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Dec

2023

Solo 401(k): The Retirement Plan Built for the Self-Employed

Navigating Solo 401(k) Plans: A Complete Guide for the Self-Employed

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

Being self-employed offers many perks, including freedom and flexibility. What it doesn’t offer is an employer-sponsored retirement plan. But when you don’t have access to a 401(k) at work, opening a solo 401(k) can make it easier to stay on track with retirement planning.

Before you establish a solo 401(k) for yourself, it’s important to understand how these plans work and the pros and cons involved.

What Is a Solo 401(k)?

A solo 401(k) is a type of 401(k) that’s designed specifically with self-employed individuals in mind. This retirement savings option follows many of the same rules as workplace 401(k) plans in terms of annual contribution limits, tax treatment, and withdrawals. But it’s tailored to individuals who run a business solo or only employ their spouses.

It’s one of several self-employed retirement options you might consider when planning a long-term financial strategy.

Definition and Overview

A solo 401(k) is a tax-advantaged retirement account that’s for self-employed individuals and business owners who have zero employees, or no employees other than their spouse. This type of 401(k) plan is also known by a few other names:

• Solo-k

• Uni-k

• One-participant plan

Traditional solo 401(k) contributions are made using pre-tax dollars. However, it’s possible to open a Roth solo 401(k) instead. In the case of a Roth solo 401(k), you’d make contributions using after-tax dollars and be able to withdraw the money tax-free in retirement.

A self-employed 401(k) plan works much the same as a regular 401(k). For instance, you may be able to take loans from your savings if needed. Catch-up contributions are also allowed. The biggest difference is that there is no matching contribution from an outside employer.

You can start investing in a solo 401(k) for yourself through an online brokerage. There’s some paperwork you’ll need to fill out to get the process started, but once your account is open you can make contributions year-round.

At the end of the year, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if the account has $250,000 or more in assets.

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Contribution Limits in Solo 401(k) Plans

Much like workplace 401(k)s, there are annual contribution limits that apply to solo 401(k) plans.

The IRS caps total contributions to a solo 401(k) account at $66,000 for 2023 and $69,000 for 2024. That doesn’t include catch-up contributions for those age 50 and over, which are an additional $7,500 for each year.

As both the employee and employer of your own business, you can contribute both elective salary deferrals and employer nonelective contributions (you are both the employer and the employee in this scenario). Each has different contribution caps.

Annual Contribution Limits

As an employee, you can contribute up to 100% of your earned income up to the annual contribution limit: $22,500 in 2023 and $23,000 in 2024, plus an additional $7,500 for those age 50+ in elective salary deferrals.
In addition, you can make employer nonelective contributions. These come directly from the “employer” (aka you) and are not deducted from the employee’s (your) salary. As an employer, you can contribute up to 25% of your self-employment income (business income – ½ self-employment tax and elective salary deferrals), in pre-tax dollars.

Setting Up a Solo 401(k) Plan

If you’re interested in setting up a solo 401(k) for yourself, you can do so through an online brokerage. Here’s a step-by-step guide for how to open a solo 401(k).

Steps to Establish Your Plan

1. Choose a Plan Administrator

A plan administrator is the person responsible for managing your solo 401(k). It’s their job to make sure the plan is meeting reporting and other requirements established by the IRS. If you’re self-employed, you can act as your own plan administrator or you could choose your accountant instead.

2. Choose a Brokerage

Once you know who’s going to manage the plan, the next step is deciding where to open it. A number of brokerages offer solo 401(k) plans so you may want to spend some time comparing things like:

• Account setup process

• Investment options

• Fees

You may be able to start the solo 401(k) account setup process online, though some brokerages require you to call and speak to a representative first. And you may need to finalize your account opening by mailing or faxing in any supporting documents the brokerage needs to complete the application.

3. Fill Out a Solo 401(k) Application

Before you can start a 401(k) account for yourself, you’ll need to give your brokerage some information about your business. A typical solo 401(k) application may ask for your:

• First and last name

• Employer Identification Number (EIN)

• Plan administrator’s name and contact information

• Social Security number

• Mailing address

• Citizenship status

• Income information

You’ll also need to disclose any professional associations or affiliations that might result in a conflict of interest with the brokerage. In completing the application, you’ll be asked to name one or more beneficiaries. You may also be asked to provide bank account information that will be used to make your initial contribution to the plan.

4. Choose Your Investments

Once you’ve returned your solo 401(k) account application and it’s been approved, you can choose your investments. The type of investments offered can depend on the brokerage and the plan. But typically, you may be able to choose from:

• Target-date funds

• Index funds

• Actively managed funds

• Exchange-traded funds (ETFs)

Whether you have access to individual stocks, bonds, CDs, or alternative investments such as commodities can depend on the platform that’s offering the plan.

5. Decide How Much to Contribute

You may choose to schedule automatic investments or make them manually according to a schedule that works for you.

Choosing Between Traditional and Roth Solo 401(k)s

You can opt for a traditional solo 401(k), which is made with pre-tax dollars, or a Roth solo 401(k), which is made with after-tax dollars. Which plan is better for you may depend on what you expect your income to be in retirement.

If you believe your income will be higher in retirement than it is now, in general, a Roth could be a better choice since you can take the distributions tax-free at that time. But if you think your income may be less in retirement than it is now, you might be better off with a traditional solo 401(k), which allows you to take the tax deduction now and have your distributions taxed in retirement.

