Financial Topics Archives | Page 337 of 808

Feb

2024

Everything You Need to Know About Lifestyle Funds and Lifestyle Investing

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

Lifestyle funds are investment funds that base their asset allocation on someone’s age, risk tolerance, and investing goals. Individuals who want to build wealth over the long term in a relatively hands-off way might consider lifestyle investings.

There are different types of lifestyle funds investors may choose from, based on their appetite for risk, the level of risk needed to achieve their goals, and their investing time horizon. Lifestyle assets often also appear inside different types of retirement accounts, including employer-sponsored retirement plans and individual retirement accounts (IRAs). Whether becoming a lifestyle investor makes sense for you can depend on what you hope to achieve with your portfolio, how much risk you’re comfortable taking, and your overall time horizon for investing.

What are Lifestyle Funds?

A lifestyle fund or lifestyle investment holds a mix of investments that reflect an investor’s goals and risk tolerance. These investment funds tailor their investment mix to a specific investor’s needs and age to provide a simplified solution for reaching their goals.

Lifestyle funds may invest in both equities (i.e. stocks) and fixed-income securities, such as bonds and notes. These funds may require fewer decisions by the asset owner, since they adjust automatically through changing lifestyle needs until you reach retirement. With lifestyle assets, as with other types of funds, it’s important to consider the balance between risk and reward.

Lifestyle funds that carry a higher degree of risk may offer higher returns to investors, while those that are more conservative in terms of risk may yield lower returns.

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How Do Lifestyle Funds Work?

Typically purchased through a retirement account or a brokerage account, lifestyle funds work by creating a diversified portfolio to meet an investor where they are, while also taking into account where they’d like to be 10, 20 or 30 years from now.

An investor can choose from an initial lifestyle fund allocation, then adjust the risk level up or down based on their preferences. A fund manager reviews the asset allocation for the fund and rebalances periodically to help an investor stay on track with their goals.

The level of risk an investor takes may correlate to the average age of retirement, which for most people is around 65. So someone who’s 25 years old now has 40 years to invest for the future, meaning they can afford to take more risk to achieve their goals. As they get older, their tolerance for risk may decrease which could mean moving away from stocks and toward fixed-income investments.

Unlike target-date funds, the level of risk in lifestyle funds doesn’t change significantly over time. So if you were to choose an aggressive lifestyle fund at 25, the asset allocation of that fund would more or less be the same at age 65. That’s important to understand for choosing the lifestyle fund that’s appropriate for your risk tolerance and goals.

Recommended: Explaining Asset Allocation by Age

Two Stages of Lifestyle Funds

Lifestyle investing can work in different stages, depending on where you are in your investing journey. Lifestyle funds accommodate these different stages by adjusting their asset allocation.

This is something the fund manager can do to ensure that you’re working toward your goals without overexposing yourself to risk along the way. The two stages of lifestyle funds are the growth stage and the retirement target date stage.

1. Growth Stage

The growth stage represents the period in which a lifestyle investor is actively saving and investing. During the growth stage, the emphasis is on diversifying investments to achieve the appropriate balance between risk and reward. This phase represents the bulk of working years for most people as they move from starting their careers to reaching their peak earnings.

In the growth stage, lifestyle funds hold an asset allocation that reflects the investor’s goals and appetite for risk. Again, whether this is more conservative, aggressive or somewhere in-between depends on the individual investor. At this time, the investor is typically concerned with funding retirement accounts, rather than withdrawing from them.

2. Retirement Target Date

The retirement target date stage marks the beginning of the countdown to retirement for an investor. During this stage, the focus shifts to preparing the investor to begin drawing an income from their portfolio, rather than making new contributions or investments.

At this point, a lifestyle investor may have to decide whether they want to maintain their existing asset allocation, shift some or all of their assets into other investments (such as an annuity), or begin drawing them down in cash. For example, an investor in their mid-50s may decide to move from an aggressive lifestyle fund to a moderate or conservative lifestyle fund, depending on their needs, anticipated retirement date, and how much risk they’re comfortable taking.

Different Types of Lifestyle Funds

Lifestyle funds aren’t all alike and there are different options investors may choose from. There are different ways lifestyle funds can be structured, including:

• Income-focused funds. These lifestyle funds aim to produce income for investors, though capital appreciation may be a secondary goal. Fixed-income securities typically make up the bulk of lifestyle income funds, though they may still include some equity holdings.

• Growth-focused funds. Lifestyle growth funds are the opposite of lifestyle income funds. These funds aim to provide investors with long-term capital appreciation and place less emphasis on current income.

• Conservative asset allocation funds. Conservative lifestyle funds may have a long-term goal of achieving a set total return through both capital appreciation and current income. These funds tend to carry lower levels of risk than other lifestyle funds.

• Moderate asset allocation funds. Moderate lifestyle funds often take a middle ground approach in terms of risk and reward. These funds may use a “fund of funds” strategy, which primarily involves investing other mutual funds.

