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

By: Tara Thomas | Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance | Updated April 08, 2019

There are several ways to use a 401(k) to buy privately-held stock.

Duncan Smith/Photodisc/Getty Images

A 401(k) plan makes for a fine financial vehicle on the road to a worry-free retirement. However, you need be sure you completely understand how it is being put to work for you, as no two 401(k) plans are alike. While you typically cannot directly use your 401(k) to buy private stocks, there are certain circumstances when you can access the funds in your 401(k). And, if you’re over the age of 59 ½, you can make penalty-free withdrawals to do with as you like, including purchasing private stocks.

Tip

Unless your 401(k) plan offers a self-directed brokerage window, you cannot use a 401(k) to directly buy private stock.

Your 401(k): The Basics

A 401(k) plan is an employer-sponsored retirement plan that is generally offered to full-time employees. As an employee, you will contribute to your 401(k) plan from each paycheck and, if you're lucky, you're employer will match your contributions up to a certain amount. For 2019, you are able to contribute up to $19,000 per year to your 401(k), up $500 from the 2018 contribution limit of $18,500. But, if you are over the age of 50, you are allowed to make an additional “catch-up” contribution amount to your plan of up to $6,000, in 2019, unchanged from the 2018 figure.

When you have a 401(k) plan, it can be tempting to think about it as a big piggy bank, but this isn’t in your best interest. The Internal Revenue Service imposes penalties on withdrawing or accessing the funds in your 401(k) until you reach the age of distribution – 59 ½. There are certain exceptions to the IRS-imposed early withdrawal penalties for hardships, however, using your 401(k) funds to buy private stocks isn’t one of them.

How Your 401(k) Contributions Are Invested

Every company organizes its 401(k) plan for the best interest of the company and employees, so as a result, every 401(k) plan is structured a little differently. However, there are many similarities among 401(k) plans in general. For example, most 401(k) plans are managed by a fund manager who selects the investments for the plan. Although some 401(k) plans are structured where employees have a few more investing options available to them, it is rare to have a plan structured where you can select individual stocks. Roughly 20 percent of employers offer self-directed 401(k) accounts.

401(k) plans are usually very diversified, meaning their assets are held in several different types of investments including stocks, bonds and mutual funds. But, you typically won’t have a hand in selecting the investments your 401(k) contributions are going to ultimately buy. On the other hand, if your employer has structured its 401 (k) to give employees greater control over investments they want, then you should familiarize yourself with your individual 401(k) plan and contact the plan’s manager for more information regarding its self-directed brokerage window.

Ways Around the Limitations

One way to use your 401(k) to purchase private stocks is to take out a 401(k) loan. Not all plans have provisions for retirement loans, so once again, you will need to check with your plan administrator for more information. The IRS also has its own set of rules that govern retirement plan loans. Visit the agency’s website for more retirement plan topics covered in depth.

Converting or “rolling” your 401(k) into an individual retirement account, or IRA, is another way for you to purchase private stocks using your 401(k). Before trying to access the funds in your 401(k), be certain you are familiar with how your plan is structured as well as any IRS consequences you could face.

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.

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About the Author

Tara Thomas is a Los Angeles-based writer and avid world traveler. Her articles appear in various online publications, including Sapling, PocketSense, Zacks, Livestrong, Modern Mom and SF Gate. Thomas has a Bachelor of Science in marine biology from California State University, Long Beach and spent 10 years as a mortgage consultant.

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