Financial Topics Archives | Page 71 of 802

Nov

2024

5 Bullish Indicators for a Stock

By Brian Nibley | Growing Wealth, invest, Investing | Comments Off

When it comes to figuring out when to buy a stock, there are two main schools of thought: fundamental analysis and technical analysis. Fundamental analysis involves all the material aspects of a company: its sales, revenue, profits, and so on — the day-to-day details of operations. Technical analysis, on the other hand, involves only looking at charts. A stock chart is a visual representation of the price movement of a particular security over time.

Using different mathematical technical indicators, it’s thought that traders can sometimes anticipate future price movements based on previous patterns. And fundamentals need not be at odds with technical analysis — the most successful investors often use both methods.

Below, we’ll look at five common bullish indicators used in technical analysis and discuss how they can be used to determine a reasonable time to buy a stock or ETF.

Key Points

• Understanding both fundamental and technical analysis is essential for making informed stock purchases, with each offering unique insights into market behavior.

• The Relative Strength Index (RSI) serves as a momentum indicator to assess whether a stock is overvalued or undervalued, guiding potential buying opportunities.

• The cup-and-handle pattern is a recognized bullish signal, characterized by a specific price movement that often precedes upward trends in stock prices.

• A golden cross occurs when a short-term moving average crosses above a long-term moving average, indicating potential bullish momentum and future price increases.

• Combining multiple technical indicators enhances accuracy in predicting stock movements, as relying on a single indicator can lead to misleading conclusions.

Technical Indicators of a Bull Trend

Before getting into the specifics of technical analysis, it’s important to understand the difference between bullish indicators and bullish patterns.

Indicators represent information generated by a computer based on a dataset. That dataset comes from the price action of a security over a set time period (one hour, one day, one month, six months, one year, etc.).

Patterns, on the other hand, are identified by human eyes when charts take on a certain shape (head and shoulders, cup and handle, etc.). Some traders even program their own computer scripts to try to identify patterns automatically, leading to a kind of hybrid of patterns and indicators.

All of these methods are broadly referred to as technical analysis — the process of using charts to try to predict which way a security will move next. A pattern or indicator that tends to appear when prices are getting ready to move higher is referred to as a bullish one.

Here are five examples of bullish indicators and bullish patterns.

RSI Weakness

The Relative Strength Index (RSI) is a technical indicator that gives investors an idea of how overvalued or undervalued a security might be. This momentum indicator gauges the significance of recent price changes. The higher the RSI, the more likely the stock is overvalued, and the lower the RSI, the more likely the stock is undervalued.

The RSI is represented by a simple line graph that goes up and down between two extremes (also known as an oscillator). When the line dips below a certain level, it can indicate potential undervaluation. Meanwhile, when it rises above a certain level, it can indicate — you guessed it — overvaluation.

RSI values range from 0 to 100 but rarely fall below 20 or go higher than 80. Between 30 and 60 is a shaded area sometimes referred to as the “paint” area. An RSI within this range can still provide some insight, but it is not as reliable an indicator as an RSI that has extended to more extreme levels.

An RSI of 50 is considered neutral, whereas an RSI of 30 and lower is considered undervalued (bullish). Meanwhile, an RSI of 70 and above is considered overvalued (bearish). In other words, the lower the RSI, the more of a bullish indicator it could be.

Cup-and-Handle Pattern

The cup-and-handle pattern is among the most bullish patterns known to stock traders. There are two main parts, as the name implies: a cup and a handle.

The cup is formed when a stock moves downward, then sideways, and then upward. Once the cup has been formed, the handle can be formed by a period of slow decline. This kind of price action leads to a chart with one part resembling the bottom half of a circle (cup) followed by a slanted line at the top edge (handle).

The pattern has a long list of nuances. Many lengthy articles have been dedicated to the cup-and-handle pattern alone. Here are quick notes about identifying the pattern:

• Ideally, the cup should be about 30% deep (having declined about 30% from its start to its lowest point).

• The handle should form over a period of at least five days to several weeks.

• Trading volume should surge when the handle finishes forming, at which point traders will often seek to enter into a position.

• Conversely, an inverted cup and handle can be a sell signal. This pattern has the same shape, only it appears upside down, with the handle slanting up and the top half of a circle forming the cup.

Moving Average Golden Cross

Moving averages (MA) are another common technical indicator. A moving average is the mean of a stock’s daily closing price for a certain number of trading days. Moving averages smooth out the trend of a stock’s price and highlight any moves above or below the trend.

A moving average is denoted by a line that overlays on a price chart. While these averages don’t contain a whole lot of information in and of themselves, sometimes key averages interacting with one another can serve as major buy or sell signals.

The 50-day MA and the 200-day MA are of particular importance when they cross paths. Most of the time, the 200-day MA will be higher than the 50-day MA. But when the 50-day crosses above the 200-day, the move can be seen as a bullish indicator signifying a trend toward upward price movement.

This indicator is known as the “golden cross,” and it is regarded as relatively rare and reliable. Prices often, but not always, move up after a golden cross happens.

Golden crosses can occur with moving averages of time frames shorter than 50 or 200 days as well, but longer time frames carry more weight.

Bollinger Bands Width

Bollinger Bands combine a simple moving average with an additional metric — a measure of price extending one standard deviation above or below the average.

