Earnings season is the period of time when publicly-traded companies release their quarterly earnings reports, as required by the Securities and Exchange Commission (SEC). Earnings season is important for investors because it provides insight into a company’s financial health and performance.
The financial results reported during an earnings season can help investors and analysts understand a company’s prospects, how a specific industry is performing, or the state of the overall economy. Knowing when earnings season is can help investors stay up to date on this information and make better investment decisions.
When Is Earnings Season?
Earnings season, again, is a period during which public companies release quarterly earnings reports, and it occurs four times a year – generally starting within a few weeks after the close of each quarter and lasting for about six weeks. For example, the earnings season for the first quarter, which ends on March 31, would typically begin in the second week of April and wrap up at the end of May.
Earnings season normally follows this timeline:
• First quarter: Mid-April through the end of May
• Second quarter: Mid-July through the end of August
• Third quarter: Mid-October through the end of November
• Fourth quarter: Mid-January through the end of February
Note, however, that not all companies report earnings on this schedule. Companies with a fiscal year that doesn’t follow the traditional calendar year may release their earnings on a different schedule.
Many retail companies, for instance, have fiscal years that end on January 31 rather than December 31, so they can capture the results from the holiday shopping season into their annual reports. Thus, these firms may report their earnings toward the end of earnings season, or even after the typical earnings reporting period.
Investors interested in knowing when companies will report earnings can check each companies’ investor relations page, or other websites to see the earnings calendars.
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Why Is Earnings Season Important for Investors?
Earnings season is an important time for investors to track a company’s or industry’s performance and better understand its financial health.
During earnings season, companies release their quarterly earnings reports, which are financial statements that lay out the revenue, expenses, and profits. This information gives investors a better understanding of how a company is operating.
Moreover, earnings season is also when companies provide guidance for the upcoming quarters, sometimes during the company’s quarterly earnings call. This guidance can give investors an idea of what to expect from a company in the future and help them make more informed investment decisions, especially if investors use fundamental analysis to choose stocks.
The following are some additional effects of earnings season:
Volatility
You may notice fluctuations in your portfolio during earnings seasons because of stock volatility. The release of earnings reports can significantly impact a company’s stock price. If a company reports better or worse than expected earnings, for example, it may result in a spike or dip in share price.
And even if a company surpasses expectations for a given quarter, its forward-looking outlook may disappoint investors, causing them to sell and drive down its price. For this reason, earnings season is often a period of high volatility for the stock market as a whole.
Investment Opportunities
Many investors closely watch earnings reports to make investment decisions, especially traders with a short-term focus who hope to take advantage of price fluctuations before or after a company’s earnings report.
And investors with a long-term focus may pay attention to earnings season because it can give clues about a company’s future prospects. For example, if a company’s earnings are consistently increasing, it may be a suitable medium- to long-term investment. On the other hand, if a company’s earnings are decreasing quarter after quarter, it may mean that it is a stock investors want to avoid.
State of the Economy
Earnings season can help investors and analysts get a better picture of the overall economy. If most earnings reports are coming in below expectations or companies are revising their financial outlooks because they see trouble in the economy, it could be a predictor of an economic downturn or a recession.
And even if the overall economy is not at risk of a downturn, earnings season can help investors see trouble in a specific sector or industry if companies in a given industry report weaker than expected earnings.
Earnings season may give investors a holistic view of the state of the stock market and economy and help them make better investment decisions than focusing on specific stocks alone.
The Takeaway
Earnings season provides investors with valuable insights into the performance and outlook of specific companies, the stock market, and the economy as a whole. However, for most investors with a long-term focus, each earnings season shouldn’t be something that causes you too much stress.
Even if some of your holdings spike or plummet because of an earnings report during earnings season, it doesn’t mean you want to make a rash investment decision based on a single quarter’s results. You still want to keep long-term performance in mind.
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Portfolio margin is a way of calculating the margin requirements for derivatives traders using a composite view of their portfolio. Portfolio margin accounts offset investors’ positive and losing positions to calculate their real-time margin requirements. Portfolio margining may provide investors with lower margin requirements, allowing them to use more of their capital in trades.
Key Points
• Portfolio margin calculates margin requirements using a risk-based approach, potentially lowering requirements and freeing up capital.
• It assesses a portfolio’s risk, considering market volatility and theoretical price changes.
