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May

2025

5 Smart Ways to Handle Supplemental Income

By Kelly Boyer Sagert | Budgeting & Goals, Growing Wealth, invest, Investing | Comments Off

Supplemental income is money that is earned above and beyond a person’s “regular” income, which, for most people, is earned through working a job. Supplemental income could include income earned through a side hustle, or it could include money from a regular job that is extra: bonuses, overtime pay, tips, commissions, and so forth.

For many people, supplemental income can amount to “extra” money beyond what’s needed to cover their regular expenses. And there are some smart ways to handle that extra income, which may help people reach their financial goals sooner.

Key Points

• Supplemental income includes bonuses, tips, commissions, and side hustles, categorized into active and passive types.

• Taxes on supplemental income must be managed, including federal, FICA, Medicare, and state taxes, with estimated quarterly payments.

• Strategies to pay off bad debt with supplemental income include the snowball, avalanche, and fireball methods, focusing on the smallest balances or the highest interest rates.

• Supplemental income can be used to establish an emergency fund covering three to six months of expenses, providing a financial buffer for unexpected costs.

• Allocate supplemental income to savings and investments for future goals, such as a down payment, vacation, or retirement, choosing from stocks, bonds, and mutual funds.

What Is Supplemental Income

As noted, supplemental income is money that is earned or otherwise accumulated beyond a typical income stream, like a paycheck. That can include bonuses or tips earned while working a job, too.

Supplemental income can also be earned in the form of a commission, by accumulating dividends on investments, or even by working a second job or side hustle.

There are numerous ways to tap into supplemental income streams, though that doesn’t mean that it’s necessarily easy. You should also know that there are generally two types of supplemental income: Active, and passive.

• Active income: This is often defined as trading time for money. The person puts in time, whether that’s through taking photographs for websites or walking dogs, and is paid for their services in exchange. It’s a typical job, in other words.

• Passive income: This kind of work involves little to no active investment in time once the gig is established. It could involve selling an uploaded ebook or affiliate marketing, as two examples.

For many people, a side hustle or second job is likely the quickest route to earning supplemental income. But there are government programs out there, too, that can help those in need, like the Supplemental Security Income program (SSI).

A Note About Supplemental Security Income

Supplemental Security Income (SSI) is a program administered by the Social Security Administration. SSI provides payments to people over the age of 65 who have a disability, including being blind or deaf. To qualify for Supplemental Security Income, people must also have limited financial resources, in addition to meeting the age and disability requirements. The purpose of the program is to help people meet their basic needs.

As the program is designed to help people meet their basic needs, some of the suggestions for handling supplemental income may not be applicable to those earning SSI benefits.That’s because those who do receive those benefits likely won’t have much room in their budget for additional spending, or the need to find ways to deploy that additional income — they may need it to cover their basic expenses.

Launching a Side Hustle

When choosing a side hustle or second job, it makes sense to pick one of interest to you; or, even better, one that inspires passion. This can help to prevent boredom and make it more likely that time and energy will continue to be invested in this income-generating activity. What hobbies, for example, can be monetized? Blogging? Making crafts or designing websites?

Ask yourself further questions: How much time can be invested in this side hustle? Can the required time ebb and flow as demands at the main job fluctuate? What resources are available to get started? And, perhaps most importantly, what’s the estimated earning potential?

Having a second job or side hustle isn’t terribly uncommon these days, as many people either need the extra money to make ends meet, or are looking for ways to pad their earnings to add to their savings or investment accounts.

One benefit of side hustles that are based on passive income is that, although work typically needs done up front to establish the side hustle, it shouldn’t need ongoing active involvement. And whether you’re renting out a room in your house, monetizing a blog, or writing ebooks to earn supplemental income, it’s important to keep some things in mind as you start to see that income roll in.

Tips for Using Your Extra Income

Here are some tips for putting your extra income to use.

1. First, Manage Your Income Taxes

When working for an employer, relevant income taxes are typically withdrawn from each paycheck but, with a side hustle (one that doesn’t involve working for an employer and receiving a paycheck, that is), the worker is responsible for paying federal taxes, FICA, Medicare tax, and any state and local taxes on net income.

That’s because a “hustle” or “gig” is typically a form of self-employment. To help, the IRS has created a Gig Economy Tax Center with plenty of resources and pieces of important information, including that income taxes must be paid on side gig income of $400 or more annually.

Those earning money from a side gig may also need to pay estimated quarterly taxes. The deadline for these payments are:

• April 15 for payment period January 1–March 31

• June 15 for payment period April 1–May 31

• September 15 for payment period June 1–August 31

• January 15 for payment period September 1–December 31

At the tax-filing deadline, (typically mid-April), a Schedule C usually needs to be filed for people earning money in a self-employed side gig. And, when earning supplemental income, it’s important to deposit enough in a bank account so that funds don’t fall short when tax returns need to be filed. What’s left over after taxes are planned for can be spent in a variety of ways, some ideas might include:

• Paying off “bad” debt.