Advantages and Disadvantages of Solo 401(k) Plans

When considering retirement account options, it can be helpful to look at the pros and cons to determine what works best for your personal situation.

Benefits of Having a Solo 401(k)

There are different reasons why opening a 401(k) for self employed individuals could make sense.

• Bigger contributions. Compared to other types of self-employed retirement plans, such as a SEP IRA or SIMPLE IRA, solo 401(k) contribution limits tend to be more generous. Neither a SEP IRA or SIMPLE IRA, for instance, allows for catch-up contributions.

• Roth contributions. You also have the option to open a Roth solo 401(k). If you anticipate being in a higher tax bracket when you retire, you may prefer being able to withdraw contributions tax-free with a Roth.

• Flexible withdrawal rules. A solo 401(k) can also offer more flexibility with regard to early withdrawals than a SEP IRA, SIMPLE IRA, traditional IRA, or Roth IRA. If your solo 401(k) plan allows it, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. An IRA-based plan wouldn’t allow for loans.

Considerations and Potential Drawbacks

There are also a few potential downsides of investing in a solo 401(k).

• Eligibility restrictions. If you run a small business and you have at least one employee other than a spouse, you won’t be able to open a solo 401(k) at all.

• Complicated reporting. Calculating contributions and filing can be more complicated with a solo 401(k) vs. a SEP IRA or SIMPLE IRA. If your plan has more than $250,000 in assets you’ll need to file Form 5500-EZ with the IRS each year.

• Administrative costs. Depending on where you open a solo 401(k) plan, the cost of maintaining it year to year may be higher compared to other self employed retirement plans. And an early 401(k) withdrawal can trigger taxes and penalties.

It’s important to consider the range of investment options offered through a solo 401(k). What you can invest in at one brokerage may be very different from another. The individual cost of those investments can also vary if some mutual funds or exchange-traded funds offered come with higher expense ratios than others.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Withdrawals and Loan Provisions

There are certain requirements for withdrawals and/or loans from a solo 401(k).

Rules for Withdrawing Funds

You can make withdrawals from a solo 401(k) without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability, but you may owe a 10% penalty as well as income taxes on the withdrawal.

Loan Options and Conditions

Some solo 401(k) plans may be set up to allow loans. If yours does, you could take out a loan in place of an early withdrawal. This could help you to avoid early withdrawal penalties and taxes. Just be sure to find out the loan terms and conditions, which can vary by plan.

Testing and Compliance for Solo 401(k)s

Unlike workplace 401(k)s, solo 401(k)s have no testing compliance requirements involved.

Alternatives to Solo 401(k) Plans

Instead of a solo 401(k), self employed individuals can consider another type of retirement account. Here’s how different options stack up.

Comparing a Solo 401(k) to a SEP IRA and Other Retirement Options

A SEP IRA is designed for small businesses. However, unlike a solo 401(k), a SEP IRA allows no catch-up contributions and there is no Roth version of the plan.

A SIMPLE IRA is for businesses with no more than 100 employees. It has much lower contribution limits than a solo 401(k) and once again, there is no Roth option.

Pros and Cons of a Solo 401(k)

A solo 401(k) has advantages and disadvantages. Here’s a side-by-side comparison of the benefits and drawbacks.

Solo 401(k) Pros	Solo 401(k) Cons
Catch-up contributions may allow older investors to save more for retirement versus a SEP IRA or SIMPLE IRA.	Only self-employed individuals who have no employees or just employee their spouses can contribute.
It’s possible to choose between a traditional solo 401(k) or Roth solo 401(k), based on your investing goals and tax situation.	Annual reporting requirements may be more complicated for a solo 401(k) compared to other self employed retirement plans.
Solo 401(k) plans may allow for loans, similar to workplace plans.	Early withdrawals from a solo 401(k) are subject to taxes and penalties.

The Takeaway

A solo 401(k) can be a worthwhile investment vehicle for self-employed people who want to save for retirement. It has more generous contribution limits than some other retirement options. In addition, there is a Roth version of the plan, and a solo 401(k) plan may also offer flexibility in terms of early withdrawals. For individuals who are self-employed, opening a solo 401(k) is one potential way to start saving for their golden years.

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FAQ

Can I contribute 100% of my salary to a solo 401(k)?

As an employee, you can contribute up to 100% of your earned income to a solo 401(k) up to the annual contribution limit, which is $22,500 in 2023, and $23,000 in 2024, plus an additional $7,500 for those age 50 and up in elective salary deferrals.

Is a solo 401(k) taxable income?

You will pay taxes with a solo 401(k), but the type of plan you open determines when you’ll pay those taxes. If you have a traditional 401(k), your contributions are tax-deferred, and they reduce your taxable income for the year in which you make them. However, you will pay taxes on distributions when you take them in retirement. If you have a Roth 401(k), you pay taxes on your contributions when you make them, but your distributions in retirement are tax-free.

What is the average return on a solo 401(k)?

The return on a solo 401(k) depends on the investments in your portfolio. However, in general, a solo 401(k) invested in a mix of bonds, stocks, and cash assets can have an average rate of return ranging between 3% and 8%. But again, it depends on what your investments are, and how much you allocate to those different assets. You may want to compare your plan’s performance to plans with similar funds to get a general sense of what the average return might be.

Who qualifies for a solo 401(k)?

