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Dec

2024

A Guide to Financial Securities Licenses

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Before someone can sell securities or offer financial advice they must first obtain the appropriate securities license. The Financial Industry Regulatory Authority (FINRA) is the organization that sets the requirements, oversees the process for earning an investments license, and administers most of the tests.

If you’re considering a career in the financial services industry it’s important to understand how securities licensing and registration works. Investors may also benefit from understanding what the various FINRA licenses signify when selecting an advisor.

Key Points

• Securities licenses are required for individuals to sell securities and offer financial advice.

• The Financial Industry Regulatory Authority (FINRA) sets the requirements and administers most of the tests for earning securities licenses.

• Different licenses allow financial professionals to offer a range of financial products and services to clients.

• The North American Securities Administrators Association (NASAA) is responsible for licensing investment advisor firms and enforcing state securities law.

• Some common FINRA licenses include Series 6, Series 7, Series 3, Series 63, Series 65, and Series 66, each with its own specific focus and requirements.

What Is a Securities License and Who Needs Them?

A securities license is a license that allows financial professionals to sell securities and/or offer financial advice. The type of license someone holds can determine the range of financial products and services they have authorization to offer to clients. Someone who holds one or more securities or investments licenses is a registered financial professional.

FINRA is the non-governmental agency responsible for overseeing the activities of registered financial professionals. That includes individuals who hold FINRA licenses to sell securities or offer advisory services. Individual investors do not need a license to buy and sell stocks.

Under FINRA rules, anyone who’s associated with a brokerage firm and engages in that firm’s securities business must have a license.

Some specific examples of individuals who might need to have a license from FINRA include:

• Registered Investment Advisors (RIAs)

• Financial advisors who want to sell mutual funds, annuities, and other investment packages on a commission-basis

• Investment bankers

• Fee-only financial advisors who only charge for the services they provide

• Stockbrokers and commodities or futures traders

• Advisors who oversee separately managed accounts

• Individuals who want to play an advisory or consulting role in mergers and acquisitions

• IPO underwriters

The North American Securities Administrators Association (NASAA) represents state securities regulators in the United States, Canada, and Mexico. This organization is responsible for licensing investment advisor firms and securities firms at the state level, registering certain securities offered to investors, and enforcing state securities law.

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

Types of FINRA Licenses

FINRA offers a number of different securities licenses. If you’re considering a career in securities trading, it’s important to understand which one or ones you might need. The appropriate license will depend on the type of securities that you want to sell, how you’ll get paid, and what (if any) other services you’ll provide to your clients.

Here’s a rundown of some of the most common FINRA licenses, what they’re used for and how to obtain one:

Series 6

FINRA offers the Series 6 Investment Company and Variable Contracts Products Representative Exam for individuals who work for investment companies and sell variable contracts products. The types of products you can sell while holding this securities license include:

• Mutual funds (closed-end funds on the initial offering only)

• Variable annuities

• Variable life insurance

• Unit investment trusts (UITs)

• Municipal fund securities, including 529 plans

Obtaining this FINRA license requires you to also pass the introductory Securities Industry Essentials (SIE) exam. This 75-question exam tests your basic knowledge of the securities industry. FINRA offers a practice test online to help you study for the SIE. You can also watch a tutorial to learn how the 50-question Series 6 exam works.

Beyond those options you may consider investing in a paid Series 6 study prep course. Series 6 courses can help you familiarize yourself with the various variable products you can sell with this license and industry best practices. You’ll need to obtain a score of at least 70 to pass both the SIE and the Series 6 exam.

Series 7

People who see stocks and other securities must take the Series 7 General Securities Representative Exam. A Series 7 investments license is typically needed to sell:

• Public offerings and/or private placements of corporate securities (i.e. stocks and bonds)

• Rights

• Stock warrants

• Mutual funds

• Money market funds

• Unit investment trusts

• Exchange-traded funds (ETFs)

• Real estate investment trusts (REITs)

• Options on mortgage-backed securities

• Government securities

• Repos and certificates of accrual on government securities

• Direct participation programs

• Venture capital

• Municipal securities

• Hedge funds

This securities license offers the widest range, in terms of what you can sell.

You’ll need to take and pass the SIE to obtain a Series 7 exam. The Series 7 exam has 125 questions in a multiple choice format and 72% is a passing score. FINRA offers a content outline you can review to get a feel for what’s included on the exam. You may also benefit from taking a study course that covers the various securities you’re authorized to sell with the Series 7 license as well as the ethical and legal responsibilities the license conveys.

Series 3

Investment professionals can earn the Series 3 license by completing the Series 3 National Commodities Futures Exam. This test focuses on the knowledge necessary to sell commodities futures. This is a National Futures Association (NFA) exam administered by FINRA. It has 120 multiple choice questions, with 70% considered a passing score.

You have to pass the Series 3 license exam to join the National Futures Association. In terms of what’s included in the exam and how to study for it, the test is divided into these subjects:

• Futures trading theory and basic functions terminology

• Futures margins, options premiums, price limits, futures settlements, delivery, exercise and assignment

• Types of orders

• Hedging strategies

• Spread trading strategies

• Option hedging

• Regulatory requirements

Neither FINRA nor the NFA offer detailed study guides or practice tests for the Series 3 securities license. But you can purchase study prep materials online.

💡 Quick Tip: How to manage potential risk factors in a self directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Series 63

The Series 63 Uniform Securities Agent State Law Exam is an NASAA exam administered by FINRA. The test has 60 questions, of which you’ll need to get at least 43 correct in order to pass with a score of 72%.