• Aggressive asset allocation funds. Aggressive lifestyle funds may also use a “fund of funds” approach, though with a slightly different focus. These funds take on more risk, though rewards may be greater as they seek long-term capital appreciation.

Lifestyle Investment Risks

Investing for retirement with lifestyle assets has some risks, so it’s important to make sure that the fund you choose matches your risk tolerance. Risk tolerance refers to the amount of risk an investor is comfortable taking in their portfolio. Risk capacity is the amount of risk needed to achieve investment goals.

Typically, younger investors can afford to take more risk in the early years of their investment career as they have more time to recover from market declines. But if that investor has a low risk tolerance, they may still choose to stick with more conservative investments. If their risk tolerance doesn’t match up with the amount of risk they need to take to achieve their investment goals, they could fall far short of them.

When considering lifestyle funds, it’s important to consider your risk mix and risk level. While lifestyle funds can simplify investing in that you don’t necessarily need to make day-to-day trading decisions, it’s still important to consider how your risk tolerance and risk capacity may evolve over time.

As you move from the growth stage to the retirement target date stage, for instance, you may need to make some adjustments to your lifestyle fund choices in order to keep pace with your desired goals.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Advantages of Lifestyle Funds

In addition to their risks, lifestyle funds offer numerous advantages to investors, starting with simplicity. When you invest in a lifestyle fund, you know more or less what to expect in terms of asset allocation, based on the risk tolerance that you specify. These funds don’t require you to be an active investor in order to realize returns.

Some funds also automatically rebalance on behalf of investors, so there’s very little you need to do, other than be mindful of how the fund’s risk mix reflects your risk tolerance at any given time.

A lifestyle fund can offer broad diversification, allowing you to gain exposure to a variety of assets without having to purchase individual stocks, bonds or other securities.

Compared to other types of mutual funds or exchange-traded funds (ETFs), lifestyle funds may carry lower expense ratios. That can allow you to retain more of your investment returns over time.

Finally, lifestyle funds encourage investors to stay invested through market ups and downs. That can help you to even out losses through dollar-cost averaging.

Lifestyle Funds vs Target Date Funds

If you have a 401(k), then you’re likely familiar with target date funds as they’re commonly offered in workplace retirement plans. A target date fund, or lifecycle fund, is a mutual fund that adjusts its asset allocation automatically, based on the investor’s target retirement date. These funds are distinguishable from lifestyle funds because they typically have a year in their name.

So a Target Date 2050 fund, for example, would attract investors who plan to retire in the year 2050. Target date funds also take a diversified approach to investing, with asset allocations that include both stocks and fixed-income securities.

The difference between target date funds and lifestyle funds is that target date funds follow a specific glide path. As the investor gets closer to their target retirement date, the fund’s asset allocation adjusts to become more conservative. Lifestyle funds don’t do that; instead, the asset allocation remains the same.

The Takeaway

Whether you choose to invest with lifestyle funds, target date funds, or something else, the most important thing is to get started saving for retirement. The longer your time horizon until retirement, the more time your money has to grow through the power of compounding interest.

If you feel like incorporating lifestyle funds into your investing strategy may help you reach your financial goals, be sure to take the pros and cons into consideration. It may also be helpful to consult with a financial professional for guidance.

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

What is a lifestyle pension fund?

A pension fund is a type of defined benefit plan, in which employees receive retirement benefits based on their earnings and years of service. A lifestyle pension fund is a pension fund that allocates assets using a lifestyle strategy in order to meet an investor’s goals and needs.

What is a lifestyle strategy?

In investing, a lifestyle strategy is an approach that chooses investments that can help an investor to reach specific milestones or goals while keeping their age and risk tolerance in mind. With lifestyle funds, the asset allocation doesn’t change substantially over time.

What is a lifestyle profile?

A lifestyle profile is a tool that investors use to help them select the most appropriate lifestyle funds based on their age, risk tolerance goals.

Photo credit: iStock/GaudiLab

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

Feb

2024

2024 Tax Season: Capital Gains Tax Guide

By Carla Tardi | Growing Wealth, invest, Investing | No Comments

What Is Capital Gains Tax?

Capital gains taxes are the taxes you pay on any profits you make from selling investments, like stocks, bonds, properties, cars, or businesses. The tax isn’t applied for owning these assets — it only hits when you profit from selling them.

It’s important for beginner investors to understand that a number of factors can affect their capital gains tax rate: how long they hold onto an investment, which asset they’re selling, the amount of their annual income, as well as their marital status.

Read on to learn how capital gains work, the capital gains tax rates, and tips for lowering capital gains taxes.

Capital Gains Tax Rates Today

Whether you hold onto an investment for at least a year can make a big difference in how much you pay in taxes.

When you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. If you profit from it after owning it for at least a year, it’s a long-term capital gain.

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Short-Term Capital Gains Tax Rates (for Tax Year 2023)

The short-term capital gains tax is taxed as regular income or at the “marginal rate,” so the rates are based on what tax bracket you’re in.

The Internal Revenue Service (IRS) changes these numbers every year to adjust for inflation. You may learn your tax bracket by going to the IRS website, or asking your accountant.