To be eligible for a solo 401(k), you must be self-employed or a small business owner with no employees other than a spouse. To open a solo 401(k) you will need an Employee Identification Number (EIN), which is available from the IRS.

Photo credit: iStock/visualspace

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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.

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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Nov

2023

Understanding Economic Indicators

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

An economic indicator is a statistic or piece of data that offers insight into an economy. Analysts use economic indicators to gauge where an economic system is in the present moment, and where it might head next. Governments use economic indicators as guideposts when assessing monetary or fiscal policies, and corporations use them to make business decisions. Individual investors can also look to these indicators as they shape their portfolios.

There are different types of economic indicators and understanding how they work can make it easier to interpret them, and fold them into your investing strategy.

What Is an Economic Indicator?

An economic indicator is typically a macroeconomic data point, statistic, or metric used to analyze the health of an individual economy or the global economy at large. Government agencies, universities, and independent organizations can collect and organize economic indicator data.

In the United States, the Census Bureau, Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) are some of the entities that aggregate economic indicator data.

Some of the most recognizable economic indicators examples include:

• Gross domestic product (GDP)

• Personal income and real earnings

• International trade in goods and services

• U.S. import and expert prices

• Consumer prices (as measured by the Consumer Price Index or CPI)

• New residential home sales

• New home construction

• Rental vacancy rates

• Home ownership rates

• Business inventories

• Unemployment rates

• Consumer confidence

Private organizations also regularly collect and share economic data investors and economists may use as indicators. Examples of these indicators include the Fear and Greed Index, existing home sales, and the index of leading economic indicators.

Together, these indicators can provide a comprehensive picture of the state of the economy and shine light on potential opportunities for investors.

How Economic Indicators Work

Economic indicators work by measuring a specific component of the economy over a set time period. An indicator may tell you what patterns are emerging in the economy — or confirm the presence of patterns already believed to be established. In that sense, these indicators can serve as a thermometer of sorts for gauging the temperature of the economic environment or where an economy is in a given economic cycle.

Economic indicators can not predict future economic or market movements with 100% accuracy. But they can be useful when attempting to identify signals about which way the economy (and the markets) might head next.

For example, an investor may study an economic indicator like consumer prices when gauging whether inflation is increasing or decreasing. If the signs point to a steady rise in prices, the investor might then adjust their portfolio to account for higher inflation. As prices rise, purchasing power declines but investors who are conscious of this economic indicator could take action to minimize negative side effects.

Types of Economic Indicators

Economic indicators are not all alike in terms of what they measure and how they do it. Different types of economic indicators can provide valuable information about the state of an economy. Broadly speaking, they can be grouped into one of three categories: Leading, lagging, or coincident.

Leading Indicators

Leading indicators are the closest thing you might get to a crystal ball when studying the markets. These indicators pinpoint changes in economic factors that may precede specific trends.

Examples of leading indicators include:

• Consumer confidence and sentiment

• Jobless claims

• Movements in the yield curve

• Stock market volatility

A leading indicator doesn’t guarantee that a particular trend will take shape, but it does suggest that conditions are ripe for it to do so.

Lagging Indicators

Lagging indicators are the opposite of leading indicators. These economic indicators are backward-looking and highlight economic movements after the fact.

Examples of lagging indicators include:

• Gross national product (GNP)

• Unemployment rates

• Consumer prices

• Corporate profits

Analysts look at lagging indicators to determine whether an economic pattern has been established, though not whether that pattern is likely to continue.

Coincident Indicators

Coincident indicators measure economic activity for a particular area or region. Examples of coincident indicators include:

• Retail sales

• Employment rates

• Real earnings

• Gross domestic product

These indicators reflect economic changes at the same time that they occur. So they can be useful for studying real-time trends or patterns.

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Popular Economic Indicators

There are numerous economic indicators the economists, analysts, institutional and retail investors use to better understand the market and the direction in which the economy may move. The Census Bureau, for example, aggregates data for more than a dozen indicators. But investors tend to study some indicators more closely than others. Here are some of the most popular economic indicators and what they can tell you as an investor.

Gross Domestic Product

Gross domestic product represents the inflation-adjusted value of goods and services produced in the United States. This economic indicator offers a comprehensive view of the country’s economic activity and output. Specifically, gross domestic product can tell you:

• How fast an economy is growing

• Which industries are growing (or declining)

• How the economic activity of individual states compares

The Bureau of Economic Analysis estimates GDP for the country, individual states and for U.S. territories. The government uses GDP numbers to establish spending and tax policy, as well as monetary policy, at the federal levels. States also use gross domestic product numbers in financial decision-making.

Consumer Price Index

The Consumer Price Index or CPI measures the change in price of goods and services consumed by urban households. The types of goods and services the CPI tracks include:

• Food and beverages

• Housing

• Apparel

• Transportation

• Medical care

• Recreation

• Education

• Communications

CPI data comes from 75 urban areas throughout the country and approximately 23,000 retailers and service providers. This economic indicator is the most widely used tool for measuring inflation. According to the Bureau of Labor Statistics, which compiles the consumer price index, it’s a way to measure a government’s effectiveness in managing economic policy.

Producer Price Index

The Producer Price Index or PPI measures the average change over time in the selling prices received by domestic producers of goods and services. In simpler terms, this metric measures wholesale prices for the sectors of the economy that produce goods, including:

• Mining

• Manufacturing

• Agriculture

• Fishing

• Forestry

• Construction

• Natural gas and electricity

The Producer Price Index can help analysts estimate inflation, as higher prices will show up on the wholesale level first before they get passed on to consumers at the retail level.

