Feb
05
2024
Short-Term vs Long-Term Investments
Unsure of the difference between long-term and short-term investments? We examine the characteristics of each and when to use them.
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SoFi
Student Loan Consolidation and Refinancing
Feb
02
2024
Everything You Need to Know About Lifestyle Funds and Lifestyle Investing
Lifestyle funds are investment funds that base their asset allocation on someone’s age, risk tolerance, and investing goals. Individuals who want to build wealth over the long term in a relatively hands-off way might consider lifestyle investings.
There are different types of lifestyle funds investors may choose from, based on their appetite for risk, the level of risk needed to achieve their goals, and their investing time horizon. Lifestyle assets often also appear inside different types of retirement accounts, including employer-sponsored retirement plans and individual retirement accounts (IRAs). Whether becoming a lifestyle investor makes sense for you can depend on what you hope to achieve with your portfolio, how much risk you’re comfortable taking, and your overall time horizon for investing.
What are Lifestyle Funds?
A lifestyle fund or lifestyle investment holds a mix of investments that reflect an investor’s goals and risk tolerance. These investment funds tailor their investment mix to a specific investor’s needs and age to provide a simplified solution for reaching their goals.
Lifestyle funds may invest in both equities (i.e. stocks) and fixed-income securities, such as bonds and notes. These funds may require fewer decisions by the asset owner, since they adjust automatically through changing lifestyle needs until you reach retirement. With lifestyle assets, as with other types of funds, it’s important to consider the balance between risk and reward.
Lifestyle funds that carry a higher degree of risk may offer higher returns to investors, while those that are more conservative in terms of risk may yield lower returns.
💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.
How Do Lifestyle Funds Work?
Typically purchased through a retirement account or a brokerage account, lifestyle funds work by creating a diversified portfolio to meet an investor where they are, while also taking into account where they’d like to be 10, 20 or 30 years from now.
An investor can choose from an initial lifestyle fund allocation, then adjust the risk level up or down based on their preferences. A fund manager reviews the asset allocation for the fund and rebalances periodically to help an investor stay on track with their goals.
The level of risk an investor takes may correlate to the average age of retirement, which for most people is around 65. So someone who’s 25 years old now has 40 years to invest for the future, meaning they can afford to take more risk to achieve their goals. As they get older, their tolerance for risk may decrease which could mean moving away from stocks and toward fixed-income investments.
Unlike target-date funds, the level of risk in lifestyle funds doesn’t change significantly over time. So if you were to choose an aggressive lifestyle fund at 25, the asset allocation of that fund would more or less be the same at age 65. That’s important to understand for choosing the lifestyle fund that’s appropriate for your risk tolerance and goals.
Recommended: Explaining Asset Allocation by Age
Two Stages of Lifestyle Funds
Lifestyle investing can work in different stages, depending on where you are in your investing journey. Lifestyle funds accommodate these different stages by adjusting their asset allocation.
This is something the fund manager can do to ensure that you’re working toward your goals without overexposing yourself to risk along the way. The two stages of lifestyle funds are the growth stage and the retirement target date stage.
1. Growth Stage
The growth stage represents the period in which a lifestyle investor is actively saving and investing. During the growth stage, the emphasis is on diversifying investments to achieve the appropriate balance between risk and reward. This phase represents the bulk of working years for most people as they move from starting their careers to reaching their peak earnings.
In the growth stage, lifestyle funds hold an asset allocation that reflects the investor’s goals and appetite for risk. Again, whether this is more conservative, aggressive or somewhere in-between depends on the individual investor. At this time, the investor is typically concerned with funding retirement accounts, rather than withdrawing from them.
2. Retirement Target Date
The retirement target date stage marks the beginning of the countdown to retirement for an investor. During this stage, the focus shifts to preparing the investor to begin drawing an income from their portfolio, rather than making new contributions or investments.
At this point, a lifestyle investor may have to decide whether they want to maintain their existing asset allocation, shift some or all of their assets into other investments (such as an annuity), or begin drawing them down in cash. For example, an investor in their mid-50s may decide to move from an aggressive lifestyle fund to a moderate or conservative lifestyle fund, depending on their needs, anticipated retirement date, and how much risk they’re comfortable taking.
