401(k) Tips

How long do 401k trades take?

If you use your 401(k) to trade, the investment options you choose will take different periods to settle. Find out how long 401(k) trades take.

3 min read

If you are using your 401(k) to trade, you will be required to pick the investments from a list of pre-selected investment options. The average 401(k) plan offers 8 to 12 investment options, which may include stocks, mutual funds, company stock, variable annuities, and guaranteed investment contracts. These investments take different durations to settle.

If you trade stocks in your 401(k), the trade can take two business days to settle after the day when the trade is executed. For example, if the trade is executed on Monday, the stocks will settle on Wednesday. If you hold mutual funds in your 401(k), the funds will settle on the next business day after the trade is executed. Some investments may have a provision that requires investors to allow more time to settle trades.

Stocks, Mutual Funds, and ETF Trades in 401(k)

Understanding how stocks, mutual funds, and exchange-traded funds trade will help you make strategic investment decisions. Mutual funds pool finances from multiple investors to buy securities like bonds or stocks. When redeeming or purchasing a mutual fund, you transact directly with the specific fund. On the other hand, when trading stocks and ETFs, the trade occurs in the secondary market.

You can trade mutual funds once daily, usually after markets close at 4 p.m. Eastern Time. When selling or buying mutual funds, trades settle by the next business day at the next net asset value (NAV). NAV is calculated daily after the markets close and may differ from the previous day’s value. If you are swapping your fund shares for a different fund in the same family, the trade settles on the next working day.

If you plan to trade more actively, ETFs and stocks are a better fit for you. ETFs hold a pool of individual securities, like mutual funds. You can buy and sell ETFs and stocks multiple times with no restrictions. Since they have no minimum investment, these options allow you to invest as low as $1 and enable investors to execute trades at any time during the trading day. ETFs and stocks take two business days to settle.

Trading securities using a 401(k) Brokerage account

Until recently, investment options provided in a 401(k) were mainly mutual funds, annuity contracts, guaranteed accounts, and company stock. However, some plans now allow plan participants to buy and sell securities using a 401(k) brokerage account, also known as a self-directed brokerage account.

A 401(k) self-directed brokerage account allows investors to take big risks with retirement savings. Usually, employers who offer 401(k) brokerage accounts must list the 401(k) with specific investment firms that offer brokerage services. Participants are then allowed a specified window when they can move funds from their 401(k) account into the brokerage account. Once the transfer is made, participants can trade various securities such as stocks, mutual funds, and ETFs tax-free. In some cases, investors can take greater risks such as trading on margin and trading call and put options.

What to consider when using a 401(k) brokerage account to trade?

If you are using a 401(k) brokerage account to trade, there are certain things you should consider before trading. The first consideration is to determine the portion of 401(k) money that you will trade. You can decide to trade part of or all the money. If you are a novice investor, you should leave part of the money in a mutual fund provided in your traditional 401(k).

You should also consider the maintenance fees associated with the investment options you want to invest in. The account maintenance fees should be below 1% of your total retirement assets in the account. Higher maintenance fees will reduce your overall investment returns. The Department of Labor requires employers and investment firms to provide information on all fees and expenses associated with an investment product to allow investors to make sound investment decisions.

Can you use a 401(k) in day trading?

If you have a 401(k) plan with your employer, you are responsible for managing your investments. You can use your 401(k) contributions to trade securities in your 401(k) account. As long as you trade within the trading plan rules, you can use a 401(k) for day trading to buy and sell stocks whenever you want.

Day trading with a 401(k) is different from using a regular brokerage account. When you use a regular brokerage account to trade stocks, you will pay immediate taxes on any gains earned from the trade. However, with a 401(k), you won’t pay taxes immediately on any gains earned from day trading. You can defer paying taxes on the gains earned until when you take money out of the account. If you withdraw the gains earned before you are 59 ½, you will pay income taxes and an additional 10% penalty tax on the withdrawal. You must be at least 59 ½ to make penalty-free withdrawals from your 401(k).