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Q: Is socially responsible investing profitable?

According to a 2022 report by Morningstar, the performance of sustainable funds was 'on par with the overall fund universe in 2020' — and outperformed conventional funds over trailing three- and five-year periods.

Jan

2025

The Growth of Socially Responsible Investing

Guide to SRI Investing

By MP Dunleavey | Investing | Comments Off

Socially responsible investing (SRI) strategies help investors put their capital into a range of securities — e.g., stocks, bonds, mutual funds — that focus on socially positive aims: e.g., clean energy, air and water; equitable employment practices, and more.

Despite market volatility driven by interest rate changes and geopolitical conflicts in recent years, SRI investing strategies have garnered steady interest from investors.

Various analyses of SRI funds suggest that the philosophy of doing well by doing some good in the world may have an upside worth exploring.

Key Points

• Socially responsible investing (SRI) involves allocating capital into securities that promote positive social and environmental outcomes, aiming for both impact and financial returns.

• The popularity of SRI has grown, with a notable increase in assets allocated to ESG-focused ETFs, rising from $5 billion in 2006 to $480 billion in 2023.

• Different investing strategies exist within the realm of SRI, including impact investing, ESG investing, and sustainable investing, each with distinct criteria and goals.

• Historical phases of SRI have evolved from exclusionary strategies to proactive investing, ultimately leading to a focus on measurable impacts and accountability.

• Recent data indicates that sustainable funds often perform on par with traditional funds, suggesting that ethical investing can also be financially advantageous.

What Is Socially Responsible Investing?

While SRI investing goes by many names — including ESG investing (for environmental, social, and government factors), sustainable, or impact investing — the fundamental idea is to channel capital into entities that are working toward specific environmental and/or social policies in the U.S. and worldwide. The aim of SRI is to generate both positive changes across various industries, while also delivering returns.

Generally, investors that embrace SRI strategies find ways to assess an organization’s environmental and social impact when deciding whether to invest in them. However, there are important distinctions between the various labels in this sector of investing.

Socially responsible investing can be seen as more of an umbrella term (similar to impact investing). Within SRI, some strategies focus specifically on companies that meet certain criteria — either by supporting specific practices (e.g., green manufacturing, ethical shopping) or avoiding others (e.g., reducing reliance on fossil fuels).

For that reason it’s incumbent on each investor to assess different SRI options, to make sure they match their own aims. This is no different from the due diligence required for anyone starting to invest.

Interest in SRI Investing Strategies

The tangible merits of socially responsible investing have always been subject to debate. But in the last couple of years there has been criticism of some of the underlying principles of SRI, as well as questions about the overall financial value of this investing approach.

Nonetheless, the value of global assets allocated to ETFs with an ESG focus have shown steady growth in the last two decades. As of November 2023, according to data from Statista, the value of these assets was $480 billion — a substantial increase since 2006, when the value of those assets was about $5 billion.

And according to a report published in 2023 by Morningstar, a fund rating and research firm, investors in conventional funds as well as SRI funds are likely to see returns over time.

SRI vs ESG vs Other Investing Strategies

While the various terms for SRI investing are often used interchangeably, it’s important for investors to understand some of the differences.

Impact Investing

Impact investing is perhaps the broadest term of all, in that it can refer to a range of priorities, goals, or values that investors may want to pursue. To some degree, impact investing implies that the investor has specific outcomes in mind: i.e. the growth of a certain sector, type of technology, or societal issue.

Impact investing may also refer to strategies that avoid certain companies, products, or practices. This could include so-called sin stocks (e.g. alcohol, tobacco), companies that adhere to principles that are in opposition to an investor’s or institution’s belief system, and more.

Socially Responsible Investing

SRI or socially conscious investing are two other broad labels, and they’re typically used to reflect progressive values of protecting the planet and natural resources, treating people equitably, and emphasizing corporate responsibility.

While SRI can be considered a type of impact investing, there may be impact investing strategies that are diametrically opposed to SRI, simply because they have different aims.

ESG Investing

Securities that embrace ESG principles, though, may be required to adhere to specific standards for protecting aspects of the environment (e.g. clean energy, water, and air); supporting social good (e.g. human rights, safe working conditions, equal opportunities); and corporate accountability (e.g. fighting corruption, balancing executive pay, and so on).

For example, some third-party organizations have helped create ESG metrics for companies and funds based on how well they adhere to various environmental, social, or governance factors.

Investors who believe in socially responsible investing may want to invest in stocks, bonds, or exchange-traded funds (ETFs) that meet ESG standards, and track ESG indexes.

Sustainable Investing

Sustainable investing is often used as a shorthand for securities that have a specific focus on protecting the environment. This term is sometimes used interchangeably with green investing, eco-friendly investing, or even ESG.

Unlike ESG — which is anchored in specific criteria having to do with a company’s actions regarding environmental, social, or governance issues — the phrase “sustainable investing” is considered an umbrella term. It’s not tied to specific criteria.

Corporate Social Responsibility (CSR)

Last, corporate social responsibility (CSR) refers to a general set of business practices that may positively impact society. Often, companies establish certain programs to support local or national issues, e.g. educational needs, ethical labor practices, workplace diversity, social justice initiatives, and more.

Ideally, CSR strategies work in tandem with traditional business objectives of hitting revenue and profit goals. But since CSR goals are specific to each company, they aren’t formally considered part of socially responsible, sustainable, or ESG investing.

A Focus on Results

Investors may want to bear in mind that, with the steady growth of this sector in the last 20 or 30 years, there are a number of ways SRI strategies can come together. For example, it’s possible to invest in sustainable pharmaceuticals and even green banks.

Either way, the underlying principle of these strategies is to make a profit by making a difference. By putting money into companies that embrace certain practices, investors can support organizations that embody principles they believe in, thereby potentially making a difference in the world, and perhaps seeing a financial upside as well.

Socially Responsible Investment Examples

These days, thousands of companies aim — or claim — to embrace ethical, social, environmental, or other standards, such as those put forth in the United Nations’ Principles of Responsible Investing, or the U.N.’s 17 Sustainable Development Goals. As a result, investors today can choose from a wide range of stocks, bonds, ETFs, and more that adhere to these criteria.