Different Types of Lifestyle Funds
Lifestyle funds aren’t all alike and there are different options investors may choose from. There are different ways lifestyle funds can be structured, including:
• Income-focused funds. These lifestyle funds aim to produce income for investors, though capital appreciation may be a secondary goal. Fixed-income securities typically make up the bulk of lifestyle income funds, though they may still include some equity holdings.
• Growth-focused funds. Lifestyle growth funds are the opposite of lifestyle income funds. These funds aim to provide investors with long-term capital appreciation and place less emphasis on current income.
• Conservative asset allocation funds. Conservative lifestyle funds may have a long-term goal of achieving a set total return through both capital appreciation and current income. These funds tend to carry lower levels of risk than other lifestyle funds.
• Moderate asset allocation funds. Moderate lifestyle funds often take a middle ground approach in terms of risk and reward. These funds may use a “fund of funds” strategy, which primarily involves investing other mutual funds.
• Aggressive asset allocation funds. Aggressive lifestyle funds may also use a “fund of funds” approach, though with a slightly different focus. These funds take on more risk, though rewards may be greater as they seek long-term capital appreciation.
Lifestyle Investment Risks
Investing for retirement with lifestyle assets has some risks, so it’s important to make sure that the fund you choose matches your risk tolerance. Risk tolerance refers to the amount of risk an investor is comfortable taking in their portfolio. Risk capacity is the amount of risk needed to achieve investment goals.
Typically, younger investors can afford to take more risk in the early years of their investment career as they have more time to recover from market declines. But if that investor has a low risk tolerance, they may still choose to stick with more conservative investments. If their risk tolerance doesn’t match up with the amount of risk they need to take to achieve their investment goals, they could fall far short of them.
When considering lifestyle funds, it’s important to consider your risk mix and risk level. While lifestyle funds can simplify investing in that you don’t necessarily need to make day-to-day trading decisions, it’s still important to consider how your risk tolerance and risk capacity may evolve over time.
As you move from the growth stage to the retirement target date stage, for instance, you may need to make some adjustments to your lifestyle fund choices in order to keep pace with your desired goals.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
Advantages of Lifestyle Funds
In addition to their risks, lifestyle funds offer numerous advantages to investors, starting with simplicity. When you invest in a lifestyle fund, you know more or less what to expect in terms of asset allocation, based on the risk tolerance that you specify. These funds don’t require you to be an active investor in order to realize returns.
Some funds also automatically rebalance on behalf of investors, so there’s very little you need to do, other than be mindful of how the fund’s risk mix reflects your risk tolerance at any given time.
A lifestyle fund can offer broad diversification, allowing you to gain exposure to a variety of assets without having to purchase individual stocks, bonds or other securities.
Compared to other types of mutual funds or exchange-traded funds (ETFs), lifestyle funds may carry lower expense ratios. That can allow you to retain more of your investment returns over time.
Finally, lifestyle funds encourage investors to stay invested through market ups and downs. That can help you to even out losses through dollar-cost averaging.
Lifestyle Funds vs Target Date Funds
If you have a 401(k), then you’re likely familiar with target date funds as they’re commonly offered in workplace retirement plans. A target date fund, or lifecycle fund, is a mutual fund that adjusts its asset allocation automatically, based on the investor’s target retirement date. These funds are distinguishable from lifestyle funds because they typically have a year in their name.
So a Target Date 2050 fund, for example, would attract investors who plan to retire in the year 2050. Target date funds also take a diversified approach to investing, with asset allocations that include both stocks and fixed-income securities.
The difference between target date funds and lifestyle funds is that target date funds follow a specific glide path. As the investor gets closer to their target retirement date, the fund’s asset allocation adjusts to become more conservative. Lifestyle funds don’t do that; instead, the asset allocation remains the same.
Recommended: Target-date Funds vs. Index Funds: Key Differences
The Takeaway
Whether you choose to invest with lifestyle funds, target date funds, or something else, the most important thing is to get started saving for retirement. The longer your time horizon until retirement, the more time your money has to grow through the power of compounding interest.
