Can I Buy Individual Stocks With My 401k?
Explore the possibilities and limitations of investing in individual stocks through your 401k, including specific plan features and other investment avenues.
A 401(k) is an employer-sponsored retirement savings plan that offers tax advantages, allowing employees to contribute a portion of their paycheck for retirement. While 401(k)s are tools for retirement planning, they do not allow for the purchase of individual company stocks. Most 401(k) plans present a curated list of investment options for participants.
Understanding Common 401(k) Investment Options
401(k) plans offer a selection of investment vehicles designed for diversification and professional management. Mutual funds are a common option, which are portfolios managed by professionals that pool money from many investors to buy a variety of stocks, bonds, or other securities. This pooling provides built-in diversification.
Target-date funds are another choice, automatically adjusting their asset allocation over time. These funds are designed based on a projected retirement date, gradually shifting from more aggressive to more conservative investments as the target year approaches. Exchange-Traded Funds (ETFs) are also available, similar to mutual funds but trading like individual stocks on an exchange throughout the day. Some 401(k) plans may also permit investing in the employer’s company stock. This is distinct from having the flexibility to choose any individual stock from the broader market.
Using a Self-Directed Brokerage Account within a 401(k)
For those seeking more control over their 401(k) investments, some plans offer a Self-Directed Brokerage Account (SDBA), also known as a “brokerage window.” An SDBA is an optional feature that acts as a sub-account within the main 401(k), expanding investment choices beyond the core plan offerings. This allows participants to invest in a wider range of securities, including individual stocks, bonds, and a more extensive selection of mutual funds and ETFs.
Not all 401(k) plans include this feature; participants must verify its availability with their plan administrator. If offered, an SDBA provides greater flexibility but also demands more active management and investment knowledge from the participant. While enabling broader investment opportunities, these accounts may involve additional fees, such as annual maintenance charges or transaction fees for trades, which can vary depending on the provider.
Other Ways to Invest in Individual Stocks
For individuals interested in investing in individual stocks outside a 401(k), several alternative investment vehicles provide this flexibility. Individual Retirement Accounts (IRAs) are a popular choice, offering broad investment options including individual stocks, ETFs, and mutual funds. Traditional IRAs allow contributions that may be tax-deductible, with earnings growing tax-deferred until withdrawal in retirement.
Roth IRAs, conversely, are funded with after-tax contributions, meaning qualified withdrawals in retirement are entirely tax-free. Both IRA types provide full control over investment selection. Another option is a taxable brokerage account, a standard investment account without the specific tax benefits or contribution limits of retirement accounts. These accounts offer complete flexibility to buy and sell individual stocks, but any realized gains from selling investments are subject to capital gains taxes. Dividends and interest earned within these accounts are also subject to income taxes in the year they are realized.