Dec
16
2024
What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401k?

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

By | invest, Investing, Preparing for Retirement | Comments Off on What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401(k)?

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

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

What Is a Money Purchase Pension Plan?

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

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

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

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


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

What Are the Money Purchase Pension Plan Contribution Limits?

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

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

•   25% of the employee’s compensation, OR

•   $66,000

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

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

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

The Pros and Cons of Money Purchase Pension Plans

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

Pros of Money Purchase Plans

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

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

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

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

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

Disadvantages of Money Purchase Pension Plan

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

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

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

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



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

Money Purchase Pension Plan vs 401(k)

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

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

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

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

Recommended: IRA vs 401(k)–What’s the Difference?

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

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

MPPP Plan

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

The Takeaway

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

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

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


Easily manage your retirement savings with a SoFi IRA.

FAQ

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

What is a pension money purchase scheme?

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

Can I cash in my money purchase pension?

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

Is final salary pension for life?

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

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/ferrantraite

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.

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Dec
16
2024
What Is a Bridge Loan?

Bridge Loan: What It Is and How It Works

By | Home Ownership, mortgage, Terminology | No Comments

A short-term bridge loan allows homeowners to use the equity in their existing home to help pay for the home they’re ready to purchase.

But there are pros and cons to using this type of financing. A bridge loan can prove expensive.

Is a bridge loan easy to get? Not necessarily. You’ll need sufficient equity in your current home and stable finances.

Read on to learn how to bridge the gap between addresses with a bridge loan or alternatives.

Key Points

•   Bridge loans offer temporary financing for buying a new home before selling the current one.

•   Secured by the current home, these loans have higher interest rates and fees.

•   Approval requires sufficient equity and strong financials.

•   Alternatives include personal loans, HELOCs, and home equity loans, each with pros and cons.

•   Bridge loans can be risky if the current home doesn’t sell quickly, leading to multiple loan payments.

What Is a Bridge Loan?

A bridge loan, also known as a swing loan or gap financing, is a temporary loan that can help if you’re buying and selling a house at the same time.

Just like a mortgage, home equity loan, or home equity line of credit (HELOC), a bridge loan is secured by the borrower’s current home (meaning a lender could force the sale of the home if the borrower were to default).

Most bridge loans are set up to be repaid within a year.

How Does a Bridge Loan Work?

Typically lenders only issue bridge loans to borrowers who will be using the same financial institution to finance the mortgage on their new home.

Even if you prequalified for a new mortgage with that lender, you may not automatically get a bridge loan.

What are the criteria for a bridge loan? You can expect your financial institution to scrutinize several factors — including your credit history and debt-to-income ratio — to determine if you’re a good risk to carry that additional debt.

You’ll also have to have enough home equity (usually 20%, but some lenders might require at least 50%) in your current home to qualify for this type of interim financing.
Lenders typically issue bridge loans in one of these two ways:

•   One large loan. Borrowers get enough to pay off their current mortgage plus a down payment for the new home. When they sell their home, they can pay off the bridge loan.

•   Second mortgage. Borrowers obtain a second mortgage to make the down payment on the new home. They keep the first mortgage on their old home in place until they sell it and can pay off both loans.

It’s important to have an exit strategy. Buyers usually use the money from the sale of their current home to pay off the bridge loan. But if the old home doesn’t sell within the designated bridge loan term, they could end up having to make payments on multiple loans.

Bridge Loan Costs

A bridge loan may seem like a good option for people who need to buy and sell a house at the same time, but the convenience can be costly.

Because these are short-term loans, lenders tend to charge more upfront to make bridge lending worth their while. You can expect to pay:

•   1.5% to 3% of the loan amount in closing costs

•   An origination fee, which can be as much as 3% of the loan value

Interest rates for bridge loans are generally higher than conventional loan rates.

Repaying a Bridge Loan

Many bridge loans require interest-only monthly payments and a balloon payment at the end, when the full amount is due.

Others call for a lump-sum interest payment that is taken from the total loan amount at closing.

A fully amortized bridge loan requires monthly payments that include both principal and interest.

How Long Does It Take to Get Approved for a Bridge Loan?

Bridge loans from conventional lenders can be approved within a few days, and loans can often close within three weeks.

A bridge loan for investment property from a hard money lender can be approved and funded within a few days.