Unemployment Rate

The unemployment rate is an economic indicator that tells you the number of people currently unemployed and looking for work. The BLS provides monthly updates on the unemployment rate and nonfarm payroll jobs. Together, the unemployment rate and the number of jobs added or lost each month can indicate the state of the economy.

Higher unemployment, for example, generally means that the economy isn’t creating enough jobs to meet the demand by job seekers. When the number of nonfarm payroll jobs added for the month exceeds expectations, on the other hand, that can send a positive signal that the economy is growing.

Consumer Confidence

The Consumer Confidence Index can provide insight into future economic developments, based on how households are spending and saving money today. This indicator measures how households perceive the economy as a whole and how they view their own personal financial situations, based on the answers they provide to specific questions.

When the indicator is above 100, this suggests consumers have a confident economic outlook, which may make them more inclined to spend and less inclined to save. When the indicator is below 100, the mood is more pessimistic and consumers may begin to curb spending in favor of saving.

The Consumer Confidence Index is separate from the Consumer Sentiment Index, which is also used to gauge how Americans feel about the economy. This index also uses a survey format and can tell you how optimistic or pessimistic households are and what they perceive to be the biggest economic challenges at the moment.

Retail Sales

Retail sales are one of the most popular economic indicators for judging consumer activity. This indicator measures retail trade from month to month. When retail sales are higher, consumers are spending more money. If more spending improves company profits, that could translate to greater investor confidence in those companies, which may drive higher stock prices.

On the other hand, when retail sales lag behind expectations the opposite can happen. When a holiday shopping season proves underwhelming, for example, that can shrink company profits and potentially cause stock prices to drop.

Housing Starts

Census Bureau compiles data on housing starts. This economic indicator can tell you at a glance how many new home construction projects in a given month. This data is collected for single-family homes and multi-family units.

Housing starts can be useful as an economic indicator because they give you a sense of whether the economy is growing or shrinking. In an economic boom, it’s not uncommon to see high figures for new construction. If the boom goes bust, however, new home start activity may dry up.

It’s important to remember that housing starts strongly correlate to mortgage interest rates. If mortgage rates rise in reaction to a change in monetary policy, housing starts may falter, which makes this economic indicator more volatile than others.

Interest Rates

Federal interest rates are an important economic indicator because of the way they’re used to shape monetary policy. The Federal Reserve makes adjustments to the federal funds rate — which is the rate at which commercial banks borrow from one another overnight–based on what’s happening with the economy overall. These adjustments then trickle down to the interest rates banks charge for loans or pay to savers.

For example, when inflation is rising or the economy is growing too quickly, the Fed may choose to raise interest rates. This can have a cooling effect, since borrowing automatically becomes more expensive. Savers can benefit, however, from earning higher rates on deposits.

On the other hand, the Fed may lower rates when the economy is sluggish to encourage borrowing and spending. Low rates make loans less expensive, potentially encouraging consumers to borrow for big-ticket items like homes, vehicles, or home improvements. Consumer spending and borrowing can help to stimulate the economy.

Stock Market

The stock market and the economy are not the same. But some analysts view stock price and trading volume as a leading indicator of economic activity. For example, investors look forward to earnings reports as an indicator of a company’s financial strength and health. They use this information about both individual companies and the markets as a whole to make strategic investment decisions.

If a single company’s earnings report is above or below expectations, that alone doesn’t necessarily suggest where the economy might be headed. But if numerous companies produce earnings reports that are similar, in terms of meeting or beating expectations, that could indicate an economic trend.

If multiple companies come in below earnings expectations, for example, that could hint at not only lower market returns but also a coming recession. On the other hand, if the majority of companies are beating earnings expectations by a mile, that could signal a thriving economy.

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The Takeaway

Economic indicators can provide a significant amount of insight into the economy and the trends that shape the markets. Having a basic understanding of the different types of economic indicators could give you an edge if you’re better able to anticipate market movements when you start investing.

Economic indicators aren’t perfect, and while they can be a helpful part of an investing strategy, investors should always do as much research as they can before making specific moves. Discussing a strategy with a financial professional may be a good idea, too.

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FAQ

What are the leading economic indicators?

There are several leading economic indicators in the U.S., and they include consumer confidence and sentiment, jobless claims, movements in the yield curve, and stock market volatility.

What are the big three macro indicators?

While they may not be “the” big three macro indicators, a few of the key macroeconomic indicators that are often cited are gross domestic product (GDP), the unemployment rate, and the Consumer Price Index (CPI).

Photo credit: iStock/FG Trade

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Nov

2023

What to Do With Company Stock If Your Company Goes Public

By Samuel Becker | Growing Wealth, invest, Investing | Comments Off

If your company goes public via an IPO, and you’re a stockholder, there are several things you can do, including standing pat and holding your shares, or selling them. But know that holding stock in your company when it goes public can be akin to a roller coaster ride.

There can be a lot of anticipation as the IPO date approaches, but no one really knows what will happen on opening day or during the weeks that follow. With that in mind, before you decide to hold or sell, there are some things to take into consideration.

