How to Trade Individual Stocks & Mutual Funds in your 401(k) Retirement Account

(August 15th, 2009)

Most 401(k) and IRA investors don’t know that they can trade (for the short term) & invest (for the long term) their retirement accounts. Most employees currently invest in their employer sponsored investment plans such as mutual funds, with the variety of choices strictly limited to reduce administration costs of the employer, as well as to reduce stress of the organization & allocation of its resources. Thus, what happens if you want control over where your 401(k) money is invested in? Well you have choices!

In order to successfully do this, follow the steps below and note that you will require extra money on top of the usual 401(k) retirement funds that you have, as well as a previous 401(k) account with a previous employer.

1) Assess how much risk capital you have on hand, and how much of money you want to devote to trading stocks/mutual funds on your own, using your 401(k) accounts. It is advised to start off small trading, since you are not an expert and you will have lots of learning curves.

2) Divide your funds in to two sources, i) money from your future contributions and ii) money from your previous 401(k) plans.

3) Open an Individual Retirement Account (IRA) with a brokerage firm, if you don’t already have one. Examples of IRA brokerage firms include Fidelity, Scottrade, American Century Investments, etc. Be sure to read the fine print of their application forms, to see how much fees they charge. Anything in excess of 1% of IRA funds is too high and you should avoid such a brokerage firm.

4) If you are using funds from a previous employer 401(k) plan, be sure to do a direct 401(k) rollover to your IRA, also known as a direct trustee to trustee transfer. In such a transfer, money will be sent directly from your old employer’s 401(k) administrator to the custodian of your IRA, you will not get this money in your hand. Go here to learn more about direct 401k rollover.

5) Contribute other required funds directly to your IRA.

6) Also if you work for your current employer, set automatic bi-weekly payroll deductions from your check and send these funds to your IRA. Once you have your own IRA set up, you can trade stocks and be the investment manager of your retirement account.

Note: We always advise for you to invest for the long term as the fees involved in short term trading as well as risks involved far outweigh the benefits of trading stocks.