Examples of When to Use a Bridge Loan

Most homebuyers probably would prefer to quickly sell the home they’re in, pay off their current mortgage, and bank the down payment for their next purchase long before they reach their new home’s closing date. They could then go about getting a mortgage on their new home using the down payment they have stashed away.

Unfortunately, the buying and selling process doesn’t always go as planned, and it sometimes becomes necessary to obtain interim funding.

Common scenarios when homebuyers might consider a bridge loan include the following.

You’re Moving for a New Job, or Downsizing

You can’t always wait for your home to sell before you relocate for work. If the move has to go quickly, you might end up buying a new home before you tie up all the loose ends on the old home.

Or maybe you’ve fallen in love with a smaller home that just hit the market, decided that downsizing your home is the way to go, and you must act quickly.

Your Closing Dates Don’t Line Up as Hoped

Even if you’ve accepted and offer on your current home, the new-home closing might be weeks or even months away. To avoid losing the contract on the new home, you might decide to get interim funding.

You Need Money for a Down Payment

If you need the money you’ll get from selling your current home to make a down payment on your next home, a bridge loan may make that possible.

Bridge Loan Benefits and Disadvantages

As with any financial transaction, there are advantages and disadvantages to taking out a bridge loan. Here are some pros and cons borrowers might want to consider.

Benefits

The main benefit of a bridge loan is the ability to buy a new home without having to wait until you sell your current home. This added flexibility could be a game-changer if you’re in a time crunch.

Another bonus for buyers in a hurry: The application and closing process for a bridge loan is usually faster than for some other types of loans.

Disadvantages

Bridge loans aren’t always easy to get. The standards for qualifying tend to be high because the lender is taking on more risk.

Borrowers can expect to pay a higher interest rate, as well as several fees.

Borrowers who don’t have enough equity in their current home may not be eligible for a bridge loan.

If you buy a new home and then are unable to sell your old home, you could end up having to make payments on more than one loan.

Worst-case scenario, if you can’t make the payments, your lender might be able to foreclose on the home you used to secure the bridge loan.

Alternatives to Bridge Loans

If the downsides of taking out a bridge loan make you uneasy, there are options that might suit your needs.

Home Equity Line of Credit (HELOC)

Rather than the lump sum of a home equity loan, a home equity line of credit lets you borrow, as needed, up to an approved limit, from the equity you have in your house.

The monthly payments are based on how much you actually withdraw. The interest rate is usually variable.

You can expect to pay a lower rate on a HELOC than a bridge loan, but there still will be closing costs. And there may be a prepayment fee, which could cut into your profits if your home sells quickly. (Because your old home will serve as collateral, you’ll be expected to pay off your HELOC when you sell that home.)

Many lenders won’t open a HELOC for a home that is on the market, so it may require advance planning to use this strategy.

Home Equity Loan

A home equity loan is another way to tap your equity to cover the down payment on your future home.

Because home equity loans are typically long term (up to 20 years), the interest rates available, usually fixed, may be lower than they are for a bridge loan. And you’ll have a little more breathing room if it takes a while to sell the old home.

You can expect to pay some closing costs on a home equity loan, though, and there could be a prepayment penalty.

Keep in mind, too, that you’ll be using your home as collateral to get a home equity loan. And until you sell your original home, unless it’s owned free and clear, you’ll be carrying more than one loan.

401(k) Loan or Withdrawal

If you’re a first-time homebuyer and your employer plan allows it, you can use your 401(k) to help purchase a house. But most financial experts advise against withdrawing or borrowing money from your 401(k).

Besides missing out on the potential investment growth, there can be other drawbacks to tapping those retirement funds.

Personal Loan

If you have a decent credit history and a solid income, typical personal loan requirements, you may be able to find a personal loan with a competitive fixed interest rate and other terms that are a good fit for your needs.

Other benefits:

•   You can sometimes find a personal loan without the origination fees and other costs of a bridge loan.

•   A personal loan might be suitable rather than a home equity loan or HELOC if you don’t have much equity built up in your home.

•   You may be able to avoid a prepayment penalty, so if your home sells quickly, you can pay off the loan without losing any of your profit.

•   Personal loans are usually unsecured, so you wouldn’t have to use your home as collateral.

The Takeaway

A bridge loan can help homebuyers when they haven’t yet sold their current home and wish to purchase a new one. But a bridge loan can be expensive, and not all that easy to get. Only buyers with sufficient equity and strong financials are candidates.