What Happens During an IPO

During an initial public offering, or IPO, a company offers shares of stock for sale to the general public for the first time — hence the phrase “going public.” Shares of the company are given a starting value known as an IPO price, and when trading begins, the price can rise amid investor demand, or fall if there is little demand.

In any case, the stock will now have some type of value on the open market. As an employee, you may have a stake in the company before the IPO through employee stock options, restricted stock units (RSUs), or you may own shares in the company outright.

Employers may offer stock options and restricted stock units (RSUs) as part of a compensation package to help retain top talent and align employee and company incentives — encouraging employees to work hard to make the company, and its stock, successful.

Stock options give employees the right to buy a specific number of shares of the company, at a set price, by the option’s expiration date.

When company stocks start trading on the open market, depending upon any restrictions, employees can decide to hang on to their shares or sell them and use the proceeds to help meet other goals.

💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

Making It Through the Lock-Up Period

That said, when a company goes public, shares and options are often subject to a lock-up period — typically 90 to 180 days — during which company insiders, such as employees, cannot sell their shares or exercise stock options.

Companies typically don’t want employees to flood the market with their stock, which could have a negative effect on the stock price while the company is getting its feet off the ground. When the lock-up period is over, employees are free to exercise their options and sell their shares.

While you’re in the lock-up period, even if it appears that your stocks are suddenly worth a lot of money, that money isn’t in your hands yet. It may be tempting to start spending as if it is, purchasing big-ticket items or putting a down payment on a house. But a lot can happen between an IPO and the end of a lock-up period. So, as the saying goes, don’t count your chickens before they hatch.

The stock market is volatile, and can involve a high degree of risk. If you spend money you have on hand assuming that you’ll be able to pay yourself back once you sell your stock, you may be in for a rude surprise if stock prices fall before then. It may be better to wait until the lock-up period is over before making any big money moves.

Selling Your Shares

If you have decided to sell, the how and when will depend on many factors, but some things that may impact your decision might be whether you own shares outright, have access to shares through employee stock options or through RSUs, and whether the stock has vested. If you already have shares of company stock in-hand, you can usually sell those as soon as the lock-up period ends.

RSUs, on the other hand, are a transfer of restricted stock shares from your employer to give you a certain number of stocks or grants that vest at a later date. Once it does so, the stock is yours to do with what you will. It’s important to note that when restricted stock vests or is transferred to the employee, the fair market value of the stock is included in the employee’s taxable wages. In some cases, RSUs are not taxed until they are fully vested and the company has IPO’d.

You may also have employee stock options, which function much differently than RSUs. A stock option essentially grants you the right to buy company shares at a predetermined price, known as a strike or exercise price.

Stock options are also normally subject to a vesting schedule, but once they vest, you do not have to exercise your right to buy shares immediately, but all stock options come with an expiration date, the last date the option holder must exercise the options or lose them.

For example, say an employee’s exercise price is $60, but the company stock is worth $50 when that employee’s shares vest. If the employee exercised their stock options, they would still have to pay $60 per share, which is more than the stock is worth at that time.

At this point, the stock option is essentially underwater and its value is negative. The employee might choose to wait to exercise their options until the value of the stock is above the exercise price and they can sell the stocks for a profit.

IPOs can be volatile, with share prices swinging up and down. Employees may want to wait for a stock’s prices to stabilize after an IPO to suss out whether it’s the right time to exercise their options.

Options If You Sell

When the lock-up period is over, you may choose to sell your vested shares. In some cases, employees may want to hold on to stock, especially if they anticipate that the price will go up. Other employees may feel they should hold on to stocks out of a sense of loyalty.

However, a concentrated position in any one stock can open you up to risk. If the stock does poorly, it can have an outsized effect on a portfolio. To avoid taking on too much risk, it may make sense to use the proceeds from the sale of company stock to accomplish other goals, such as diversifying your portfolio or paying down debt.

Diversifying Your Portfolio

As mentioned, holding a concentrated position in any one investment can open your portfolio up to additional or unwanted risk. Imagine for a moment that your only investment was the stock you hold in your company.

If stock prices fall, your portfolio will likely feel the full effect of that downward pressure. Now imagine that you hold stock in 100 different companies.

If any one of them does poorly, the effect it will have on your portfolio will be much smaller.

This is the concept behind diversification. A diversified portfolio holds a mix of asset classes, such as stocks and bonds. And within these asset classes, a portfolio likely holds a mix of investments diversified across factors such as size, sector, and geography.

The individual assets in this mix will likely respond in different ways to different market conditions, which can help reduce volatility. For example, a spike in oil prices might hurt some manufacturing stocks but help petroleum stocks.

Selling shares of your company stock and diversifying among a broad group of asset classes might help reduce market risk and volatility inside your portfolio, leaving you less beholden to how one company performs.

Paying Down High Interest Debt

You may also consider selling shares of company stock to pay off high-interest debt. For example, if you carry a balance on your credit card, you could be subject to interest rates of 14% or more. At that rate, your balance can grow quickly, especially if you’re only making minimum payments.

Paying down high-interest debt and saving on interest payments can have a positive impact on your overall finances.

Investing in a Home

Buying a house requires careful planning, even more so when you plan on using company stock to help you do it. There are a number of factors you may want to consider.

First, you might carefully determine whether buying a home is a good investment. You could start by considering how long you plan to stay there. Buying a home comes with all sorts of extra costs, such as appraisal fees, inspection fees, and closing costs.

