Feb
27
2024
Can You Write a Check From a Savings Account?

Can You Write Checks From a Savings Account?

By | Family Finances, Life & Career, money | Comments Off on Can You Write Checks From a Savings Account?

If you’re wondering, “Can you write a check from a savings account?” the short answer is no. You can’t write checks from a savings account; instead, you can do so from a checking account, which is designed to provide that specific financial service. Savings accounts are primarily for earning interest on your deposits and transferring money occasionally.

Checks might seem like an old-fashioned payment method, but they are vital in specific transactions. For instance, you might need to pay the deposit for an apartment rental by check. In addition, personal checks are more secure for mailing payments than cash.

While you may want to draw funds from a savings account, that’s really not its purpose. Here, you’ll learn the details on this situation and also a possible work-around or two.

Key Points

•   Writing checks from a savings account is not possible; it can only be done from a checking account.

•   Savings accounts are primarily for earning interest and occasional money transfers, not for check-writing.

•   Checks are still important for certain transactions, such as apartment rental deposits and secure mailing of payments.

•   Savings accounts are designed for saving money, earning interest, and providing security for future needs.

•   While payments cannot be made directly from a savings account using checks, automatic transfers and mobile banking can be used for certain transactions.

Why You Can’t Write Checks from a Savings Account?

You can’t write checks from a savings account because these accounts are for earning interest on cash you leave alone. Federal law, in fact, prohibits check-writing from such accounts and may restrict how often you can transfer money out of a savings account, too.

Part of the way a bank makes money is to lend out your funds on deposit in a savings account for other purposes. You earn an annual percentage yield, or APY, on your deposit for giving the bank the privilege of using your money that’s in a savings account. In other words, your financial institution is depending on some savings-account money staying put, not being regularly transferred out via checks.

Checking accounts, however, are designed to allow customers to write checks and make purchases. They may not make much or any interest, but you can move your money out of these accounts via checks and electronic transfers. You can even write a check to yourself to access your money.

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What Accounts Can You Write a Check From?

One of the ways that checking accounts vs. savings accounts differ is that you can’t write checks from a savings account. However, both checking accounts and money market accounts can let you move funds out via checks. You can choose from the following types:

•   Standard checking. This account typically provides a checkbook and debit card to make purchases. You might earn meager or no interest, but you can access your cash quickly. And, as with most kinds of checking accounts, you’ll be able to get cashier’s checks and certified checks if needed.

•   Premium checking. This is a checking account on steroids, with better interest rates, rewards programs, and customer perks. In addition, these accounts might have monthly fees or steep minimum balance requirements in order to get those enhanced benefits, so check your customer agreement carefully.

•   Rewards checking. Think of rewards checking as akin to a premium checking account but focuses on providing cash back for debit card usage. Again, it’s crucial to read the fine print for these accounts, as they usually require specific spending habits to be worthwhile.

•   High-interest checking. This kind of account, also known as high-yield checking, blends saving and checking together by providing higher interest rates while allowing you to write checks and use your debit card.

While this account attempts to provide the best of both worlds, you’ll likely receive a lower interest rate than a savings account. You also might have to fulfill strict requirements (such as a monthly high account balance or transaction count).

•   Student checking. High school and college students can access banking through these accounts. Student checking accounts typically provide leniency for overdrafts and promotional rewards for new customers. However, your account will change to a standard checking account when you lose student status, meaning you may lose the advantages of a student account.

•   Second chance checking. Customers with less than perfect banking histories can struggle to find a bank that will provide them with an account. Unpaid bank fees and repeated overdrafts can cast a shadow over your banking record, making financial institutions hesitant to work with you. Fortunately, numerous institutions offer second chance checking to give customers another shot at banking. These accounts might restrict spending or charge monthly fees to cover their risk but can help you get back on your feet.

•   Money market account. Many money market accounts also combine some of the features of savings and checking accounts. For example, money market accounts can earn higher interest than typical checking accounts (making them more like savings accounts) but allow you to write checks, as with a checking account.

Recommended: How to Sign Over a Check to Someone Else

What You Can Do With a Savings Account

While you can’t write checks with a savings account, the different types of savings accounts offer these functions and benefits:

•   Security. You can safely save for the future, whether that means building an emergency fund or saving for a down payment on a house. If you bank at a Federal Deposit Insurance Corporation (FDIC)- or National Credit Union Administration (NCUA)-insured institution, you will have up to $250,000 per depositor or shareholder, per insured institution for each account category.

•   Interest. As noted above, you’ll earn interest. The annual percentage yield (APY) will help your money grow.

•   Convenience. You can also use mobile banking with a savings account. This feature allows you to access your account from your phone to deposit checks, transfer money, and view monthly statements.

•   Perks. You may be able to snag some perks by opening a savings account, such as some banking fees being waived or a one-time cash bonus.

•   Automated savings. You can set up automatic transfers from your checking account to savings to help increase your savings in an effortless way.

•   Account linking. You can link your savings account as a backup to your checking to help avoid overdrafting.

Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

Tips for Using a Savings Account to Make Payments

If your goal is to make payments from a savings account, you can’t use a check, as you’ve learned above. Plus, saving accounts may often have monthly transaction limits, meaning you can’t move money from the account for every monthly expense and random bill that may pop up. Generally, you can transfer money from a savings account six times a month.

You can, however, set up a small number of automatic transfers out of your savings account. Follow these tips:

•   Have your account details handy. Double-check your account and routing numbers to make sure you are transferring funds out of the right account.

•   Limit the bills you pay with your savings account. The less information is out there, the less likely it is to fall into a thief’s hands.

•   Don’t attempt more than your account’s transaction limit. Usually, plan on paying no more than six monthly bills with your savings account. Check with your financial institution, however, to find out your exact transaction limits.