If you find yourself looking to bridge the gap between homes, you might also consider a personal loan or a HELOC, a home equity loan, or a personal loan among other alternatives. With a little due diligence and some paperwork, you’ll soon be financially prepared to purchase your next home.

FAQ

What are the cons of a bridge loan?

It can be harder to qualify for a bridge loan than for a standard home loan, and both costs and interest rate may be higher as well. And taking out a bridge loan means you may have to make payments on two loans if your first property doesn’t sell.

Why would someone get a bridge loan?

A homebuyer who has found their perfect next property but who is in a short-term cash crunch might opt for a bridge loan if they feel very confident that they can sell their current home quickly. This might be especially true in a hot market, where there is lots of competition for homes and the buyer wants to move quickly.

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Dec
16
2024
12 Ways to Save Money on Water

12 Ways to Save Money on Water

By | Budgeting & Goals, Family Finances, money | Comments Off on 12 Ways to Save Money on Water

Reducing water usage at home is a great way to lower your monthly expenses and be a better steward to the environment at the same time. But how exactly can you save H2O as well as money spent on water in your daily life?

Key Points

•   The average water bill in America is about $40 a month, but this can vary significantly by location and household usage.

•   Reducing water usage can be good for the environment and a person’s finances.

•   To save water, wait to wash clothes until there is enough for a full load and run the dishwasher only when it is completely full.

•   Consider installing ENERGY STAR-certified appliances for better water efficiency.

•   Shorten shower times to conserve water.

What Is the Average Monthly Water Bill Per Household?

The average water bill in the U.S. was approximately $50 in 2023. While that may not seem to be too big a strain on the typical checking account, keep in mind that water bills can vary significantly depending on where you live, how much water your family uses, and the time of year.

On average, families use more than 50% of their water in the bathroom alone. Those living in an apartment without an outdoor space may spend less on water; outdoor water usage (for gardens, lawns, and pools) accounts for about 30% of the average American’s water bill — up to 60% in the summer.

Quick Money Tip:Typically, checking accounts don’t earn interest. However, some accounts will pay you a bit and help your money grow. An online bank account is more likely than brick-and-mortar to offer you the best rates.

Does Using Less Water Save Money?

You can save money by using less water. That’s because your monthly water bill reflects water usage: The more water you use, the more money you’ll spend. Beyond financial savings, conserving water is great for the environment and can help to provide reliable water for families today and in the future.

12 Ways to Reduce Your Water Bill and Save Money

If you’re looking to economize on your water costs, here is a list of 12 helpful ways to save on your water bill every month:

1. Only Use the Washer for Full Loads

Washing machines are an essential appliance for keeping our clothes and linens clean, but they require a lot of water to operate. Waiting until you have enough dirty clothes for a full load — or using the machine’s “small load” option in a pinch — can go a long way in reducing water usage.

Bonus Tip: Because washing machines and laundry detergents have improved significantly over the years, you rarely need to use the hot water option. Using cold water only can keep gas or electric bills down as well, providing another way to save money.

2. Use a Dishwasher — But Only If It’s Full

Dishwashers are more efficient at washing dishes than our own hands. The trick? Only run it if it’s fully loaded. That’s how to save money on water usage and your water bill.

Bonus Tip: Save even more water by simply scraping food scraps off your plate before loading it in the dishwasher. No need to rinse it, which wastes water!

Recommended: How Much of Your Paycheck Should You Save?

3. Upgrade to Water-Efficient Appliances

Today’s washing machines and dishwashers are far more efficient than appliances from even 15 years ago. In fact, an ENERGY STAR-certified dishwasher saves nearly 3,800 gallons of water in its lifetime, and an ENERGY STAR washing machine uses 33% less water per cycle (and requires 25% less electricity to run, too).

While replacing home appliances has an upfront cost, you’ll save money on water and energy bills in the long run. Some energy-efficient appliances may even come with rebates.

Bonus Tip: Look for front-load washers; these can use up to half as much water per cycle as top-load units.

4. Upgrade Plumbing Fixtures, Too

Major appliances aren’t all you can upgrade. Plumbing fixtures like toilets and showerheads offer another opportunity to cut back on water usage. If it’s bathroom remodeling time (whether you’re finding a contractor or in DIY mode), search for low-flow (and dual-flush) toilets that use less water per flush. Low-flow showerheads better conserve water (saving up to 2,700 gallons per year) but actually offer superior performance. In both cases, look for the WaterSense label, created by the EPA or Environmental Protection Agency.

