Feb
26
2025
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How Much Money Should I Have Saved by 40?

By | Budgeting & Goals, Growing Wealth, invest, Investing, Preparing for Retirement | No Comments

By the time you reach 40, your retirement savings should ideally be on track to support a comfortable lifestyle once you stop working. But how do you know if you’re saving enough? Exactly how much should you have for retirement by age 40?

The answer depends on various factors, including your income, current expenses, and long-term financial goals. Below, we’ll walk you through key retirement savings benchmarks, simple ways to calculate your retirement savings target, and how to play catch-up if you’re behind.

Key Points

•   Aim to have three times your annual income saved for retirement by age 40.

•   Prioritize paying off high-interest debt over saving for retirement in your 40s.

•   Maximize contributions to 401(k) and IRA accounts to boost savings.

•   Consider Roth accounts for tax-free withdrawals in retirement.

•   Protect your retirement savings by building an emergency fund with at least six months’ worth of living expenses.

Understanding Your Retirement Savings at 40

Whether you have a full-time job or you’re self-employed, a smart way to save for retirement is in a retirement savings account, such as 401(k) or an individual retirement account (IRA). Unlike regular investment accounts, these accounts give you a tax break on your savings, either upfront or down the line when you withdraw the funds.

In the meantime, your money grows without being taxed.

A general rule of thumb is to save at least 15% to 20% of your income into your retirement fund. However, you may need to adjust this percentage based on your income and current monthly expenses.

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Retirement Savings Benchmarks for 40-Year-Olds

Financial experts provide benchmarks to help gauge whether you’re on track with retirement saving. A common guideline suggests having two to three times your annual salary saved in a 401(l) or IRA by 40. For example, if you earn $80,000 per year, you should aim for $160,000 to $240,000 in retirement savings.

If you haven’t reached this benchmark, however, don’t get discouraged. There are ways to boost retirement savings in your 40s, plus ways to play catch-up later (more on that below).

Analyzing Personal Financial Circumstances

As you enter your 40s, it’s likely that your income is increasing. However, your expenses and financial obligations may also be on the rise. You may be managing mortgage payments, still paying off student loans, and also trying to save for a child’s future college education. Here’s a look at how to balance it all.

Income and Earning Potential

Your income level directly affects how much you can save for retirement. If your income is modest and your expenses are high, it may be difficult to put 10%, let alone 15%, of each paycheck into retirement. The key is to save a consistent percentage of each paycheck, even if it’s small. As your income grows, so will your contributions. As you earn more, you can also gradually bump up the percent you put into retirement savings.

Current Debt and Financial Obligations

In your 40s, you may have debts, which can hinder your ability to save for retirement. Which is wiser — saving for retirement or paying off your debts?

A general rule of thumb is to prioritize paying off high-interest debts, like credit cards, over saving for retirement. This is because your investment returns likely won’t exceed the interest you’re paying on your balances. With other debts, like student loans and a mortgage, however, it’s generally a good idea to balance paying them off while consistently contributing to retirement savings.

Recommended: Money Management Guide

Calculating Your Retirement Savings Target

So how much 401(k) should you have at 40? There are two guidelines financial planners often use to help people determine how much they should have in retirement savings. Here’s a closer look at each.

Salary Multiplier Method

This approach recommends saving a multiple of your salary at different life stages. While this method doesn’t account for any unique lifestyle choices or financial needs, it provides a quick and easy way to assess your savings progress at various ages.

Retirement Savings By:

•  Age 30: 1x your annual income

•  Age 40: 3x your annual income

•  Age 50: 6x your annual income

•  Age 60: 8x your annual income

•  Age 67: 10x your annual income

Income Replacement Ratio Approach

This method focuses on saving enough to replace 75% of your pre-retirement income annually once you stop working. So if you think you’ll be making $100,000 in the last few years before retirement, you would plan on needing $75,000 a year to live on once you stop working.

There are a few reasons you’ll likely need less than your full income after retirement:

•   Your everyday expenses will likely be lower.

•   You’re no longer a portion of your earnings into retirement savings.

•   Your taxes may be lower.

How to Maximize Your Retirement Savings in Your 40s

Maximizing contributions to tax-advantaged accounts such as 401(k)s and IRAs can accelerate your retirement savings in your 40s.

Contribute to Retirement Accounts

If you have access to a 401(k) at work, you ideally want to contribute up to the max allowed by the Internal Revenue Service (IRS). For tax year 2024, the most you can contribute to a 401(k) is $23,000 if you’re under age 50. For 2025, the maximum rises to $23,500.

If you don’t have access to an employer-sponsored retirement plan, you can open an IRA and set-up automatic transfers from your checking account into the IRA each month — ideally up to max allowed for an IRA. For tax years 2024 and 2025, you can contribute up to $7,000 if you’re under age 50.

You can make 2024 IRA contributions until the unextended federal tax deadline.

Take Advantage of 401(k) Matching

Employer-sponsored 401(k) plans often come with matching contributions. If your employer offers this benefit, consider adjusting your contributions to get the full match, since this is essentially free money. Over time, compound returns (which are the returns you earn on your returns) on these extra contributions can lead to substantial growth.

Leverage Catch-Up Contributions

Once you reach age 50, you can make catch-up contributions to your 401(k), which could help you save even more for retirement.

For tax years 2024 and 2025, the 401(k) catch-up contribution is an extra $7,500 on top of the regular $23,000 limit for 2024 (for a total limit of $30,500) and $23,500 for 2025 (for a total limit of $31,000). Those aged 60 to 63 can contribute an additional $11,250 (in place of the $7,500) in 2025, if their plan allows it.