• Traders must maintain a $100,000 net liquidating value and get approval for margin trading.
• The Chicago Board of Options Exchange sets rules, and brokers use the TIMS model for daily risk assessment.
• Margin trading is risky and not recommended for beginners, but it can increase buying power for experienced investors.
Portfolio Margin, Defined
Portfolio margin is a type of risk-based margin used with qualified derivative accounts. It calculates a trader’s real-time portfolio margin requirements based on a risk assessment of their portfolio or marginable securities.
If a trader has a well-hedged portfolio they will have a lower margin trading requirement, allowing them to utilize more of their cash for trades and take advantage of more leverage. Of course the more margin a trader uses, the higher their risk of loss.
How Does Portfolio Margin Work?
Investors with qualified accounts where they trade derivatives including options, swaps, and futures contracts must maintain a certain composite-margin. Portfolio margin is a policy with a set of requirements that aim to reduce risk for the lender.
To determine portfolio margin, the lender consolidates the long and short positions held in different derivatives against one another. This works by calculating the overall risk of an investor’s portfolio and adjusting margin requirements accordingly.
The portfolio margin policy requirement must equal the amount of liability that remains once all the investor’s offsetting (long and short) positions have been netted against one another. Usually portfolio margin requirements are lower for hedged positions than they are with other policy requirements.
For example, the liability of a losing position in an investor’s portfolio could be offset if they hold a large enough net positive position in another derivative.
Margin vs Portfolio Margin
Here’s a closer look at how margin vs. portfolio margin compare when online investing, or investing with a broker.
Margin
Margin is the amount of cash, or collateral, that investors must deposit when they enter into a margin trade. Margin accounts work by allowing a trader to borrow money from their broker or exchange. By borrowing cash to cover part of the trade, an investor can enter into much larger positions than they could if they only used cash on hand.
Borrowing money, however, poses a risk to the lender. For this reason, the lender requires that traders hold a certain amount of liquid cash in their account to remain in margin trades. If a trader loses money on a position, the broker can then claim cash from the trader’s account to cover the loss.
Traditional margin loans under Regulation T require investors to put up a certain percentage of cash for margin trades based on the amount of the trade.
Portfolio Margin
Portfolio margin, on the other hand, calculates the required deposit amount based on the risk level of the investor’s overall portfolio. It looks at the net exposure of all the investor’s positive and losing positions. If a derivative investor has a well-hedged portfolio, their margin requirement can be much lower than it would be with traditional margin policies.
This chart spells out the differences:
Regulation T Margin
Portfolio Margin
Maintenance margin = 50% of initial margin
Initial and maintenance margin is the same
Traders can’t use margin on long options, and long options have a 100% requirement
Traders can use margin on long options, and they can use long options as collateral for other marginable trades
Margin requirements are fixed percentages
Trader’s overall portfolio is evaluated by offsetting positions against one another
Margin equity = stock + (+/- cash balance)
Buying power (maintenance excess) = net liquidation value – margin requirements
Less flexibility on margin requirements
Broad-based indices allow for more leverage
Margin requirement is a fixed percentage of trade amounts
Stock volatility and hypothetical future scenarios are part of portfolio margin calculation
Portfolio Margin and Volatility
Portfolio margin calculations take into account investing in volatile markets by factoring in the outcome of various scenarios.
Portfolio Margin Calculation
Calculating portfolio margin is a multi-step process. The calculation includes hypothetical market volatility and theoretical price changes.
The steps are:
1. Create a set of theoretical price changes across the trader’s margin account. These ranges may be different when trading options, stocks, and indices.
2. Divide the range and calculate the gain or loss on the overall position for each theoretical scenario.
Portfolio margin can be a great tool for experienced investors who want to invest more of their available cash. However, there are some important things to keep in mind:
• Margin trading tends to be risky and is not recommended for beginning traders
• Traders must keep $100,000 net liquidating value in their portfolio margin account (this is not the same as a client’s margin account). If the account goes below this, they may lose their active trading positions and the ability to trade on margin.
• Traders must get approval to enable margin trading on a brokerage account before they can utilize the portfolio margin rules.
If an investor’s margin balance falls below the margin requirement, they could face a margin call, which would require them to either deposit more cash or sell securities in order to increase their balance to the required amount.
