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Q: What Is Greenwashing?

Greenwashing is when a company markets itself as more environmentally friendly than it actually is. Also known as 'green sheen,' this tactic is used to attract consumers who prefer products with high environmental standards.

Dec

2024

What Is Greenwashing?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

As climate issues continue to loom large around the world, people are becoming familiar with the term greenwashing — when a company markets itself as more sustainable than it actually is. This tactic impacts investors and consumers alike because it’s designed to mislead people through a variety of means: mislabeling, the use of vague terminology, making claims about green actions or outcomes that can’t be verified (or are found to be deceptive).

The term greenwashing is derived from the notion of whitewashing, which is when a company or individual conceals wrongdoings by presenting a cleaned-up, but deceptive version of their actions.

One reason companies engage in greenwashing is to attract consumer and investor dollars. According to the 2023 Business of Sustainability Index, 68% of consumers claimed they would spend more money on environmentally friendly products. But some companies engage in greenwashing to avoid environmental regulations.

Key Points

• Greenwashing is when a company markets itself as more sustainable or eco-friendly than it is.

• Companies may engage in greenwashing to attract consumers, employees, or investors.

• Greenwashing can also be an attempt to avoid stringent or costly regulations.

• Common greenwashing techniques include misleading labels, vague or meaningless terminology, a deceptive use of data, and more.

• It’s vital for investors, as well as consumers, to look beyond an organization’s green claims to verify whether they are adhering to ESG standards.

Identifying the Different Types of Greenwashing

Before you buy products marketed as sustainable or eco-friendly, or invest in a green company that makes similar claims, it may help to know some of the red flags of greenwashing.

Many of these can be convincing, so in order to decide whether a company is engaging in actual greenwashing or not, you may have to do your own research.

Here’s what to look out for when purchasing a product, or investing in a company that claims to embrace sustainability or ESG investing strategies (i.e., environmental, social, and governance practices):

• Vague language: Labels such as “eco-conscious,” “clean,” or “100% sustainable” don’t actually mean anything in terms of a company’s manufacturing processes or adherence to environmental criteria. Be sure to research ESG standards that reflect actual environmental practices.

• Imagery: If a polluting company uses marketing images of flowers, trees, beaches and so forth, they may be trying to appear more environmentally friendly than they really are. Be sure to check whether the product lives up to the advertising.

• Greenwashing a traditionally polluting product: Companies may attempt to improve the branding of a product by making it seem more environmentally friendly without actually changing much or anything about it.

• False associations: Brands can make it seem like they are endorsed by a third party when they really aren’t, or the third party is simply their own subsidiary.

• Green products from a polluting company: A company might make a product that has a lower environmental impact, such as an electric vehicle, but manufacture it in a way that creates significant waste and greenhouse gas emissions.

• Fabricated data: Companies might fund research that will have results that make them look better, or make data up completely.

Again, because socially responsible investing has grown so rapidly, and many companies want to attract the attention of investors and consumers with a green sensibility, there is commensurate growth on the greenwashing side, so it does pay to be cautious when making choices.

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Example of Greenwashing

Greenwashing is increasingly on the radar of regulatory bodies that protect consumers and investors, but some watchdog organizations lack the resources to hold companies to account. A few examples of what would be considered greenwashing are described on the U.S. Federal Trade Commission (FTC) website:

• A company labels a trash bag they are selling as “recyclable.” Although this may be true, it’s unlikely that a trash bag full of trash will be emptied and then recycled on its own. This label makes the product appear to have an environmental benefit, but in reality it doesn’t.

• In another example, a company labels a product as having 50% more recycled content than a previous product did. This makes it sound like a significant amount, but in fact the company may have increased the recycled content from 2% to only 3%, so there has been hardly any change in reality.

• A company labels a product as “recyclable” but they don’t say specifically whether all parts of it are recyclable, just some parts, or just the packaging.

Other real-world examples include: An oil company that’s known for environmental negligence releases advertisements that state their dedication to a carbon-free future — or companies promising to do environmental cleanups, but failing to actually follow through on those promises.

You can compare these to alternative or solar energy companies that are making a difference.

The Negative Impact of Greenwashing on a Company

Although in the short term greenwashing might benefit a company if it leads to more people buying their products, the risk is that negative consequences can quickly outweigh those gains. If consumers realize the company is engaging in greenwashing, rather than adhering to established ESG frameworks, there can be a big PR backlash, and serious reputational damage.

Companies can also face legal ramifications for their misleading claims. And investors interested in true impact investing may take their business elsewhere.

In the long term, the biggest negative consequence is the actual environmental impact of manufacturing practices that are not, in fact, green or sustainable. Companies rely on clean water and air, quality soil, and a stable climate to operate. A thriving economy requires a healthy planet, and greenwashing ultimately doesn’t support either.

6 Ways to Avoid Greenwashing

Whether purchasing products or investing in companies, if you are looking for the most sustainable options, there are a few ways to avoid greenwashing.

1. Clear and Transparent Language

Watch out for vague terms and language. If a brand makes sustainability claims, look for specifics such as certifications, verifiable third-party endorsements, industry credentials, and details about exactly what the brand is doing.

2. Evaluate the Data

If a brand uses statistics and numbers to back up its sustainability claims, make sure the numbers are backed up with credible data.

3. Compare Similar Products

A company may make sustainability claims when in fact their product has basically the same environmental impact as their competitor’s. Compare ingredients, packaging, and manufacturing information to see whether one product is really better than another.

4. Look Beyond the Final Product

Even if a company is improving the impact of its products, it may not be addressing the waste and emissions associated with its operations or supply chain. If this is the case, they may be just making changes for marketing purposes. Check out a company’s website and/or watchdog groups to learn how much effort is going into sustainability at the corporate level.

5. Look for Goals and Timelines

If a company is truly implementing a comprehensive sustainability plan, it would include measurable goals and timelines. Ideally those would be available to investors and consumers, in the interest of transparency.

6. Verify Ingredients and Materials

Some terminology and product labels can be misleading. For instance, a company might say that their product is made from organic cotton or recycled plastic, when in fact only a small percentage of the cotton or plastic is organic or recycled and the rest is not.

The FDA has no guidelines for what the term “natural” means, and according to the USDA the term simply means that a product is “minimally processed” with “no artificial ingredients.”

Greenwashing vs Green Marketing

There is nothing wrong with a company telling the story of its environmental initiatives and the steps it is taking to produce products more sustainably. That’s green marketing at its best and most transparent. By contrast, greenwashing is when a company attempts to cover up their bad practices.