• Establishing an emergency savings fund.

• Saving and investing.

• Enjoying some discretionary spending.

2. Paying Off “Bad” Debt

Bad debt can be defined, in general, as debt you acquire that results in a net loss. For example, going into debt for a vacation, a big party, clothes and/or gadgets doesn’t add to your net worth. Going into debt for your education or home may gradually add to your net worth in the future.

Bad debt can also refer to loans or lines of credit with higher interest rates, and which are harder to pay off as a result. Supplemental income can be used to pay this debt down or off.

Debt management plans to pay off debt include the snowball or avalanche methods — and a combo of the two, the fireball method. Different strategies work better for different people, so it can be worth experimenting with them to make the best choice.

With the snowball method, list bad debts by the amount owed, from the smallest to the highest. Include credit card debts, personal loans, and so forth. Then, make the minimum payment on each but put extra funds on the one with the smallest balance to get it paid off. Once that balance is zero, home in on the debt with the second smallest balance and keep using this strategy until all bad debt is paid off. Avoid using credit cards during this time.

With the avalanche method, list bad debt in order of its interest rate, from highest to lowest. Make minimum payments on all of them and put extra funds on the one with the highest rate. Pay it off and then move to the next highest rate, and so forth.

With the fireball method, take “bad” debt with interest rates of 7% or more and then list them from smallest to largest. Make the minimum payment on all and then put excess on the smallest of the “bad” debts. Rinse and repeat.

3. Establishing an Emergency Savings Account

Another smart idea is to put supplemental income into an emergency savings account. This can be accomplished in conjunction with a debt payment plan (put half of the excess funds into an emergency account and use the other half to pay down bad debt, for example) or as a single focused goal.

Funds in this account are intended for use if a financial emergency occurs. This can be a leaky roof that requires immediate attention, a significant car repair, or unexpected medical bills. Having a robust emergency fund can help to prevent the need to rely on credit cards to address unanticipated expenses.

It is commonly suggested that emergency savings accounts should contain three to six months’ worth of expenses. So, add those monthly bills up and multiply by three — and also by four, five, and six. This gives a range of the rainy-day fund’s goal.

Recommended: Planning your emergency fund? Our emergency savings calculator can assist you in setting the right target.

4. Saving and Investing

You could save or invest your extra money! This can include saving for personal goals, from a down payment on a house to a vacation fund, and or for retirement. What’s important is to prioritize how it makes sense to use extra money being earned and then save and invest to help meet those goals. How you save or invest that money would be up to you, but you could look at some common investment choices including stocks, bonds, mutual funds, and alternative investments, and more.

5. Enjoy Some Discretionary Spending

Once the financial “need-to” items are checked off the list, it can be okay to use some supplemental income to have fun. You could update your wardrobe, buy a new video game, take in a movie, or even go out to a nice dinner. If it’s within your budget parameters, treating yourself every now and then can be a nice thing to do.

Plus, getting a taste of the finer things may help keep you motivated to make sure your spending stays in check and that you stick to your budget going forward.

The Takeaway

Supplemental income is extra income earned beyond your primary income stream, and finding ways to drive supplemental or secondary income can help you reach your financial goals sooner. It can also help you free up some room in your budget to potentially treat yourself every now and then.

You can also put that extra money to work, by saving it and earning interest, or investing it for the future.

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

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

What is supplemental income?

Supplemental income refers to income derived outside of a primary income stream, such as a wage-paying job. Supplemental income can include bonuses, tips, commissions, or money earned through side hustles.

What is the difference between active and passive income?

Active income often or generally involves trading time for money, such as at a job or through employment. Passive income is money earned through little or not time investment, such as returns generated by investments.

Do I owe taxes on my side hustle income?

Yes, income taxes are owed on income earned of more than $400 annually, per IRS rules.

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SOBNK-Q225-054

May

2025

Diamond Hands? Tendies? A Guide to Day Trading Terminology

A User’s Guide to New Day Trading Lingo

By Colin Dodds | Growing Wealth, invest, Investing, Terminology | Comments Off

An increasing interest in trading and investing in recent years has sparked new nicknames, jargon, and day trading lingo. For most, the jargon used on Wall Street and in other facets of the financial industry was largely unknown outside of the markets.

But with more and more people taking to social media and investment forums, new memes and acroynyms have quickly taken flight. It can be helpful for investing community newcomers to know what certain terms and phrases actually mean. Note, of course, that language is always evolving, and that there may be even newer phrases out there that we’ve yet to include!