Understanding SRI Standards

In addition, there are also standards set out by financial institutions or other organizations which are used to evaluate different companies. It may be useful when selecting stocks that match your values to know the standards or metrics that have been used to verify a company’s ESG status.

Depending on your priorities, you could consider companies in the following sectors, or that embrace certain practices:

• Clean energy technology and production

• Supply chain upgrades

• Clean air and water technology, products, systems, manufacturing

• Sustainable agriculture

• Racial and gender equality

• Fair labor standards

• Community outreach and support

Exploring Different Asset Classes

Investors can also trade stocks of companies that are certified B Corporations (B Corps), which meet a higher standard for environmental sustainability in their businesses, or hit other metrics around public transparency and social justice, for example. B Corps can be any company, from bakeries to funeral homes, and may or may not be publicly traded.

Companies issue green bonds to finance projects and business operations that specifically address environmental and climate concerns, such as energy-efficient power plants, upgrades to municipal water systems, and so on.

These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

Another option for investors who don’t want to pick individual SRI or ESG stocks is to consider mutual funds and exchange-traded funds (ETFs) that provide exposure to socially responsible companies and other investments.

There are a growing number of index funds that invest in a basket of sustainable stocks and bonds. These funds allow investors to diversify their holdings by investing in one security.

There are numerous indexes that investors use as benchmarks for the performance of socially responsible funds. Three of the most prominent socially responsible indexes include: the MSCI USA Extended ESG Focus Index; Nasdaq 100 ESG Index; S&P 500 ESG Index. (Remember, you cannot invest directly in an index, only in funds that track the index.)

The Growing Appeal of Socially Responsible Investments

While many investors find the idea of doing good or making an impact appealing, the question of profit has long been a point of debate within the industry. Do you sacrifice performance if you invest according to certain values?

Unfortunately, the lack of consistency in terms of what constitutes a sustainable or socially/environmentally responsible investment has made it difficult to compare SRI strategies to conventional ones. One financial company may use one set of criteria when developing its sustainable offerings; another company may use its own proprietary set of standards.

That said, as the universe of sustainable offerings continues to grow, it’s possible to create more apples-to-apples comparison sets. According to Morningstar data, sustainable equity funds saw median returns of 16.7% for 2023 versus 14.4% for traditional equity funds. The relative outperformance of SRI strategies was consistent across equity fund styles and most market caps, but particularly large-cap equities. Over 75% of SRI and conventional funds include large-cap equities.

In addition, sustainable fund assets under management (AUM) globally were up 15% over 2022, growing to $3.4 trillion.

The Evolution of Responsible Investing

Socially conscious investing is not a new concept: People have been tailoring their investment strategies for generations, for a number of reasons, not all of them related to sustainability. In fact, it’s possible to view the emergence of socially conscious investing in three phases.

Phase 1: Exclusionary Strategies

Exclusionary strategies tend to focus on what not to invest in. For example, those who embrace Muslim, Mormon, Quaker, and other religions, were (and sometimes still are) directed to avoid investing in companies that run counter to the values of that faith. This is sometimes called faith-based investing.

Similarly, throughout history there have been groups as well as individuals who have taken a stand against certain industries or establishments by refusing to invest in related companies. Non-violent groups have traditionally avoided investing in companies that produce weapons. Others have skirted so-called “sin stocks”: companies that are involved in alcohol, tobacco, sex, and other businesses.

On a more global scale, widespread divestment of investor funds from companies in South Africa helped to dismantle the system of racial apartheid in South Africa in the 1980s.

Phase 2: Proactive Investing

Just like exclusionary strategies, proactive strategies are values-led. But rather than taking an avoidant approach, here investors put their money into companies and causes that match their beliefs.

For example, one of the earliest sustainable mutual funds was launched in 1971 by Pax World; the founders wanted to take a stand against chemical weapons in the Vietnam war and encourage investors to support more environmentally friendly businesses.

This approach gained steady interest from investors, as financial companies launched a range of funds that focused on supporting certain sectors. So-called green investing helped to establish numerous companies that have built sustainable energy platforms, for example.

Phase 3: Investing With Impact

With the rise of digital technology in the last 30 years, two things became possible.

First, financial institutions were able to create screening tools and filters to help investors gauge which companies actually adhered to certain standards — whether ethical, environmental, or something else. Second, the ability to track real-time company behavior and outcomes helped establish greater transparency — and accountability — for financial institutions evaluating these companies for their SRI fund offerings.

By 2006, the United Nations launched the Principles for Responsible Investment (PRI), a set of global standards that helped create a worldwide understanding of Environmental, Social, and Governance strategies.

ESG became the shorthand for companies that focus on protecting various aspects of the environment (including clean energy, water, and air); supporting social good (including human rights, safe working conditions, equal opportunities); and fair corporate governance (e.g. fighting corruption, balancing executive pay, and so on).

Why Choose Socially Responsible Investing?

While the three phases of socially responsible investing did emerge more or less chronologically, all three types of strategies still exist in various forms today. But the growing emphasis on corporate accountability in terms of outcomes — requiring companies to do more than just green-washing their policies, products, and marketing materials — has shifted investors’ focus to the measurable impacts of these strategies.

Now the reasons to choose SRI strategies are growing.

Investors Can Have an Impact

The notion of values-led investing is that by putting your money into organizations that align with your beliefs, you can make a tangible difference in the world. The performance of many sustainable funds, as noted above, indicates that it’s possible to support the growth of specific companies or sectors (although growth always entails risk, and past performance is no guarantee of future results).

Socially Responsible Strategies May Be Profitable, Too

As discussed earlier, the question of whether SRI and ESG funds are as profitable as they are ethical has long been a point of debate. But that skepticism is ebbing now, with new performance metrics suggesting that sustainable funds are on par with conventional funds.

Socially Responsible Investing May Help Mitigate Risk

The criteria built into ESG investment standards may also help identify companies with poor governance practices, or those with exposure to environmental and social risks that could lead to financial losses.

Do Retirement Accounts Offer Socially Responsible Investments?

