Since 401(k) plans are retirement plans offered by employers, the rules that govern them can differ depending on which plan your company offers. Many have restrictions that prevent new employees from contributing to their 401(k) accounts for anywhere from the first three months of their employment to the first year. And not every program will let you buy and sell stock.
Not a Brokerage Account
Traditionally, most 401(k) accounts haven’t been like brokerage accounts where you buy and sell stocks regularly. Instead, they acted as retirement savings plans that allowed you to invest part of your pre-tax earnings. Even today, most retirement accounts follow this model. When you invest in your 401(k), you’re usually investing in shares of a mutual fund, not in individual stocks. The average fund offers 19 separate investment options to choose from, usually some combination of stocks and bonds.
The Brokerage Window
That being said, some companies have started offering more flexible options for 401(k) accounts, including the option to trade stocks as if it were a brokerage account. This so-called “brokerage window” is also sometimes referred to as a self-directed 401(k) or self-directed brokerage account. But that doesn’t necessarily mean your employer will offer that option. Even if your company’s 401(k) does come with a brokerage window, the company might still restrict how frequently you’re allowed to trade and what types of assets you’re allowed to invest in. The rules differ from company to company, so make sure you study the options your plan provides.
Don't Touch It
Even if your company allows you to move funds around from stock to stock, that may not be the best way to invest. Hopping from one investment to the other can incur all sorts of brokerage fees, which can eat into your profits over time. If you really want to trade the stock market, you can always open up a separate brokerage account and let your 401(k) grow your retirement nest egg untouched.
The Contribution Limit
Regardless of whether your program has a brokerage window option or not, the IRS limits how much you can contribute to your account, though this amount changes year to year, with the 2013 limit set at $17,500. Your employer may also provide a matching contribution to your account, up to 100 percent of your contributions. And workers 50 years or older are allowed to contribute additional “catch up” funds.
Jake Costa has been a reporter and editor since 2003. Among other topics, he has covered business, finance, science, technology and the environment. He has written for "The Financial Times," Environmental Leader, "Latin Finance" and Sybase. He has a Bachelor of Arts in literature from the University of Michigan.