•   Maintain an adequate balance. Transferring money from your checking account and depositing cash or paychecks into your savings account will help ensure you don’t overdraft the account.

Banking With SoFi

Savings accounts are excellent tools for earning interest and working towards your financial goals. However, they are less suitable for making payments because you can’t write checks from a savings account. Although you can make payments from savings accounts in a pinch, it’s better to use checking accounts for these transactions. After all, it’s what checking accounts are designed for.

If you’re looking for a banking partner who can provide the best of both checking and savings accounts, see what SoFi offers. When you open an online bank account, you’ll have the convenience of spending and saving in one place. Plus, with our Checking and Savings, you’ll earn a competitive APY and pay no account fees, two features that can help your money grow faster. Plus, you’ll receive both paper checks and a debit card to help you make payments.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Why do checks come from checking accounts?

Checks come from checking accounts because banks intend payments to flow frequently from these accounts. In addition, checking accounts are the most convenient way to deposit and withdraw money from a bank because you can withdraw money an unlimited amount of times per month.

Why can I not write checks with a savings account?

You can’t write checks with a savings account because the account is for saving money and earning interest payments. Banks don’t provide checks for a savings account because the intention is for you to save money and leave at least a chunk of it untouched in the account. On the other hand, checking accounts allow you to write checks.

Can I write any check from a savings account?

You can’t write a check from a savings account because that is not how they operate according to federal guidelines. You can save money and earn interest with a savings account, while a checking account allows you to write checks.

Photo credit: iStock/AndreyPopov

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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Feb
27
2024
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What Is Considered a Good Return on Investment?

By | Growing Wealth, invest, Investing | No Comments

A good return on investment is generally considered to be about 7% per year, based on the average historic return of the S&P 500 index, and adjusting for inflation. But of course what one investor considers a good return might not be ideal for someone else.

And while getting a “good” return on your investments is important, it’s equally important to know that the average return of the U.S. stock market is just that: an average of the market’s performance, typically going back to the 1920s. On a year-by-year basis, investors can expect returns that might be higher or lower — and they also have to face the potential for outright losses.

In addition, the S&P 500 is a barometer of the equity markets, and it only reflects the performance of the 500 biggest companies in the U.S. Most investors will hold other types of securities in addition to equities, which can affect their overall portfolio return.

Key Points

•   A good return on investment is generally considered to be around 7% per year, based on the average historic return of the S&P 500 index, adjusted for inflation.

•   The average return of the U.S. stock market is around 10% per year, adjusted for inflation, dating back to the late 1920s.

•   Different investments, such as CDs, bonds, stocks, and real estate, offer varying rates of return and levels of risk.

•   It’s important to consider factors like diversification and time when investing long-term.

•   Investing in stocks carries higher potential returns but also higher risk, while investments like CDs offer lower returns but are considered safer.

What Is the Historical Average Stock Market Return?

Dating back to the late 1920s, the S&P 500 index has returned, on average, around 10% per year. Adjusted for inflation that’s roughly 7% per year.

Here’s how much a 7% return on investment can earn an individual after 10 years. If an individual starts out by putting in $1,000 into an investment with a 7% average annual return, they would see their money grow to $1,967 after a decade, assuming little or no volatility (which is unlikely in real life).

It’s important for investors to have realistic expectations about what type of return they’ll see.

For financial planning purposes however, investors interested in buying stocks should keep in mind that that doesn’t mean the stock market will consistently earn them 7% each year. In fact, S&P 500 share prices have swung violently throughout the years. For instance, the benchmark tumbled 38% in 2008, then completely reversed course the following March to end 2009 up 23%.

Factors such as economic growth, corporate performance, interest rates, and share valuations can affect stock returns. Thus, it can be difficult to say X% or Y% is a good return, as the investing climate varies from year to year.

A better approach is to think about your hoped-for portfolio return in light of a certain goal (e.g. retirement), and focus on the investment strategy that might help you achieve that return.

Line graph: 10 Year Model of S&P 500

Why Your Money Loses Value If You Don’t Invest it

It’s helpful to consider what happens to the value of your money if you simply hang on to cash.

Keeping cash can feel like a safer alternative to investing, so it may seem like a good idea to deposit your money into a savings account — the modern day equivalent of stuffing cash under your mattress. But cash slowly loses value over time due to inflation; that is, the cost of goods and services increases with time, meaning that cash has less purchasing power. Inflation can also impact your investments.

Interest rates are important, too. Putting money in a savings account that earns interest at a rate that is lower than the inflation rate guarantees that money will lose value over time.

This is why, despite the risks, investing money is often considered a better alternative to simply saving it. The inflation risk is lower.

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.

*Probability of Member receiving $1,000 is a probability of 0.028%.

What Is a Good Rate of Return for Various Investments?

As noted above, determining a good rate of return will also depend on the specific investments you hold, and your asset allocation. You can always calculate the expected rate of return for various securities.

CDs

Certificates of deposit (CDs) may be considered a relatively safe investment because they offer a fixed rate of return in return for keeping your money on deposit for a specific period of time. That means there’s relatively little risk — but because investors also agree to tie their money up for a predetermined period of time CDs are also considered illiquid. There is generally a penalty for withdrawing your money before the CD matures.

Generally, the longer money is invested in a CD, the higher the return. Many CDs require a minimum deposit amount, and larger deposits (i.e. for jumbo CDs) tend to be associated with higher interest rates.

It’s the low-risk nature of CDs that also means that they earn a lower rate of return than other investments, usually only a few percentage points per year. But they can be a good choice for investors with short-term goals who need a relatively low-risk investment vehicle while saving for a short-term goal.

