If your employer allows 401(k) trading, you may want to trade securities with your 401(k) money. Find out how often you can buy and sell in your 401(k).3 min read
Traditionally, a 401(k) account was designed as a place where employees could accumulate retirement savings rather than a brokerage account where they could trade securities. However, some 401(k) plans now allow their participants to trade mutual funds and other investments in their 401(k) accounts.
You can buy and sell funds as often as you want in your 401(k). However, some employers may restrict how frequently you can buy and sell funds, and the type of investments you are allowed to invest in. In some situations, employers may allow frequent trading, while in other situations, employers may limit how often you can trade with your 401(k) money. Â
Generally, 401(k) fund sponsors allow participants to trade in their 401(k) to protect their 401(k) money. Participants can quickly switch out of a fund when the market goes up, and switch back when the market goes down. This allows participants to earn higher returns than if they let their 401(k) investments remain active during the market movements. In between the market movements, participants can put their retirement savings in a money market account to continue growing.
While it is not illegal to use 401(k) money to buy and sell funds every day, some 401(k) plans discourage the practice. When a participant trades actively in a commission-free account without incurring sales loads on the funds, the cost of trading is passed on to the fund sponsor, who is also the employer. As a result, employers may institute rules to curb excessive trading in 401(k) plans.
Originally, 401(k) plans were created to allow retirement savers to accumulate savings for their retirement. However, some employers have modified this purpose to allow retirement savers to buy and sell funds directly from their 401(k) accounts, similar to a brokerage account.
Some companies now offer a brokerage window, also known as a self-directed 401(k). The brokerage window allows retirement savers to direct their investments, and they can choose their own investments, without restricting themselves to the pre-selected investment options. However, the plan sponsor may still restrict how often account holders can trade, and the type of assets they can invest in.
If the plan sponsor allows you to trade as often as you see fit, you should exercise some restraint when investing. Switching investments too often can incur high brokerage fees that could reduce your investment earnings over time. Also, trading actively using your retirement savings could ruin your retirement goals. Instead, you can have a separate brokerage account, and let your 401(k) money remain intact.
Breaking Down 401(k) Self-Directed Brokerage Accounts
So you’ve been diligently contributing to your 401(k) plan, watching that employer match add up, but feeling a bit frustrated by the limited investment options? I totally get it. The good news is that yes, you might be able to buy and sell individual stocks in your 401(k) – but there’s a catch. You’ll need access to something called a self-directed brokerage account (SDBA) or brokerage window within your 401(k) plan.
Let me tell you, when I first discovered this option existed, it was like finding a secret door in my financial house! But before you get too excited, we need to understand what these accounts actually are and whether they’re right for your retirement strategy.
What Exactly Is a 401(k) Self-Directed Brokerage Account?
A self-directed brokerage account (SDBA) is basically an investment option within your 401(k) that gives you way more freedom than the typical menu of mutual funds your employer selected With an SDBA, you can access a much wider array of investment options, including
- Individual stocks
- Bonds
- Exchange-traded funds (ETFs)
- Mutual funds beyond what your plan normally offers
Traditionally 401(k) plans limited participants to a handful of mutual funds annuity contracts, guaranteed accounts, and maybe your company’s stock. But as investors became more sophisticated and demanded more control, some employers started offering these brokerage windows.
According to a 2023 survey by the Plan Sponsor Council of America, about 38.8% of employers now offer brokerage windows in their 401(k) plans. That’s a pretty significant chunk! However, Vanguard’s 2024 “How America Saves” report shows that while 21% of their 401(k) accounts offer a brokerage window, only a tiny 1% of participants actually use them.
How Does a 401(k) Brokerage Window Actually Work?
If your employer offers this option, they’ll select a specific brokerage firm like E*TRADE or Charles Schwab to partner with Here’s how it typically functions
- You’ll see the brokerage account listed among your investment options in your 401(k) plan
- You may have specific periods each year when you can move money from your regular 401(k) investments into the brokerage account
- Once funds are in the brokerage account, you can buy and sell investments similar to how you would in a regular brokerage account
- All transactions remain tax-sheltered within your 401(k)
It’s important to note that there are some limitations. While you can trade stocks, bonds, ETFs and mutual funds, you generally can’t engage in higher-risk activities like:
- Trading on margin
- Buying put or call options
- Purchasing futures contracts
Some plans do allow covered call writing, but this depends on your specific plan’s rules.
