How to Use a 401(k) to Buy Private Stocks

The 401(k) is a great investment tool, especially for retirement planning, but most don't give you the option to pick privately-held stocks directly and rely instead on mutual funds or other investments. If you want to get into the stock-picking game, there are some ways to use your 401(k) to build a portfolio, such as borrowing or withdrawing from your account or converting it to an Individual Retirement Account (IRA). Options are limited, and some methods could result in withdrawal penalties or other risks. You may also need to start a brokerage account to place the purchase orders for privately-held stocks.

Step 1

Ask the administrator of your 401(k) account if its features include a self-directed brokerage window, which lets investors choose privately-held stocks as part of their 401(k) holdings. Your administrator will have details on how to execute those stock orders. Most 401(k)s don't offer this option, in which case, you will need to open an account with a traditional or online stock broker and fund it with resources from your 401(k) to purchase privately-held stocks.

Step 2

Borrow or withdraw money from your 401(k) and transfer the funds to the brokerage account you will use to buy privately-held stocks. Many employers offer plans that let contributors take out loans equal to a certain percentage of the account's balance. Usually, these loans come with conditions, such as maintaining employment with the company, and changing jobs or other violations of the terms might require you to pay back the balance of the loan immediately or reclassify it as an account withdrawal. If you can't borrow from your 401(k), you can withdraw funds directly, but be aware that in addition to paying taxes on the withdrawal, you will also have to pay a 10 percent penalty.

Step 3

Consider converting your 401(k) account into an IRA. Most IRAs allow for privately-held stocks to be included in the portfolio. Converting a 401(k) to an IRA is often called a "rollover." There are different types of IRAs to consider, and many financial service firms will assist you with the paperwork to open the account.

Tip

  • Research the funds in your 401(k) to determine what companies and industries it includes. If you don't want to take the risk of borrowing or withdrawing from your 401(k) to purchase privately-held stocks, you can adjust your 401(k) to invest in funds that target the specific companies or industries in which you have interest.

Warning

  • Contributions to 401(k)s enjoy preferential tax treatment. Carefully research how changes to your account would affect your taxes and balance those considerations with the risks associated with privately-held stock purchases.

Photo Credits

  • Duncan Smith/Photodisc/Getty Images

About the Author

Terry Lane has been a journalist and writer since 1997. He has both covered, and worked for, members of Congress and has helped legislators and executives publish op-eds in the “Wall Street Journal,” “National Journal” and “Politico." He earned a Bachelor of Science in journalism from the University of Florida.

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