Here are the weekly national rates compiled by the Federal Deposit Insurance Corporation (FDIC) as of April 17, 2023:

Non-Jumbo Deposits National Avg. Annual Percentage Yield
1 month 0.24%
3 month 0.78%
6 month 1.03%
12 month 1.54%
24 month 1.43%
36 month 1.34%
48 month 1.29%
60 month 1.37%

Bonds

Purchasing a bond is basically the same as loaning your money to the bond-issuer, like a government or business. Similar to a CD, a bond is a way of locking up a certain amount of money for a fixed period of time.

Here’s how it works: A bond is purchased for a fixed period of time (the duration), investors receive interest payments over that time, and when the bond matures, the investor receives their initial investment back.

Generally, investors earn higher interest payments when bond issuers are riskier. An example may be a company that’s struggling to stay in business. But interest payments may be lower when the borrower is trustworthy, like the U.S. government, which has never defaulted on its Treasuries.

Stocks

Stocks can be purchased in a number of ways. But the important thing to know is that a stock’s potential return will depend on the specific stock, when it’s purchased, and the risk associated with it. Again, the general idea with stocks is that the riskier the stock, the higher the potential return.

This doesn’t necessarily mean you can put money into the market today and assume you’ll earn a large return on it in the next year. But based on historical precedent, your investment may bear fruit over the long-term. Because the market on average has gone up over time, bringing stock values up with it, but stock investors have to know how to handle a downturn.

As mentioned, the stock market averages a return of roughly 7% per year, adjusted for inflation.

Real Estate

Returns on real estate investing vary widely. It mostly depends on the type of real estate — if you’re purchasing a single house versus a real estate investment trust (REIT), for instance — and where the real estate is located.

As with other investments, it all comes down to risk. The riskier the investment, the higher the chance of greater returns and greater losses. Investors often debate the merit of investing in real estate versus investing in the market.

Likely Return on Investment Assets

For investors who have a high risk tolerance (they’re willing to take big risks to potentially earn high returns), some investments are better than others. For example, investing in a CD isn’t going to reap a high return on investment. So for those who are looking for higher returns, riskier investments are the way to go.

Remember the Principles of Good Investing

Investors focused on seeing huge returns over the short-term may set themselves up for disappointment. Instead, remembering basic tenets of responsible investing can best prep an investor for long-term success.

First up: diversification. It can be a good idea to invest in a wide variety of assets — stocks, bonds, real estate, etc., and a wide variety of investments within those subgroups. That’s because each type of asset tends to react differently to world events and market forces. Due to that, a diverse portfolio can be a less risky portfolio.

Time is another important factor when investing. Investing early may result in larger returns in the long-term. That’s largely because of compound interest, which is when interest is earned on an initial investment, along with the returns already accumulated by that investment. Compound interest adds to your returns.

Investing with SoFi

While every investor wants a “good return” on their investments, there isn’t one way to achieve a good return — and different investments have different rates of return, and different risk levels. Investing in CDs tends to deliver lower returns, while stocks (which are more volatile) may deliver higher returns but at much greater risk.

Your own investing strategy and asset allocation will have an influence on the potential returns of your portfolio over time.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, and other fees apply (full fee disclosure here). Members can access complimentary financial advice from a professional.

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

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.


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

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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Feb
27
2024

When Do You Pay Taxes on Stocks?

By | Growing Wealth, invest, Investing | No Comments

Investors usually need to pay taxes on their stocks when and if they sell them, assuming they’ve accrued a capital gain (or profit) from the sale. But there are other circumstances when stock holdings may generate a tax liability for an investor, too. This is important for investors to understand so that they can plan for the tax implications of their investment strategy. Knowing how your investments could impact your taxes may better prepare you for tax season and allow you to make more informed investment decisions.

First, an important note: The following should not be considered tax advice. Below, you’ll learn about some tax guidelines, but to fully understand the implications, it’s wise to consult a tax professional.

Key Points

•   Short-term capital gains tax rates for tax years 2023-2024 range from 10% to 37% based on taxable income.

•   Long-term capital gains tax rates for tax years 2023-2024 range from 0% to 20% based on taxable income.

•   Short-term capital gains tax rates for married couples filing jointly are higher than for single individuals.

•   Long-term capital gains tax rates for married couples filing jointly are the same as for single individuals.

•   The tax rates provided are for the specified tax years and are subject to change.

Do You Have to Pay Taxes on Stocks?

Do you need to pay taxes on stocks? It depends. Typically, as mentioned, investors would need to pay capital gains taxes when they sell a stock – the sale of which triggers a taxable event. But broadly speaking, yes, investors need to pay taxes on their stock holdings. The main question and what investors need to figure out, is when do you need to pay taxes on stocks, and what other actions or incidences, besides a sale, could trigger a taxable event.

When Do You Pay Taxes on Stocks?

There are several scenarios in which you may owe taxes related to the stocks you hold in an investment account. The most well known is the tax liability incurred when you sell a stock that has appreciated in value since you purchased it. The difference in value is referred to as a capital gain. When you have capital gains, you must pay taxes on those earnings.

Capital gains even have their own special tax levels and rules. To get a sense of what you might owe after selling a stock, you’d need to check the capital gains tax rate – more on that below.

You will only owe capital gains taxes if your investments are sold for more than you paid for them (you turn a profit from the sale). That’s important to consider – especially if you’re trying to get a sense of taxes and ROI on your investments, with taxes taken into account.

There are two types of capital gains tax:

Short-term Capital Gains

Short-term capital gains tax applies when you sell an asset that you owned for less than one year, and that gained in value within that time frame. These gains would be taxed at the same rate as your typical tax bracket, so they’re important for day traders to consider.

