Most of us learn from a young age that it’s important to save for retirement. Most investors take the “Warren Buffet” approach to investing, which is to buy and hold for the long term. But are there other things that you can do with your retirement account besides let it collect dust? Well, you could use it to buy penny stocks.
Can I Really Buy Penny Stocks With My 401(k)?
This is a popular question especially among those younger generations that want the best of both worlds. With most 401(k) plans, there are strict rules when it comes to taking money out and putting money in. For instance, the maximum contribution limit for a 401(k) in 2019 is $19,000. This increased from the 2018 figure of $18,500. But what if you want to build faster? Well, you can add more to your 401(k) by using the funds to trade things like penny stocks.
Keep in mind that we’re using penny stock trading as an example. Of course, you aren’t solely limited to one of the highest risk asset classes in the stock market. This is something that the “401(k) teachers” don’t tell you. With most 401(k) plans being designed for investing and “saving until retirement,” not many people know about this. Essentially, you can take the nest-egg in your 401(k) and use it to day-trade.
An Unconventional Way To Leverage Your Retirement Account
I say penny stocks or micro-cap stocks because they are traditionally associated with risk. We’re talking quick, highly volatile and potentially highly profitable moves in the market. Day trading is an active investment strategy that involves buying and selling stock in as short a period. Because of this, you’ll need to keep in mind all of the rules that go with day trading.
Regardless, the benefit is being able to take advantage of quick spikes in the price of certain stocks. Because penny stocks are higher risk, the assumption is that you couldn’t use a retirement account to day trade. That is simply inaccurate.
Why Would You Want To Day Trade With A 401(k)?
Usually, people invest in a 401(k) because it helps with taxes when you reach retirement age. It can also work against you if you want to withdraw from the account before you reach retirement. In this case, your tax advantages are still in play. As a result, this is a big advantage if you like making money on your money.
For example, when you sell a stock for a gain in a brokerage, you owe tax on that gain, immediately. With something like a 401(k), you won’t owe taxes on the gain if the money stays in the account. This means that you can earn a higher after-tax return in the 401(k) as well as indirectly contribute more to your 401(k) with a winning trade. Whatever gains you make from day trading will likely end up accruing the same interest that the 401(k) will.
Keep in mind that even though this is the case, you still need to avoid taking a withdrawal on that gain until retirement age. If you do, you’ll have to pay the penalty. Either way, this is a great alternative to just watching and waiting for your 401(k) to grow. Just know the best strategies when you’re looking to buy penny stocks.