Apr
25
2025
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How to Start Investing in Utilities

By | Growing Wealth, invest, Investing | Comments Off on How to Start Investing in Utilities

Investors looking for a value investment that typically provides steady income without much volatility might consider investing in utilities. Utility companies provide essential services that the public uses on a daily basis, such as water and electricity, making them generally stable investments. Investing in utilities is considered to be low risk compared to other types of stocks, since utility companies are regulated entities with few competitors.

Plus, their profits and expenditures are very predictable, so they tend to provide steady performance. Utilities are a constant in modern life — people always need them — so utility companies tend to ride out economic downturns without significant volatility. As a result, utility stocks may provide higher dividends than other fixed-income assets, though they may not offer substantial growth potential.

Key Points

•   Utility stocks have the potential to provide a steady income stream through relatively high dividends.

•   These stocks are characterized by stability, regulation, and limited competition.

•   The essential nature of utilities ensures consistent consumer demand.

•   Utility stocks are often considered a safe haven, offering protection during market downturns.

•   Some utility stocks in emerging markets present opportunities for growth.

What Are Utility Stocks?

The utilities sector includes electricity, gas, water, and waste services. Cable and telephone companies used to be placed in the utilities sector, but now they are within the communications sector due to shifts in technology and competition.

The utilities sector includes companies that generate traditional power as well as alternative and sustainable energy (sometimes called green energy), in addition to companies that transmit and distribute power to homes and businesses. Companies that provide natural gas generally buy it from oil and gas drilling companies and distribute it to customers. Water companies provide clean water to customers and collect and treat dirty water.

There are government regulations protecting utility companies, making it difficult for competitors to enter the market. Regulations also control the prices that utility companies charge for goods and services, making their earnings predictable and creating even more stability in the market.

It’s also extremely expensive to build the infrastructure needed to provide utilities. This allows utility companies to establish themselves in a region and grow steadily over time without significant competition.

Who Should Invest in Utilities Stocks?

Utility stocks are generally considered to be income stocks rather than growth stocks, since they provide consistent dividends but don’t tend to significantly increase in value.

Some people might be tempted to think of utility stocks as similar to bonds, since they provide consistent income and tend to be stable and safe. But they are not the same. One difference is that the yields from utility stocks tend to be higher than those of bonds and other fixed-income investments. These factors make them popular as a safe haven asset, and among retirees and conservative investors.

Choosing Utilities Stocks to Invest In

There are a number of ways to evaluate a stock in a utility company before buying it — here’s what investors might want to consider.

New Utility Companies and Emerging Markets

Since utility stocks have high dividends (making them popular monthly dividend stocks) and tend to be established companies, they don’t have the opportunity for significant growth. But some stocks in emerging markets or those of new utility companies can be an exception. Growth investors tend to gravitate towards these types of utility stocks, use utilities as a safe haven during market downturns, or as a way to diversify.

Companies with Moderate Dividend Payouts

Investors can look at a company’s dividend payout ratio to see how much of its profits it retains and how much it pays out to shareholders. If a company pays out less to shareholders, it may have more potential for growth since it keeps those revenues to invest back into the business and won’t need to borrow as much money.

Undervalued Utility Companies

Technical analysis can help both growth and value investors pick out which utility stocks might be undervalued and those which have the most potential for growth and income.

Utilities with Healthy Credit Ratings

Another tool investors can look at when choosing utility stocks is their credit rating. A higher credit rating means a company will be able to borrow more money, which is important for utility companies that need to continue investing in and maintaining infrastructure. However, too much debt isn’t a good sign, so investors should look at the company’s EBITDA (earnings before interest, taxes, depreciation, and amortization) and debt-to-total-capital ratios when comparing potential utility stock investments.

Other factors to consider when choosing utility stocks:

•   The region in which the company operates

•   The regulatory market in that region

•   The utility the company provides and its business model

•   The dividend rate

•   The company’s financial performance

Investors who want to gain exposure to a broad cross-section of the market rather than choosing individual stocks might choose to invest in utility ETFs and mutual funds.

Benefits of Investing in Utilities Stocks

There are several reasons investors choose to add utility stocks to their portfolio:

•   They tend to pay out higher dividends than other fixed-income assets and stocks.

•   They are considered safe and stable investments. There will always be a demand for utilities, investors tend to sell off higher-risk investments first, they are under government regulation, and they have few competitors.

•   They tend to have high dividends and stability. Even though they don’t always see significant growth, their high dividends and low volatility make them a popular investment, so they do continue to grow over time.