Short-Term Capital Gains Rates for Tax Years 2023 – 2024
Single Taxable Income

 Married Couple Filing Jointly Taxable Income
2023

 2024

 2023

 2024
10% $0 – $11,000 $0 – $11,600 $0 – $22,000 $0 – $23,200
12% $11,001 – $44,725 $11,6001 – $47,150 $22,001 – $89,450 $23,201 – $94,300
22% $44,726 – $95,375 $47,151 – $100,525 $89,451 – $190,750 $94,301 – $201,050
24% $95,376 – $182,100 $100,526 – $191,950 $190,751 – $364,200 $201,051 – $383,900
32% $182,101 – $231,250 $191,951 – $243,725 $364,201 – $462,500 $383,901 – $487,450
35% $231,251 – $578,125 $243,726 to $609,350 $462,501 – $693,750 $487,451 to $731,200
37% $578,126 or higher $609,351 or higher $693,751 or higher $731,201 or higher

Long-term Capital Gains

Long-term capital gains tax applies when you sell an asset that gained in value after holding it for more than a year. Depending on your taxable income and tax filing status, you’d be taxed at one of these three rates: 0%, 15%, or 20%. Overall, long-term capital gains tax rates are typically lower than those on short-term capital gains.

Long-Term Capital Gains Rates for Tax Years 2023 – 2024
Single Taxable Income

 Married Couple Filing Jointly Taxable Income
2023

 2024

 2023

 2024
0% $0 – $44,625 $0 – $47,025 $0 – $89,250 $0 – $94,050
15% $44,626 – $492,300 $47,026 – $518,900 $89,251 – $553,850 $94,051 – $583,750
20% $492,301 or higher $518,901 or higher $553,851 or higher $583,751 or higher

Capital Losses

If you sell a stock for less than you purchased it, the difference is called a capital loss. You can deduct your capital losses from your capital gains each year, and offset the amount in taxes you owe on your capital gains.

You can also apply up to $3,000 in investment losses to offset regular income taxes.

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

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Tax-loss Harvesting

The process mentioned above – which involves deducting capital losses from your capital gains to secure tax savings – is called tax-loss harvesting. It’s a common technique often used near the end of the calendar year to try and minimize an investor’s tax liability.

Tax-loss harvesting is also commonly used as a part of a tax-efficient investing strategy. It may be worth speaking with a financial professional to get a better idea of whether it’s a good strategy for your specific situation.

💡 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.

Taxes on Investment Income

You may have taxes related to your stock investments even when you don’t sell them. This holds true in the event that the investments generate income.

Dividends

You may receive periodic dividends from some of your stocks when the company you’ve invested in earns a profit. If the dividends you earn add up to a large amount, you may be required to pay taxes on those earnings. Each year, you will receive a 1099-DIV tax form for each stock or investment from which you received dividends. These forms will help you determine how much in taxes you owe.

There are two broad categories of dividends: qualified or nonqualified/ordinary. The IRS taxes non-qualified dividends at your regular income tax bracket. The rate on qualified dividends may be 0%, 15%, or 20%, depending on your filing status and taxable income. This rate is usually less than the one for nonqualified dividends, though those with a higher income typically pay a higher tax rate on dividends.

Interest Income

This money can come from brokerage account interest or from bond/mutual fund interest, as two examples, and it is taxed at your ordinary income level. Municipal bonds are an exception because they’re exempt from federal taxes and, if issued from your state, may be exempt from state taxes, as well.

Net Investment Income Tax (NIIT)

Also called the Medicare tax, this is a flat rate investment income tax of 3.8% for taxpayers whose adjusted gross income exceeds $200,000 for single filers or $250,000 for filers filing jointly. Taxpayers who qualify may owe interest on the following types of investment income, among others: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

Recommended: Investment Tax Rules Every Investor Should Know

When Do I Not Have to Pay Taxes on Stocks?

Again, this should first and foremost be a discussion you have with your tax professional. But there are a few situations you should know about where you often don’t pay taxes when selling a stock. For example, if you are investing through a tax-deferred retirement investment account like an IRA or a 401(k), you won’t have to pay taxes on any gains when you buy and sell stocks inside the account. However, if you were to sell stock in one of these accounts and then withdraw it, you could owe taxes on the withdrawal.

4 Strategies To Pay Lower Taxes on Stocks

If the answer to “Do you have to pay taxes on stocks?” is “yes” for your personal financial situation, then the question becomes how to pay a lower amount of taxes. Strategies can include:

Buy and Hold

Holding on to stocks long enough for dividends to become qualified and for any capital gains tax to be in the long-term category because they are typically taxed at a lower rate.

Tax-loss Harvesting

As discussed, utilizing a tax-loss harvesting strategy can help you with offsetting your capital gains with capital losses.

Use Tax-advantaged Accounts

Putting your investments into retirement accounts or other tax-advantaged accounts may help lower your tax liabilities.

Refrain From Taking Early Withdrawals

Avoiding the temptation to make early withdrawals from your 401(k) or other retirement accounts.

Taxes for Other Investments

Here’s a short rundown of the types of taxes to be aware of in regards to investments outside of stocks.

Mutual Funds

Mutual funds come in all sorts of different types, and owning mutual fund shares may involve tax liabilities for dividend income, as well as capital gains. Ultimately, an investor’s tax liability will depend on the type and amount of distribution they receive from the mutual fund, and if or when they sell their shares.

Property

“Property” is a broad category, and can include assets like real estate. The IRS looks at property all the same, however, from a taxation standpoint. In short, property is subject to capital gains taxes (not to be confused with “property taxes,” which are something else entirely. In effect, if you buy a house and later sell it for a profit, that gain would be subject to capital gains taxes.

Options

Taxes on options trading can be confusing, and tax liabilities will depend on the type of options an investor has traded. But generally speaking, capital gains taxes apply to options trading activity – it may be wise to consult with a financial professional for more details.

Investing With SoFi

For most investors, paying taxes on stocks involves paying capital gains taxes after they sell their holdings, or paying income tax on dividends. But it’s important to keep in mind that the tax implications of your investments will vary depending on the types of investments in your portfolio and the accounts you use, among other factors.

