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Aug

2024

Guide to Self-Directed IRAs (SDIRA)

By Austin Kilham | Growing Wealth, invest, Investing | Comments Off

Individual retirement accounts, or IRAs, typically allow for a lot of flexibility in the kinds of investments you can make, from stocks and bonds to mutual funds and exchange-traded funds (ETFs).

However, most IRAs don’t allow certain alternative investments like precious metals and real estate. If you want to hold assets like these in your retirement account, you’ll need a self directed IRA (SDIRA), a specific type of Roth or traditional IRA.

Key Points

• A self-directed IRA (SDIRA) allows individuals to invest in a broader array of assets, including real estate, cryptocurrency, and precious metals, compared to traditional IRAs.

• Account holders of SDIRAs manage their investments independently, which involves conducting research and due diligence on potential assets, thus increasing their responsibility.

• While SDIRAs can offer high potential returns, they also carry higher fees and risks, particularly due to the illiquidity of many alternative investments.

• Contribution limits for SDIRAs mirror those of traditional IRAs, allowing up to $7,000 annually, or $8,000 for individuals aged 50 and older.

• Opening an SDIRA requires finding an approved custodian, selecting investments, completing transactions through a reputable dealer, and planning for less liquid withdrawals.

What Is a Self-Directed IRA (SDIRA)?

Self directed IRAs and self directed Roth IRAs allow account holders to buy and sell a wider variety of investments than regular traditional IRAs and Roth IRAs. Experienced investors, familiar with sophisticated or risky investments, often use these.

While a custodian or a trustee administers the SDIRA, the account holder typically manages the allocation themselves, taking on responsibility for researching investments and due diligence. These accounts may also come with higher fees than regular IRAs, which can cut into the size of your retirement nest egg over time.

What Assets Can You Put in a Self-Directed IRA or a Self-Directed Roth IRA?

Individuals can hold a number of unique alternative investments in their SDIRA, including but not limited to:

• Real estate and land

• Cryptocurrency

• Precious metals

• Mineral, oil, and gas rights

• Water rights

• LLC membership interest

• Tax liens

• Foreign currency

• Startups through crowdfunding platforms

Recommended: Types of Alternative Investments

Types of SDIRAs

There are specific kinds of SDIRAs customized to investors looking for certain types of investments. The different types include:

Self-directed SEP IRAs

Simplified Employee Pension IRAs (SEP IRAs) are for small business owners or those who are self-employed so that they can make contributions that are tax deductible for themselves and any eligible employees they might have. This type of retirement account gives them the flexibility to invest in alternative investments.

Self-directed SIMPLE IRAs

A Savings Incentive Match Plan IRA (SIMPLE IRA) is a tax-deferred retirement plan for employers and employees of small businesses. Both the employer and the employees can make contributions to this plan. It allows for some alternative kinds of investments.

Recommended: SIMPLE IRA vs Traditional

Self-directed Precious Metal IRAs

Similarly, there are self-directed IRAs for those who would like to invest in precious metals like gold. However, be aware that some precious metal IRAs may charge higher fees than the market price for precious metals.

How Do Self-Directed IRAs Work?

Now that you know the answer to the question, what is a self directed IRA?, it’s important to understand how these accounts work and the self directed IRA rules. You’ll also want to familiarize yourself with the guidelines regarding opening an IRA if you have a 401(k).

Aside from their ability to hold otherwise off-limits alternative investments, SDIRAs work much like their traditional counterparts. SDIRAs are tax-advantaged retirement accounts, and they can come in two flavors: traditional SDIRAs and Roth SDIRAs.

Traditional IRA Contributions and Withdrawal Rules

IRA contributions to traditional accounts goes in before taxes, which reduces investors’ taxable income, lowering their income tax bill in the year they make the contribution. For 2024, individuals can contribute up to $7,000 in total across accounts. Those age 50 and up can make an extra $1,000 catch-up contribution for a total of $8,000. Investments inside the account grow tax-deferred.

It’s important to pay close attention to self directed IRA rules, particularly rules for IRA withdrawals. Once individuals begin to make withdrawals at age 59 ½, they are taxed at normal income tax rates. Account holders who make withdrawals before that age may owe taxes and a possible 10% early withdrawal penalty. Traditional SDIRA account holders must begin making required minimum distributions (RMDs) after age 73.

Roth IRA Contributions and Withdrawal Rules

Roth SDIRAs have the same contribution limits as traditional SDIRAs. However, retirement savers contribute to Roths with after-tax dollars. Investments inside the account grow tax-free, and withdrawals after age 59 ½ aren’t subject to income tax.

Roths are also not subject to RMD rules. As long as an individual has had the account for at least five years (as defined by the IRS), they can withdraw Roth contributions at any time without penalty, though earnings may be subject to tax if withdrawn before age 59 ½.

There are also rules restricting who can contribute to a Roth IRA, based on their income. In 2024, Roth eligibility begins phasing out at $146,000 for single people, and $230,000 for people who are married and file their taxes jointly.

Individuals can maintain both traditional and Roth IRA accounts, however, contribution limits are cumulative across accounts, and cannot exceed $7,000, or $8,000 for those 50 and over.

Traditional vs Roth SDIRA

There are some differences between a self-directed traditional IRA and a self-directed Roth IRA.

