An IDA is authorized by the employer through its retirement plan’s adoption agreement. If adopted, the plan, typically a 401(k) plan, allows employees to self-direct a portion or all of their deferred monies into investments outside of the predetermined list of investments. Another name for this is a participant brokerage option. The employee has discretion over the investments, but all assets remain a part of the retirement plan and subject to the plan’s policies and rules.
An IDA can be established only with the approval of the employer through its retirement plan adoption agreement. The participant and retirement plan trustee jointly open the IDA at a qualified custodian. The IDA account documentation specifies who is authorized to make investment decisions (typically the participant) and who is authorized to move money in or out of the IDA (usually the retirement plan trustee).
An IDA is not the same as a Self-Directed IRA, but there are similarities. Both are self-directed accounts using tax-sheltered money to save for retirement. Both often invest in alternative investments such as real estate products, private securities, private promissory notes as well as public stocks, bonds and mutual funds. In an IRA, the accountholder not only makes the investment decisions, but also authorizes cash movement in and out of the account. In an IDA, however, the plan trustee controls all non-investment related cash movement in and out of the IDA. The plan trustee provides statements for the overall retirement plan, while the IDA custodian provides statements specifically for the investments made through the IDA option.
Much like a self-directed IRA, an IDA allows you to diversity your retirement assets by expanding your investment options. While most retirement plans have a limited investment selection, the IDA allow participants to purchase not only stocks and bonds sold on the stock exchanges, but to purchase alternative investments such as precious metals, private securities, limited liability companies, limited partnerships and real estate products. Participants use their personal knowledge and expertise to enhance their retirement portfolio and increase their retirement savings.
Not directly. Because the IDA is part of the larger retirement plan, all new money into or out of the plan must be authorized by the plan trustee according to the rules as established by the plan’s adoption agreement. The participant should contact the plan administrator/employer to request a distribution or make a contribution. The participant, however, does make the decision to buy or sell investments within the IDA.