That’s why it may be worthwhile to work with an experienced accountant and a financial advisor who can help you understand and manage the complexities of different tax scenarios.

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

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

FAQ

How much do you pay taxes on stocks?

How much an investor pays in taxes on stocks depends on several factors, including any applicable capital gain, how long they held the stock, and whether they received any income from the stock, such as dividend distributions.

Do you get taxed when you sell stocks?

Yes, investors do generate a tax liability when they sell a stock in the form of capital gains taxes. If the investor has generated a capital loss as the result of a sale, they can use it to offset tax liabilities generated by other capital gains.

How do you avoid taxes on stocks?

There are several strategies that investors can use to try and avoid or minimize taxes on stocks, including utilizing a buy-and-hold strategy, opting not to take early withdrawals, and utilizing tax-advantaged accounts.

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.

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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Feb
27
2024
IRA vs 401(k): What Is the Difference?

IRA vs 401(k): What Is the Difference?

By | Growing Wealth, invest, Investing, Preparing for Retirement, Terminology | No Comments

The biggest difference between an IRA vs. a 401(k) is the amount you can save. You can save over three times as much in a 401(k) vs. an IRA — $23,000 versus $7,000 for tax year 2024, and $22,500 versus $6,500 for tax year 2023. But not everyone has access to a 401(k), because these are sponsored by an employer, typically for full-time employees.

“A 401(k) is probably one of the most common retirement vehicles,” says Brian Walsh, a CFP® at SoFi. “A 401(k) will be available through work. Your employer is going to choose whether or not to make a 401(k) available to all the employees. Generally speaking, 401(k)s are the most popular retirement plan employers provide.”

Other than that, a traditional IRA and a 401(k) are similar in terms of their basic provisions and tax implications. Both accounts are considered tax deferred, which means you can deduct the amount you contribute each year — unless you have a Roth account, which has a different tax benefit.

Before you decide whether one or all three types of retirement accounts might make sense for you, it helps to know all the similarities and differences between a 401(k) and a traditional IRA and Roth IRA.

Key Points

•   An IRA (Individual Retirement Account) and a 401(k) are both retirement savings accounts, but they have different features and eligibility requirements.

•   IRAs are typically opened by individuals, while 401(k)s are offered by employers to their employees.

•   IRAs offer more investment options and flexibility, while 401(k)s may have employer matching contributions and higher contribution limits.

•   Both accounts offer tax advantages, but the timing of tax benefits differs: IRAs provide tax benefits during retirement, while 401(k)s offer tax benefits upfront.

•   Choosing between an IRA and a 401(k) depends on factors like employment status, employer contributions, investment options, and personal financial goals.

How Are IRAs and 401(k)s Different?

The government wants you to prioritize saving for retirement. As a result, they provide tax incentives for IRAs vs. 401(k)s.

In that respect, a traditional IRA and a 401(k) are somewhat similar; both offer tax-deferred contributions, which may lower your taxable income, and tax-deferred investment growth. Also, you owe taxes on the money you withdraw from these accounts in retirement (or beforehand, if you take an early withdrawal).

There is a bigger difference between a Roth IRA and a 401(k). Roth accounts are funded with after-tax contributions — so they aren’t tax deductible. But they provide tax-free withdrawals in retirement.

And while you can’t withdraw the contributions you make to a traditional IRA until age 59 ½ (or incur a penalty), you can withdraw Roth contributions at any time (just not the earning or growth on your principal).

These days, you may be able to fund a Roth 401(k), if your company offers it.

Get a 1% IRA match on rollovers and contributions.

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

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.

Other Key Differences Between IRAs and 401(k)s

As with anything that involves finance and the tax code, these accounts can be complicated. Because there can be stiff penalties when you don’t follow the rules, it’s wise to know what you’re doing.

Who Can Set Up a 401(k)?

As noted above, a key difference between an IRA and a 401(k) is that 401(k)s are qualified employer-sponsored retirement plans. You typically only have access to these plans through an employer who offers them as part of a full-time compensation package.

In addition, your employer may choose to provide matching 401(k) funds as part of your compensation, which is typically a percentage of the amount you contribute (e.g. an employer might match 3%, dollar for dollar).

Not everyone is a full-time employee. You may be self-employed or work part-time, leaving you without access to a traditional 401(k). Fortunately, there are other options available to you, including solo 401(k) plans and opening an IRA online (individual retirement accounts).

Who Can Set Up an IRA?

Anyone can set up an individual retirement account (IRA) as long as they’re earning income. (And if you’re a non-working spouse of someone with earned income, they can set up a spousal IRA on your behalf.)

If you already have a 401(k), you can still open an IRA and contribute to both accounts. But if you or your spouse (if you’re married) are covered by a retirement plan at work, you may not be able to deduct the full amount of your IRA contributions.

Understanding RMDs

Starting at age 72, you must take required minimum distributions (RMDs) from your tax-deferred accounts, including: traditional IRAs, SEP and SIMPLE IRAs, and 401(k)s. Be sure to determine your minimum distribution amount, and the proper timing, so that you’re not hit with a penalty for skipping it.

It’s worth noting, though, that RMD rules don’t apply to Roth IRAs. If you have a Roth IRA, or inherit one from your spouse, the money is yours to withdraw whenever you choose. The rules change if you inherit a Roth from someone who isn’t your spouse, so consult with a professional as needed.

However, RMD rules do apply when it comes to a Roth 401(k), similar to a traditional 401(k). The main difference here, of course, is that the Roth structure still applies and withdrawals are tax free.

A Closer Look at IRAs

An IRA is an individual retirement account that has a much lower contribution limit than a 401(k) (see chart below). Anyone with earned income can open an IRA, and there are two main types of IRAs to choose from: traditional and Roth accounts.

