Most of us learn from a young age that saving for retirement is important. Most investors take the “Warren Buffet” approach to investing, which is to buy and hold for the long term. But are there other things you can do with your retirement account besides letting it collect dust? Well, you could use it to buy penny stocks.
Can I 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 regarding taking money out and putting it 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 designed for investing and “saving until retirement,” not many people know about this. 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 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 as possible. Because of this, you’ll need to keep in mind all the rules with day trading.
Regardless, the benefit is taking advantage of quick spikes in the price of specific 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 they reach retirement age. It can also work against you if you want to withdraw from the account before you retire. In this case, your tax advantages are still in play. As a result, this is a significant 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 you can earn a higher after-tax return in the 401(k) and indirectly contribute more to your 401(k) with a winning trade. Whatever gains you make from day trading will likely accrue the same interest that the 401(k) will.
Remember 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 an excellent 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.
Penny Stocks & Risk
Trading in your 401(k) might sound enticing on the surface. But don’t forget that this is designed as a retirement account. The stock market is risky, in general. When you add the layer regarding stocks under $5, that risk gets amplified dramatically. Within the blink of an eye, you can see a move up of 100% or more.
You can also see a move down that slashes the valuation of specific stocks in half or greater. Risk and reward must be weighed when you’re trading penny stocks in your 401(k) or in a traditional brokerage account. The simple and hopefully obvious explanation new traders need to grasp is that not all penny stocks will become the “next AMC” or the “next GME.”
Sometimes you’ll “only” get a 10% or 20% move in a cheap stock, and that’s it for the time being. But a gain is a gain, and 10% is much better than a 50% loss if you hold out for bigger profits that weren’t in the cards. Learning how to trade is more valuable than simply finding the next stock pick from a random social media account.
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