Generally speaking, individual retirement accounts may include socially responsible or ESG investment options. For example, when investing in different types of IRAs, e.g., a traditional, Roth, or SEP IRA, investors typically have access to all the securities offered by that financial institution, including stocks, bonds, and ETFs that may reflect ESG standards. The choice is up to individual investors.

That hasn’t always been the case with employer-sponsored 401k or 403b plans. But in 2023, the Department of Labor issued a rule allowing plan fiduciaries to consider ESG investment options for plan participants.

While some plans may now offer socially responsible or ESG investments, there is a push from some lawmakers to restrict or eliminate the availability of these funds. ERISA standards for retirement plans dictate that the investment options offered by employer-sponsored plans “must be based on risk return factors that the fiduciary prudently determines are material to investment value.” Some lawmakers argue that ESG funds are higher risk and not suitable for employees in company plans.

The Takeaway

Socially responsible investing is a broad term that can mean different things to different groups, but no matter which term you use — socially conscious investing, impact investing, ESG investing — it comes down to the compelling idea that by investing your money in organizations that match your values, you can make a difference in the world.

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FAQ

Is socially responsible investing profitable?

Socially responsible investing can be profitable, as multiple reviews of fund performance have shown over the last several years. That said, some believe that the financial strength of ESG or SRI strategies is debatable. While any investment strategy has its own risks, it’s best to assess them according to your own aims.

What is the difference between ESG investing and socially responsible investing?

Socially responsible investing is considered a broad term that can encompass a range of practices and standards. ESG investing stands for environmental, social, and governance factors, is a set of principles that is often used to assess how well companies meet specific, measurable criteria. While there is no single industry-wide metric for ESG standards, investors can consider various proprietary tools.

How many socially responsible investment opportunities are there?

It’s impossible to say how many SRI opportunities there are, as the stocks, bonds, and other securities that embrace ESG standards continue to grow. More than 120 new sustainable funds entered the SRI landscape in 2021, in addition to 26 existing funds that took on a sustainable mandate.

What is the socially responsible investment theory?

The theory behind socially responsible investing can be summed up by the old saying about “Doing well by doing good.” In other words, by investing in companies that support positive social and environmental products and policies, it’s possible to help investors realize a profit.

How do you start socially responsible investing?

Investors who are interested in SRI or ESG investing can begin by getting to know companies that adhere to certain eco-friendly or socially responsible standards. In addition, many financial institutions offer clients a way to screen for stocks or mutual funds that have an ESG focus.

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Jan

2025

Dividends: What They Are and How They Work

By Michael Flannelly | Investing | Comments Off

A dividend is when a company periodically gives its shareholders a payment in cash, additional shares of stock, or property. The size of that dividend payment depends on the company’s dividend yield and how many shares you own.

Not all companies pay dividends, but many investors look to buy stock in companies that pay them as a way to generate regular income in addition to stock price appreciation. A dividend investing strategy is one way many investors look to make money from stocks and build wealth.

Key Points

• Dividends are payments made by companies to shareholders, either in cash, additional shares of stock, or property.

• Dividend payments are based on the company’s dividend yield and the number of shares owned by the investor.

• Dividends can be paid out in cash or additional stock, and they usually follow a fixed schedule.

• Companies are not required to pay dividends, and dividend payments are not always guaranteed.

• Dividend stocks can provide regular passive income, offer dividend reinvestment plans, and may have tax advantages.

What Is a Dividend?

A dividend payment is a portion of a company’s earnings paid out to the shareholders. For every share of stock an investor owns, they get paid an amount of the company’s profits.

The total amount an investor receives in a dividend payment is based on the number of shares they own. For example, if a stock pays a quarterly dividend of $1 per share and the investor owns 50 shares, they would receive a dividend of $50 each quarter.

Companies can pay out dividends in cash, called a cash dividend, or additional stock, known as a stock dividend.

Generally, dividend payouts happen on a fixed schedule. Most dividend-paying companies will pay out their dividends quarterly. However, some companies pay out dividends annually, semi-annually (twice a year), or monthly.

Occasionally, companies will pay out dividends at random times, possibly due to a windfall in cash from a business unit sale. These payouts are known as special dividends or extra dividends.

A company is not required to pay out a dividend. There are no established rules for dividends; it’s entirely up to the company to decide if and when they pay them. Some companies pay dividends regularly, and others never do.

Even if companies pay dividends regularly, they are not always guaranteed. A company can skip or delay dividend payments as needed. For example, a company may withhold a dividend if they had a quarter with negative profits. However, such a move may spook the market, resulting in a drop in share price as investors sell the struggling company.

Types of Dividends

As noted, the most common types of dividends are cash dividends and stock dividends.

Cash dividends are dividends paid out in the form of cash to shareholders. Cash dividends are the most common form of dividend. Stock dividends are, likewise, more or less what they sound like: Dividends paid out in the form of additional stock. Generally, shareholders receive additional common stock.

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How Are Dividends Paid Out?

There are four critical dates investors need to keep in mind to determine when dividends are paid and see if they qualify to receive a dividend payment.

• Declaration Date: The day when a company’s board of directors announces the next dividend payment. The company will inform investors of the date of record and the payable date on the declaration date. The company will notify shareholders of upcoming dividend payments by a press release on the declaration day.

• Date of Record: The date of record, also known as the record date, is when a company will review its books to determine who its shareholders are and who will be entitled to a dividend payment.

• Ex-dividend date: The ex-dividend date, typically set one business day before the record date, is an important date for investors. Before the ex-dividend date, investors who own the stock will receive the upcoming dividend payment. However, if you were to buy a stock on or after an ex-dividend date, you are not eligible to receive the future dividend payment.

• Payable date: This is when the company pays the dividend to shareholders.

Example of Dividend Pay Out

Shareholders who own dividend-paying stocks would calculate their payout using a dividend payout ratio. Effectively, that’s the percentage of the company’s profits that are paid out to shareholders, which is determined by the company.

The formula is as follows: Dividend payout ratio = Dividends paid / net income

As an example, assume a company reported net income of $100,000 and paid out $20,000 in dividends. In this case, the dividend payout ratio would be 20%. Shareholders would either receive a cash payout in their brokerage account, or see their total share holdings increase after the payout.

Why Do Investors Buy Dividend Stocks?

