Some investors prefer to take a hands-off approach to their retirement funds by choosing a 401(k) plan offered by their employer, and letting their contributions accumulate untouched. Others prefer a more proactive approach and trade funds within the umbrella offered by their funds. Although the Internal Revenue Service doesn’t place limits on how often an investor can make trades within a 401(k) plan, it allows plan administrators to place rules that can restrict the frequency of in-plan trades.
Trading Restrictions on Retirement Plans
The IRS places few restrictions on funds placed inside qualified 401(k) retirement plans. As with any other tax-deductible retirement fund, investors can't take possession of the funds without incurring income taxes on the amount withdrawn. And, if the distribution was made before the beneficiary turned 59 1/2, the IRS penalizes the investor with an additional 10 percent early withdrawal fee.
Some large brokerages place limits on how often funds can be transferred within a plan. Investors should contact their plan administrator to determine if any restrictions are placed on intrafund trading.
Conversions to an IRA
Because many workers leave small amounts with employer-sponsored 401(k) plans when they get a new job, some choose to convert old 401(k)s into a traditional or Roth individual retirement account (IRA). In many cases, investors make the conversion in a trustee-to-trustee transfer in which the funds pass directly from one brokerage to another. The IRS allows investors to make trustee-to-trustee rollovers between funds as often as they wish.
An investor takes possession of the 401(k) assets and has 60 days to reinvest them into another qualifying fund before incurring taxes or penalties. After an investor makes this type of rollover, the funds must stay in the new account for at least one year before they can be transferred again.
Required Brokerage Fees
Because the IRS allows plan administrators to charge members a transaction fee for each trade they make within the plan, investors should consider the implications of frequent 401(k) trades. Those who make frequent trades can negate their gains – or at least severely curtail them – by incurring fees assessed for each in-plan trade. Investors should consult with their plan administrator to determine what fees, if any, are assessed for each transaction, and weigh trading decisions accordingly.
Other Restrictions on 401(k) Accounts
Although plans can require each participating employee to remain in a 401(k) plan for at least one year after joining it, the IRS limits the mandatory participation rule to a 365-day period. This is called being vested, so if you hear that term, it is in reference to the time necessary to collect any employer contributions to your 401(k).
Employees can transfer funds from the plan at any time after one year. Additionally, all employee contributions to a plan are 100 percent vested, meaning they can withdraw all funds from the plan immediately without having to wait to take possession of the assets. The IRS allows employer contributions to vest only after employees have worked a specified amount of time for the company.
Read More: When Should 401(k) Capital Gains Taxes be Paid?
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.