A Self-Directed Brokerage Option (SDBO) allows 401(k) plan holders to invest their 401(k) money directly into U.S. Equities, ADRs, ETFs, Publicly-traded Limited Partnerships, Publicly-traded REITs, U.S. Treasury Securities, Corporate Bonds, Mortgage-backed Securities, CDs, Mutual funds not already offered in 401(k) Core lineup, and so on.

I read in a Vanguard 401(k) plan customized to some firm based in the United States:

  • The only permitted sources for exchange into the SDBO are pre-tax sources.
  • Your plan restricts Roth assets to be exchanged into the SDBO.

Why would an employer 401(k) plan prevents Roth assets from being exchanged into the Self-Directed Brokerage Option (SDBO)?

  • 1
    Because Roth funds are post-tax and they don't want to mix up the pre- and post-tax money?
    – mkennedy
    Jun 6 '18 at 23:23
  • @mkennedy thanks, why would it be an issue? It's already mixed in the non-SDBO investment options of the 401(k), and they're able to keep track of the Roth money vs. pre-tax money. Jun 6 '18 at 23:31
  • 2
    @FranckDernoncourt: "It's already mixed" absolutely not. They are not merely keeping track, the money is actually in separate accounts. Letting you manage the money as a lump sum is a fiction for your convenience. To let you self-direct Roth funds, you would have to manage two entirely separate brokerage accounts -- maintaining a similar fiction would be impossible.
    – Ben Voigt
    Jun 7 '18 at 13:37
  • 2
    You can only maintain the fiction for securities which (a) allow fractional shares (b) have no minimum and (c) have no per-trade commission. Lacking (c) just means the accountholder will be aware of the number of accounts (because they're charged the fee that many times) but if assumptions (a) or (b) are broken it makes synchronized trades across both accounts completely impossible.
    – Ben Voigt
    Jun 7 '18 at 16:22
  • 2
    Besides that, different securities have different tax implications so you don't want to preserve the same mix in pre-tax, Roth, and taxable accounts.
    – Ben Voigt
    Jun 7 '18 at 16:23

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