This is a question that has long puzzled me about IRAs.
I have an IRA with T. Rowe Price. I’ve been putting money every month into one of their target retirement funds. It seems like I’m only limited to buying funds managed by T. Rowe Price, though. I can’t even buy individual equities. Is this typical of IRAs, or do other brokerages give you more options?
You can open a self-directed IRA at almost any brokerage and can buy whatever you like. It sounds like maybe you’re talking about a 401k plan which generally restricts you to selected investments.
It’s “typical” in that it’s not shocking that it is the case but as **nivlac **said you should easily be able to open an account with more flexibility. Unlike **niviac **I don’t think you`re really talking about a 401(k)… it looks like T. Rowe Price just only lets their IRA account holders invest in their 90+ funds.
Former T. Rowe Price employee and current TRP IRA and 401-K owner here.
My self-directed IRA is an account at T. Rowe Price Discount Brokerage. I own individual stocks and a TRP money market fund in that one. The money market fund is required as a repository for the proceeds of sales. I’m pretty sure I can buy any security with this account, including the funds of other fund managers.
I also have a retirement account from my time as a TRP employee. This account is a 401-K and is restricted to TRP mutual funds.
T. Rowe Price manages retirement programs, mostly 401-Ks, for many companies. When I worked there, these plans offered mutual funds which were not restricted to TRP-managed funds.
I work for a major discount brokerage firm. You can buy stocks, bonds, cds, several thousand mutual funds, and even option contracts inside IRA accounts.
This meshes with my experience (OK, not as a TRP employee / customer; we’re with Fidelity). My Fidelity-managed 401(k) is limited to a specific set of funds, though they’re not Fidelity mutual funds (my employer is large enough that there are some customized funds available to them, and in fact we were invested in those funds even before Fidelity took over the management). My self-directed IRA can invest in anything. Though the one time I looked into a non-Fidelity fund, I saw that there are transaction fees for those - I think it would have cost me 25 bucks to invest in a Vanguard fund.
Typo Knig’s 401(k) is with another firm, and interestingly their plan has some funds that are the managing company’s, but also allows them to invest in other outside funds.
Legally speaking, you can hold virtually any asset in an IRA, including precious metals, stock of privately held corporations and real estate. (The law/interpretations of the law require a third party custodian to hold precious metals and you can’t own a home or company stock from which you benefit, such as your own).
As a result, the real-life limitations we’re used to are set up by the custodian of the account, and that may be as severe as a limited set of mutual funds or as loose as any publicly traded asset. My IRA with Etrade lets me buy stock, bonds, currencies, options and more, but I can’t send them a pile of gold bullion to add to the account.
Are you sure that you haven’t opened a variable annuity? Annuities can be either qualified or non-qualified, so you can have an IRA that’s also an annuity (or a 401k that’s also an annuity, or a Roth, or whatever). A variable annuity would also only have a number of pre-selection subaccounts, which would behave like mutal funds (except not exactly. It’s complicated).
And it does seem like T. Rowe Price offers them: http://individual.troweprice.com/public/Retail/Retirement/Variable-Annuities
If you do have a variable annuity, then, yes, your investment options are limited by the subaccounts that the company offers. Additionally, there may be early withdrawal charges for transferring to another investment vehicle. So, while you could legally do it, it may not be a viable option, depending on the charges.
You really should talk to your financial advisor or broker or whatever–the term IRA is really just a qualification code, not a type of investment vehicle, and it’s going to be impossible for anyone here to know exactly what you have.
When I transferred my IRA to Vanguard I was asked if I wanted Vanguard to be the custodian or if I wanted to open a Vanguard brokerage account.
With Vanguard as the custodian we’d need to use their funds. With a brokerage account pretty much anything was available, including individual issues.
Since I was going to Vanguard because of their low-cost indexes, using them as a custodian was the point. No need in paying additional brokerage fees.
Can you expand on this? Home ownership seems intuitive but what’s the legal difference between owning owning stock in a company “you benefit from” or “own” and one you don’t?
I think this is my situation. When I log into my T. Rowe Price Account, I see my account type (Roth IRA), account number, and registration. Under the "Registration: heading, it says
T ROWE PRICE TRUST CO
CUST FOR THE ROTH IRA OF
XXX
Apparently the “CUST” must stand for custodian. Perhaps I should contact T. Rowe Price at this point and verify this and, if it is the case, find out how to change it to the brokerage option mentioned by Doug Bowe.
An obvious case of a benefit would be to form “Fuzzy Dunlop Inc,” buy the company’s stock with $100,000 out of your IRA, then loan that money to yourself as the sole shareholder and corporate officer. There are ways to invest IRA/401k funds in a company you control, but it has to be done precisely right and I refer clients to a third party to get that all set up (if they insist on it; I don’t recommend doing it in the first place).
Merely owning stock as an investment - even if you’re an employee - doesn’t break the rules, though. The issue at hand is control over the company and degree of ownership. Steve Jobs might be restricted from investing his 401k funds in Apple stock, but most employees wouldn’t.
Right. Understood on the Apple example. But Apple is a public company and it’s easy to see own stock and still have no control. Maybe myself and the type of investor I know are more sophisticated than whatever an average investor is but it seems like quite a few investors with enough cash to invest in private companies would be pretty savvy. Maybe I’m mistaken on the proportions.
For instance, if you’re going to invest a few hundred thousand dollars in an early stage private company you’d at least negotiate for a board position to protect your interest. Would that make it illegal? If you were forming a bona fide company doing real business, not some scheme like you alluded to, and didn`t want to manage or direct the company could you form an LLC and limit yourself to a profit interest with no voting rights? You could, of course, but could you then own it through your IRA?
Or is it generally limited to situations like employees owning a de minimis interest?
My guess is that savvy investors would rather not use funds from an IRA for that kind of investment. Sec 1244 gives you benefits if you take a loss on qualified small business stock that you lose if the stock was in an IRA. You also lose benefits from pass-through losses from S Corps or Partnerships. If you do make a profit, withdrawals from an IRA are subject to income tax as ordinary income (tax rates up to 35%), whereas profits on sale of stock are taxed at a maximum of 15%, as are qualified dividends. Retirement accounts are mostly beneficial to wage earners rather than investors.
Of course, I’m avoiding the question you asked because I’m not sure of the details. It’s the kind of thing where I would refer a client to a specialist. I know enough of the basic principles to know that caution is warranted, but not enough about the specifics to navigate it myself.
I don`t think savvy investors would either. I was just curious how one could define the situation. Thanks for your insight.