Key Points

• Day trading lingo has become increasingly popular in recent years as more retail investors have gotten into the markets.

• Tendies refers to gains or profits, originating from jokes about receiving chicken tenders for financial successes.

• STONKS is a playful term for stocks, used to mock poor financial decisions and the market.

• Diamond Hands symbolizes the resolve to hold investments despite short-term losses, and may reflect a higher risk tolerance.

• Paper Hands, conversely, refers to selling an investment quickly in the face of volatility or a stock decline.

• HODL means holding investments through losses, reflecting a community-driven approach to avoid panic selling.

Popular Day Trading Lingo in 2025

Here’s a rundown of some of the most popular trading lingo and slang — so you’ll have a better idea of what people in the financial industry are talking about!

Tendies

This term is short for chicken tenders, which is a way of saying gains or profits or money. The phrase originated with self-deprecating jokes by 4Chan users making fun of themselves as living with their mothers, who rewarded them with chicken tenders, or tendies.

STONKS

This is a playful way of saying stocks, or of referring more broadly to the world of finance. The obvious misspelling is a way of making fun of the market, and to mock people who lose money in the market. It became a popular meme of a character called Meme Man in front of a blue board full of numbers, used as a quick reaction to someone who made poor investing or financial decisions.

Diamond Hands

This is an investor who holds onto their investments despite short-term losses and potential risks. The diamond refers to both the strength of their hands in holding on to an investment, as well as the perceived value of staying with their investments.

Paper Hands

This is the opposite of diamond hands. It refers to an investor who sells out of an investment too soon in response to the pressure of high financial risks. In another age, they would have been called panic sellers.

YOLO

When used in the context of day trading or investing, the popular acronym for the phrase “you only live once” is usually used in reference to a stock a user has taken a substantial and possibly risky position in.

Bagholder or Bag Holder

This is a term for someone who has been left “holding the bag.” They’re someone who buys a stock at the top of a speculative runup, and is stuck with it when the stock peaks and rolls back.

To the Moon

This term is often accompanied by a rocket emoji. Especially on certain online stock market forums, it’s a way of expressing the belief that a given stock will rise significantly.

GUH

This is similar to the term “ugh,” and people use it as an exclamation when they’ve experienced a major loss. It came from a popular video of one investor on Reddit who made the sound when they lost $45,000 in two minutes of trading.

JPOW

This is shorthand for Jerome Hayden “Jay” Powell, the current Federal Reserve Chair, also popular on online forums as the character on the meme “Money Printer Go Brrr.” Both refer to Federal Reserve injections of capital in response to the COVID-19 pandemic, as well as “quantitative easing” policies.

Position or Ban

This is a demand made by users on the WallStreetBets (WSB) subreddit to check the veracity of another user’s investment suggestions. It means that a user has to deliver a screenshot of their brokerage account to prove the gain or loss that the user is referencing. It’s a way of eliminating posters who are trying to manipulate the board. Users who can’t or won’t show the investments, and the gain or loss, can face a ban from the community.

Roaring Kitty

This is the social media handle of Keith Gill, the Massachusetts-based financial adviser who’s widely credited with driving the 2021 GameStop and meme stock rally with his Reddit posts and YouTube video streams.

Apes Together Strong

This refers to the idea that retail investors, working together, can shape the markets. It is sometimes represented, in extreme shorthand, by a gorilla emoji. And the phrase comes from an earlier meme, which references the movie Rise of Planet of the Apes, in which downtrodden apes take over the world. In the analogy, the apes are retail investors. And the idea is that when they band together to invest in heavily-shorted stocks like GameStop, they can outlast the investors shorting those stocks, and make a lot of money at the expense of professional traders, such as hedge funds.

Hold the Line

This is an exhortation to fellow investors on WSB. It is based on an old infantry battle cry. But in the context of day traders, it’s used to inspire fellow board members not to sell out of stocks that the forum believes in, but which have started to drop in value.

DD

This refers to the term “Due Diligence,” and is used to indicate a deeply researched or highly technical post.

HODL

“HODL” is an abbreviation of the phrase “Hold On For Dear Life.” It’s used in two ways. Some investors use it to show that they don’t plan to sell their holdings. And it’s also used as a recommendation for investors not to sell out of their position — to maintain their investment, even if the value is dropping dramatically. HODL (which is also used in crypto circles) is often used by investors who are facing short-term losses, but not selling.

KYS

This is short for “Keep Yourself Safe,” and it is a rare bearish statement on WSB and other boards. It’s a way of advising investors to sell out of a given stock.

