invest Archives | Page 10 of 182

Sep

2024

Guide to Environmental, Social, and Governance (ESG) Investing

By Michael Flannelly | Growing Wealth, invest, Investing, Terminology | Comments Off

What Is ESG?

ESG, which stands for environmental, social, and governance factors, refers to non-financial criteria that investors can use to determine whether companies are socially and environmentally responsible.

ESG investing is considered a form of sustainable or impact investing, but the term itself is more specific to emphasize that companies must focus on positive results in these three areas.

There is, however, no universally shared set of ESG criteria used by all investors or financial firms to evaluate a company’s soundness or risk along these lines. Rather, investors must learn which standards a certain fund or stock adheres to before choosing to invest.

Even so, there has been growing interest in ESG strategies in the last decade, as many of these funds have shown themselves to offer competitive returns vs. traditional strategies.

What Is ESG Investing?

As discussed, investors use ESG criteria to screen potential investments; if a business’s operations don’t follow ESG standards, investors may avoid putting money into the company. In that sense, ESG investing can be seen as a type of socially responsible investing.

But, as mentioned above, there is no universal set of standards for what makes a company ESG friendly. Companies committed to ESG operations may publish sustainability reports to give investors some insights into the firm. Additionally, third-party organizations have stepped in to create ESG scores for companies and funds based on their adherence to various ESG factors.

The following are some of the common factors that investors consider when evaluating the three different ESG areas.

Environmental

The environmental component of ESG criteria might include metrics on a company’s energy emissions, waste, and water usage. Investors may also focus on the risks and opportunities associated with the impacts of climate change on the company and its industry.

Some company information that environmentally conscious investors may evaluate include:

• Pollution and carbon footprint

• Water usage and conservation

• Renewable energy integration (such as solar and wind)

• Climate change policies

💡 Recommended: How to Invest in EV Stocks

Social

The social component of ESG generally describes the impact of a company’s relationships with people and society. Factors as varied as corporate culture, commitment to diversity, and how much a company invests in local organizations or communities can impact socially conscious investors’ decisions on buying into a specific corporation.

Some other social factors can include:

• Employee pay, benefits, and perks

• Diversity, equity, and inclusion

• Commitment to social justice causes

• Ethical supply chains (e.g., no sweatshops, conflict-free minerals, etc.)

Governance

The governance component of ESG generally focuses on how the company is run. Investors want to know how the board of directors, company, and shareholders relate to one another.

Some additional governance factors that investors evaluate include:

• Executive compensation, bonuses, and perks

• Diversity of the board of directors and management team

• Transparency in communications with shareholders

• Rights and roles guaranteed to shareholders

How ESG Scores Work

ESG scores — sometimes called ESG ratings — are designed to measure a company’s performance based on specific environmental, social, and governance criteria. Investors can use them to assess a company’s success, risks, and opportunities concerning these three areas.

An ESG score is typically calculated by analyzing a company’s available data on environmental, social, and governance policies and practices using various sources, like SEC filings, government databases, and media reports.

A high ESG score means a company manages ESG risks better than its peers, while a low ESG score means the company has more unmanaged ESG risks. Evaluating a company’s ESG score, along with financial analysis, can give investors a better idea of the company’s long-term prospects.

Some of the most prominent ESG score providers are MSCI, Morningstar Sustainalytics, and S&P Global. But some financial firms conduct their own ESG evaluations and provide proprietary scores. Transparency into how the scores are calculated can vary.

ESG vs SRI vs Impact Investing

ESG investing is sometimes called sustainable investing, impact investing, or socially responsible investing (SRI). However, impact investing and socially responsible investing are often viewed differently than ESG investing.

Some of the differences between the three investment strategies are:

• ESG investing focuses on a company or fund’s environmental, social, and governance practices and traditional financial analysis.

• Socially responsible investing eliminates or selects investments according to specific ethical guidelines. Investors following an SRI strategy may avoid investing in companies related to gambling and other sin stocks, or they may avoid companies that cause damage to the natural environment — or both.

• Impact investing is generally done by institutional investors and foundations. Impact investing focuses on making investments in companies or projects specifically designed to generate positive social or environmental impact.

In addition there is another designation investors may want to know, green investing refers to strategies that are purely focused on benefiting the environment.

Last, corporate social responsibility initiatives, or CSR refers to programs and initiatives that organizations may establish on their own. Often, these business decisions support socially responsible movements, like environmental sustainability, ethical labor practices, and social justice initiatives.

Why Is ESG Investing Important?

ESG investing is important because it offers investors a way of putting their money into causes that are significant to them, with the hope of having a genuine impact via their investments in certain companies or funds. This is why ESG is often called impact investing, although true impact investing is a broader term, and refers to a range of companies that may or may not be focused on sustainable issues.

Whether or not companies or funds that embrace ESG strategies deliver on the promised goals is a matter for investors to decide via due diligence. As noted above, without a commonly agreed-upon set of standards and some form of accountability, it’s difficult to ascertain which companies are truly having an impact.

Are ESG Strategies Profitable?

Nonetheless, investors have continued to be interested in ESG strategies. In 2021, socially responsible U.S. mutual funds saw record inflows of some $70 billion — a 36% increase over 2020. ESG funds saw substantial outflows through 2021 and most of 2022. But sustainable funds still managed to outperform non-sustainable funds through Q3 of 2022, despite challenging market conditions, according to Morningstar research as of September 30, 2022.

During the third quarter of 2022, sustainable large-cap funds netted $525 million, versus their unsustainable equity peers, who lost $25 billion that period.

Two other studies from Morningstar added to the evidence that funds which embrace socially responsible investing strategies tend to outperform conventional mutual funds.

Their “Sustainable Funds U.S. Landscape Report” from February 2022 found that “two thirds of sustainable offerings in the large-blend category topped the U.S. market index last year compared with 54% of all funds in the category.”

According to the report: “There are 5 times as many sustainable funds in the U.S. today than a decade ago, and 3 times more than five years ago.”

Types of ESG Investments

Investors can make ESG investments in the stocks and bonds of companies that adhere to ESG criteria or have high ESG scores. Other potential investment vehicles are mutual funds and exchange-traded funds (ETFs) with an ESG strategy.

Stocks

Buying stocks of companies with environmental, social, and governance commitments can be one way to start ESG investing. However, investors will often need to research companies that have ESG credibility or rely on third-party agencies that release ESG scores.