Here’s a table that breaks down the short-term capital gains tax rates for the 2023 tax year, or for tax returns that are filed in 2024.

Marginal Rate	Income — Single	Married, filing jointly
10%	Up to $11,000	Up to $22,000
12%	$11,000 to $44,725	$22,000 to $89,450
22%	$44,725 to $95,375	$89,450 to $190,750
24%	$95,375 to $182,100	$190,750 to $364,200
32%	$182,100 to $231,250	$364,200 to $462,500
35%	$231,250 to $578,125	$462,500 to $693,750
37%	$578,125 or more	More than $693,750

Long-Term Capital Gains Tax Rate By Income for Tax Year 2023 (or Tax Season 2024)

Long-term capital gains taxes for an individual are simpler and lower than for married couples. These rates fall into three brackets: 0%, 15%, and 20%.

The following table breaks down the long-term capital-gains tax rates for the 2023 tax year by income and status.

Capital Gains Tax Rate	Income — Single	Married, Filing Separately	Head of Household	Married, Filing Jointly
0%	Up to $44,625	Up to $44,625	Up to $59,750	Up to $89,250
15%	$44,626 to $492,300	$44,626 to $276,900	$59,751 to $523,050	$89,251 to $553,850
20%	$492,301 or more	$276,901 or more	$523,051 or more	$553,851 or more

A higher 28% is applied to long-term capital gains from transactions involving art, antiques, stamps, wine, and precious metals.

Additionally, individuals with modified adjusted gross incomes (MAGIs) over $200,000 and couples filing jointly with MAGIs over $250,000 — who have net investment income, may have to pay the Net Investment Income Tax (NIIT), which is 3.8% on the lesser of the net investment income or the excess over the MAGI limits.

Tips For Lowering Capital Gains Taxes

Hanging onto an investment for more than a year can lower your capital gains taxes significantly.

Capital gains taxes also don’t apply to so-called “tax-advantaged accounts” like 401(k) plans, IRAs, or 529 college savings accounts. So selling investments within these accounts won’t generate capital gains taxes. Instead, traditional 401(k)s and IRAs are taxed when you take distributions, while qualified distributions for Roth IRAs and 529 plans are tax-free.

Single homeowners also get a break on the first $250,000 they make from the sale of their primary residence, which they need to have lived in for at least two of the past five years. The limit is $500,000 for a married couple filing jointly.

For new investors, it might be helpful to know that you may deduct as much as $3,000 in losses from an investment to help offset the amount of taxes on your income.

How US Capital Gains Taxes Compare

Generally, capital gains tax rates affect the wealthiest taxpayers, who typically make a bigger chunk of their income from profitable investments.

Here’s a closer look at how capital gains taxes compare with other taxes, including those in other countries.

Compared to Other Taxes

The maximum long-term capital gains taxes rate of 20% is lower than the highest marginal rate of 37%.

Proponents of the lower long-term capital gains tax rate say the discrepancy exists to encourage investments. It may also prompt investors to sell their profitable investments more frequently, rather than hanging on to them.

Comparison to Capital Gains Taxes In Other Countries

In 2023, the Tax Foundation listed the capital gains taxes of the 27 different European Organization for Economic Cooperation and Development (OECD) countries. The U.S.’ maximum rate of 20% is roughly midway on the spectrum of comparable capital gains taxes.

In comparison, Denmark had the highest top capital gains tax at a rate of 42%. Norway was second-highest at 37.84%. Finland and France were third on the list, both at 34%. In addition, the following European countries all levied higher capital gains taxes than the U.S. (listed in order from highest to lowest): Ireland, the Netherlands, Sweden, Portugal, Austria, Germany, Italy, Spain, and Iceland.

Compared With Historical Capital Gains Tax Rates

Because short-term capital gains tax rates are the same as those for wages and salaries, they adjust when ordinary income tax rates change. For instance, in 2018, tax rates went down because of the Trump Administration’s tax cuts. Therefore, so did short-term capital gains rates.

As for long-term capital gains tax, Americans today are paying rates that are relatively low historically. Today’s maximum long-term capital gains tax rate of 20% started in 2013.

For comparison, the high point for long-term capital gains tax was in the 1970s, when the maximum rate was at 35%.

Going back in time, in the 1920s the maximum rate was around 12%. From the early 1940s to the late 1960s, the rate was around 25%. Maximum rates were also pretty high, at around 28%, in the late 1980s and 1990s. Then, between 2004 and 2012, they dropped to 15%.

💡 Quick Tip: Did you know that investment losses aren’t necessarily bad news? Some losses can be used to offset gains, potentially reducing how much tax you owe. Learn more about investment taxes.

Tax Loss Harvesting

Tax loss harvesting is the strategy of selling some investments at a loss to offset the taxable profits from another investment.

Using short-term losses to offset short-term gains is a way to take advantage of tax loss harvesting — because, as discussed above, short-term gains are taxed at higher rates. IRS rules also dictate that short-term or long-term losses must be used to offset gains of the same type, unless the losses exceed the gains from the same type.