The Takeaway

Many retail traders have found a new home on message boards — and created a new language in the process. Some of the phrases are based on pop culture and memes, others are appropriated from terms used for decades. No matter the origins, it’s clear that the investors using these phrases are evolving the way retail investors talk about investing online and maybe IRL as well.

Learning to speak the language of the markets can be helpful, too, so that you don’t miss anything important when researching investment opportunities. That doesn’t mean it’s absolutely necessary, but it may help decipher some of the messages on online forums.

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).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

What does STONKS mean?

“STONKS” is a playful term for “stocks,” and is often used to mock or make fun of poor financial decisions and the stock market.

What does HODL mean?

“HODL” is stock market jargon that’s actually an abbreviation for “hold on for dear life.” It’s also used in crypto circles, and can convey that investors don’t plan to sell their holdings.

Photo credit: iStock/FG Trade

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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SOIN-Q225-053

May

2025

Angel Investors: What They Are and How to Find Them

By Kate Ashford | Growing Wealth, invest, Investing | Comments Off

An angel investor is typically a high-net-worth individual or a group of individuals who invest their own capital in early-stage startup companies, usually in exchange for an equity ownership stake.

An angel investor may provide a one-time investment in a company, or they may provide ongoing support. They may also be called private investors, seed investors, or just “angels,” for short. Like any other type of investor, angel investors seek projects that have the potential to become profitable, in order to see a return on their investment.

There are several ways a new business might try to secure money for expansion or growth, from friends to bank lenders to joining a startup accelerator program. Angel investors are another option that can provide a capital infusion, but there are trade-offs when accepting funds in exchange for a stake in a new company.

Key Points

• Angel investors provide seed capital for early-stage startups, typically in exchange for equity in the company.

• Unlike Venture Capitalists, which work for bigger firms, angels invest their own money.

• In addition to funding, angel investors may also provide business advice, mentorship, and networking opportunities.

• Some angel investors are professional, and fund multiple projects at once. But some startups obtain funding from angel investors who are friends or family.

• Because most startups are high risk, angel investors must be prepared to lose money.

What Is an Angel Investor?

If you’ve ever watched the show “Shark Tank,” you’ve seen one type of angel investor in action. On the show, a group of wealthy investors listen to pitches from entrepreneurs who are looking for funding for their small business or startup. In exchange for providing seed money, these investors generally get an ownership share in the business.

Angel investors can also be personal friends or colleagues of the entrepreneur. Typically they’re wealthy enough to provide a significant amount of money, despite the risks the startup could fail.

Again, angel investors use their own funds when investing in new projects. Venture capitalists, by contrast, work for firms that supply funding for new ventures.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Who Can Be an Angel Investor?

Angel investors were once required to be accredited investors, which demanded, among other things, that they have a net worth of $1 million in assets, not including personal residences — or yearly income greater than $200,000 alone, or $300,000 for a household for the previous two years. (Anyone who holds a Series 7, Series 65, or Series 82 in good standing also qualifies).

This was meant to limit angel investing — which is a risky practice — to those who ostensibly had enough assets to safely dabble in it. In recent years, however, virtually anyone can be an angel investor, as long as they have the capital and the willingness to take certain risks.

Recommended: What Is Active Investing?

Ways to Become an Angel Investor With Less Cash

These days it’s possible to get involved in angel investing via a crowdfunding-type of platform, without putting tens of thousands of dollars on the line. A smaller investment won’t reduce the risk, but it may reduce an investor’s total loss. These crowdfunding platforms enable smaller investors to dip their toes in the water (picture a GoFundMe for your business idea):

Republic, StartEngine, and WeFunder are among the bigger platforms that provide investment opportunities for accredited and non-accredited investors — and potential funding options for entrepreneurs. Some platforms act as a marketplace of sorts, helping to match potential funders with the right project.

Would-be investors who are non-accredited would do well to familiarize themselves with Reg CF, or Regulation Crowdfunding, which dictates the terms and conditions for non-accredited investors (e.g., investing limits, income rules, and so on).

Recommended: Tips for Investing in Tech Stocks

What Are the Pros of Using Angel Investors?

There are a number of benefits to using angel investors to help finance a venture.

Less risk

If you take out a loan to finance your business, you’ll still be expected to pay it back, whether or not your venture is a success. Angel investors generally understand the risk of investing in a startup business, and may not expect any return on capital if the business goes south.

Expertise

If angel investors also happen to be experts in your business, they can offer advice and guidance based on their years of experience.

Credibility

Angel investors are often well-known in their field, and if they invest in your idea, it can boost your reputation and status to have them on board.

They’re Willing to Take a Leap

Unlike a bank, which may need more concrete proof that you’re onto something big, an angel investor might be more willing to gamble on a solid idea.