💡 Recommended: How to Analyze a Stock

Bonds

The bonds of corporations involved in ESG-friendly business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.

Additionally, government bonds used to fund green energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

💡 Recommended: How to Buy Bonds: A Guide for Beginners

Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to ESG companies and investments.

A growing number of index funds invest in a basket of sustainable stocks and bonds. These funds allow investors to diversify their holdings by investing in one security.

However, not all ESG funds follow the same criteria and may focus on different aspects of environmental, social, and governance issues. Interested investors would do well to look under the hood of specific funds to evaluate their holdings and other criteria.

💡 Recommended: A Beginner’s Guide to Investing in Index Funds

Identifying ESG Companies

What is the best way to find an ESG company? There are a number of resources available for ESG investors, including proprietary tools that allow investors to search and/or evaluate different stocks based on specific criteria.

There are also a number of lists published by financial media companies that evaluate companies and funds according to ESG criteria.

Financial ratings firms like Morningstar publish regular research reports on different aspects of the ESG sector.

In addition, many industry firms and fund-providers have their own proprietary evaluation methods that investors might consider. Here are five of the biggest companies that provide ESG ratings, according to Fortune.com.

• FTSE Russell: Publishes ESG ratings on 7,200 securities

• ISS ESG: Provides ratings on 11,800 issuers and 25,000 funds

• MSCI: Publishes ESG ratings for over 8,000 companies worldwide

• Refinitiv: Calculates ESG scores on 11,800 companies

• Sustainalytics: Publishes ESG ratings on more than 13,000 companies

Benefits of ESG Investing

ESG investing has several benefits, including:

• Improving long-term financial performance: A growing body of evidence suggests that companies with solid ESG ratings may be good investments. They tend to outperform those with weaker ratings, both in share price performance and earnings growth.

• Mitigating risk: ESG factors can help identify companies with poor governance practices or exposure to environmental and social risks, leading to financial losses.

• Creating social and environmental impact: By investing in companies that are leading the way on environmental, social, and governance issues, investors can help drive positive change and make a positive impact on society.

These potential benefits are increasing the popularity of ESG investing. According to Bloomberg, global ESG assets may surpass $41 trillion by the end of 2022 and reach $50 trillion by 2025, up from $22.8 trillion in 2016.

Risks of ESG Investing

The main disadvantage of ESG strategies is that they limit the number of investments that people can consider. Thus, some investors may end up trading potential returns for the ability to invest according to their values.

In addition, ESG investments can sometimes come with higher costs, for example an ESG fund may have a higher expense ration vs. a traditional counterpart.

While there is a growing body of data regarding the performance of ESG indices and securities, it’s still a relatively new sector relative to more traditional investments.

Starting an ESG Investment Portfolio

If you’re interested in creating an ESG portfolio, you can start by contacting a financial advisor who can help you shape your investment strategy.

However, if you are ready to start investing and want to build a portfolio on your own, you can follow these steps:

• Open a brokerage account: You will need to open a brokerage account and deposit money into it. Once your account is funded, you will be able to buy and sell stocks, mutual funds, and other securities.

• Pick your assets: Decide what type of investment you want to make, whether in a stock of a company, an ESG-focused ETF or mutual fund, or bonds.

• Do your research: It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.

• Invest: Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive social and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification will help to reduce your risk and maximize your returns.

ESG Investing Strategies

ESG investing can be different based on values and financial goals. It’s therefore essential to start with your investment goals and objectives when crafting an ESG investing strategy. Consider how ESG factors can help you achieve these goals.

It’s also crucial to understand the data and information available on ESG factors; this will vary by company and industry. When researching potential ESG investments, you want to make sure a company has a clear and publicly-available ESG policy and regularly discloses its ESG performance. Additionally, it can be helpful to look at third-party scores to determine a company’s ESG performance.

The Takeaway

In recent years, investor interest in sustainable investing strategies like ESG has grown. In addition, there is some data that suggests that ESG strategies may be just as effective as traditional strategies in terms of performance.

This is despite the fact that ESG criteria are inconsistent throughout the industry. There are a myriad different ways that companies can provide ESG-centered investments, but there aren’t industry-wide benchmarks for different criteria or success metrics.

Thus, it’s fair to say that there is no “right” way to invest in ESG companies. What matters most is that you have done your own research; you are comfortable with the companies you are investing in; and you believe in their ability to create long-term value.

Investors interested in making ESG investments can use the SoFi app to help. When you open an Active Invest account with SoFi Invest®, you can trade stocks and ETFs to build an ESG portfolio. SoFi doesn’t charge commissions (although operating expense ratios and other fees may apply to exchange-traded funds), and SoFi members have access to complimentary advice from financial professionals.

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

FAQ

What are the three pillars of ESG?

ESG stands for three areas that some companies strive to embrace by being proactive about the environment, supportive of social structures, and transparent and ethical in corporate leadership.

What are some examples of ESG investing?

There are countless ways to add ESG strategies to your portfolio: You can consider investing in green bonds, in companies that focus on environmentally supportive technologies, in funds that invest in a multitude of renewable energy companies, clean water initiatives, carbon sequestration, and more.

What is the difference between ESG and sustainability?

Sustainability is a broader term. Environmental, social, and governance factors may support sustainability in different ways: by limiting air or water pollution, by supporting fair labor practices, by insisting on transparency in corporate governance.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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.

SOIN1122025

Sep

2024

Health Care Costs in Retirement: How to Plan Ahead

By Laurel Tincher | Budgeting & Goals, invest, Investing, Preparing for Retirement | Comments Off

Health Care in Retirement
How Much to Budget for Health Care Costs in Retirement
What Does Medicare Cost, What Does It Cover?
Other Ways to Pay for Health Care
FAQ

When planning for retirement, people often assume Medicare will cover their medical bills, but in fact many retirees will face out-of-pocket costs that, over time, could reach into the six figures.

While it’s difficult to predict for sure what your actual health care costs in retirement will be — especially in light of today’s longevity — it’s wise to work with a ballpark figure in order to create a safety net of savings that will cover you, no matter what your needs will be in the years to come.

Key Points

• Planning for retirement should take health care costs into account, such as potential out-of-pocket costs and long-term care.

• According to research, the average 65-year-old individual may need $165,000 in savings to cover medical expenses in retirement (and double that amount for couples).

• Medicare covers medical costs such as preventive care, doctor visits, prescription drugs, inpatient hospital stays, short-term rehab, and hospice.