You’ll need this license if you also hold a Series 6 or Series 7 license and you want to sell securities in any state. The NASAA offers a downloadable study guide that offers an overview of what’s included on the Series 63 securities license exam. Topics include:

• Regulation of investment advisors

• Regulation of broker-dealers

• Regulation of securities and issuers

• Communication with customers and prospects

• Ethical practices

Beyond that, the NASAA offers a list of suggested vendors for purchasing Series 63 exam study materials. But it doesn’t specifically endorse any of these vendors or their products for individuals who plan to obtain a Series 63 license.

Series 65

The Series 65 Uniform Investment Adviser Law Exam is another NASAA test that’s administered by FINRA. Holding this license allows you to offer services as a financial planner or a financial advisor on a fee-only basis. The exam has 130 multiple choice questions and you’ll need to get at least 92 questions correct to pass.

As with the Series 63 exam, the NASAA offers a study guide for the Series 65 exam that outlines key topics. Some of the things you’ll need to be knowledgeable about include:

• Basic economic concepts and terminology

• Characteristics of various investment vehicles, such as government securities and asset-backed securities

• Client investment recommendations and strategies

• Regulatory and ethical guidelines

You can review a list of approved vendors for Series 65 study materials on the NASAA website.

Series 66

The Series 66 Uniform Combined State Law Exam is the third NASAA exam administered by FINRA. Financial professionals who want to qualify as both securities agents and investment adviser representatives take this test.

This multiple choice exam has 100 questions and you’ll need a score of 73 correct or higher to pass. If you already hold a Series 7 license, which is a co-requisite, you could choose to take the Series 66 exam in place of the Series 63 and Series 65 exams.

The study guide and the scope of what the Series 66 exam covers is similar to the Series 65 exam. So if you hold a Series 65 license already, you may have little difficulty in studying and preparing for the Series 66 exam.

The Takeaway

Earning a securities license could help to further your career if you’re interested in the financial services industry. Knowing which license you need and how to qualify for it is an important first step.

Fortunately, you don’t need to hold a FINRA license to invest for yourself. For instance, you could do some research and work at building a diversified portfolio.

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.

About the author

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.

You may also be interested in:

How Are Financial Institutions Governed?

FINRA vs the SEC

How to Choose a Financial Advisor

Photo credit: iStock/jacoblund

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

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Dec

2024

What Is an Equal-Weighted Index? How to Calculate It

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

An equal-weight index gives each constituent the same weight in the index, versus a market-cap-weighted or price-weighted index, where bigger companies (or those trading at higher prices) hold a larger share of the index.

Equal weighting strives to equalize the impact of each company’s performance on the overall index. Traditional market-cap weighting tends to give bigger companies more influence over outcomes.

Equal-weight investing is a smart beta strategy that may appeal to certain types of investors more than others. This article will delve deep into equal-weight investing, including:

• What Is an Equal Weighted Index?

• How to Calculate an Equal Weighted Index.

• Advantages of Using an Equally Weighted Index.

• Disadvantages of Using an Equally Weighted Index.

What Is an Equal-Weighted Index?

A stock market index tracks the performance of a specific group of stocks or a particular sector of the market. For example, the S&P 500 Composite Stock Price Index tracks the movements of 500 companies that are recognized as leaders within their respective industries.

Stock market indices are often price-weighted or capitalization-weighted.

• In a price-weighted index, the stocks that have the highest share price carry the most weight. In a capitalization-weighted index, the stocks with the highest market capitalization carry the most weight.

• Market capitalization represents the value of a company as measured by multiplying the current share price by the total number of outstanding shares.

While some investors may wish to invest in stocks, others may be interested in mutual funds or index funds, which are like a container holding many stocks.

How Equal Weighting Works

An equal-weighted index is a stock market index that gives equal value to all the stocks that are included in it. In other words, each stock in the index has the same importance when determining the index’s value, regardless of whether the company is large or small, or how much shares are trading for.

An equally weighted index essentially puts all of the stocks included in the index on a level playing field when determining the value of the index. With a price-weighted or capitalization-weighted index, on the other hand, higher-priced stocks and larger companies tend to dominate the index’s makeup — and thereby dictate or influence the overall performance of that index.

This in turn influences the performance of corresponding index funds, which track that particular index. Because index funds mirror a benchmark index, they are considered a form of passive investing.

Most exchange traded funds (ETFs) are passive funds that also track an index. Now there are a growing number of actively managed ETFs. While equal-weight ETFs are considered a smart beta strategy, they aren’t fully passive or active in the traditional sense. These funds do track an index, but some active management is required to rebalance the fund and keep the constituents equally weighted.

Examples of Equal-Weight Funds

Equal-weight exchange-traded funds (ETFs) have grown more common as an increasing number of investors show interest in equal-weight funds. Equal weight falls under the umbrella of smart-beta strategies, which refers to any non-market-capitalization strategy.

The term “smart beta” doesn’t mean a particular strategy is better or more effective than others.

Equal-weight funds, for example, are designed to shift the weight of an index and its corresponding funds away from big cap players, which can unduly influence the performance of the index/fund. And while an equal-weight strategy may have improved fund performance in some instances, the results are inconsistent.

Here is a list of the top five equal-weight ETFs by assets under management (AUM), according to ETF.com.

1. Invesco S&P 500 Equal Weight ETF (RSP )

2. SPDR S&P Biotech (XBI )

3. SPDR S&P Oil and Gas Exploration and Production (XOP )

4. SPDR S&P Global Natural Resources ETF (GNR )

5. First Trust Cloud Computing ETF (SKYY )

How to Calculate Equal-Weighted Index

To calculate equal weighted index, you need to know two things:

• The share price of each stock that’s included in the index

• Total number of stocks included in the index

If you’re calculating an equally weighted index value for an index that has five stocks in it, each one would be weighted 20%, regardless of its stock price or market capitalization. To find an equal-weighted index value, you would simply add the share price of each stock together, then multiply it by the weight.