5. Taking Shorter Showers

This tip is pretty simple but bears repeating: The less time you spend in the shower, the less water you’ll use. And as long as you keep your showers short, you’ll save water — and money — by showering instead of taking a bath. How’s that for a creative way to save money?

Bonus Tip: Want to reduce your usage and save more money on water? Get wet when you first step into the shower, then turn off the water while you lather and scrub; then rinse.

6. Fix Leaks

Leaky faucets and toilets that won’t stop running are noticeable, but your home may have other, less obvious plumbing leaks to watch out for, like your hot water tank or supply line. Because many drain pipes exist behind your walls, you may only catch a leak by hearing it, so keep your ears sharp throughout the year.

The cost to repair a plumbing leak can be high, but doing so will lower your water bill in the long run — and leaks left alone can develop into larger, more expensive problems down the road.

7.Turn Off the Water When Brushing Your Teeth

Letting the water run the entire time you brush your teeth — especially if you brush them for the ADA’s recommended two minutes — has become the poster child for wasting water. Turning off the water while you brush can be such an easy way to cut back on water usage and avoid the consequences of not saving money.

Bonus Tip: This also applies while shaving; only run the water when you need it.

8. Compost Instead of Using the Garbage Disposal

Have food scraps? Don’t throw them all in the garbage disposal, which uses water; try composting instead. You can compost foods like fruits, vegetables, eggshells, meat, and coffee (filters included!); doing so can be great for your garden.

Bonus Tip: Another way to reduce water usage in the kitchen is to thaw frozen meat overnight in the refrigerator, rather than running it under warm water.

9. Keep a Pitcher of Water in the Fridge

If you let the tap run until the water gets cold enough to fill your drinking glass, you’re wasting water. Consider putting a pitcher of water in the fridge instead so that it’s cold when you want it. As a bonus, you can invest in a pitcher with a water filter for cleaner drinking water.

10. Care for Your Lawn Strategically

Before watering your lawn, check the weather forecast. If rain is predicted in the next few days, don’t bother watering the lawn at all. Even if it’s hot out and hasn’t rained lately, your grass may not need water. Try stepping on it; if it springs back up, you don’t need to water it yet.

If you must water your lawn, check your sprinkler system to ensure there are no leaks, and don’t overwater. That’s another way to avoid common budgeting mistakes when it comes to water usage.

Bonus Tip: Mowing your lawn less regularly is actually a good thing. Longer grass allows for deeper root growth — and thus a drought-resistant lawn that doesn’t need to be watered as often.

Recommended: APY Interest Calculator

11. Use a Commercial Car Wash

Car aficionados may insist upon washing their car every other week (or every week, if they’re dedicated). While washing and waxing your car is good for protecting its paint and maintaining its value, you can get away with fewer car washes. To keep water usage down, try once a month at most.

You can also cut your own water costs entirely by paying for a commercial wash. Commercial car washes use 60% less water and are designed to prevent water pollution from runoff. Many locations also recycle their wash water multiple times.

Recommended: How Much Auto Insurance Do You Need?

12. Cover Your Pool

Here’s the last way to stay motivated to save money on water costs: Have a pool outside? Make sure you cover it when not in use. Not only does this keep unwanted debris out of the swimming area, but it also helps reduce the amount of water that evaporates each day.

The Takeaway

Saving money on water isn’t just great for your wallet; it’s also great for the environment. From composting to upgrading appliances to cutting back on car washes, you can dramatically reduce your family’s water consumption — and see great savings on your water bill as a result.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

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

How much money can you save on your water bill by using less water?

The average American spends about $50 a month on their water bill. If your family reduces water usage by 25%, your bill could drop to roughly $37.50, putting an extra $150 into your savings per year. How much money you can save on your water bill depends on how much water you’re able to conserve and what the cost of water is in your city.

Why is saving water important?

Reducing water usage does more than lower your water bill. Saving water means that we use less water from rivers, bays, and estuaries — and this is a big deal for our environment. When we use less water, we also reduce water and wastewater treatment costs. Plus, it takes a lot of energy to treat, pump, and heat our water, all of which contribute to air pollution. In areas threatened by drought, reducing our personal water usage ensures our neighbors, friends, and family also have access to the water they need.

How much water is used per household a year?

