Dec
28
2024
What Are I Bonds? 9 Things to Know Before Investing

What Are I Bonds?

By | Growing Wealth, Investing, money | Comments Off on What Are I Bonds?

I Bonds are a type of savings bond issued by the U.S. Treasury. They are designed to protect against inflation and are generally considered a safe investment because they are backed by the government.

I Bonds are essentially a loan to an entity (in this case the U.S. government), with the promise to return an investor’s money, typically with interest. These bonds also offer some tax advantages.

If you’re considering buying I Bonds and you’re wondering, how do I Bond work?, here’s what you need to know.

Key Points

•   I Bonds are government-backed savings bonds designed to be low-risk.

•   The interest rate of I Bonds combines a fixed rate and an inflation rate, adjusted semi-annually, which together provide the bonds’ composite rate.

•   Tax benefits include exemption from state and local taxes, and possible deferral of federal taxes.

•   Purchase limits of I Bonds are set at $10,000 per individual annually.

•   I Bonds must be held for 12 months before redemption. Cashing them in before holding them for five years incurs a penalty of the last three months’ interest.

How Do I Bonds Work?

I Bonds are a type of savings bond offered by the U.S. Treasury and backed by the full faith and credit of the U.S. government. These bonds offer two types of interest payments: a fixed rate and an inflation rate, which together provide the bond’s composite rate (or yield).

The fixed-rate portion is determined when the bond is purchased, and it remains the same for the life of the bond. The variable rate gets adjusted twice a year, based on inflation rates. The composite rate on I Bonds issued as of November 1, 2024 is 3.11%. If you’re wondering how that rate compares to the interest rate on other types of savings vehicles, the rate on a 60-month certificate of deposit (CD) in November 2024 was 4.15% , for example, and the average rate on a high-yield savings account was more than 4%.

Because I Bonds are backed by the U.S. government, they are designed to have a low risk of default. Furthermore, the principal is guaranteed. This is one of the advantages of savings bonds overall. As a result, I Bonds are generally considered low-risk investments.

Individuals who buy I Bonds must hold them for at least 12 months before cashing them in. if they redeem the bonds before the five-year mark, they will lose the last three months of interest. Investors can hold onto I Bonds for up to 30 years, when they reach maturity.

While paper I Bonds used to be available in certain circumstances, starting January 1, 2025, all new I Bonds will be electronic.

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How Do You Calculate I Bond Interest Rate?

If you are interested in buying bonds like I Bonds, you’ll want to know how to figure out the interest rate. To calculate the I Bonds interest rate, you combine the fixed rate and inflation rate to get the composite rate.

For example, if you bought I Bonds in November 2024 when the fixed rate was 1.20% and the inflation rate was 0.95%, to calculate the composite rate you would use this formula:

[Fixed rate + (2x inflation rate) + (fixed rate x inflation rate)] = composite rate

Plugging in the actual numbers, it would be:

[0.0120 + (2 x 0.0095) + (0.0120 x 0.0095)] + 0.0311 or 3.11%

Using these numbers, you’ll earn 3.11% interest on the amount you invested in I Bonds for six months, at which time the rate may change again. So if you invested $1,000 in I Bonds, you would earn $15.55 in interest in six months. The earnings would then be added to your original investment, and for the next six months you would earn interest on that new, higher amount of $1,015.55.

One thing to keep in mind is that if you cash in I Bonds before five years, you will lose the last three months worth of interest. So, if possible, you may want to hang onto them for five years to avoid giving up interest you may have earned.

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Are I Bonds Still a Good Investment?

Whether I Bonds make sense for you as an investment depends on a number of factors, your financial goals, risk tolerance, overall investment strategy, and timeline.

Benefits of I Bonds

I Bonds have a number of potential advantages. These include:

•   Lower risk: I Bonds are designed to be a low-risk investment, backed by the U.S. government. If you have a low risk tolerance, I Bonds may be a good choice for you. Also, if you’re looking for a place to park money that you’ll need in five or so years — for a down payment on a house, say — I Bonds can offer a low-risk option.

•   Protection against inflation: I Bonds can help protect your purchasing power in times of high inflation. If inflation rises, the interest rate on I Bonds rises as well. For instance, in May 2022, when inflation was high, I Bonds paid a composite rate of 9.62%. As of November 1, when inflation was much lower, the composite rate on I Bonds issued was 3.11%.

•   May offer tax advantages: While there are federal taxes on I Bonds, there are no state and local taxes on them.

Drawbacks of I Bonds

There are some downsides to investing in I Bonds, however, such as the following:

•   Time commitment: I Bonds must be held for at least 12 months before they can be redeemed.

•   Possible interest penalty: You’ll lose the last three months’ worth of interest if you sell I Bonds before the five-year mark.

•   Purchase limit: Individuals can purchase no more than $10,000 worth of electronic I Bonds each year through the U.S. Treasury’s Treasury Direct.

•   Lower interest rate: The interest rate may be lower for I Bonds than for some other investments.