The IRA catch-up contribution is $1,000 for both 2024 and 2025, for a total contribution limit of $8,000 for those age 50 or older.

Expert Strategies to Increase Retirement Savings

There are a number of smart ways to maximize your savings and stay on track for retirement. Here are a few strategies experts advise.

Salary Negotiations and Their Long-Term Impact on Savings

If it’s been a while since you’ve received a raise, this may be a good time to ask for one. By age 40, you’ve probably developed skills that make you valuable to your employer. To increase your chances of success, it can be helpful to research industry standards, highlight your achievements, and demonstrate your value to the company.

Even small salary increases can have a compounding effect on long-term savings. If you need some incentive for negotiating for a higher salary, consider this: Increasing your retirement contributions by just $25 a month for the next 20 years can add an extra $13,023.17 to your retirement fund, assuming a growth rate of 7.00% and monthly compounding.

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Building a Solid Financial Foundation With a Six-Month Emergency Fund

Having an emergency fund that contains at least six months’ worth of living expenses is also critical to your retirement plan.

Why? While retirement is still a long way off if you’re 40, an emergency could happen at any time. For instance, you may get hit with an unexpected medical bill or your heating system might break in the middle of winter and need to be replaced. If you don’t have the emergency funds to cover these things, you might be forced to dip into your retirement fund early (and pay penalties) or run up debt that could limit your ability to save for retirement.

You might open a high-yield savings account for your emergency fund to help it grow. Consider automating your savings to make sure you’re contributing to your emergency fund regularly. Once it’s fully funded, you can allocate the money you had been contributing to the emergency fund to your retirement savings.

Recommended: Emergency Fund Calculator

Why Prioritizing Roth Retirement Accounts Can Pay Off

A Roth IRA or Roth 401(k) is a retirement account that taxes your contributions up front, but your withdrawals in retirement are tax-free, including all your growth. This differs from a traditional IRA, which involves tax-deferred contributions, meaning you’ll pay taxes every time you withdraw money, including on your growth. A Roth IRA or 401 (k) can be especially beneficial if you anticipate being in a higher tax bracket later in life.

Even if you have a 401(k) at work, you can add a Roth IRA to boost your retirement earnings. However, there are contribution and income limits with Roth IRAs that you’ll need to keep in mind.

The Role of Expenses in Retirement Planning

Figuring out how much your retirement living expenses will be is important for calculating how money you’ll need to save. These are some of the things you may want to consider and budget for when figuring out how much to save for retirement.

Planning for Health Care Expenses in Retirement

As people grow older, their health care needs and costs typically increase. For many, health care can be one of the biggest retirement expenses. Fidelity estimates that the average person may need $165,000 to cover health care costs in retirement.

If you have a high-deductible health insurance plan, you might want to set up a health savings account (HSA). An HSA is a tax-advantaged account that can be used to pay for medical expenses. You can invest the money in an HSA, and if you leave it untouched, it will grow and earn interest. When you make withdrawals in retirement, you won’t pay any taxes if you spend the money on qualified health care expenses.

Long-term care insurance is another option to consider for covering health care costs later in life. Researching Medicare options and potential out-of-pocket expenses ahead of time can help you prepare for future medical needs.

Incorporating Home Costs Into Retirement Savings

Housing costs are another major retirement expense. You may have mortgage payments, homeowner’s insurance, and home maintenance and repairs to pay for. If you rent, you’ll have to cover your monthly rental fee plus renters’ insurance.

If you’re planning on a move after you retire, where you choose to live can have a major impact on how much you pay for housing. In general, living on the coasts can be more expensive. You may want to take the cost of living into consideration when you’re thinking about where you want to live in retirement.

Family and Retirement: Balancing the Present and Future

Along with planning for retirement, you may be saving for important family milestones, such as college and a child’s wedding. Fortunately, with proper budgeting and planning, it is possible to help cover these expenses and save for retirement at the same time.

Budgeting for College Savings While Prioritizing Retirement

To help your children with the cost of college, consider opening a 529 plan. You fund this account with after-tax dollars, but your money grows tax-free and withdrawals for qualified education expenses are also tax-free.

Just keep in mind: Financial experts generally recommend that people in their 40s prioritize retirement savings over college savings. The reason? Financial aid can help fill a college funding gap, but there’s no financial aid for retirement, so you’ll want to ensure your retirement contributions remain consistent.

You might funnel extra funds toward college saving. You can also let family members know they can contribute to a child’s 529. For instance, instead of birthday gifts, you might ask loved ones to contribute to your child’s 529 instead.

Weddings and Other Major Family Expenses

If you’d like to help pay for your child’s wedding or first home purchase it’s a good idea to save for those goals separately, so they don’t disrupt your retirement savings progress.

If the wedding or home purchase is coming up in the next few years, you might open a high-yield savings account earmarked for that goal. If these family expenses are well off in the future, you might want to invest in mutual funds or a stock index fund, which could deliver more growth (though returns are not guaranteed).

The Takeaway

While there are several rules of thumb as to how much money you should have saved by 40, the truth is everyone’s path to a comfortable retirement looks different. One piece of advice is universal, however: The sooner you start saving for retirement, the better your chances of being in a financially desirable position later in life.

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Feb
25
2025
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What Is Dividend Yield?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Is Dividend Yield?

Dividend yield concerns how much an investor realizes from their investments over the course of a year as a result of dividends. Dividends, which are payouts to investors as a share of a company’s overall profit, can help investors generate bigger returns, and some investors even formulate entire strategies around maximizing dividends.

But it’s important to have a good understanding of dividends, dividend yields, and other related concepts before going too far into the weeds.