• Medicare Advantage Plans are Medicare-approved, private insurance plans that may cover medical basics as well as other expenses, such as vision, hearing, and dental.

• Health savings accounts (HSAs) and long-term care insurance can help pay for medical expenses not covered by Medicare.

Health Care in Retirement

The cost of health care in retirement can be overwhelming. According to the annual Fidelity Retiree Health Care Cost Estimate in 2024, a typical retired couple aged 65 could spend as much as $330,000 in after-tax savings on medical expenses during the course of their retirement.

That figure doesn’t include related health costs such as dental services, over-the-counter medications, or long-term care — which are not currently covered by original Medicare.

Long-term care expenses can be especially onerous, with the median cost of a private room in a nursing home running about $116,800 per year, according to the 2023 Genworth Cost of Care Survey. This, too, is an expense that many people may need to factor into their retirement plans, given the growing number of people living into their 80s and 90s — or longer.

This “new longevity,” as it’s sometimes called, may also lead to additional health-related costs down the line that are difficult to anticipate now, but require educated estimates nonetheless — especially for women, who live on average about five years longer than men.

Recommended: Different Types of Retirement Accounts

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.

How Much to Budget for Health Care Costs in Retirement

To create a realistic plan for retirement, and make optimal financial decisions about investing for retirement, insurance coverage, and the timing of important government benefits — the starting point is to look at how much money will be coming in, and how much will be going out to pay for likely health issues.

Social Security Benefits

While Social Security benefits depend on an individual’s work history, as well as the age when they first file for Social Security, the key thing to know about this source of income is that it’s limited. The average monthly payout, starting in January 2024, was $1,907. And the maximum possible benefit amount is $3,822 per month, for those who retire at full retirement age in 2024.

Individuals can file for Social Security starting at age 62, generally speaking, but “full retirement age” is 67 for those born in 1960 and later. To get a more accurate estimate of your own benefit amount, go to SSA.gov.

Private Sources of Income

Fortunately, most retirees also have savings or a pension, which can add to their income. Nearly 80% of retirees reported having one or more sources of private income, in addition to Social Security, according to the Economic Well-Being of U.S. Households in 2022, by the Federal Reserve Board.

For example, you may have opened a retirement account like an IRA or an employer-sponsored plan, such as a 401(k), that may offer an additional source of income.

If you’re freelance or a small business owner, you may have a SEP IRA or a SIMPLE IRA — common retirement plan options for the self-employed.

The point is to have a grasp of your income sources in retirement, as well as your anticipated cash flow, so that you can cover medical costs in retirement.

Understanding Health Care Costs

As costs vary considerably depending on one’s region, age, and overall health, it can be difficult to estimate the precise amount to set aside for health care in retirement.

Start by assessing your overall health today, and speaking to your doctor(s) about any chronic conditions, genetic predispositions, and any other risk factors that could impact the care you need as you get older.

Unfortunately, there’s almost no way to predict with any accuracy the types of conditions or care you might need, or what they will cost, when preparing for retirement. But in some cases this thought exercise may help you anticipate some upcoming costs, so you can factor that into your overall estimate.

Of course, not all of your medical costs in retirement will be out of pocket; Medicare (and Medicaid, if you qualify) cover many medical expenses. But this insurance is another expense to factor in.

What Does Medicare Cost, What Does It Cover?

Medicare is a medical insurance program offered by the federal government for those 65 years and older, and those who are disabled. Medicare will pay certain health care expenses in retirement, but with restrictions. Dental, vision, and hearing care, including hearing aids, are not covered by Original Medicare, generally known as Parts A and B.

Also, as noted above: Medicare does not cover long-term care, like an assisted living or nursing home facility.

Note that you must apply for Medicare benefits within a certain window, or risk being penalized with higher premiums. Generally, the Initial Enrollment period begins three months before you turn 65, and it ends three months after the month in which you turned 65. Some exceptions apply (for example, if you have health insurance through your employer, or were affected by a natural disaster).

Be sure to check the terms that might apply to your situation to avoid a penalty.

Understanding Medicare Coverage

The following terms generally apply to those with a modified adjusted gross income (MAGI) over $103,000, or $206,000 for a married couple. If your premium is subject to an income adjustment, it could be as high as $594 per month (though according to the Centers for Medicare and Medicaid Services (CMS), the highest rate generally applies to people with incomes over $500,000, or $750,000 for a married couple).

• Medicare Part A covers inpatient hospital stays and treatment, as well as skilled nursing care (i.e. short-term rehab), limited in-home care and hospice. As long as you or your spouse had sufficient Medicare taxes withheld through your job (generally at least 10 years), you won’t pay a monthly premium for Part A. The deductible for Part A is $1,632 in 2024.

• Medicare Part B covers outpatient care, preventive care, and visits to doctors. The monthly premium for Part B is about $174 per month, with a roughly $240 annual deductible in 2024.

• Medicare Part D covers prescription drugs. The monthly premium is about $55.50 in 2024.

Medicare Part C, or Medicare Advantage Plans, is a bit of a separate case. Medicare Advantage plans are private insurance plans that are Medicare-approved, and may cover vision, hearing, or dental needs, as well as the medical basics and prescriptions covered by Parts A, B, and D. Medicare Advantage plans are optional.

While the Advantage Plans are designed to fill in certain gaps in coverage, you want to make sure the costs are manageable, and that you’re not paying for overlapping policies.

Medicare Costs

In other words, assuming at least one hospital stay that requires you to pay the deductible, the basic cost of Medicare alone is about $4,600 per year. Again, that doesn’t include:

• Vision care

• Dental care

• Hearing care or hearing aids

• Long-term care

Most people will need some or all of those types of health care as they get older, which could add to your potential out-of-pocket expenses over time, and speaks to the need for some emergency savings.

Other Ways to Pay for Health Care

In addition to Medicare, there are other ways to pay for medical expenses during retirement, including HSA accounts and long-term care insurance.

Health Savings Account (HSA)

When choosing a health insurance plan before you retire, consider one that comes with a health savings account (HSA) that may help you save money for retirement medical expenses. These accounts generally come with high-deductible health plans (HDHPs), and provide three substantial tax benefits:

• Contribution deductions

• Tax-deferred growth

• Withdrawals without taxation for qualified medical costs

The accounts take pre-tax deposits to cover health care costs that are not covered by insurance. The unspent money in an HSA rolls over from year to year. Most important, the money in an HSA account belongs to you, even when you are no longer participating in the original high-deductible plan.