As mentioned, dividend payments and stock price appreciation make up a stock’s total return. But beyond being an integral part of total stock market returns, dividend-paying stocks present unique opportunities for investors in the following ways.

Passive Dividend Income

Many investors look to buy stock in companies that pay dividends to generate a regular passive dividend income. They may be doing this to replace a salary — e.g., in retirement — or supplement their current income. Investors who are following an income-producing strategy tend to favor dividend-paying stocks, government and corporate bonds, and real estate investment trusts (REITs).

Dividend Reinvestment Plans

A dividend reinvestment plan (DRIP) allows investors to reinvest the money earned from dividend payments into more shares, or fractional shares, of that stock. A DRIP can help investors take advantage of compounding returns as they benefit from a growing share price, additional shares of stock, and regular dividend payments. The periodic payments from dividend stocks can be useful when utilizing a dividend reinvestment plan.

Dividend Tax Advantages

Another reason that investors may target dividend stocks is that they may receive favorable tax treatment depending on their financial situation, how long they’ve held the stock, and what kind of account holds the stock.

There are two types of dividends for tax purposes: ordinary and qualified. Ordinary dividends are taxable as ordinary income at your regular income tax rate. However, a dividend is eligible for the lower capital gains tax rate if it meets specific criteria to be a qualified dividend. These criteria are as follows:

• It must be paid by a U.S. corporation or a qualified foreign corporation.

• The dividends are not the type listed by the IRS under dividends that are not qualified dividends.

• You must have held the stock for more than 60 days in the 121-day period that begins 60 days before the ex-dividend date.

Investors can take advantage of the favorable tax treatments of qualified dividends when paying taxes on stocks.

How to Evaluate Dividend Stocks

Evaluating dividend stocks requires some research, like evaluating other types of stocks. There’s analysis to be done, but investors will also want to take special care to look at prospective dividend yields and other variables related to dividends.

In all, investors would likely begin by digging through a stock’s financial reports and earnings data, and then looking at its dividend yield.

Analysis

As noted, investors may want to start their stock evaluations by looking at the data available, including balance sheets, cash flow statements, quarterly and annual earnings reports, and more. They can also crunch some numbers to get a sense of a company’s overall financial performance.

Dividend Yield

A dividend yield is a financial ratio that shows how much a company pays out in dividends relative to its share price. The dividend yield can be a valuable indicator to compare stocks that trade for different dollar amounts and with varying dividend payments.

Here’s how to calculate the dividend yield for a stock:

Dividend Yield = Annual Dividend Per Share ÷ Price Per Share

To use the dividend yield to compare two different stocks, consider two companies that pay a similar $4 annual dividend. A stock of Company A costs $95 per share, and a stock of Company B costs $165.

Using the formula above, we can see that Company A has a higher dividend yield than Company B. Company A has a dividend yield of 4.2% ($4 annual dividend ÷ $95 per share = 4.2%). Company B has a yield of 2.4% ($4 annual dividend ÷ $165 per share = 2.4%).

If investors are looking to invest in a company with a relatively high dividend yield, they may invest in Company A.

While this formula helps compare dividend yields, there may be other factors to consider when deciding on the suitable investment. There are many reasons a company could have a high or low dividend yield, and some insight into dividend yields is necessary for further analysis.

Tax Implication of Dividends

Dividends do, generally, trigger a tax liability for investors. There may be some special considerations at play, so if you have a lot of dividends, it may be beneficial to consult with a financial professional to get a sense of your overall tax liabilities.

But in a broad sense, regular dividends are taxed like ordinary income if they’re reinvested. If an investor receives stock dividends, though, that’s typically not taxable until the investor sells the holdings later on. Further, qualified dividends are usually taxed at lower rates that apply to capital gains – but there may be some variables involved that can change that.

Investors who do receive dividends should receive a tax form, a 1099-DIV, from the payor of the dividends if the annual payout is at least $10.

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The Takeaway

Dividends are a way that companies compensate shareholders just for owning the stock, usually in the form of a cash payment. Many investors look to dividend-paying stocks to take advantage of the regular income the payments provide and the stock price appreciation in total returns.

Additionally, dividend-paying companies can be seen as stable companies, while growth companies, where value comes from stock price appreciation, may be riskier. If your investment risk tolerance is low, investing in dividend-paying companies may be worthwhile.

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FAQ

Are dividends free money?

In a way, dividends may seem or feel like free money, but in another sense, they’re more like a reward for shareholders for owning a portion of a company.

Where do my dividends go?

Depending on the type of dividend, they’re usually distributed into an investor’s brokerage account in the form of cash or additional stock. The specifics depend on the type of account that dividend-paying stocks are held in, among other things.

How do I know if a stock pays dividends?

Investors can look at the details of stocks through their brokerage or government regulators’ websites. The information isn’t hard to find, typically, and some brokerages allow investors to search specifically for dividend-paying stocks, too.

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Jan

2025

What Is a Credit Spread? Explained and Defined

By Colin Dodds | Growing Wealth, invest, Investing | Comments Off

The term “credit spread” refers to two distinct financial concepts: the difference in yield between Treasury and corporate bonds, which can serve as a market indicator, or an options strategy that capitalizes on premium differences.

As a market indicator, a credit spread uses these differing yields as an indicator of investor sentiment, and as a way to gauge how optimistic or risk-averse investors are feeling.

In options, a credit spread refers to a trading strategy in which an investor sells a higher-premium option while simultaneously purchasing a lower-premium option on the same underlying security.

Key Points

• Credit spreads reflect yield differences between Treasury and corporate bonds, which can indicate investor sentiment versus credit quality.

• Credit spreads can serve as a market risk indicator, with wider spreads suggesting higher perceived risk.

• Macroeconomic factors and market sentiment cause credit spreads to fluctuate.

• In options trading, a credit spread involves selling a higher-premium option and buying a lower-premium option.

• Strategies like bear call spreads and bull put spreads are types of credit spreads that try to benefit from option premium differences.

Credit Spread – the Market Indicator

A credit spread is the gap between the interest rate offered to investors by a U.S. Treasury bond versus another debt security with the same maturity. The differences in the yield of the different bonds– or credit spread – typically reflects differences in credit quality between Treasuries and other bonds.