With a traditional SDIRA, you save pre-tax money for your retirement, just like you do with a traditional IRA plan. You pay taxes on the money when you withdraw it, which you can do without penalty starting at age 59 ½. However, a self-directed traditional IRA gives you the flexibility to invest in alternative assets, like real estate or precious metals.

With a self-directed Roth IRA, just like a regular Roth IRA, you make after-tax contributions to the plan. The withdrawals you make starting at age 59 ½ are tax-free, as long as you have had the account for at least five years, according to the five-year rule. With this type of self-directed IRA, you can invest in alternative investments, such as private equity, real estate, and precious metals.

💡 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.

Pros and Cons of Self-Directed IRAs

Self-directed IRAs offer unique perks for the right investor. However, those interested must weigh those benefits against potential drawbacks.

Benefits of Self-Directed IRAs

An SDIRA allows investors to branch out into different types of investments to which they might otherwise not have access. This allows investors to seek out potentially higher returns and diversify their portfolios beyond the offerings in traditional IRAs.

Alternative investments have the potential to offer higher returns than investors might achieve with stock market investments. However, investors beware: These opportunities for higher rewards come at the price of higher risk.

Also, investors’ ability to hold a broader spectrum of investments that can help them diversify their portfolio and potentially manage risks, such as inflation risk or longevity risk, the chance an investor will run out of money before they die. For example, some SDIRAs allow investors to hold gold, a traditional hedge against inflation.

Drawbacks of Self-Directed IRAs

While there are some very real advantages to using SDIRAs, these must be weighed against their disadvantages.

For starters, investments like stocks and shares of ETFs are highly liquid. Investors who need their money quickly can sell them in a relatively short period of time, usually a matter of days.

However, some of the investments available in SDIRAs are not liquid. For example, real estate and physical commodities like precious metals may take quite a bit of time to sell if you need to access your money. Individuals who need to sell these assets quickly may find themselves in a situation in which they must accept less than they believe the asset is worth.

SDIRAs may also carry higher fees. Individuals who hold regular IRA accounts may not have to pay management or investment fees. However, SDIRA holders may have to pay fees associated with holding the account and with the purchase and maintenance of certain assets.

Finally, SDIRAs place a lot of responsibility in the hands of their account holders. Investors must research investments themselves and perform due diligence to make sure that whatever they’re buying is legitimate and matches their risk tolerance.

What’s more, investors must make sure the assets they hold meet IRS rules. Running afoul of these rules can be costly, in some cases causing investors to pay taxes and penalties.
Here’s a look at the pros and cons of SDIRAs at a glance:

Pros	Cons
Tax-advantaged growth. Contributions to traditional accounts are tax deductible. Investments grow tax-deferred in traditional accounts and tax-free in Roth accounts.	Not liquid. Selling alternative investments may be slow and difficult.
Same contribution limits as regular IRAs. In 2024, individuals can contribute up to $7,000 a year, or $8,000 for those aged 50 and up.	Higher fees. Individuals may be on the hook for account fees and fees associated with alternative investments.
Higher returns. Alternative investments may offer higher returns than those available in the stock market.	Increased responsibility. Investors must research investments carefully themselves and ensure they stay within rules for approved IRA investments.
Diversification. SDIRAs offer investors the ability to invest in assets beyond the stock and bond markets.	Higher risk. Alternative investments tend to be riskier than more traditional investments.

4 Steps to Opening a Self-Directed IRA

Investors who want to open an SDIRA will need to take the following steps:

1. Find a custodian or trustee.

This can be a bank, trust company, or another IRS-approved entity. You’ll need to follow their requirements for opening an IRA account. Some SDIRAs specialize in certain asset classes, so look for a custodian that allows you to invest in the asset classes in which you’re interested.

2. Choose investments.

Decide which alternatives you want to hold in your SDIRA. Perform necessary research and due diligence.

3. Complete the transaction.

Find a reputable dealer from which your custodian can purchase the assets, and ask them to complete the sale.

4. Plan withdrawals carefully.

Because alternative assets have less liquidity than other types of investments, you may need to plan sales well in advance of needing retirement income or meeting any required minimum distributions.

Investing in Your Retirement With SoFi

If you’re opening your first IRA account, you’re likely best served with a traditional or Roth IRA. Because of the complications involved in using an SDIRA, only sophisticated investors should consider it.

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).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Are self-directed IRAs a good idea?

There are advantages and disadvantages to self-directed IRAs. Benefits include the fact that you can make alternative types of investments you might not otherwise be able to. That could help you diversify your portfolio and potentially increase your returns.

However, there are drawbacks to SDIRAs, including higher risk because alternative investments tend to be riskier, and potentially higher fees for maintenance of investments in the plan and account fees. In addition, investors need to research the investments themselves and follow the IRS rules carefully to make sure they comply. Finally, many alternative investments are not liquid, which means they could take longer and be more difficult to sell.

Can you set up a self-directed IRA yourself?

To set up a self-directed IRA, find a custodian or trustee such as a bank or trust company to open an account, research and choose your investments, find a reputable dealer for the investments you’d like to make, and have your custodian complete the transactions.

How much money can you put in a self-directed IRA?

In 2024, you can contribute up to $7,000 to a traditional or Roth self-directed IRA, plus an additional $1,000 if you’re 50 or older.