Key Points

•   Dividend yield represents the annual dividend paid to shareholders relative to the stock price, expressed as a percentage, which helps investors assess potential returns.

•   Investors can calculate dividend yield by dividing the annual dividend per share by the stock’s current price, providing insight into a company’s attractiveness as an investment.

•   A higher dividend yield may signal an established company, but it can also indicate slower growth or potential financial troubles, requiring careful evaluation.

•   Considering the history of dividend growth and the dividend payout ratio can provide additional insights into a company’s financial health and dividend sustainability.

•   Understanding the difference between dividend yield and dividend rate is essential, as dividend yield is a ratio while dividend rate is expressed in dollar amounts.

What Is Dividend Yield?

A stock’s dividend yield is how much the company annually pays out in dividends to shareholders, relative to its stock price. The dividend yield is a financial ratio (dividend/price) expressed as a percentage, and is distinct from the dividend itself.

Dividend payments are expressed as a dollar amount, and supplement the return a stock produces over the course of a year. For an investor interested in total return, learning how to calculate dividend yield for different companies can help to decide which company may be a better investment.

But bear in mind that a stock’s dividend yield will tend to fluctuate because it’s based on the stock’s price, which rises and falls. That’s why a higher dividend yield may not be a sign of better value.

How Does Dividend Yield Differ From Dividends?

It’s important to really drive home the difference between dividend yield and dividends in general.

Dividends are a portion of a company’s earnings paid to investors and expressed as a dollar amount. Dividends are typically paid out each quarter (although semi-annual and monthly payouts are common). Not all companies pay dividends.

Dividend yield, on the other hand, refers to a stock’s annual dividend payments divided by the stock’s current price, and expressed as a percentage. Dividend yield is one way of assessing a company’s earning potential.

How to Calculate Dividend Yield

Calculating the dividend yield of an investment is useful for investors who want to compare companies and the dividends they pay. For investors looking for investments to help supplement their cash flow, or even to possibly live off dividend income, a higher dividend yield on a stock would be more attractive than a lower one.

What Is the Dividend Yield Formula?

The dividend yield formula is more of a basic calculation than a formula: Dividend yield is calculated by taking the annual dividend paid per share, and dividing it by the stock’s current price:

Annual dividend / stock price = Dividend yield (%)

Dividend Yield Formula

How to Calculate Annual Dividends

Investors can calculate the annual dividend of a given company by looking at its annual report, or its quarterly report, finding the dividend payout per quarter, and multiplying that number by four. For a stock with fluctuating dividend payments, it may make sense to take the four most recent quarterly dividends to arrive at the trailing annual dividend.

It’s important to consider how often dividends are paid out. If dividends are paid monthly vs. quarterly, you want to add up the last 12 months of dividends.

This is especially important because some companies pay uneven dividends, with the higher payouts toward the end of the year, for example. So you wouldn’t want to simply add up the last few dividend payments without checking to make sure the total represents an accurate annual dividend amount.

Example of Dividend Yield

If Company A’s stock trades at $70 today, and the company’s annual dividend is $2 per share, the dividend yield is 2.85% ($2 / $70 = 0.0285).

Compare that to Company B, which is trading at $40, also with an annual dividend of $2 per share. The dividend yield of Company B would be 5% ($2 / $40 = 0.05).

In theory, the higher yield of Company B may look more appealing. But investors can’t determine a stock’s worth by yield alone.

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Dividend Yield: Pros and Cons

Pros

 Cons
Can help with company valuation. Dividend yield can indicate a more established, but slower-growing company.
May indicate how much income investors can expect. Higher yield may mask deeper problems.
Yield doesn’t tell investors the type of dividend (ordinary vs. qualified), which can impact taxes.

For investors, there are some advantages and disadvantages to using dividend yield as a metric that helps inform investment choices.

Pros

•   From a valuation perspective, dividend yield can be a useful point of comparison. If a company’s dividend yield is substantially different from its industry peers, or from the company’s own typical levels, that can be an indicator of whether the company is trading at the right valuation.

•   For many investors, the primary reason to invest in dividend stocks is for income. In that respect, dividend yield can be an important metric. But dividend yield can change as the underlying stock price changes. So when using dividend yield as a way to evaluate income, it’s important to be aware of company fundamentals that provide assurance as to company stability and consistency of the dividend payout.

Cons

•   Sometimes a higher dividend yield can indicate slower growth. Companies with higher dividends are often larger, more established businesses. But that could also mean that dividend-generous companies are not growing very quickly because they’re not reinvesting their earnings.

Smaller companies with aggressive growth targets are less likely to offer dividends, but rather spend their excess capital on expansion. Thus, investors focused solely on dividend income could miss out on some faster-growing opportunities.

•   A high dividend yield could indicate a troubled company. Because of how dividend yield is calculated, the yield is higher as the stock price falls, so it’s important to evaluate whether there has been a downward price trend. Often, when a company is in trouble, one of the first things it is likely to reduce or eliminate is that dividend.

•   Investors need to look beyond yield to the type of dividend they might get. An investor might be getting high dividend payouts, but if they’re ordinary dividends vs. qualified dividends they’ll be taxed at a higher rate. Ordinary dividends are taxed as income; qualified dividends are taxed at the lower capital gains rate, which typically ranges from 0% to 20%. If you have tax questions about your investments, be sure to consult with a tax professional.

The Difference Between Dividend Yield and Dividend Rate

As noted earlier, a dividend is a way for a company to distribute some of its earnings among shareholders. Dividends can be paid monthly, quarterly, semi-annually, or even annually (although quarterly payouts tend to be common in the U.S.). Dividends are expressed as dollar amounts. The dividend rate is the annual amount of the company’s dividend per share.