Better Chance of Success

Companies with angel investor interest stand a greater chance of survival than those with less angel investor interest, according to findings from the National Bureau of Economic Research. Having angel investment doesn’t mitigate the risk of starting a business, but it’s possible that having angel investors on board can provide some oversight or accountability that might be beneficial.

What Are the Cons of Angel Investors?

There are also some potential disadvantages to having angel investors.

Loss of Full Ownership

Angel investors often provide funding in return for a share of the business, so involving angel investors means giving up some of your control. It also means that if the business succeeds, they’ll share in the proceeds.

They May Add Pressure

Angel investors aren’t giving you money out of kindness and good will. They may be aggressive investors who expect to see a high return on their investment. If they’re sinking money into your venture, it may feel there’s more riding on your success or failure, and seek to influence business decisions.

Funding May Be Slow

Finding angel investors can take time, and the process of securing backers — and for the cash to find its way to your venture — can take even longer.

It’s a Competitive Market

Even if you have a brilliant idea, there’s no guarantee that you’ll be able to find backers for it. According to the University of New Hampshire Center for Venture Research, which focuses on trends in angel investing, in 2023 only about 24.4% of projects received angel investment. That said, there were 54,735 new ventures that did get funding in 2023 (although that was a 12.2% decrease over 2022 projects funded).

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Where to Find Angel Investors

Startups looking for early-stage investors can look in several places.

Friends and Family

In many cases, startups get some or all of their initial investment from friends and family who believe in their idea and want to support the venture.

High-Net-Worth Individuals

Networking within your business community may allow you to make connections with people who’d be interested in helping to back your idea. It can be helpful to join local business, trade, and community organizations. Attend meetings and trade fairs, and have your elevator pitch well-honed.

Angel Funding Groups

There are a number of sites that seek to match entrepreneurs with angel investors, including:

Angel Capital Association: A collective of accredited angel investors

Golden Seeds: A group whose members focus on women-led ventures

Angel Investment Network: A network that seeks to connect entrepreneurs with business angels

Crowdfunding Sites

While traditional angel groups seek to match entrepreneurs with accredited investors, as noted above, some crowdfunding sites allow lots of smaller investors to pitch in to move your venture along. You’ll likely have to apply to have your idea or business vetted by the site before they’ll present your project to their members.

The Takeaway

Angel investors are typically high-net-worth individual or group backers that support startup and early-stage business ventures. But lately, opportunities have opened up for individuals of all types to invest in companies that have recently launched.

For entrepreneurs, an angel investor can be an enormous help, both in terms of financing their dream as well as providing guidance if they have relevant business experience. On the flip side, some entrepreneurs may find there is added pressure to deliver when an angel investor is backing their startup.

Whether you’re interested in finding an angel investor for your own startup idea, or thinking of becoming one, there are a number of risks associated with this type of business. Consider the pros and cons in light of your own financial goals, as there are many different paths forward.

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

FAQ

How much do angel investors usually invest in a business?

The amounts vary, and are influenced by the angel investor’s own status as either an accredited or non-accredited investor: SEC designations that set net worth and income criteria for investors. Angel investors tend to invest in the $25,000 to $100,000 range. Venture capital funds may be higher.

How do you pay an angel investor?

Most angel investors get an equity stake in the company in exchange for seed capital. If the company succeeds; that equity stake may provide a profit. If the venture fails, angel investors usually don’t expect the funds to be returned. These terms are set when the deal is made with the entrepreneur.

Do angel investors pay tax on any profit they earn?

Yes. The profit from a successful venture is taxed under capital gains rules. However, if the angel owns Qualified Small Business Stock in the company, the profit from QSBS is not taxed. Taxes are complicated, especially with high-risk angel investing, and it’s best to consult with a professional.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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.

SOIN-Q225-049

May

2025

What Is a Charitable Gift Annuity and How Does It Work?

By Jamie Cattanach | Growing Wealth, invest, Investing | Comments Off

A charitable gift annuity is a contract with a charitable organization that allows a donor (or donors) to make a contribution in exchange for a partial tax deduction, and a fixed income payout for life.

A charitable gift annuity combines aspects of charitable giving — which includes the satisfaction of giving to a meaningful cause, as well as a tax deduction — with the guaranteed, lifelong income stream that comes from an annuity.

When the donor and the spouse or beneficiary pass, any funds remaining in the charitable gift annuity are donated to the organization.

Key Points

• A charitable gift annuity is a contract that combines a charitable donation with the guarantee of a steady income stream to the donor(s).

• Various nonprofit organizations offer charitable gift annuity contracts; there may be age and donation requirements.