Investors will also sometimes call credit spreads “bond spreads” or “default spreads.” For investors, credit spreads give investors a quick method for comparing a particular corporate bond versus its Treasury-based, lower-risk alternative.

When investors refer to credit spreads, they usually describe them in terms of basis points, each of which is a 1/100th of a percent (or a percent of a percent). For example, a 1% difference in yield between a Treasury bond and a debt security of the same duration would be called a credit spread of 100 basis points.

For example, if a 10-year Treasury note offers investors a yield of 3%, while a 10-year corporate bond offers to pay investors a 7% interest rate, there would be a 400 basis-point spread between them.

Recommended: What is Yield?

U.S. Treasury bonds are widely considered the benchmark of choice because the financial services industry views them as being relatively low-risk, given their backing by the U.S. government. By contrast, corporate bonds are generally seen as carrying higher risk even when they’re issued by well-established companies with good credit ratings.

Investors look for compensation in the form of extra yield when purchasing corporate bonds, given their additional risk. This is where a debt security’s credit spread comes in handy as an indicator of perceived risk.

Because they have a lower risk of defaulting, higher quality bonds can offer lower interest rates – and lower credit spreads – to investors. Conversely, lower quality bonds have a greater risk of default, and so they must offer higher rates – and higher credit spreads – to compensate investors for taking on additional risk.

Why Do Credit Spreads Fluctuate?

The credit spreads of corporate bonds may change over time for a number of reasons. This could be due to macroeconomic fluctuations such as inflation, or the degree of market enthusiasm for the company issuing the bond.

When equity markets appear to be heading for a downturn, both institutional and retail investors may sell stocks and corporate bonds, and then reinvest in U.S. Treasuries. This shift can lower the yields on U.S. Treasury bonds as investors seek safer assets, while corporate bond yields may rise in order to compensate for the perceived increase in risk. The result is often a widening of credit spreads.

This is one reason investors look at average credit spreads as a window into the overall market sentiment. Wider credit spreads indicate declining investor sentiment. Narrower credit spreads typically signify more bullish sentiment among investors.

What Is a Credit Spread in Options Trading?

In options trading, a credit spread takes on a new meaning. In an option credit spread strategy (also known as a “credit spread option” or a “credit risk option”), an investor buys and sells options on the same underlying security with the same expiration, but at different strike prices.

The hope is that the premium received for the option they sell is higher than the premium paid for the option they buy, resulting in a net credit for the investor.

The strategy takes two forms:

Bull Put Spread

In a bull put spread, an investor buys and sells options in which they’ll make a maximum return if the value of the underlying security goes up.

A bull put spread, also called a put credit spread, involves an investor selling a put option and purchasing a second put option with a lower strike price. The investor buys the same amount of both options with the same expiration date.

In a bull put spread strategy, as long as the price of the underlying security remains above a certain level, the strategy will begin to produce profits as the differences between the value of the two options begins to evaporate as a result of time decay. Time decay is how much the value of an options contract declines as that contract grows closer to its expiration date.

The maximum profit is limited to the net credit received, and losses are limited to the difference between the strike prices, minus the premium received.

As the name indicates, the bull put spread is a strategy used by investors who are bullish on a security. The higher the underlying security rises during the options contract, the better the investor will do. But if the underlying security falls below the long-put strike price, then the investor can lose money on the strategy.

Bear Call Spread

The other type of credit spread in options trading is known as a bear call spread (or a call credit spread). A bear call spread is essentially the opposite of a bull call spread: investors expect that a security’s price will go down. Thus, the investor buys and sells two options on the same security with the same expiration date, but at different strike prices.

A bull put spread can be a profitable strategy if the investor remains under a certain level over the duration of the options contracts. If the security is below the short call’s strike price at expiration, then the spread seller gets to keep the entire premium, giving the investor a healthy return. But the risk is that if the price of the security rises above the long-call strike price at the expiration of the strategy, then the investor faces a loss.

The Takeaway

A credit spread is an important indicator of investor sentiment. It’s also an options investing strategy where a high premium option is written and a low premium option is bought on the same security. Understanding the meaning of terms like credit spread is an important step for both new investors and experienced investors interested in options trading.

🛈 While investors are not able to sell options on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.

Explore SoFi’s user-friendly options trading platform.

Photo credit: iStock/Astarot

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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.

SOIN-Q424-052

Jan

2025

Options Collar: How the Strategy Works and Examples

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

A collar is an options strategy used by traders to try to protect themselves against heavy losses. The strategy, also known as a hedge wrapper, is a risk-management options strategy that involves taking a long position in an underlying stock, buying an out-of-the-money (OTM) put, and selling an OTM call.

With an option collar, you’re buying a protective put and a covered call at the same time on a stock that you already own or have long exposure to. Although options collars are designed with the aim to protect against losses, they may also limit any potential gains. Investors need to consider a collar’s break-even point, maximum risk of loss, and maximum potential profit.

Key Points

• Options collar strategy involves buying a protective put and selling a covered call to limit losses and gains on a stock.

• The strategy is used to protect unrealized gains while allowing some upside potential.

• Maximum profit and loss depend on whether the trade is executed at a net credit or debit.

• Time decay and volatility have specific impacts on the strategy, affecting option prices and potential outcomes.

• Collar options are effective for managing risk and protecting assets without selling stock positions.

What Is an Options Collar?

An options collar is designed to manage risk by buying a put option and selling a covered call option at the same time for the same underlying stock. Investors may use this options trading strategy when they want to potentially limit losses on a stock they own, even if it means putting a limit on potential gains.

Typically, the stock price will be between the two strike prices: the high price on the covered call, and the low price on the put option. An options trader uses a collar when they are bullish on the underlying stock but want to be protected against the potential risk of large losses.

A collar is also a useful option strategy when the goal is to protect unrealized gains on a stock.