A company that pays $1 per share, quarterly, has an annual dividend rate of $4 per share.

The difference between this straight-up dollar amount and a company’s dividend yield is that the latter is a ratio. The dividend yield is the company’s annual dividend divided by the current stock price, and expressed as a percentage.

What Is a Good Dividend Yield?

dividend yield of sp500 vs dividend aristocrats

Two companies with the same high yields are not created equally. While dividend yield is an important number for investors to know when determining the annual cash flow they can expect from their investments, there are deeper indicators that investors may want to investigate to see if a dividend-paying stock will continue to pay in the future.

A History of Dividend Growth

When researching dividend stocks, one place to start is by asking if the stock has a history of dividend growth. A regularly increasing dividend is an indication of earnings growth and typically a good indicator of a company’s overall financial health.

The Dividend Aristocracy

There is a group of S&P 500 stocks called Dividend Aristocrats, which have increased the dividends they pay for at least 25 consecutive years. Every year the list changes, as companies raise and lower their dividends.

Currently, there are 65 companies that meet the basic criteria of increasing their dividend for a quarter century straight. They include big names in energy, industrial production, real estate, defense contractors, and more. For investors looking for steady dividends, this list may be a good place to start.

Dividend Payout Ratio (DPR)

Investors can calculate the dividend payout ratio by dividing the total dividends paid in a year by the company’s net income. By looking at this ratio over a period of years, investors can learn to differentiate among the dividend stocks in their portfolios.

A company with a relatively low DPR is paying dividends, while still investing heavily in the growth of its business. If a company’s DPR is rising, that’s a sign the company’s leadership likely sees more value in rewarding shareholders than in expanding. If its DPR is shrinking, it’s a sign that management sees an abundance of new opportunities abounding. In extreme cases, where a company’s DPR is 100% or higher, it’s unlikely that the company will be around for much longer.

Other Indicators of Company Health

Other factors to consider include the company’s debt load, credit rating, and the cash it keeps on hand to manage unexpected shocks. And as with every equity investment, it’s important to look at the company’s competitive position in its sector, the growth prospects of that sector as a whole, and how it fits into an investor’s overall plan. Those factors will ultimately determine the company’s ability to continue paying its dividend.

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Test your understanding of what you just read.

The Takeaway

Dividend yield is a simple calculation: You divide the annual dividend paid per share by the stock’s current price. Dividend yield is expressed as a percentage, versus the dividend (or dividend rate) which is given as a dollar amount. The dividend yield formula can be a valuable tool for investors, and not just ones who are seeking cash flow from their investments.

Dividend yield can help assess a company’s valuation relative to its peers, but there are other factors to consider when researching stocks that pay out dividends. A history of dividend growth and a good dividend payout ratio (DPR), as well as the company’s debt load, cash on hand, and credit rating can help form an overall picture of a company’s health and probability of paying out higher dividends in the future.

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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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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 $50 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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Comparing Warrants vs Options

Comparing Stock Warrants vs Stock Options

By | Growing Wealth, invest, Investing | Comments Off on Comparing Stock Warrants vs Stock Options

Stock warrants give the holder the right to buy shares of stock at a set price on a set date directly from the public company that issues them, whereas stock options convey the right to buy or sell shares on or before a specific date at a specific price.

The chief difference between stock warrants and stock options is that warrants are issued directly by a company that’s seeking to raise capital. Stock options are derivative contracts that investors can trade, in order to take advantage of price fluctuations in the underlying security.

Key Points

•   Stock warrants allow investors to buy shares at a specified price on a set date, directly from the issuing company, while stock options are derivative contracts traded among investors.

•   Companies typically issue stock warrants to raise capital, whereas stock options are created and traded by investors, allowing for more flexibility in trading.

•   Exercising a warrant results in the issuance of new shares, which can lead to dilution, while exercising options does not create new shares and is settled between traders.

•   Both stock warrants and options provide speculative opportunities but differ in terms of issuance, market trading, and potential dilution effects.

•   Understanding the differences between stock warrants and options is crucial for investors, as each serves distinct purposes and carries unique risks and benefits.

What Are Stock Warrants?

A stock warrant is a contract that allows the holder the right to buy shares of stock at a future date at a specified price. The wording in a stock warrant typically allows the holder to purchase shares at a premium to the stock’s price at the time of issue.

Companies issue stock warrants directly to investors. The companies set the terms of the warrant, including the stock’s purchase price and the final date by which the investor can exercise the warrant. Warrant holders do not have an obligation to buy the shares, but if they decide to do so they would exercise the warrants via their brokerage account.

Public companies may issue stock warrants as a means of raising capital to fund new expansion projects. A company may also issue stock warrants to investors if it faces financial trouble and needs to raise funds to avoid a bankruptcy filing.


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

What Are Stock Options?

A stock option is a contract that gives holders the right — not the obligation — to buy or that represents the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put option) an underlying security on or before a specified date at a specified price. With stock options, holders of the contract do not have to buy the underlying shares, but they have the right to do so.

Again, the options holder does not have to buy; they simply have the right to do so. Exercising options means you agree to buy the shares If an investor chooses not to exercise the option, it expires worthless. Investors can trade some options on a public exchange alongside stocks and other securities.

Recommended: How to Trade Options: An In-Depth Guide

Similarities and Differences Between Warrants and Options

Warrants and options sound alike and at first glance, they seem to imply the same thing: A right to trade shares of a particular stock. But there are also important differences between these two contracts that investors need to understand.