• Donors provide a lump sum amount in cash or other assets, which the organization invests.

• Income payments are fixed according to an agreed-upon rate, and provided for the lifetime of the donor.

• Because a charitable gift annuity is a contract with a specific organization, it’s not possible to provide multiple donations via one contract.

What Is a Charitable Gift Annuity?

A charitable gift annuity allows a donor to make a contribution to a charity in exchange for a fixed monthly income for both the donor and an optional additional beneficiary, often a spouse. This stream of payments may start immediately, or after an agreed-upon period of time, and can be a steady source of income in retirement that is guaranteed through the annuity until all listed beneficiaries die.

Many organizations, such as universities and other large nonprofit entities, offer charitable gift annuity contracts. Depending on the organization, donations can be made in cash, securities, or property. The assets are invested in an account on behalf of the donor(s); the donor takes a partial tax deduction.

Depending on the donor’s age and life expectancy, they will receive fixed payments (not variable, like some annuities), without inflation adjustments, for the rest of their life.

However, there are important tax considerations to think through before purchasing a charitable gift annuity — or any annuity, for that matter.

Understanding the Concept of Annuities

To fully understand charitable gift annuities, it’s important to have a background on annuities in general.

An annuity is a type of financial product used to create an income stream during retirement. It’s a contract — generally between the beneficiary and an insurance company or bank — that guarantees the buyer a set monthly payment in exchange for a lump sum deposit (although other terms may apply).

Recommended: What is an Annuity, Exactly?

Sometimes, payments into the annuity can be made directly from an existing retirement account like a traditional IRA account, if you open an IRA, or from 401(k). Then, the annuity provider invests the money and makes payments back to the buyer once the retirement period starts. Payments might last for a set amount of time, like 10 years, or for the rest of the beneficiary’s life.

For the provider, an annuity is basically a wager against the buyer’s life expectancy. If the buyer passes away before the funds have been paid back to them entirely, the annuity provider gets to keep the remainder.

With a charitable gift annuity, however, it works a little bit differently.

How Does a Charitable Gift Annuity Work?

With a charitable gift annuity, the contract is drawn up not between the buyer and an insurance company or bank (as with a standard annuity), but between a donor and a qualified charity. Organizations may have age or donation amount requirements.

The donor makes a gift to the charity, and the money is set aside in a reserve account, where it’s invested. Money from the reserve account — both principal and interest — are used to pay out the fixed monthly stipend the beneficiary or beneficiaries receive. Payments are generally not adjusted for inflation, but remain steady throughout the donor’s lifetime.

Charitable annuity payments are made to the donor and beneficiary until both have passed away — at which point, any remaining money is kept by the charity and used for charitable purposes.

In this way, the buyer of a charitable gift annuity can make a gift to a cause they support, all while helping themselves create a secure and reliable retirement income in the meantime.

Tax Implications of Using a Charitable Gift Annuity

The tax treatment of both the donation to the charity and the payments can be complicated; investors must be sure to read the fine print and/or consult with a professional.

The initial donation might qualify for a partial tax deduction that year, based on the estimated remainder amount the charity may receive when the donor dies. If the donor can’t take a tax deduction because the donation amount exceeds income for that year, it’s possible to carry the deduction forward for up to five years.

A gift of appreciated securities or other assets may help the donor avoid a portion of the capital gains tax they would have owed if they had sold those assets; but some capital gains are factored in over time.

By and large the annuity payments are taxed as income, although a portion of the initial payments may be tax free.

What Are the Benefits of Charitable Gift Annuities?

Along with helping donors support a charity of their choosing both during and after life, charitable annuities have some other features that can make them attractive retirement vehicles for some people.

Non-Cash Donations

Many charitable gift annuities allow donors to contribute non-cash donations, including fixed-income securities and investments — and sometimes tangible assets like art and real estate. Having this option means that donors might save money on capital gains taxes.

Annuity income is generally taxed as normal income at both the federal and state levels, although as noted a portion of the payments may be tax free, based on your statistical life expectancy. And by donating real assets, buyers of charitable gift annuities might avoid paying a portion of capital gains taxes on their donation. (That said, regular income tax will still apply on any and all income received through the annuity.)

Payment Flexibility

Another nice thing about charitable gift annuities is the flexibility buyers have in receiving the payments when there is more than one beneficiary. Payments can either be structured to go to both beneficiaries at once, or to only kick in for the second beneficiary after the death of the first.

In any case, as noted, any leftover funds will be donated to the charity when all beneficiaries have passed away.

Alternatives to Charitable Gift Annuities

Although charitable gift annuities can be a valuable tool, they may not be the right choice for every investor for a variety of reasons, including:

• Gift annuities tend to offer lower rates than most commercial annuity types, so they might not maximize your retirement income.