Photo credit: iStock/Andres Victorero

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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.

SoFi Invest®

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

Aug

2024

The Ultimate List of Financial Ratios

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

Financial ratios are numerical calculations that illustrate the relationship between one piece or group of data and another. Business owners use financial statement ratios to performance, assess risk and guide decision-making. For investors, these calculations can provide meaningful data that reflects a company’s liquidity and financial health.

The use of financial ratios is often central to a quantitative or fundamental analysis approach, though they can also be used for technical analysis. For example, a value investor may use certain types of financial ratios to indicate whether the market has undervalued a company or how much potential its stock has for long-term price appreciation. Meanwhile, a trend trader may check key financial ratios to determine if a current pricing trend is likely to hold.

With either strategy, informed investors must understand the different kinds of commonly used financial ratios, and how to interpret them.

Key Points

• Financial ratios serve as essential tools for evaluating a company’s performance, risk, and overall financial health, assisting both business owners and investors in decision-making.

• Key financial ratios include Earnings Per Share (EPS), Price-to-Earnings (P/E), and Debt to Equity (D/E), each providing insights into profitability, valuation, and leverage.

• Liquidity ratios, such as the Current Ratio and Quick Ratio, help assess a company’s ability to meet short-term obligations, crucial for evaluating newer firms.

• Profitability ratios, including Gross Margin and Return on Assets, gauge how effectively a company generates income from its operations and assets.

• Coverage ratios, like the Debt Service Coverage Ratio and Interest Coverage Ratio, measure a company’s capacity to manage its debt obligations, providing insights into financial stability.

What Are Financial Ratios?

A financial ratio is a means of expressing the relationship between two pieces of numerical data. When discussing ratios in a business or investment setting, you’re typically talking about information that’s included in a company’s financial statements.

Recommended: How to Read Financial Statements

Financial ratios can provide insight into a company, in terms of things like valuation, revenues, and profitability. They can also aid in comparing two companies.

For example, say you’re considering investing in the tech sector, and you are evaluating two potential companies. One has a share price of $10 while the other has a share price of $55. Basing your decision solely on price alone could be a mistake if you don’t understand what’s driving share prices or how the market values each company. That’s where financial ratios become useful for understanding a company’s inner workings.

💡 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.

Key Financial Ratios

Investors tend to use some financial ratios more often or place more significance on certain ratios when evaluating business or companies. Here are some of the most important financial ratios to know.

1. Earnings Per Share (EPS)

Earnings per share or EPS measures earnings and profitability. This metric can tell you how likely a company is to generate profits for its investors. A higher EPS typically indicates better profitability, though this rule works best when making apples-to-apples comparisons for companies within the same industry.

EPS Formula:

EPS = Net profit / Number of common shares

To find net profit, you’d subtract total expenses from total revenue. (Investors might also refer to net profit as net income.)

EPS Example:

So, assume a company has a net profit of $2 million, with 12,000,000 shares outstanding. Following the EPS formula, the earnings per share works out to $0.166.

2. Price-to-Earnings (P/E)

Price-to-earnings ratio or P/E helps investors determine whether a company’s stock price is low or high compared to other companies or to its own past performance. More specifically, the price-to-earnings ratio can give you a sense of how expensive a stock is relative to its competitors, or how the stock’s price is trending over time.

P/E Formula:

P/E = Current stock price / Current earnings per share

P/E Example:

Here’s how it works: A company’s stock is trading at $50 per share. Its EPS for the past 12 months averaged $5. The price-to-earnings ratio works out to 10, meaning investors would have to spend $10 for every dollar generated in annual earnings.

3. Debt to Equity (D/E)

Debt to equity or D/E is a leverage ratio. This ratio tells investors how much debt a company has in relation to how much equity it holds.

D/E Formula:

D/E = Total liabilities / Shareholders equity

In this formula, liabilities represent money the company owes. Equity represents assets minus liabilities or the company’s book value.

D/E Example:

Say a company has $5 million in debt and $10 million in shareholder equity. Its debt-to-equity ratio would be 0.5. As a general rule, a lower debt to equity ratio is better as it means the company has fewer debt obligations.

4. Return on Equity (ROE)

Return on equity or ROE is another financial ratio that’s used to measure profitability. In simple terms, it’s used to illustrate the return on shareholder equity based on how a company spends its money.

ROE Formula:

ROE = Net income – Preferred dividends / Value of average common equity

ROE Example:

Assume a company has net income of $2 million and pays out preferred dividends of $200,000. The total value of common equity is $10 million. Using the formula, return on equity would equal 0.18 or 18%. A higher ROE means the company generates more profits.

Liquidity Ratios

Liquidity ratios can give you an idea of how easily a company can pay its debts and other liabilities. In other words, liquidity ratios indicate cash flow strength. That can be especially important when considering newer companies, which may face more significant cash flow challenges compared to established companies.

5. Current Ratio

Also known as the working-capital ratio, the current ratio tells you how likely a company is able to meet its financial obligations for the next 12 months. You might check this ratio if you’re interested in whether a company has enough assets to pay off short-term liabilities.

Formula:

Current Ratio = Current Assets / Current Liabilities

Example:

Say a company has $1 million in current assets and $500,000 in current liabilities. It has a current ratio of 2, meaning for every $1 a company has in current liabilities it has $2 in current assets.