When Bollinger Bands get very close together, it often indicates that a trend change lies on the immediate horizon. That means the price might be likely to break out either higher or lower in the near future in most cases.

While this indicator is a little vaguer than the others, combining it with a few other bits of information can sometimes make it a bullish indicator.

For example, an investor might choose to look at Bollinger Bands alongside one of the other indicators mentioned here. If the RSI for a particular stock were at 40 at the same time that Bollinger Bands were close together, that might give an investor further assurance that an upward move could be on the horizon.

Piercing Pattern

The piercing pattern is simpler than most others. It marks the possibility of a short-term reversal from downward price action to upward price action based on only two days of trading.

The pattern occurs when the first day opens near its high point, closes near the low, and has an average or larger-than-average price range. Then the second day begins trading with a gap down, opening near the low and closing near the high. The close ought to form a candlestick covering at least half of the length of the first day’s red candlestick.

A piercing pattern rarely appears in perfect form. As with other patterns, the closer to perfection the setup looks, the more likely it is to be accurate. When bullish patterns like this one coincide with other bullish indicators, like a low reading on the RSI, the potential for price gains becomes strengthened.

Other Technical Analysis Factors to Consider

It’s important to remember that technical indicators should be used together when possible. Looking at only one indicator may not always give as accurate a picture of which direction price action will head next.

Another concern is time frame. These indicators and patterns need to be looked at over a sufficient amount of time to prove effective — the longer the better, in general. Looking at price movements on a daily chart might lead to one impression, but zooming out and looking at six months or a year might result in a different (and often more accurate) assessment for the simple reason that there is more data included.

Finally, when thinking about bullish patterns and indicators, realize that most investors have access to the same public knowledge. When a bullish development occurs, millions of stock traders use technical analysis to try to identify the pattern at more or less the same time. This can lead the charts to become self-fulfilling, as everyone can buy at the same bullish point or sell at the same bearish point, regardless of anything else happening.

The Takeaway

Technical analysis, which involves only looking at stock charts, is one of the two main schools of thought when it comes to figuring out when to buy a stock. Investors using this form of analysis may look at both bullish indicators and bullish patterns to determine when it appears that prices are preparing to move higher. There are a number of these patterns and indicators investors might look at — from RSI weakness to piercing pattern — though it’s generally best to use technical indicators together and also take time frame into consideration.

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Nov

2024

How to Invest and Profit During Inflation

How to Invest During Inflation

By Brian O'Connell | Growing Wealth, invest, Investing | Comments Off

Inflation occurs when there is a widespread rise in the prices of goods and services. The inflation rate, or the rate at which prices increase, rose, in recent years, at its fastest pace in 40 years before falling during 2024. That has an impact on both consumers and investors. High inflation makes common goods like groceries, gasoline, and rent more expensive for consumers, meaning paychecks might not go as far if wages don’t rise along with prices.

For investors, high inflation may also affect the financial markets. It’s possible that rising inflation could impact the markets, as consumers have less money to spend, and the Federal Reserve may step in to check rising inflation by making loans and credit more expensive with higher interest rates. What’s an investor do when inflation is on the upswing? Often, it means adjusting investment portfolios to protect assets against rising prices and an uncertain economy.

Key Points

• Inflation affects purchasing power, which may affect financial markets, impacting consumers and investors.

• High inflation can lead to increased interest rates, affecting stock and bond market performance.

• During bouts of inflation, investors may want to consider stocks of companies that can raise prices, consumer goods stocks, commodities, TIPS, and I Bonds during inflation.

• Inflation can reduce stock market growth and bond returns, making it crucial to adjust portfolios.

• Long-term investment plans should not be drastically changed due to temporary inflation spikes.

Inflation Basics, Explained

Inflation is primarily defined as a continuing rise in prices. Some inflation is okay and natural — historically, economic booms have come with an annual inflation rate of about 1% to 2%, a range that reflects solid consumer sentiment amidst a growing economy. An inflation rate of 5% or more can be a different story, with higher rates associated with an overheated economy.

Inflation rates often correlate to economic growth, which is sometimes good for consumers. When economic growth occurs, consumers and businesses have more money and tend to spend it. When cash flows through the economy, demand for goods and services grows, leading food and services producers to raise prices. That triggers a rise in inflation, with the inflation rate growing even more as demand for goods and services outpaces supply.

Conversely, prices fall when demand slides and supply is abundant; the inflation rate tumbles as economic growth wanes.

The main barometer of inflation in the United States is the Consumer Price Index (CPI). The CPI encompasses the retail price of goods and services in common sectors such as housing, healthcare, transportation, food and beverage, and education, among other economic sectors. The Federal Reserve uses a similar index, the Personal Consumption Expenditures Price Index (PCE), in its inflation-related measurements. Economists and investors track inflation on both a monthly and an annual basis.

Investing & Inflation: How Are They Related?

Inflation may affect the stock market, and investors may have less money to put into the markets when prices rise and their budgets become tighter. Overall, it means there may be less liquidity in the markets. The relationship between investing and inflation may further be affected as interest rates are increased to combat rising prices, potentially affecting business profitability.

Inflation’s Impact on Stock and Bond Investments

Investing during inflation can be tricky. It’s important to know that inflation impacts both stock and bond markets, but in different ways.

Inflation and the Stock Market

Inflation has an indirect impact on stocks, partially reflecting consumer purchasing power. As prices rise, retail investors may have less money to put into the stock market, reducing market growth.