Similarities

Warrants and options both offer investors an opportunity to gain exposure to a particular stock without requiring them to purchase shares.

With both warrants and options, the investor must exercise the security to actually acquire shares. Both have specific guidelines with regard to the price at which investors can purchase (or sell in the case of put options) their shares and the deadline for exercising them.

Warrants and options are both speculative in nature, since investors are essentially betting on which way the underlying asset’s price will move. Investors can use different strategies when trading options or exercising warrants to maximize profitability while minimizing losses.

Differences

Warrants and options also have important differences. While companies issue stock warrants, traders typically buy and sell options with each other directly. Warrants create new shares of companies, while options do not cause any dilution.

When investors exercise a warrant, they receive the stock directly from the company, while options are settled between traders.


💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.

Stock Warrants vs Stock Options: A Summary

Here’s a closer look at options vs. warrants.

Stock Warrants

 Stock Options
Confers the right to purchase shares of stock at a specified price on a specified date. Confers the right to buy (in the case of a call) or sell (in the case of a put) shares of stock at a specified price on or before a specified date. Holders of the contract have the right, but not the obligation, to exercise the contract.
Warrants create new shares, which can result in dilution. Options do not create new shares so there’s no dilution.
Issued by the company directly to investors. Issued by traders who write call or put options.
Original issue warrants are not listed on exchanges, but there is a secondary market for the securities. Options can be traded on public exchanges alongside other securities.
Used to raise capital for the company. Traders can write options to maximize profits based on price movements.
Warrant holders may have a decade or more in which to exercise their right to buy shares. Options tend to be shorter-term in nature, with expiration periods lasting anywhere from a few days up to 18 months.
Less commonly used in the U.S. Options are regularly traded on public exchanges in the U.S.

Pros and Cons of Warrants

If you’re considering warrants versus options, it’s helpful to understand the advantages and disadvantages of each.

Stock warrants can offer both advantages and disadvantages to investors. Whether it makes sense to include stock warrants in a portfolio can depend on your individual goals, time horizon for investing and risk tolerance.

Stock Warrant Pros

 Stock Warrant Cons
Warrant holders have the right to purchase shares of stock but are not required to do so. Price volatility can diminish the value of stock warrants over time.
Stocks may be offered to investors at a premium price to the current market price. When warrants are exercised, new shares are issued which can result in dilution.

Pros and Cons of Options

Like stock warrants, there trading stock options has both upsides and potential downsides. Beginning traders may benefit from having a guide to options exercising to help them understand the complexities and risks involved. Here are some of the key points to know about trading options.

Stock Option Pros

 Stock Option Cons
Higher return potential compared to trading individual shares of stock. Stock options are more sensitive to volatility which can mean higher risk for investors.
May be suited to active day traders who are hoping to capitalize on short-term price movements. Frequent options trades can mean paying more in commissions, detracting from overall returns.
Traders can use options as a hedging tool to manage risk in uncertain market environments. Time value constantly decays the value of options.

Test your understanding of what you just read.

The Takeaway

Understanding the difference between options and warrants matters if you’re considering either of these types of securities. While the language of stock warrants may sound similar to some of the terms used in options trading, these are really two different instruments.

Companies issue stock warrants largely to raise capital, whereas traders typically buy and sell options with each other directly. Warrants create new shares of companies, while options do not cause any dilution.

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

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


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

FAQ

Is a warrant the same thing as an option?

No. Warrants and options are not the same thing. Companies issue stock warrants to give investors the right to buy shares of stock at a specified price on a specified date. Stock warrants can allow investors to purchase shares of stock at a premium while giving them plenty of time in which to decide whether to exercise the warrant.

Options are derivatives contracts that give buyers the right, but not the obligation to buy (in the case of a call) or sell (in the case of a put) an asset at a specific price within a certain period of time.

Can warrants exist in a SPAC?

Yes. A Special Purpose Acquisition Company, SPACs, are typically created for the purpose of acquiring or merging with an existing company. This type of arrangement allows private companies to circumvent the traditional IPO process. A SPAC may use warrants to raise capital from investors. These warrants are generally good for up to five years following the completion of a merger or acquisition.

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/Inside Creative House

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

Shares vs Stocks: What’s the Difference?

By | Growing Wealth, Investing, Terminology | No Comments

The difference between the terms stock and shares is a simple one. An investor buys shares of stock in a company. The stock represents the company, and is sold in units called shares.

Thus, an investor can own a certain number of shares of a company’s stock: e.g., they might own 100 shares of Company A. But it’s incorrect to say an investor owns 100 stocks in Company A. If an investor owns 100 stocks, that would mean they own shares of stock in 100 different companies.

Key Points

•   The terms “shares” and “stock” are often used in tandem, but they refer to different aspects of an equity investment.

•   A stock is a broad term for the asset, while a share is the unit of ownership.

•   Owning 100 shares implies you have 100 units of one company’s stock, while owning 100 stocks means you have stakes in 100 different companies.

•   Ordinary shares are the same as common stock, and preference shares are the same as preferred stock.

•   Common stockholders have voting rights and may receive dividends; preferred stockholders usually don’t have voting rights, but they often receive dividends before common stockholders.

Stock vs Share: Comparison

A stock is the actual asset you purchase, while a share is the unit of measurement for that asset.

So, investing in a certain stock means you’re investing in that company. A share tells you how much of that stock you own.

Differences Between Stocks and Shares

Stocks

 Shares
A stock refers to the publicly-traded company that issues shares A share is the unit of measurement of ownership in a company
Stocks can refer to the ownership of many different companies Shares usually refer to the specific ownership stake in a company
Stock is a more general term Share is a more precise term

For example, if you are interested in investing in Company A, you will buy 100 shares of Company A stock. Owning 100 shares of Company A would give you a specific ownership stake in the company.