• If you don’t have physical assets to donate, there may be more efficient ways to invest your cash.

• Income streams from any type of annuity are usually still subject to federal and state income tax, unless they’ve been purchased using a Roth IRA or Roth 401(k), whose funds have already been taxed.

For investors who’d like more control over their investments, and fewer restrictions around when and how they can access the money, there are other places to put your retirement money.

One option is to take advantage of an employer-sponsored retirement account like a 401(k) at work. And almost anyone can bolster their retirement savings by investing in an IRA. Those under set income limits can invest in a Roth IRA, which will allow them to take tax-free distributions once they reach retirement age.

Even if you choose an alternative retirement option, you can continue to make donating to charities part of your financial plan. It may even be possible to set aside money for charitable giving while on a tight budget.

The Takeaway

A charitable gift annuity enables a donor to contribute money to a charity, with the promise of getting regular payments in return later in life — for themselves and an optional beneficiary. Part of the initial payment, as well as any leftover funds, are donated to the charity after all the beneficiaries have died, making it a good way to secure retirement income while supporting a cause at the same time.

While a charitable annuity may be attractive to some investors, other types of retirement savings may allow an individual more nuanced control of their investments and more flexibility in the size and frequency of their withdrawals upon 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

How do you pick a good charitable gift annuity?

The right charitable gift annuity for you depends on your charitable giving goals, the rate of return on the investment (which determines the income payments), and other terms that may or may not be beneficial.

Is a charitable gift annuity a smart idea?

It depends. A charitable gift annuity offers the advantage of providing the donor with a fixed, guaranteed income stream for life — as well as a meaningful contribution to an important cause. That said, investors seeking retirement income may find higher rates through regular annuities or other options.

How much does a charitable gift annuity pay?

The terms of charitable gift annuities vary widely, depending on the organization. Some offer modest rates of return, others pay more. Donors must also factor in their age and life expectancy at the time of the donation, as well as the total amount of the donation itself.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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.

SOIN-Q225-061

May

2025

Everything You Need to Know About Insider Trading

Everything You Ever Wanted to Know About Insider Trading

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

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

Insider trading — the practice of using confidential, nonpublic (or “insider”) information to the investor’s own advantage — can be a criminal offense.

Trading specialists have defined the term “confidential information” as material information about an investment that is not available to other investors. That insider knowledge can tilt the playing field in favor of the recipient, leading to an imbalanced trading landscape that investment industry regulators rigorously attempt to keep fair and balanced.

That said, there are some types of insider transactions that fall within the boundaries of the law.

Key Points

• Insider trading refers to the illegal practice of buying and/or selling shares of a public company, using nonpublic information about the company that’s material to its performance.

• The most egregious examples of insider trading involve stealing or illegally obtaining sensitive company information.

• If discovered, insider trading may provoke severe penalties, including fines or time in prison.

• That said, some investors may be privy to “inside” information that is legal to use when making trades, as long as they follow SEC rules.

• When investors file the requisite reports with the SEC about potential insider trades, these may be considered legal.

History of U.S. Insider Trading Laws

Insider trading rules and regulations in the U.S. date back to the early 1900s, when the U.S. Supreme Court ruled against a corporate executive who bought company stock based on insider information. The ruling, based on common law statutes long used by the United Kingdom, laid the path for Congress to pass a law prohibiting sales security fraud (the 1933 Securities Act of 1933) that was further solidified by the Securities Exchange Act of 1934.

Those laws not only prohibited profiting from the sale of securities tied to insider information, they also largely blocked quick turnaround trading profits by an investor who owned more than 10% of a company stock.

Fast forward to 1984, when Congress passed the Trading Sanctions Act, and subsequently the passage of the Securities Fraud Enforcement Act of 1988. These set financial penalties of three times the amount of income accumulated from insider trading, further clarifying the definition and rules surrounding insider trading.

Examples of Insider Trading

The practice of insider trading can manifest in myriad ways. Broadly, anyone who steals, misappropriates, or otherwise gathers confidential data or nonpublic information, and uses it to profit on changes in a company’s stock price, might be investigated for insider trading.

Here are some common examples:

• A company executive, employee, or board member who trades a corporation’s stock after being made aware of a particular business development — like the sale of the firm, positive or negative earnings numbers, a company scandal or significant data breach — could be construed by regulators as insider trading.

• Any associates — like friends, family, or co-workers — of company executives, employees, or board members, who also trade on private information not available to the investing public, may be targeted for insider trading.

• Executives and staffers of any company that provides products or services to another company, and who obtain information about a significant corporate move that would likely sway the firm’s stock price, could be trading on “inside” news.