How Options Collars Work

With a collar option strategy, a trader aims to protect their long stock position by buying a put option, limiting any further losses should the stock price fall below the put’s strike price. Traders also sell an out-of-the-money call option for more than the stock’s current price. This caps potential gains, but it may also help reduce the cost of protection when compared to the premium of a standalone put on the underlying shares. This comes with the trade-off of capped gains, however: any increase in value beyond the strike price will not be realized.Buying a put gives the trader the right (but not the obligation) to sell the stock at the put’s strike price. Selling the call requires the writer to sell the stock at the call’s strike price, if it is assigned. In the meantime, the trader remains long on the shares of the underlying stock.

A trader constructs a collar through their brokerage when they think there could be near-term weakness in the stock but do not want to sell their position.

Maximum Profit

The short call position in a collar option strategy caps upside, limiting the maximum potential profit. The maximum profit depends on whether or not the investor establishes the options trade at a net debit (upfront expense) or a net credit (upfront income).

• Net debit: Maximum profit = Call strike price – Stock purchase price – Net premium paid

• Net credit: Maximum profit = Call strike price – Stock purchase price + Net premium received

At a high level, the trader makes the most money when the stock price is at or above the call’s strike at expiration.

Maximum Loss

The protective put limits losses in the event the underlying share price falls below the put’s strike. This is calculated in one of two ways:

• Net debit: Maximum loss = Stock purchase price – Put strike price – Net debit paid

• Net credit: Maximum loss = Put strike price – Stock purchase price + Net premium received

Break-even Points

Once established, a collar option has two possible break even points – again, depending on whether the trade was executed at a net credit or debit.

• Net debit: Break-even point = Stock purchase price + Net premium paid

• Net credit: Break-even point = Stock purchase price + Net premium collected

Pros and Cons of Collars

Pros	Cons
Limits losses from a falling share price	Limits gains from a rising share price
Allows for some upside exposure	Exposes the trader to risk within the range of the collar
Cheaper than only buying puts	Can be a complicated strategy for new traders
Ownership of the stock retained	Early assignment risk may disrupt the strategy’s effectiveness

Options Collar Examples

Suppose a trader is long shares of XYZ stock that currently trades at $100. The trader is concerned about limited near-term upside and wants to avoid the risk of a significant decline in share price. A collar strategy might help with these concerns.

The trader sells a covered call at the $110 strike price, receives a $5 premium, and also buys a protective put at the $90 strike price of $4. The net credit is $1 and the trader has not paid any commissions.

With these two options trades, the trader has capped their upside at the call’s strike price and the downside at the put’s strike. The breakeven point is $99 (the current stock price, minus the net credit from the premium).

Let’s say the stock rallies to the call’s strike by expiration. In this case, the trader realizes value on the long stock position, keeps the $5 call premium, and lets the put expire worthless. The gain is $11 (the stock price’s gain plus the option’s net credit received.

If the stock price drops to $80, the trader loses $20 on the stock position, keeps the $5 call premium, and $6 gain on the $90 strike long put. Thus, the net loss is $9. The trader benefitted from the collar as opposed to just owning the stock, which went down $20. The payoff diagram below shows how losses are limited in our trade scenario, but gains are also capped at the $110 mark.

Collar Payoff Diagram

Factors That Impact an Options Collar

There are three main factors that can impact the outcome of a collar.

Impact of Price Changes

A collar keeps a trader’s long-term bullish stance while seeking to protect unrealized profits from a short-term decline in share price. If the underlying stock price rises, the collar provides some exposure to upside gains, capped at the short call’s strike. The real value of a collar comes if the stock price drops through the long put strike: the collar protects the trader from further losses.

Another way to look at the impact of price changes is to view it from a perspective of time. A collar can help a trader with a short-term bearish outlook but a bullish long term view. Collars have a positive Delta.

Impact of Volatility Changes

Changes in volatility have a relatively smaller impact on a collar options strategy versus other options trades. This is because the trader has simultaneous long and short option positions. The collar trade usually has a near-zero vega, a calculation that measures an option’s sensitivity to the underlying asset’s volatility.

Recommended: What Are the Greeks in Options Trading?

Impact of Time

With a collar options trade, the effect of time decay depends on how close the stock price is to the option strike prices. Time decay demonstrates the loss in value that an option has as it nears expiration.

Time decay benefits the trader when the underlying stock’s price approaches the short call’s strike price. The option’s extrinsic value decreases as it approaches expiration, which can reduce the potential of assignment.

On the flip side, time decay may work against the trader if the stock price nears the long put’s strike, as the put’s extrinsic value gradually decreases approaching expiration. However, if the stock price stabilizes near the strike price, the option retains intrinsic value, which offsets the impact of time decay, unless the put expires worthless.

When the stock price is about equally between the two strikes, time decay is neutral since both option prices erode at approximately the same rate. So, while the short put value drops, the long call offsets those gains from time decay.

Reasons to Consider Using a Collar Option Strategy

A collar is an effective strategy when an investor expects a stock to trade sideways or down over a period. A trader might also use it when they expect a stock to go up over time and do not want to sell their shares, but they do want to protect unrealized gains – perhaps for tax reasons. A collar option trade is less bearish than buying puts outright, but it may still offer a hedge against large losses. Also, selling the upside call helps finance the protective position.

Limiting Risk

A collar option strategy limits risk beyond the protective put’s strike. Even if a stock price goes to zero, the trader’s loss maxes out at the protective put’s strike.

Protecting an Asset

Another way to protect your stock position is to implement a protective put. With a protective put, a trader buys a put in addition to their long position in the underlying stock. This trade would be more expensive than a collar, since there is no sale of a call option to offset the cost of buying the put, but retains the unlimited upside of the underlying stock position.

The Takeaway

An options collar is a strategy in options trading whereby a trader protects an unrealized gain on a stock at a reduced cost while still allowing some upside equity participation. This strategy is commonly used by traders engaging in online investing to manage risk. Traders might implement a collar for tax purposes or to limit the overall risk in their portfolio.

Explore SoFi’s user-friendly options trading platform.

🛈 While investors are not able to sell options, or covered calls, on SoFi’s options trading platform at this time, they can buy call and put options to try to benefit from stock movements or manage risk.

FAQ

Are options collars bearish or bullish?

An options collar strategy is neither strictly bearish nor bullish. It is typically a neutral-to-slightly-bullish strategy because it provides downside protection through the put option while allowing limited upside potential via the call option. This makes it a common option for investors who are cautiously optimistic but want to hedge against significant downside risk.