Actual green marketing may include:

• Certifications and endorsements from established regulatory organizations

• Clearly labeled manufacturing processes

• Recyclable, compostable, or biodegradable materials (but watch out for these labels, sometimes a product can actually only be composted or biodegrade in very specific conditions that aren’t realistic).

• Products free from toxic chemicals

• Use of renewable energy

• The use of transportation measures such as EVs

• Purchase of carbon offsets for any unavoidable emissions

• In-office programs and measures such as renewable energy, LEED certified buildings, on-site composting, or elimination of single use plastic

• Doesn’t use too much packaging, and ideally avoids plastic packaging

• Circularity programs that allow consumers to send back the product for repair or reuse

• High-quality manufacturing made to last rather than one-time or short-term use

• Fair trade and ethical labor practices

• Environmental programs outside the company, such as donations or volunteer efforts

The Takeaway

Greenwashing is a marketing tactic some companies use to align themselves with the growing consumer and investor desire for sustainable products and investments. It’s related to the concept of “whitewashing,” which means covering up the truth with a positive-sounding story.

Investors committed to sustainability can look for red flags of greenwashing before deciding whether to invest.

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FAQ

What is ESG greenwashing?

ESG greenwashing is the practice of using marketing tactics to exaggerate an organization’s environmental, social, or governance efforts in order to attract customers, employees, investors, or positive media attention.

What are the three most common kinds of greenwashing?

Three common types of greenwashing are the use of environmental imagery, misleading labels and language, and hidden tradeoffs where the company emphasizes one sustainable aspect of a product — while still engaging in environmentally damaging practices.

Photo credit: iStock/fizkes

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Dec

2024

457 vs 401(k): A Detailed Comparison

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

Table of Contents

401(k) Plans
Vesting in a 401(k) Retirement Plan
457 Plans
Vesting in a 457 Retirement Plan
457 vs 401(k): Comparing the Pros
457 vs 401(k): Comparing the Cons
457 vs 401(k): The Differences
457 vs 401(k): The Similarities
457 vs 401(k): Which Is Better?
FAQ

Depending on where you work, you may be able to save for retirement in a 457 plan or a 401(k). While any employer can offer a 401(k), a 457 plan is commonly associated with state and local governments and certain eligible nonprofits.

Both offer tax advantages, though they aren’t exactly the same when it comes to retirement saving. Understanding the differences between a 457 retirement plan vs. 401(k) plans can help you decide which one is best for you.

And you may not have to choose: Your employer could offer a 401(k) plan and a 457 plan as retirement savings options. If you’re able to make contributions to both plans simultaneously, you could do so up to the maximum annual contribution limits — a terrific savings advantage for individuals in organizations that offer both plans.

Key Points

• A 457 plan and a 401(k) are retirement savings options with tax advantages.

• Both plans have contribution limits and may offer employer matching contributions.

• A 401(k) is governed by ERISA, while a 457 plan is not.

• 457 plans allow penalty-free withdrawals before age 59 ½ if you retire, unlike 401(k) plans.

• 457 plans have special catch-up provisions for those nearing retirement.

401(k) Plans

A 401(k) is a tax-advantaged, defined contribution plan. Specifically, it’s a type of retirement plan that’s recognized or qualified under the Employee Retirement Income Security Act (ERISA).

With a 401(k) plan, the amount of benefits you can withdraw in retirement depends on how much you contribute during your working years and how much those contributions grow over time.

Understanding 401(k) Contributions

A 401(k) is funded with pre-tax dollars, meaning that contributions reduce your taxable income in the year you make them. And withdrawals are taxed at your ordinary income tax rate in retirement.

Some employers may offer a Roth 401(k) option, which would enable you to deposit after-tax funds, and withdraw money tax-free in retirement.

401(k) Contribution Limits

The IRS determines how much you can contribute to a 401(k) each year. For 2024, the annual contribution limit is $23,000; $22,500 in 2023. Workers age 50 or older can contribute an additional $7,500 in catch-up contributions. Generally, you can’t make withdrawals from a 401(k) before age 59 ½ without incurring a tax penalty. So, if you retire at 62, you can avoid the penalty but if you retire at 52, you wouldn’t.

Employers can elect to make matching contributions to a 401(k) plan, though they’re not required to. If an employer does offer a match, it may be limited to a certain amount. For example, your employer might match 50% of contributions, up to the first 6% of your income.

401(k) Investment Options

Money you contribute to a 401(k) can be invested in mutual funds, index funds, target-date funds, and exchange-traded funds (ETFs). Your investment options are determined by the plan administrator. Each investment can carry different fees, and there may be additional fees charged by the plan itself.

The definition of retirement is generally when you leave full-time employment and live on your savings, investments, and other types of income. So remember that both traditional and Roth 401(k) accounts are subject to required minimum distribution (RMD) rules beginning at age 72. That’s something to consider when you’re thinking about your income strategy in retirement.

💡 Recommended: 5 Steps to Investing in Your 401k Savings Account

Vesting in a 401(k) Retirement Plan

A 401(k) plan is subject to IRS vesting rules. Vesting determines when the funds in the account belong to you. If you’re 100% vested in your account, then all of the money in it is yours.

Employee contributions to a 401(k) are always 100% vested. The amount of employer matching contributions you get to keep can depend on where you are on the company’s vesting schedule. Amounts that aren’t vested can be forfeited if you decide to leave your job or you retire.

Employer’s may use a cliff vesting approach in which your percentage of ownership is determined by year. In year one and two, your ownership claim is 0%. Once you reach year three and beyond, you’re 100% vested.

With graded vesting, the percentage increases gradually over time. So, you might be 20% vested after year two and 100% vested after year six.

All employees in the plan must be 100% vested by the time they reach their full retirement age, which may or may not be the same as their date of retirement. The IRS also mandates 100% vesting when a 401(k) plan is terminated.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

457 Plans

A 457 plan is a deferred compensation plan that can be offered to state and local government employees, as well as employees of certain tax-exempt organizations. The most common version is the 457(b); the 457 (f) is a deferred compensation plan for highly paid executives. In certain ways, a 457 is very similar to a 401(k).

• Employees can defer part of their salary into a 457 plan and those contributions are tax-deferred. Earnings on contributions are also tax-deferred.

• A 457 plan can allow for designated Roth contributions. If you take the traditional 457 route, qualified withdrawals would be taxed at your ordinary income tax rate when you retire.

• Since this is an employer-sponsored plan, both traditional and Roth-designated 457 accounts are subject to RMDs once you turn 72.

• For 2023, the annual contribution limit is $22,500, and $7,500 for the catch-up amount for workers who are 50 or older.

