How often can I buy and sell in my 401k?

Traditionally, a 401(k) account was designed as a place where employees could accumulate retirement savings rather than a brokerage account where they could trade securities. However, some 401(k) plans now allow their participants to trade mutual funds and other investments in their 401(k) accounts.

You can buy and sell funds as often as you want in your 401(k). However, some employers may restrict how frequently you can buy and sell funds, and the type of investments you are allowed to invest in. In some situations, employers may allow frequent trading, while in other situations, employers may limit how often you can trade with your 401(k) money.  

401(k) trading rules

Generally, 401(k) fund sponsors allow participants to trade in their 401(k) to protect their 401(k) money. Participants can quickly switch out of a fund when the market goes up, and switch back when the market goes down. This allows participants to earn higher returns than if they let their 401(k) investments remain active during the market movements. In between the market movements, participants can put their retirement savings in a money market account to continue growing.

While it is not illegal to use 401(k) money to buy and sell funds every day, some 401(k) plans discourage the practice. When a participant trades actively in a commission-free account without incurring sales loads on the funds, the cost of trading is passed on to the fund sponsor, who is also the employer. As a result, employers may institute rules to curb excessive trading in 401(k) plans.

The brokerage window

Originally, 401(k) plans were created to allow retirement savers to accumulate savings for their retirement. However, some employers have modified this purpose to allow retirement savers to buy and sell funds directly from their 401(k) accounts, similar to a brokerage account.

Some companies now offer a brokerage window, also known as a self-directed 401(k). The brokerage window allows retirement savers to direct their investments, and they can choose their own investments, without restricting themselves to the pre-selected investment options. However, the plan sponsor may still restrict how often account holders can trade, and the type of assets they can invest in.

If the plan sponsor allows you to trade as often as you see fit, you should exercise some restraint when investing. Switching investments too often can incur high brokerage fees that could reduce your investment earnings over time. Also, trading actively using your retirement savings could ruin your retirement goals. Instead, you can have a separate brokerage account, and let your 401(k) money remain intact.

Advantages of 401(k) Day trading

If the employer allows you to trade funds as you see fit, you can decide to use a day-trading strategy. Using this strategy in a 401(k) plan has a tax advantage since you can postpone paying taxes on any gains made from investments as long as the money remains in the account.

If you withdraw funds from your 401(k), you will pay ordinary income tax on the amount withdrawn, and an additional 10% penalty if you are below age 59 ½. With a brokerage account, you will pay taxes immediately you make a gain from selling investments.

Drawbacks of 401(k) trading

Day trading in a 401(k) account has some limitations. One of these limitations is that aggressive trading may result in losses if you take too many risks. Day traders buy and sell funds based on daily price fluctuations, and it can be a gamble making accurate predictions. Most investors find it difficult to outperform stock indexes when investing in the long term.

Also, if you break the 401(k) rules for day trading, the plan sponsor could lock you out from using your 401(k) to trade. This may occur if you exceed the number of trades allowed within a specific period, or if you take too many risks.

How often can you change 401(k) investment?

According to the Department of Labor, employers must allow plan participants to change their investments at least quarterly. If your employer follows these guidelines, you may be allowed to change your investments at least every quarter, or more frequently. Generally, how often you can change the securities you have invested in depends on the company policy.

The employer must provide written documentation to plan participants on how the plan operates. You can check the summary plan description to know how often your employer allows investment changes. If you don’t have a copy of the document, you can request a copy from the company's human resource department.

You can also change your investments when the employer is valuing 401(k) accounts. During the valuation process, the employer evaluates the current account balance, account growth, and losses incurred. Account valuations may occur monthly or quarterly, and sometimes even daily. You can take advantage of the valuation period to change your investment allocations.