What Your HSA Savings May Cover

HSA funds can be used to pay for a variety of medical expenses in retirement. For instance, prescription drugs, eyeglasses, hearing aids, and other medical supplies can generally be purchased with HSA funds.

Additionally, you can use HSA savings to cover deductibles and co-payments for medical care. Medicare premiums and long-term care insurance premiums can also be covered using HSA funds.

By utilizing catch-up payments and employer contributions, those who are already over 50 can still get the most out of these programs. A catch-up payment of $1,000 per year, in addition to the maximum contribution limit, is allowed for people 55 and older. One can use an HSA to pay for yearly physicals or other preventative exams covered by an HDHP.

A benefit of utilizing an HSA to cover medical expenses in retirement is that the money in the account can be invested, allowing it to increase in value over time. This might be helpful for people who wish to have a dedicated source of savings to cover medical bills.

It’s worth noting that funds in an HSA must be used for qualified medical expenses in order to be withdrawn tax-free. It’s a good idea to consult a tax professional or review IRS guidelines to ensure that HSA funds are being used appropriately.

Long-Term Care Insurance

Another approach to bridge the Medicare gap is to get long-term care insurance. This kind of insurance can provide a monthly benefit for long-term care, either for a few years or for the rest of one’s life.

The expenses of long-term care such as in-home care, assisted living, and nursing facility care, can be covered in part by long-term care insurance. These services are often required by people who are unable to do activities of daily living on their own, such as eating, dressing, or bathing, due to a chronic disease or disability.

That said, these policies can be complex, as well as expensive, and it may be wise to consult with a professional before purchasing coverage.

The Takeaway

Medical expenses can be a large portion of one’s retirement budget. As daunting as it may seem, calculating these expenditures ahead of time and developing an insurance and spending plan will help you save more of your retirement funds for other needs.

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

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

FAQ

How much does the average person spend on health care in retirement?

Health care costs depend on a variety of factors, but on average a healthy person over age 65 could spend as much as $165,000 during their retirement ($330,000 per couple).

How do I prepare for health care expenses in retirement?

A few ways to prepare include making a retirement budget, saving in a retirement account, funding a health savings account while still employed, making sure to get adequate medical insurance through Medicare and/or private Advantage plans once you turn 65. You may want to consider long-term care insurance as well.

How do I save for out-of-pocket medical expenses?

Ways to save on out-of-pocket medical expenses include shopping around for the best prices on health care services, making use of preventive care services to help reduce the need for more expensive treatments in the future, and purchasing insurance to help cover unexpected medical costs. In addition, funding a health savings account (HSA) when it’s offered is a tax-advantaged way to set aside money for health care costs.

Photo credit: iStock/jacoblund

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.

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.

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.

SOIN0522016

Sep

2024

What Is MAGI and How Do You Calculate It?

By Rebecca Lake | Family Finances, invest, Money & Life | Comments Off

MAGI, or modified adjusted gross income, is your adjusted gross income, plus certain deductions added back in. Adjusted gross income, or AGI, is your total income, minus any deductions you’re eligible to claim.

Knowing how to calculate MAGI can help you determine which tax deductions or credits you may be eligible for when it’s time to file your return. Here’s a breakdown of what MAGI is, and why it matters.

Key Points

• MAGI (Modified Adjusted Gross Income) is adjusted gross income (AGI) plus certain deductions added back in.

• Knowing MAGI can be crucial for tax planning, minimizing tax liabilities, and determining eligibility for tax credits, such as the Child Tax Credit.

• Gross income may include wages, business and retirement income, tips, dividends, capital gains, rents, and interest.

• Common deductions used to determine AGI include student loan interest, contributions to certain retirement plans, educator expenses, and health savings account (HSA) contributions.

• Deductions that need to be added back to AGI to determine MAGI may include traditional IRA contributions, student loan interest, passive loss or passive income, excluded foreign income, and rental losses, among others.

What Is MAGI?

MAGI is a tax term that refers to modified adjusted gross income. Gross income is your income before taxes or other deductions are applied. Understanding your MAGI can be helpful for tax planning, whether you’re making money trading stocks, or simply working a single job and earning a paycheck.

Definition of MAGI

In simple terms, MAGI is your adjusted gross income with some deductions added back in to see if you qualify for specific deductions or income-based programs.

Some groups may define MAGI slightly differently depending on how it’s used. For instance, in context of student loan interest deductions, the Internal Revenue Service (IRS) notes the following:

For most taxpayers, MAGI is the adjusted gross income (AGI) as calculated on their federal income tax return before subtracting any deduction for student loan interest.

The Social Security Administration (SSA), meanwhile, uses this definition:

Modified Adjusted Gross Income (MAGI) is the sum of the beneficiary’s adjusted gross income (AGI) (found on line 11 of the Internal Revenue Service (IRS) tax filing form 1040), plus tax-exempt interest income (line 2a of IRS Form 1040).

You may wonder why you’re subtracting certain deductions and then adding them back in, but the totals of your MAGI and AGI may differ. We’ll compare MAGI and AGI a little further on to help you understand the difference.

Recommended: What Is Income Tax?

Why MAGI Is Important

MAGI becomes important when determining which, if any, tax breaks you may be eligible to claim. It’s helpful to know your MAGI if you plan to:

• Make traditional IRA contributions that you plan to deduct on your taxes.

• Claim a premium tax credit for health insurance expenses.

• Claim child tax credits or education credits, which reduce your tax liability dollar for dollar.

It can also be helpful if you plan to contribute to a Roth IRA, which requires you to be income-eligible. An IRA is a tax-advantaged account that you can use to save for retirement. Traditional IRAs allow for deductible contributions while Roth IRAs offer tax-free qualified withdrawals.

Apart from tax planning, your MAGI is used for Medicare planning to determine what you’ll pay for monthly premiums once you turn 65.

MAGI vs. Adjusted Gross Income (AGI)

MAGI and AGI are two different calculations, though the final numbers may be very close. Here’s how the IRS defines AGI:

Adjusted gross income, also known as (AGI), is defined as total income minus deductions, or “adjustments” to income that you are eligible to take.

Gross income, for AGI purposes, includes wages, dividends, capital gains, business and retirement income, tips, rents, and interest. Adjustments to income are deductions that reduce your gross income.