One big difference with 457 plans is that these limits are cumulative, meaning they include both employee and employer contributions rather than allowing for separate matching contributions the way a 401(k) does.

Another interesting point of distinction for older savers: If permitted, workers can also make special catch-up contributions for employees who are in the three-year window leading up to retirement.

They can contribute the lesser of the annual contribution limit or the basic annual limit, plus the amount of the limit not used in any prior years. The second calculation is only allowed if the employee is not making regular catch-up contributions.

Vesting in a 457 Retirement Plan

Vesting for a 457 plan is similar to vesting for a 401(k), but you generally can’t be vested for two full years. You’re always 100% vested in any contributions you make to the plan. The plan can define the vesting schedule for employer contributions. For example, your job may base vesting on your years of service or your age.

As with a 401(k), any unvested amounts in a 457 retirement plan are forfeited if you separate from your employer for any reason. So if you’re planning to change jobs or retire early, you’d need to calculate how much of your retirement savings you’d be entitled to walk away with, based on the plan’s vesting schedule.

457 vs 401(k): Comparing the Pros

When comparing a 457 plan vs. 401(k), it’s important to look at how each one can benefit you when saving for retirement. The main advantages of using a 457 plan or a 401(k) to save include:

• Both offer tax-deferred growth

• Contributions reduce taxable income

• Employers can match contributions, giving you free money for retirement

• Both offer generous contribution limits, with room for catch-up contributions

• Both may offer loans and/or hardship withdrawals

Specific 457 Plan Advantages

A 457 plan offers a few more advantages over a 401(k).

Unlike 401(k) plans, which require employees to wait until age 59 ½ before making qualified withdrawals, 457 plans allow withdrawals at whatever age the employee retires. And the IRS doesn’t impose a 10% early withdrawal penalty on withdrawals made before age 59 ½ if you retire (or take a hardship distribution).

Also, independent contractors can participate in an organization’s 457 plan.

And, as noted above, 457 plans have that special catch-up provision option, for those within three years of retirement.

457 vs 401(k): Comparing the Cons

Any time you’re trying to select a retirement plan, you also have to factor in the potential downsides. In terms of the disadvantages associated with a 457 retirement plan vs. 401(k) plans, they aren’t that different. Here are some of the main cons of both of these retirement plans:

• Vesting of employer contributions can take several years, and plans vary

• Employer matching contributions are optional, and not every plan offers them

• Both plans are subject to RMD rules

• Loans and hardship withdrawals are optional

• Both can carry high plan fees and investment options may be limited

Perhaps the biggest con with 457 plans is that employer and employee contributions are combined when applying the annual IRS limit. A 401(k) plan doesn’t have that same requirement so you could make the full annual contribution and enjoy an employer match on top of it.

457 vs 401(k): The Differences

The most obvious difference between a 401(k) vs. 457 account is who they’re meant for. If you work for a state or local government agency or an eligible nonprofit, then your employer can offer a 457 plan for retirement savings. All other employers can offer a 401(k) instead.

Aside from that, 457 plans are not governed by ERISA since they’re not qualified plans. A 457 plan also varies from a 401(k) with regard to early withdrawal penalties and the special catch-up contributions allowed for employees who are nearing retirement. Additionally, a 457 plan may require employees to prove an unforeseeable emergency in order to take a hardship distribution.

A 457 plan and a 401(k) can offer a different range of investments as well. The investments offered are determined by the plan administrator.

457 vs 401(k): The Similarities

Both 457 and 401(k) plans are subject to the same annual contribution limits, though again, the way the limit is applied to employer and employee contributions is different. With traditional 401(k) and 457 plans, contributions reduce your taxable income and withdrawals are taxed at your ordinary income tax rate. When you reach age 72, you’ll need to take RMDs unless you’re still working.

Either plan may allow you to take a loan, which you’d repay through salary deferrals. Both have vesting schedules you’d need to follow before you could claim ownership of employer matching contributions. With either type of plan you may have access to professional financial advice, which is a plus if you need help making investment decisions.

457 vs 401(k): Which Is Better?

A 457 plan isn’t necessarily better than a 401(k) and vice versa. If you have access to either of these plans at work, both could help you to get closer to your retirement savings goals.

A 401(k) has an edge when it comes to regular contributions, since employer matches don’t count against your annual contribution limit. But if you have a 457 plan, you could benefit from the special catch-up contribution provision which you don’t get with a 401(k).

If you’re planning an early retirement, a 457 plan could be better since there’s no early withdrawal penalty if you take money out before age 59 ½. But if you want to be able to stash as much money as possible in your plan, including both your contributions and employer matching contributions, a 401(k) could be better suited to the task.

Investing in Retirement With SoFi

If you’re lucky enough to work for an organization that offers both a 457 plan and a 401(k) plan, you could double up on your savings and contribute the maximum to both plans. Or, you may want to choose between them, in which case it helps to know the main points of distinction between these two, very similar plans.

Basically, a 401(k) has more stringent withdrawal rules compared with a 457, and a 457 has more flexible catch-up provisions. But a 457 can have effectively lower contribution limits, owing to the inclusion of employer contributions in the overall plan limits.

The main benefit of both plans, of course, is the tax-advantaged savings opportunity. The money you contribute reduces your taxable income, and grows tax free (you only pay taxes when you take money out).

Another strategy that can help you manage your retirement savings: Consider rolling over an old 401(k) account so you can keep track of your money in one place. SoFi makes setting up a rollover IRA pretty straightforward, and there are no rollover fees or taxes.

Help grow your nest egg with a SoFi IRA.

FAQ

What similarities do 457 and 401(k) retirement plans have?

A 457 and a 401(k) plan are both tax-advantaged, with contributions that reduce your taxable income and grow tax-deferred. Both have the same annual contribution limit and regular catch-up contribution limit for savers who are 50 or older. Either plan may allow for loans or hardship distributions. Both may offer designated Roth accounts.

What differences do 457 and 401(k) retirement plans have?

A 457 plan includes employer matching contributions in the annual contribution limit, whereas a 401(k) plan does not. You can withdraw money early from a 457 plan with no penalty if you’ve separated from your employer. A 457 plan may be offered to employees of state and local governments or certain nonprofits while private employers can offer 401(k) plans to employees.

Is a 457 better than a 401(k) retirement plan?

A 457 plan may be better for retirement if you plan to retire early. You can make special catch-up contributions in the three years prior to retirement and you can withdraw money early with no penalty if you leave your employer. A 401(k) plan, meanwhile, could be better if you’re hoping to maximize regular contributions and employer matching contributions.

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.