So for example, say an index has five stocks priced at $100, $50, $75, $90 and $85. Each one would be weighted at 20%.

Following the formula, you would add each stock’s price together for a total of $400. You’d then multiply that by the 20% weighting to arrive at an equal-weighted value of 80.

As fund turnover occurs and new assets are exchanged for old ones, or as share prices fluctuate, the equally weighted index value must be recalculated.

The equally weighted index formula can be used to determine the value of a particular index. You may want to do this when determining which index ETF to invest in or whether it makes sense to keep a particular index mutual fund in your portfolio.

Advantages of Using an Equally Weighted Index

An index investing strategy might be preferable if you lean toward more conservative investments or you simply want exposure to a broad market index without concentrating on a handful of stocks. That’s something you’re less likely to get with mutual funds or ETFs that follow a price-weighted or capitalization-weighted index.

Here are some of the reasons to consider an equal-weighted index approach:

• An equal-weight strategy can increase diversification in your portfolio while potentially minimizing exposure to risk.

• It’s relatively easy to construct an equally weighted portfolio using index mutual funds and ETFs.

• It may appeal to value investors, since there’s less room for overpriced stocks to be overweighted and undervalued stocks to be underweighted.

• Equal-weighted indices may potentially generate better or more incremental returns over time compared to price-weighted or capitalization-weighted indices, but there are no guarantees.

Disadvantages of Using Equally Weighted Index

While there are some pros to using an equal weighted approach, it may not always be the best choice depending on your investment goals. In terms of potential drawbacks, there are two big considerations to keep in mind:

• Equal-weighted index funds or ETFs that have a higher turnover rate may carry higher expenses for investors.

There is typically a constant buying and selling of assets that goes on behind the scenes to keep an equal-weighted mutual fund or ETF in balance.

Higher turnover ratios, i.e. how often assets in the fund are swapped in and out, can lead to higher expense ratios if a fund requires more active management. The expense ratio is the price you pay to own a mutual fund or ETF annually, expressed as a percentage of the fund’s assets. The higher the expense ratio, the more of your returns you hand back each year to cover the cost of owning a particular fund.

• Equal-weighted indices can also be problematic in bear market environments, which are characterized by an overall 20% decline in stock prices. During a recession, cap-weighted funds may outperform equal-weighted funds if the fund is being carried by a few stable, larger companies.

◦ Conversely, an equal-weighted index or fund may miss out on some of the gains when markets are strong and bigger companies outperform.

Advantages	Disadvantages
Can increase diversification	Will typically have higher costs
Constructing an equal-weight portfolio is straightforward	May see outsize declines in bear markets
Equal-weight strategies may appeal to value investors	May not realize full market gains
Equal-weight strategies may perform better than traditional strategies, but there are no guarantees

The Takeaway

In an equal-weight index, each stock counts equally toward the index’s value, regardless of whether the company is large or small, or what shares are currently trading for. The same is true of any corresponding fund.

There are advantages to investing in an equal-weight index fund over a capitalization-weighted index or price-weighted index. For example, equal-weighted indices may generate better or more consistent returns. Investing in an equal-weight index may be appealing to investors who prefer a value investing strategy or who want to diversify their portfolio to minimize risk.

With a SoFi Invest online trading account, you can begin building your portfolio using SoFi’s streamlined, secure investing app. You can follow a DIY path by choosing which stocks or ETFs to invest in, in addition to many other options including fractional shares, IPO shares, and more. SoFi doesn’t charge any commission, and members have access to complimentary financial advice from professionals.

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

FAQ

How do equal-weight ETFs work?

Like an equal-weight index, an equal-weight ETF holds the same proportion of each of its constituents, which in theory may equalize the impact of different companies’ performance.

When should you buy equal-weighted ETFs?

If you’d like to invest in a certain sector, but you don’t want to be riding the coattails of the biggest companies in that sector because you see the value in other players, you may want to consider an equal-weight ETF.

What is the equally weighted index return?

The return of an equally weighted index would be captured by the performance of an investment in a corresponding index fund or ETF. So if you invest $100 in Equal Weight Fund A, which tracks an equal weight index, and the fund goes up or down by 5%, you would see a 5% gain or loss.

About the author

Rebecca Lake

You may also be interested in:

Value-Weighted Index: Explanation and How to Calculate

Understanding The Stock Market Index

The S&P 500 Explained and Defined

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.
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Dec

2024

Inherited IRA: Distribution Rules for Beneficiaries

Inherited IRA Distribution Rules Explained

By Ashley Kilroy | invest, Investing, Preparing for Retirement | Comments Off

The distribution rules for inheriting an IRA are highly complicated, and have changed since the SECURE Act of 2019. Unlike other kinds of inheritances, an inherited IRA is governed by IRS rules about how and when the money can be distributed, and depend on whether the beneficiary is an eligible designated beneficiary or a non-spouse beneficiary.

Other factors that influence inherited IRA distributions include: the age of the original account holder when they died, and whether the account holder had started taking required minimum distributions (RMDs) before their death.

This story does not address non-individual beneficiaries, such as a charity.

Key Points

• An inherited IRA refers to funds bequeathed by a deceased IRA owner to one or more beneficiaries.

• It can also describe a specific type of IRA that a beneficiary can open to receive inherited funds, which is subject to different terms than an ordinary IRA.

• The factors that impact how a beneficiary must handle inherited IRA assets include whether they are a spouse or non-spouse of the deceased, and whether the original account owner had started taking required minimum distributions (RMDs).

• Thanks to the SECURE Act of 2019, there are more favorable options for eligible designated beneficiaries, who have the option of stretching out withdrawals longer, in most cases.