•   Hard to predict return over time: To maximize your return on investment when purchasing I Bonds, it’s important to understand how the two interest rate components of the bond can play out over time. As mentioned, the fixed interest rate remains the same for the life of the bond. But the inflation rate of the bond adjusts with changes in inflation rates twice per year. If inflation goes up, so does the bond’s inflation rate. If inflation goes down, the bond’s inflation rate would likewise decrease as well.

I Bonds vs EE Bonds

Investors considering buying savings bonds may want to compare I Bonds and EE Bonds. The two types of bonds have many similarities but also a few key differences.

Similarities

You can buy both EE Bonds and I Bonds from Treasury Direct. Both types of bonds are backed by the full faith and credit of the U.S. government, and they are each designed to be a low-risk investment. They both mature in 30 years.

I Bonds and EE Bonds each have a purchase limit of $10,000 per individual per year.

Differences

One of the main differences between EE Bonds and I Bonds is that EE bonds issued after May 2005 have a fixed interest rate that doesn’t change for at least the first 20 of its 30 years, while I Bonds have a composite rate that combines a fixed rate and an inflation rate, which changes every six months. The interest rate for EE Bonds bought as of November 1 is 2.60%.

One unique feature of EE Bonds is that, over a 20-year period, these bonds are guaranteed to double in value. While I Bonds don’t offer the same guarantee, your principal is guaranteed and the bonds are designed to keep pace with inflation.

Do You Pay Taxes on I Bonds?

Tax-efficient investors may want to consider certain I Bond features. For instance, I Bonds are exempt from local and state taxes. While federal taxes usually apply, they could be deferred until the bond is ultimately sold or matures; whichever happens first.

Additionally, I Bond investors may use the interest payments for qualified higher education expenses and receive a 100% deduction. Some restrictions apply, including:

•   You must cash out your I Bonds the year that you want to claim the exclusion.

•   Your modified adjusted gross income must be less than the cut-off amount the IRS sets for the year.

•   You must use the interest paid to cover qualified higher education expenses for you, your spouse, or your dependent children the same year.

•   You cannot be married, filing separately.



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How Do You Buy I Bonds?

You need to meet certain criteria to purchase I Bonds. To be eligible to buy I Bonds you must be:

•   A United States citizen, no matter where you live

•   A United States resident, or

•   A civilian employee of the United States, no matter where you live

If you are eligible to purchase them, buying I Bonds is easy. As previously mentioned, individuals can purchase electronic I Bonds online through Treasury Direct, after setting up a Treasury Direct account. They can be bought in denominations starting at $25. The maximum amount of electronic I Bonds someone can purchase is $10,000 per calendar year.

The Takeaway

If you’re looking for an investment that’s designed to be safe, I Bonds may be worth considering. They are backed by the U.S. government and offer protection from inflation, certain tax advantages, and other benefits that may make them a low-risk choice for your savings goals. However, because I Bonds come with a composite rate of return, it’s hard to predict how much your money will actually earn over time.

If you’re interested in different savings vehicles, there are alternatives to I Bonds, including CDs and high-yield savings accounts. By exploring your options, you can determine the best choice — or choices — for you and your financial goals.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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 up to 3.80% APY on SoFi Checking and Savings.

FAQ

How Long Do I Bonds Take to Mature?

I Bonds reach maturity in 30 years. You can redeem I Bonds after holding them for 12 months, but if you cash in I Bonds in less than five years, you’ll lose the last three months of interest.

How Often Can You Buy I Bonds?

In one calendar year, an individual can buy up to $10,000 worth of I Bonds. The limit is counted by the Social Security number of the first person listed on the bond, according to Treasury Direct. If you are a co-owner of I Bonds and the second person named on the bonds, those bonds will not count toward your limit.

In addition, if you give I Bonds as a gift, those bonds count toward the limit of the recipient, not you as the giver.

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SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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23
2024
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401(k) Taxes: Rules on Withdrawals and Contributions

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on 401(k) Taxes: Rules on Withdrawals and Contributions

Employer-sponsored retirement plans like a 401(k) are a common way for workers to save for retirement. According to the Bureau of Labor Statistics, a little more than half of private industry employees participate in a retirement plan at work. So participants need to understand how 401(k) taxes work to take advantage of this popular retirement savings tool.

With a traditional 401(k) plan, employees can contribute a portion of their salary to an account with various investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and cash.

There are two main types of workplace 401(k) plans: a traditional 401(k) plan and a Roth 401(k). The 401(k) tax rules depend on which plan an employee participates in.

Traditional 401(k) Tax Rules

When it comes to this employer-sponsored retirement savings plan, here are key things to know about 401(k) taxes and 401(k) withdrawal tax.

Recommended: Understanding the Different Types of Retirement Plans

401(k) Contributions Are Made With Pre-tax Income

One of the biggest advantages of a 401(k) is its tax break on contributions. When you contribute to a 401(k), the money is deducted from your paycheck before taxes are taken out, which reduces your taxable income for the year. This means that you’ll pay less in income tax, which can save you a significant amount of money over time.

If you’re contributing to your company’s 401(k), each time you receive a paycheck, a self-determined portion of it is deposited into your 401(k) account before taxes are taken out, and the rest is taxed and paid to you.