6. Quick Ratio

The quick ratio, also called the acid-test ratio, measures liquidity based on assets and liabilities. But it deducts the value of inventory from these calculations.

Formula:

Quick Ratio = Current Assets – Inventory / Current Liabilities

Example:

Quick ratio is also useful for determining how easily a company can pay its debts. For example, say a company has current assets of $5 million, inventory of $1 million and current liabilities of $500,000. Its quick ratio would be 8, so for every $1 in liabilities the company has $8 in assets.

7. Cash Ratio

A cash ratio tells you how much cash a company has on hand, relative to its total liabilities. Essentially, it tells you how easily a company could pay its liabilities with cash.

Formula:

Cash Ratio = (Cash + Cash Equivalents) / Total Current Liabilities

Example:

A company that has $100,000 in cash and $500,000 in current liabilities would have a cash ratio of 0.2. That means it has enough cash on hand to pay 20% of its current liabilities.

8. Operating Cash Flow Ratio

Operating cash flow can tell you how much cash flow a business generates in a given time frame. This financial ratio is useful for determining how much cash a business has on hand at any given time that it can use to pay off its liabilities.

To calculate the operating cash flow ratio you’ll first need to determine its operating cash flow:

Operating Cash Flow = Net Income + Changes in Assets & Liabilities + Non-cash Expenses – Increase in Working Capital

Then, you calculate the cash flow ratio using this formula:

Formula:

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

Example:

For example, if a company has an operating cash flow of $1 million and current liabilities of $250,000, you could calculate that it has an operating cash flow ratio of 4, which means it has $4 in operating cash flow for every $1 of liabilities.

Solvency Ratios

Solvency ratios are financial ratios used to measure a company’s ability to pay its debts over the long term. As an investor, you might be interested in solvency ratios if you think a company may have too much debt or be a potential candidate for a bankruptcy filing. Solvency ratios can also be referred to as leverage ratios.

Debt to equity is a key financial ratio used to measure solvency, though there are other leverage ratios that are helpful as well.

9. Debt Ratio

A company’s debt ratio measures the relationship between its debts and its assets. For instance, you might use a debt ratio to gauge whether a company could pay off its debts with the assets it has currently.

Formula:

Debt Ratio = Total Liabilities / Total Assets

Example:

The lower this number is the better in terms of risk. A lower debt ratio means a company has less relative debt. So a company that has $25,000 in debt and $100,000 in assets, for example, would have a debt ratio of 0.25. Investors typically consider anything below 0.5 a lower risk.

10. Equity Ratio

Equity ratio is a measure of solvency based on assets and total equity. This ratio can tell you how much of the company is owned by investors and how much of it is leveraged by debt.

Formula:

Equity Ratio = Total Equity / Total Assets

Example:

Investors typically favor a higher equity ratio, as it means the company’s shareholders are more heavily invested and the business isn’t bogged down by debt. So, for example, a company with $200,000 in total equity and $200,000 in total assets has an equity ratio of 0.80. This tells you shareholders own 80% of the company.

💡 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.

Profitability Ratios

Profitability ratios gauge a company’s ability to generate income from sales, balance sheet assets, operations and shareholder’s equity. In other words, how likely is the company to be able to turn a profit?

Return on equity is one profitability ratio investors can use. You can also try these financial ratios for estimating profitability.

11. Gross Margin Ratio

Gross margin ratio compares a company’s gross margin to its net sales. This tells you how much profit a company makes from selling its goods and services after the cost of goods sold is factored in.

Formula:

Gross Margin Ratio = Gross Margin / Net Sales

Example

A company that has a gross margin of $250,000 and $1 million in net sales has a gross margin ratio of 25%. Meanwhile, a company with a $250,000 gross margin and $2 million in net sales has a gross margin ratio of 12.5% and realizes a smaller profit percentage per sale.

12. Operating-Margin Ratio

Operating-margin ratio measures how much total revenue is composed of operating income, or how much revenue a company has after its operating costs.

Formula:

Operating Margin Ratio = Operating Income / Net Sales

Example:

A higher operating-margin ratio suggests a more financially stable company with enough operating income to cover its operating costs. For example, if operating income is $250,000 and net sales are $500,000, that means 50 cents per dollar of sales goes toward variable costs.

13. Return on Assets Ratio

Return on assets or ROA measures net income produced by a company’s total assets. This lets you see how good a company is at using its assets to generate income.

Formula:

Return on Assets = Net Income / Average Total Assets

Example:

Investors typically favor a higher ratio as it shows that the company may be better at using its assets to generate income. For example, a company that has $10 million in net income and $2 million in average total assets generates $5 in income per $1 of assets.

Efficiency Ratios

Efficiency ratios or financial activity ratios give you a sense of how thoroughly a company is using the assets and resources it has on hand. In other words, they can tell you if a company is using its assets efficiently or not.

14. Asset Turnover Ratio

Asset turnover ratio is a way to see how much sales a company can generate from its assets.

Formula:

Asset Turnover Ratio = Net Sales / Average Total Assets

A higher asset turnover ratio is typically better, as it indicates greater efficiency in terms of how assets are being used to produce sales.