Investors can also apply losses from investments of as much as $3,000 to offset income. And because tax losses don’t expire, if only a portion of losses was used to offset income in one year, the investor can “save” those losses to offset taxes in another year.

The Takeaway

Capital gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year to adjust for inflation.

It’s important for investors to know that capital gains tax rates can differ significantly based on whether they’ve held an investment for at least a year. An investor’s income level also determines how much they pay in capital gains taxes.

An accountant or financial advisor can suggest ways to lower your capital gains taxes as well as help you set financial goals.

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

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

SoFi Invest®

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

Feb

2024

SIMPLE IRA Contribution Limits for Employers & Employees

By Austin Kilham | invest, Investing, Preparing for Retirement | Comments Off

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a way for self-employed individuals and small business employers to set up a retirement plan.

It’s one of a number of tax-advantaged retirement plans that may be available to those who are self-employed, along with solo 401(k)s, and traditional IRAs. These plans share a number of similarities. Like 401(k)s, SIMPLE IRAs are employer-sponsored (if you’re self-employed, you would be the employer in this case), and like other IRAs they give employees some flexibility in choosing their investments.

SIMPLE IRA contribution limits are one of the main differences between accounts: meaning, how much individuals can contribute themselves, and whether there’s an employer contribution component as well.

Here’s a look at the rules for SIMPLE IRAs.

SIMPLE IRA Basics

SIMPLE IRAs are a type of employer-sponsored retirement account. Employers who want to offer one cannot have another retirement plan in place already, and they must typically have 100 employees or less.

Employers are required to contribute to SIMPLE IRA plans, while employees can elect to do so, as a way to save for retirement.

Employees can usually participate in a SIMPLE IRA if they have made $5,000 in any two calendar years before the current year, or if they expect to receive $5,000 in compensation in the current year.

An employee’s income doesn’t affect SIMPLE IRA contribution limits.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

SIMPLE IRA Contribution Limits, 2023 and 2024

Employee contributions to SIMPLE IRAs are made with pre-tax dollars. They are typically taken directly from an employee’s paycheck, and they can reduce taxable income in the year the contributions are made, often reducing the amount of taxes owed.

Once deposited in the SIMPLE IRA account, contributions can be invested, and those investments can grow tax deferred until it comes time to make withdrawals in retirement. Individuals can start making withdrawals penalty free at age 59 ½. But withdrawals made before then may be subject to a 10% or 25% early withdrawal penalty.

Employee contributions are capped. For 2023, contributions cannot exceed $15,500 for most people. For 2024, it’s $16,000. Employees who are age 50 and over can make additional catch-up contributions of $3,500 for 2023 and 2024, bringing their total contribution limit to $19,000 in 2023 and $19,500 in 2024.

See the chart below for SIMPLE IRA contribution limits for 2023 and 2024.

	2023	2024
Annual contribution limit	$15,500	$16,000
Catch-up contribution for age 50 and older	$3,500	$3,500

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.

Employer vs Employee Contribution Limits

Employers are required to contribute to each one of their employees’ SIMPLE plans each year, and each plan must be treated the same, including an employer’s own.

There are two options available for contributions: Employers may either make matching contributions of up to 3% of employee compensation — or they may make a 2% nonelective contribution for each eligible employee.

If an employer chooses the first option, call it option A, they have to make a dollar-for-dollar match of each employee’s contribution, up to 3% of employee compensation. (If the employer chooses option B, the nonelective contribution, this requirement doesn’t apply.) An employer can offer smaller matches, but they must match at least 1% for no more than two out of every five years.

In option A, if an employee doesn’t make a contribution to their SIMPLE account, the employer does not have to contribute either.

In the second option, option B: Employers can choose to make nonelective contributions of 2% of each individual employee’s compensation. If an employer chooses this option, they must make a contribution whether or not an employee makes one as well.

Contributions are limited. Employers may make a 2% contribution up to $330,000 in employee compensation for 2023, and up to $345,000 in employee compensation for 2024.

(The 3% matching contribution rule for option A is not subject to this same annual compensation limit.)

Whatever contributions employers make to their employees’ plans are tax deductible. And if you’re a sole proprietor you can deduct the employer contributions you make for yourself.

See the chart below for employer contribution limits for 2023 and 2024.

	2023	2024
Matching contribution	Up to 3% of employee contribution	Up to 3% of employee contribution
Nonelective contribution	2% of employee compensation up to $330,000	2% of employee compensation up to $345,000

SIMPLE IRA vs 401(k) Contribution Limits

There are other options for employer-sponsored retirement plans, including the 401(k), which differs from an IRA in some significant ways.

Like SIMPLE IRAs, 401(k) contributions are made with pre-tax dollars, and money in the account grows tax deferred. Withdrawals are taxed at ordinary income tax rates, and individuals can begin making them penalty-free at age 59 ½.

