Most working people have heard of employer-sponsored 401(k)s, but the 801(k) presents an opportunity to build your retirement cache by purchasing stock directly from a company. The 801(k) is better known by its Wall Street moniker -- the dividend reinvestment program, or DRIP. These programs represent a long-term investment strategy that allows you to gradually increase your ownership in a company as the company pays out taxable dividends. To be eligible for an 801(k), you need to first own shares in the company.
Investing in an 801(k) means you will be purchasing shares directly from a company instead of going the traditional route of using a broker or investing in a mutual fund. This allows you full control of your investment and reduces the fees you pay to buy stock. It also requires you to do your homework before buying into a company. Research companies in fields that you are interested in and find out if they offer a DRIP 801(k) plan.
Consult an Accountant
An 801(k) works by taking the dividend from the initial stock you purchase and allowing you to use it to purchase additional ownership in the company. This provides a solid investment strategy with a company that has hit its stride and is generous to shareholders, but it also can be an accounting nightmare. Because you reinvest in the company each time a dividend is paid out, you are making more frequent purchases that are viewed in the accounting world as separate transactions. Because dividends are taxable, you will need to be sharp with your spreadsheets or have a trusted accountant who can help you file your taxes.
Buy Initial Shares
To enroll in an 801(k), you first must own stock in the company that you obtain through a method other than an 801(k). The easiest way to get in with a company is to buy a small amount of stock in that company using a brokerage firm. If you are being adventurous and want to avoid brokerage firms completely, some companies may offer you the chance to buy "no load" stock, or stock that is available directly for sale from the company, which will then allow you to enroll in the company's DRIP.
Enroll in DRIP
After becoming a shareholder, you are now eligible to enroll in a company's DRIP. Contact the company and inquire about enrolling in its reinvestment program, or 801(k). Every company will operate its plan in a slightly different manner, with most allowing investments once a quarter during dividend payouts. Depending on the company, you might have opportunities to enroll in an automatic program that invests directly from your account without the need for you to do it manually each quarter.
- Comstock/Stockbyte/Getty Images
- How Can Smaller Investors Obtain Access to Private Equity Investment?
- Dividend Paying vs. Dividend Yield
- How to Buy into a Fourth-Quarter Dividend
- How to Buy Shares of Dividend-Paying Companies Without Paying Broker Fees
- What Is the Meaning of Compound Dividend?
- How Do I Buy Stocks Cheap?
- What Is the Importance of Investor Ratios?
- What Happens to Dividends in a Stock Portfolio?