• Eligible designated beneficiaries include a spouse, a minor child, someone who is chronically ill or disabled, per IRS rules, or an individual up to 10 years younger than the original account holder.

What Is an Inherited IRA?

When an IRA owner passes away, the funds in their account are bequeathed to their beneficiary (or beneficiaries), who can open an inherited IRA to accept the funds, or they may be able to rollover the money to their own IRA account.

• The original retirement account could be any type of IRA, such as a Roth IRA, traditional IRA, SEP IRA, or SIMPLE IRA.

• The deceased’s 401(k) or other qualified retirement plan can also be used to fund an inherited IRA, but the distribution terms would be specified by the plan administrator.

If you inherit an IRA, the following conditions determine what you can do with the funds:

• Your relationship to the deceased account holder (e.g., are you a spouse or non-spouse)

• The original account holder’s age when they died

• Whether they had started taking their required minimum distributions (RMDs) before they died

• The type of retirement account involved

Basic Rules About Withdrawals

There are a number of options available for taking distributions, depending on your relationship to the deceased. At minimum, most beneficiaries can either take the inherited funds as a lump sum, or they can follow the 10-year rule.

The 10-year rule regarding inherited IRAs means that the account must be emptied by the 10th year following the death of the original account holder.

In all cases, the tax rules governing the type of IRA (tax-deferred vs. Roth) apply to the inherited IRA as well. So withdrawals from an inherited traditional IRA are taxed as income. Withdrawals from an inherited Roth IRA are generally tax-free (details below).

Exceptions for Eligible Designated Beneficiaries

Withdrawal rules for inherited IRAs are different for eligible designated beneficiaries.
According to the IRS, an eligible designated beneficiary refers to:

• The spouse or minor child of the original account holder.

• A minor child is under age 21, and can be biological or legally adopted.

• An individual who meets the IRS criteria for being a disabled or chronically ill person.

• A person who is no more than 10 years younger than the IRA owner or plan participant.

If you qualify as an eligible designated beneficiary, and you are a non-spouse, here are the options that pertain to your situation:

• If you’re a minor child, you can extend withdrawals until you turn 21.

• If you’re disabled or chronically ill, or not more than 10 years younger than the deceased, you can extend withdrawals throughout your lifetime.

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 Are the RMD Rules for Inherited IRAs?

Assuming the original account holder had not started taking RMDs, and you are the surviving spouse and sole beneficiary of the IRA, you have a few options:

Rollover the Funds to Your Own IRA

If you rollover the funds to your own IRA, new or existing, you have to do an apples-to-apples rollover (tax deferred to tax deferred, Roth to Roth.) In addition:

• Once rolled over, inherited funds become subject to regular IRA rules, based on your age. Meaning: You have to wait to take distributions until you’re 59 ½ (or potentially owe a 10% penalty), in the case of a tax-deferred account rollover.

• You can keep contributing to the IRA.

• RMDs from your own IRA are subject to your life expectancy table and likely smaller, which may be advantageous from a tax perspective.

Move the Funds to an Inherited IRA

You can also set up an inherited IRA in order to receive the funds you’ve inherited. Again the accounts must match (e.g., funds from a regular Roth IRA must be moved to an inherited Roth IRA). Inherited IRAs follow slightly different rules.

• You cannot contribute to the IRA.

• You must take RMDs every year, but these can be based on your own life expectancy

• Distributions from a tax-deferred account are taxable, but the 10% penalty for early withdrawals before age 59½ doesn’t apply.

If the Deceased Had Started Taking RMDs

If the original account holder had started taking RMDs, you (the spouse) have to take the rest of the RMDs for that year they died in. Then you switch to your own RMD, from there on out, each year.

Some people prefer to open their inherited IRA account with the same firm that initially held the money for the deceased. However, you can open an IRA with almost any bank or brokerage.

When You Inherit from a Non-Spouse

If you are a non-spouse beneficiary, here’s what to consider. First, decide whether you meet the criteria for being an eligible designated beneficiary, or a designated beneficiary.

If You’re a Non-Spouse, Eligible Designated Beneficiary

Non-spouse eligible designated beneficiaries include: chronically ill or disabled non-spouse beneficiaries; non-spouse beneficiaries not more than 10 years younger than the original deceased account holder; or a minor child of the account owner.

Once a minor child beneficiary reaches 21, they have 10 years to deplete the account.

If You’re a Non-Spouse Designated Beneficiary

All other non-spouse beneficiaries (including grandchildren and other relatives) must follow the 10-year rule and deplete the account by the 10th year following the death of the account holder.

After that 10-year period, the IRS will impose a 50% penalty tax on any funds remaining.

Multiple Beneficiaries

If there is more than one beneficiary of an inherited IRA, the IRA can be split into different accounts so that there is one for each person.

However, in general, you must each start taking RMDs by December 31st of the year following the year of the original account holder’s death, and all assets must be withdrawn from each account within 10 years (aside from the exceptions noted above).

It’s Possible to Disclaim Assets

You can also refuse an inherited IRA. In that case, the funds will pass to the next eligible beneficiary. Generally, the choice to disclaim inherited IRA assets must be completed within nine months of the account holder’s death.

Inherited IRA Examples

These are some of the different instances of inherited IRAs and how they can be handled.

Spouse inherits and becomes the owner of the IRA: When the surviving spouse is the sole beneficiary of the IRA, they can opt to become the owner of it by rolling over the funds into their own IRA. The rollover must be done within 60 days.

This could be a good option if the original account holder had already started taking RMDs, because it delays the RMDs until the surviving spouse turns 73.

Non-spouse designated beneficiaries: An adult child or friend of the original IRA owner can open an inherited IRA account and transfer the inherited funds into it.