In contrast, if you said you wanted to buy 100 stocks, that would generally mean you wanted to buy shares of 100 different companies.

You could buy 10 shares of one company’s stock, 50 shares of another, 1,000 shares of another, and so on. Shares represent the percentage of ownership you have in that company.

Recommended: How to Invest in Stocks: A Beginner’s Guide

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

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*Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

What Are Stocks?

Stocks, also called equities, are a type of security that gives investors a stake in a publicly traded company. A publicly traded company trades on a stock exchange, like the New York Stock Exchange or Nasdaq.

When you buy stock, you buy a share or fractional shares of a publicly traded company. You essentially own a small piece of the company, hoping to get a return on your investment.

Companies typically issue stock to raise capital. Usually, the goal is to grow the business or launch a new product, but the company could also use the money to pay off debts or for another purpose.

Why Should I Buy Stocks?

Generally, people buy stocks with the hope that the company they invest in will earn money, and as a result, the investor will see a return or growth. There are two ways to earn money through stock ownership: dividends and capital appreciation.

Dividends are payouts a company makes to its shareholders. When a company is profitable, it can choose to share some of its profits with its shareholders through dividend payments. Typically, companies pay dividends on a specified schedule, often quarterly, although they can pay them at any time.

The second way to earn money is through capital appreciation, which is when a stock’s price increases above the purchase price. However, capital appreciation doesn’t lock in your gains; you don’t realize your profits until you sell your stock. And there is no guarantee that a stock will appreciate. Sometimes, owing to a range of factors, a stock’s price may drop, and investors may incur a loss.

If you sell stock and realize a profit, you must pay capital gains taxes on the earnings. The amount of tax you owe on your earnings depends on the type of asset, and how long you held it before selling.

Types of Stocks

There are two main types of stocks that investors can buy and sell.

•   Common stock: The type of stock most people invest in, common stockholders have voting rights and may receive dividends.

•   Preferred stock: Investors of this type of stock usually don’t have voting rights, but they often receive dividends before common stockholders. Preferred stock also gives investors a higher claim to assets than common stockholders if the company is liquidated.

Recommended: Preferred Stock vs. Common Stock

How Are Stocks Categorized?

Beyond common and preferred stocks, investors can buy and sell many different types of stocks. Usually, investors break down the various categories of stocks based on investing styles and company size, among other factors.

By Different Styles of Investing

Investors may divide up stocks of different companies into value and growth stocks.

Growth stocks have the potential for high earnings that may outpace the market. Growth stocks don’t usually pay dividends, so investors looking at these stocks hope to make money through capital gains when they sell their shares after the price increases.

Growth stocks are often tech, biotech, and some consumer discretionary companies. As the name suggests, consumer discretionary companies sell goods or services that consumers don’t consider essential.

Value stocks, in contrast, are stocks that investors consider to be trading below a price that accurately reflects the company’s strength. Value stocks usually have a lower price-to-earnings ratio.

Value investors are hoping to buy a stock when its price is low relative to its earnings, holding it until the market corrects and the stock price goes up to the point that better reflects the company’s underlying value.

Recommended: Value vs. Growth Stocks

By Market Cap

Market capitalization, often referred to as market cap, is a common way to categorize stocks. Market cap is a measure of a company’s value. Below is a breakdown of market cap categories:

•   Micro-Cap: $50 million to $300 million

•   Small-Cap: $300 million to $2 billion

•   Mid-Cap: $2 billion to $10 billion

•   Large-Cap: $10 billion or higher

•   Mega-Cap: $200 billion or higher

Generally speaking, companies with larger market capitalizations are older, more established, and have greater international exposure. Meanwhile, smaller-cap stocks tend to be newer, less established, and more domestically oriented. Smaller-cap companies can be riskier but also offer more growth potential.

What Are Shares?

A share is a piece of the company an investor can own. A share is a unit of ownership (e.g., you own 10 shares), whereas stock is a measurement of equity (e.g., you own 10% of the company).

Think of shares as a small portion of a company. So, if a company were a pie, a share would be a slice of said pie: the more slices, the more shares.

Shares play a role when calculating a company’s market cap. To find the market cap of a publicly traded company, you multiply the stock’s price by the number of outstanding shares, which is the number of shares currently owned by shareholders. This can also be referred to as shares outstanding, and the exact number can fluctuate over time.

Changes in the number of shares available can occur for various reasons. For example, if a company decides to release more shares to the public, the number of shares would increase.

Additionally you can own shares in a variety of assets other than stocks, like mutual funds, exchange-traded funds (ETFs), limited partnerships (LPs), and real estate investment trusts (REIT).

Types of Shares

Like with stock, investors may own different types of shares.

•   Ordinary shares are the same as common stock. Holders of ordinary shares are entitled to vote on corporate matters and may receive dividends.

•   Preference shares are the same as preferred shares. Holders of preferred shares usually receive dividends before common stock dividends are issued. If the company enters bankruptcy, shareholders of preference shares may be paid from company assets before common stockholders.

•   Deferred shares are shares usually issued to company founders and executives where they are the last in line to be paid in bankruptcy proceedings, following preferred and common stockholders.

•   Non-voting shares, as the name suggests, do not confer voting rights to the shareholder. Non-voting shares may have different dividend rights and rights to company assets in the event of liquidation compared to holders of voting shares.

Stock Splits Definition

A stock split is a decision made by the board of directors of a company to adjust the price of their stock without changing the company’s overall value. It is one of the ways how the number of a company’s outstanding shares can change.