If you feel like incorporating lifestyle funds into your investing strategy may help you reach your financial goals, be sure to take the pros and cons into consideration. It may also be helpful to consult with a financial professional for guidance.
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).
FAQ
What is a lifestyle pension fund?
A pension fund is a type of defined benefit plan, in which employees receive retirement benefits based on their earnings and years of service. A lifestyle pension fund is a pension fund that allocates assets using a lifestyle strategy in order to meet an investor’s goals and needs.
What is a lifestyle strategy?
In investing, a lifestyle strategy is an approach that chooses investments that can help an investor to reach specific milestones or goals while keeping their age and risk tolerance in mind. With lifestyle funds, the asset allocation doesn’t change substantially over time.
What is a lifestyle profile?
A lifestyle profile is a tool that investors use to help them select the most appropriate lifestyle funds based on their age, risk tolerance goals.
Photo credit: iStock/GaudiLab
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.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN0124072
Feb
02
2024
SIMPLE IRA Contribution Limits for Employers & Employees
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a way for self-employed individuals and small business employers to set up a retirement plan.
It’s one of a number of tax-advantaged retirement plans that may be available to those who are self-employed, along with solo 401(k)s, and traditional IRAs. These plans share a number of similarities. Like 401(k)s, SIMPLE IRAs are employer-sponsored (if you’re self-employed, you would be the employer in this case), and like other IRAs they give employees some flexibility in choosing their investments.
SIMPLE IRA contribution limits are one of the main differences between accounts: meaning, how much individuals can contribute themselves, and whether there’s an employer contribution component as well.
Here’s a look at the rules for SIMPLE IRAs.
SIMPLE IRA Basics
SIMPLE IRAs are a type of employer-sponsored retirement account. Employers who want to offer one cannot have another retirement plan in place already, and they must typically have 100 employees or less.
Employers are required to contribute to SIMPLE IRA plans, while employees can elect to do so, as a way to save for retirement.
Employees can usually participate in a SIMPLE IRA if they have made $5,000 in any two calendar years before the current year, or if they expect to receive $5,000 in compensation in the current year.
An employee’s income doesn’t affect SIMPLE IRA contribution limits.
💡 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.
SIMPLE IRA Contribution Limits, 2023 and 2024
Employee contributions to SIMPLE IRAs are made with pre-tax dollars. They are typically taken directly from an employee’s paycheck, and they can reduce taxable income in the year the contributions are made, often reducing the amount of taxes owed.
Once deposited in the SIMPLE IRA account, contributions can be invested, and those investments can grow tax deferred until it comes time to make withdrawals in retirement. Individuals can start making withdrawals penalty free at age 59 ½. But withdrawals made before then may be subject to a 10% or 25% early withdrawal penalty.
Employee contributions are capped. For 2023, contributions cannot exceed $15,500 for most people. For 2024, it’s $16,000. Employees who are age 50 and over can make additional catch-up contributions of $3,500 for 2023 and 2024, bringing their total contribution limit to $19,000 in 2023 and $19,500 in 2024.
See the chart below for SIMPLE IRA contribution limits for 2023 and 2024.
| 2023 | 2024 | |
|---|---|---|
| Annual contribution limit | $15,500 | $16,000 |
| Catch-up contribution for age 50 and older | $3,500 | $3,500 |
Boost your retirement contributions with a 1% match.
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Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.
Employer vs Employee Contribution Limits
Employers are required to contribute to each one of their employees’ SIMPLE plans each year, and each plan must be treated the same, including an employer’s own.
There are two options available for contributions: Employers may either make matching contributions of up to 3% of employee compensation — or they may make a 2% nonelective contribution for each eligible employee.
If an employer chooses the first option, call it option A, they have to make a dollar-for-dollar match of each employee’s contribution, up to 3% of employee compensation. (If the employer chooses option B, the nonelective contribution, this requirement doesn’t apply.) An employer can offer smaller matches, but they must match at least 1% for no more than two out of every five years.
In option A, if an employee doesn’t make a contribution to their SIMPLE account, the employer does not have to contribute either.
In the second option, option B: Employers can choose to make nonelective contributions of 2% of each individual employee’s compensation. If an employer chooses this option, they must make a contribution whether or not an employee makes one as well.
