Pretty much the title. If someone sells an index fund that has gained value from within a traditional 401k, and then uses that money to buy into another index fund without withdrawing, do they still need to pay capital gains/early 401k withdraw penalty?

Or is this only when money is taken out?

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CDragon00 t1_jecddh0 wrote on March 30, 2023 at 11:55 PM

#2,506,714

No, selling/buying/exchanging without actually withdrawing is not a taxable event.

sonnyfab t1_jecdeif wrote on March 30, 2023 at 11:55 PM

#2,506,721

There are no taxable events within a 401k. The taxation occurs either when funds are deposited into or withdrawn from the account, depending on whether it is Roth or traditional.

atexit8 t1_jecdiov wrote on March 30, 2023 at 11:56 PM

#2,506,749

It is a nontaxable event.

Who is the 401K's custodian?

nkyguy1988 t1_jecdity wrote on March 30, 2023 at 11:56 PM

#2,506,750

Trade away all you want. IRAs/401ks, with limited exceptions like owning MLPs, have their tax considerations only when money enters/leaves the account. Reitement accounts also have zero capital gains tax considerations.

DrGreenMeme OP t1_jece9kq wrote on March 31, 2023 at 12:01 AM

#2,506,947

Replying to atexit8 (#2,506,749)

It's just a hypothetical, I have a roth 401k personally, but just was curious

AcademicApplication1 t1_jecjbrm wrote on March 31, 2023 at 12:39 AM

#2,508,281

You cannot hold cash in a 401k so there's no taxable event, all funds must be invested in something

DaemonTargaryen2024 t1_jee3u4t wrote on March 31, 2023 at 10:47 AM

#2,522,735

Think of a 401k or an IRA like an umbrella. Anything done under the umbrella is a nontaxable event (except Roth conversion). Once it leaves the cover of the umbrella it gets hit with taxes.

Just because it has no taxable event doesn’t necessarily make it a good idea though. “Trading” in the 401k will lead to less profits more often than not. If this is part of a purposeful change in asset allocation that’s fine. But if you think you can time the market, think again.

DrGreenMeme OP t1_jeetopw wrote on March 31, 2023 at 2:28 PM

#2,531,271

Replying to AcademicApplication1 (#2,508,281)

Wym? If I sell FXAIX in a fidelity 401k, the money must go somewhere? Held in SPAXX or something but basically cash, no?

AcademicApplication1 t1_jeewmnc wrote on March 31, 2023 at 2:48 PM

#2,532,304

Replying to DrGreenMeme (#2,531,271)

When you "sell" you must move to something else like even a money market isn't considered cash, you can never have cash in a 401k