You may also be interested in:

Guide to 457 Retirement Plans

A Beginner’s Guide to 401(k) Retirement Plans

Types of Retirement Plans and Which to Consider

SoFi Invest®

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

Dec

2024

What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401(k)?

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

A money purchase pension plan or MPPP is an employer-sponsored retirement plan that requires employers to contribute money on behalf of employees each year. The plan itself defines the amount the employer must contribute. Employees may also have the option to make contributions from their pay.

Money purchase pension plans have some similarities to more commonly used retirement plans such as 401(k)s, pension plans, and corporate profit sharing plans. If you have access to a MPPP plan at work, it’s important to understand how it works and where it might fit into your overall retirement strategy.

What Is a Money Purchase Pension Plan?

Money purchase pension plans are a type of defined contribution plan. That means they don’t guarantee a set benefit amount at retirement. Instead, these retirement plans allow employers and/or employees to contribute money up to annual contribution limits.

Like other retirement accounts, participants can make withdrawals when they reach their retirement age. In the meantime, the account value can increase or decrease based on investment gains or losses.

Money purchase pension plans require the employer to make predetermined fixed contributions to the plan on behalf of all eligible employees. The company must make these contributions on an annual basis as long as the plan is maintained.

Contributions to a money purchase plan grow on a tax-deferred basis. Employees do not have to make contributions to the plan, but they may be allowed to do so, depending on the plan. The IRS does allow for loans from money purchase plans but it does not permit in-service withdrawals.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

What Are the Money Purchase Pension Plan Contribution Limits?

Each money purchase plan determines what its own contribution limits are, though the amount can’t exceed maximum limits set by the IRS. For example, an employer’s plan may specify that they must contribute 5% or 10% of each employee’s pay into that employee’s MPPP plan account.

Annual money purchase plan contribution limits are similar to SEP IRA contribution limits. For 2023, the maximum contribution allowed is the lesser of:

• 25% of the employee’s compensation, OR

• $66,000

The IRS routinely adjusts the contribution limits for money purchase pension plans and other qualified retirement accounts based on inflation. The amount of money an employee will have in their money purchase plan upon retirement depends on the amount that their employer contributed on their behalf, the amount the employee contributed, and how their investments performed during their working years. Your account balance may be one factor in determining when you can retire.

Rules for money purchase plan distributions are the same as other qualified plans, in that you can begin withdrawing money penalty-free starting at age 59 ½. If you take out money before that, you may owe an early withdrawal penalty.

Like a pension plan, money purchase pension plans must offer the option to receive distributions as a lifetime annuity. Money purchase plans can also offer other distribution options, including a lump sum. Participants do not pay taxes on their accounts until they begin making withdrawals.

The Pros and Cons of Money Purchase Pension Plans

Money purchase pension plans have some benefits, but there are also some drawbacks that participants should keep in mind.

Pros of Money Purchase Plans

Here are some of the advantages for employees and employers who have a money purchase plan.

• Tax benefits. For employers, contributions made on behalf of their workers are tax deductible. Contributions grow tax-free for employees, allowing them to put off taxes on investment growth until they begin withdrawing the money.

• Loan access. Employees may be able to take loans against their account balances if the plan permits it.

• Potential for large balances. Given the relatively high contribution limits, employees may be able to accumulate account balances higher than they would with a 401(k) retirement plan, depending on their pay and the percentage their employer contributes on their behalf.

• Reliable income in retirement. When employees retire and begin drawing down their account, the regular monthly payments through a lifetime annuity can help with budgeting and planning.

Disadvantages of Money Purchase Pension Plan

Most of the disadvantages associated with money purchase pension plans impact employers rather than employees.

• Expensive to maintain. The administrative and overhead costs of maintaining a money purchase plan can be higher than those associated with other types of defined contribution plans.

• Heavy financial burden. Since contributions in a money purchase plan are required (unlike the optional employer contributions to a 401(k)), a company could run into issues in years when cash flow is lower.

• Employees may not be able to contribute. Depending on the terms of a plan, employees may not be able to make contributions to the plan. However, if the employer offers both a money purchase plan and a 401(k), employees could still defer part of their salary for retirement.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Money Purchase Pension Plan vs 401(k)

The main differences between a pension vs 401(k) have to do with their funding and the way the distributions work. In a money purchase plan, the employer provides the funding with optional employee contribution.

With a 401(k), employees fund accounts with elective salary deferrals and option employer contributions. For both types of plans, the employer may implement a vesting schedule that determines when the employee can keep all of the employer’s contributions if they leave the company. Employee contributions always vest immediately.

The total annual contribution limits (including both employer and employee contributions) for these defined contribution plans are the same, at $66,000 for 2023. But 401(k) plans allow for catch-up contributions made by employees aged 50 or older. For 2023, the total employee contribution limit is $22,500 with an extra catch-up contribution of $7,500.

Both plans may or may not allow for loans, and it’s possible to roll amounts held in a money purchase pension plan or a 401(k) over into a new qualified plan or an Individual Retirement Account (IRA) if you change jobs or retire.

Employees may also be able to take hardship withdrawals from a 401(k) if they meet certain conditions, but the IRS does not allow hardship withdrawals from a money purchase pension plan.

Here’s a side-by-side comparison of a MPPP and a 401(k):

	MPPP Plan	401(k) Plan
Funded by	Employer contributions, with employee contributions optional	Employee salary deferrals, with employer matching contributions optional
Tax status	Contributions are tax-deductible for employers, growth is tax-deferred for employees	Contributions are tax-deductible for employers and employees, growth is tax-deferred for employees
Contribution limits (2023)	Lesser of 25% of employee’s pay or $66,000	$22,500, with catch-up contributions of $7,500 for employees 50 or older
Catch-up contributions allowed	No	Yes, for employers 50 and older
Loans permitted	Yes, if the plan allows	Yes, if the plan allows
Hardship withdrawals	No	Yes, if the plan allows
Vesting	Determined by the employer	Determined by the employer

The Takeaway

Money purchase pension plans are a valuable tool for employees to reach their retirement goals. They’re similar to 401(k)s, but there are some important differences.

Whether you save for retirement in a money purchase pension plan, a 401(k), or another type of account the most important thing is to get started. The sooner you begin saving for retirement, the more time your money will have to grow through the power of compounding returns.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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FAQ

Here are answers to some additional questions you may have about money pension purchase plans.

What is a pension money purchase scheme?

A money purchase pension plan or money purchase plan is a defined contribution plan that allows employers to save money on behalf of their employees. These plans are similar to profit-sharing plans ,and companies may offer them alongside a 401(k) plan as part of an employee’s retirement benefits package.