Contributions are limited. Employers may make a 2% contribution up to $330,000 in employee compensation for 2023, and up to $345,000 in employee compensation for 2024.
(The 3% matching contribution rule for option A is not subject to this same annual compensation limit.)
Whatever contributions employers make to their employees’ plans are tax deductible. And if you’re a sole proprietor you can deduct the employer contributions you make for yourself.
See the chart below for employer contribution limits for 2023 and 2024.
| 2023 | 2024 | |
|---|---|---|
| Matching contribution | Up to 3% of employee contribution | Up to 3% of employee contribution |
| Nonelective contribution | 2% of employee compensation up to $330,000 | 2% of employee compensation up to $345,000 |
SIMPLE IRA vs 401(k) Contribution Limits
There are other options for employer-sponsored retirement plans, including the 401(k), which differs from an IRA in some significant ways.
Like SIMPLE IRAs, 401(k) contributions are made with pre-tax dollars, and money in the account grows tax deferred. Withdrawals are taxed at ordinary income tax rates, and individuals can begin making them penalty-free at age 59 ½.
Contribution limits for 401(k)s are much higher than for SIMPLE IRAs. In 2023, individuals could contribute up to $22,500 to their 401(k) plans. Plan participants age 50 and older could make $7,500 in catch-up contributions for a total of $30,000 per year. In 2024, individuals can contribute $23,000 to their 401(k), and those 50 and older can make $7,500 in catch-up contributions for a total of $30,500.
Employers may also choose to contribute to their employees’ 401(k) plans through matching contributions or non-elective contributions. Employees often use matching contributions to incentivize their employees to save, and individuals should try to save enough each year to meet their employer’s matching requirements.
Employers may also make nonelective contributions regardless of whether an employee has made contributions of their own. Total employee and employer contributions could equal up to $66,000 in 2023, or 100% of an employee’s compensation, whichever is less. For those aged 50 and older, that figure jumped to $73,500. In 2024, total employee and employer contributions are $69,000, or $76,500 for those 50 and up.
As a result of these higher contribution limits, 401(k)s can help individuals save quite a bit more than they could with a SIMPLE IRA. See chart below for a side-by-side comparison of 401(k) and SIMPLE IRA contribution limits.
| SIMPLE IRA 2023 | SIMPLE IRA 2024 | 401(k) 2023 | 401(k) 2024 | |
|---|---|---|---|---|
| Annual contribution limit | $15,500 | $16,000 | $22,500 | $23,000 |
| Catch-up contribution | $3,500 | $3,500 | $7,500 | $7,500 |
| Employer Contribution | Up to 3% of employee contribution, or 2% of employee compensation up to $330,000 | Up to 3% of employee contribution, or 2% of employee compensation up to $345,000 | Matching and nonelective contributions up to $66,000 | Matching and nonelective contributions up to $69,000. |
💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.
SIMPLE IRA vs Traditional IRA Contribution Limits
Individuals who want to save more in tax-deferred retirement accounts than they’re able to in a SIMPLE IRA alone can consider opening an IRA account. Regular IRAs come in two flavors: traditional and Roth IRA.
Traditional IRAs
When considering SIMPLE vs. traditional IRAs, the two actually work similarly. However, contribution limits for traditional accounts are quite a bit lower. For 2023, individuals could contribute $6,500, or $7,500 for those 50 and older. In 2024, individuals can contribute $7,000, or $8,000 for those 50 and older.
That said, when paired with a SIMPLE IRA, individuals could make $22,000 in total contributions in 2023, which is almost as much as with a 401(K). In 2024, they could make $23,000 in total contributions, which is the same as a 401(k).
Roth IRAs
Roth IRAs work a little bit differently.
Contributions to Roths are made with after-tax dollars. Money inside the account grows-tax free and individuals pay no income tax when they make withdrawals after age 59 ½. Early withdrawals may be subject to penalty. Because individuals pay no income tax on withdrawals in retirement, Roth IRAs may be a consideration for those who anticipate being in a higher tax bracket when they retire.
Roth contributions limits are the same as traditional IRAs. Individuals are allowed to have both Roth and traditional accounts at the same time. However, total contributions are cumulative across accounts.