• Local, city, state, or federal government managers and employees who may come across sensitive, private information about a company that’s not available publicly, and use that knowledge to profit from a change in the company’s stock price, could be involved with insider trading.

The above examples are among the most egregious insider trading scenarios, and are also more likely to become an enforcement priority for government regulators.

Is Insider Trading Ever Legal?

Most investors who buy stocks online or through a brokerage don’t need to worry about insider trading rules. In addition, there are scenarios where what is technically considered “insider trading” is in fact legal under federal regulatory statutes.

For instance, anyone employed by a company could fall under the definition of an insider trader. But as long as all stock transactions involving the company are registered with the U.S. Securities and Exchange Commission in advance, an employee stock transaction may be considered legal.

That’s the case whether a rank-and-file employee buys 100 shares of company stock or if the chief executive officer buys back shares of the firm’s stock — even if that more high-profile trading activity significantly swings the company’s share price.

Who Enforces Insider Trading Rules?

Insider trading enforcement measures operate under the larger umbrella of the U.S. government.

How Insider Trading Is Investigated

Insider trading investigations usually start on the firm level before the SEC gets involved. Self-regulating industry organizations like the Financial Industry Regulatory Authority (FINRA) or the National Association of Financial Planners (NAPF), for example, may also come across illegal trading practices and pass the lead on to federal authorities.

It’s also not uncommon for insider trading practices to be revealed by government agencies other than the SEC. For example, the FBI may run into insider trading activity while pursuing a completely separate investigation, and pass on the tip to the SEC.

When the U.S. Securities and Exchange Commission (SEC) investigates potential insider trading cases, they do so using multiple investigatory methods:

Surveillance. The SEC has multiple surveillance tools to root out insider trading violations. Tracking big variations in a company’s trading history (especially around key dates like earnings calls, changes in executive leadership, and when a company buys another firm or is bought out itself) is a common way for federal regulators to uncover insider trading.

Tipsters. Investors aware of insider information, especially those who lose money on insider trades, often provide valuable leads and tips on insider trading occurrences. This often occurs in the equity options market, where trade values increase significantly with each transaction, and where stock prices can especially be vulnerable to big price swings after suspicious trading activity in the options trading marketplace.

If, for example, a trader with inside information uses it to buy company stock or to buy an option call for profit, the party on the other side of the trade, who may stand to lose significant cash on the trade, may alert the SEC that profiteering via inside information may be taking place. In that scenario, the SEC will likely appoint an investigator to follow up on the tip and see if insider trading did occur.

Company whistleblowers. Another common alert that insider trading is occurring comes from company whistleblowers who speak up when company employees or managers with unique access to company trading patterns seem to be benefitting from those price swings.

What Happens in an Insider Trading Investigation

When federal regulators are made aware of securities fraud from insider trading, they may launch an investigation run by the SEC’s Division of Enforcement. In that investigation:

• Witnesses are contacted and interviewed.

• Trading records are reviewed, with a close eye on trading patterns around the time of potential insider trading activity.

• Phone and computer records are subpoenaed, and if needed, wiretaps are used to gain information from potential insider trading targets.

• Once the investigation is complete, the investigation team presents its findings to an SEC review board, which can decide on a fine and other penalties (like suspension of trading privileges and cease-and-desist orders) or opt to take its case to federal court.

• After the court hears the case and decides on the merits, any party accused of insider trading is expected to abide by the court ruling and the case is ended.

Penalties for Insider Trading

An individual convicted of insider trading can face both a prison sentence and civil and criminal fines — up to 20 years and as much as $5 million. Additionally, civil penalties may include fines of up to three times the profit gained, or loss avoided, as a result of the insider trading violation.

Companies that commit insider trading can face civil and criminal fines. The maximum fine for an entity whose securities are publicly traded that has been found guilty of insider trading is $25 million.

The Takeaway

Insider trading — executing a trade based on knowledge that has not been made public — is a serious offense and can lead to severe punishment, including jail time and heavy fines.

That’s all for good reason, as restrictions on insider trading help ensure a balanced financial trading market environment — one that accommodates fair trading opportunities for all market participants.

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

FAQ

What is an example of insider trading?

If a company executive or employee at a pharmaceutical company learns of an upcoming drug approval and buys shares based on that information, that could be insider trading.

Is it illegal to buy stock in a company you work for?

No. buying stock in a company you work for is not necessarily an incidence of insider trading — unless you used confidential, nonpublic information to time the purchase of the shares and gain accordingly.

How do people get caught for insider trading?

The SEC and companies themselves may use a combination of surveillance and data analysis, especially watching trades around news headlines, to catch insider traders.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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.

SOIN-Q225-041