Portfolio Margin Requirements
The Chicago Board of Options Exchange (CBOE) sets the rules for portfolio margin. In 2006 it expanded margin requirements, with the goal of better connecting requirements to portfolio risk exposure. Reducing the amount of portfolio margin required for lower risk investment accounts frees up more capital for leveraged trades, benefitting both the trader and the broker.
Brokers must use the approved portfolio margin calculation model provided by The Options Clearing Corporation (OCC), which is the Theoretical Intermarket Margining System (TIMS). TIMS calculates the margin requirements based on the risk of the portfolio on a daily basis.
To remain qualified for portfolio margin, investors must maintain a minimum of $100,000 net liquid value in their account.
There are additional requirements derivatives traders should keep in mind if they use leverage to trade. Regulation T is a set of regulations for margin trading accounts overseen by the Federal Reserve Bank.
Brokers must evaluate potential margin traders before allowing them to start margin trading, and they must maintain a minimum equity requirement for their trading customers. In addition, brokers must inform traders of changes to margin requirements and of the risks involved with margin trading.
The Takeaway
Margin trading may be very profitable and is a tool for investors, but it comes with a lot of risk and isn’t recommended for most traders. If you use margin trading for derivatives, however, portfolio margin may free up more capital for trading.
If you’re an experienced trader and have the risk tolerance to try out trading on margin, consider enabling a SoFi margin account. With a SoFi margin account, experienced investors can take advantage of more investment opportunities, and potentially increase returns. That said, margin trading is a high-risk endeavor, and using margin loans can amplify losses as well as gains.
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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.
*Borrow at 11%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information. 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.
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Shareholder voting rights allow certain stockholders to vote on issues impacting company performance, including mergers and acquisitions, dividend payouts, new securities, and who is elected to the board of directors. Investors who own shares of common stock of a company usually have shareholder voting rights. Investors with common stock are generally allowed one vote per share they own. Thus, an investor who owns 1,000 shares of stock may have 1,000 votes to cast.
If the idea of potentially participating in a company’s decision-making process is appealing to you, keep reading to learn more about the voting rights of equity shareholders and how they work.
Key Points
• Shareholder voting rights enable stockholders to participate in key decisions affecting company performance, such as electing directors and approving mergers.
• Common stockholders typically receive one vote per share owned, while preferred stockholders usually do not have voting rights but have priority for dividends.
• Voting processes vary; shareholders can vote in person, by mail, via phone, or online, depending on company policies and ownership type.
• Proxy voting allows shareholders to authorize someone else to vote on their behalf, often necessary for those unable to attend meetings.
• The record date determines eligibility to vote at the annual meeting, and companies must notify shareholders in advance about meeting details and voting issues.
What Are Stockholder Voting Rights?
Stockholder voting rights are the privileges granted to shareholders of a company to vote on matters that affect the company, such as the election of directors and the approval of major corporate actions, and to have a say in how the company is run.
First, it helps to distinguish between common and preferred stock. As noted above, investors who own shares of common stock are typically granted voting rights, usually at one vote per share.
Meanwhile, investors with preferred stock generally can’t vote on matters relating to the company’s governance and policies, but these investors are given preferred treatment in terms of dividend payouts. In the case of bankruptcy, preferred shareholders are usually paid before common stockholders.
There’s another wrinkle when understanding the voting rights of equity shareholders. In a privately held company, the corporation itself (along with state corporation laws) oversees and can restrict shareholder voting rights. In a publicly traded company, shareholder voting follows company rules but must also adhere to the Securities and Exchange Commission (SEC) guidelines.
And while investors who own common stock generally have shareholder voting rights, only “investors of record” are allowed to vote at the annual company meeting. “Of record” status refers to the process whereby investors are added to company records, which isn’t determined simply by which type of shares they own but by when they bought the shares. Investors must buy their shares before the record date to be added to the company record before a meeting — and thereby allowed to vote.
What Do Shareholders Vote On?
Shareholders vote on matters such as the election of the board of directors, the approval of significant corporate actions, like mergers and acquisitions, and the adoption of changes to the company’s bylaws.
The voting rights of equity shareholders don’t extend to issues concerning day-to-day operations or management issues, like hiring and firing, budget allocation, product development, etc. The management team of a company makes these decisions throughout the year.
Nonetheless, the issues shareholders vote on can significantly impact a company’s bottom line, strategy, and overall profitability.