See the chart for a look at SIMPLE IRA vs. traditional and Roth IRA contribution limits.
| SIMPLE IRA 2023 | SIMPLE IRA 2024 | Traditional and Roth IRA 2023 | Traditional and Roth IRA 2024 | |
|---|---|---|---|---|
| Annual contribution limit | $15,500 | $16,000 | $6,500 | $7,000 |
| Catch-up contribution | $3,500 | $3,500 | $1,000 | $1,000 |
| Employer Contribution | Up to 3% of employee contribution, or 2% of employee compensation up to $330,000 | Up to 3% of employee contribution, or 2% of employee compensation up to $345,000 | None | None |
The Takeaway
SIMPLE IRAs are an easy way for employers and employees to save for retirement — especially those who are self-employed (or for companies with under 100 employees). In fact, a SIMPLE IRA gives employers two ways to help employees save for retirement — by a direct matching contribution of up to 3% (assuming the employee is also contributing to their SIMPLE IRA account), or by providing a basic 2% contribution for all employees, regardless of whether the employees themselves are contributing.
While SIMPLE IRAs don’t offer the same high contribution limits that 401(k)s do, individuals who want to save more can compensate by opening a traditional or Roth IRA on their own.
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).
Photo credit: iStock/FatCamera
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
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.
SoFi Invest®
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.
SOIN1023162
Read moreFeb
01
2024
What Is Margin in Forex Trading?
Forex margin trading is when foreign exchange traders borrow money from their brokers in order to make bigger trades than they would otherwise be able to based on their capital position. Like all margin trading, the risks of forex margin trading are higher, but the practice can also produce higher profits.
Traders who engage in forex margin trading are using leverage as part of their investing strategy.
What Is Forex Margin?
Forex margin is similar to the margin trading used in futures markets. Traders deposit money into a margin account as a good faith deposit, which allows them to open, hold and trade forex using leverage (with their account balance as collateral). This lets the traders control trades worth much more than they would otherwise.
Forex (also known as foreign exchange or FX) is a global trading market in which investors trade national currencies. Forex trading is the largest and most liquid market in the world. Currencies trade in what are called “pairs.” For example, the Euro (EUR) versus the United States dollar (USD) appears as the EUR/USD currency pair with the Euro being the base currency and the USD being the term currency.
Traders use the FX market to hedge against foreign currency and interest rate risk. Geopolitical risks are also managed while speculators take part alongside hedgers. The forex market is both a spot (cash) market and a derivatives market. Forwards, futures, currency swaps, and options trade in the FX market.
How Does Forex Margin Work?
Forex margin works by allowing a trader to hold large positions with a relatively small amount of collateral. When you trade with leverage, you amplify risk and return.
While there is no standard amount of margin in the forex market, it is common for traders to post 1% margin, which allows them to trade $100,000 of notional currency for every $1,000 posted.
For example, let’s say you want to trade forex on margin to speculate on the price of the EUR relative to the USD. You must open an FX trading account with a firm that offers this type of trading. Before trading, you must make a deposit into your margin account.
Let’s assume the broker requires 1% margin to trade EUR/USD. You seek to control $50,000 worth of that currency pair, so you post a deposit of $500. After opening the account and posting margin, you execute a buy order on the EUR/USD pair for $50,000 of notional currency at $1.20 per Euro.
If EUR/USD moves from $1.20 to $1.212, that 1% advance moves your position value from $50,000 to $50,500. Your unrealized profit is $500, or 100% of your initial deposit. If EUR/USD declines 1%, you have an unrealized loss of $500. You could face a margin call or a forced liquidation if prices move against you enough.
💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.
Forex Margin Requirements
Forex margin requirements vary by broker. Variables such as liquidity and volatility impact the amount of margin you need to trade FX. The less liquid the trading environment and the more volatile the currency pair, the higher your margin requirement will generally be. The broker wants you to be able to trade freely but must balance the credit (or default) risk of its customers. Trading with small margin amounts means you have high leverage.