What is the benefit of an options collar strategy

An options collar strategy offers downside protection by way of a put option while reducing costs by selling a call option. It also allows investors to retain ownership of the underlying stock. This strategy could help mitigate risk and potentially create more portfolio stability.

What is the opposite of an options collar?

The opposite of an options collar strategy can be considered one of several moves: a naked position, which is an options contract with no offsetting position, or an unhedged long or short stock position, which means holding a financial asset without risk management strategies in place (e.g., other options or futures contracts) to protect against downward price movements.

What is the risk of an options collar?

Options collars come with several potential downsides. There is limited upside potential due to the sale of the out-of-the-money call option, limited risk reduction since a collar does not protect against losses entirely, and early assignment risk, which occurs when the call option buyer exercises their right to purchase the stock before the option’s expiration, potentially disrupting the strategy.

Photo credit: iStock/gorodenkoff

SoFi Invest®

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

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

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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.

SOIN-Q424-043

Jan

2025

The Pros and Cons of a Roth IRA

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

A Roth IRA offers a tax-advantaged way to save for retirement. Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals in retirement are tax-free. Individuals with earned income up to certain limits may be eligible to contribute to a Roth IRA.

A Roth IRA also has some potential drawbacks, however. Weighing the pros and cons of a Roth IRA can help you decide whether it’s a good fit in your retirement portfolio.

What Is a Roth IRA?

A Roth IRA is an individual retirement account that’s funded with after-tax dollars. That means you can’t deduct Roth contributions from your taxes at the time you make them. But in retirement, at age 59 ½ and older, qualified withdrawals are tax-free. That’s the most straightforward way of defining a Roth IRA, and it’s also one of the reasons some investors are drawn to it.

You can have a Roth IRA in addition to a 401(k) or other workplace retirement savings plan. You could also open a Roth IRA to help save for retirement if you don’t have access to an employer-sponsored retirement plan.

The IRS sets annual contribution limits for Roth IRAs, and these limits are adjusted periodically for inflation. The contribution limit for a Roth IRA in both 2024 and 2025 is $7,000 per year, while those 50 and up can contribute up to $8,000 per year.

Roth IRA Eligibility

To open a Roth IRA, you must have earned income, but one of the cons of a Roth IRA is that there are limits on how much you can earn to be eligible.

The chart below illustrates what you can contribute to a Roth IRA based on your modified adjusted gross income (MAGI) and tax filing status.

Filing status	2024 MAGI	Roth IRA contribution allowed
Single	Up to $146,000	$7,000 ($8,000 for those 50 and older)
	From $146,000 to $161,000	Partial contribution
	$161,000 or more	$0
Married, filing jointly	Up to $230,000	$7,000 ($8,000 for those 50 and older)
	From $230,000 to $240,000	Partial contribution
	$240,000 or more	$0
Married, filing separately	Less than $10,000	Partial contribution
	$10,000 and more	$0

As you can see, high-income earners may be ineligible for a Roth. You could, however, make contributions to a traditional IRA instead.

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.

Roth IRA vs. Traditional IRA

A traditional IRA is also a tax-advantaged individual retirement account. Traditional IRAs have the same annual contribution limits as Roth IRAs. The main difference between a traditional vs. Roth IRA is their tax treatment.

Traditional IRAs are funded with pre-tax dollars. That means you may be eligible to deduct some or all of the contributions you make each year. In retirement, you’ll pay income tax on qualified withdrawals.

The amount you can deduct in traditional IRA contributions depends on your income, tax filing status, and whether you’re covered by a retirement plan at work.

What Are the Pros and Cons of a Roth IRA?

Saving for retirement in a Roth IRA has advantages, but it may not be the right option for everyone. Here are pros and cons of Roth IRAs.

Pros of a Roth IRA

There are several advantages of a Roth IRA, including:

Tax-Free Growth and Withdrawals

Because Roth IRAs are funded with after-tax dollars, you’ve already paid tax on the money you contribute. Your money grows tax-free while it’s invested, and when you withdraw it in retirement, you pay no taxes on it.

Tax-free withdrawals are beneficial if you expect your income to be higher in retirement than it is during your working years. Any money you take out of a Roth IRA at age 59 ½ or older wouldn’t increase your tax liability as long as it’s a qualified withdrawal.

No Required Minimum Distributions

With traditional IRAs, account holders must begin taking required minimum distributions (known as RMDs) from their account annually once they reach age 73 (assuming they reach age 72 in 2023 or later). If you don’t withdraw the required amount on time, you are subject to a tax penalty.

Roth IRAs do not have RMDs. You can leave the money in your account for as long as you like.

Contributions Can Be Withdrawn Penalty-Free

Ideally, the concept of a Roth IRA is to leave your money in the account until retirement. At age 59 ½ you can begin taking distributions without facing a 10% early withdrawal penalty. However, you can withdraw the contributions you make to a Roth IRA penalty-free at any time.

Your earnings are a different matter. You cannot withdraw your earnings before age 59 ½ without incurring taxes and penalties.

Cons of a Roth IRA

There are some drawbacks to an IRA, which mean these accounts may not be a good fit for everyone. These are the main cons of a Roth IRA to consider.

No Tax Deduction

Roth IRAs don’t offer a tax deduction for the contributions you make. Instead, you have to wait until retirement to reap the tax benefits. Tax-free withdrawals in your golden years could be an advantage, however, if you anticipate being in a higher tax bracket in retirement.

Income Limits Apply

Earning a higher income could put a Roth IRA out of reach for certain individuals, as our chart above indicates. If you’re not eligible for a Roth because of your earnings, you could consider a backdoor Roth IRA.

With a backdoor Roth, you make nondeductible contributions to a traditional IRA and then convert that IRA to a Roth IRA. However, since you’re moving pre-tax dollars into an after-tax account, you’ll owe income taxes on a Roth IRA conversion at the time you complete it, which could be costly.

The 5-Year Rule

Unlike traditional IRAs, Roth IRA accounts are subject to the 5-year rule. This rule says that, barring certain exceptions, your account must be open for at least five years before you can withdraw the earnings tax- and penalty-free at age 59 ½. The 5-year rule also applies to IRA conversions.