The Pros: Why You Might Want to Trade Stocks in Your 401(k)
Let’s talk about the potential upside of having a brokerage window in your 401(k):
1. Massively Expanded Investment Options
The standard 401(k) might offer you 10-20 fund choices. With a brokerage window, you suddenly have access to thousands of investment options. This means you can:
- Invest in specific sectors you believe will outperform
- Choose lower-fee investment options than what might be available in the standard plan
- Build a more customized portfolio aligned with your specific goals
2. Target Specific Market Opportunities
Maybe you’ve identified a particular subsector of the market that’s poised for growth, or you want to invest in specific companies you believe in. With a brokerage window, you can do exactly that instead of hoping your mutual funds might include those opportunities.
3. Potential for Higher Returns
If you’re a knowledgeable investor who can select winning investments, you might significantly outperform the standard options in your employer’s 401(k). The ceiling for returns is much higher when you can pick individual stocks.
4. All Within Your Tax-Advantaged Account
All your trading happens inside your 401(k), so you don’t have to worry about paying taxes on dividends or capital gains until you withdraw from the account in retirement (or potentially never, in the case of a Roth 401(k)).
The Cons: Serious Risks to Consider Before Trading Stocks in Your 401(k)
Before you rush to move your retirement savings into individual stocks, we need to talk about the very real downsides:
1. Higher Fees Can Eat Into Your Returns
Brokerage windows often come with:
- Account maintenance fees
- Transaction fees for trades
- Higher expense ratios on certain investments
According to data from Charles Schwab, while the average advised balance for self-directed brokerage accounts as of Q2 2024 was $335,008, many investors see their returns significantly reduced by fees.
2. Requires Substantial Investment Knowledge
Look, I’m not trying to discourage anyone, but successfully managing individual stock investments requires:
- Understanding how to analyze companies
- Knowledge of diversification principles
- Emotional discipline during market volatility
- Time to research and monitor investments
Most plan participants simply don’t have this expertise, which is why the standard 401(k) options are designed to be more straightforward.
3. Emotional Trading Can Devastate Your Retirement Savings
One of the biggest challenges with self-directed accounts is avoiding emotional decision-making. When the market drops, the temptation to sell can be overwhelming. When certain stocks are soaring, FOMO can drive poor buying decisions.
This behavior often leads to buying high and selling low – the exact opposite of successful investing.
4. Potential Fiduciary Issues
There’s an ongoing debate about whether employers could face liability if employees lose significant amounts in brokerage windows. Under ERISA (Employee Retirement Income Security Act), all investment options in qualified plans need to meet certain fiduciary standards.
Who Should Consider Using a 401(k) Brokerage Window?
Based on the available data and expert opinions, these accounts tend to work best for:
- Highly educated investors with previous trading experience
- Higher-income employees who can afford to take some risks
- Those who have a clear investment strategy (not just following hot tips)
- Individuals who understand the importance of diversification
David Wray, president of the Plan Sponsor Council of America, notes that “the people who use [brokerage windows] are typically highly paid—not your typical 401(k) participant going into a target-date fund.”
Smart Strategies If You Do Use a Brokerage Window
If you’ve weighed the pros and cons and still want to trade stocks in your 401(k), here are some approaches that can help reduce your risk:
1. Limit Your Exposure
A common recommendation from financial advisors is to only put a portion of your 401(k) assets into the brokerage window – maybe 10-20% at most. Keep the bulk of your retirement savings in more diversified, traditional options.
2. Focus on Long-Term Investments
Your 401(k) is for retirement, not day trading! Choose investments you’re comfortable holding for years, not weeks or months.
3. Mind the Extra Fees
Be aware of all transaction costs and account fees associated with the brokerage window. These can significantly impact your returns over time.
4. Consider ETFs Instead of Individual Stocks
If you want more control but with less risk than individual stocks, ETFs can offer targeted exposure to specific sectors while maintaining some diversification.
How to Find Out If Your 401(k) Offers a Brokerage Window
Curious if this option is even available to you? Here’s how to check:
- Review your 401(k) plan documents
- Contact your HR department or benefits coordinator
- Log into your 401(k) portal and look for mentions of a “brokerage window” or “self-directed account”
- Call your 401(k) provider’s customer service line
Real World Example: Success and Failure with 401(k) Stock Trading
Let me share a quick story. My colleague Mark (not his real name) moved about 30% of his 401(k) into a brokerage window back in 2018. He put half of that money into a few blue-chip stocks he’d researched thoroughly and the other half into sector ETFs focusing on technology and healthcare.