For 2025, participants can contribute up to $23,500 each year to a 401(k) plan, plus $7,500 in catch-up contributions if they’re 50 or older. The contribution limits are up from 2024, when the limit was $23,000. The annual catch-up amount is unchanged at $7,500.

But now there is an extra catch-up provision: For 2025, those ages 60 to 63 may contribute an additional $11,250 per year instead of $7,500, thanks to SECURE 2.0 — for a total of $34,750.

401(k) Contributions Lower Your Taxable Income

The more you contribute to your 401(k) account, the lower your taxable income is in that year. If you contribute 15% of your income to your 401(k), for instance, you’ll only owe taxes on 85% of your income.

Withdrawals From a 401(k) Account Are Taxable

When you take withdrawals from your 401(k) account in retirement, you’ll be taxed on your contributions and any earnings accrued over time.

The withdrawals count as taxable income, so during the years you withdraw funds from your 401(k) account, you will owe taxes in your retirement income tax bracket.

Early 401(k) Withdrawals Come With Taxes and Penalties

If you withdraw money from your 401(k) before age 59 ½, you’ll owe both income taxes and a 10% tax penalty on the distribution.

Although individual retirement accounts (IRAs) allow penalty-free early withdrawals for qualified first-time homebuyers and qualified higher education expenses, that is not true for 401(k) plans.

That said, if an employee leaves a company during or after the year they turn 55, they can start taking distributions from their 401(k) account without paying taxes or early withdrawal penalties.

Can you take out a loan or hardship withdrawal from your plan assets? Many plans do allow that up to a certain amount, but withdrawing money from a retirement account means you lose out on the compound growth from funds withdrawn. You will also have to pay interest (yes, to yourself) on the loan.

Roth 401(k) Tax Rules

Here are some tax rules for the Roth 401(k).

Your Roth 401(k) Contributions Are Made With After-Tax Income

When it comes to taxes, a Roth 401(k) works the opposite way of a traditional 401(k). Your contributions are post-tax, meaning you pay taxes on the money in the year you contribute.

If you have a Roth 401(k) and your company offers a 401(k) match, that matching contribution will go into a pre-tax account, which would be a traditional 401(k) account. So you would essentially have a Roth 401(k) made up of your own contributions and a traditional 401(k) of your employer’s contributions.

Recommended: How an Employer 401(k) Match Works

Roth 401(k) Contributions Do Not Lower Your Taxable Income

When you have Roth 401(k) contributions automatically deducted from your paycheck, your full paycheck amount will be taxed, and then money will be transferred to your Roth 401(k).

For instance, if you’re making $50,000 and contributing 10% to a Roth 401(k), $5,000 will be deposited into your Roth 401(k) annually, but you’ll still be taxed on the full $50,000.

Roth 401(k) Withdrawals Are Tax-Free

When you take money from your Roth 401(k) in retirement, the distributions are tax-free, including your contributions and any earnings that have accrued (as long as you’ve had the account for at least five years).

No matter what your tax bracket is in retirement, qualified withdrawals from your Roth 401(k) are not counted as taxable income.

It can also be helpful to know that, like a Roth IRA, a Roth 401(k) no longer requires participants to start taking required minimum distributions at age 73.

There Are Limits on Roth 401(k) Withdrawals

In order for a withdrawal from a Roth 401(k) to count as a qualified distribution — meaning, it won’t be taxed — an employee must be age 59 ½ or older and have held the account for at least five years.

If you make a withdrawal before this point — even if you’re age 61 but have only held the account since age 58 — the withdrawal would be considered an early, or unqualified, withdrawal. If this happens, you would owe taxes on any earnings you withdraw and could pay a 10% penalty.

Early withdrawals are prorated according to the ratio of contributions to earnings in the account. For instance, if your Roth 401(k) had $100,000 in it, made up of $70,000 in contributions and $30,000 in earnings, your early withdrawals would be made up of 70% contributions and 30% earnings. Hence, you would owe taxes and potentially penalties on 30% of your early withdrawal.

If the plan allows it, you can take a loan from your Roth 401(k), just like a traditional 401(k), and the same rules and limits apply to how much you can borrow. Any Roth 401(k) loan amount will be combined with outstanding loans from that plan or any other plan your employer maintains to determine your loan limits.

You Can Roll Roth 401(k) Money Into a Roth IRA

Money in a Roth 401(k) account can be rolled into a Roth IRA. Like an employer-sponsored Roth 401(k), a Roth IRA is funded with after-tax dollars.

It’s important to note, however, that there’s also a five-year rule for Roth IRAs: Earnings cannot be withdrawn tax- and penalty-free from a Roth IRA until five years after the account’s first contribution. If you roll a Roth 401(k) into a new Roth IRA, the five-year clock starts over at that time.

Do You Have to Pay Taxes on a 401(k) Rollover?

If you do a direct rollover of your 401(k) into an IRA or another eligible retirement account, you generally won’t have to pay taxes on the rollover. However, if you receive the funds from your 401(k) and then roll them over yourself within 60 days, you may have to pay taxes on the amount rolled over, as the IRS will treat it as a distribution from the 401(k).

Recommended: How to Roll Over Your 401(k)

Do You Have to Pay 401(k) Taxes after 59 ½?