Contribution limits for 401(k)s are much higher than for SIMPLE IRAs. In 2023, individuals could contribute up to $22,500 to their 401(k) plans. Plan participants age 50 and older could make $7,500 in catch-up contributions for a total of $30,000 per year. In 2024, individuals can contribute $23,000 to their 401(k), and those 50 and older can make $7,500 in catch-up contributions for a total of $30,500.

Employers may also choose to contribute to their employees’ 401(k) plans through matching contributions or non-elective contributions. Employees often use matching contributions to incentivize their employees to save, and individuals should try to save enough each year to meet their employer’s matching requirements.

Employers may also make nonelective contributions regardless of whether an employee has made contributions of their own. Total employee and employer contributions could equal up to $66,000 in 2023, or 100% of an employee’s compensation, whichever is less. For those aged 50 and older, that figure jumped to $73,500. In 2024, total employee and employer contributions are $69,000, or $76,500 for those 50 and up.

As a result of these higher contribution limits, 401(k)s can help individuals save quite a bit more than they could with a SIMPLE IRA. See chart below for a side-by-side comparison of 401(k) and SIMPLE IRA contribution limits.

	SIMPLE IRA 2023	SIMPLE IRA 2024	401(k) 2023	401(k) 2024
Annual contribution limit	$15,500	$16,000	$22,500	$23,000
Catch-up contribution	$3,500	$3,500	$7,500	$7,500
Employer Contribution	Up to 3% of employee contribution, or 2% of employee compensation up to $330,000	Up to 3% of employee contribution, or 2% of employee compensation up to $345,000	Matching and nonelective contributions up to $66,000	Matching and nonelective contributions up to $69,000.

💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

SIMPLE IRA vs Traditional IRA Contribution Limits

Individuals who want to save more in tax-deferred retirement accounts than they’re able to in a SIMPLE IRA alone can consider opening an IRA account. Regular IRAs come in two flavors: traditional and Roth IRA.

Traditional IRAs

When considering SIMPLE vs. traditional IRAs, the two actually work similarly. However, contribution limits for traditional accounts are quite a bit lower. For 2023, individuals could contribute $6,500, or $7,500 for those 50 and older. In 2024, individuals can contribute $7,000, or $8,000 for those 50 and older.

That said, when paired with a SIMPLE IRA, individuals could make $22,000 in total contributions in 2023, which is almost as much as with a 401(K). In 2024, they could make $23,000 in total contributions, which is the same as a 401(k).

Roth IRAs

Roth IRAs work a little bit differently.

Contributions to Roths are made with after-tax dollars. Money inside the account grows-tax free and individuals pay no income tax when they make withdrawals after age 59 ½. Early withdrawals may be subject to penalty. Because individuals pay no income tax on withdrawals in retirement, Roth IRAs may be a consideration for those who anticipate being in a higher tax bracket when they retire.

Roth contributions limits are the same as traditional IRAs. Individuals are allowed to have both Roth and traditional accounts at the same time. However, total contributions are cumulative across accounts.

See the chart for a look at SIMPLE IRA vs. traditional and Roth IRA contribution limits.

	SIMPLE IRA 2023	SIMPLE IRA 2024	Traditional and Roth IRA 2023	Traditional and Roth IRA 2024
Annual contribution limit	$15,500	$16,000	$6,500	$7,000
Catch-up contribution	$3,500	$3,500	$1,000	$1,000
Employer Contribution	Up to 3% of employee contribution, or 2% of employee compensation up to $330,000	Up to 3% of employee contribution, or 2% of employee compensation up to $345,000	None	None

The Takeaway

SIMPLE IRAs are an easy way for employers and employees to save for retirement — especially those who are self-employed (or for companies with under 100 employees). In fact, a SIMPLE IRA gives employers two ways to help employees save for retirement — by a direct matching contribution of up to 3% (assuming the employee is also contributing to their SIMPLE IRA account), or by providing a basic 2% contribution for all employees, regardless of whether the employees themselves are contributing.

While SIMPLE IRAs don’t offer the same high contribution limits that 401(k)s do, individuals who want to save more can compensate by opening a traditional or Roth IRA on their own.

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).

Help grow your nest egg with a SoFi IRA.

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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.

SoFi Invest®

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

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Feb

2024

5 Investment Strategies for Beginners

By SoFi Editors | Growing Wealth, invest, Investing | Comments Off

Investing is a powerful tool that allows you to put your money to work to help you reach future financial goals. But if you’re new to investing, you may be asking yourself what investment strategies should you pursue?

Here’s a guide to help you get started.

5 Popular Investment Strategies for Beginners

1. Asset Allocation

Once you’ve opened an investment account and you begin to build your portfolio, asset allocation is an important strategy to consider to help you balance potential risk and rewards. A typical portfolio might divide its assets among three main asset classes: stocks, bonds, and cash. Each asset class has its own risk and return profile, behaving a little bit differently under different market circumstances.

For example, stocks tend to offer the highest gains, but they are also the most volatile, presenting the most potential for losses. Bonds are generally considered to be less risky than stocks, while cash is typically more stable.