By 2023, that portion of his account had outperformed his regular 401(k) investments by about 4% annually. The key to his success? He didn’t panic sell during market drops and stuck to his long-term strategy.
On the flip side, another friend moved 70% of her retirement savings into individual stocks in 2021, chasing the bull market. When tech stocks crashed in 2022, she panicked and sold at the bottom, locking in massive losses that will take years to recover from.
The Bottom Line: Proceed with Caution
Can you buy and sell stocks in your 401(k)? Possibly yes, if your employer offers a brokerage window option. Should you? That depends entirely on your investment knowledge, risk tolerance, and long-term financial plan.
The data clearly shows that while many employers offer these accounts, very few employees actually use them – and there’s probably good reason for that. For most 401(k) participants, the standard investment options provide a simpler, less risky path to retirement security.
If you’re considering this route, I’d strongly recommend consulting with a financial advisor first to make sure it aligns with your overall retirement strategy. Your 401(k) represents your financial future, and while the allure of picking winning stocks is strong, the consequences of getting it wrong can be devastating to your retirement dreams.
Remember, even investment professionals struggle to consistently outperform the market over the long term. Sometimes the boring, traditional approach to 401(k) investing might be the smartest move after all!
What’s your experience with 401(k) investments? Have you considered using a brokerage window or are you sticking with the traditional options? I’d love to hear your thoughts!
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If your employer allows 401(k) trading, you may want to trade securities with your 401(k) money. Find out how often you can buy and sell in your 401(k).3 min read
Traditionally, a 401(k) account was designed as a place where employees could accumulate retirement savings rather than a brokerage account where they could trade securities. However, some 401(k) plans now allow their participants to trade mutual funds and other investments in their 401(k) accounts.
You can buy and sell funds as often as you want in your 401(k). However, some employers may restrict how frequently you can buy and sell funds, and the type of investments you are allowed to invest in. In some situations, employers may allow frequent trading, while in other situations, employers may limit how often you can trade with your 401(k) money. Â
Generally, 401(k) fund sponsors allow participants to trade in their 401(k) to protect their 401(k) money. Participants can quickly switch out of a fund when the market goes up, and switch back when the market goes down. This allows participants to earn higher returns than if they let their 401(k) investments remain active during the market movements. In between the market movements, participants can put their retirement savings in a money market account to continue growing.
While it is not illegal to use 401(k) money to buy and sell funds every day, some 401(k) plans discourage the practice. When a participant trades actively in a commission-free account without incurring sales loads on the funds, the cost of trading is passed on to the fund sponsor, who is also the employer. As a result, employers may institute rules to curb excessive trading in 401(k) plans.
Originally, 401(k) plans were created to allow retirement savers to accumulate savings for their retirement. However, some employers have modified this purpose to allow retirement savers to buy and sell funds directly from their 401(k) accounts, similar to a brokerage account.
Some companies now offer a brokerage window, also known as a self-directed 401(k). The brokerage window allows retirement savers to direct their investments, and they can choose their own investments, without restricting themselves to the pre-selected investment options. However, the plan sponsor may still restrict how often account holders can trade, and the type of assets they can invest in.
If the plan sponsor allows you to trade as often as you see fit, you should exercise some restraint when investing. Switching investments too often can incur high brokerage fees that could reduce your investment earnings over time. Also, trading actively using your retirement savings could ruin your retirement goals. Instead, you can have a separate brokerage account, and let your 401(k) money remain intact.
Advantages of 401(k) Day trading
If the employer allows you to trade funds as you see fit, you can decide to use a day-trading strategy. Using this strategy in a 401(k) plan has a tax advantage since you can postpone paying taxes on any gains made from investments as long as the money remains in the account.
If you withdraw funds from your 401(k), you will pay ordinary income tax on the amount withdrawn, and an additional 10% penalty if you are below age 59 ½. With a brokerage account, you will pay taxes immediately you make a gain from selling investments.
EPISODE 33: You CAN legally day trade your 401k
FAQ
Can I buy and sell stocks in my 401k without paying taxes?
What happens when you sell stocks in a 401k?
If you choose not to do an NUA, there may be an option available to leave the company stock assets in the 401(k). When you sell your shares, you’ll pay long-term capital gains tax on the stock’s NUA, along with any additional capital gains that occur after you make the distribution.
Can you trade stocks within a 401k?
Generally, 401(k) fund sponsors allow participants to trade in their 401(k) to protect their 401(k) money. Participants can quickly switch out of a fund when the market goes up, and switch back when the market goes down.
How much do I need in my 401k to get $1000 a month?