If you have a traditional 401(k), you will generally have to pay taxes on withdrawals after age 59 ½. This is because the money you contributed to the 401(k) was not taxed when you earned it, so it’s considered income when you withdraw it in retirement.

However, if you have a Roth 401(k), you can withdraw your contributions and earnings tax-free in retirement as long as you meet certain requirements, such as being at least 59 ½ and having had the account for at least five years.

Do You Pay 401(k) Taxes on Employer Contributions?

The taxation of employer contributions to a 401(k) depends on whether the account is a traditional or Roth 401(k).

In the case of traditional 401(k) contributions, the employer contributions are not included in your taxable income for the year they are made, but you will pay taxes on them when you withdraw the funds from the 401(k) in retirement.

In the case of Roth contributions, the employer contributions are not included in a post-tax Roth 401(k) but rather in a pre-tax traditional 401(k) account. So, you do not pay taxes on the employer contributions in a Roth 401(k), but you do pay taxes on withdrawals.

How Can I Avoid 401(k) Taxes on My Withdrawal?

The only way to avoid taxes on 401(k) withdrawals is to take advantage of a Roth 401(k), as noted above. With a Roth 401(k), your contributions are made post-tax, but withdrawals are tax-free if you meet certain criteria to avoid the penalties mentioned above.

However, even if you have to pay taxes on your 401(k) withdrawals, you can take the following steps to minimize your taxes.

Consider Your Tax Bracket

Contributing to a traditional 401(k) is essentially a bet that you’ll be in a lower tax bracket in retirement — you’re choosing to forgo taxes now and pay taxes later.

Contributing to a Roth 401(k) takes the opposite approach: Pay taxes now, so you don’t have to pay taxes later. The best approach for you will depend on your income, your tax situation, and your future tax treatment expectations.

Strategize Your Account Mix

Having savings in different accounts — both pre-tax and post-tax — may offer more flexibility in retirement.

For instance, if you need to make a large purchase, such as a vacation home or a car, it may be helpful to be able to pull the income from a source that doesn’t trigger a taxable event. This might mean a retirement strategy that includes a traditional 401(k), a Roth IRA, and a taxable brokerage account.

Decide Where To Live

Eight U.S. states don’t charge individual income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. And New Hampshire only taxes interest and dividend income.

This can affect your tax planning if you live in a tax-free state now or intend to live in a tax-free state in retirement.

The Takeaway

Saving for retirement is one of the best ways to prepare for a secure future. And understanding the tax rules for 401(k) withdrawals and contributions is essential for effective retirement planning. By educating yourself on the rules and regulations surrounding 401(k) taxes, you can optimize your retirement savings and minimize your tax burden.

Another strategy to help stay on top of your retirement savings is to roll over a previous 401(k) to a rollover IRA. Then you can manage your money in one place.

SoFi makes the rollover process seamless. The process is automated so there’s no need to watch the mail for your 401(k) check — and there are no rollover fees or taxes.

Easily manage your retirement savings with a SoFi IRA.

FAQ

Do you get taxed on your 401(k)?

You either pay taxes on your 401(k) contributions — in the case of a Roth 401(k) — or on your traditional 401(k) withdrawals in retirement.

When can you withdraw from 401(k) tax free?

You can withdraw from a Roth 401(k) tax-free if you have had the account for at least five years and are over age 59 ½. With a traditional 401(k), withdrawals are generally subject to income tax.

How can I avoid paying taxes on my 401(k)?

You never truly avoid paying taxes on a 401(k), as you either have to pay taxes on contributions or withdrawals, depending on the type of 401(k) account. By contributing to a Roth 401(k) instead of a traditional 401(k), you can withdraw your contributions and earnings tax-free in retirement.

SoFi Invest®

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


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.

Update: The deadline for making IRA contributions for tax year 2020 has been extended to May 17, 2021.
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23
2024
What Is 401k Auto Escalation?

What Is 401(k) Auto Escalation?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on What Is 401(k) Auto Escalation?

One way to ensure you’re steadily working toward your retirement goals is to automate as much of the process as possible. Some employers streamline the retirement savings process for their employees with automatic enrollment, signing you up for a retirement plan unless you choose to opt out.

There are many ways to automate a 401(k) experience at every step of the way. You can have contributions taken directly from your paycheck before they ever hit your bank account and invest them right away. With automatic deductions, you’re more likely to save for your future rather than spending on immediate needs.

In some cases, you may also be able to automatically increase the amount you save. Some employers also offer a 401(k) auto escalation option that could increase your retirement savings amount as you get older. Here’s a closer look at how 401(k) auto escalation works and how it may help you on your way to your retirement goals.

Key Points

•   401(k) auto escalation automatically increases contributions at regular intervals until a preset maximum is reached.

•   The SECURE Act allows auto escalation up to 15% of an employee’s salary.

•   Auto escalation helps employees save more for retirement without needing to adjust contributions manually.

•   Employers benefit from auto escalation by attracting and retaining talent and possibly reducing payroll taxes.

•   Employees should assess if auto escalation aligns with their financial capabilities and retirement goals.

