Qualified retirement plans can be a minefield for people who intend to use them for something other than accumulate assets for retirement. I’ve lately listened to pitch artists who claim that setting up a QRP enables a beneficiary to invest in things that are normally prohibited from an IRA or other type of self-directed individual account. Well, folks, some things don’t belong in personal retirement accounts for really good reasons.
Assets like precious metals, collectibles, real estate, tax lien certificates, and tax deed properties are encumbered with special risks that make them unsuitable for IRAs. Those products are illiquid and have other qualifications that make them difficult to value. Real estate investors already have vehicles like 1031 exchanges to defer their capital gains from real estate deals, so using a QRP to dabble in real estate is overkill. Policymakers designed IRAs to accommodate stocks, bonds, and their highly tradable proxies (index funds, etc.). The intent of the law is to allow the power of compounding, periodic rebalancing, and the reinvestment of dividends and interest to build an IRA investor’s wealth over several decades. Tax regulations deliberately exclude exotic and illiquid instruments from IRAs precisely because of their difficulties.
Legal loopholes allow QRPs to invest in such illiquid things because regulators presume that QRPs are sponsored by institutions. The IRS requirements for a QRP are extensive, presumably because corporate sponsors have the resources to manage their administration. Those institutions are further presumed to be sophisticated enough and liquid enough to invest some small portion of their QRP holdings in illiquid things. Structuring a QRP for an individual investor strikes me as a greedy way to fit some securities vendor’s illiquid pet projects into a retirement account that wasn’t designed to hold them.
The IRS has plenty of guidelines for setting up retirement plans and accounts. Most individual investors are probably just fine with an employer’s QRP-administered 401(k) account, along with a traditional IRA. I personally use an IRA because that’s all I need as an individual with no corporate plan sponsor. I am not about to spend untold amounts on legal fees and regulatory filings just to pretend I need a QRP in the eyes of the law. I believe the law should frown upon those who abuse QRP loopholes.