•   They can be less volatile during economic downturns. Utilities provide essential services, making them a good way to diversify a portfolio.

•   They have little competition. Government regulations create the opportunity for utility companies to essentially become monopolies within their operating region, reducing the ability for competitors to enter the market.

•   Certain utility stocks may provide tax benefits. This can include lower capital gains rates for qualified dividends.



💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Downsides of Investing in Utilities

Although there are many reasons to invest in utilities, like any investment, they come with some downsides:

•   They are riskier than bonds. Since they are still part of the stock market, their values do fluctuate along with market trends. Utility stocks lost about half of their value (not including dividends) in both of the major market downturns in the past decade.

•   They don’t often provide opportunities for significant short-term growth. Here, their stability can be seen as a negative.

•   Rising interest rates can negatively affect utility stocks. That’s because utility companies tend to hold a lot of debt since their businesses require significant capital investment. As interest rates rise, companies have a higher debt burden. Also, when interest rates rise, stock prices tend to decrease, thereby decreasing their amount of equity funding and causing some investors to shift funds into other types of assets.

•   Utility companies are affected by changes in government policy. Regulations can also make it challenging for companies to grow, since they can’t easily increase their prices.

•   Not every utility company has high returns. The best choices for investors are the ones that show visible potential for both growth and high-yield dividends. Since utility infrastructure is expensive to build and maintain, companies need to show that they will be able to continue running and growing while still earning enough profit to pay out dividends.

The Takeaway

Investing in utility stocks can be a good way to diversify a portfolio by adding low-volatility assets that typically have high dividends. The public will always need utilities like water, gas, electric and renewable energy — and that allows utility companies to weather economic downturns relatively well.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q225-031

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Apr
24
2025
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Ordinary vs Qualified Dividends

By | Growing Wealth, invest, Investing | Comments Off on Ordinary vs Qualified Dividends

The vast majority of dividends — i.e., regular payouts from a company to certain stockholders — are considered ordinary dividends, but some are qualified dividends, and the tax treatment is different for each.

While sorting out which type of dividend you have can be confusing, it’s important to know the difference as they are taxed at different rates: Qualified dividends are taxed at the more favorable capital gains rate, while ordinary dividends are taxed as income.

Key Points

•   Dividends are regular payouts to certain company shareholders. Not all companies pay dividends.

•   Most types of dividends are considered ordinary dividends. Qualified dividends must meet certain IRS criteria.

•   Ordinary dividends are taxed as income; qualified dividends are taxed at the more favorable long-term capital gains rate.

•   Knowing the types of dividends you have is important for tax planning purposes.

What Are Dividends, How Do They Work?

When a company pays shareholders a portion of company earnings on a regular basis (i.e., quarterly), these payouts are called dividends, and they come in addition to any potential gains from stock performance.

Dividend amounts are set by the company, and investors receive a payout based on the number of shares the investor owns. For example, if a stock pays a quarterly dividend of $0.50 per share and the investor owns 50 shares, they would receive a dividend of $25 each quarter.

Companies are not required to pay dividends, and not all shareholders own dividend-paying stock.

As noted, most dividends are ordinary dividends (non-qualified), but some are qualified dividends that meet certain IRS criteria.

How Are Dividends Paid?

Typically, dividends are paid in cash, and they’re sent by the company directly to your brokerage, which will deposit the money into your account.

Alternatively, you might get dividends as additional shares of stock. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically reinvest your dividend payment in additional shares. This has the advantage of both simplifying the process (since you won’t have to receive the cash and then buy more shares yourself), and potentially being less expensive, since many DRIP programs don’t charge commissions on share purchases.

Additionally, some DRIP programs offer the ability to buy additional shares at a discount.

Less commonly, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company, or physical assets the company owns.


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What Is a Qualified Dividend?

Certain dividends from holding shares of stock in domestic companies and some foreign companies — and which an investor has held for a minimum period of time — are considered qualified dividends.

Equally important, though, is that qualified dividends are distinct from ordinary dividends, which include capital gains distributions, dividends paid on bank deposits, dividends from tax-exempt corporations, and more.

Qualified dividends are taxed at the lower capital gains tax rate versus ordinary dividends, which are taxed as income. They’re taxed at the long-term capital gains rate, which ranges from 0% to 15% to 20%.