Housing prices can vary widely from region to region. Keep an eye on housing values in your area to help you determine whether they are likely to rise in the long term. You may want to check out websites that offer market value trends information for the area you are interested in buying.

If you are planning to sell your shares to purchase a house, consider being prepared to sell as soon as you’ve found a house and have been approved for a mortgage loan. Selling right away can help you lock in any gains and help keep you from being at the mercy of market movements. Lenders will also need to verify liquidation before loan closing if the funds are used in the home purchase.

Selling while you know you have enough money to cover a down payment, for example, will help you avoid the risk that stock prices will drop between approval and closing, which could leave you scrambling to find other assets to make up the difference.

Planning for an IPO

If your company goes public, you have options as to what you can do with your shares. Your company IPO and the vesting of your stock are scheduled events, so you can use that to your advantage. You might want to start making a plan as soon as you can if you decide to go the selling route. And make sure you understand the tax consequences of holding or selling your stock and make that consideration a part of your broader tax plan.

For example, RSUs vesting according to their schedule after an IPO might bump you into a higher tax bracket, providing an opportunity to mitigate those effects with other tax-efficient strategies like funding retirement plans. Talk to a tax professional to learn more.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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

Should you exercise stock options before a company goes public?

It’s possible to exercise stock options before a company goes public, but it’s impossible to say whether any individual should, as circumstances vary between individuals and companies. It may be worth discussing your options with a financial professional.

Are stock options worthless if a company never goes public?

Stock options may become worthless if a company never goes public, or they may lose considerable value. There’s no guarantee that they will do so, however.

Is it better to exercise options before or after an IPO?

It may be relatively common to exercise stock options before a company goes public so as to best take advantage of any post-IPO share value increases.

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.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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.

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2023

How to Read Stock Charts as a New Trader

By Samuel Becker | Growing Wealth, Investing, Terminology | No Comments

Learning how to read stock charts can feel similar to learning how to drive a car. It can be baffling at first, but once you learn the basics, including types of stock market charts, and the patterns they’re forecasting, you’ll hopefully get the hang of it.

With that in mind, learning how to read stock charts is a bit of a heavy lift, and can be difficult or intimidating for newer investors. Keep that in mind: It’ll take some time and practice before you feel comfortable! But the sooner you learn to decipher stock charts, the more useful that knowledge will be in your investment strategy.

The Art of Reading Stock Charts

Learning how to read stock charts can feel like you’re training in some sort of higher art. But again, with some practice, many investors can learn to do it and implement it into their investment strategy.

Understanding Chart Types

There are a handful of basic stock chart types, including line charts, bar charts, and candlestick charts. Thankfully, these charts are more or less exactly what they sound like.

For instance, line charts simply graph a financial security’s historical performance with a line, allowing investors to see the ups and downs over time. A candlestick chart, on the other hand, shows a stock’s high, low, opening, and closing prices for a specific time period. Bar charts also show a security’s price change over time, but there are some slight differences between bar charts and candlestick charts – often, bar charts aren’t color-coded, for example.

Decoding Stock Chart Data

Stock charts are relaying a lot of information about a stock’s performance over certain time periods. Taking that all into account can be difficult, but the main data points investors will want to try and utilize to guide their investment decisions involve prices, dates, and trading volume.

Before you proceed any further, though, you’ll want to make sure you know what stock symbols are.

Stock symbols, or tickers, are the series of letters, and sometimes numbers, by which a particular stock is uniquely identified. For example, the stock symbol for Apple is AAPL, and the stock symbol for Amazon is AMZN. Stock symbols are defined by the exchanges on which those stocks are traded — for instance, the New York Stock Exchange (NYSE) or the Nasdaq. These are the markets on which stocks and other assets are bought and sold. Stocks traded on the NYSE and Nasdaq can have tickers up to 5-letters long, but most are only 2-4.

With that in mind, using graphs and charts to figure out what’s happening in the stock market is the next step.
The first thing you’ll notice when looking at the chart itself is that it’s pretty much a line graph. Remember middle school math? You’re dealing with a basic X and Y axis—and the X axis refers to time.

On a stock line chart, the trend line is measuring the asset’s performance over that period of time. Investors might want to view the stock’s performance over a single day, week, or month, or see its long-run trend line over the past year or longer. It all depends on your personal trading goals.

Some stock charts may spell out the stock’s opening price, low price, high price, and closing price during a given time period, usually marked simply O, L, H, and C. Here’s what those figures each refer to:

• The opening price is the first price at which the stock traded during the given time period.

• The low price is the lowest price at which the stock sold during the given time period.

• The high price is the highest price at which that stock sold during the given time period.

• Finally, the closing price is the last price at which the stock sold before the exchange closed.

If the exchange is still open and the stock is being actively traded, the stock chart will likely display the last price, which is just what it sounds like: the last price at which the stock was successfully sold.

You might also see the change in that price from the one immediately before it, or last change, usually displayed as both a dollar value and a percentage.

For example, if you were looking at a chart for Company X (using a fictitious stock ticker, CMPNYX) stock, it might display the following string of letters and numbers:

CMPNYX 197.16 +0.05 (+0.04%)

In this example, CMPNYX is the ticker symbol, and $197.16 is the last recorded price of a single share sold on the exchange. That price was five cents higher than the trade immediately before it, meaning the value of the stock rose, in that time, by 0.04%.