Perhaps more importantly, high inflation may cause the Federal Reserve to raise interest rates to cool down the economy. Higher interest rates also make stock market investments less attractive to investors, as they can get higher returns in lower-risk assets like bonds.

Recommended: How Do Interest Rates Impact Stocks?

Also, when inflation rises, that puts pressure on investors’ stock market returns to keep up with the inflation rate. For instance, consider a stock portfolio that earns 5% before inflation. If inflation rises at a 6.0% rate, the portfolio may actually lose 1.0% on an inflation-adjusted basis – hypothetically speaking, of course.

However, some stocks and other assets can perform well in periods of rising prices, which can be a hedge against inflation. When inflation hits the consumer economy, companies often boost the prices of their goods and services to keep profits rolling, as their cost of doing business rises at the same time. Consequently, rising prices contribute to higher revenues, which helps boost a company’s stock price. Investors, after all, want to be in business with companies with robust revenues.

Overall, rising inflation may raise the investment risk of an economic slowdown or recession. That scenario doesn’t bode well for strong stock market performance, as uncertainty about the overall economy tends to curb market growth, thus reducing company earnings which leads to sliding equity prices.

Inflation and the Bond Market

Inflation may be a drag on bond market performance, as well. Most bonds like U.S. Treasury, corporate, or municipal bonds offer a fixed rate of return, paid in the form of interest or coupon payments. As fixed-income securities offer stable, but fixed, investment returns, rising inflation can eat at those returns, further reducing the purchasing power of bond market investors.

Additionally, the Federal Reserve’s response to inflation — higher interest rates — can lower the price of bonds because there is an inverse relationship between bond yields and bond prices. So, bond investors and bond funds may experience losses because of high interest rates.

Recommended: How Does the Bond Market Work?

What to Consider Investing in During Inflation

Investors can take several steps to protect their portfolios during periods of high inflation. Choosing what to invest in during inflation is like selecting investments at any other time — you’ll need to evaluate the asset itself and how it fits into your overall portfolio strategy both now and in the future.

1. Retail Stocks

Investors might consider stocks where the underlying company can boost prices in times of rising inflation. Retail stocks, like big box stores or discount retailers with a global brand and a massive customer base, can be potential investments during high inflation periods. In that scenario, the retailer could raise prices and not only cover the cost of rising inflation but also continue to earn profits in a high inflation period.

2. Consumer Goods Stocks

Think of a consumer goods manufacturer that already has a healthy portion of the toothpaste or shampoo market and doesn’t need excess capital as it’s already well-invested in its own business. Companies with low capital needs tend to do better in inflationary periods, as they don’t have to invest more cash into the business to keep up with competitors — they already have a solid market position and the means to produce and market their products.

3. Commodities

Investing in precious metals, oil and gas, gold, and other commodities can also be good inflation hedges. The price growth of many commodities contributes to high inflation. So investors may see returns by investing in commodities during high inflationary periods. Take the price of oil, natural gas, and gasoline. Businesses and consumers rely highly on oil and gas and will likely keep filling up the tank and heating their homes, even if they have to pay higher prices. That makes oil — and other commodities — a good portfolio component when inflation is on the move.

Recommended: Commodities Trading Guide for Beginners

4. Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) can be a good hedge against inflation. By design, TIPS are like most bonds that pay investors a fixed rate twice annually. They’re also protected against inflation as the principal amount of the securities is adjusted for inflation.

5. I Bonds

During periods of high inflation, investors may consider investing in Series I Savings Bonds, commonly known as I Bonds. I Bonds are indexed to inflation like TIPS, but the interest rate paid to investors is adjustable. With an I bond, investors earn both a fixed interest rate and a rate that changes with inflation. The U.S. Treasury sets the inflation-adjusted interest rate on I Bonds twice a year.

The Takeaway

Investors should proceed with caution when inflation rises. It may be tempting to readjust your portfolio because prices are rising. However, massive changes to a well-planned portfolio may do more harm than good, especially if you are investing with a long time horizon. Periods of high inflation usually wane, so throwing a long-term investment plan out the window just because inflation is moving upward may knock you off course to meet your long-term financial goals.

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Nov

2024

Understanding the 403(b) Retirement Plan: A Comprehensive Guide

By Pam O’Brien | invest, Investing, Preparing for Retirement | Comments Off

If you work for a tax-exempt organization or a public school, you typically have access to a 403(b) plan rather than a 401(k). What is a 403(b)? It’s a workplace retirement plan that can help you start saving for your post-work future.

In this guide, find out how 403(b) plans work, who is eligible for them, and the rules for contributing.

Key Points

• A 403(b) plan serves as a retirement savings option for employees of tax-exempt organizations and public schools, allowing for tax-deductible contributions.

• Two main types of 403(b) plans exist: traditional plans, which use pre-tax contributions, and Roth plans, which utilize after-tax dollars, impacting tax obligations at withdrawal.

• Contribution limits for a 403(b) in 2025 are $23,500 and for 2024 are $23,000, with additional catch-up contributions available for long-term employees and those aged 50 or older.

• Investment options in a 403(b) may be more limited compared to other retirement plans, often focusing on annuities and mutual funds rather than a diverse portfolio.

• Employees can adjust their contributions to a 403(b) and may access funds through loans or hardship distributions, subject to specific plan rules and penalties.

