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

In order to invest in private stocks, you need first to withdraw funds from your 401(k) plan

401(k) is a U.S. individual contribution-defined retirement savings plan that allows employees to defer income taxes on earnings until the saved funds are withdrawn. However, there are considerable restrictions on using 401(k) plans for risky investments. 401(k) are usually invested in approved mutual funds that put emphases on stocks, bonds, money-market instruments or a mix of those. In order to invest in private stocks or choose any other risky investment options, you will first need to withdraw a part of your funds from you 401(k) plan.

Instructions

1. Contact your 401(k) administrator and inquire how to get a loan from your 401(k) account, which is often the easiest option available. The maximum amount allowed is usually $50,000 or 50 percent of your account balance, whichever is less. When considering taking a loan, analyze whether it makes financial sense for you. Pay particular attention to any fees, charges or interest rates that you will need to pay on your loan.

2. Review the options of direct withdrawal from your 401(k) account. Remember, however, that employers often restrict early withdrawals from the 401(k) account. If you are under the age of 59 1/2, any withdrawals may be subject to an excise tax of 10 percent plus any income taxes you owe to the government.

3. Choose a withdrawal option that suits your needs. Although it is possible to withdraw funds from your 401(k) account before retirement age, the funds withdrawn will be subject to considerable charges (10 percent withdrawal fee plus your due income tax). Don't forget to include these charges when comparing expected returns on your 401(k) account against the returns you expect to get from your investment in private stocks (your return on private stocks should be enough to compensate the 401(k) withdrawal charges).

4. Buy the private stocks you are interested in. Make your decisions after a careful examination of all the risks involved. Because private stocks are not traded on a stock exchange, you may find it difficult to be able to sell your stocks in the future.

References

• Internal Revenue Service: 401(k) Resource Guide - Plan Sponsors - General Distribution Rules