A company usually initiates a stock split when its stock price gets too high. For example, if a company’s stock is trading at over $1,000, it can be difficult for some investors to purchase and limits the availability of buyers.

To remedy this problem, a company will issue new shares through a stock split, lowering the price of each share but maintaining its market cap. A 10-for-1 stock split, for instance, would exchange 1 share worth $1,000 into 10 shares, each worth $100. Your total investment value remains the same, but the number of shares you own increases.

Other Ways to Own Stock

Trading company stocks or shares isn’t the only way to own equities. One alternative is to invest in shares of a mutual fund, a managed investment fund that pools money from several different investors. The money is then invested in various securities, including stocks and bonds.

Another option for investors is exchange-traded funds (ETFs). Like mutual funds, ETFs are baskets of securities packaged into a single investment vehicle. But unlike mutual funds, investors can trade shares of ETFs all day in the stock market.

One significant benefit that mutual funds and ETFs offer is portfolio diversification. A mutual fund and ETF can either be actively managed by a financial professional or passively managed, which means the fund tracks an index like the S&P 500.

Another way besides stocks or shares to get exposure in the market is through options trading. Options are contracts giving the purchaser the right — but not always the obligation — to buy or sell a security, like stock or (ETF), at a fixed price within a specific period of time.

Test your understanding of what you just read.

The Takeaway

The difference between stocks and shares is that a share represents a unit of ownership in a company, while stocks refer to the ownership of one or more companies. It’s common to use both terms when discussing equity investments. But knowing the distinction between the two terms can help you better understand the stock market and investing.

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).

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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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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

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

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Rollover IRA vs Traditional IRA: What’s the Difference?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Rollover IRA vs Traditional IRA: What’s the Difference?

If you’re leaving a job, you may hear the term “rollover IRA.” But exactly what is a rollover IRA? Employees have the option of moving their retirement savings from their employer-sponsored 401(k) plan to an individual retirement account, or IRA, at another financial institution when they leave a job. This IRA, where they transfer their 401(k) savings to, is called a rollover IRA. If the 401(k) plan was not a Roth 401(k), you’ll likely want to open what’s called a traditional IRA.

In this scenario, a rollover IRA is also a traditional IRA. But they aren’t always the same. You can have a traditional IRA that is not a rollover IRA. Read on for the differences worth noting between a rollover IRA and a traditional IRA.

Key Points

•   A rollover IRA is an individual retirement account created with funds rolled over from a qualified retirement plan, like a 401(k), usually when someone leaves a job.

•   A traditional IRA is funded by direct contributions by the account holder, and contributions are tax-deductible up to a cap and subject to eligibility limitations.

•   Directing rollover funds from an employer-sponsored plan to a traditional IRA that holds your direct contributions is called commingling funds, which you may not want to do, especially if you want to transfer the rollover funds to a new employer’s plan.

•   Withdrawals from either type of IRA before age 59.5 are subject to both income taxes and an early withdrawal penalty, except for certain eligible expenses.

•   The IRS requires owners of both types of IRAs to start making withdrawals at age 73 (for people born in 1951 or later); these withdrawals are also called required minimum distributions (RMDs).

Is There a Difference Between a Rollover IRA and a Traditional IRA?

When it comes to a rollover IRA vs. traditional IRA, the only real difference is that the money in a rollover IRA was rolled over from an employer-sponsored retirement plan. Otherwise, the accounts share the same tax rules on withdrawals, required minimum distributions, and conversions to Roth IRAs.

💡 Recommended: Here’s a complete list of retirement plans to compare.

Get a 1% IRA match on rollovers and contributions.

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

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

What Is a Rollover IRA?

A rollover IRA is an individual retirement account created with money that’s being rolled over from a qualified retirement plan. Generally, rollover IRAs happen when someone leaves a job with an employer-sponsored plan, such as a 401(k) or 403(b), and they roll the assets from that plan into a rollover IRA.

In a rollover IRA, like a traditional IRA, your savings grow tax-free until you withdraw the money in retirement. There are several advantages to rolling your employer-sponsored retirement plan into an IRA, vs. into a 401(k) with a new employer:

•   IRAs may charge lower fees than 401(k) providers.

•   IRAs may offer more investment options than an employer-sponsored retirement account.

•   You may be able to consolidate several retirement accounts into one rollover IRA, simplifying management of your investments.

•   IRAs offer the ability to withdraw money early for certain eligible expenses, such as purchasing your first home or paying for higher education. In these cases, while you’ll pay income taxes on the money you withdraw, you won’t owe any early withdrawal penalty.

There are also some rollover IRA rules that may feel like disadvantages to putting your money into an IRA instead of leaving it in an employer-sponsored plan:

•   While you can borrow money from your 401(k) and pay it back over time, you cannot take a loan from an IRA account.

•   Certain investments that were offered in your 401(k) plan may not be available in the IRA account.

•   There may be negative tax implications to rolling over company stock.

•   An IRA requires that you start taking Required Minimum Distributions (RMDs) from the account at age 73, even if you’re still working, whereas you may be able to delay your RMDs from an employer-sponsored account if you’re still working.

•   The money in an employer plan is protected from creditors and judgments, whereas the money in an IRA may not be, depending on your state.

Recommended: This guide can help you financially prepare for retirement.

What Is a Traditional IRA?

Now that you know the answer to the question of what is a rollover IRA?, you’ll want to familiarize yourself with a traditional IRA. To understand the difference between a rollover IRA vs. traditional IRA, it helps to know some IRA basics.