They generally must start taking RMDs by December 31 of the year after the year in which the original account holder passed away. And they must withdraw all funds from the account 10 years after the original owner’s death.

Both a spouse and a non-spouse inherit the IRA: In this instance of multiple beneficiaries, the original account can be split into two new accounts. That way, each person can proceed by following the RMD rules for their specific situation.

How Do I Avoid Taxes on an Inherited IRA?

Money from IRAs is generally taxed upon withdrawals, so your ordinary tax rate would apply to any tax-deferred IRA that was inherited — traditional, SEP IRA, or SIMPLE IRA.

However, if you have inherited the deceased’s Roth IRA, which allows for tax-free distributions, you should be able to make tax-free withdrawals of contributions and earnings, as long as the original account was set up at least five years ago (a.k.a. The five-year rule). As with an ordinary Roth account, you can withdraw contributions tax free at any time.

The Takeaway

Once you inherit an IRA, it’s wise to familiarize yourself with the inherited IRA rules and requirements that apply to your situation. No matter what your circumstance, inheriting an IRA account has the potential to put you in a better financial position for your own retirement.

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

Help build your nest egg with a SoFi IRA.

FAQ

Are RMDs required for inherited IRAs in 2023?

The IRS recently delayed the final RMD rule changes regarding inherited IRAs to calendar year 2024. What this means is that the IRS will, in some cases, waive penalties for missed RMDs on inherited IRAs in 2023 — but only if the original owner died after 2019 and had already started taking RMDs.

What are the disadvantages of an inherited IRA?

The disadvantages of an inherited IRA include: knowing how to navigate and follow the complex rules regarding distributions and RMDs, and understanding the tax implications and potential penalties for your specific situation.

How do you calculate your required minimum distribution?

To help calculate your required minimum distribution, you can consult IRS Publication 590-B. There you can find information and tables to help you determine what your specific RMD would be.

Photo credit: iStock/shapecharge

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.

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Dec

2024

What Is Greenwashing?

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

As climate issues continue to loom large around the world, people are becoming familiar with the term greenwashing — when a company markets itself as more sustainable than it actually is. This tactic impacts investors and consumers alike because it’s designed to mislead people through a variety of means: mislabeling, the use of vague terminology, making claims about green actions or outcomes that can’t be verified (or are found to be deceptive).

The term greenwashing is derived from the notion of whitewashing, which is when a company or individual conceals wrongdoings by presenting a cleaned-up, but deceptive version of their actions.

One reason companies engage in greenwashing is to attract consumer and investor dollars. According to the 2023 Business of Sustainability Index, 68% of consumers claimed they would spend more money on environmentally friendly products. But some companies engage in greenwashing to avoid environmental regulations.

Key Points

• Greenwashing is when a company markets itself as more sustainable or eco-friendly than it is.

• Companies may engage in greenwashing to attract consumers, employees, or investors.

• Greenwashing can also be an attempt to avoid stringent or costly regulations.

• Common greenwashing techniques include misleading labels, vague or meaningless terminology, a deceptive use of data, and more.

• It’s vital for investors, as well as consumers, to look beyond an organization’s green claims to verify whether they are adhering to ESG standards.

Identifying the Different Types of Greenwashing

Before you buy products marketed as sustainable or eco-friendly, or invest in a green company that makes similar claims, it may help to know some of the red flags of greenwashing.

Many of these can be convincing, so in order to decide whether a company is engaging in actual greenwashing or not, you may have to do your own research.

Here’s what to look out for when purchasing a product, or investing in a company that claims to embrace sustainability or ESG investing strategies (i.e., environmental, social, and governance practices):

• Vague language: Labels such as “eco-conscious,” “clean,” or “100% sustainable” don’t actually mean anything in terms of a company’s manufacturing processes or adherence to environmental criteria. Be sure to research ESG standards that reflect actual environmental practices.

• Imagery: If a polluting company uses marketing images of flowers, trees, beaches and so forth, they may be trying to appear more environmentally friendly than they really are. Be sure to check whether the product lives up to the advertising.

• Greenwashing a traditionally polluting product: Companies may attempt to improve the branding of a product by making it seem more environmentally friendly without actually changing much or anything about it.

• False associations: Brands can make it seem like they are endorsed by a third party when they really aren’t, or the third party is simply their own subsidiary.

• Green products from a polluting company: A company might make a product that has a lower environmental impact, such as an electric vehicle, but manufacture it in a way that creates significant waste and greenhouse gas emissions.

• Fabricated data: Companies might fund research that will have results that make them look better, or make data up completely.

Again, because socially responsible investing has grown so rapidly, and many companies want to attract the attention of investors and consumers with a green sensibility, there is commensurate growth on the greenwashing side, so it does pay to be cautious when making choices.

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Example of Greenwashing

Greenwashing is increasingly on the radar of regulatory bodies that protect consumers and investors, but some watchdog organizations lack the resources to hold companies to account. A few examples of what would be considered greenwashing are described on the U.S. Federal Trade Commission (FTC) website:

• A company labels a trash bag they are selling as “recyclable.” Although this may be true, it’s unlikely that a trash bag full of trash will be emptied and then recycled on its own. This label makes the product appear to have an environmental benefit, but in reality it doesn’t.

• In another example, a company labels a product as having 50% more recycled content than a previous product did. This makes it sound like a significant amount, but in fact the company may have increased the recycled content from 2% to only 3%, so there has been hardly any change in reality.

• A company labels a product as “recyclable” but they don’t say specifically whether all parts of it are recyclable, just some parts, or just the packaging.