Setting Up a Roth IRA

Opening a Roth IRA is relatively easy. You choose where to open the account, fill out the required paperwork, designate a beneficiary, and fund your account.

Like many other investment accounts, you can open a Roth IRA through an online brokerage and link a bank account to it to make your first contribution.

Once you add funds to your IRA, you can decide how to invest them. Typically, brokerages offer options such as mutual funds and index funds. If you’re looking for alternative investments you may want to consider opening a self-directed IRA instead.

Roth IRA Withdrawal Rules

You can withdraw your Roth IRA contributions at any time without taxes or penalties. However, when it comes to earnings, Roth IRA withdrawal rules can be complicated since you have to factor in the five-year rule.

To help simplify things, this at-a-glance chart shows how withdrawals of earnings from a Roth IRA work and when taxes and penalties apply.

Your age	The account has been open less than five years	The account has been open for five years or more
Under 59 ½	Withdrawals of earnings are subject to taxes and penalties, unless an exception (like a disability) applies.	Withdrawals of earnings are not subject to taxes if the money is used for a first-home purchase or the account holder becomes disabled or passes away.
59 ½ or older	Withdrawals of earnings are subject to taxes, but not penalties.	Withdrawals of earnings are tax- and penalty-free.

Naming a Trust as Your Roth IRA Beneficiary

When you set up a Roth IRA, you need to name a beneficiary. Your beneficiary inherits the money in your Roth IRA after your death.

You can name an individual such as your spouse or child as your IRA beneficiary. You can also designate a trust as your beneficiary. A trust is a legal entity that you transfer your assets to. It’s administered by a trustee who manages your assets for you, according to your wishes.

For example, you might name a trust as the beneficiary of your Roth IRA if you’d like a say in what happens to your assets once you pass away. If you leave your IRA to an individual, they can do what they like with it. A trust allows you to leave specific instructions about how the assets in the trust can be used.

The Takeaway

A Roth IRA offers some unique benefits when it comes to retirement savings. With a Roth IRA, your money grows tax-free, you can make tax-free qualified withdrawals in retirement, and there’s no need for RMDs.

But not everyone is eligible to open a Roth IRA. There are income limits on these accounts, plus you must have funded a Roth for at least five years in order to make qualified withdrawals of your earnings without facing taxes and a penalty.

For those who are eligible for a Roth IRA, the prospect of tax-free withdrawals in retirement may make the potential downsides worth it. Consider all the pros and cons of a Roth IRA to make an informed decision about whether this type of retirement account is right for you.

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).

FAQs

Are Roth IRAs considered a safe investment?

A Roth IRA is not an investment; it’s an individual retirement account into which you put money that you plan to invest. Your choice of investments, and your risk tolerance, can determine how “safe” your Roth IRA may be. When comparing different investments, consider the risk and possible reward of each one to determine if you’re comfortable with it.

Do Roth individual retirement accounts have income limits?

Roth IRAs do have income limits set by the IRS and updated annually that determine who can contribute. These limits are based on your modified adjusted gross income (MAGI). If your MAGI exceeds the limit allowed for your filing status, you won’t be able to make a Roth IRA contribution. For example, in 2024, a single person with a MAGI of $161,000 or more and a person married filing jointly with a MAGI of $240,000 or more are not eligible to contribute to a Roth IRA.

How much can you contribute to a Roth IRA?

The annual Roth IRA contribution limit is set by the IRS. For tax years 2024 and 2025, the annual contribution limit for Roth IRAs is $7,000. These IRAs allow for a catch-up contribution of up to $1,000 per year if you’re 50 or older, for a total of $8,000 each year.

Photo credit: iStock/Lusyaya

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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

SoFi Invest®

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

SOIN-Q324-012

Guide to SRI Investing

What Is Socially Responsible Investing?

Interest in SRI Investing Strategies

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

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

SRI vs ESG vs Other Investing Strategies

Impact Investing

Socially Responsible Investing

ESG Investing

Sustainable Investing

Corporate Social Responsibility (CSR)

A Focus on Results

Socially Responsible Investment Examples

Understanding SRI Standards

Exploring Different Asset Classes

The Growing Appeal of Socially Responsible Investments

The Evolution of Responsible Investing

Phase 1: Exclusionary Strategies

Phase 2: Proactive Investing

Phase 3: Investing With Impact

Why Choose Socially Responsible Investing?

Investors Can Have an Impact

Socially Responsible Strategies May Be Profitable, Too

Socially Responsible Investing May Help Mitigate Risk

Do Retirement Accounts Offer Socially Responsible Investments?

The Takeaway

FAQ

Is socially responsible investing profitable?

What is the difference between ESG investing and socially responsible investing?

How many socially responsible investment opportunities are there?

What is the socially responsible investment theory?

How do you start socially responsible investing?

Dividends: What They Are and How They Work

What Is a Dividend?

Types of Dividends

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How Are Dividends Paid Out?

Example of Dividend Pay Out

Why Do Investors Buy Dividend Stocks?

Passive Dividend Income

Dividend Reinvestment Plans

Dividend Tax Advantages

How to Evaluate Dividend Stocks

Analysis

Dividend Yield

Tax Implication of Dividends

The Takeaway

FAQ

Are dividends free money?

Where do my dividends go?

How do I know if a stock pays dividends?

What Is a Credit Spread? Explained and Defined

Credit Spread – the Market Indicator

Why Do Credit Spreads Fluctuate?

What Is a Credit Spread in Options Trading?

Bull Put Spread

Bear Call Spread

The Takeaway

Options Collar: How the Strategy Works and Examples

What Is an Options Collar?

How Options Collars Work

Maximum Profit

Maximum Loss

Break-even Points

Pros and Cons of Collars

Options Collar Examples

Collar Payoff Diagram

Factors That Impact an Options Collar

Impact of Price Changes

Impact of Volatility Changes

Impact of Time

Reasons to Consider Using a Collar Option Strategy

Limiting Risk

Protecting an Asset

The Takeaway

FAQ

Are options collars bearish or bullish?

What is the benefit of an options collar strategy

What is the opposite of an options collar?

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