401(k) Recap

A 401(k) is a defined contribution plan offered through your employer. It allows employees to contribute some of their wages directly from their paycheck. Contributions are made with pre-tax money, which may reduce taxable income in the year they are made, providing an immediate tax benefit.

In 2025, employees can contribute up to $23,500 a year to their 401(k), up from $23,000 in 2024. Those aged 50 and older can contribute an extra $7,500, bringing their potential contribution total to $31,000 in 2025 and $30,500 in 2024. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

For many individuals, the goal is to eventually max out a 401(k) up to the contribution limit. Employers may offer matching funds to help encourage employees to save. Individuals should aim to contribute at least enough to meet their employer’s match, in order to get that “free money” from their employer to invest in their future.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open an IRA account and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

How 401(k) Auto Escalation Works

An auto escalation is a 401(k) feature that automatically increases your contribution at regular intervals by a set amount until a preset maximum is achieved. The SECURE Act, signed into law in 2019, allows auto escalation programs to raise contributions up to 15%. Before then, the cap on default contributions was 10% for auto escalation programs.

For example, you may choose to set your auto escalation rate to raise your contributions by 1% each year. Once you hit that 15% ceiling, auto escalation will cease. However, you can still choose to increase the amount you are saving on your own beyond that point.

Recommended: Understanding the Different Types of Retirement Plans

Advantages of 401(k) Auto Escalation

When it comes to auto escalation programs, there are important factors to consider — for employees as well as for employers who sponsor the 401(k) plan.

Advantages for Employees

•   Auto escalation is one more way to automate savings for retirement, so that it is always prioritized.

•   Auto escalation may increase the amount employees save for retirement more than they would on their own.

•   Employees don’t have to remember to make or increase contributions themselves until they reach the auto escalation cap.

•   Increasing tax-deferred contributions may help reduce an employee’s tax burden.

Advantages for Sponsors

Employers who offer auto escalation may find it helps with both employee quality and retention as well as with reducing taxes.

•   Auto escalation provides a benefit that may help attract top talent.

•   It helps put employees on track to automatically save, which may increase retention and contribute to their sense of financial well-being.

•   It reduces employer payroll taxes, because escalated funds are contributed pre-tax by employees.

•   It may generate tax credits or deductions for employers. For example, matching contributions may be tax deductible.

•   As assets under management increase, 401(k) companies may offer lower administration fees or even the ability to offer additional services to participants.

Disadvantages of 401(k) Auto Escalation

While there are undoubtedly benefits to 401(k) auto escalation, there are also some potential downsides to consider.

Disadvantages for Employees

Even on autopilot, it can be important to review contributions so as to avoid these disadvantages.

•   Auto escalation may lull employees into a false sense of security. Even if they’re increasing their savings each year, if their default rate was too low to begin with, they may not be saving enough to meet their retirement goals.

•   If an employee experiences a pay freeze or hasn’t received a raise in a number of years, auto escalation will mean 401(k) contributions represent an increasingly larger proportion of take-home pay.

Disadvantages for Sponsors

Employers may want to consider these potential downsides before offering 401(k) auto escalation.

•   Auto escalation requires proper administrative oversight to ensure that each employee’s escalation amounts are correct — and it may be time-consuming and costly to fix mistakes.

•   This option may increase the need to communicate with 401(k) record keepers.

•   Auto escalation may cause employer contribution amounts to rise.

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

Is 401(k) Auto Escalation Right for You?

If your employer offers auto escalation, first determine your goals for retirement. Consider whether or not your current savings rate will help you achieve those goals and whether escalation could increase the likelihood that you will.

Also decide whether you can afford to increase your contributions. Perhaps your default rate is already set high enough that you are maxing out your retirement savings budget. In this case, auto escalation might land you in a financial bind.

However, if you have room in your budget, or you expect your income to grow each year, auto escalation may help ensure that your retirement savings continue to grow as well.

If your employer does not offer auto escalation, or you choose to opt out, consider using pay raises as an opportunity to change your 401(k) contributions yourself.

The Takeaway

A 401(k) is one of many tools available to help you save for retirement — and auto escalation can help you increase your contributions regularly without any additional thought or effort on your part.

If you’ve maxed out your 401(k) or you’re looking for a retirement account with more flexible options, you might want to consider a traditional or Roth IRA. Both types of IRAs offer tax-advantaged retirement savings.

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 grow your nest egg with a SoFi IRA.

FAQ

Is 401(k) auto enrollment legal?

Yes, automatic enrollment allows employers to automatically deduct 401(k) contributions from an employee’s paycheck unless they have expressly communicated that they wish to opt out of the retirement plan.

What is automatic deferral increase?

Automatic deferral increase is essentially the same as auto escalation. It automatically increases the amount that you are saving by a set amount at regular intervals.

Can a company move your 401(k) without your permission?

Your 401(k) can be moved without your permission by a former employer if the 401(k) has a balance of $5,000 or less.

Photo credit: iStock/Halfpoint


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

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


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.