Example:

Say a company has $500,000 in net sales and $50,000 in average total assets. Their asset turnover ratio is 10, meaning every dollar in assets generates $10 in sales.

15. Inventory Turnover Ratio

Inventory turnover ratio illustrates how often a company turns over its inventory. Specifically, how many times a company sells and replaces its inventory in a given time frame.

Formula:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Example:

Investors use average inventory since a company’s inventory can increase or decrease throughout the year as demand ebbs and flows. As an example, if a company has a cost of goods sold equal to $1 million and average inventory of $500,000, its inventory turnover ratio is 2. That means it turns over inventory twice a year.

16. Receivables Turnover Ratio

Receivables turnover ratio measures how well companies manage their accounts receivable. Specifically, it considers how long it takes companies to collect on outstanding receivables.

Formula:

Receivables Turnover Ratio = Net Annual Credit Sales / Average Accounts Receivable

Example:

If a company has $100,000 in net annual credit sales, for example, and $15,000 in average accounts receivable its receivables turnover ratio is 6.67. The higher the number is, the better, since it indicates the business is more efficient at getting customers to pay up.

Coverage Ratios

Coverage ratios are financial ratios that measure how well a company manages its obligations to suppliers, creditors, and anyone else to whom it owes money. Lenders may use coverage ratios to determine a business’s ability to pay back the money it borrows.

17. Debt Service Coverage Ratio

Debt service coverage reflects whether a company can pay all of its debts, including interest and principal, at any given time. This ratio can offer creditors insight into a company’s cash flow and debt situation.

Formula:

Debt Service Coverage Ratio = Operating Income / Total Debt Service Costs

Example:

A ratio above 1 means the company has more than enough money to meet its debt servicing needs. A ratio equal to 1 means its operating income and debt service costs are the same. A ratio below 1 indicates that the company doesn’t have enough operating income to meet its debt service costs.

18. Interest Coverage Ratio

Interest-coverage ratio is a financial ratio that can tell you whether a company is able to pay interest on its debt obligations on time. This is also called the times earned interest ratio.

Formula:

Interest Coverage Ratio = EBIT ( Earnings Before Interest and Taxes) / Annual Interest Expense

Example:

Let’s say a company has an EBIT of $100,000. Meanwhile, annual interest expense is $25,000. That results in an interest coverage ratio of 4, which means the company has four times more earnings than interest payments.

19. Asset-Coverage Ratio

Asset-coverage ratio measures risk by determining how much of a company’s assets would need to be sold to cover its debts. This can give you an idea of a company’s financial stability overall.

Formula:

Asset Coverage Ratio = (Total Assets – Intangible Assets) – (Current Liabilities – Short-term Debt) / Total Debt

You can find all of this information on a company’s balance sheet. The rules for interpreting asset coverage ratio are similar to the ones for debt service coverage ratio.

So a ratio of 1 or higher would suggest the company has sufficient assets to cover its debts. A ratio of 1 would suggest that assets and liabilities are equal. A ratio below 1 means the company doesn’t have enough assets to cover its debts.

Market-Prospect Ratios

Market-prospect ratios make it easier to compare the stock price of a publicly traded company with other financial ratios. These ratios can help analyze trends in stock price movements over time. Earnings per share and price-to-earnings are two examples of market prospect ratios. Investors can also look to dividend payout ratios and dividend yield to judge market prospects.

20. Dividend Payout Ratio

Dividend payout ratio can tell you how much of a company’s net income it pays out to investors as dividends during a specific time period. It’s the balance between the profits passed on to shareholders as dividends and the profits the company keeps.

Formula:

Dividend Payout Ratio = Total Dividends / Net Income

Example:

A company that pays out $1 million in total dividends and has a net income of $5 million has a dividend payout ratio of 0.2. That means 20% of net income goes to shareholders.

21. Dividend Yield

Dividend yield is a financial ratio that tracks how much cash dividends are paid out to common stock shareholders, relative to the market value per share. Investors use this metric to determine how much an investment generates in dividends.

Formula:

Dividend Yield = Cash Dividends Per Share / Market Value Per Share

Example:

For example, a company that pays out $5 in cash dividends per share for shares valued at $50 each are offering investors a dividend yield of 10%.

Ratio Analysis: What Do Financial Ratios Tell You?

Financial statement ratios can be helpful when analyzing stocks. The various formulas included on this financial ratios list offer insight into a company’s profitability, cash flow, debts and assets, all of which can help you form a more complete picture of its overall health. That’s important if you tend to lean toward a fundamental analysis approach for choosing stocks.

Using financial ratios can also give you an idea of how much risk you might be taking on with a particular company, based on how well it manages its financial obligations. You can use these ratios to select companies that align with your risk tolerance and desired return profile.

The Takeaway

Learning the basics of key financial ratios can be a huge help when constructing a stock portfolio. Rather than focusing on a stock’s price, you can use financial ratios to take a closer look under the hood of a company.

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

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

Photo credit: iStock/MStudioImages

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.

SoFi Invest®

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

SOIN0723078

Aug

2024

What Is Dividend Yield?

By AJ Smith | Growing Wealth, invest, Investing, Terminology | Comments Off

Dividend yield concerns how much an investor realizes from their investments over the course of a year as a result of dividends. Dividends, which are payouts to investors as a share of a company’s overall profit, can help investors generate bigger returns, and some investors even formulate entire strategies around maximizing dividends.