Most people won’t pay more than 15% on qualified dividends, but they might owe as much as 37% in income tax on ordinary dividends. As such, investors typically prefer to receive qualified dividends, but they’re the less common kind of dividend paid out.

Qualified dividends must meet certain requirements:

•   The dividend must be paid by a U.S. company or a qualified foreign corporation (i.e., one that’s traded on a U.S. stock exchange).

•   The dividend must not be of the type that does not qualify (i.e., it cannot be an ordinary dividend).

•   In addition, it’s important to know the holding period, and how often dividends are paid. If you hold common stock, you must have held the shares for more than 60 days during the 121-day period starting 60 days before the ex-dividend date. (That’s the date by which an investor must have purchased shares of a stock in order to receive an upcoming dividend.)

•   If you hold preferred stock, you must have held the shares for more than 90 days during the 181-day period starting 90 days before the ex-dividend date.

•   A mutual fund must have held the investment unhedged for more than 60 days during the 121-day period starting 60 days before the ex-dividend date, and investors must have held their shares of the mutual fund for the same period.

Recommended: Capital Gains Tax Guide

How to Figure Out If You Have a Qualified Dividend

For investors about to count the number of days they’ve held a stock, they must include the day they sold the stock, but do not include the day they bought it.

Here is an example:

Imagine you bought 1,000 shares of ABC Company common stock on July 2, 2024, and you sold the 1,000 shares on August 11, 2024. ABC Company paid a cash dividend of 25 cents per share with an ex-dividend date of July 15, 2024.

Since you only held shares of ABC Company for 40 days of the 121-day period that began 60 days before the ex-dividend date, you have no qualified dividends from ABC Company, and your Form 1099-DIV from the company should reflect the ordinary dividend amount in box 1a.

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What Is an Ordinary Dividend?

In general, investors should assume that any dividend they receive is an ordinary dividend unless they’re told otherwise. The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.

Qualified dividends are reported in box 1b on IRS Form 1099-DIV, while ordinary dividends are reported in box 1a.

Certain kinds of dividends are not qualified dividends even if they’re reported in box 1b of your Form 1099-DIV, according to the IRS. The following dividends are on this list:

•   Capital gains distributions

•   Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions

•   Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year

•   Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation

•   Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property

•   Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends

•   Payments shown on Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends

Ordinary dividends must be reported on IRS Form 1040, line 3b, and they are taxed at ordinary income rates, which range from 10% to 37%.


💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

How Qualified and Ordinary Dividends are Reported at Tax Time

Generally, an investor will receive a Form 1099-DIV — “Dividends and Distributions” — from each institution or company that pays a dividend of $10 or more. This form reports your capital gains distributions, dividend and non-dividend distributions, and any taxes withheld from your payments during that tax year.

Even if an investor does not receive a 1099-DIV from a company, they are still required to report any dividends on their tax return.

On Form 1099-DIV, dividends are reported as follows:

•   Box 1a: Ordinary dividends, representing the total dividends paid to you during that tax year

•   Box 1b: Qualified dividends, and this will be the portion of total dividends that qualify for the lower tax rate

•   Box 3: Non-dividend distributions, which are a nontaxable return of capital

If you have had taxes withheld from your dividends, this will be reported in box 4 for federal taxes, and 14 for state tax withholdings.

The Takeaway

Understanding qualified versus ordinary dividends can help investors make decisions about what account to hold their dividend-paying investments in: Inside a retirement account, such as an IRA, an investor will owe no taxes on dividend income, but they’ll often pay ordinary income taxes on all withdrawals.

Outside a retirement account, an investor will pay lower rates on qualified dividends, and may be able to use dividends to supplement other income or to reinvest in their portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

SOIN-Q225-017

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Apr
24
2025
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What Is an Accredited Investor?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is an Accredited Investor?

An accredited investor must meet specific financial criteria, and have the necessary experience to be accredited. Some investments are limited to only accredited investors.

There are two major categories of accredited investors: individuals and legal entities, which can include trusts, limited liability companies, and businesses.

Businesses like banks, investment broker-dealers, insurance companies, and pension or retirement plans are common examples of accredited investors.

Further, some private investment firms may follow legal guidelines that allow only the participation of accredited investors: i.e., those who meet certain net worth or income criteria as determined by the Securities and Exchange Commission.

Key Points

•   Owing to the complexity and risk some investments carry, they’re only available to accredited investors, not ordinary retail investors.

•   An accredited investor must meet specific financial criteria in order to invest in certain products.