Self-employed people can also consider opening a SEP-IRA or a SIMPLE IRA, which are tax-deferred accounts that have higher contribution limits.

Traditional IRA

Like a 401(k), contributions to a traditional IRA are tax deductible and may help lower your tax bill. In 2024, IRA contribution limits are $7,000, or $8,000 for those aged 50 or older. In 2023, IRA contribution limits are $6,500, or $7,500 for those aged 50 or older.

With a traditional IRA, investments inside the account grow tax-deferred. And unlike 401(k)s where an employer might offer limited options, IRAs are more flexible because they are classified as self-directed and you typically set up an IRA through a brokerage firm of your choice.

Thus it’s possible to invest in a wider range of investments in your IRA, including stocks, bonds, mutual funds, exchange-traded funds, and even real estate.

When making withdrawals at age 59 ½, you will owe income tax. As with 401(k)s, any withdrawals before then may be subject to both income tax and the 10% early withdrawal penalty.

What Are Roth Accounts?

So far, we’ve discussed traditional 401(k) and IRA accounts. But each type of retirement account also comes in a different flavor — known as a Roth.

The main difference between traditional and Roth IRAs lies in when your contributions are taxed.

•   Traditional accounts are funded with pre-tax dollars. The contributions are tax deductible and may provide an immediate tax benefit by lowering your taxable income and, as a result, your tax bill.

•   Money inside these accounts grows tax-deferred, and you owe income tax when you make withdrawals, typically when you’ve reached the age of 59 ½.

Roth accounts, on the other hand, are funded with after-tax dollars, so your deposits aren’t tax deductible. However, investments inside Roth accounts also grow tax-free, and they are not subject to income tax when withdrawals are made at or after age 59 ½.

As noted above, Roths have an additional advantage in that you can withdraw your principal at any time (but you cannot withdraw principal + earnings until you’ve had the account for at least five years, and/or you’re 59 ½ or older — often called the five-year rule).

Roth accounts may be beneficial if you anticipate being in a higher tax bracket when you retire versus the one you’re in currently. Then tax-free withdrawals may be even more valuable.

It’s possible to hold both traditional and Roth IRAs at the same time, though combined contribution limits are the same as those for traditional accounts. And those limits can’t be exceeded.

Additionally, the ability to fund a Roth IRA is subject to certain income limits: above a certain limit you can’t contribute to a Roth. There are no income limits for a designated Roth 401(k), however.

A Closer Look at a 401(k)

Contributions to your 401(k) are made with pre-tax dollars. This makes them tax-deductible, meaning the amount you save each year can lower your taxable income in the year you contribute, possibly resulting in a smaller tax bill.

In 2024, you can contribute up to $23,000 to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $30,500. In 2023, you can contribute up to $22,500 each year to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $30,000.

401(k) catch-up contributions allow people nearing retirement to boost their savings. In addition to the contributions made, an employer can also match their employee’s contribution, up to a combined employer and employee limit of $69,000 in 2024 and $66,000 in 2023.

An employer may offer a handful of investment options to choose from, such as exchange-traded funds (ETFs), mutual funds, and target date mutual funds. Money invested in these options grows tax-deferred, which can help retirement investments grow faster.

When someone begins taking withdrawals from their 401(k) account at age 59 ½ (the earliest age at which you can start taking penalty-free withdrawals), those funds are subject to income tax. Any withdrawals made before 59 ½ may be subject to a 10% early withdrawal penalty, on top of the tax you owe.

When Should You Use a 401(k)?

If your employer offers a 401(k), it may be worth taking advantage of the opportunity to start contributing to your retirement savings. After all, 401(k)s have some of the highest contribution limits of any retirement plans, which means you might end up saving a lot. Here are some other instances when it may be a good idea:

1. If your employer matches your contributions

If your company matches any part of your contribution, you may want to consider at least contributing enough to get the maximum employer match. After all, this match is tantamount to free money, and it can add up over time.

2. You can afford to contribute more than you can to an IRA

For tax year 2024, you can only put $7,000 in an IRA, but up to $23,000 in a 401(k) — if you’re over 50, those amounts increase to $8,000 for an IRA and $30,500 for a 401(k).

For tax year 2023, you can only put $6,500 in an IRA, but up to $22,500 in a 401(k) — if you’re over 50, those amounts increase to $7,500 for an IRA and $30,000 for a 401(k). If you’re in a position to save more than the IRA limit, that’s a good reason to take advantage of the higher limits offered by a 401(k).

3. When your income is too high

Above certain income levels, you can’t contribute to a Roth IRA. How much income is that? That’s a complicated question that is best answered by our Roth IRA calculator.

And if you or your spouse are covered by a workplace retirement plan, you may not be able to deduct IRA contributions.

If you can no longer fund a Roth, and can’t get tax deductions from a traditional IRA, it might be worth throwing your full savings power behind your 401(k).

When Should You Use an IRA?

If you can swing it, it may not hurt to fund an IRA. This is especially true if you don’t have access to a 401(k). But even if you do, IRAs can be important tools. For example:

1. When you leave your company

When you leave a job, you can rollover an old 401(k) into an IRA — and it’s generally wise to do so. It’s easy to lose track of old plans, and companies can merge or even go out of business. Then it can become a real hassle to find your money and get it out.

You can also roll the funds into your new company’s retirement plan (or stick with an IRA rollover, which may give you more control over your investment choices).

Recommended: How to Roll Over Your 401(k)

2. If your 401(k) investment choices are limited

If you have a good mix of mutual funds in your 401(k), or even some target date funds and low-fee index funds, your plan is probably fine. But, some plans have very limited investment options, or are so confusing that people can’t make a decision and end up in the default investment — a low interest money market fund.

If this is the case, you might want to limit your contributions to the amount needed to get your full employer match and put the rest in an IRA.