Demystifying the 403(b) Plan

A retirement plan for employees of tax-exempt organizations and public schools, a 403(b) is also known as a tax-sheltered annuity or TSA plan. Employees can contribute to the plan directly from their paycheck, and their employer may contribute as well. A 403(b) can help you save for retirement.

What Exactly is A 403(b) Retirement Plan?

What is a 403(b)? The 403(b) retirement plan is a type of qualified retirement plan designed to help employees save for retirement. Certain schools, religious organizations, hospitals and other organizations often offer this plan to employees. (In layman’s terms, it’s the 401(k) of the nonprofit world.)

Like 401(k)s, 403(b) plans allow for regular contributions toward an employee’s retirement goal. Contributions are tax-deductible in the year they’re made. Also, you won’t pay taxes on any earnings in the account until you make withdrawals.

However, unlike 401(k)s, 403(b)s sometimes invest contributions in an annuity contract provided through an insurance company rather than allocate it into a stocks-and-bonds portfolio.

Distinguishing Between Different 403(b) Options

There are two main types of 403(b) plans: traditional and Roth. With a traditional 403(b), employees contribute pre-tax money to their 403(b) account. This reduces their taxable income, giving them an immediate tax advantage. They will pay taxes on the money when they withdraw it.

With a Roth 403(b), employees contribute after-tax dollars to the plan. They will not owe taxes on the money when they withdraw it.

Not every 403(b) plan offers a Roth version.

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The 403(b) Plan in Action: Participation and Contributions

The IRS states that a 403(b) plan “must be maintained under a written program which contains all the terms and conditions…” In other words, for the plan to be legitimate, paperwork is required.

An employee may get a whole packet of information about the 403(b) plan as part of the onboarding process. This package can include salary reduction agreement terms (this refers to employee contributions from the plan that come from the employee’s paychecks), eligibility rules, explanations of benefits, and more.

In certain limited cases, an employer may not be subject to this requirement. For example, church plans that don’t contain retirement income aren’t required to have a written 403(b) plan.

Who Gets to Participate?

Only employees of specific public and nonprofit employers are eligible to participate in 403(b)s, as are some ministers. You may have access to a 403(b) plan if you’re any of the following:

• An employee of a tax-exempt 501(c)(3) nonprofit organization

• An employee of the public school system, including state colleges and universities, who is involved in the day-to-day operations of the school

• An employee of a public school system organized by Indian tribal governments

• An employee of a cooperative hospital service organization

• A minister who works for a 501(c)(3) nonprofit organization and is self-employed, or who works for a non-501(c)(3) organization but still functions as a minister in their day-to-day professional life

Employers may automatically enroll employees in a 403(b), though employees can opt out if they so choose. Of course, participating in an employer-sponsored retirement plan is one good way to start saving for retirement.

Universal Availability Rule: Who Doesn’t Qualify for 403(b) Participation?

Employers must offer 403(b) coverage to all qualifying employees if they offer it to one — this rule is known as “universal availability.” However, plans may exclude certain employees, including those under the following circumstances:

• Employees working fewer than 20 hours per week

• Employees who contribute $200 or less to their 403(b) each year

• Employees who participate in a retirement plan, like a 401(k) or 457(b), of the employer

• Employees who are non-resident aliens

• Employees who are students performing certain types of services

The same laws that allow these coverage limits also require employers to give employees notice of specific significant plan changes, like whether or not they have the right to make elective deferrals.

Types of Contributions: Understanding Your Options

You can contribute to your 403(b) through automatic paycheck deductions. This process is similar to that of a 401(k) — the employee agrees to have a certain amount of their salary redirected to the retirement plan during each pay period.

However, other types of 403(b)contributions are also eligible, including:

• Nonelective contributions from your employer, such as matching or discretionary contributions

• After-tax contributions can be made by an employee and reported as income in the year the funds are earned for tax purposes. These funds may or may not be designated Roth contributions. In this case, the employer needs to keep separate accounting records for Roth contributions, gains, and losses.

The Cap on Contributions: Limits and Regulations

In 2025, workers can put up to $23,500 into a 403(b) plan. In 2024, workers can put up to $23,500 into a 403(b) plan. Workers who’ve been with their employer for 15 years may be able to contribute an additional $3,000 if they meet certain requirements. Those age 50 or older can contribute an additional $7,500 to a 403(b).

Combined contributions from the employee and the employer may not exceed the lesser of 100% of the employee’s most recent yearly compensation or $69,000 in 2024 and $66,000 in 2023.

Investing Within Your 403(b) Plan

A 403(b) may offer an employee a more limited number of investment options compared to other retirement savings plans.

Exploring Investment Choices for Your 403(b)

One way 403(b) plans diverge from other retirement plans, like 401(k)s and even IRAs, is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds (ETFs), 403(b)s commonly invest in annuity contracts sold by insurance companies.

Part of the reason these plans are known as “tax-sheltered annuities” is that they were once restricted to annuity investments alone — a limit removed in 1974. While many 403(b) plans still offer annuities, they have also largely embraced the portfolio model that 401(k) plans typically offer. 403(b) plans now typically also offer custodial accounts invested in mutual funds.

Comparing 403(b) with Other Retirement Plans

How does a 403(b) stack up against other retirement plans, such as 401(k)s, IRAs, and pension plans? Here’s how they compare.