Typical margin requirements range from 50% on the high end to 0.5% on the low end. Those figures correspond to 2:1 leverage and 200:1 leverage, respectively. Knowing your leverage ratio helps you grasp your account’s risk. Brokers determine forex margin requirements based on your credit profile and how much default risk they want to take on.
Forex Margin Terms
You’ll need to understand forex margin terms to navigate this volatile trading arena:
• Equity: Your account balance after adding current profits and subtracting current losses from your cash
• Margin Requirement: Your required deposit to trade with leverage
• Used margin: Margin set aside to keep existing trades active
• Free margin: Available margin to open new positions
• Margin level in forex: A measure of how well funded your account is. Divide your equity by used margin, then multiply that by 100 to find your margin level in forex.
• Leverage: The use of borrowed capital to enhance returns
• Pip: A measurement representing the smallest unit of value in a currency quote. Pip stands for “percentage in point.”
• Spread: The difference between the bid and ask prices
What Is Margin Level in Forex?
Your margin level in forex is the ratio between equity and used margin. It is a straightforward calculation expressed as a percentage. It is your account’s equity percentage multiplied by 100. If you’re trading a currency pair other than the currency in your account, you may have to also do a currency conversion to determine your forex margin in that denomination.
Margin Level = (Equity / Used Margin) x 100%
For example, if you have $5,000 of equity with $1,000 of margin, then your margin level is 500%. The lower the margin level in forex, the less free margin you have available to trade. If your margin level dips low enough, your broker might issue a margin call or an automatic stop out on your position.
While margin level minimums vary depending on the brokerage firm used, many brokers set a minimum margin level at 100%. That means if your equity is equal to or less than your margin used, you will not be able to open new trades.
Forex Margin Example
Let’s say you wish to go long the USD/JPY currency pair. Assume your account balance is $2,000 and you trade a notional value of $10,000. Also assume the margin requirement on this pair is 5%. Your required margin is the notional value multiplied by the margin requirement.
$500 = $10,000 x .05
Now compare the required margin (which is also your used margin) of $500 to your $2,000 of equity.
Your margin level is $2,000 / $500
400% = ($2,000 / $500) x 100%
Your margin level, 400%, is safely above the 100% minimum margin level in forex to avoid margin calls and automatic liquidation from your broker. You can also open new trades so long as your margin level remains above the 100% minimum.
Pros and Cons of Trading Forex on Margin
There are both benefits and drawbacks to using margin when trading currencies. Here’s a look at some of them.
Pros
Pros of using margin to trade forex include that it can enhance return potential, more buying power means access to many trading opportunities and currency pairs, and that the forex markets are open 24 hours a day, five and a half days a week. Depending on how you like to trade, that can be an attractive feature.
Cons
Some of the downsides of trading forex on margin are that trading with high leverage can quickly lead to big losses and margin calls, trading forex on margin creates more volatility, which can increase stress, and that forex markets are less regulated than some other markets. In short: there’s more risk to take into consideration.
💡 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.
Is There a Difference Between Leverage and Margin in Forex?
Leverage and margin are similar concepts, but they’re different. One way to think of the differences is that a trader can use margin to increase their leverage. Margin is the tool, and leverage is the force behind the tool, which can be used to potentially increase returns (or losses).
The Takeaway
Currency trading is a liquid market that is open more hours per week than regular stock markets. Forex trading involves posting a margin deposit that allows traders to have exposure to large notional values of a currency. There are advantages and disadvantages to know as well as risks to consider.
If you do have the experience and the risk tolerance to try out trading on margin, you could increase your buying power, take advantage of more investment opportunities, and potentially increase your returns. But don’t forget the risks involved.
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).
FAQ
How much margin should you use for Forex trading?
It depends on your comfort level and risk tolerance. If you seek maximum risk, then you might be comfortable with a low margin amount. Those with a lower risk tolerance might prefer to trade with a higher margin deposit. You can typically have a leverage ratio anywhere from 1:1 to 500:1.
What is a bad margin level in Forex trading?
You want to have a forex trading margin level above 100%. A margin percentage any lower means you might not be able to open new trades.
Can you trade Forex without leverage?
Yes, you can trade forex without leverage by only trading with your margin deposit.
What is free margin in forex trading?