Given the one vote per share rule, the more shares an investor owns, the more influence they can exert if they actively exercise their voting rights — which is why many large investors pay close attention to critical issues where their vote might make a difference. Many shareholder activists use the voting process to exert influence over their investments.
Shareholders are generally alerted to the annual meeting via mail, including a package that summarizes the main issues to be addressed at the company meeting. These can include topics like:
As you’re considering which stocks to invest in, you may want to look into how shareholder voting works with each company. For instance, some companies don’t allow shareholders to call special meetings, and a supermajority vote is required to change some of the company’s bylaws.
What Happens at a Shareholder Meeting?
If you choose to attend the annual general meeting of a company in which you own stock, this is typically the only time that the company directors and shareholders will interact.
In certain states, public and private companies hold annual meetings, but the rules about holding these meetings are stricter for public companies. The agenda will probably be similar to the following:
Notice of Meeting
The voting rights of equity shareholders allow those investors to get advance notice of what will be covered at the annual meeting. Each company has specific rules about how far in advance they must notify shareholders of the meeting, but in most cases, the company sends physical mailers with pertinent information.
The company must also file a statement with the SEC outlining the date, time, and location of the next meeting. This statement will also include the topics to be discussed and voted on at the meeting.
Minutes of the Previous Meeting
Notes from what happened at the previous general meeting are presented and approved.
Presentation of Financial Statements
The company will present current financial statements to the shareholders.
Ratification of Director Actions
Decisions made by the board of directors over the previous year are presented and approved or denied by the shareholders. This can include the payment of dividends according to a set dividend payment schedule.
Speeches
Certain companies will present an overall vision of the company’s goals for the upcoming year or other information relevant to shareholders.
Open Floor for Shareholder Questions
Typically there will be a time when shareholders are allowed to ask questions.
Election of the Board of Directors and Other Votes
Shareholders vote on who will be members of the company’s board of directors for the upcoming year. Voting on other issues will also take place.
Extraordinary Matters
If a special meeting is called during the year, which is different from the annual general meeting, other topics will be discussed and voted on. These could include the removal of an executive, an urgent legal matter, or another issue that requires immediate attention.
How Does the Voting Process Work?
There are a few different ways you can exercise your shareholder voting rights. These differ depending on the company and what type of owner you are. As mentioned, certain companies may give shareholders one vote per share of stock they own, while others give each shareholder one vote in total.
If you get one vote per share, this means you have a larger say in decision-making at the corporate level if you are more heavily invested in the company.
However, for voting to commence, the meeting must have a quorum. Reaching a quorum refers to the minimum number of shareholders that must be present or represented at a shareholder meeting for the meeting to be valid and for votes to be counted. Usually, this is a simple majority of share votes.
Registered owners hold shares directly with the company, while beneficial owners hold shares indirectly through a bank or broker. Most U.S. investors are beneficial owners. As either type of owner, you should receive instructions on how to vote in each of the following ways:
In Person
Companies typically hold annual meetings that shareholders are allowed to attend. They can also hold special meetings throughout the year.
Shareholders receive materials in the mail or via e-mail containing details of upcoming meetings. Most companies hold their annual meetings between March and June, within six months after the close of the previous fiscal year.
By Mail
You can exercise your stock voting rights by mail if you are a registered owner. You will receive instructions on filling out a proxy card so that a delegate can vote on your behalf. You will receive a voting instruction form if you are a beneficial owner.
By Phone
The materials you receive in the mail might include a phone number and directions to vote over the phone.
Over the Internet
Some companies are now providing instructions for shareholders to vote online. This can be a more convenient way to complete shareholder voting.
What Are Proxy Requirements?
Many shareholders live too far away and are too busy to attend company meetings and vote in person. For this reason, shareholders may vote by proxy, meaning they authorize someone to vote on their behalf.
You may be familiar with the estate planning term “health care proxy” or “financial proxy” — a designation allowing an agent to make decisions on behalf of someone else. It’s similar in that a formal power of attorney or other permission must be granted to allow a proxy vote.
As a shareholder, you will receive a proxy ballot in the mail containing information about the issues on which you can vote.
The proxy statement also may include information about the company’s management and the qualifications of any potential board members, the agenda for the meeting, and the company’s largest shareholders. These statements are filed with the SEC annually before the general meeting.