403(b) vs. 401(k): Similarities and Differences

These two plans share many similarities. However, one notable difference between 403(b) plans and 401(k) plans is there is no profit sharing in 403(b)s — workplaces that are 403(b)-eligible aren’t working toward a profit.

Another way 403(b) plans diverge from 401(k)s is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds, 403(b)s commonly invest in annuity contracts sold by insurance companies or in custodial accounts invested in mutual funds.

403(b) vs. IRA vs. Pension Plans: What’s Right for You?

An IRA offers more investment choices than a 403(b). With a 403(b), your investment options are narrower.

403(b) plans may also have higher fees than other retirement plans. In addition, certain 403(b) plans aren’t required to adhere to standards set by the Employee Retirement Income Security Act (ERISA), which protects employees who contribute to a retirement account.

However, 403(b)s have much higher contribution limits than IRAs. IRA contributions are $7,000 for 2024 for individuals under age 50, compared to $23,000 in contributions for a 403(b). IRA contributions are $6,500 for 2023 for individuals under age 50, compared to $22,500 in contributions for a 403(b).

As for pension plans, public school teachers are typically eligible for defined benefit pension plans that their employer contributes to that gives them a lump sum or a set monthly payment at retirement. These teachers should also be able to contribute to a 403(b), if it’s offered, to help them save even more for retirement.

Advantages and Challenges of a 403(b) Plan

There are both pros and cons to participating in a 403(b) plan. Here are some potential benefits and disadvantages to consider.

Tax Benefits and Employer Matching: The Upsides

As mentioned, a 403(b) offers tax advantages, whether you have a traditional or Roth 403(b) plan. Contribution limits are also higher than they are for an IRA.

Employers may match employees’ contributions to a 403(b). Check with your HR department to find out if your employer matches, and if so, how much.

Potential Drawbacks: Fees and Investment Choices

Some 403(b)s charge higher fees than other types of plans. They also have a narrower range of investment options, as mentioned earlier.

Making Changes to Your 403(b) Plan

If a situation arises that requires you to make changes to your 403(b), such as contributing less from your paychecks to the plan, it is possible to do so.

When Life Changes: Adjusting Your 403(b) Contributions

You can adjust your contributions to a 403(b). Check with your employer to find out if they have any rules or guidelines for when and how often you can make changes to your contributions, and then get the paperwork you’ll need to fill out to do so.

Plan Termination: Understanding the Process and Implications

An employer has the right to terminate a 403(b), but they’re required to distribute all accumulated benefits to employees and beneficiaries “as soon as administratively feasible.”

Employees may be eligible to roll their 403(b) funds over into a new retirement fund upon termination.

Loans, Distributions, and Withdrawals from 403(b) Plans

Here’s information about taking money out of your 403(b), whether it’s a loan or a withdrawal.

Borrowing from Your 403(b): What You Need to Know

There are rules that limit how and when an account holder can access funds in a 403(b) account. Generally, employees can’t take distributions, without penalties, from their 403(b) plan until they reach age 59 ½.

However, some 403(b) plans do allow loans and hardship distributions. Loan rules vary by the plan. Hardship distributions require the employee to demonstrate immediate and heavy financial need to avoid the typical early withdrawal penalty. Check with your employer to find out the particulars of your plan.

Taking Distributions: The When and How

Like other retirement plans, 403(b)s have limits on how and when participants can take distributions. Generally, account holders cannot touch the funds until they reach age 59 1/2 without paying taxes and a penalty of 10%. Furthermore, required minimum distributions, or RMDs, apply to 403(b) plans and kick in at age 73.

If you leave your job, you can keep your 403(b) where it is, or roll it over to another retirement account, such as an IRA or a retirement plan with your new employer.

Maximizing Your 403(b) Plan

If you have a 403(b), the amount you contribute to the plan could potentially help you grow your savings. Here’s how.

Strategic Contribution Planning: How to Maximize Growth

If your employer offers a match on contributions to your 403(b), you should aim to contribute at least enough to get the full match. Not doing so is like leaving free money on the table.

Beyond that, many financial advisors suggest aiming to contribute at least 10% of your income for retirement. You may be able to save less if you have access to guaranteed retirement income such as a pension, as many teachers do, but consider all your options carefully before deciding.

If 10% seems like an unreachable goal, contribute what you can, and then consider increasing the amount that you save each time you get a raise. That way, the higher contribution will not put as much of a dent in your take-home pay.

Doing some calculations to figure out how much you need to save and when you can retire can help you determine the best amount of save.

The Takeaway

If you work for a nonprofit employer, contributing to a 403(b) is a tax-efficient way to start saving for retirement. The earlier you can start saving for retirement, the more time your money can have to grow.

If your employer does not offer a 403(b), or if you’re interested in additional ways to save or invest for retirement, you may want to consider opening another tax-advantaged retirement savings account such as an IRA to help you reach your financial goals.

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.

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.

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

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Nov

2024

401(k) Catch-Up Contributions: What Are They & How Do They Work?

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

Retirement savers age 50 and older get to put extra tax-advantaged money into their 401(k) accounts beyond the standard annual contribution limits. Those additional savings are known as “catch-up contributions.”

If you have a 401(k) at work, taking advantage of catch-up contributions is key to making the most of your plan, especially as retirement approaches. Here’s a closer look at how 401(k) catch-up limits work.