Can I cash in my money purchase pension?

You can cash in a money purchase pension at retirement in place of receiving lifetime annuity payments. Otherwise, early withdrawals from a money purchase pension plan are typically not permitted, and if you do take money early, taxes and penalties may apply.

Is final salary pension for life?

A final salary pension is a defined benefit plan. Unlike a defined contribution plan, defined benefit plans pay out a set amount of money at retirement, typically based on your earnings and number of years of service. Final salary pensions can be paid as a lump sum or as a lifetime annuity, meaning you get paid for the remainder of your life.

About the author

Rebecca Lake

You may also be interested in:

What Is a Pension Plan & How Does It Work?

401(k) vs Pension Plan: Differences and Which is Better For You

Guide to Rolling Over a Pension Into an IRA

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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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Dec

2024

What Happens to My Stock in a Merger?

By Inyoung Hwang | Growing Wealth, invest, Investing | Comments Off

It’s hard to know what to expect as an investor when mergers take place and you own stocks that are in the mix. Acquisitions often lead to a loss in value for the acquiring company’s shares, while the target company often sees a lift. But that’s not always the case, and there are certainly no guarantees.

Key Points

• Mergers and acquisitions often result in varied stock price movements, typically causing the acquiring company’s shares to decline while the target company’s shares appreciate.

• Regulatory approvals, stock volatility, and executive decisions can lead to the cancellation of M&A deals, creating investment uncertainty despite most deals ultimately succeeding.

• The market reaction to M&A announcements can vary, with several scenarios affecting share prices, such as investor perceptions of deal value and potential synergies.

• Employee stock options can be impacted significantly during mergers, with employees potentially seeing their shares cashed out or exchanged for new company shares.

• While mergers can offer growth opportunities and resource access, they also carry risks of failure and may not guarantee increased shareholder value.

What Are Mergers and Acquisitions (M&A)?

Mergers and acquisitions (M&A) are corporate transactions that involve two companies combining, or one buying a majority stake in another. This can involve private companies or public companies.

A CEO might embark on an M&A transaction with the objective of finding “synergies,” which is Wall Street lingo for creating value through consolidation. Synergies are typically found by reducing costs or finding new avenues for growth by combining two companies.

Stock-for-stock mergers — when the target’s shares are converted into the buyer’s shares — are the most common type of M&A transaction. That’s why there’s often a burst of M&A activity after a prolonged bull market: Companies with high stock prices can use their shares to make pricey purchases.

For instance, in early 2020, M&A activity experienced a slowdown as the repercussions of COVID-19 took hold of the global economy. Dealmaking during the pandemic eventually came back as share prices soared and executives sought opportunities to adjust to the new business environment.

Meanwhile, in an all-cash merger, the buyer either has to spend the cash they have on hand, or raise new capital to fund the purchase of the target.

What Is a Merger of Equals?

A true merger of equals (MOEs) is rare, so most mergers are actually acquisitions. But MOEs could signal to investors that two similar, roughly equal-sized companies are uniting because there are significant tax or cost savings to be had. Investors may find that with MOEs, the premiums paid aren’t as significant.

What Is Private Equity?

Private equity (PE) firms, alternative investment funds that buy and restructure companies, also participate in M&A. They seek deals when there’s “dry powder,” or funds that have been committed by investors but aren’t yet spent.

How Do Stocks Move During Mergers?

After an M&A announcement, the most common reaction on Wall Street is for the shares of the acquiring company to fall and those of the target company to rally. That’s because the buyer typically offers a premium for the takeover in order to win over shareholders, and big company moves or decisions are a key driver of price fluctuations and how stocks work.

The rally in the target’s stock can come as a surprise, often leaving investors with the dilemma of selling them, or holding onto them after the deal is complete. The target’s shares usually trade for less than the acquisition price until the transaction closes. This is because the market is pricing in the risk of the deal falling apart.

Why Do M&A Deals Fall Through?

Deals can and do fall apart for a number of reasons. For example, deals can get scrapped because of a key regulatory disapproval, stock volatility, or simply because the CEOs changed their minds.

That would mean the money spent on investment bankers, lawyers, and consultants to put together the M&A terms would have been effectively wasted, not to mention the specter of a costly break-up fee. As a result, there can be investor skepticism towards M&A.

Different Stock Reactions to M&A

Tracking movement in the stock market is a key way to gauge how shareholders and other investors feel about a deal. Here are some different scenarios of how the market could react and influence share prices:

Buyer (acquiring company) rises alongside target (company being acquired): This is typically the best case scenario for companies and investors. It occurs when the stock market believes the deal is a smart acquisition for the buyer and that the deal’s been made at a good price.

Buyer falls significantly: The buyer’s shares may plummet if investors believe executives are overpaying for a target or if they think the target isn’t a good purchase.

Target moves little: The target’s shares may see little change if rumors of a potential deal already sent share prices higher, causing the premium to be baked in. Alternatively, the premium being paid may be low, causing a muted market reaction.

Buyer rises, target falls: In rarer cases, a deal gets called off and the buyer’s shares rise while the target falls. This could be because investors have soured on the merger and believe that the acquiring company is getting out of a bad deal.

Target falls: If a target company needs money, a private equity firm could buy a stake at a discount. In such cases, the target company’s shares could slump.

Merger vs Acquisition Impacts on Stocks

Mergers and acquisitions are similar, and when it comes to the effect of each on stocks, the impact is generally felt in the same way, too. That is, for shareholders, there likely isn’t all that much of a difference in how a merger or an acquisition would affect the value of their shares.

The key difference mostly concerns the variance in values or sizes between the two companies. Mergers generally involve two roughly equal-sized or valued companies, meaning that the effect on share values may be rather muted.

Acquisitions tend to involve companies of different sizes or values, so you’re more likely to see a swing in share values, as discussed.

M&A Stock Impact Example

To see the effect of a merger or acquisition on a stock’s price, let’s look at a textbook example: The merger between Kraft and Heinz in 2015, which created one of the largest food companies in the world.

The two companies had multiple similarities, including their size and the industries in which they operated. And when the merger was originally announced, stock values soared. Kraft shares shot up more than 35% in March 2015 after the news hit the market.

The new company, the Kraft Heinz Company, became a single stock: Kraft Heinz Co., trading under the KHC ticker. While the stock did originally shoot way up in price, the following months saw its value taper off before rallying again and reaching a peak of nearly $100 per share in early 2017.

Since then, however, its value has fallen, and as of late 2024, is trading at around $30 per share.

How Is Employee Stock Impacted By a Merger?