If you own stocks through a mutual fund, the investment managers can also cast proxy votes on your behalf.
The proxy voter is often someone on the company’s management team. Even if you choose to vote by proxy, there are some issues you can still directly vote for or against, such as the election of directors and the chief executive officer’s salary.
How Do You Know When to Vote?
Part of understanding how the voting rights of equity shareholders work hinges on knowing when you can vote. If a company is preparing to hold a vote, it sets what is known as a “record date.” As noted above, if you own shares of that company on the record date, you have a right to vote. The company will send all eligible voters one of the following three notices:
• A physical notice stating that proxy materials are available for viewing online,
• A package containing a voting instruction form or proxy card, as well as an annual report, or
• A package containing an information statement and annual report but no proxy card.
When deciding whether to invest in a stock, you may want to look for any news regarding previous shareholder meetings. You can find out more about what shareholders have voted on in the past and how shareholder voting works with that company to make the best choices about how you might decide to cast your votes.
The Takeaway
The voting rights of equity shareholders can be summed up pretty simply: Investors of record who own shares of common stock are generally entitled to one vote per share, which they can cast at the annual shareholder meeting to shape company policy — and potentially profitability.
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FAQ
Which type of stock comes with voting rights?
Most publicly traded companies issue two types of stock: common stock and preferred stock. Common stock typically comes with voting rights, while preferred stock does not.
What is the difference between registered and beneficial owners when voting on corporate matters?
A registered owner is a person or entity whose name is recorded on the company’s books as the owner of a particular share of stock. This person or entity has the right to vote on corporate matters and to receive dividends and other distributions from the company. On the other hand, a beneficial owner is a person or entity that ultimately owns or controls the stock, even though their name may not be recorded on the company’s books. Beneficial owners may have acquired their ownership interest in the stock through a brokerage account or a trust, for example.
How do shareholders vote for the board of directors?
Shareholders typically vote for the board of directors at the annual meeting of shareholders. In most cases, shareholders can vote in person at the meeting or by proxy, which allows them to appoint someone else to vote on their behalf. Some companies may also allow shareholders to vote by mail or online.
What is the impact of voting rights?
Voting rights are an important aspect of ownership in a publicly traded company. As a shareholder, your voting rights give you the ability to influence the company’s direction and hold its management accountable.
What is e-voting in shares?
E-voting, or electronic voting, is a process that allows shareholders to cast their votes electronically rather than in person or by mail. E-voting is usually done through an online platform provided by the company or a third-party service provider.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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.
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 $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
There isn’t a simple yes or no answer as to whether your retirement accounts can be garnished. The Employment Retirement Income Security Act (ERISA) protects certain retirement accounts from garnishment if you’re sued by a creditor. The Act does not extend to non-qualified accounts like IRAs. However, those accounts do enjoy certain protections in bankruptcy.
The IRS may be able to garnish or take your 401(k) funds, however, if you owe back taxes. The IRS can also dip into your IRA or any self-employed retirement accounts you own to collect on a past due tax bill. If you’re worried about being sued by a creditor or running afoul of the IRS, it’s important to know when retirement accounts may be subject to garnishment.
Key Points
• Barring certain exceptions, ERISA protects qualified retirement plans from garnishment; however, non-qualified plans like IRAs may lack these safeguards.
• Retirement accounts — including qualified retirement plans like 401(k)s — can be garnished for unpaid taxes or court-ordered restitution.
• Qualified retirement accounts may also be garnished if an individual owes child support or alimony.
• Individuals may be able to avoid garnishment for unpaid taxes by setting up a payment plan, negotiating an Offer In Compromise, or making a claim for financial hardship.
• To prevent garnishment, timely tax payments, responding to IRS notices, and maintaining domestic support payments are essential.
What Does Garnishment Mean?
Garnishment is a legal process in which one entity takes money from another under the authority of federal or state law to satisfy a debt. Both wages and bank accounts can be subject to garnishment in connection with debt collection lawsuits. A court order may be necessary to enforce a garnishment agreement.
Federal law can limit which wages or bank account deposits are exempt from garnishment and under what conditions. For example, if you receive Social Security benefits, they may be exempt if you’re sued for unpaid credit card debt. Those benefits are not bulletproof, however. And ignoring how your funds could be imperiled could be a critical retirement mistake.