Key Points

• Individuals aged 50 and older can contribute additional funds to their 401(k) accounts through catch-up contributions.

• The catch-up contribution limit is $7,500 for both 2023 and 2024, allowing eligible participants to save a total of $30,000 in 2023 and $30,500 in 2024.

• Catch-up contributions can be made to various retirement accounts, including 401(k) plans, 403(b) plans, and IRAs, providing flexibility in retirement savings.

• Utilizing catch-up contributions effectively can help older savers offset previous under-saving and better prepare for retirement expenses.

What Is 401(k) Catch-Up?

A 401(k) is a type of defined contribution plan. This means the amount you can withdraw in retirement depends on how much you contribute during your working years, along with any employer matching contributions you may receive, as well as how those funds grow over time.

There are limits on how much employees can contribute to their 401(k) plan each year as well as limits on the total amount that employers can contribute. The regular employee contribution limit is $22,500 for 2023 and $23,000 for 2024. This is the maximum amount you can defer from your paychecks into your plan — unless you’re eligible to make catch-up contributions.

Under Internal Revenue Code Section 414(v), a catch-up contribution is defined as a contribution in excess of the annual elective salary deferral limit. For 2023 and 2024, the 401(k) catch-up contribution limit is $7,500.

That means if you’re eligible to make these contributions, you would need to put a total of $30,000 in your 401(k) in 2023 to max out the account and $30,500 in 2024. That doesn’t include anything your employer matches.

Congress authorized catch-up contributions for retirement plans as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The legislation aimed to help older savers “catch up” and avoid falling short of their retirement goals, so they can better cover typical retirement expenses and enjoy their golden years.

Originally created as a temporary measure, catch-up contributions became a permanent feature of 401(k) and other retirement plans following the passage of the Pension Protection Act in 2006.

Who Is Eligible for 401(k) Catch-Up?

To make catch-up contributions to a 401(k), you must be age 50 or older and enrolled in a plan that allows catch-up contributions, such as a 401(k).

The clock starts ticking the year you turn 50. So even if you don’t turn 50 until December 31, you could still make 401(k) catch-up contributions for that year, assuming your plan follows a standard calendar year.

Making Catch-Up Contributions

If you know that you’re eligible to make 401(k) catch-up contributions, the next step is coordinating those contributions. This is something with which your plan administrator, benefits coordinator, or human resources director can help.

Assuming you’ve maxed out your 401(k) regular contribution limit, you’d have to decide how much more you want to add for catch-up contributions and adjust your elective salary deferrals accordingly. Remember, the regular deadline for making 401(k) contributions each year is December 31.

It’s possible to make catch-up contributions whether you have a traditional 401(k) or a Roth 401(k), as long as your plan allows them. The main difference between these types of plans is tax treatment.

• You fund a traditional 401(k) with pre-tax dollars, including anything you save through catch-up contributions. That means you’ll pay ordinary income tax on earnings when you withdraw money in retirement.

• With a Roth 401(k), regular contributions and catch-up contributions use after-tax dollars. This allows you to withdraw earnings tax-free in retirement, which is a valuable benefit if you anticipate being in a higher tax bracket when you retire.

You can also make catch-up contributions to a solo 401(k), a type of 401(k) used by sole proprietorships or business owners who only employ their spouse. This type of plan observes the same annual contribution limits and catch-up contribution limits as employer-sponsored 401(k) plans. You can choose whether your solo 401(k) follows traditional 401(k) rules or Roth 401(k) rules for tax purposes.

401(k) Catch-Up Contribution Limits

Those aged 50 and older can make catch-up contributions not only to their 401(k) accounts, but also to other types of retirement accounts, including 403(b) plans, 457 plans, SIMPLE IRAs, and traditional or Roth IRAs.

The IRS determines how much to allow for elective salary deferrals, catch-up contributions, and aggregate employer and employee contributions to retirement accounts, periodically adjusting those amounts for inflation. Here’s how the IRS retirement plan contribution limits for 2023 add up:

Retirement Plan Contribution Limits in 2023
	Annual Contribution	Catch Up Contribution	Total Contribution for 50 and older
Traditional, Roth and solo 401(k) plans; 403(b) and 457 plans	$22,500	$7,500	$30,000
Defined Contribution Maximum, including employer contributions	$66,000	$7,500	$73,500
SIMPLE IRA	$15,000	$3,500	$18,500
Traditional and Roth IRA	$6,500	$1,000	$7,500

These amounts only include what you contribute to your plan or, in the case of the defined contribution maximum, what your employer contributes as a match. Any earnings realized from your plan investments don’t count toward your annual or catch-up contribution limits.

Also keep in mind that employer contributions may be subject to your company’s vesting schedule, meaning you don’t own them until you’ve reached certain employment milestones.

Tax Benefits of Making Catch-Up Contributions

Catch-up contributions to 401(k) retirement savings allow you to save more money in a tax-advantaged way. The additional money you can set aside to “catch up” on your 401(k) progress enables you to save on taxes now, as you won’t pay taxes on the amount you contribute until you withdraw it in retirement. These savings can add up if you’re currently in a high tax bracket, offsetting some of the work of saving extra.

The amount you contribute will also grow tax-deferred, and making catch-up contributions can result in a sizable difference in the size of your 401(k) by the time you retire. Let’s say you start maxing out your 401(k) plus catch-up contributions as soon as you turn 50, continuing that until you retire at age 65. That would be 15 years of thousands of extra dollars saved annually.