The EPA estimates that the average American uses 82 gallons of water per day. For a family of four, that’s 328 gallons a day or nearly 120,000 gallons a year. Families can save a lot of water by taking simple measures: For example, the EPA estimates families save 13,000 gallons of water per year by replacing inefficient toilets — and 9,400 gallons of water annually by repairing leaks.

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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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

This content is provided for informational and educational purposes only and should not be construed as financial 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.

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26 Tax Deductions for College Students and Other Young Adults_780x440

21 Tax Deductions for College Students and Other Young Adults

By | Budgeting & Goals, Financial Independence, money | Comments Off on 21 Tax Deductions for College Students and Other Young Adults

If you’re a student or a recent grad, you are likely just starting your financial life and looking for ways to economize. One way to do that is to learn about the tax deductions and credits that can often help you lower your tax bill whether you’re still in school or just got your degree.

Here, you’ll learn about more than 20 possible ways you can save on your tax bill. But keep in mind: Taxes can get complicated. If you have any outstanding questions or concerns about your specific situation, consider consulting with a tax professional.

Smart Tax Deductions for Young Adults

1. American Opportunity Tax Credit

If someone is still in school, they might qualify for The American Opportunity Tax Credit (AOTC). The AOTC allows people to take a student tax credit of up to $2,500 for tuition, fees, and course materials they paid for during the taxable year for an undergraduate education.

In addition, 40% of the credit, or up to $1,000, is refundable, which means that someone can receive it even if they happen not to owe any taxes for the year. To qualify, the taxpayer or their dependent needs to be pursuing a degree and enrolled half-time at the very least. A taxpayer can only take advantage of this for four years, no matter how long it takes the student to finish the degree.

💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

2. Lifetime Learning Credit

Unlike the AOTC, the Lifetime Learning Credit (LLC) is available to vocational, graduate, and non-degree or vocational students, too. The maximum benefit? Up to $2,000 is allowed per tax return. To learn more about the differences between the LLC and AOTC and which one might be right for you, see this IRS chart.

3. Student Loan Interest

Students and parents of students paying for a child’s education through student loans can use the student loan interest tax benefit for education. With this deduction, they can deduct up to $2,500 in interest they paid for the year.

4. Moving Expenses

Perhaps instead of going to college, a young adult enrolled in the military instead. If they are a Member of Active Forces on active duty and had to move due to a military order, then they could take a deduction for themselves, their spouse, and their dependents. On Form 3903, active members of the military can claim expenses related to a military move like transportation and storage of household goods and personal effects and travel (including lodging) from the old home to the new home. They cannot include the cost of meals.

The IRS has an interactive tool to help taxpayers determine whether or not their moving expenses may qualify for a moving deduction.

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5. Self-Employment Tax

If a young adult chose to go into business for themselves after graduating, then they can deduct one-half of their self-employment tax, which is 12.4% for Social Security and 2.9% for Medicare. They can do this when figuring their adjusted gross income on Form 1040 or Form 1040-SR.

6. Home Office

Someone who works at home, whether they’re working at their job remotely or after hours, or they are self-employed, can take a deduction for their home office. Someone can deduct expenses that keep their home office running such as utilities, insurance, and general repairs, but they cannot deduct unrelated expenses like a gardening bill or the paint they used for a room that is not their office. There is a simplified method for this deduction as well as a regular one. With the simple one, taxpayers can deduct $5 per square foot of the home used for business, with a 300-square-foot maximum (see both methods on the IRS’ website ).

Recommended: Do You Qualify for Home Office Tax Deductions?

7. Standard Mileage Rate

If a young adult is using their car for business purposes, then they may be able to deduct their standard mileage rate, which is 67 cents per mile for tax year 2024. They need to keep in mind, however, that if they use the standard mileage rate, they cannot use the car expenses deduction as well. They cannot deduct lease payments, gasoline, car depreciation, vehicle registration fees, oil, or insurance.

8. Car Expenses

When a young adult does not use the standard mileage rate, then they can deduct car expenses that involve business purposes from their taxes. If they use the vehicle for personal and business expenses, then they need to split the deductions.

9. Meals While Traveling

When traveling for business, young adults who are entrepreneurs or self-employed can take a 50% deduction for their unreimbursed business meals. They can either take a standard meal allowance through the IRS or keep records of their actual costs for their meals and take those deductions.

10. Other Travel Expenses

The IRS also allows taxpayers to deduct some travel expenses. If young adults own their own business or are otherwise traveling for professional purposes, they could deduct things like travel by airplane, car, or train, fares for taxis to and from the airport to the hotel, the shipping of baggage, dry cleaning, and laundry, and business calls made on the trip.