But it’s important to have a good understanding of dividends, dividend yields, and other related concepts before going too far into the weeds.

Key Points

• Dividend yield represents the annual dividend paid to shareholders relative to the stock price, expressed as a percentage, which helps investors assess potential returns.

• Investors can calculate dividend yield by dividing the annual dividend per share by the stock’s current price, providing insight into a company’s attractiveness as an investment.

• A higher dividend yield may signal an established company, but it can also indicate slower growth or potential financial troubles, requiring careful evaluation.

• Considering the history of dividend growth and the dividend payout ratio can provide additional insights into a company’s financial health and dividend sustainability.

• Understanding the difference between dividend yield and dividend rate is essential, as dividend yield is a ratio while dividend rate is expressed in dollar amounts.

What Is Dividend Yield?

A stock’s dividend yield is how much the company annually pays out in dividends to shareholders, relative to its stock price. The dividend yield is a financial ratio (dividend/price) expressed as a percentage, and is distinct from the dividend itself.

Dividend payments are expressed as a dollar amount, and supplement the return a stock produces over the course of a year. For an investor interested in total return, learning how to calculate dividend yield for different companies can help to decide which company may be a better investment.

But bear in mind that a stock’s dividend yield will tend to fluctuate because it’s based on the stock’s price, which rises and falls. That’s why a higher dividend yield may not be a sign of better value.

How Does Dividend Yield Differ From Dividends?

It’s important to really drive home the difference between dividend yield and dividends in general.

Dividends are a portion of a company’s earnings paid to investors and expressed as a dollar amount. Dividends are typically paid out each quarter (although semi-annual and monthly payouts are common). Not all companies pay dividends.

Dividend yield, on the other hand, refers to a stock’s annual dividend payments divided by the stock’s current price, and expressed as a percentage. Dividend yield is one way of assessing a company’s earning potential.

How to Calculate Dividend Yield

Calculating the dividend yield of an investment is useful for investors who want to compare companies and the dividends they pay. For investors looking for investments to help supplement their cash flow, or even to possibly live off dividend income, a higher dividend yield on a stock would be more attractive than a lower one.

What Is the Dividend Yield Formula?

The dividend yield formula is more of a basic calculation than a formula: Dividend yield is calculated by taking the annual dividend paid per share, and dividing it by the stock’s current price:

Annual dividend / stock price = Dividend yield (%)

How to Calculate Annual Dividends

Investors can calculate the annual dividend of a given company by looking at its annual report, or its quarterly report, finding the dividend payout per quarter, and multiplying that number by four. For a stock with fluctuating dividend payments, it may make sense to take the four most recent quarterly dividends to arrive at the trailing annual dividend.

It’s important to consider how often dividends are paid out. If dividends are paid monthly vs. quarterly, you want to add up the last 12 months of dividends.

This is especially important because some companies pay uneven dividends, with the higher payouts toward the end of the year, for example. So you wouldn’t want to simply add up the last few dividend payments without checking to make sure the total represents an accurate annual dividend amount.

Example of Dividend Yield

If Company A’s stock trades at $70 today, and the company’s annual dividend is $2 per share, the dividend yield is 2.85% ($2 / $70 = 0.0285).

Compare that to Company B, which is trading at $40, also with an annual dividend of $2 per share. The dividend yield of Company B would be 5% ($2 / $40 = 0.05).

In theory, the higher yield of Company B may look more appealing. But investors can’t determine a stock’s worth by yield alone.

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Dividend Yield: Pros and Cons

Pros	Cons
Can help with company valuation.	Dividend yield can indicate a more established, but slower-growing company.
May indicate how much income investors can expect.	Higher yield may mask deeper problems.
	Yield doesn’t tell investors the type of dividend (ordinary vs. qualified), which can impact taxes.

For investors, there are some advantages and disadvantages to using dividend yield as a metric that helps inform investment choices.

Pros

• From a valuation perspective, dividend yield can be a useful point of comparison. If a company’s dividend yield is substantially different from its industry peers, or from the company’s own typical levels, that can be an indicator of whether the company is trading at the right valuation.

• For many investors, the primary reason to invest in dividend stocks is for income. In that respect, dividend yield can be an important metric. But dividend yield can change as the underlying stock price changes. So when using dividend yield as a way to evaluate income, it’s important to be aware of company fundamentals that provide assurance as to company stability and consistency of the dividend payout.

Cons

• Sometimes a higher dividend yield can indicate slower growth. Companies with higher dividends are often larger, more established businesses. But that could also mean that dividend-generous companies are not growing very quickly because they’re not reinvesting their earnings.

Smaller companies with aggressive growth targets are less likely to offer dividends, but rather spend their excess capital on expansion. Thus, investors focused solely on dividend income could miss out on some faster-growing opportunities.

• A high dividend yield could indicate a troubled company. Because of how dividend yield is calculated, the yield is higher as the stock price falls, so it’s important to evaluate whether there has been a downward price trend. Often, when a company is in trouble, one of the first things it is likely to reduce or eliminate is that dividend.