The proportion of each asset class you hold will depend on your goals, time horizon, and risk tolerance. Your goal is how much you aim to save. Your time horizon is the length of time you have before reaching your goals. And your risk tolerance is how much risk you’re willing to take to achieve your goals.

Your asset allocation can shift over time. For example, someone in their 30s saving for retirement has a long time horizon and may have a higher risk tolerance. As a result their portfolio may contain mostly stocks. As that person grows older and nears retirement, their portfolio may shift to contain more bonds and cash, which are typically less risky and less likely to lose value in the short-term.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

2. Diversification

Another way to help manage risk in your portfolio is through diversification, building a portfolio with a mix of investments across assets to avoid putting all your eggs in one basket.

Here’s how it works: Imagine you had a portfolio consisting of stock from one company. If that stock does poorly your entire portfolio suffers.

Now imagine a portfolio consisting of many stocks, from companies of all sizes and sectors. Not only that, it also holds other investments, including bonds. If one stock suffers, it will have a much smaller effect on your overall portfolio, spreading out the risk of holding any one investment.

3. Rebalancing

Your portfolio can change over time, shifting your assets allocation and diversification. For example, if there is a bull market and stocks outperform, you may discover that you now hold a greater portion of your portfolio in stocks than you had intended.

At this point, you may need to rebalance your portfolio to bring it back in line with your goals, time horizon, and risk tolerance. In the example above, you might decide to sell some stock or buy more bonds, for instance.

4. Buy and Hold Strategy for Investing

Market fluctuations are a natural part of the market cycle. However, investors may get nervous and be tempted to sell when prices drop. When they do, investors might lock in their losses and miss out on subsequent market rebounds.

Investors practicing buy-and-hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so may help curb the tendency to panic sell, and it might also help minimize fees associated with trading.

Buy and hold might also affect an investor’s taxes. Holding a long-term investment vs. short-term one can make a big difference in terms of how much an individual pays in taxes.

If you profit from an investment after owning it for at least a year, it’s a long-term capital gain. Less than that is short-term. Capital gains tax rates can change, but generally, longer-term investments are taxed at a lower rate than short-term ones.

💡 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.

5. Dollar-Cost Averaging

Dollar-cost averaging is a strategy in which individuals invest on a regular basis by making fixed investments on a regular schedule regardless of price.

For example, say an investor wants to invest $1,000 every quarter in an exchange-traded fund (ETF) that tracks the S&P 500. Each quarter, the price of that fund will likely vary — sometimes it will be up, sometimes it will be down. The amount of money the individual invests remains the same, so they are buying fewer shares when prices are high, and more shares when prices are low.

This strategy can help individuals avoid emotional investing. It’s also straightforward and can help investors stick to a plan, rather than trying to time the market.

The Takeaway

Investing is an ongoing process. Your life, goals, and financial needs will all change as your circumstances do. For example, may you get a raise at work, get married and have a child, or decide to retire early. Factors like these will change how much money you need to save and how you invest. Monitor your portfolio and make adjustments as needed.

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

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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.

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.

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.

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.
SOIN0124124

Feb

2024

Understanding 401(k) Contribution Limits: 2023-2024

By Pam O’Brien | Growing Wealth, invest, Investing | Comments Off

Participating in a 401(k) through your employer can be a good way to contribute to and save for your retirement. One important thing to know is that there are limits on how much you can contribute each year and the amount typically changes, as per guidelines from the IRS.

Read on to find out about the 401(k) contribution limit for 2023 and 2024.

Overview of 401(k) Contribution Limits

The IRS reviews and often adjusts annual 401(k) contribution limits. The amount you can contribute to your 401(k) is increasing in 2024.

Changes in Contribution Limits for 2024

In 2024, you can contribute up to $23,000 in your 401(k). If you’re age 50 or older, you can contribute an additional $7,500 to your 401(k) plan for a grand total of $30,500 in annual contributions for 2024.

Yearly Contribution Limits Explained

The IRS reviews the annual contribution limits for 401(k)s, typically in the fall of each year, and adjusts them when necessary to account for inflation. The IRS changed the yearly 401(k) contribution limits (also known as elective deferral limits) for 2023 and 2024.

2023 Contribution Limits

For 2023, you can contribute up to $22,500 to your 401(k). Those age 50 and up may contribute additional catch-up contributions of $7,500 — for a total contribution limit of $30,000.

2024 Contribution Limits

For 2024, the IRS is raising the 401(k) contribution limit once again. You may contribute up to $23,000 to your 401(k) in 2024. However, the catch-up contribution limit for older employees is not changing in 2024; instead it will remain at the 2023 level. That means those age 50 and up may contribute an additional $7,500 to their 401(k) for 2024, for a total of $30,500.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Employer Contributions and Catch-Up Provisions

One of the factors that makes a 401(k) a good vehicle for saving for retirement is that an employer may also contribute to the plan on your behalf.

And for older employees, the opportunity to make catch-up contributions to help save for retirement can be especially helpful.