Some common deductions that reduce gross income to determine AGI include:

• Health insurance premiums (if self-employed)

• One half of self-employment taxes paid

• Student loan interest

• Educator expenses

• Traditional IRA contributions and other qualified retirement plans

Your MAGI is your AGI, with some deductions added back in. Certain deductions are subject to limits, meaning that if your MAGI is too high, your deduction may be reduced or phased out entirely.

Who Needs to Calculate MAGI

Anyone who’s interested in claiming every tax credit or deduction they’re eligible for, up to the full amount allowed by the IRS, may benefit from knowing how to calculate MAGI.

Estimating your tax liability before the year ends gives you time to make some last-minute financial moves that might reduce what you owe or increase your refund. For instance, say you’ve been thinking of opening a Roth IRA. You’ll first need to know your MAGI to know if you’re eligible to contribute to a Roth, based on your income.

It’s also helpful to know your MAGI when applying for federal benefit programs. Your MAGI can affect your eligibility for:

• Supplemental Nutrition Assistance Program (SNAP) benefits

• Medicaid

• Children’s Health Insurance Program (CHIP) benefits

Calculate your Roth IRA eligibility.

Using your MAGI, discover how much you can put into a Roth IRA in 2024 using SoFi’s IRA contribution calculator.

How to Calculate MAGI

Tax planning software programs can calculate your MAGI automatically, or you consult with a tax professional. You’ll need a few pieces of information to find your MAGI.

Step 1: Calculate Your Adjusted Gross Income (AGI)

You’ll first need to find your AGI. To do that you first add up your total gross income. Again, this is all of your income from all sources, before taxes and deductions. Everyone’s list may be different, but might include:

• Full or part-time employment wages

• Self-employment income

• Investments, including rental income

• Interest and dividends

• Capital gains

You’ll use your gross income number to find your AGI in the next step.

Step 2: Add or Subtract Applicable Adjustments

Now you’ll subtract applicable adjustments to gross income to find your AGI. Again, this will differ from individual to individual, but some of the most common adjustments for AGI include:

• Traditional IRA contributions, including SEP IRA contributions if you’re self-employed

• Student loan interest

• Half of self-employment taxes paid

• Tuition and fees

• Contributions to a Health Savings Account (HSA)

The final number, after adjustments, is your AGI.

Step 3: Determine Your MAGI

Using your AGI you’ll now add back applicable adjustments to get your MAGI. Some of the things you’ll add back include:

• Traditional IRA contributions, and SEP IRA contributions if you’re self-employed

• Student loan interest

• Half of self-employment taxes paid

• Tuition and fees

• Passive loss or passive income

• Rental losses

• Non-taxable Social Security payments

• Foreign earned income exclusion

The resulting number is your MAGI, and this is what will help you discern which deductions or credits you might be eligible to take when filing your tax return.

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.

Common Adjustments to AGI for MAGI Calculation

Some adjustments to AGI for MAGI calculations are more common than others. Here are some of the most-often used adjustments.

Tax-Exempt Interest Income

Tax-exempt interest income is not subject to tax at the federal level — as the name implies. This income may, however, still be subject to income tax at the state and local levels.

An example of tax-exempt interest income is income earned from municipal bonds. A municipal bond is a debt instrument that city and local governments use to raise money to fund public works.

When you buy a municipal bond or muni, the bond issuer agrees to pay you interest for a set term in exchange for the use of your money. If the bond is tax-exempt you won’t owe income tax on the interest earned.

But again, interest income from these bonds may still generate state or local tax liabilities.

Qualified Tuition Expenses

Qualified tuition expenses include tuition and required fees for enrollment or attendance at eligible postsecondary schools. The term “qualified tuition expenses” is most often used when discussing education tax credits, such as the American Opportunity Tax Credit (AOTC).

Qualified tuition expenses do not include:

• Room and board

• Transportation costs

• Insurance and medical expenses

• Student fees that are not required as a condition of enrollment or attendance

You can’t claim this credit for the same expenses that were paid for with tax-free scholarships or grants. Neither can you claim a deduction for the same education expenses that you claim a tax credit for.

IRA Contributions

Traditional IRAs allow you to deduct some or all of your contributions. The amount you can deduct is determined by three things:

• Your MAGI

• Your tax filing status

• Whether you (and your spouse, if married) are covered by a retirement plan at your job

Note: If you or your spouse (if you’re married) are not covered by a retirement plan at work, your IRA contributions are fully deductible.

If either you or your spouse are covered by a workplace retirement plan, your IRA deduction may be limited. To determine how much of your IRA contributions you can deduct in a given year, if any, you’ll need to calculate your MAGI by adding certain deductions back to your AGI — such as the IRA contributions you deducted.

Deducting SEP or SIMPLE IRA Contributions

Keep in mind that contributions to self-employed retirement plans, such as SEP or SIMPLE IRAs, are generally subject to the same tax treatment as traditional IRAs. But because these accounts are used by small business owners and those who are self-employed, the rules governing deductions can be different from traditional IRAs, so it’s wise to check.

Roth IRAs do not allow for deductible contributions.

Student Loan Interest Deduction

When are student loans tax deductible? Generally speaking, the loan principal is not deductible, though the interest you pay might be.

The student loan interest deduction allows you to subtract amounts paid for student loan interest from your taxable income. As of 2024, you can deduct the lesser of $2,500 or the amount of interest you paid during the year.

Your MAGI must be below a certain amount to claim this deduction. For 2024, your ability to claim the deduction begins to phase out at these levels:

• Single filers with a MAGI of $80,000 or more

• Married couples filing jointly with a MAGI of $165,000

Single filers with a MAGI exceeding $95,000 and married couples with a MAGI greater than $195,000 won’t be able to deduct student loan interest.

MAGI and Tax Credits

Tax credits reduce your tax liability dollar for dollar. Some tax credits are refundable, meaning you can get a credit for them even if you don’t owe any tax.

MAGI is used to determine eligibility for a number of tax credits, including:

• Child Tax Credit

• Earned Income Tax Credit (EITC)

• Premium tax credit for health insurance

• Dependent Care Credit

Claiming credits can reduce your tax liability at the end of the year.

MAGI and Deductions

Tax deductions reduce your taxable income, which can push you into a lower tax bracket. As mentioned above, MAGI is used for several key deductions, including:

• IRA contributions

• Student loan interest

• Educator expenses

• Deductions for adoption expenses

You can claim both tax credits and deductions on your return to try and minimize your tax liability, or boost your refund. However, you can’t claim tax credits and deductions for the same expenses.