Other real-world examples include: An oil company that’s known for environmental negligence releases advertisements that state their dedication to a carbon-free future — or companies promising to do environmental cleanups, but failing to actually follow through on those promises.

You can compare these to alternative or solar energy companies that are making a difference.

The Negative Impact of Greenwashing on a Company

Although in the short term greenwashing might benefit a company if it leads to more people buying their products, the risk is that negative consequences can quickly outweigh those gains. If consumers realize the company is engaging in greenwashing, rather than adhering to established ESG frameworks, there can be a big PR backlash, and serious reputational damage.

Companies can also face legal ramifications for their misleading claims. And investors interested in true impact investing may take their business elsewhere.

In the long term, the biggest negative consequence is the actual environmental impact of manufacturing practices that are not, in fact, green or sustainable. Companies rely on clean water and air, quality soil, and a stable climate to operate. A thriving economy requires a healthy planet, and greenwashing ultimately doesn’t support either.

6 Ways to Avoid Greenwashing

Whether purchasing products or investing in companies, if you are looking for the most sustainable options, there are a few ways to avoid greenwashing.

1. Clear and Transparent Language

Watch out for vague terms and language. If a brand makes sustainability claims, look for specifics such as certifications, verifiable third-party endorsements, industry credentials, and details about exactly what the brand is doing.

2. Evaluate the Data

If a brand uses statistics and numbers to back up its sustainability claims, make sure the numbers are backed up with credible data.

3. Compare Similar Products

A company may make sustainability claims when in fact their product has basically the same environmental impact as their competitor’s. Compare ingredients, packaging, and manufacturing information to see whether one product is really better than another.

4. Look Beyond the Final Product

Even if a company is improving the impact of its products, it may not be addressing the waste and emissions associated with its operations or supply chain. If this is the case, they may be just making changes for marketing purposes. Check out a company’s website and/or watchdog groups to learn how much effort is going into sustainability at the corporate level.

5. Look for Goals and Timelines

If a company is truly implementing a comprehensive sustainability plan, it would include measurable goals and timelines. Ideally those would be available to investors and consumers, in the interest of transparency.

6. Verify Ingredients and Materials

Some terminology and product labels can be misleading. For instance, a company might say that their product is made from organic cotton or recycled plastic, when in fact only a small percentage of the cotton or plastic is organic or recycled and the rest is not.

The FDA has no guidelines for what the term “natural” means, and according to the USDA the term simply means that a product is “minimally processed” with “no artificial ingredients.”

Greenwashing vs Green Marketing

There is nothing wrong with a company telling the story of its environmental initiatives and the steps it is taking to produce products more sustainably. That’s green marketing at its best and most transparent. By contrast, greenwashing is when a company attempts to cover up their bad practices.

Actual green marketing may include:

• Certifications and endorsements from established regulatory organizations

• Clearly labeled manufacturing processes

• Recyclable, compostable, or biodegradable materials (but watch out for these labels, sometimes a product can actually only be composted or biodegrade in very specific conditions that aren’t realistic).

• Products free from toxic chemicals

• Use of renewable energy

• The use of transportation measures such as EVs

• Purchase of carbon offsets for any unavoidable emissions

• In-office programs and measures such as renewable energy, LEED certified buildings, on-site composting, or elimination of single use plastic

• Doesn’t use too much packaging, and ideally avoids plastic packaging

• Circularity programs that allow consumers to send back the product for repair or reuse

• High-quality manufacturing made to last rather than one-time or short-term use

• Fair trade and ethical labor practices

• Environmental programs outside the company, such as donations or volunteer efforts

The Takeaway

Greenwashing is a marketing tactic some companies use to align themselves with the growing consumer and investor desire for sustainable products and investments. It’s related to the concept of “whitewashing,” which means covering up the truth with a positive-sounding story.

Investors committed to sustainability can look for red flags of greenwashing before deciding whether to invest.

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FAQ

What is ESG greenwashing?

ESG greenwashing is the practice of using marketing tactics to exaggerate an organization’s environmental, social, or governance efforts in order to attract customers, employees, investors, or positive media attention.

What are the three most common kinds of greenwashing?

Three common types of greenwashing are the use of environmental imagery, misleading labels and language, and hidden tradeoffs where the company emphasizes one sustainable aspect of a product — while still engaging in environmentally damaging practices.

Photo credit: iStock/fizkes

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Dec

2024

457 vs 401(k): A Detailed Comparison

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

Table of Contents

401(k) Plans
Vesting in a 401(k) Retirement Plan
457 Plans
Vesting in a 457 Retirement Plan
457 vs 401(k): Comparing the Pros
457 vs 401(k): Comparing the Cons
457 vs 401(k): The Differences
457 vs 401(k): The Similarities
457 vs 401(k): Which Is Better?
FAQ

Depending on where you work, you may be able to save for retirement in a 457 plan or a 401(k). While any employer can offer a 401(k), a 457 plan is commonly associated with state and local governments and certain eligible nonprofits.

Both offer tax advantages, though they aren’t exactly the same when it comes to retirement saving. Understanding the differences between a 457 retirement plan vs. 401(k) plans can help you decide which one is best for you.

And you may not have to choose: Your employer could offer a 401(k) plan and a 457 plan as retirement savings options. If you’re able to make contributions to both plans simultaneously, you could do so up to the maximum annual contribution limits — a terrific savings advantage for individuals in organizations that offer both plans.

Key Points

• A 457 plan and a 401(k) are retirement savings options with tax advantages.

• Both plans have contribution limits and may offer employer matching contributions.

• A 401(k) is governed by ERISA, while a 457 plan is not.

• 457 plans allow penalty-free withdrawals before age 59 ½ if you retire, unlike 401(k) plans.

• 457 plans have special catch-up provisions for those nearing retirement.