11. Business Interest

If a young entrepreneur took out a business loan vs. a personal loan to get their startup running, then they can deduct the interest they paid. If they utilized the loan proceeds for more than one type of expense, then they need to allocate the interest based on how they used the loan’s proceeds.

12. 401(k) Contributions Deduction for Employed People

The government doesn’t tax money that an employee diverts directly from their paychecks into a traditional 401(k). For tax year 2024, the 401(k) contribution limit for individuals is $23,000; for tax year 2025, the limit is $23,500.

13. IRA Deduction for Self-Employed People

If someone does not have a job that provides a 401(k), they may be eligible to deduct their contributions to a traditional Individual Retirement Account (IRA). This can be a common tax deduction when you are self-employed.

You can learn more about the various kinds of IRAs and possible deductions from the IRS website.

14. Employee Pay

A young entrepreneur who has hired someone as an independent contractor may be able to deduct the income they pay that person on their tax return. You may want to check in with a tax professional if you hire contract workers or salaried individuals to make sure you stay on top of your taxes.

15. Educator Expenses

A young graduate who is working as a teacher is able to deduct up to $300 of the expenses they put towards things they used in the classroom, such as books, courses, and computer equipment. If they teach a course in physical education or health, then athletic supplies would count towards the deduction as well.

16. Health Savings Account

If a taxpayer chose to use a tax-deductible Health Savings Account (HSA) for their healthcare expenses in 2024, then they can contribute up to $4,150 for self-only coverage; in 2025, they can contribute up to $4,300. Note: An HSA is only available to people who have a high-deductible health insurance plan.

Recommended: HSA vs. FSA: What Are the Differences?

17. Home Mortgage Interest

If a young adult is fortunate enough to own their own home, they may qualify for the home mortgage interest deduction, which allows them to deduct home mortgage interest on the first $750,000 of their debt.

18. State and Local Tax Deduction

Under federal rules, taxpayers who itemize may be able to deduct up to $10,000 of certain state and local taxes from their taxable income.

19. Charitable Contributions

Young adults who itemize may be able to deduct charitable donations on their return. Just remember that federal law limits cash contributions to just 60% of their AGI for the year. It’s always best to keep receipts and records of charitable contributions in order to take the deduction.

20. Medical Expenses

Healthcare is very expensive, but the IRS allows taxpayers to deduct the amount of total medical expenses that exceed 7.5% of their adjusted gross income (AGI). Medical expenses include payments for diagnosing, preventing, and mitigating disease.

21. Residential Energy Credit

If a young adult is lucky enough to own their own home and invests in qualifying clean energy (think heat pumps, solar panels, geothermal energy), they may be able to claim up to 30% of the costs as a tax credit.

The Takeaway

Making smart use of tax deductions can help maximize a tax refund or minimize tax liability. Even if you are a student or a young person, you may be able to claim deductions and credits that make a difference on your tax return. You might even qualify for a tax refund that you could use to pay down debt or sock away in the bank to earn interest.

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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.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Checking & Savings Fee Sheet for details at sofi.com/legal/banking-fees/.
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.

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.

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2024
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What Happens to My Stock in a Merger?

By | Growing Wealth, invest, Investing | Comments Off on What Happens to My Stock in a Merger?

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

Key Points

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

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

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

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

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

What Are Mergers and Acquisitions (M&A)?

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

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

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

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

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

What Is a Merger of Equals?

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

What Is Private Equity?

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

How Do Stocks Move During Mergers?

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

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

Why Do M&A Deals Fall Through?

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

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

Different Stock Reactions to M&A

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

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

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

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

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

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

Merger vs Acquisition Impacts on Stocks

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

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

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

M&A Stock Impact Example

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

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

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

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

How Is Employee Stock Impacted By a Merger?

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

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

Do Mergers Create Value?

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

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

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

Buying a Stock Before vs After a Merger

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

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

Calculating Stock Price After a Merger

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

What Is Merger Arbitrage?

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

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

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

What Is a Cash-Out Merger?

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

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

Pros and Cons of Mergers

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

Pros of Mergers

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

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

Cons of Mergers

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

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

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

The Takeaway

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

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

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

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

FAQ

How do stocks work with mergers?

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

How do you calculate a stock price after a merger?

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

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

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

SoFi Invest®

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

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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