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.
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Dec
12
2024
How Bid and Ask Price Work in Trading

Bid and Ask Price: Definition, Example, How It Works

By | Growing Wealth, invest, Investing | Comments Off on Bid and Ask Price: Definition, Example, How It Works

Bid and ask are commonly used investing terms, and they refer to the best potential price at which a security on the market could be bought or sold for at any given time. In other words, the best price that buyers and sellers would potentially be willing to buy (the “bid” price) or sell (the “ask” or offer price) the asset.

It’s important for traders to understand the bid vs. ask price of a security, as well as the difference between the two, which is known as the bid-ask spread. The market price is a historical price: the price of the last trade that occurred with the security. The bid and ask prices, on the other hand, show what buyers and sellers would be willing to trade the security for now.

Key Points

•   The bid price is the highest price a buyer is willing to pay for a security, reflecting market demand.

•   The ask price is the lowest price a seller is willing to accept, representing market supply.

•   The bid-ask spread, the difference between bid and ask prices, serves as a transaction cost and indicates market liquidity.

•   Narrow bid-ask spreads suggest high liquidity and trading volume, while wider spreads indicate lower liquidity.

•   Investors use the bid-ask spread to assess market sentiment and risk, with narrower spreads indicating lower risk.

What Are Bid and Ask?

If you’re new to online investing or investing in stocks, you’re probably wondering about bid vs. ask prices. Bid and ask prices show the current market supply and demand for the security. The bid price represents demand for a security; the ask price represents supply.

When an asset has high liquidity — i.e. the market has a high trading volume not dominated by selling — the bid and ask prices will be fairly close. In other words the bid-ask spread, or the difference between the bid and ask prices, will be narrow in a highly liquid market. When there’s a greater gap between demand and supply, the spread will be wider.

That’s why the bid-ask spread is often considered a gauge of liquidity.

Bid Price

The bid price is the best potential price that retail investors would be willing to pay to buy a security.

So if a trader wants to sell a security, they would want to know how much they’d be able to sell it for. They can find out the best price they could get for the security by looking at the current bid price in the market, which would show the highest potential amount they could get for it.

Ask Price

Conversely, ask price is the lowest price investors are willing to sell a security for at any given time. If a trader wants to buy a security, they want to get the lowest possible price, so they look at the ask price to find out what that is.

Bid and Ask Price Examples

Let’s imagine that an investor wants to buy Stock X at the quoted price of $75, so they plan to buy 10 shares for $750. But they end up paying $752. That’s not an error, but rather because the ask price (the selling price) is $75.20.

The current price of $75 per share is the last traded price. But prices can change quickly, and in this case the ask price was 20 cents higher. The bid or buyer’s price is almost always lower than the ask price.

Investors can use limit orders to set specific parameters around the price at which they’re willing to buy or sell a security. This can give investors some control, so they’re not simply paying the current price, which may or may not be advantageous.

Evaluating the bid-ask spread can be part of an investor’s due diligence when trying to gauge rates of return for different securities.

What the Bid-Ask Spread Signals

How far apart the ask price and bid price are can give you a sense of how the market views a particular security’s worth.

If the bid price and ask price are fairly close together, that suggests that buyers and sellers are more or less in agreement on what a security is worth. On the other hand, if there’s a wider spread between the bid and ask price, that might signal that buyers and sellers don’t necessarily agree on a security’s value.

How Are Bid and Ask Prices Determined?

Essentially it’s the supply and demand of the market that sets the bid and ask prices. And many factors can play into supply vs. demand. Because of this, investors who are interested in active investing can use the difference in price between the bid and the ask of a security to gauge what the market thinks the security is worth.

Investors and market-makers can place buy or sell orders at a price they set. These orders will be fulfilled if someone is willing to sell or buy the security at that bid or ask price. Those order placements determine the bid and ask price.

What’s the Difference Between Bid and Ask Prices?

In any market, from stocks to real estate to lemonade stands, there is almost always a difference between what someone is willing to pay for an item versus what someone wants to sell it for.

A buyer may want to buy a house for $300,000, but the seller is selling it for $325,000. An investor may want to buy a stock for $100, but the sell or ask price is $105.

That difference in price is called the spread, and when the spread is narrow it’s a lot easier to close the sale. When the spread is wider, there is a bigger gap between what the buyer thinks an item is worth vs. what the seller thinks it’s worth.

What Does It Mean When Bid and Ask Are Close?

A narrow spread, i.e. when the bid and ask price are close, means traders will be able to buy and sell the security at roughly the same price. This generally means there is a high trading volume for the security, with a lot of people willing to buy and sell because of high demand.

If demand increases for the security, the bid and ask prices will move higher, and vice versa. If there is a surge in demand, but not enough supply, that might drive the bid price up. Conversely, if supply outpaces demand, the bid price of a security could fall In either case, the spread would likely get wider when the bid or the ask prices outweighs the other.

The Bid-Ask Spread

The bid-ask spread is the gap between the two prices: the bid or buyer’s price and the ask or offer price. There are different factors that can affect a stock’s spread, including:

•   Liquidity. A measure of how easily a stock or security can be bought and sold or converted to cash. The more liquid an investment is, the closer the bid and ask price may be, since the market is in agreement about what the security is worth.

•   Trading volume. This means how many shares of a stock or security are traded on a given day. As with liquidity, the more trading volume a security has, the closer together the bid and ask price are likely to be.

