Individual Retirement Accounts and 401(k) plans are tax-advantaged retirement savings plans. Both are funded with pre-tax money and provide for the tax-deferred growth of contributions and earnings. Distributions trigger taxes at ordinary income tax rates. The process of trading stocks in these accounts is similar to any taxable investment account, but the tax advantages these accounts offer may alter your trading strategy.
Step 1
Read your account documentation. Many 401(k) plans are managed by mutual fund companies and only allow you to invest in mutual funds, not individual stocks. IRAs are generally more flexible in terms of your investment options, but you should check with your IRA custodian if you have any doubt about your ability to purchase stocks in your account. For example, some IRA custodians do not permit real estate investments in an IRA, and while real estate stocks are typically permitted, each custodian has the right to prohibit certain investments.
Step 2
Devise a strategy. Before you buy stocks in your retirement plan, determine which stocks would be best served within the plan, and which would be better purchased in a regular taxable investment account. For example, taxes are deferred on IRA and 401(k) investments, so if you are a buy-and-hold investor, you might buy stocks paying the highest dividends in your retirement account, as opposed to paying tax on the dividends in a regular account. If you are a short-term trader, you might trade stocks most actively in an IRA or 401(k) to take advantage of the tax-deferral of short-term trading gains, which would be taxed at ordinary income rates in a taxable investment account.
Step 3
Research your stocks. Regardless of the tax consequences, you should purchase only stocks that have a valid investment case. In other words, while taxation is important, research and purchase only stocks that match your personal investment objectives and risk tolerance, and fit into your overall portfolio strategy.
Step 4
Buy your stock. Contact your financial adviser, 401(k) administrator, or whoever can execute trades on your behalf. Tell them the name and symbol of the stock, along with how many shares you wish to purchase. If your account is set up to trade online, enter the same purchase information on the trading platform of your investment firm's website.
Step 5
Confirm your transaction. Your IRA custodian or 401(k) administrator will provide you with a confirmation of your trade. Verify that your trade was executed as you desired. If there are any discrepancies, correct them immediately by contacting your investment firm.
Things You'll Need
- IRA account
- 401(k) account
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