Understanding Employer Match Limits

Your employer can make matching contributions to your 401(k) in addition to the funds you contribute. Matching funds may be based on the amount you choose to contribute.

For example, your employer might offer matching funds if you contribute 5% or more of your salary, as an incentive to get you to save. It’s a good idea to save at least the minimum amount to receive an employer’s match. If you don’t, you could be giving up free money.

There is an overall limit on how much you and your employer can contribute to your 401(k) plan each year. The combined limit for employer plus employee contributions in 2023 cannot exceed 100% of your income or is $66,000, whichever is lower. The 2024 combined limit is 100% of your income or $69,000, whichever is lower.

Catch-Up Contributions for Older Investors

If you are over the age of 50, your retirement contribution limit increases. The 401(k) catch-up contribution lets you fill in gaps in your retirement savings as you get closer to retirement. In 2023 and 2024, you can make up to $7,500 in catch-up contributions.

Roth 401(k) vs Traditional 401(k) Limits

In addition to traditional 401(k)s, there are other types of employer-sponsored retirement accounts, such as a Roth 401(k). The main difference between a traditional 401(k) and a Roth 401(k) is that contributions to a Roth 401(k) are made after-tax, while contributions to a traditional 401(k) are made with pre-tax dollars. Money grows inside a Roth 401(k) account tax-free and is not subject to income tax when you withdraw it.

Like a traditional 401(k), a Roth 401(k) has contribution limits.

Understanding Roth 401(k) Limits

Employee contribution limits for Roth 401(k)s are $22,500 for 2023, and $23,000 for 2024, the same as traditional 401(k)s. Roth 401(k) catch-up contribution limits for those 50 and up are $7,500 in 2022 and 2023 — also the same as catch-up contribution limits for traditional 401(k)s.

Comparing Traditional 401(k) Limits

Here’s a side-by-side comparison of traditional 401(k) contribution limits for 2023 and 2024.

Traditional 401(k)	2023	2024
Employee contribution limit	$22,500	$23,000
Catch-up contribution limit	$7,500	$7,500
Combined employee and employer contribution limit	$66,000	$69,000

Managing Multiple 401(k) Plans

You may have multiple 401(k) plans, including some with previous employers. In that case, the same yearly contribution limits still apply.

Contribution Limits with Multiple Employers

Even if you have 401(k) plans with multiple employers, you must abide by the same annual contribution limits across all your plans. So, for 2023, the maximum you can contribute to all your 401(k) plans is $22,500, and for 2024, the maximum amount you can contribute is $23,000. You can split these total amounts across the different plans, or contribute them to just one plan.

After-Tax 401(k) Contribution Rules

Some 401(k) plans allow for after-tax contributions. What this means is that as long as you haven’t reached the maximum combined limit of your plan — which is $66,000 in 2023 — you can make after-tax contributions up to the maximum combined limit.

For instance, if you contribute $22,500 to your 401(k) in 2023, and your employer contributes $5,000 through an employer match, you can contribute an additional $38,500 in after-tax dollars, if your plan allows it, to reach the $66,000 maximum.

Excess Contributions and Their Implications

Figuring out how much you want to contribute to your 401(k) can be tricky. And you’re not allowed to go over the contribution limits or you may face penalties.

Handling Over-Contribution

If you contribute too much to your 401(k), you could be charged a 10% fine. You might also owe income tax on the excess amount.

Fortunately, many 401(k) plans have automatic cut-offs in place to help you avoid excess contributions. However, if you change jobs or you have more than one 401(k) plan, you might accidentally contribute too much. If you realize you’ve done this, you have until April 15 to request that the excess contributions be returned to you, along with any earnings those contributions made while they were in your 401(k). You can report excess contributions when you file your taxes using form 1099-R.

Strategies to Avoid Excess Contributions

To avoid making excess 401(k) contributions:

• Check the maximum contribution limits each year.

• If you get a raise, reassess your contribution amount to make sure you’re not exceeding it.

• If you have more than one 401(k) plan, review your contributions across all of your plans to make sure you’re not exceeding the maximum contribution limits.

Maximizing Your 401(k) Contributions

When you have a 401(k), you’ll want to get the most out of it to help you save for retirement. Here’s how.

Ideal Contribution Strategies

To maximize your 401(k):

• Start contributing to the plan as soon as you can. The earlier you start saving, the more time your money has to grow.

• Contribute at least enough to get the employer match on your 401(k). If you don’t, you are essentially passing up free money.

• Keep track of all your 401(k) plans to make sure you don‘t exceed the annual contribution limits. And if you have a 401(k) from a previous employer, you might want to do a 401(k) rollover to potentially get more out of the plan.

Balancing 401(k) with Other Retirement Plans

Along with your 401(k), you can open other types of retirement accounts to help you save for your golden years. For instance, consider opening a tax-advantaged IRA online. You can save up to $7,000 in 2024 in a traditional or Roth IRA, plus an extra $1,000 each year if you are over age 50 — and that’s in addition to what you can save in your 401(k).