•   Generally, an accredited investor must have $200,000 in income ($300,000 if married), or $1 million in net worth, excluding their primary residence.

•   Accredited investors may be individuals, but can also be trusts, institutions, and other entities.

•   The accredited investor designation protects main street investors from undue risk, and allows some companies to skirt SEC rules.

The Accredited Investor, Defined

Many private placement investment firms — some of which may take on a high level of risk, use complicated investment products and strategies — require investors to be accredited in order to circumvent the SEC’s legal requirements.

“One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering,” according to the SEC’s Office of Investor Education and Advocacy.

When an investment is sold to the public, it is under the regulatory authority of the SEC. (For example, a mutual fund sold to retail investors falls under the purview of the SEC.) This includes certain disclosures and extensive reporting requirements to the SEC.

Accredited Investors vs. Retail Investors

Retail investors are generally individuals who invest their own money, often for retirement, but sometimes to buy stocks online. Retail investors have to meet some basic requirements when opening an investment account, but not the stringent criteria that apply to accredited investors.

Why Companies Choose Accredited Investors

Why might an investment firm choose to limit themselves to accredited investors? For one, adhering to the SEC regulations can be an expensive and labor-intensive process. In the eyes of the law, accredited investors are more sophisticated, or may have the means to take on the risk that such investment opportunities produce.

Who Qualifies as an Accredited Investor?

For individuals to qualify as accredited investors, they must prove that they have the means necessary to take the risk involved in certain investments. This can be done in one of a few ways:

•   First, the individual must have earned income that exceeded $200,000 (or $300,000 if married) in each of the prior two years, and reasonably expects the same for the current year.

•   Or they must have a net worth over $1 million, either alone or with a spouse or spousal equivalent. That does not include the value of their primary residence.

Other Types of Accredited Investors

On Aug. 26, 2020, the SEC updated the qualification criteria. Individuals who have Series 7, Series 65, or Series 82 licenses in good standing can now be considered accredited investors.

The SEC said this was done to allow those with knowledge and expertise to invest in private investment markets even if they do not yet meet the financial qualifications.

General partners, directors, and executives with a private fund also qualify as accredited investors.

With the recent expansion of the qualification parameters, “knowledgeable employees” of the investment fund also now qualify as accredited investors.

Get up to $1,000 in stock when you fund a new Active Invest account.*

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*Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

How a Trust Can Be an Accredited Investor

For a trust to qualify as an accredited investor, assets must total more than $5 million, and the trust cannot have been formed specifically to purchase the investment.

The trust must also be directed by a “sophisticated” person — someone who the investment company reasonably believes has the requisite experience and ability to understand the risks associated with the investment.

As of the most recent changes, LLCs with assets of over $5 million may also qualify.

Alternatively, an entity can qualify as an accredited investor when all of the equity owners are individually accredited investors.

Because this reporting is not channeled through the SEC, investment companies typically collect the information necessary to confirm that a person is an accredited investor, or may require that potential customers sign off that they are accredited investors.

The Net Worth Requirement

One of the qualifications for being an accredited investor is to have a net worth of $1 million. How do you calculate your net worth?

Generally, individual net worth is calculated by taking a person’s assets and subtracting liabilities. Assets are things of value that a person owns, and liabilities are debts owed.

For example, imagine a person has the following assets: a primary residence, a checking account, a 401(k) retirement account, and a car.

They also have a mortgage loan and two student loans — those are their liabilities.

To determine their net worth, the individual would first total the value of the assets and then the liabilities, and subtract the value of the latter from the former.

That said, the SEC has a few specific rules about what is counted in a net worth calculation:

•   As mentioned, a primary residence is not to be included in the person’s net worth calculation.

•   A mortgage on a primary residence is also not to count in the net worth calculation, unless the value of the mortgage is greater than the value of the home.

•   If the mortgage is “under water,” then the amount of the loan that exceeds the fair market value of the home should be included.

•   When considering other real estate holdings with a spouse or spouse equivalent, it is not necessary that they be held under both names. For example, a property held by just one of the two parties would count.

How Can Non-Accredited Investors Invest?

You don’t need to be an accredited investor to begin building wealth for the future. There are plenty of opportunities for investors of every level to get involved and earn returns in the stock exchange.

It’s important to understand that all investments carry some amount of risk. It’s always a good idea for investors to familiarize themselves with the risks involved with their desired investments.

To start, investors can open an account at a brokerage or with an online trading platform to buy and sell securities like stocks and exchange-traded funds (ETFs).