The Social Security Administration (SSA) can withhold some of your benefits if your state presents a garnishment order for unpaid alimony, child support, or restitution. The Treasury Department can also withhold some of your benefits to offset unpaid tax debts. Generally, a garnishment order cannot be lifted until the debt in question is satisfied.
Can Retirement Accounts Be Garnished?
Retirement accounts can be garnished but there are specific rules that apply in determining which accounts are subject to garnishment. This is where it’s important to understand the different types of retirement plans.
As mentioned, certain retirement accounts are protected by ERISA. They’re usually referred to as qualified retirement plans. Examples of ERISA plans include:
• Profit-sharing plans
• 401(k) plans
• Money purchase plans
• Stock bonus plans
• Employee stock ownership plans
• Defined benefit plans, including pensions
Generally speaking, money held in ERISA plans are protected from garnishment by creditors. The amount you can protect is unlimited, so whether you’ve saved $1,000 or $1 million in an ERISA plan, it’s safely out of reach of creditors.
There is an exception made in cases where the account owner is ordered by a court to pay restitution to the victim of a crime. In that instance, a federal ruling has deemed it acceptable to allow garnishment of ERISA plans to make restitution payments.
Non-qualified plans are not covered by ERISA protections. Non-qualified plans can include deferred compensation plans and executive bonus plans, but traditional and Roth IRAs can also fall under this umbrella.
The good news is that state law can include provisions to protect IRAs from garnishment. So if you’re sued for a $20,000 credit card debt, your creditor might not be able to touch any money you’ve stashed in a traditional or Roth IRA. Federal law also protects your online IRA or other type of IRA from garnishments relating to unpaid debts if you file for bankruptcy protection.
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Reasons Your 401(k) May Be Garnished
It’s not common for a 401(k) to be garnished, thanks to ERISA. But there are some scenarios where it can happen. Here are some of the reasons why a 401(k) can be garnished.
You Have a Solo 401(k)
A solo 401(k) or one-participant 401(k) is a type of 401(k) plan that’s designed for people who are self-employed or run a business and have just one employee who is their spouse. These plans are not subject to ERISA rules, so they could be vulnerable to creditors which may include garnishment for unpaid debt.
Even though a solo 401(k) isn’t protected at the federal level, your assets could still be safe under state law. As mentioned, many states exempt retirement accounts from creditor garnishments. The exemption limit may vary from state to state, though some states protect 100% of retirement assets.
You Owe Child Support or Alimony
If you’re ordered to pay child support or alimony and fail to do so, the court could order you to turn over some of your 401(k) assets to make those payments. If you’re getting divorced, then your spouse may be able to claim part of those assets as part of the settlement.
They’ll generally need a Qualified Domestic Relations Order (QDRO) to do so. This document directs the plan administrator on how to divide 401(k) assets between spouses, according to the terms set by the divorce agreement.
You Owe Restitution
As mentioned, retirement accounts can be garnished in cases where you’re ordered by a court to pay restitution to someone. For example, say that you were negligent and injured someone in a car accident. The court might order you to pay restitution to the injured person.
If you don’t arrange another form of payment, the court might greenlight garnishment of your 401(k). The amount that can be garnished must reflect the amount of restitution you were ordered to pay.
Can the Government Take My 401(k) or IRA?
The federal government, specifically the IRS, can garnish your retirement accounts. So when can the IRS take your 401(k) or IRA? Simply, if you owe unpaid tax debt and have made no attempt to pay it. Garnishment and property liens are usually options of last resort, as the IRS might give you an opportunity to set up an Installment Agreement or make an Offer In Compromise to satisfy the debt.
Before the IRS can garnish your retirement accounts for unpaid taxes, it has to provide you with adequate notice. That means sending a written letter that specifies how much you owe. If you don’t respond to this notice, the IRS will send out a final notice giving you an additional opportunity to pay your taxes or schedule a hearing.
Should you still do nothing, that opens the door for the government to garnish your 401(k), IRA, and other retirement accounts. Note that the IRS can also garnish your Social Security retirement benefits but not Supplemental Security Income (SSI) benefits.
State tax agencies can seek a judgment against you for unpaid debt. While they can obtain a court order requesting payment, they cannot force you to withdraw money from a retirement account to pay. You could, however, still be subject to wage garnishments or bank account levies.