• Investors need to look beyond yield to the type of dividend they might get. An investor might be getting high dividend payouts, but if they’re ordinary dividends vs. qualified dividends they’ll be taxed at a higher rate. Ordinary dividends are taxed as income; qualified dividends are taxed at the lower capital gains rate, which typically ranges from 0% to 20%. If you have tax questions about your investments, be sure to consult with a tax professional.

The Difference Between Dividend Yield and Dividend Rate

As noted earlier, a dividend is a way for a company to distribute some of its earnings among shareholders. Dividends can be paid monthly, quarterly, semi-annually, or even annually (although quarterly payouts tend to be common in the U.S.). Dividends are expressed as dollar amounts. The dividend rate is the annual amount of the company’s dividend per share.

A company that pays $1 per share, quarterly, has an annual dividend rate of $4 per share.

The difference between this straight-up dollar amount and a company’s dividend yield is that the latter is a ratio. The dividend yield is the company’s annual dividend divided by the current stock price, and expressed as a percentage.

What Is a Good Dividend Yield?

dividend yield of sp500 vs dividend aristocrats

Two companies with the same high yields are not created equally. While dividend yield is an important number for investors to know when determining the annual cash flow they can expect from their investments, there are deeper indicators that investors may want to investigate to see if a dividend-paying stock will continue to pay in the future.

A History of Dividend Growth

When researching dividend stocks, one place to start is by asking if the stock has a history of dividend growth. A regularly increasing dividend is an indication of earnings growth and typically a good indicator of a company’s overall financial health.

The Dividend Aristocracy

There is a group of S&P 500 stocks called Dividend Aristocrats, which have increased the dividends they pay for at least 25 consecutive years. Every year the list changes, as companies raise and lower their dividends.

Currently, there are 65 companies that meet the basic criteria of increasing their dividend for a quarter century straight. They include big names in energy, industrial production, real estate, defense contractors, and more. For investors looking for steady dividends, this list may be a good place to start.

Dividend Payout Ratio (DPR)

Investors can calculate the dividend payout ratio by dividing the total dividends paid in a year by the company’s net income. By looking at this ratio over a period of years, investors can learn to differentiate among the dividend stocks in their portfolios.

A company with a relatively low DPR is paying dividends, while still investing heavily in the growth of its business. If a company’s DPR is rising, that’s a sign the company’s leadership likely sees more value in rewarding shareholders than in expanding. If its DPR is shrinking, it’s a sign that management sees an abundance of new opportunities abounding. In extreme cases, where a company’s DPR is 100% or higher, it’s unlikely that the company will be around for much longer.

Other Indicators of Company Health

Other factors to consider include the company’s debt load, credit rating, and the cash it keeps on hand to manage unexpected shocks. And as with every equity investment, it’s important to look at the company’s competitive position in its sector, the growth prospects of that sector as a whole, and how it fits into an investor’s overall plan. Those factors will ultimately determine the company’s ability to continue paying its dividend.

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The Takeaway

Dividend yield is a simple calculation: You divide the annual dividend paid per share by the stock’s current price. Dividend yield is expressed as a percentage, versus the dividend (or dividend rate) which is given as a dollar amount. The dividend yield formula can be a valuable tool for investors, and not just ones who are seeking cash flow from their investments.

Dividend yield can help assess a company’s valuation relative to its peers, but there are other factors to consider when researching stocks that pay out dividends. A history of dividend growth and a good dividend payout ratio (DPR), as well as the company’s debt load, cash on hand, and credit rating can help form an overall picture of a company’s health and probability of paying out higher dividends in the future.

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

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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.

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

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Jul

2024

What Is Stagflation & Will It Happen Again?

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

Stagflation is an economic term that is actually a combination of the words stagnation and inflation — and describes an economy that is both stagnant, and experiencing inflation. For investors, it’s worth being aware of what it means, because of the threat it poses to economies and markets.

Stagflation creates potentially disastrous conditions where people experiencing a decline in purchasing power also feel discouraged against investing. It can create a chain reaction of wealth-destroying events where unemployment climbs and economic output slows, contributing to a national economic malaise.

What Is Stagflation?

Stagflation is a term used to describe a situation when the economy is growing slowly (stagnation) and prices rise rapidly (inflation).

The term was coined by British Conservative Party politician Iain Norman Macleod in a 1965 speech to Parliament. At the time, the United Kingdom was in the midst of simultaneous high inflation and unemployment. In the speech to Parliament, Macleod said, “We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of ‘stagflation’ situation and history in modern terms is indeed being made.”

Usually, economists and analysts will use the unemployment rate as a proxy for economic activity when discussing stagflation. So, a period of stagflation is when unemployment rises while inflation — as measured by the consumer price index (CPI) — accelerates above normally acceptable levels of price growth.

However, like many economic concepts, there is no standard definition of stagflation. Policymakers, elected officials, and investors will use the term stagflation in various economic scenarios.

Stagflation vs Inflation

Inflation is a general increase in the average prices of goods and services. In contrast, stagflation is a combination of stagnant economic growth and rising inflation.

Low levels of inflation are normal for an economy; there’s a reason why movie theater tickets cost more today than they did in the 1950s. Inflation doesn’t become an issue until prices get out of control and spiral upwards. Policymakers within the Federal Reserve like inflation to rise about 2% each year.

You can have inflation without stagflation, but you can’t have stagflation without inflation.