By looking at how the trend line moves over the chart period, you can get a sense of the stock’s price and performance over time as well as its most recent statistics.

Volume corresponds to how many shares are bought and sold within a specific time period. In other words, it’s a measure of supply and demand. Volume is often represented as a series of bars running along the bottom axis of the chart. The bars’ size aligns with the number of trades made during that time period, and can be useful for guesstimating upcoming sales trends for that asset.

It’s not a perfect science, of course, but if a stock is trading at low volume — i.e., few shares are being bought and sold each day — it may indicate that the current price trend is about to change. Perhaps the stock is in poor demand because it’s valued too highly for the market. It could also just mean the investment is out of favor with investors.

On the other hand, a high trade volume might indicate that you’ll have an easier time selling the stock quickly if you’re considering short-term trading.

The Role of Technical Indicators

Investors and traders can use a variety of technical indicators to try and make sense of the market, too. That can include things like the 200-day moving average, which attempts to focus on overall pricing trends for a specific stock, or a variety of other trend and momentum indicators.

There are many technical indicators that investors can use to their advantage. It may be worth taking the time to learn more about each, and decide whether to fold them into your strategy.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Technical vs. Fundamental Analysis

We’ve discussed technical analysis, but fundamental analysis is another important element to introduce into the mix. Chart-reading, though, does rely heavily on technical analysis. For that reason, it may be worth revisiting some of the core reasons that investors will want to bone up on the subject.

The Case for Technical Analysis

Fundamental analysis focuses on a company’s underlying performance, whereas technical analysis is more focused on a stock’s performance. While there may be drawbacks to technical analysis, technical indicators are the type that will reveal patterns in stock charts that can be used to make investment decisions. While the buy or sell signals those patterns relay may or may not be faulty, those indicators are what investors are going to want to use when reading stock charts.

When Fundamentals Intersect with Charts

As mentioned, fundamental analysis concerns a company’s financial and operational health, more so than deciphering lines on a chart. Fundamental analysis involves looking at indicators such as earnings per share, price-to-earnings ratios, and return on equity, which can have an effect on how investors decide to buy, sell, or hold a stock. That, naturally, can dictate what a stock’s performance looks like on a chart – which is where it intersects with technical indicators, in many respects.

Essential Stock Chart Knowledge

When it comes down to it, investors may be best served by garnering essential stock chart knowledge involving the various styles of stock charts, their uses, and the language, or key terms, used to describe what those charts are displaying.

Stock Chart Styles and Their Uses

As mentioned, there are a few main types of stock charts: line charts, bar charts, and candlestick charts (there may be others, but we’ll stick with a few basic ones). Each shows the performance of a specific stock, albeit in different ways. Learning what those charts show, how they show it, and how to translate that information into action is ultimately what investors should aim to do when learning how to read stock charts.

Key Terms Every Trader Should Know

There are also a number of key terms that traders should know. The list can be lengthy, but should probably include words and phrases such as market capitalization (as discussed), price-to-earnings ratios, dividend yields, options, assets, and many more. You should become more familiar with them as you move through your investing journey – you’ll likely start using many of them yourself as your trading activity and strategies become more sophisticated, too.

Applying Your Stock Chart Skills

At the end of the day, learning how to read stock charts, for most investors, is all about one thing: applying that knowledge and making better-informed investing decisions.

How to Use Charts for Smarter Investing

There’s really no limit to the way that investors or traders can use charts to make smarter decisions. The more time you spend studying charts and learning what they show or say, the more information you’ll end up having at your disposal with which to make a decision. The issue, of course, is that all of that information still can’t tell you in all certainty what a stock’s value is going to do next.

That’s perhaps the most important thing to remember about stock charts: they are not a crystal ball, and there’s no guarantee that investors will achieve the outcomes they were hoping or planning for.

Can Charts Enhance Your Investment Strategy?

Stock charts can enhance your investment strategy by adding a whole new dimension – and pile of data and information about specific stocks – to your tool kit. But again, you can spend hours looking at charts, and that still doesn’t mean that a position or investment won’t blow up in your face. You may think of it this way – all investing involves a level of risk, but learning to use stock charts as a part of your strategy may help you gauge how big those risks are, and in some cases, avoid particularly risky investments.

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.

SoFi Invest®

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

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Nov

2023

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Understanding IRA Rollover Rules: A Comprehensive Guide

By Pam O’Brien | Growing Wealth, Investing, Preparing for Retirement | No Comments

If you’re leaving your job, there are numerous things you must attend to before you clock out for the last time. One task that’s extremely important is figuring out what to do with the retirement account you have set up through the company you’re leaving.

Once you separate from your employer, you will have a few options to choose from when deciding what to do with your retirement savings, including doing an IRA rollover.

Read on to learn more about IRA rollovers and the IRA rollover rules.

What is an IRA Rollover?

An IRA rollover is the movement of funds from a qualified plan, like a 401(k) or 403(b), to an IRA. This scenario could come up when changing jobs or when switching accounts for reasons such as wanting lower fees and more investment options.
There are several factors to be aware of regarding what an IRA rollover is and how it works.

People generally roll their funds over so that their retirement money doesn’t lose its tax-deferred status. But, let’s say you leave your job and want to withdraw the money from your 401(k) so you can use it to pay some bills. In this case, you’d be taxed on the money and also receive a penalty for withdrawing funds before age 59 ½.