Having more than one type of retirement plan could potentially help you reach your financial goals faster. Not only can you put away more money for your retirement, an IRA typically gives you more investing options that a 401(k) does, making it more flexible. It can also assist you with diversifying your portfolio to help manage risk and potentially help grow your retirement savings.

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

FAQ

What is the maximum 401(k) contribution for 2023?

The maximum 401(k) contribution limit for 2023 is $22,500. Those aged 50 and up may contribute an additional $7,500 in 2023.

Are 401(k) contribution limits changing in 2024?

Yes, 401(k) contribution limits are changing in 2024. The 401(k) contribution limit in 2024 is $23,000. Individuals who are 50 and older can contribute an additional $7,500 to their 401(k) in 2024.

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

If you make less than $23,000 annually, you may be able to contribute 100% of your salary to a 401(k). However, your specific 401(k) plan may limit the amount you can contribute.

You should also note that there is an overall limit on how much you and your employer can contribute to your 401(k) plan each year. The combined limit for employer plus employee contribution in 2023 cannot exceed 100% of your income or is $66,000, whichever is lower. The 2024 combined limit is 100% of your income or $69,000, whichever is lower.

Is there a salary cap for 401(k) contributions?

Yes, there are income limit rules for 401(k) contributions. The amount of compensation eligible for 401(k) contributions in 2023 is $330,000. Anything above that amount of compensation is not eligible for contribution. What this means is that while you can contribute up to the maximum employee contribution, which is $22,500 in 2023, your employer can only match up to the income limit.

What happens if I exceed the 401(k) max?

If you contribute too much to your 401(k), you could be charged a 10% penalty. You might also owe income tax on the excess amount. If you realize you’ve exceeded the 401(k) maximum, you have until April 15 to request that the excess contributions be returned to you, along with any earnings the contributions made while they were in your 401(k). You can report excess contributions on form 1099-R when you file your taxes.

How much can I contribute to a 401(k) if I’m 50 years of age or older?

If you are 50 or older, you can contribute up to $30,000 in your 401(k) in 2023, and up to $30,500 in 2024. This includes an additional $7,500 each year in catch-up contributions.

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.

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

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

SoFi Invest®

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

Everything You Need to Know About Lifestyle Funds and Lifestyle Investing

What are Lifestyle Funds?

How Do Lifestyle Funds Work?

Two Stages of Lifestyle Funds

1. Growth Stage

2. Retirement Target Date

Different Types of Lifestyle Funds

Lifestyle Investment Risks

Advantages of Lifestyle Funds

Lifestyle Funds vs Target Date Funds

The Takeaway

FAQ

What is a lifestyle pension fund?

What is a lifestyle strategy?

What is a lifestyle profile?

2024 Tax Season: Capital Gains Tax Guide

What Is Capital Gains Tax?

Capital Gains Tax Rates Today

Short-Term Capital Gains Tax Rates (for Tax Year 2023)

Long-Term Capital Gains Tax Rate By Income for Tax Year 2023 (or Tax Season 2024)

Tips For Lowering Capital Gains Taxes

How US Capital Gains Taxes Compare

Compared to Other Taxes

Comparison to Capital Gains Taxes In Other Countries

Compared With Historical Capital Gains Tax Rates

Tax Loss Harvesting

The Takeaway

SIMPLE IRA Contribution Limits for Employers & Employees

SIMPLE IRA Basics

SIMPLE IRA Contribution Limits, 2023 and 2024

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Employer vs Employee Contribution Limits

SIMPLE IRA vs 401(k) Contribution Limits

SIMPLE IRA vs Traditional IRA Contribution Limits

Traditional IRAs

Roth IRAs

The Takeaway

5 Investment Strategies for Beginners

5 Popular Investment Strategies for Beginners

1. Asset Allocation

2. Diversification

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3. Rebalancing

4. Buy and Hold Strategy for Investing

5. Dollar-Cost Averaging

The Takeaway

Understanding 401(k) Contribution Limits: 2023-2024

Overview of 401(k) Contribution Limits

Changes in Contribution Limits for 2024

Yearly Contribution Limits Explained

2023 Contribution Limits

2024 Contribution Limits

Employer Contributions and Catch-Up Provisions

Understanding Employer Match Limits

Catch-Up Contributions for Older Investors

Roth 401(k) vs Traditional 401(k) Limits

Understanding Roth 401(k) Limits

Comparing Traditional 401(k) Limits

Managing Multiple 401(k) Plans

Contribution Limits with Multiple Employers

After-Tax 401(k) Contribution Rules

Excess Contributions and Their Implications

Handling Over-Contribution

Strategies to Avoid Excess Contributions

Maximizing Your 401(k) Contributions

Ideal Contribution Strategies

Balancing 401(k) with Other Retirement Plans

FAQ

What is the maximum 401(k) contribution for 2023?

Are 401(k) contribution limits changing in 2024?

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

Is there a salary cap for 401(k) contributions?

What happens if I exceed the 401(k) max?

How much can I contribute to a 401(k) if I’m 50 years of age or older?

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