Depending on the specifics, employee stock can be significantly affected by a merger. One of the most profound ways this can occur is that the new company might cancel or modify employee stock options.

But generally, if you are an employee in a company that is merging with another or being acquired, it’s likely that you will see your shares either cashed out, or exchanged for shares in the new company.

Do Mergers Create Value?

There’s long been a debate among investors and academics whether M&A actually creates value for stakeholders and shareholders. Recent research has shown that frequent acquirers do tend to add value, while bigger deals are riskier. A lot of mergers fail, costing billions.

The stock market is famously fickle, and it can take time before the market gives credit to the combined company for any cost or revenue synergies. In general, cost-saving synergies are much easier to pledge, while revenue synergies could be tougher to deliver.

Investors should also pay attention to executive changes that result from the merger. Leadership turnover can make a difference when it comes to making sure a merger adds value and two companies integrating well.

Buying a Stock Before vs After a Merger

For investors, timing the market can be tricky when it comes to deciding to buy a stock before or after a merger. The fact of the matter is that there’s no real way to know for sure what will happen when news of a merger reaches the stock markets, or what will happen after the merger goes through.

But as mentioned, some stocks do rally on the news of a merger, while others might fall. It’ll often come down to the specific companies involved, their relative sizes or values, and the overall economic environment.

Calculating Stock Price After a Merger

If you own shares in a company that’s involved in a merger, you’ll likely wonder what your shares will be worth after it’s all said and done. Unfortunately, no one can predict the future — which means there’s really no way to calculate a stock’s price after a merger goes through. If there were, you can be sure that traders would be lined up to either buy the stock before a merger in anticipation of its value going up, or short-selling the stock in order to bet against it.

What Is Merger Arbitrage?

Merger arbitrage — also known as merger arb or risk arbitrage — is a hedge-fund or private equity strategy that involves buying shares of the target company and shorting shares of the acquiring company. Returns are usually amplified through the use of leverage.

The so-called “spreads” between the takeover company and the offer value are a way to calculate the odds the market is placing on the deal successfully closing. When it comes to retail vs. institutional investors, some of the former may want to try merger arbitrage. However, there are key points to keep in mind.

First and foremost, it’s typical that most of the arbitrage opportunities will have been taken immediately after the deal gets announced. That said, mergers fall apart for all sorts of reasons. Usually, the biggest hurdle is getting regulatory approval, as regulators often reject a deal for being anticompetitive. A crash in the stock market could also make buyers back out.

What Is a Cash-Out Merger?

A cash-out merger, which is often called a “freeze-out or squeeze-out” merger, effectively freezing out certain shareholders. This is done when two entities merge, and shareholders of the target company don’t want to be a part of the acquiring company. As such, stipulations of the deal may require that shareholders of the target company sell their shares before the merger.

Essentially, they’re cashing out their shares before the merger goes through.

Pros and Cons of Mergers

Like anything, there are pros and cons to mergers. Here’s a rundown of some of the upsides and downsides of M&A activity:

Pros of Mergers

The biggest advantages of mergers, for acquiring companies, are that they potentially allow those companies to grow faster, enter new markets, and acquire new talent and resources. Merging with a new company means bringing on a big new addition, and all that comes with it.

For target companies, shareholders or owners can see a big payday as a result of a merger, and they may benefit from access to a bigger pool of resources owned by the acquiring company.

Cons of Mergers

Potential drawbacks of a merger are that they can easily fall apart (due to regulatory issues, or other problems), they can eat up massive amounts of time and resources, and that they can be risky. Remember, there’s no guarantee that a merger will create more value than it destroys, so it’s something of a roll of the dice depending on the specifics.

Mergers need to jump through a lot of hoops, too, to get approved by regulators — much like a company going through the IPO process. So, investors would do well to temper their excitement about a merger until it becomes a little more clear as to whether the process will result in a successful marriage.

Or, at the very least, have a high risk tolerance when online investing in stocks involved in a merger or acquisition.

The Takeaway

When a merger is announced, the typical reaction is for the acquiring company’s stock price to fall, while the target company’s stock price gains. But different scenarios in the market can give clues on how investors are feeling towards an M&A deal.

Mergers are risky, too, and many of them fail. For investors, the important thing to know is that M&A announcements can go either way, but they often can and do result in the creation of shareholder value for those holding stocks.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How do stocks work with mergers?

Depending on the specifics of the merger, investors may have their shares cashed-out, or exchanged for shares of the new company. Prices of stocks may increase or decrease, often depending on if they’re shares of the target or acquiring company.

How do you calculate a stock price after a merger?

After a merger, two companies’ stocks become one. There’s no easy way or calculation to determine a stock’s price post-merger, as no one can predict the future. But there are historical trends that can be researched involving post-merger price fluctuations that may be helpful to some investors.

Is it good to buy stock before or after a merger?

Any and every stock purchase has its risks, and buying a stock before or after a merger may be more risky than your average purchase. Nobody knows which way a price will go in the future, but if you do want some advice about buying a stock before or after a merger, it may be best to speak with a financial professional for guidance.

SoFi Invest®

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

SOIN-Q424-040

Dec

2024

Understanding a Taxable Brokerage Account vs an IRA

By Michael Flannelly | Growing Wealth, invest, Investing | No Comments

Table of Contents

What Are Taxable Brokerage Accounts?
What Is an IRA?
Taxable Brokerage Accounts vs IRA Accounts
Tax Advantages of an IRA vs Taxable Brokerage Account
Which Type of Account Is Best for Me?
Pros and Cons of Taxable Brokerage Accounts
Is it Smart to Have Both an IRA and a Taxable Brokerage Account?
FAQ

Tax-sheltered accounts like the IRA and 401(k) have long been the go-to investment accounts for retirement planning. These types of accounts offer ways to build up tax-advantaged savings for the future. However, investing in taxable brokerage accounts is another common way to build wealth for the short or long term.

The most notable difference between an IRA and a taxable brokerage account can be seen around tax season. With taxable brokerage accounts, you typically pay taxes on your capital gains and dividends each year. In contrast, tax-advantaged accounts generally only involve paying taxes when you make your contribution or withdraw your money, depending on the type of account.

Investors should know the similarities and differences between IRAs and taxable brokerage accounts. Learning the ins and outs of these accounts can help you decide which is right for you to build wealth and meet your financial goals.

Key Points

• Taxable brokerage accounts and IRAs serve different purposes, with brokerage accounts focusing on general investment and IRAs designed specifically for retirement savings.

• Taxable brokerage accounts require annual taxes on capital gains and dividends, while IRAs allow for tax-deferred growth until funds are withdrawn.

