Can I Invest My 401(k) In Stocks? | Importance, Benefits & Risks (2024)

FAQs

Can I Invest My 401(k) In Stocks? | Importance, Benefits & Risks? ›

Yes, individuals can invest their 401(k) retirement savings in stocks. Most 401(k) plans offer various investment options, including stock funds. These funds may invest in individual stocks or a portfolio of stocks.

You typically can't invest in specific stocks or bonds in your 401(k) account. Instead, you often can choose from a list of mutual funds and exchange-traded funds (ETFs). Some of these will be actively managed, while others may be index funds. So what kinds of funds and investments can you expect to see?

Moreover, if you are under age 59 ½, you will be hit with a 10% early withdrawal penalty, making it an even less attractive option. Instead, it is recommended to keep investing as the market dips and stick with your strategic plan.

Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).

Key Takeaway. Rolling over your 401(k) money into an IRA can be a good way to defer taxes until you retire and begin to take distributions. But if your account includes publicly traded stock in the company you work for, you can save money by withdrawing it from your 401(k) and putting it in a taxable brokerage account.

Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.

One of the best things to do during a stock market crash or a low financial point is to stay the course and not reduce your 401(k) contributions. In fact, some believe a bear market is the right time to increase the percentage of income you funnel into your savings if you can afford it.

The tax advantages of a 401(k) plan combined with an employer match are a winning combination. “If you invest your retirement directly into stocks instead of a retirement account, you will be subject to taxes on the dividends and capital gains when you sell the stocks.

While it appears that you're losing money during a market crash, in reality, it's just your stocks losing value. For example, say you buy 10 shares of a stock priced at $100 per share, so your total account balance is $1,000. If that stock price drops to $80 per share, those shares are now only worth $800.

What happens to my 401k if the dollar crashes? ›

If the dollar collapses, your 401(k) would lose significant value. Exponential inflation would result if the dollar collapsed, decreasing the real value of the dollar compared with other global currencies, which, in effect, would reduce the value of your 401(k).

The value of a 401(k) account, or any retirement account, always depends on how the account is invested. For many people who are still decades away from retirement, their portfolios will largely consist of stocks, which may suffer declines during a recession or economic slowdown.

Income-producing assets like bonds and dividend stocks can be a good option during a recession. Bonds tend to perform well during a recession and pay a fixed income. Similarly, dividend stocks pay regular income regardless of how the stock market is performing.

Good alternatives include traditional and Roth IRAs and health savings accounts (HSAs). A non-retirement investment account can offer higher earnings but your risk may be higher. Investment accounts don't typically come with the same tax advantages as retirement accounts.

Like a savings account or individual retirement account (IRA), a 401(k) itself is simply a type of financial account. Once you contribute money to your 401(k), you must then invest the money in stock or bond funds, otherwise it will remain as cash.

The most people who invest in the S&P 500 do so through index funds, which are mutual funds or exchange-traded funds that aim to replicate the benchmark's performance. Most employer-sponsored retirement accounts—like 401(k)s or 403(b)s—offer at least one S&P 500 index fund.

By age 35, aim to save one to one-and-a-half times your current salary for retirement. By age 50, that goal is three-and-a-half to six times your salary. By age 60, your retirement savings goal may be six to 11-times your salary. Ranges increase with age to account for a wide variety of incomes and situations.