New investors will want to be mindful of investing fees, as those will reduce any potential investment returns. This includes account fees, trading commissions, and the fees built into the funds themselves, called expense ratios.

The Takeaway

An accredited investor — a person or an entity — is qualified to invest in certain private investments like a hedge fund or a venture capital fund. Individuals must meet a high financial bar or have industry expertise to be accredited.

The rules for accredited investors can be seen as both protections for those investing, as well as advantageous for private investment firms.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest with as little as $5 with a SoFi Active Investing account.

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q225-016

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Apr
24
2025
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Vesting Schedule: Important Things to Know

By | Growing Wealth, invest, Investing, Life & Career | Comments Off on Vesting Schedule: Important Things to Know

A vesting schedule refers to the requirements employees must meet in order to become “vested” and gain ownership of the assets the employer is providing, whether that’s company stock, 401(k) contributions, or another benefit.

In some companies, employees vest right away — i.e., there is no waiting period or other qualification they must meet to gain full ownership of a certain benefit. In other cases, the vesting schedule typically incentivizes employees by offering matching retirement funds, shares of company profit, or stock options over a certain time period.

For example, you may be partially vested in your 401(k) after one year, and fully vested after two years.

While remaining at a company for a certain amount of time is a common vesting requirement, hitting specific performance benchmarks may also be a part of the vesting contract.

An employee is fully vested when they receive ownership of a portion of, or all of, the assets their employer offers. If the employee were to leave the company before the assets were fully vested, they would lose out on some or all of those contributions/profits/stock options.

What Is a Vesting Schedule?

A vesting schedule is essentially a way to incentivize employees to stay with a company for a period of time. The reward for remaining with the company may include stock options or restricted stock units, retirement plan contributions (also known as the employer match), or other rewards.

So how does an individual know when they are partially or fully vested? The vesting schedule is typically provided when the employee is hired. But they can ask their employer for a vesting schedule, which lays out the conditions they must meet or the dates that must be reached before vesting begins.

Employees who are partially vested are only entitled to a percentage of the assets being offered: e.g., 25% after one year, 50% after two years, and so on. These employees have not yet met certain requirements, such as years spent with the company or hours worked during the year, for example. Those who are not “vested” are typically not entitled to any assets at all.

Employees who are fully vested have the right to full ownership of the assets; in essence, they’ve earned this additional form of compensation.

Three Types of Vesting Schedules

Vesting schedules may come in a few different varieties: immediate, graded, and cliff vesting.

Immediate Vesting

Immediate vesting schedules give employees full ownership of assets as soon as the assets hit their accounts.

For example, under an immediate vesting schedule, if an employer makes a matching contribution to a retirement account, that contribution belongs to the employee regardless of any other conditions. The employee is now free to do what they will with the contribution.

Note that if you open an IRA, you’re effectively vested immediately because IRAs are self-funded. Vesting schedules only pertain to employer contributions.

Graded Vesting

A graded vesting schedule increases the portion of vested assets over time. Typically as an employee’s tenure at a company increases, the amount of vested assets gradually increases — until the employee eventually owns 100% of the assets.

If the employee should leave the company before the vesting period is over, they will only be entitled to the portion of the assets in which they are already vested.

Graded vesting schedules are usually no longer than six years for retirement plans, according to federal guidelines, though employers may choose to use a shorter vesting schedule. With a hypothetical six-year vesting schedule, an employee might be 0% vested for their first two years of employment and 20% vested every year after that.

Cliff Vesting

This type of vesting schedule transfers 100% of assets to employees after a certain amount of time has passed. For example, an employee may need to work at their job for two years before they are fully vested. If they separate from employment for any reason before that period is up, they aren’t entitled to any of the assets.

Cliff vesting schedules for retirement accounts are three years at most, according to federal guidelines, but may be shorter.

Vesting and IRAs

Most people might be familiar with traditional IRAs and Roth IRAs, which individuals can set up and contribute to themselves. But there are a couple of IRA options that employers can contribute to as well, including SEP and SIMPLE IRAs.

Employers may offer SIMPLE IRAs in place of a 401(k). They can then offer funds that match employee contributions, or they can make non-elective contributions, money they put in an employee’s account regardless of how much that employee has contributed themselves.

A SEP IRA is a retirement plan available to self-employed workers and small business owners. Unlike with other IRA plans, with a SEP IRA employees do not make contributions. Employers, including the self-employed, make contributions for them. Self-employed individuals act as their own employer and employee.