• Different types of IRAs, such as Traditional and Roth, offer unique tax advantages and rules regarding contributions and withdrawals tailored to individual financial situations.

• A combination of both account types can provide flexibility and diversification, allowing investors to meet both short-term and long-term financial goals.

• Each account type has its pros and cons, making it essential to evaluate personal financial objectives before deciding on the appropriate investment strategy.

What Are Taxable Brokerage Accounts?

Think of taxable brokerage accounts as “traditional” investment accounts — brokerage-offered investment accounts with stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Investors who utilize these accounts, including online brokerage accounts, invest and trade to build short- or long-term wealth, but not necessarily for retirement.

The investments within a taxable brokerage account are subject to tax on any capital gains, dividends, or interest earned. Brokerage account holders pay taxes each year based on investment income.

It’s also important to note that tax liability can vary based on variables like the types of investments held within the brokerage account, the length of time they are held, and an individual’s tax bracket. For example, short-term capital gains, which are gains on investments held for less than a year, are taxed at the same rate as ordinary income. In contrast, long-term capital gains, which are gains on investments held for more than a year, are typically taxed at a lower rate.

Recommended: Capital Gains Tax Guide

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

What Is an IRA?

An IRA, or individual retirement account, is an investment account designed specifically to save for retirement. Contributions to an IRA may be tax-deductible or tax-deferred, and the accounts’ investments can grow tax-free until they are withdrawn at retirement age.

There are several different types of IRAs, including Traditional IRAs, Roth IRAs, and SEP IRAs, which have different rules for contributions, taxes, and withdrawals. An IRA can be a helpful tool for saving for retirement and taking advantage of potential tax benefits.

Taxable Brokerage Accounts vs IRA Accounts

Tax-sheltered, or tax-deferred, investment accounts like IRAs differ from taxable brokerage accounts because they generally offer tax advantages and have restrictions on contributions and withdrawals. The tax advantages make them designed for long-term retirement saving and investing. Besides having money invested for retirement, the most notable benefits of IRAs are no yearly tax burden and, in some cases, tax-deductible contributions.

Here’s a breakdown of what each tax-deferred account may offer compared to a brokerage account.

Traditional IRAs vs Taxable Brokerage Accounts

The traditional IRA has no income limits; as long as someone has a taxable income, they can contribute to a traditional IRA. The gains, dividends, and interest earned in IRAs grow tax-deferred during contributing years. Contributions to a traditional IRA may be tax-deductible, though the benefits phase out if you have a high enough income.

With a few exceptions, IRA withdrawal rules say account holders will have to pay a 10% early withdrawal penalty if they take a distribution before reaching age 59 ½. Additionally, account holders are required to start making withdrawals the year they turn age 73 (if they reach age 72 after December 31, 2022) that are taxed as income.

These limitations make a traditional IRA different from a taxable brokerage account, as taxable brokerage accounts do not have withdrawal restrictions and penalties.

With a traditional IRA, as with taxable brokerage accounts, account holders will need to manage it independently or with a financial planner’s help.

A traditional IRA might be a good option for investors who think they will be in a lower tax bracket when they retire. In theory, these investors would save money on taxes by paying them in retirement compared to paying taxes now.

For 2024, account holders can contribute up to $7,000 per year (or up to $8,000 if they are age 50 or older). For 2025, the total contributions investors can make to a traditional IRA remains the same — up to $7,000 (or up to $8,000 if they are 50 and up).

Roth IRAs vs Taxable Brokerage Accounts

Like taxable brokerage accounts, Roth IRA contributions aren’t tax-deductible. Investors contribute with post-tax dollars, but that also means they won’t be subject to taxes when they withdraw funds in retirement.

However, income limits exist for those who can contribute to a Roth IRA account. If you make more than the income limits, then the amount of money you can contribute to a Roth IRA may be reduced, and high earners may not be able to contribute to a Roth IRA at all. For 2024, income limits start at $146,000 per year for single tax filers and $230,000 for married couples filing jointly. For 2025, income limits start at $150,000 per year for single tax filers and $236,000 for married couples filing jointly. You can use a Roth IRA calculator to help determine your contribution limit.

As with brokerage accounts, Roth IRA account holders can contribute to their accounts at any age. Investors who want to make retirement contributions can do so even after they’ve retired.

Rules around Roth IRA withdrawals are less stringent than those for a traditional IRA. Roth account holders can also begin to take the account’s growth starting at age 59 ½ with no penalty as long as the account has been open for five years.

For those eligible to contribute to a Roth IRA, these accounts make the most sense if the account holder thinks they will be in a higher tax bracket in retirement. Since account holders pay taxes on the contributions in the year they were made, it makes the most sense to pay income taxes when in a lower tax bracket.

401(k)s vs Taxable Brokerage Accounts

Similar to an IRA, 401(k) accounts are one of the most common tax-sheltered accounts. The big difference between an IRA and a 401(k) account is that the 401(k) is employer-sponsored, and employees and employers can contribute to the account.

Employees can contribute to their 401(k) up to $23,000 per year in 2024 and up to $23,500 in 2025. Employees over 50 can make additional catch-up contributions of $7,500 annually in both 2024 and 2025, and in 2025, those 60 to 63 can make a higher catch-up contribution of up to $11,250 under the SECURE 2.0 Act. Many employers offer employees 401(k) plans, some even matching contributions up to a certain percentage.

The 401(k) is one of the most common ways to build a retirement nest egg because the contributions are automatic and come out of the employee’s paycheck, so employees may not even notice the money is gone.

Tax Advantages of an IRA vs Taxable Brokerage Account

As noted above, IRAs offer several tax advantages compared to taxable brokerage accounts. Investors generally use IRAs for tax efficient investing.

Here are some of the main differences:

• Contributions to traditional IRAs may be tax-deductible: Contributions to a traditional IRA may be tax-deductible, depending on your income and whether a retirement plan at work covers you or your spouse. This means that the money you contribute to a traditional IRA can be deducted from your taxable income, potentially reducing the amount of tax you owe.

• Earnings in an IRA grow tax-free or tax-deferred: The money you earn in an IRA, including interest, dividends, and capital gains, grows tax-deferred or tax-free until you withdraw it in retirement. In a taxable brokerage account, you would have to pay taxes on any capital gains and dividends you earn each year.

• Withdrawals from traditional IRAs may be taxed at a lower rate: When you withdraw money from a traditional IRA in retirement, it is taxed as ordinary income at your marginal tax rate. However, if you are in a lower tax bracket in retirement than when you made the contributions, your withdrawals may be taxed at a lower rate.