The Takeaway

MAGI is the same as AGI plus some adjustments added back into the mix. Navigating tax terms can seem daunting but it’s helpful to understand what MAGI is and how it can impact your financial situation. Learning about how taxes work can help you develop a plan for potentially minimizing your tax liabilities, so that you might have more money to invest.

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).

FAQ

What is the difference between MAGI and AGI?

Your MAGI is your adjusted gross income, with certain adjustments added back in. Your AGI is your gross income, after certain deductions are taken out.

Is MAGI used for all tax calculations?

MAGI is used for certain tax calculations that determine eligibility for tax breaks. For example, if you’re wondering whether you can claim the Earned Income Tax Credit, or get a deduction for traditional IRA contributions, your MAGI makes a difference.

Can MAGI be higher or lower than AGI?

Your MAGI will always be equal to your AGI, or higher. MAGI is your AGI, with certain deductions or adjustments added back in.

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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.

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.

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.

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SOIN-Q324-016

Sep

2024

ESG, SRI, and Impact Investing Strategies: How Are They Different?

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Impact investing is a broad category that includes a wide range of strategies; among them are two that are focused on the environment as well as social and governance issues: ESG (for environmental, social, and governance issues) and SRI (for socially responsible investing).

Investors who are interested in making an impact with their investing dollars may want to consider funds that embrace ESG or SRI strategies, but impact investing can include other goals as well (e.g., investing in or avoiding certain industries or sectors, or goals).

While there are ways in which these three strategies overlap, it’s important to understand the distinctions as they pertain to your own investing goals.

Key Points

• Impact investing refers to strategies that focus on having a measurable impact on certain companies, industries, or sectors.

• Impact investing is a broad category that can include a range of strategies, including ESG (environmental, social, and governance) and SRI (socially responsible investing), as well as others.

• As investor interest in ESG and SRI strategies has grown, so have inflows to funds that adhere to certain standards.

• Despite investor interest, standards and metrics vary widely when it comes to ESG, SRI, or any other type of impact investing.

Understanding ESG, SRI, and Impact Investing

These days, numerous companies seek to meet certain ethical, social, environmental, or other standards. While some criteria have been inspired by the United Nations’ Principles for Responsible Investment, or the U.N.’s 17 Sustainable Development Goals, investors need to bear in mind that the definition of ESG, SRI, and impact investing can vary from company to company, from country to country.

Nonetheless, investor interest in these strategies continues to grow. In fact, 67% of asset owners (e.g. institutional investors) say that over the last five years ESG standards have become even more critical to the investment process, according to a 2023 survey by Morningstar, the fund research and rating company.

As a result a number of companies have developed proprietary screening tools and scoring methods to help investors assess different investments, including stocks, bonds, ETFs, and more.

Defining ESG, SRI, and Impact Investing

That being said, the lack of clearcut ESG and SRI standards dates back to the very beginnings of these strategies.

As early as the 18th century, religious groups like the Methodists would take a financial stand against certain societal problems (e.g., the slave trade or alcohol and tobacco manufacturing) by not investing in related organizations. This values-based approach became known over time as impact investing.

Today, ESG and SRI investing can be considered modern offshoots of that philosophy — but typically with a focus on investing proactively in certain companies or sectors with the goal of supporting specific changes or outcomes.

It’s still possible to invest in ESG and SRI strategies that explicitly avoid certain industries, companies, or types of products (e.g., avoiding companies known to use child labor).

Impact investing tends to be used interchangeably with the term values investing, as well as ESG and SRI investing, but again these strategies have different aims and standards.

Impact Investing

The goal of impact investing is for investments to have a positive, measurable impact in a given area. That might mean avoiding industries (e.g. alcohol or weapons), or investing directly in social, environmental, political, or other concerns.

Some mutual funds or exchange-traded funds (ETFs) may utilize impact investing strategies, but impact investing may also involve private funds, such as closed-end private equity and venture capital funds. This is partly because some public companies have to prioritize financial goals to meet shareholder expectations or earnings forecasts, and impact goals alone may not suffice (more on profitability below).

Following are some examples of impact investing categories:

Impact Category	Metrics
Environmental	• Trees planted • Solar panels installed • Greenhouse gas emissions limited or reduced
Women’s Empowerment	• Female founders supported • Number of female employees
Jobs and Education	• Jobs created • Income creation • Access and enrollment targets
Affordable Housing	• People housed • Number of units built
Essential Services	• Individuals in need of bank accounts • Patients served in medical facilities

ESG Investing

ESG stands for environmental, social, and governance factors. It’s a set of criteria that can help investors evaluate companies according to how well they uphold or meet relevant criteria, in addition to financial concerns.

ESG investing is considered a form of sustainable or impact investing, but companies that embrace this term theoretically must focus on positive results in those three areas.

When ESG strategies started gaining more attention in the 1960s, some investors assumed ESG investing was primarily about values and ethics. Over time investors come to realize that ESG strategies may also impact a company’s financials. For example, ESG reporting can help illuminate potential risks to company performance, not only progress toward sustainability goals.

Still, adoption of ESG reporting and analysis has been slow owing to a lack of consistency around standards and metrics for meeting these criteria. While the SEC adopted new rules in early 2024 to help “standardize climate-related disclosures by public companies and in public offerings,” it soon stayed those rules when a number of groups filed petitions for review in multiple courts of appeals.

Overall, there is still quite a bit of variance in these standards.

However, the table below shows some common ways to assess a company’s adherence to ESG standards:

Environmental	Social	Governance
Energy consumption	Community engagement and support	Diversity in the board of directors
Waste and pollution	Human and labor rights	Management performance
Climate change mitigation and adaptation	Health and safety impacts on products, local areas, etc.	Executive compensation
Conservation and protection of biodiversity	Shareholder relations	Corruption
Resource management, such as water usage and sanitation	Employee relations	Disclosures and transparency

SRI

Socially responsible investing, or SRI, is another impact investing category that focuses on social and ethical issues. SRI mutual funds were among the first values-based investment products on the market.

While SRI is similar to ESG, it’s more broadly defined. Unlike ESG investing, which revolves around a set of standards, SRI doesn’t have clearly defined criteria, and investment strategies vary depending on the company.