However, if you roll your money over instead of withdrawing it, you don’t have to pay taxes or penalties for an early withdrawal. Plus, you can keep saving for retirement.

When you roll funds over to a new IRA, you should follow IRA rollover rules that can help ensure you do everything legally, don’t have to pay taxes, and don’t pay penalties for any mistakes.

The Difference Between Direct and Indirect Rollovers

You can choose between two types of rollovers and it’s important to know the differences between each.

Direct Rollovers

First, you may choose a direct rollover, which is the moving of funds directly from a qualified retirement plan to your IRA, without ever touching the money. Your original company may move these funds electronically or by sending a check to your IRA provider. With a direct rollover you don’t have to pay taxes or early distribution penalties since your funds move directly from one tax-sheltered account to another.

Indirect Rollovers

The second option is an indirect rollover. In this case, you withdraw money from your original retirement account by requesting a check made out to your name, then deposit it into your new IRA later.

Some people choose an indirect rollover because they need the money to accomplish short-term plans, or they haven’t decided what they want to do with the money upon leaving their job. Other times, it’s because they simply don’t know their options.

Differences

Many people prefer a direct rollover to an indirect rollover, because the process is simpler and more efficient. With a direct rollover, you aren’t taxed on the money. With an indirect rollover, you are taxed, and if you’re under 59 ½ years old, you have to pay a 10% withdrawal penalty, unless you follow specific IRA rollover rules. You should consult with a tax professional to understand the implications of an indirect rollover prior to making this election.

Keep in mind that a transfer is different from a rollover: A transfer is the movement of money between the same types of accounts, while a rollover is the movement of money from two different kinds of accounts, like a qualified plan into a traditional IRA.

The IRA One-Rollover-Per-Year Rule

You can only do an IRA-to-IRA rollover once every 12 months, although there are some exceptions. You’ll want to familiarize yourself with this information to follow the IRA rollover rules.

If you’re rolling funds over from an IRA, you can only complete a rollover once every 12 months. There are exceptions, such as trustee-to-trustee transfers and rollovers from a traditional IRA to a Roth IRA, which are commonly referred to as conversions.

And, most notably, the one-year rule does not apply to IRA rollovers from an employer-sponsored retirement plan like a 401(k).

The Crucial 60-Day Rollover Rule

If you choose to do an indirect IRA rollover, you have 60 days to deposit the funds into a rollover IRA account, along with the amount your employer withheld in taxes. That’s because IRS rules require you to make up the taxes that were withheld with outside funds. Otherwise, you will be taxed on the withholding as income.

If you deposit the full amount — the amount you received plus the withheld taxes — you will report a tax credit of the withheld amount. The withholding will not be returned to you, but rather settled up when you file that year’s taxes.

What You Can and Cannot Roll Over: Limitations and Eligibility

There are some rules about the types of assets you can roll over into an IRA.

Types of Distributions Eligible for Rollover

You can roll over almost any type of distribution from your IRA, with a few exceptions (see more information on that below). However, there is one key point to keep in mind.

The same-property rule says that when you withdraw assets from your retirement account, you must deposit those exact same assets into your IRA.

For example, if you take out $10,000, then $10,000 must go into your IRA, even if some of the original withdrawal was withheld for taxes. If you withdraw stocks, those same stocks must go into the new IRA, even if their value has changed.

This means that when you withdraw money, you can’t use the cash to invest, then put the money you earn from those investments into the IRA. That money would be considered regular income, so you’d be taxed on it.
If you break this rule, not only will you have to pay taxes, but you may also be required to pay a penalty.

Exemptions and Restrictions on Rollover Eligibility

You cannot roll over your annual required minimum distributions (RMDs), which you must take annually when you turn 73.

Also, you cannot roll over loans that were taken as distributions or hardship distributions from your retirement account.

IRA Rollovers and Taxes

Taxes will not be withheld if you do a direct rollover of your retirement account to an IRA or another retirement account.

However, if an IRA distribution is made to you, it’s typically subject to 20% withholding.

Compatibility Rules When Rolling Funds to an IRA

Unfortunately, you don’t always have the ability to transfer funds directly from one type of retirement account to another. You can roll over from certain types to others, but not every kind of account is compatible with every other account. For example: You can roll funds from a Roth 401(k) into a Roth IRA, but not into a traditional IRA; and you can roll funds from a traditional IRA into a SIMPLE IRA, but only after two years.

Rules Specific to 401(k), 403(b), and Other Employer-Sponsored Plans

If you have a Roth 401(k) or 403(b), you can roll the money in those accounts into a Roth IRA without paying taxes. However, if you have a traditional 401(k) or 403(b), you can still roll over the funds, but it will be considered a Roth conversion. In this case, you’ll need to pay income taxes on the money.

When in doubt, check the rules at irs.gov, and consult a tax advisor to confirm you’re making the right moves.

Your Rollover IRA: How to Optimize and Manage It

If you don’t already have an IRA provider, choose the one you want to use to open your new IRA. You can look for a provider that gives you the kind of investment options and resources you want while keeping the fees low to help you save as much as possible for retirement.

An online broker might be right for you if you plan to manage your investments yourself. Another option is a robo-advisor, which can provide help managing your money for lower fees than a human advisor would. But then again you might feel most comfortable with a person helping to manage your account. Ultimately, the choice of a provider is up to you and what’s best for your needs and situation.

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

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

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