Free margin is the amount of money available to open new forex positions. It is your account’s equity after subtracting the margin used.
What is a good margin level in forex?
Generally, a good margin level in forex would be above 100%, but depending on how experienced of a trader you are, it can be much higher.
What does 5% margin mean in forex?
The margin percentage refers to how much cash a trader needs to put down to open a trade. So, if the requirement is 5% margin, a trader must put down 5% of the overall trade amount to open a position.
Photo credit: iStock/eggeeggjiew
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.
*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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Jan
30
2024
401(k) Catch-Up Contributions: What Are They & How Do They Work?
Retirement savers age 50 and older get to put extra tax-advantaged money into their 401(k) accounts beyond the standard annual contribution limits. Those additional savings are known as “catch-up contributions.”
If you have a 401(k) at work, taking advantage of catch-up contributions is key to making the most of your plan, especially as retirement approaches. Here’s a closer look at how 401(k) catch-up limits work.
What Is 401(k) Catch-Up?
A 401(k) is a type of defined contribution plan. This means the amount you can withdraw in retirement depends on how much you contribute during your working years, along with any employer matching contributions you may receive, as well as how those funds grow over time.
There are limits on how much employees can contribute to their 401(k) plan each year as well as limits on the total amount that employers can contribute. The regular employee contribution limit is $22,500 for 2023 and $23,000 for 2024. This is the maximum amount you can defer from your paychecks into your plan — unless you’re eligible to make catch-up contributions.
Under Internal Revenue Code Section 414(v), a catch-up contribution is defined as a contribution in excess of the annual elective salary deferral limit. For 2023 and 2024, the 401(k) catch-up contribution limit is $7,500.
That means if you’re eligible to make these contributions, you would need to put a total of $30,000 in your 401(k) in 2023 to max out the account and $30,500 in 2024. That doesn’t include anything your employer matches.
Congress authorized catch-up contributions for retirement plans as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The legislation aimed to help older savers “catch up” and avoid falling short of their retirement goals, so they can better cover typical retirement expenses and enjoy their golden years.
Originally created as a temporary measure, catch-up contributions became a permanent feature of 401(k) and other retirement plans following the passage of the Pension Protection Act in 2006.
Who Is Eligible for 401(k) Catch-Up?
To make catch-up contributions to a 401(k), you must be age 50 or older and enrolled in a plan that allows catch-up contributions, such as a 401(k).
The clock starts ticking the year you turn 50. So even if you don’t turn 50 until December 31, you could still make 401(k) catch-up contributions for that year, assuming your plan follows a standard calendar year.
Making Catch-Up Contributions
If you know that you’re eligible to make 401(k) catch-up contributions, the next step is coordinating those contributions. This is something with which your plan administrator, benefits coordinator, or human resources director can help.
Assuming you’ve maxed out your 401(k) regular contribution limit, you’d have to decide how much more you want to add for catch-up contributions and adjust your elective salary deferrals accordingly. Remember, the regular deadline for making 401(k) contributions each year is December 31.
It’s possible to make catch-up contributions whether you have a traditional 401(k) or a Roth 401(k), as long as your plan allows them. The main difference between these types of plans is tax treatment.
• You fund a traditional 401(k) with pre-tax dollars, including anything you save through catch-up contributions. That means you’ll pay ordinary income tax on earnings when you withdraw money in retirement.
• With a Roth 401(k), regular contributions and catch-up contributions use after-tax dollars. This allows you to withdraw earnings tax-free in retirement, which is a valuable benefit if you anticipate being in a higher tax bracket when you retire.
You can also make catch-up contributions to a solo 401(k), a type of 401(k) used by sole proprietorships or business owners who only employ their spouse. This type of plan observes the same annual contribution limits and catch-up contribution limits as employer-sponsored 401(k) plans. You can choose whether your solo 401(k) follows traditional 401(k) rules or Roth 401(k) rules for tax purposes.
401(k) Catch-Up Contribution Limits
Those aged 50 and older can make catch-up contributions not only to their 401(k) accounts, but also to other types of retirement accounts, including 403(b) plans, 457 plans, SIMPLE IRAs, and traditional or Roth IRAs.