From the moment you open a traditional IRA, your contributions to the account are typically tax deductible, so your savings will grow tax-free until you make withdrawals in retirement.

This is advantageous to some retirees: Upon retirement, it’s likely one might be in a lower income tax bracket than when they were employed. Given that, the money they withdraw will be taxed at a lower rate than it would have when they contributed.

A Side-by-Side Comparison of Rollover IRA vs Traditional IRA

  Rollover IRA Traditional IRA
Source of contributions Created by “rolling over” money from another account, most typically an employer-sponsored retirement plan, such as 401(k) or 403(b). For the rollover amount, annual contribution limits do not apply. Created by regular contributions to the account, not in excess of the annual contribution limit, although rolled-over money can also be contributed to a traditional IRA.
Contribution limits There is no limit on the funds you roll over from another account. If you’re contributing outside of a rollover, the limit is $7,000 for tax year 2024 plus an additional $1,000 if you’re 50 or older. Up to $7,000 for tax year 2024, plus an additional $1,000 if you’re 50 or older.
Withdrawal rules Withdrawals before age 59 ½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home). Withdrawals before age 59 ½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home).
Required minimum distributions (RMDs) You’re required to withdraw a certain amount of money from this account each year once you reach age 73 (thanks to the SECURE 2.0 Act of 2022). You’re required to withdraw a certain amount of money from this account each year once you reach age 73 (again, thanks to the SECURE 2.0 Act).
Taxes Since contributions are from a pre-tax account, all withdrawals from this account in retirement will be taxed at ordinary income rates. If contributions are tax deductible, all withdrawals from this account in retirement will be taxed at ordinary income rates. (If contributions were non-deductible, you’ll pay taxes on only the earnings in retirement.)
Convertible to a Roth IRA Yes Yes

Can You Contribute to a Rollover IRA?

By now you’re probably wondering, can I contribute to a rollover IRA?, and the answer is yes. You can make contributions to a rollover IRA, up to IRA contribution limits. For tax year 2023, individuals can contribute up to $6,500 (with an additional catch-up contribution of $1,000 if you’re 50 or older). If you do add money to your rollover IRA, however, you may not be able to roll the account into another employer’s retirement plan at a later date.

Can You Combine a Traditional IRA With a Rollover IRA?

A rollover IRA is essentially a traditional IRA that was created when money was rolled into it. Hence, you can combine two IRAs by having a direct transfer done from one account to another, or by rolling money from one IRA to the other IRA.

There’s one important aspect of the transfer or rollover process that will help prevent the money from counting as an early withdrawal or distribution to you—and that’s being timely with any transfers. With an indirect rollover, you typically have 60 days to deposit the money from the now-closed fund into the new one.

A few other key points to remember: As mentioned above, if you add non-rollover money to a rollover account, you may lose the ability to roll funds into a future employer’s retirement plan. Also keep in mind that there’s a limit of one rollover between IRAs in any 12-month period. This is strictly an IRA-to-IRA limit and does not apply to rollovers from a retirement plan to an IRA.

How to Open a Traditional or Rollover IRA Account

Opening a traditional IRA and a rollover IRA are identical processes — the only difference is the funding. Open a traditional or rollover IRA by doing the following:

•   Decide where to open your IRA. For instance, you can choose an online brokerage firm where you can choose your own investments, or you can select a robo-advisor that will offer automated suggestions based on your answers to a few basic investing questions. (There’s a small fee associated with most robo-advisors.)

•   Open an account. From the provider’s website, select the type of IRA you’d like to open — traditional or rollover, in this case — and provide a few pieces of personal information. You’ll likely need to supply your date of birth, Social Security number, and contact and employment information.

•   Fund the account. You can fund the account with a direct contribution via check or a transfer from your bank account, transferring money from another IRA, or rolling over the money from an employer-sponsored retirement plan. Contact your company plan administrator for information on how to do the latter.

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The Takeaway

Both a rollover IRA and a traditional IRA allow investors to put money away for retirement in a tax-advantaged way, with very little difference between the two accounts.

One of the primary questions anyone considering a rollover IRA should consider is, will you keep contributing to it? If so, that would prevent you from rolling the rollover IRA back into an employer-sponsored retirement account in the future.

Whether it’s a rollover IRA you’ve created by rolling over an employer-sponsored retirement account or a traditional IRA you’ve opened with regular contributions, either account can play a key role in your retirement game plan.

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

Can you take money out of a rollover IRA?

You can, but if you take money from a rollover IRA (or a traditional IRA for that matter) before age 59½, those withdrawals are subject to income tax and an early withdrawal penalty of 10%. There are certain exceptions, however. If you withdraw the money for certain higher education expenses or to buy your first home, for example, the penalty may not apply.

Why would you rollover an IRA?

A rollover is when you move money between two different types of retirement plans. Typically, you might roll over an IRA if you leave a job with an employer-sponsored plan, such as a 401(k) or 403(b). You would roll the assets from that plan into a rollover IRA where your savings grow tax-free until you withdraw the money in retirement. You could instead choose to leave the money in your former employer’s plan, if that’s allowed, or roll it over into your new employer’s 401(k) or 403(b) plan, if they have one. However, a rollover IRA may offer you more investment choices and lower fees and costs than an employer-sponsored plan.

Can I roll over assets into my traditional IRA?

Yes, rolled over money can be contributed to a traditional IRA. It’s also worth noting that you can also combine a traditional IRA and a rollover IRA. You can do this with a direct transfer from one account to another, or by rolling money from one IRA to another, for instance. Just keep in mind that there is a limit of one rollover between IRAs in any 12-month period.

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


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.

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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