•   Volatility. A way of gauging how rapidly a stock’s price moves up or down. When there are wider swings in a stock’s price, i.e. more volatility, the bid-ask price spread can also be wider as market makers attempt to profit from the price changes.

Who Benefits From the Bid-Ask Spread?

The difference in price between the bid and the ask is where brokers and market makers make their profit.

But traders can also benefit from the bid-ask spread, if they use limit orders to get the best possible price on a desired trade, as opposed to using market orders.

How the Bid-Ask Spread Is Used

When you understand how bid-ask spread works, you can use that to invest strategically and manage the potential for risk. This means different things whether you are planning to buy, sell, or hold a stock.

If you’re selling stocks, that means getting the best bid price; when you’re buying, it means paying the best ask price. Essentially, the goal is the same as with any other investing strategy: to buy low and sell high.

Bid-Ask Spread Impact on Trading Profits

Naturally, the bid-ask spread impacts trading profits, and in fact can act almost as a hidden cost.

For example, if an investor places a market order on a stock with a bid price of $90 and an ask price of $91, they’ll get the stock at $91 per share. If the price of the stock rises 5%, so the bid price is now $94.50 and the ask price is $95.55 and the bid-ask spread is $1.05.

If the investor decides to sell the shares they bought at $91 through a market order, they will receive $94.50 per share. So their profit is $3.50 per share, even though the stock price rose by $4.55. The $1.05 gap in profit reflects the $1.05 bid-ask spread on this stock.

Wide vs Narrow Bid-Ask Spread

What is the difference between wide and narrow bid-ask spreads, and what is the significance of each? Here’s a rundown.

Narrow Bid-Ask Spreads

The bid-ask spread, often just called the spread, is tighter when a security has more liquidity, i.e. there’s higher trading volume for that stock. When you think of big companies, industry leaders, constituents of different indexes like the Dow Jones or the S&P 500, those companies may have higher volume and narrower spreads.

Wider Bid-Ask Spreads

Conversely, smaller companies or those that aren’t in demand tend to have wider spreads, reflecting a lower level of market interest. These trades tend to be more expensive, as investors must contend with lower liquidity.

Impact of the Bid-Ask Spread

The narrower the bid-ask spread, the more favorable it is for traders. If an investor wants to buy 100 shares of Stock A at $60, but shares are being offered at $60.25, that 25 cent spread may not seem like much. It would add up to $25 (100 x 0.25). But if that trader wanted to buy 500 shares or more, the cost of the spread is about $125.

The Takeaway

Bid and ask prices help traders know exactly how much they may buy and sell securities for. The bid price is the highest price a buyer is willing to pay for a security. The ask price is the lowest price a seller is willing to accept. The difference between them is the bid-ask spread, or “spread.” The spread ends up being a transaction cost, as market makers pocket the cost of the spread.

Since the bid price and the ask price are essentially a function of supply and demand in the market, investors can consider the bid-ask spread as a gauge of risk. The narrower the spread, the more aligned buyers and sellers are on the value of a certain security, and thus there’s higher volume and more liquidity — and lower risk to the investor that the stock or security might lose value (although it could, as there are no guarantees).

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).

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

FAQ

Do I buy a stock at the bid or ask price?

You buy a stock at the ask price, that’s the lowest price the seller is willing to offer.

Is the last price the same as the market price?

The last price is the last traded price for a security, or the last price at which it closed. The market price is the best current price.

Is it better if your bid is higher than the asking price?

The bid price is typically lower than the seller’s price or ask price, so it would be unusual if the bid was higher than the ask. If a bid price is higher than the ask, a trade would occur, but it would put the buyer at risk of a potential loss.

Photo credit: iStock/eclipse_images

SoFi Invest®

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

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

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

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

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Dec
06
2024
What Is a Shareholder Activist?

What Is a Shareholder Activist?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Shareholder Activist?

A shareholder activist may be a hedge fund, institutional investor, or wealthy individual who uses an ownership stake in a company to influence corporate decision-making. Shareholder activists, sometimes called activist investors, typically seek to change how a company is run to improve its financial performance. However, they may also have other objectives, such as increasing transparency or promoting social responsibility.

Activist shareholders can impact the way a company is managed, thus affecting its stock price. As such, you may benefit from understanding shareholder activism and how these investors may impact the stocks in your portfolio.

Key Points

•   Shareholder activists use ownership stakes to influence corporate decisions, aiming to improve financial performance or promote transparency and social responsibility.

•   Activists can be hedge funds, institutional investors, or wealthy individuals seeking changes in company management.

•   Activist investors may use media and shareholder voting to gain support for their proposals and influence company strategies.

•   Goals of activism vary, from improving environmental impact to unlocking shareholder value through strategic changes.

•   Activism can lead to stock volatility, but targeted stocks may still be valuable for diversified portfolios if proposed changes are supported.

How Shareholder Activism Works

Shareholder activism is a process in which investors purchase a significant stake in a company to influence the management of the company. When an investor builds up a large enough stake in a company, this usually opens up channels where they may discuss business proposals directly with management.