By law, required employer contributions to SEP IRAs and SIMPLE IRAs are immediately vested. This goes for any other IRA-based plan as well.

Vesting and 401(k)s

When you contribute to your 401(k), your employer may offer matching contributions to incentivize you to save at least enough to get the match.

While your own contributions to your 401(k) are 100% yours immediately, your employer may decide to give you ownership of the employer matching funds according to a vesting schedule.

It’s important to know the difference between your vested 401(k) balance and your overall balance. Your 401(k) may offer a variety of different vesting schedules, the terms of which are laid out in the plan document. As noted, some plans offer immediate vesting, while others may offer cliff vesting after up to three years of service, or a graded vesting system in which an employee’s vested percentage grows over time.

When Must Employees Be 100% Vested?

A retirement plan’s “normal retirement age” is the age set by the plan at which an employee is eligible to receive their full accrued benefits. In the case of annuity payments or other installment payments, this is the date employees can begin receiving payments.

According to government rules, employees must be 100% vested by the time they reach normal retirement age, which is typically age 65 in the private sector. With some government jobs, employees who are at least 62 may be considered fully vested. Again, terms vary and so do age requirements; it’s best to check with your employer.

Additionally, employees must be immediately 100% vested in their accrued benefits if an employer decides to terminate a plan, including for the following reasons: voluntarily; as part of bankruptcy proceedings; when the company is sold; or because of a switch to another retirement plan.

At such a point, employer matching contributions and any profit sharing are fully vested regardless of any previous vesting schedule.

Sometimes employers will terminate only part of a retirement plan — for example, if a factory closure forces 25% of the company workforce to be laid off. In this case, workers affected by the partial termination have the same vesting rights as those affected by a full plan termination.

Vesting Stock Options

Employee stock options offer employees the chance to buy company stock at a predetermined price, and are often offered on a vesting schedule as well. Employees are often not allowed to buy the stock — also known as exercising their stock options — until they are vested.

As with other types of compensation, vesting can follow a number of schedules, including graded scheduling, which allows employees to exercise their stock option gradually, and cliff scheduling. In some cases employees may be granted stock options that are immediately vested.

Once a stock option vests and an employee exercises it, they can sell the stock or hang on to it and hope the value appreciates.

What Are Restricted Stock Units?

Restricted stock units (RSUs) are another form of compensation in which employees are promised a specific amount of stock at a later date. While there are some differences between ESOs and RSUs, one similarity is that both may follow a vesting schedule and don’t belong to the employee until they are vested.

Employees who receive RSUs from a private company — a company whose shares don’t trade on the open market — may not be able to sell them until the company goes public in an initial public offering.

Learning more about stock market basics may be useful in understanding how employee stock options work.

Why Companies Choose to Use Vesting

The different vesting schedules and the rules around them can get complicated. So why would an employer go through all that trouble? By using vesting schedules, employers are trying to align employees’ goals with their own.

It can be time-consuming and costly to find new employees, so when an employer finds someone they like, they want them to stick around. Vesting schedules are one way employers can motivate employees to stay with the company for a certain period of time.

Some types of compensation, such as stock options, add another layer of incentive to the mix. That’s because as a company flourishes, that company’s stock may theoretically become more valuable, incentivizing workers to work hard to keep the company successful.

Additionally, having some time before an employee is fully vested in their benefits allows companies a bit of a trial period. If a new hire doesn’t work out, the company can let them go without owing them additional benefits.

How to Find Out Your Vesting Schedule

It’s critical to know how and when employer contributions to retirement accounts vest. That way, individuals can make informed decisions about when to leave their jobs, while minimizing the amount of money they’re leaving on the table. For example, to make the most of their benefits, an employee with 12 months to go before they are fully vested may want to hang on to their job for another year before they start looking for a new one.

To fully understand an employer’s vesting policies, employees can speak with a representative in their human resources department. They may also get details of their retirement plan by reading the summary plan description, which lays out how it operates and what it provides. Individuals may also check their annual benefits statement. This statement should reflect an employee’s accrued and vested assets, and it may lay out what assets an employee will forfeit upon termination.

The Takeaway

Vesting schedules are a tool used by employers to motivate employees to stay with the company by offering full monetary or stock contributions after a certain period of employment. There are generally three different types of vesting: immediate, cliff, and graded.

For employees, it’s important to understand the vesting schedule of one’s retirement plan, stock options, or RSUs. This information can help guide career decisions as well as investment decisions.

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