The IRS determines how much to allow for elective salary deferrals, catch-up contributions, and aggregate employer and employee contributions to retirement accounts, periodically adjusting those amounts for inflation. Here’s how the IRS retirement plan contribution limits for 2023 add up:
|
Retirement Plan Contribution Limits in 2023 |
|||
|---|---|---|---|
| Annual Contribution | Catch Up Contribution | Total Contribution for 50 and older | |
| Traditional, Roth and solo 401(k) plans; 403(b) and 457 plans | $22,500 | $7,500 | $30,000 |
| Defined Contribution Maximum, including employer contributions | $66,000 | $7,500 | $73,500 |
| SIMPLE IRA | $15,000 | $3,500 | $18,500 |
| Traditional and Roth IRA | $6,500 | $1,000 | $7,500 |
These amounts only include what you contribute to your plan or, in the case of the defined contribution maximum, what your employer contributes as a match. Any earnings realized from your plan investments don’t count toward your annual or catch-up contribution limits.
Also keep in mind that employer contributions may be subject to your company’s vesting schedule, meaning you don’t own them until you’ve reached certain employment milestones.
Tax Benefits of Making Catch-Up Contributions
Catch-up contributions to 401(k) retirement savings allow you to save more money in a tax-advantaged way. The additional money you can set aside to “catch up” on your 401(k) progress enables you to save on taxes now, as you won’t pay taxes on the amount you contribute until you withdraw it in retirement. These savings can add up if you’re currently in a high tax bracket, offsetting some of the work of saving extra.
The amount you contribute will also grow tax-deferred, and making catch-up contributions can result in a sizable difference in the size of your 401(k) by the time you retire. Let’s say you start maxing out your 401(k) plus catch-up contributions as soon as you turn 50, continuing that until you retire at age 65. That would be 15 years of thousands of extra dollars saved annually.
Those extra savings, thanks to catch-up contributions, could easily cross into six figures of added retirement savings and help compensate for any earlier lags in saving, such as if you were far off from hitting the suggested 401(k) amount by 30.
Roth 401(k) Catch-Up Contributions
The maximum amount you can contribute to a Roth 401(k) is the same as it is for a traditional 401(k): $22,500 and, if you’re 50 or older, $7,500 in catch-up contributions, as of 2023. For 2024, it is $23,000 and, if you’re 50 or older, $7,500 in catch-up contributions. This means that if you’re age 50 and up, you are able to contribute a total of $30,000 to your Roth 401(k) in 2023 and $30,500 in 2024.
If your employer offers both traditional and Roth 401(k) plans, you may be able to contribute to both, and some may even match Roth 401(k) contributions. Taking advantage of both types of accounts can allow you to diversify your retirement savings, giving you some money that you can withdraw tax-free and another account that’s grown tax-deferred.
However, if you have both types of 401(k) plans, keep in mind while managing your 401(k) that the contribution limit applies across both accounts. In other words, you can’t the maximum amount to each 401(k) — rather, they’d share that limit.
The Takeaway
Putting money into a 401(k) account through payroll deductions is one of the easiest and most effective ways to save money for your retirement. To determine how much you need to put into that account, it helps to know how much you need to save for retirement. If you start early, you may not need to make catch-up contributions. But if you’re 50 or older, taking advantage of 401(k) catch-up contributions is a great way to turbocharge your tax-advantaged retirement savings.
Of course, you can also add to your retirement savings with an IRA. While a 401(k) has its advantages, including automatic savings and a potential employer match, it’s not the only way to grow retirement wealth. If you’re interested in a traditional, Roth, or SEP IRA, you can easily open an IRA account on the SoFi Invest® brokerage platform. If you’re age 50 or older, those accounts will also provide an opportunity for catch-up contributions.
FAQ
How does the 401(k) catch-up work?
401(k) catch-up contributions allow you to increase the amount you are allowed to contribute to your 401(k) plan on an annual basis. Available to those aged 50 and older who are enrolled in an eligible plan, these catch-contributions are intended to help older savers meet their retirement goals.
What is the 401(k) catch-up amount in 2023?
For 2023, the 401(k) catch-up contribution limit is $7,500.
Photo credit: iStock/1001Love
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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