Activist investors may also use the shareholder voting process to wield influence over a company if they believe it is mismanaged. This more aggressive tactic may allow activist shareholders to nominate their preferred candidates for the board of directors or have a say on a company’s management decisions.

Activist investors typically own a relatively small percentage of shares in a company, perhaps less than 10% of a firm’s outstanding stock, so they may need to convince other shareholders to support their proposals. They often use the media to generate support for their campaigns.

Shareholder activists may also threaten lawsuits if they do not get their way, claiming that the company and its board of directors are not fulfilling their fiduciary duties to shareholders.

Activist investors’ goals can vary. Some investors may want to see companies improve their environmental and social impact, so they will suggest that the company adopt a Corporate Social Responsibility framework. Other investors try to get the company to adopt changes to unlock shareholder value, like selling a part of the company or increasing dividend payouts.

However, shareholder activism can also be a source of conflict between shareholders and management. Some activist investors may prefer the company unlock short-term gains that benefit shareholders, perhaps at the expense of long-term business operations. These investors may exit a position in a company once they unlock the short-term gains with little concern for the company’s future prospects.

Recommended: Stakeholder vs. Shareholder: What’s the Difference?

Types of Shareholder Activists

There are three primary types of shareholder activists: hedge funds, institutional investors, and individual investors. So, your average investor who may be doing a bit of online investing or building a retirement portfolio likely wouldn’t qualify as a shareholder activist. Each type of shareholder activist has its distinct objectives and strategies.

Hedge Funds

Hedge funds are private investment vehicles usually only available to wealthy individuals who make more than $200,000 annually or have a net worth over $1 million. These funds often take a more aggressive approach to shareholder activism, like public campaigns and proxy battles, to force a company to take specific actions to generate a short-term return on its investment.

Institutional Investors

Institutional investors are typically large pension funds, endowments, and mutual funds that invest in publicly-traded companies for the long term. These investors often use their voting power to influence a company’s strategy or management to improve their investment’s financial performance.

Individual Investors

Though less common than hedge funds and institutional investors, very wealthy individual investors sometimes use their own money to buy shares in a company and then push for change.

Examples of Shareholder Activists

Shareholder activism became a popular strategy in the 1970s and 1980s, when many investors – called “corporate raiders” – used their power to push for changes in a company’s management. Shareholder activism has evolved since this period, but there are still several examples of activist investors

For example, Carl Icahn is one of the most well-known shareholder activists who made a name for himself as a corporate raider in the 1980s. He was involved in hostile takeover bids for companies such as TWA and Texaco during the decade.

Since then, Icahn has been known for taking large stakes in companies and pushing for changes, such as spin-offs, stock buybacks, and management changes. More recently, Icahn spearheaded a push in early 2022 to nominate two new directors to the board of McDonald’s. His goal was to get McDonald’s to change its treatment of pigs. However, his preferred nominees failed to get elected to the board.

Another well known activist investor is Bill Ackman, the founder and CEO of Pershing Square Capital Management, a hedge fund specializing in activist investing. Ackman is known for his high-profile campaigns, including his battle with Herbalife.

In 2012, Ackman shorted the stock of Herbalife, betting the company would collapse. He accused Herbalife of being a pyramid scheme and called for a government investigation. Herbalife denied the allegations, and the stock continued to rise. Ackman eventually closed out his position at a loss.

Recommended: Short Position vs Long Position, Explained

Other examples of shareholder activists include Greenlight Capital, led by David Einhorn, and Third Point, a hedge fund founded by Dan Loeb.

In 2013, Einhorn took a stake in Apple and pushed for the company to return more cash to shareholders through share repurchases and dividends. Apple eventually heeded his advice and initiated a plan to return $100 billion to shareholders through dividends and buybacks.

In 2011, Loeb’s hedge fund took a stake in Yahoo and pushed for the company to fire its CEO, Scott Thompson. Thompson eventually resigned, and Yahoo appointed Loeb to its board of directors. More recently, in 2022, Loeb took a significant stake in Disney and started a pressure campaign calling on the company to spin-off or sell ESPN. However, he eventually backed off that suggestion.

Is Shareholder Activism Good for Individual Investors?

Depending on the circumstances, a shareholder activist campaign may be good for investors. Some proponents argue that shareholder activism can improve corporate governance, promote ESG investing, and lead to better long-term returns for investors.

Others contend that activist investors are primarily interested in short-term gains and may not always have the best interests of all shareholders in mind. While individual investors may benefit from a stock’s short-term spike after an activist shareholder’s campaign, this rally may not last for investors interested in long-term gains.

The Takeaway

Shareholder activists use their financial power to try to influence the management of publicly traded companies. Because activist investors often leverage the media to promote their goals, individual investors may read about these campaigns and worry about how they could affect their holdings.

Generally, the impact of shareholder activism on investors depends on the specific goals of the activist and the response of the company’s management. If an activist successfully pressures management to make changes that improve the company’s performance, this can increase shareholder value. However, if an activist’s campaign is unsuccessful or the company’s management resists the activist’s demands, this can lead to a decline in the stock price.

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).

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

Photo credit: iStock/xavierarnau

SoFi Invest®

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

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

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

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

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