Those extra savings, thanks to catch-up contributions, could easily cross into six figures of added retirement savings and help compensate for any earlier lags in saving, such as if you were far off from hitting the suggested 401(k) amount by 30.

Roth 401(k) Catch-Up Contributions

The maximum amount you can contribute to a Roth 401(k) is the same as it is for a traditional 401(k): $22,500 and, if you’re 50 or older, $7,500 in catch-up contributions, as of 2023. For 2024, it is $23,000 and, if you’re 50 or older, $7,500 in catch-up contributions. This means that if you’re age 50 and up, you are able to contribute a total of $30,000 to your Roth 401(k) in 2023 and $30,500 in 2024.

If your employer offers both traditional and Roth 401(k) plans, you may be able to contribute to both, and some may even match Roth 401(k) contributions. Taking advantage of both types of accounts can allow you to diversify your retirement savings, giving you some money that you can withdraw tax-free and another account that’s grown tax-deferred.

However, if you have both types of 401(k) plans, keep in mind while managing your 401(k) that the contribution limit applies across both accounts. In other words, you can’t the maximum amount to each 401(k) — rather, they’d share that limit.

The Takeaway

Putting money into a 401(k) account through payroll deductions is one of the easiest and most effective ways to save money for your retirement. To determine how much you need to put into that account, it helps to know how much you need to save for retirement. If you start early, you may not need to make catch-up contributions. But if you’re 50 or older, taking advantage of 401(k) catch-up contributions is a great way to turbocharge your tax-advantaged retirement savings.

Of course, you can also add to your retirement savings with an IRA. While a 401(k) has its advantages, including automatic savings and a potential employer match, it’s not the only way to grow retirement wealth. If you’re interested in a traditional, Roth, or SEP IRA, you can easily open an IRA account on the SoFi Invest® brokerage platform. If you’re age 50 or older, those accounts will also provide an opportunity for catch-up contributions.

Help grow your nest egg with a SoFi IRA.

FAQ

How does the 401(k) catch-up work?

401(k) catch-up contributions allow you to increase the amount you are allowed to contribute to your 401(k) plan on an annual basis. Available to those aged 50 and older who are enrolled in an eligible plan, these catch-contributions are intended to help older savers meet their retirement goals.

What is the 401(k) catch-up amount in 2023?

For 2023, the 401(k) catch-up contribution limit is $7,500.

Photo credit: iStock/1001Love

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

Nov

2024

Who Gets the Insurance Check When a Car Is Totaled?

By Kim Franke-Folstad | Budgeting & Goals, Financial Independence | Comments Off

If your car is totaled in an accident, you may expect the insurance payment to come to you as the car’s owner. Not necessarily. If you financed or leased your car, the insurance company will make sure the lender or leaseholder is paid first. You’ll receive whatever remains of the settlement — if anything.

Read on for a breakdown of how the insurance claims process works and who gets the insurance check when a car is totaled.

Key Points

• Insurance pays the lender first if a car is financed or leased, with the owner receiving any remaining settlement.

• A car is totaled if repair costs exceed its market value.

• Actual cash value is based on pre-crash condition, age, and local market prices.

• Gap insurance covers the difference if the settlement is less than the loan balance.

• Comprehensive and collision coverage are two types of coverage that will pay for a totaled car.

Getting an Insurance Check for a Totaled Car

Unless your totaled car was only a few months old, or you have new-car replacement coverage, the check you receive from the insurance company probably won’t be enough to replace it with a brand-new model.

If your car is financed or leased, as noted above, the insurance company will first pay off the lender or leaseholder. The car’s owner will receive a check only if any funds remain after the car is paid off.

If you’re not sure what would happen if your car was totaled, it might be time for a personal insurance planning session to review your coverage.

What Happens If Your Car Is Totaled in an Accident?

After an accident, your insurance company will assign an adjuster to assess your car and estimate the cost of repairs. If the estimated cost of fixing the car is more than the car’s market value, the insurance company may declare it a “total loss.” The same thing may happen if the insurance company determines the car may not be safe to drive even if it were fixed.

How Your Car’s Value Is Determined

The insurance company will determine your car’s “actual cash value” based on its pre-crash condition and what similar models are selling for in your area. They’ll also factor in things like the car’s age, wear and tear (inside and out), mileage, and any optional equipment you’ve added. (You can learn more about the lingo discussed here in our guide to car insurance terms.)

Recommended: How to Get Car Insurance

What If the Accident Wasn’t Your Fault?

If another insured driver is found at-fault for the accident that damaged your car, that person’s insurance should pay the claim — and your insurance deductible won’t come into play.

However, you should expect to pay your deductible amount if:

• You’re responsible for an accident.

• The fault is shared.

• No one is at-fault for the damage to your vehicle. For example, a tree branch or other debris hits your car in a storm.

• The driver who caused the accident is uninsured or underinsured, and your uninsured motorist coverage pays your claim.

Is a Car Totaled When the Airbags Deploy?

The cost of replacing activated airbags will be considered in the overall cost of repairing your damaged vehicle. However, a vehicle won’t necessarily be declared totaled because the airbags deployed.

Who Decides If Your Car Is Totaled?