401(k) Plans

A 401(k) is a tax-advantaged, defined contribution plan. Specifically, it’s a type of retirement plan that’s recognized or qualified under the Employee Retirement Income Security Act (ERISA).

With a 401(k) plan, the amount of benefits you can withdraw in retirement depends on how much you contribute during your working years and how much those contributions grow over time.

Understanding 401(k) Contributions

A 401(k) is funded with pre-tax dollars, meaning that contributions reduce your taxable income in the year you make them. And withdrawals are taxed at your ordinary income tax rate in retirement.

Some employers may offer a Roth 401(k) option, which would enable you to deposit after-tax funds, and withdraw money tax-free in retirement.

401(k) Contribution Limits

The IRS determines how much you can contribute to a 401(k) each year. For 2024, the annual contribution limit is $23,000; $22,500 in 2023. Workers age 50 or older can contribute an additional $7,500 in catch-up contributions. Generally, you can’t make withdrawals from a 401(k) before age 59 ½ without incurring a tax penalty. So, if you retire at 62, you can avoid the penalty but if you retire at 52, you wouldn’t.

Employers can elect to make matching contributions to a 401(k) plan, though they’re not required to. If an employer does offer a match, it may be limited to a certain amount. For example, your employer might match 50% of contributions, up to the first 6% of your income.

401(k) Investment Options

Money you contribute to a 401(k) can be invested in mutual funds, index funds, target-date funds, and exchange-traded funds (ETFs). Your investment options are determined by the plan administrator. Each investment can carry different fees, and there may be additional fees charged by the plan itself.

The definition of retirement is generally when you leave full-time employment and live on your savings, investments, and other types of income. So remember that both traditional and Roth 401(k) accounts are subject to required minimum distribution (RMD) rules beginning at age 72. That’s something to consider when you’re thinking about your income strategy in retirement.

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Vesting in a 401(k) Retirement Plan

A 401(k) plan is subject to IRS vesting rules. Vesting determines when the funds in the account belong to you. If you’re 100% vested in your account, then all of the money in it is yours.

Employee contributions to a 401(k) are always 100% vested. The amount of employer matching contributions you get to keep can depend on where you are on the company’s vesting schedule. Amounts that aren’t vested can be forfeited if you decide to leave your job or you retire.

Employer’s may use a cliff vesting approach in which your percentage of ownership is determined by year. In year one and two, your ownership claim is 0%. Once you reach year three and beyond, you’re 100% vested.

With graded vesting, the percentage increases gradually over time. So, you might be 20% vested after year two and 100% vested after year six.

All employees in the plan must be 100% vested by the time they reach their full retirement age, which may or may not be the same as their date of retirement. The IRS also mandates 100% vesting when a 401(k) plan is terminated.

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.

457 Plans

A 457 plan is a deferred compensation plan that can be offered to state and local government employees, as well as employees of certain tax-exempt organizations. The most common version is the 457(b); the 457 (f) is a deferred compensation plan for highly paid executives. In certain ways, a 457 is very similar to a 401(k).

• Employees can defer part of their salary into a 457 plan and those contributions are tax-deferred. Earnings on contributions are also tax-deferred.

• A 457 plan can allow for designated Roth contributions. If you take the traditional 457 route, qualified withdrawals would be taxed at your ordinary income tax rate when you retire.

• Since this is an employer-sponsored plan, both traditional and Roth-designated 457 accounts are subject to RMDs once you turn 72.

• For 2023, the annual contribution limit is $22,500, and $7,500 for the catch-up amount for workers who are 50 or older.

One big difference with 457 plans is that these limits are cumulative, meaning they include both employee and employer contributions rather than allowing for separate matching contributions the way a 401(k) does.

Another interesting point of distinction for older savers: If permitted, workers can also make special catch-up contributions for employees who are in the three-year window leading up to retirement.

They can contribute the lesser of the annual contribution limit or the basic annual limit, plus the amount of the limit not used in any prior years. The second calculation is only allowed if the employee is not making regular catch-up contributions.

Vesting in a 457 Retirement Plan

Vesting for a 457 plan is similar to vesting for a 401(k), but you generally can’t be vested for two full years. You’re always 100% vested in any contributions you make to the plan. The plan can define the vesting schedule for employer contributions. For example, your job may base vesting on your years of service or your age.

As with a 401(k), any unvested amounts in a 457 retirement plan are forfeited if you separate from your employer for any reason. So if you’re planning to change jobs or retire early, you’d need to calculate how much of your retirement savings you’d be entitled to walk away with, based on the plan’s vesting schedule.

457 vs 401(k): Comparing the Pros

When comparing a 457 plan vs. 401(k), it’s important to look at how each one can benefit you when saving for retirement. The main advantages of using a 457 plan or a 401(k) to save include:

• Both offer tax-deferred growth

• Contributions reduce taxable income

• Employers can match contributions, giving you free money for retirement

• Both offer generous contribution limits, with room for catch-up contributions

• Both may offer loans and/or hardship withdrawals

Specific 457 Plan Advantages

A 457 plan offers a few more advantages over a 401(k).

Unlike 401(k) plans, which require employees to wait until age 59 ½ before making qualified withdrawals, 457 plans allow withdrawals at whatever age the employee retires. And the IRS doesn’t impose a 10% early withdrawal penalty on withdrawals made before age 59 ½ if you retire (or take a hardship distribution).

Also, independent contractors can participate in an organization’s 457 plan.

And, as noted above, 457 plans have that special catch-up provision option, for those within three years of retirement.

