Bogleheads

olemacdee · Joined: 17 Oct 2009 Posts: 2

Can you buy and sell stocks in a 401K account as often as you want and only pay taxes on the difference between your initial investments and your accumulated profit once you reach the age of 59? Thanks for any help you can offer.

JDCPAEsq · Joined: 05 Mar 2007 Posts: 568 Location: Southwest Florida

If all your contributions are pre-tax contributions, you will pay tax on the entire value of the account as it is withdrawn. The only way you have a basis in the 401(k) is to make after tax contributions. Security transactions within the account are irrelevant.
John

kaneohe · Joined: 22 Sep 2008 Posts: 560

Assuming you have a "conventional old-style traditional" 401K where all contributions are pre-tax, all withdrawals would be taxed, not just your accumulated "profit" since none of your contributions was after-tax and your basis is 0.

You pay taxes when you withdraw the funds, not when you reach a certain age. Depending on your plan rules, you may need to be careful how often you trade.......some plans or funds have rules against excessive trading with consequences banning you from certain funds to financial penalties. Hopefully you will be warned before violating the rule but better to be aware and ask the question before.

Generally, though, you have the correct idea that the 401K umbrella shelters you from the usual taxation you would have if the funds were in a taxable account where you would be subject to taxes on every trade.

livesoft · Joined: 01 Mar 2007 Posts: 8015

Also, you don't pay tax when you reach age 59. You only pay tax when you withdraw some of the money. You can roll over also to an IRA as well without paying tax at the rollover.

You also don't have to withdraw all the money all at once. You could withdraw some at age 62 and some at age 80 and some in between.

And with stock trading in a 401(k), you don't get to deduct your realized capital losses from your taxes either.

olemacdee · Joined: 17 Oct 2009 Posts: 2

Thank you all for the responses.

dbr · Joined: 04 Mar 2007 Posts: 3457

One complication that can exist in a 401k is the special treatment of company stock under Net Unrealized Appreciation rules. As far as I know, if company stock issued as part of company contributions is sold within the 401k, the NUA treatment is voided forever.