SRI-focused investors might choose to avoid certain investments or industries, or choose companies that specifically work on or donate to certain causes. Investors may need to evaluate companies and funds based on their own criteria.
SRI investing strategies can include a focus on one or more of the following:

• Alternatives to fossil fuels (e.g., clean energy like wind or solar technologies)

• Avoiding so-called vice industries like alcohol, tobacco, cannabis, gambling

• Investing in female or minority-led companies, or companies with a social justice mission

• Avoiding companies relating to arms manufacturing and the military

• Investing in companies that adhere to human rights standards

• Supporting specific environmental outcomes, e.g. mitigating air and water pollution, safer agricultural practices, and so on

Is Sustainable Investing Different from ESG, SRI, and Impact Strategies?

Sustainable investing strategies can encompass SRI as well as ESG strategies. And while some investors use sustainable investing and impact investing interchangeably, it’s important to remember that not all impact investing is sustainable in nature.

Can SRI or ESG Investing Be Profitable?

The performance of SRI and ESG strategies versus their conventional peers have long been subject to debate. Nonetheless, the value of assets allocated to ETFs with an ESG focus has grown steadily in the last two decades. As of November 2023, according to data from Statista, the value of global assets in ESG funds was $480 billion — a substantial jump from $5 billion in 2006.

Investors interested in SRI and ESG strategies may want to examine the FTSE4Good Index Series: a compilation of stock indexes that track companies that seek to meet certain criteria or achieve certain environmental, social, or corporate governance goals. Morningstar has also developed a sustainability rating system, in use since 2016.

The Takeaway

Investors may want to bear in mind that, with the steady growth of ESG and SRI strategies in the last couple of decades, investment opportunities that focus on having an impact on the world are likely to expand.

In addition, the underlying goal of these strategies is to make a difference and potentially see a profit as well. That said, impact strategies overall don’t reduce investment risk factors; all types of impact investing, including ESG and SRI strategies, are subject to the same economic and market risk factors as conventional strategies.

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

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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.

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.

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.

SOIN0822001

Sep

2024

Can You Name a Trust as a Beneficiary of an IRA?

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

Individual retirement accounts (IRAs) offer a tax-advantaged way to invest for retirement. When opening an IRA, one question you’ll need to answer is who should be the beneficiary. You could name your spouse or another relative, but it’s also possible to list a trust as beneficiary of IRA assets.

A trust is a legal arrangement used in estate planning that allows an individual called a
trustee to manage assets for one or more beneficiaries, according to the specific wishes of the person who creates the trust.

There are advantages and disadvantages to naming a trust as the beneficiary of an IRA. It’s helpful to understand the implications of this process when developing your estate plan.

Key Points

• Naming a trust as an IRA beneficiary allows the account holder to control when and how IRA assets are distributed after they’re gone.

• IRA assets can be left to a trust in order to provide financially for those dependent on care, such as minors or special needs individuals.

• When an IRA is left to a trust instead of a spouse, that spouse will not be able to claim or roll those assets into their own IRA, as they would if they were the beneficiary.

• IRA assets held in a trust must be distributed within five years if the IRA owner died before starting to take required minimum distributions (RMDs).

• A trust that qualifies as a see-through trust, which passes assets to beneficiaries through the trust, may be able to bypass certain distribution requirements.

How an IRA Is Inherited

The way IRAs work is that the account holder makes contributions to the IRA (up to $7,000 in 2024 for those under age 50, and up to $8,000 for those 50 and up) to help save for retirement. The account holder names one or more beneficiaries to inherit the IRA. After the account holder’s death, IRA beneficiaries must take distributions from the account — known as required minimum distributions (RMDs) — and pay any required taxes due on those distributions, in accordance with Internal Revenue Service (IRS) rules.

You can select one or more beneficiaries when you open an IRA and then update your beneficiaries at any time. For example, you could make a change to your beneficiary designation if you get married or divorced and wish to name or remove your spouse.

Types of Designated IRA Beneficiaries

A designated IRA beneficiary, similar to a 401(k) beneficiary, is the individual who will inherit the IRA account, as chosen by the account owner. A designated IRA beneficiary must be a person.

There are two primary categories of designated beneficiaries: Spouse and non-spouse. Non-spouse designated beneficiaries to an IRA can include:

• Children

• Parents or other family members

The IRS recognizes a separate category of designated beneficiaries, referred to as eligible designated beneficiaries (EDBs). This term is used to describe beneficiaries who benefit from special treatment regarding inherited IRA distributions under the SECURE Act, which went into effect in 2020. The following individuals qualify for EDB status:

• Spouses and minor children of the deceased IRA owner

• Disabled or chronically ill individuals

• Individuals who are not more than 10 years younger than the IRA owner

Eligible designated beneficiaries can space out required minimum distributions from an inherited IRA over their lifetime. Ordinarily, non-spouse beneficiaries who inherit an IRA are required to withdraw all of the assets from the account within 10 years, under the rules of the SECURE ACT.

Non-Designated Beneficiaries

Non-designated beneficiaries are entities that inherit an IRA or another retirement account. Examples of non-designated beneficiaries include:

• Estates

• Charities

• Trusts

Non-designated beneficiaries must withdraw IRA assets within five years of the account owner’s death if the owner died before they were required to start taking RMDs at age 72 before 2023, and at age 73 beginning in 2023.

However, if the account owner died after they started taking out RMDs, the payout rule applies. According to this rule, the beneficiary (in this case, the trust) must take out the assets over what would have been the account owner’s life expectancy if they had not died.

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.

Benefits to Naming a Trust as an IRA Beneficiary

So, can a trust be the beneficiary of an IRA? Yes. But should a trust be the beneficiary of an IRA? That answer is largely determined by the specifics of your situation. Here are some of the advantages of naming a trust as beneficiary to an IRA.

Control

Assets held in a trust are managed by a trustee who is bound by a fiduciary duty, meaning that they must act in the best interest of their client. During your lifetime you may act as your own trustee, with someone else succeeding you at your death. Any trustee you name is required to adhere to your wishes, as specified in the trust document.

That means you can have a say in what happens to IRA assets after you’re gone. That’s one of the chief benefits to a trust. If you were to name an individual as IRA beneficiary, on the other hand, they could do whatever they like with the money.

Special Situations

Trusts can be used to manage assets on behalf of minor children or special needs children/adults. You may set up a trust for the purpose of providing financially for a family member or another individual who is dependent on you for their care.

Setting up an IRA financial trust ensures that their needs will continue to be met after you’re gone. You can leave specific instructions for your trustee and any successor trustees you name on how the trust assets should be used to fund the care for these individuals.