What Happens When Your Retirement Account Is Garnished?
When a retirement account is garnished, money is withdrawn and handed over to the recipient, which may be a creditor or the government. At that point, there may be nothing you can do to get that money back.
You should receive notification of the garnishment before it happens. That can give you time to make alternate arrangements to pay the debt. You could try to do that after the garnishment moves ahead, though it might be difficult to retrieve the money.
For example, if your 401(k) is garnished to pay back taxes you could contact the IRS to see if you might be able to reverse it by paying the tax debt, setting up a payment plan, or negotiating an Offer In Compromise. You could also attempt to make a claim for financial hardship which may help you to get the garnishment reversed.
Tips for Avoiding 401(k) Garnishment
Having your retirement accounts garnished can be unpleasant to say the least and it’s best avoided if possible. If you’re concerned about your 401(k) or other retirement accounts being garnished, here are some things you can do to try and prevent that from happening.
Pay Your Taxes on Time
One of the simplest ways to avoid a garnishment is to pay your federal taxes on time. If you’ve filed your return but you don’t have the money to pay what’s owed in full, you can potentially work out a payment agreement with the IRS, take out a loan, or charge it to a credit card.
You could also borrow from your 401(k) to satisfy unpaid tax debts. Using your 401(k) to pay down debt is usually not advised, since it can shrink your overall wealth and you might face tax penalties. However, you may prefer it to having the money taken from your account by the IRS.
Don’t Ignore IRS Notices
If the IRS sends you a letter requesting payment for unpaid taxes, don’t ignore it. Doing so could lead to a garnishment if the government makes additional attempts to get you to pay with no success. If you’re questioning whether the amount is accurate you may want to contact the IRS for verification or consult with a tax attorney.
Keep Up With Domestic Support Payments
When you’re ordered by a judge to pay child support or alimony, it’s important that you make those payments in a timely manner. As with back taxes, failing to pay could result in your 401(k) being garnished to satisfy the terms of the order in keeping with the divorce agreement or decree.
The Takeaway
There are certain retirement mistakes that are best avoided and having your savings garnished is one of them. Knowing when retirement accounts can be garnished can help you to preserve your assets.
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FAQ
Can the government legally take your 401(k)?
The federal government can garnish your 401(k) if you owe unpaid tax debts and all other attempts at collection have been unsuccessful. The IRS can also place levies against your property, including homes, vehicles, and other assets to force you to pay what’s owed.
Can a 401(k) be garnished by the IRS?
Yes, the IRS can garnish your 401(k) if you don’t pay federal taxes. Generally, the IRS will give you sufficient notice beforehand so that you have time to either pay the taxes owed or make alternate arrangements for handling your tax bill.
How do I protect my 401(k) from the IRS?
The simplest way to protect a 401(k) from the IRS is to pay your federal taxes on time and not disregard any notices or requests for payment you receive from the government. If you can’t pay in full, you might be able to set up a payment plan or an Offer In Compromise to avoid 401(k) garnishment.
Photo credit: iStock/Charday Penn
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.
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.
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.
Whether you are a new investor or a seasoned trader, it’s common to hear the word “volatility” when discussing the movements of a stock price or index. More volatile stocks tend to have larger swings in value, both up and down.
There are two forms of volatility, however. Historical volatility, which measures past price movements, and implied volatility, which estimates future price fluctuations based on options pricing. It’s crucial for participants in these markets to understand the difference between implied vs historical volatility.
Key Points
• Historical volatility measures the range of returns on a market index or security over a given time period.
• Traders use historical volatility to set stop-loss levels and analyze riskiness.
• Historical volatility is different from implied volatility, which is forward-looking.
• Implied volatility measures expected future volatility based on options prices, reflecting market expectations.
• Higher implied volatility tends to lead to higher options premiums since the price is more likely to jump to a trader’s advantage (or disadvantage).
Historical Volatility Definition
As the name suggests, historical volatility measures a stock’s price as compared to its average, or mean. The most popular way to calculate a stock’s historical volatility is by calculating the standard deviation of its price movements during a period of time.
Investors use historical volatility to get an idea of how likely the stock is to make large movements in price. A stock with higher volatility may indicate elevated risk, because there is a higher potential that the stock’s price could rise or drop significantly.