3. When you’re between jobs

Not every company has a 401(k), and people are not always employed. There may be times in your life when your IRA is the only option. If you have self-employment income, you can make higher contributions to a SEP IRA or a Solo 401(k) you set up for yourself.

4. If you can “double dip.”

If you have a 401(k), are eligible for a Roth IRA, or can deduct contributions to a traditional IRA, and you can afford it — it may be worth investing in both. After all, saving more now means more money — and financial security — down the line. Once again, you can check our IRA calculator to see if you can double dip. Just remember that the IRA contribution limit is for the total contributed to both a Roth and traditional IRA.

The real question is not: IRA vs. 401(k), but rather — which of these is the best place to put each year’s contributions? Both are powerful tools to help you save, and many people will use different types of accounts over their working lives.

When Should You Use Both an IRA and 401(k)?

Using an IRA and a 401(k) at the same time may be a good way to save for your retirement goals. Funding a traditional or Roth IRA and 401(k) at once can allow you to save more than you would otherwise be able to in just one account.

Bear in mind that if you or your spouse participate in a workplace retirement plan, you may not be able to deduct all of your traditional IRA contributions, depending on how high your income is.

Having both types of accounts can also provide you some flexibility in terms of drawing income when you retire. For example, you might find a 401(k) as a source of pre-tax retirement income. At the same time you might fund a Roth IRA to provide a source of after-tax income when you retire.

That way, depending on your financial and tax situation each year, you may be able to strategically make withdrawals from each account to help minimize your tax liability.

The Takeaway

What is the difference between an IRA and a 401(k)? As you can see now, the answer is pretty complicated, depending on which type of IRA you’re talking about. Traditional IRAs are tax deferred, just like traditional 401(k)s — which means your contributions are tax deductible in the year you make them, but taxes are owed when you take money out.

Roth accounts — whether a Roth IRA or a Roth 401(k) — have a different tax treatment. You deposit after-tax funds in these types of accounts. And then you don’t pay any tax on your withdrawals in retirement.

The biggest difference is the amount you can save in each. For tax year 2023, it’s $23,000 in a 401(k) ($30,500 if you’re 50 and over) versus only $7,000 in an IRA ($8,000 if you’re 50+). For tax year 2023, it’s $22,500 in a 401(k) ($30,000 if you’re 50 and over) versus only $6,500 in an IRA ($7,500 if you’re 50+).

Another difference is that a 401(k) is generally sponsored by your employer, so you’re beholden to the investment choices of the firm managing the company’s plan, and the fees they charge. By contrast, you set up an IRA yourself, so the investment options are greater — and the fees can be lower.

Generally, you can have an IRA as well as a 401(k). The rules around contribution limits, and how much you can deduct may come into play, however.

If you’re ready to open an IRA, it’s easy when you set up an Active Invest account with SoFi Invest.

Not sure what the right strategy is for you? SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

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

Is a 401(k) considered an IRA for tax purposes?

No. A 401(k) is a completely separate account than an IRA because it’s sponsored by your employer.

Is it better to have a 401(k) or an IRA?

You can save more in a 401(k), and your employer may also offer matching contributions. But an IRA often has a much wider range of investment options. It’s wise to weigh the differences, and decide which suits your situation best.

Can you roll a 401(k) Into an IRA penalty-free?

Yes. If you leave your job and want to roll over your 401(k) account into an IRA, you can do so penalty free within 60 days. If you transfer the funds and hold onto them for longer than 60 days, you will owe taxes and a penalty if you’re under 59 ½.

Can you lose money in an IRA?

Yes. You invest all the money you deposit in an IRA in different securities (i.e. stocks, bonds, mutual funds, ETFs). Ideally you’ll see some growth, but you could also see losses. There are no guarantees.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
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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Feb
27
2024
What Are High-Net Worth Individuals?

What Are High-Net Worth Individuals?

By | Growing Wealth, invest, Investing | Comments Off on What Are High-Net Worth Individuals?

A high net worth individual (HNWI) is generally considered to be someone who has $1 million or more in investable assets. That includes liquid assets such as cash or cash equivalents.

Someone who has a high net worth may rely on specialized financial services for money management. For example, they may work with a wealth manager or open accounts at a private bank. In terms of financial planning, the needs of high net worth individuals may include estate planning, investment guidance, and tax management.

Achieving a high net worth is something that can be done through strategic investing and careful portfolio building. It’s important to keep in mind that high net worth individuals may have access to certain investments that the everyday investor would not. Minimizing liabilities is another part of the wealth-building puzzle, as net worth takes debt into account alongside assets.

Key Points

•   A high net worth individual (HNWI) is someone with $1 million or more in investable assets, including cash or cash equivalents.

•   HNWIs may rely on specialized financial services like wealth managers or private banks for money management, estate planning, investment guidance, and tax management.

•   Different metrics, such as income, investable assets, and net worth (assets minus liabilities), can be used to define high net worth individuals.

•   The SEC requires registered advisors to disclose information about high net worth individuals on Form ADV, and accredited investors are also considered high net worth individuals.

•   HNWIs may enjoy benefits like reduced fees, discounts on financial services, access to exclusive investments, and special perks and events.

What Defines a High Net Worth Individual?

When it comes to the high net worth definition, there are different metrics that can be used to calculate net worth and determine whether someone falls under the high net worth umbrella. Those can include a person’s:

•   Income

•   Investable assets

•   Total net worth when liabilities are deducted from assets

The Securities and Exchange Commission (SEC) requires registered advisors to provide information about high net worth individuals on Form ADV. Specifically, the form asks advisors to list how many clients they serve who have $750,000 in investable assets or a $1.5 million net worth.