Disadvantages to a Trust IRA Beneficiary

Naming a trust as the beneficiary of an IRA doesn’t always make sense, however. You may lose more than you benefit by choosing a trust as beneficiary vs. an individual. Here are some of the drawbacks to carefully consider.

Distribution Rules

Non-person IRA beneficiaries, including trusts, must fully distribute assets within five years of the account owner’s death if the owner had not yet begun taking required minimum distributions, or if the account is a Roth IRA. If the account owner died after they started taking out RMDs, however, the beneficiary must take out the assets over what would have been the account owner’s life expectancy if they had not died.

The only exception to these rules is if a trust qualifies as a see-through trust (learn more about that below).

By comparison, designated non-spouse beneficiaries generally have a 10-year window in which to withdraw IRA assets. Spousal beneficiaries can treat the IRA as their own and roll it over to their retirement account, which may minimize their tax liability.

Loss of Spousal Benefits

Naming a trust as IRA beneficiary when you have a living spouse takes away some of the tax benefits that are typically afforded to spouses when inheriting retirement accounts.

Most importantly, they don’t have the option to treat the IRA as their own. That could increase their tax obligation when receiving trust assets, leaving them with less inherited wealth to fund their retirement.

Rules for Trusts Inheriting IRAs

The SECURE Act introduced rules for trusts that inherit IRAs, including the five-year requirement for distributions. The rules says that non-designated beneficiaries must withdraw IRA assets within five years of the account owner’s death if the owner died before they were required to start taking out RMDs at age 72 before 2023, and at age 73 beginning in 2023.

If the account owner died after they started taking out RMDs, the beneficiary must take out the assets over what would have been the account owner’s life expectancy if they had not died.

Trusts may be able to bypass these requirements if they qualify as see-through entities, meaning they pass retirement assets to beneficiaries. With see-through trusts, the RMDs that must be taken are calculated based on the age of the beneficiary.

Here are the rules for see-through trusts.

• Trusts must be valid according to the laws of the state in which they’re created.

• The trust must become irrevocable, meaning it can’t be changed, when the account owner passes away.

• Trust beneficiaries must be readily identifiable.

• A copy of the trust must be provided to the custodian by October 31 in the year following the account owner’s death.5

These are the most current rules as of 2024. New legislation or updates to existing legislation can change inherited IRA rules.

Process for Updating IRA Beneficiary

The process for updating IRA beneficiaries is usually determined by the brokerage or bank that holds your IRA. If you need to make an update, you’ll need to contact your IRA custodian for the next steps.

Typically, you’ll fill out a beneficiary change form and share some information about the new beneficiary. If you’re updating your IRA beneficiary to a trust you’ll likely need to share the trust’s tax identification number as well as the trustee’s name and contact information.

Keep in mind that if you have an irrevocable trust you may not be able to make the change. Talking to an estate planning attorney or financial advisor can help you better understand what changes you can or cannot make.

The Takeaway

If you’re considering a trust as part of your estate plan and you also have an IRA, think about your specific situation and objectives. Putting an IRA in a trust could make sense if you have a special family situation or you want some say in how the assets are to be used after your death. On the other hand, it’s important to weigh the tax consequences your heirs might face.

If you don’t yet have an IRA but you’d like to set one up and begin making IRA contributions, it’s easy to open a retirement account online.

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

FAQs

Who pays the taxes if a trust is the beneficiary of an IRA?

When a trust retains income from an inherited IRA, the trust pays tax on that income. If IRA assets are passed on to the trust beneficiaries, then the beneficiaries pay the tax.

Can a trust be the beneficiary of Roth IRAs and traditional IRAs?

A trust can be the beneficiary of a traditional or Roth IRA. It’s possible for someone to have both types of IRAs and name a trust as beneficiary to one or both of them.

Do IRAs with beneficiaries go through probate?

Probate is a legal process in which a deceased person’s assets are inventoried, outstanding debts are paid, and remaining assets are then passed on to their heirs. Generally speaking, retirement accounts with designated beneficiaries are not subject to probate.

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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.

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

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

SOIN-Q324-010

Guide to Environmental, Social, and Governance (ESG) Investing

What Is ESG?

What Is ESG Investing?

Environmental

Social

Governance

How ESG Scores Work

ESG vs SRI vs Impact Investing

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Why Is ESG Investing Important?

Are ESG Strategies Profitable?

Types of ESG Investments

Stocks

Bonds

Mutual Funds and ETFs

Identifying ESG Companies

Benefits of ESG Investing

Risks of ESG Investing

Starting an ESG Investment Portfolio

ESG Investing Strategies

The Takeaway

FAQ

What are the three pillars of ESG?

What are some examples of ESG investing?

What is the difference between ESG and sustainability?

Health Care Costs in Retirement: How to Plan Ahead

Health Care in Retirement

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

How Much to Budget for Health Care Costs in Retirement

Social Security Benefits

Private Sources of Income

Understanding Health Care Costs

What Does Medicare Cost, What Does It Cover?

Understanding Medicare Coverage

Medicare Costs

Other Ways to Pay for Health Care

Health Savings Account (HSA)

What Your HSA Savings May Cover

Long-Term Care Insurance

The Takeaway

FAQ

How much does the average person spend on health care in retirement?

How do I prepare for health care expenses in retirement?

How do I save for out-of-pocket medical expenses?

What Is MAGI and How Do You Calculate It?

What Is MAGI?

Definition of MAGI

Why MAGI Is Important

MAGI vs. Adjusted Gross Income (AGI)

Who Needs to Calculate MAGI

How to Calculate MAGI

Step 1: Calculate Your Adjusted Gross Income (AGI)

Step 2: Add or Subtract Applicable Adjustments

Step 3: Determine Your MAGI

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

Common Adjustments to AGI for MAGI Calculation

Tax-Exempt Interest Income

Qualified Tuition Expenses

IRA Contributions

Deducting SEP or SIMPLE IRA Contributions

Student Loan Interest Deduction

MAGI and Tax Credits

MAGI and Deductions

The Takeaway

FAQ

What is the difference between MAGI and AGI?

Is MAGI used for all tax calculations?

Can MAGI be higher or lower than AGI?

ESG, SRI, and Impact Investing Strategies: How Are They Different?

Understanding ESG, SRI, and Impact Investing

Defining ESG, SRI, and Impact Investing

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Impact Investing

ESG Investing

SRI

Is Sustainable Investing Different from ESG, SRI, and Impact Strategies?

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

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

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

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