People often use the word “totaled” as a general description for a car that’s been badly damaged. But only your insurance company can decide a car is totaled based on its value and the cost of repairs.

What Types of Coverage Will Pay for a Totaled Car?

Drivers are often more concerned about the cost of their monthly premiums than with how much car insurance they really need. But not all types of coverage will pay for a totaled car.

After an accident, you’ll need one of the following policies — which should be available from both traditional and online insurance companies — to be reimbursed for a totaled car.

Collision

Collision coverage pays for damage to your vehicle or property. That can include damage caused by crashing into another vehicle or running off the road and into a tree or fence. Even if you’re responsible for the accident, collision coverage will pay for the repairs, minus the deductible amount you’ve chosen.

Comprehensive

Comprehensive coverage pays for losses caused by something other than a collision, such as a weather event, hitting an animal, theft, or vandalism.

Property Damage Liability

Property damage liability coverage pays for damage to your vehicle (and other property) if you’re in an accident and the other driver is found to be at fault.

Uninsured / Underinsured Motorist

If you’re in an accident and the other driver is at fault but isn’t insured or doesn’t have sufficient auto insurance, uninsured motorist coverage pays for your repairs.

New-Car Replacement

With new-car replacement coverage, if your car is totaled, your insurer will pay to replace it with a brand-new car of the same make and model (minus your deductible).

Gap Coverage

If you owe more on your car loan or lease than what your insurance company says your damaged car is worth, you could end up having to make up the difference. Gap insurance can bridge the gap between your settlement and what you still owe.

Rental Reimbursement

Unless you have a backup vehicle to use until you replace your totaled car, you may have to rent a car. If your auto policy includes rental reimbursement coverage, your insurer may refund your out-of-pocket costs for the rental, but only for a limited time.

Do You Still Have to Make Loan Payments on a Totaled Car?

Even if your vehicle has been declared a total loss, your lender will likely expect you to keep making timely loan payments until the claim is settled. (If you don’t, that can hurt your credit.) So it’s a good idea to stay on top of any paperwork, and to check in with your insurance company and lender regularly to be sure the claims process is on track.

What If the Insurance Payment Isn’t Enough to Pay Off Your Loan?

Unless you have gap coverage, the settlement you receive may not be enough to pay off your loan or lease. Insurers are required to pay only what a totaled car was worth before it was damaged. So if your car’s actual cash value is less than what you owe the lender — or less than the payoff amount on your lease — you can end up having to make up the difference out of pocket.

If you research what your car was worth and think your settlement amount is too low, you can try to negotiate a higher amount. The insurer may ask you to provide documentation that proves the car was worth more than they’re offering, so be ready to round up photos of the car, maintenance receipts, and other paperwork that backs up your position.

You can also research comparable cars in your area. You may even want to hire a private appraiser to get a second opinion. If you think it will help, you might consider hiring an attorney.

Do Insurance Rates Increase After a Car Is Totaled?

Each insurance company has its own policy that determines whether a driver’s rates will increase after an accident. The decision may depend on who was at fault, your driving record, whether you’re a longtime customer or new driver, and other factors.

If you decide to shop for lower insurance rates to save money, keep in mind that you may have to answer questions about prior claims and accidents.

The Takeaway

When a car is so badly damaged that fixing it would cost more than it’s worth, the insurer may decide it’s totaled. That means instead of repairing it, the insurance company will pay the owner the car’s actual cash value, based on its condition just prior to the accident.

If you own your car outright, the payment will come to you. If the car is financed and you’re still making payments, the insurer will make sure the lender is paid first. After that, you’ll get what’s left of the settlement. Either way, you can end up short of what you’ll need to replace your damaged vehicle.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

SoFi brings you real rates, with no bait and switch.

FAQ

If my car is totaled, will the insurance company send me a check?

If you own the car, the settlement payment will go directly to you. When the car is financed, the lender will be paid first, and you’ll receive what’s left of the settlement.

Can I keep the money from the insurance claim?

If you owned the car that was totaled, you probably can use the insurance settlement for anything you like. But if the car was financed, the insurance company will make sure you pay off what you owe.

Photo credit: iStock/rocketegg

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Home and Renters Insurance: Insurance not available in all states.
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SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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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401(k) Catch-Up Contributions: What Are They & How Do They Work?

What Is 401(k) Catch-Up?

Who Is Eligible for 401(k) Catch-Up?

Making Catch-Up Contributions

401(k) Catch-Up Contribution Limits

Tax Benefits of Making Catch-Up Contributions

Roth 401(k) Catch-Up Contributions

The Takeaway

FAQ

How does the 401(k) catch-up work?

What is the 401(k) catch-up amount in 2023?

Who Gets the Insurance Check When a Car Is Totaled?

Getting an Insurance Check for a Totaled Car

What Happens If Your Car Is Totaled in an Accident?

How Your Car’s Value Is Determined

What If the Accident Wasn’t Your Fault?

Is a Car Totaled When the Airbags Deploy?

Who Decides If Your Car Is Totaled?

What Types of Coverage Will Pay for a Totaled Car?

Collision

Comprehensive

Property Damage Liability

Uninsured / Underinsured Motorist

New-Car Replacement

Gap Coverage

Rental Reimbursement

Do You Still Have to Make Loan Payments on a Totaled Car?

What If the Insurance Payment Isn’t Enough to Pay Off Your Loan?

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