• Contributions to a Roth IRA are not tax-deductible: Contributions to a Roth IRA are not tax-deductible, but the money you withdraw in retirement is tax-free, provided you meet specific requirements. This can be a good option if you expect to be in a higher tax bracket in retirement than you are now.

Which Type of Account Is Best for Me?

Brian Walsh, Certified Financial Planner™ at SoFi, says ultimately, you’ll have a mixture of accounts. However, what’s right for you depends on your situation. “It depends if you have access to a 401(k) and an employer match … it depends on what you’re eligible for.” Here are a few considerations that can help you assess your situation.

Think About Investing in a Traditional IRA If…

• You want to take advantage of tax-deferred contributions.

• You expect to be in a lower tax bracket in retirement.

• You’ve maxed out your 401(k) contributions and make too much to contribute to a Roth account.

Think About Investing in a Roth IRA If…

• You expect to be in a higher tax bracket in retirement.

• You want the option to pass on the account easily to your heirs.

• You’ve maxed out your traditional 401(k) and want to offset some of your future tax burden with a Roth IRA.

Think About Investing in a 401(k) If…

• Your employer offers a plan with a match program.

• You’re uncertain about your future tax liability, and your employer allows you to split contributions between a traditional 401(k) and a Roth 401(k).

• You prefer a hands-off approach to investing.

Think About Investing in a Taxable Brokerage Account If…

• You’ve maxed out all contribution limits to your 401(k) and IRAs.

• You want to invest in investments not offered in your 401(k) or IRA, like options or cryptocurrency.

• You want more control over your investments with the opportunity to withdraw funds at your leisure.

Pros and Cons of Taxable Brokerage Accounts

Here are some of advantages and disadvantages of taxable brokerage accounts:

Pros of Taxable Accounts

• Flexibility: Taxable brokerage accounts allow you to invest in a wide range of assets, such as stocks and bonds, as well as derivatives. This allows you to create a diversified portfolio that may help you meet your investment goals.

• Growth potential: Taxable brokerage accounts offer the potential for significant growth, as you can earn capital gains on your investments if they increase in value.

• No contribution limits: Unlike tax-advantaged accounts, taxable brokerage accounts have no contribution limits. This means you can contribute as much as you want to your account, subject to income limits or restrictions.

Cons of Taxable Accounts

• Taxes: One of the main disadvantages of taxable brokerage accounts is that you will be required to pay taxes on your investment income and capital gains. This can significantly reduce your overall returns.

• Lack of tax benefits: Taxable brokerage accounts do not offer the same tax benefits as tax-advantaged accounts. For example, 401(k)s and IRA contributions may be tax-deductible, while investments in taxable brokerage accounts are not.

• Potential for loss: As with any investment, there is a risk of loss in a taxable brokerage account. If your investments decline in value, you could lose some or all of your initial investment.

Is it Smart to Have Both an IRA and a Taxable Brokerage Account?

It may be a consideration to have both an IRA and a taxable brokerage account, as each type has its specific benefits and drawbacks.

An IRA can be a good option if you are looking to open a retirement account and save for retirement and want the potential tax benefits of an IRA. On the other hand, a taxable brokerage account can be a good choice if you are looking to invest for goals other than retirement or if you are not eligible for a tax deduction on your contributions to an IRA.

Having both an IRA and a taxable brokerage account can give you more flexibility and diversification in your investments, which can help you manage risk and improve your overall financial situation.

The Takeaway

Every account — from taxable brokerage accounts to IRAs — has advantages and disadvantages, which is why some investors choose to invest in a few. The old cliche, “don’t put all your eggs in one basket,” is a solid philosophy for financial planning. Investing in several different “baskets” is one way to ensure that your money is working hard for you.

Take a step toward reaching your financial goals with SoFi Invest.

FAQ

What is the difference between an IRA and a taxable brokerage account?

An IRA is designed specifically to save for retirement. Unlike a taxable brokerage account, which is used for general investing, contributions to a traditional IRA may be tax-deductible, and the investments within the account grow tax-deferred until they are withdrawn at retirement age. There are several other types of IRAs, including Roth IRAs, which have different rules for contributions, taxes, and withdrawals.

Is it better to contribute to an IRA or a taxable brokerage account?

Whether to contribute to an IRA or a taxable brokerage account depends on your circumstances and financial goals. In general, an IRA can be a good option if you are looking to save for retirement and want the potential tax benefits of an IRA. However, if you are not eligible for a tax deduction on your contributions or looking to invest for goals other than retirement, a taxable brokerage account may be a better choice.

How is a taxable brokerage account taxed?

The investments held within a taxable brokerage account may be subject to tax on any capital gains, dividends, or interest earned. Short-term capital gains, which are gains on investments held for less than a year, are taxed at the same rate as ordinary income. Long-term capital gains, which are gains on investments held for more than a year, are typically taxed at a lower rate. Dividends and interest income earned are also subject to tax.

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

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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.
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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.

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.

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

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SOIN-Q424-025

Identifying the Different Types of Greenwashing

Example of Greenwashing

The Negative Impact of Greenwashing on a Company

6 Ways to Avoid Greenwashing

1. Clear and Transparent Language

2. Evaluate the Data

3. Compare Similar Products

4. Look Beyond the Final Product

5. Look for Goals and Timelines

6. Verify Ingredients and Materials

Greenwashing vs Green Marketing

The Takeaway

FAQ

What is ESG greenwashing?

What are the three most common kinds of greenwashing?

401(k) Plans

Understanding 401(k) Contributions

401(k) Contribution Limits

401(k) Investment Options

Vesting in a 401(k) Retirement Plan

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

457 Plans

Vesting in a 457 Retirement Plan

457 vs 401(k): Comparing the Pros

Specific 457 Plan Advantages

457 vs 401(k): Comparing the Cons

457 vs 401(k): The Differences

457 vs 401(k): The Similarities

457 vs 401(k): Which Is Better?

Investing in Retirement With SoFi

FAQ

What similarities do 457 and 401(k) retirement plans have?

What differences do 457 and 401(k) retirement plans have?

Is a 457 better than a 401(k) retirement plan?

You may also be interested in:

What Is a Money Purchase Pension Plan?

What Are the Money Purchase Pension Plan Contribution Limits?

The Pros and Cons of Money Purchase Pension Plans

Pros of Money Purchase Plans

Disadvantages of Money Purchase Pension Plan

Money Purchase Pension Plan vs 401(k)

The Takeaway

FAQ

What is a pension money purchase scheme?

Can I cash in my money purchase pension?

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M&A Stock Impact Example

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