Highly volatile investments purchased with leveraged accounts can create additional risk. On the other hand, a stock with higher historical volatility could also be potentially more rewarding, since there is also a possibility that the stock’s price could make a big jump upward (or downward). Stocks may become more volatile during times of recession or uncertainty.
Investors measure a stock’s historical volatility as a percentage of the stock’s price, and not as an absolute number. That makes it easier to compare historical volatility between stocks — even if they have very different values — while assessing investment opportunities. When comparing the volatility of stocks, it’s important to look at them during the same time period.
Implied Volatility Definition
Implied volatility measures a stock’s expected future price fluctuations, derived from options prices, and is commonly used by traders to assess market uncertainty. While historical volatility is backward-looking, implied volatility attempts to quantify a stock’s volatility going forward.
Implied volatility reflects the prices of the options contracts associated with a particular stock. Options traders often assess implied volatility using metrics like Vega, one of the Greeks in options trading, which measures how sensitive an option’s price is to changes in implied volatility.
A stock with a higher implied volatility generally has options contracts with higher premiums. This is because there is more uncertainty around the direction of the underlying stock.
Although both implied volatility and historical volatility measure the volatility of stocks, they measure it in different ways. Historical volatility reflects the past price movements of a particular stock or index, while implied volatility gauges future expectations of price movements based on the prices of options contracts. Traders use implied volatility when they are determining the extrinsic value of an option.
When to Use Historical vs Implied Volatility
Historical volatility is used for assessing a stock’s past price movements. It demonstrates a stock’s value fluctuation over a specific period, and may provide an idea of the risk associated with it. Investors use historical volatility to gauge the potential for future price swings based on historical data.
Implied volatility may help an investor evaluate options pricing or forecast potential future price movements. This figure reflects the market’s expectations for future volatility, based on the prices of options contracts. Traders often use implied volatility to determine whether options are overpriced or underpriced relative to expected price movements.
For example, a trader could look at options with implied volatility that differs from its historical volatility. If an option’s implied volatility is lower than the historical volatility of the underlying stock, that may be a signal of an undervalued option premium.
Comparing Implied and Historical Volatility
Here is a quick summary of the differences between historical and implied volatility:
Historical Volatility:
Historical volatility is used to analyze a stock’s past price movements, regardless of whether the investor is purchasing the stock itself or trading its options. It can help assess the stock’s risk or potential for large price swings, which is valuable for both stock investors and options traders.
Implied Volatility:
Implied volatility is specific to options because it’s derived from options prices, reflecting the market’s expectations of future volatility. Implied volatility isn’t just for options traders, however. It can also be useful for stock traders as an indicator of market sentiment about the stock’s future price movements.
Historical Volatility
Implied Volatility
Calculated using the historical prices of a stock or index
Determined indirectly based on the prices of options contracts
Used by investors as well as traders to analyze a stock’s movements
Used primarily for options and based on options prices, which are based on market expectations of volatility
Measures past performance based on historical data
Projects future performance, representing an indicator of future volatility
How to Use Implied and Historical Volatility Together
Because implied volatility and historical volatility measure different things, it can be useful to employ them both. The historical volatility of a given stock or index will measure how much the price has historically moved up and down. If you’re interested in investing in options for a stock, you can look at how its historical volatility compares to the implied volatility denoted by the prices of its options contracts.
One way you can incorporate some of these ideas into your trading strategies is through a volatility skew. A volatility skew depends on the difference in implied volatility between options contracts that are in the money, at the money, and out of the money.
Another relevant concept when it comes to implied volatility is a volatility smile, a graphic representation of the strike prices and the implied volatility of options with the same underlying asset and expiration date.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
The Takeaway
Options traders often look at both historical and implied volatility when determining their options trading strategy. You may also use these tools while investing, or you might look at other factors to evaluate potential investments.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
How is implied volatility calculated from historical volatility?
The historical volatility of a stock or index reflects the changes in historical stock prices. It is often, but not always, calculated as the standard deviation of a stock’s price movements. Implied volatility is not calculated directly from historical data. Rather, it is derived from the market prices of options contracts for the underlying stock.
Is there a difference between implied and realized volatility?
Realized volatility is another name for the historical volatility of a stock. So while implied and realized volatility both measure how volatile a stock is, they have different definitions, and investors use them in different ways.
Photo credit: iStock/kupicoo 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.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. 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. 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.
