that’s a good thing. But if you’re a novice, assessing a world of mutual funds and stocks can be overwhelming.
Start by considering how much time you have until you need the money — your expected retirement age. Then think about how much risk you’re willing to take. Can you own aggressive investments without losing sleep, or do you need something more stable before you’re comfortable? Your time horizon and your risk tolerance should be the deciding factors when you choose what kinds of 401(k) investments are right for you.