457 vs 401(k): Comparing the Cons

Any time you’re trying to select a retirement plan, you also have to factor in the potential downsides. In terms of the disadvantages associated with a 457 retirement plan vs. 401(k) plans, they aren’t that different. Here are some of the main cons of both of these retirement plans:

• Vesting of employer contributions can take several years, and plans vary

• Employer matching contributions are optional, and not every plan offers them

• Both plans are subject to RMD rules

• Loans and hardship withdrawals are optional

• Both can carry high plan fees and investment options may be limited

Perhaps the biggest con with 457 plans is that employer and employee contributions are combined when applying the annual IRS limit. A 401(k) plan doesn’t have that same requirement so you could make the full annual contribution and enjoy an employer match on top of it.

457 vs 401(k): The Differences

The most obvious difference between a 401(k) vs. 457 account is who they’re meant for. If you work for a state or local government agency or an eligible nonprofit, then your employer can offer a 457 plan for retirement savings. All other employers can offer a 401(k) instead.

Aside from that, 457 plans are not governed by ERISA since they’re not qualified plans. A 457 plan also varies from a 401(k) with regard to early withdrawal penalties and the special catch-up contributions allowed for employees who are nearing retirement. Additionally, a 457 plan may require employees to prove an unforeseeable emergency in order to take a hardship distribution.

A 457 plan and a 401(k) can offer a different range of investments as well. The investments offered are determined by the plan administrator.

457 vs 401(k): The Similarities

Both 457 and 401(k) plans are subject to the same annual contribution limits, though again, the way the limit is applied to employer and employee contributions is different. With traditional 401(k) and 457 plans, contributions reduce your taxable income and withdrawals are taxed at your ordinary income tax rate. When you reach age 72, you’ll need to take RMDs unless you’re still working.

Either plan may allow you to take a loan, which you’d repay through salary deferrals. Both have vesting schedules you’d need to follow before you could claim ownership of employer matching contributions. With either type of plan you may have access to professional financial advice, which is a plus if you need help making investment decisions.

457 vs 401(k): Which Is Better?

A 457 plan isn’t necessarily better than a 401(k) and vice versa. If you have access to either of these plans at work, both could help you to get closer to your retirement savings goals.

A 401(k) has an edge when it comes to regular contributions, since employer matches don’t count against your annual contribution limit. But if you have a 457 plan, you could benefit from the special catch-up contribution provision which you don’t get with a 401(k).

If you’re planning an early retirement, a 457 plan could be better since there’s no early withdrawal penalty if you take money out before age 59 ½. But if you want to be able to stash as much money as possible in your plan, including both your contributions and employer matching contributions, a 401(k) could be better suited to the task.

Investing in Retirement With SoFi

If you’re lucky enough to work for an organization that offers both a 457 plan and a 401(k) plan, you could double up on your savings and contribute the maximum to both plans. Or, you may want to choose between them, in which case it helps to know the main points of distinction between these two, very similar plans.

Basically, a 401(k) has more stringent withdrawal rules compared with a 457, and a 457 has more flexible catch-up provisions. But a 457 can have effectively lower contribution limits, owing to the inclusion of employer contributions in the overall plan limits.

The main benefit of both plans, of course, is the tax-advantaged savings opportunity. The money you contribute reduces your taxable income, and grows tax free (you only pay taxes when you take money out).

Another strategy that can help you manage your retirement savings: Consider rolling over an old 401(k) account so you can keep track of your money in one place. SoFi makes setting up a rollover IRA pretty straightforward, and there are no rollover fees or taxes.

Help grow your nest egg with a SoFi IRA.

FAQ

What similarities do 457 and 401(k) retirement plans have?

A 457 and a 401(k) plan are both tax-advantaged, with contributions that reduce your taxable income and grow tax-deferred. Both have the same annual contribution limit and regular catch-up contribution limit for savers who are 50 or older. Either plan may allow for loans or hardship distributions. Both may offer designated Roth accounts.

What differences do 457 and 401(k) retirement plans have?

A 457 plan includes employer matching contributions in the annual contribution limit, whereas a 401(k) plan does not. You can withdraw money early from a 457 plan with no penalty if you’ve separated from your employer. A 457 plan may be offered to employees of state and local governments or certain nonprofits while private employers can offer 401(k) plans to employees.

Is a 457 better than a 401(k) retirement plan?

A 457 plan may be better for retirement if you plan to retire early. You can make special catch-up contributions in the three years prior to retirement and you can withdraw money early with no penalty if you leave your employer. A 401(k) plan, meanwhile, could be better if you’re hoping to maximize regular contributions and employer matching contributions.

About the author

Rebecca Lake

You may also be interested in:

Guide to 457 Retirement Plans

A Beginner’s Guide to 401(k) Retirement Plans

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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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Identifying the Different Types of Greenwashing

Example of Greenwashing

The Negative Impact of Greenwashing on a Company

6 Ways to Avoid Greenwashing

1. Clear and Transparent Language

2. Evaluate the Data

3. Compare Similar Products

4. Look Beyond the Final Product

5. Look for Goals and Timelines

6. Verify Ingredients and Materials

Greenwashing vs Green Marketing

The Takeaway

FAQ

What is ESG greenwashing?

What are the three most common kinds of greenwashing?

401(k) Plans

Understanding 401(k) Contributions

401(k) Contribution Limits

401(k) Investment Options

Vesting in a 401(k) Retirement Plan

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

457 Plans

Vesting in a 457 Retirement Plan

457 vs 401(k): Comparing the Pros

Specific 457 Plan Advantages

457 vs 401(k): Comparing the Cons

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457 vs 401(k): The Similarities

457 vs 401(k): Which Is Better?

Investing in Retirement With SoFi

FAQ

What similarities do 457 and 401(k) retirement plans have?

What differences do 457 and 401(k) retirement plans have?

Is a 457 better than a 401(k) retirement plan?

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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