The SEC can also refer to high net worth individuals when discussing accredited investors. An accredited investor is defined as having:

•   Earned income of $200,000 or more (or $300,000 for couples) in each of the two prior years, with a reasonable expectation of the same income in future years

•   Net worth of over $1 million either alone or with a spouse, excluding the value of a primary residence

What is considered a high net worth individual to those who work with them? Private banks or wealth managers who serve high net worth individuals might choose to define them differently. For example, someone who wants to open an account with a private bank might need to have $5 million or $10 million in investable assets to qualify. Someone who has that much in assets may be relabeled as “very high net worth” instead. And at higher levels of assets, they enter the realm of ultra high net worth.

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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.

*Probability of Member receiving $1,000 is a probability of 0.028%.

Benefits Afforded to HNWIs

High net worth individuals may get a number of special benefits. For instance, they might qualify for reduced fees and discounts on financial services like investments and banking. They may also be granted access to special perks and events.

HNWI can also invest in things other investors or the general public can’t, such as hedge funds, venture capital funds, and private equity funds.

HNWI Examples & Statistics

The super rich, or HNWI, are tracked by Forbes on the Real-Time Billionaires List, which is updated daily. As of August 31, 2023, these were the HNWI at the top if the list:

•   Elon Musk with a net worth of $248.8 billion

•   Bernard Arnault and family with a net worth of $208 billion

•   Jeff Bezos with a net worth of $160.9 billion

•   Larry Ellison with a net worth of $152.3 billion

•   Warren Buffet with a net worth of $121.1 billion

Recommended: What’s the Difference Between Income and Net Worth?

How Is Net Worth Calculated?

Wondering how to find net worth? It’s a relatively simple calculation. There are three steps for figuring out net worth:

1.    Add up assets. These can include:

◦   Bank account balances, including checking, savings, and certificates of deposit

◦   Retirement accounts

◦   Taxable investment accounts

◦   Property, such as real estate or vehicles

◦   Collectibles or antiques

◦   Businesses someone owns

2.    Add up liabilities. Liabilities are debts owed. For example, a home’s value can be considered an asset for net worth calculations. But if there’s a mortgage owing on it, that amount has to be entered into the liabilities column.

3.    Subtract liabilities from assets. The remaining amount is an individual’s net worth.

Net worth can be a positive or negative number, depending on how much someone has in assets versus what they owe in liabilities.

Net Worth vs Liquid Net Worth

In simple terms, net worth is the difference between assets and liabilities. Liquid net worth, on the other hand, is the difference between liquid assets and liabilities. A liquid asset is one that can easily be sold or used to invest. So cash in a savings account is an example of a liquid asset while investments in a real estate investment trust (REIT) would be illiquid since they can’t be sold at short notice.

What Is an Ultra High Net Worth Individual?

Someone who fits the definition of an ultra high net worth individual (UHNWI) generally has personal financial holdings or assets of $30 million or more. People who are considered to be ultra high net worth individuals are among the top 1% wealthiest in the world.

So what is the net worth of the top 1%?

According to a report from Knight Frank, the typical net worth of the 1% falls far below the $30 million in assets required for ultra high net worth status. For example, in the U.S. someone would need $4 million in wealth to join the ranks of the top 1%. They’d need $7.9 million to belong to the top 1% in Monaco.

But what about the top 0.1%? Again, the level of wealth needed to qualify is still below the $30 million cutoff required for an UHNWI. In the U.S., you’d need $25.1 million to be considered part of the 0.1%. This is the highest amount of assets needed to qualify among the countries included in Knight Frank’s research.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

How to Get a Higher Net Worth

Reaching high net worth status can be a lofty goal but it’s one many HENRYs — high earner not rich yet — work toward. The typical HENRY makes most or all of their income from working. While they may earn an above-average income, they may not have sufficient disposable income to start building wealth to increase their net worth.

There are, however, some ways to change that. For example, someone who earns a higher income but doesn’t have the higher net worth to reflect it may consider things like:

•   Paying off student loans or other debts

•   Relocating to a less expensive area to reduce their cost of living

•   Rethinking their tax strategy so they’re able to keep more of their income

•   Finding ways to increase income

Coming up with a solid investment strategy is also important for boosting net worth. That includes diversifying to manage risk while investing in assets that are designed to produce income. For example, that might include such things as:

•   Purchasing shares of dividend stocks

•   Enrolling in a dividend reinvestment plan (DRIP)

•   Buying dividend exchange-traded funds (ETFs)

•   Investing in REITs or real estate mutual funds

Creating multiple streams of income with investments or starting a side hustle while also reducing liabilities can help with making progress toward a higher net worth. At the same time, it’s also important to take advantage of wealth-building assets you may already have on hand.

For example, if you have access to a 401(k) or similar plan at work, then making contributions can be an easy way to increase net worth. If your employer offers a company matching contribution you could use that free money to help build wealth.

The Takeaway

High net worth individuals are typically described as people who have $1 million or more in investable assets. Those with more than $5 to 10 million in investable assets may be labeled as “very high net worth”, and those with more than $30 million are generally considered ultra high net worth individuals.

Individuals with a higher net worth often consider time to be an asset in itself. The thinking goes, the sooner you begin investing, the better.

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


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

FAQ

What are different types of high-net-worth individuals?

There are several types of high net worth individuals. Those who are high net worth have more than $1 million. Individuals with about $5 million are considered very high net worth. If a person has more than $30 million dollars they are considered ultra high net worth.

Where are most of the HNWIs located?

North America has the most high net worth individuals. There are 7.9 million HNWI in North America. The Asia-Pacific region has 7.2 million high net worth individuals, and there are 5.7 million HNWI in Europe.

Do high-net-worth individuals include 401(k)?

Yes. All of your different retirement accounts, including your 401(k), are included as assets when calculating high net worth.

Photo credit: iStock/Cecilie_Arcurs

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

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