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Has Stagflation Ever Happened?

Before the 1970s, economists didn’t think stagflation — a period of rising unemployment and inflation — was possible. Theoretically, inflation should decrease when unemployment increases because workers have less bargaining power to get higher wages. So, the theory goes, stagflation shouldn’t happen.

However, stagflation did occur in the United States from the mid-1970s. During the 1973-1975 recession, the U.S. experienced five quarters where the gross domestic product (GDP) decreased. Inflation peaked at 12.2% in November 1974, and the unemployment rate rose to 9.0% in May 1975.

This stagflation cycle was part of a larger sequence of events called the Nixon Shock.

Responding to increasing inflation in 1971, President Richard Nixon imposed wage and price controls and surcharges on imports. This created a perfect-storm condition where, when the 1973 oil crisis hit, those surcharges on imports made prices at the gas pump — and across many U.S. industries — skyrocket to then-record prices. The rising prices helped lead to a wage-price spiral, where inflation led to workers asking for higher wages, which led to more inflation, and so on.

The Federal Reserve raised interest rates to combat the inflation of the early-70s, but this only created a recession and high unemployment without tamping down inflation. Thus, a prolonged economic stagnation accompanying inflation occurred — a stagflation situation.

While the economy recovered slightly in the late 1970s, inflation remained a problem for the rest of the decade. Federal Reserve chairman Paul Volcker eventually hiked interest rates to 20% by 1981, triggering a recession to get inflation under control.

Will Stagflation Happen Again?

There are debates about whether stagflation will or could occur again in the United States. There’s always a chance, but the circumstances need to be just right for it to happen.

Most recently, the economy was in a precarious situation in early 2022, with inflation running high after the fallout of the Covid-19 pandemic, and the Federal Reserve raising interest rates at a historic pace to combat it. The Fed was trying to curb inflation with the hope of a soft landing, in which an economy slows enough that prices stop rising quickly but not so slowly that it sparks a recession.

As of July 2024, inflation has moderated, and the economy has not slipped into a recession – but things can always change. So, the economy has not, so far, seen widespread stagnation, and inflation has come down – it appears that stagflation has been avoided.

While no one can predict the future, it stands to reason that events that have happened in the past can happen again. Stagflation may occur again, but this doesn’t have to be a dire situation as long as you prepare your financial situation.

How Can Stagflation Impact Investors?

Economic stagnation can have several impacts on investors. Firstly, it can lead to lower returns on investment as companies are less likely to grow and expand in a stagnant economy. This can lead to investors becoming more risk-averse as they seek out investments that are more likely to provide stability and income.

Secondly, stagnation can also lead to higher levels of unemployment, which can, in turn, lead to social unrest and political instability. This can make it more difficult for companies to operate in a given country and lead to investors losing confidence in the economy.

A slowdown of economic activity lasting several months sounds like it can only be a bad thing. But a recession does not necessarily mean the death knell for your finances. For some investors, there are, perhaps surprisingly, compelling strategies to consider when the market is down. Volatility may allow investors to buy low and then make appreciable gains as the market corrects itself.

Recommended: How to Invest During Inflation

The Takeaway

Stagflation occurs when an economy experiences simultaneous high inflation and high unemployment. It’s a situation that often leads to decreased spending by consumers and businesses, which can further stall economic growth and investment returns.

Stagflation has occurred before in the U.S. — notably during the Nixon Shock of the early 1970s — and there is no reason to think it won’t happen again at some point.

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Jul

2024

HSA vs FSA: The Similarities and Differences

By Emily Greenhill Pierce | Family Finances, Insurance, money | Comments Off

A health savings account (HSA) and a flexible savings account (FSA) are both tax-advantaged savings accounts that help you pay for out-of-pocket medical expenses. To contribute to an HSA, you must be enrolled in a high-deductible health plan. To contribute to an FSA, you can have any type of health plan but your employer must offer an FSA as a benefit. Here’s a closer look at the similarities and differences between FSAs and HSAs and how to choose between them.

HSA and FSA, Explained

A health savings account (HSA) is designed to help individuals with high-deductible health plans (HDHPs) save for medical expenses. Contributions to an HSA are tax-deductible (or deducted from your paycheck pretax), and the funds can be used for a wide range of qualified medical expenses. HSAs also offer investment options and grow tax-free. In addition, withdrawals for qualified expenses are tax-free.

In 2024, a health plan is considered an HDHP if it has a minimum deductible of $1,600 for individual plans and $3,200 for family coverage.

A flexible spending account (FSA) is a benefit offered by employers that allows employees to set aside pretax dollars for eligible healthcare expenses. Unlike HSAs, FSAs do not require an HDHP. However, FSAs typically have a “use-it-or-lose-it” rule, meaning that any unused funds at the end of the plan year are forfeited unless your employer offers a grace period or a certain amount to roll over.

If you leave your job, you lose your FSA unless you’re eligible for FSA continuation through COBRA.

Differences Between HSA and FSA

Even when you have health insurance, you may run into medical expenses that your plan doesn’t cover, such as copays, eyeglasses, dental expenses, medications, diagnostic tests, and hospital fees. Both HSAs and FSAs allow you to set aside pretax money to cover these costs. But there are some key differences between them. Here’s how these two types of savings accounts compare at a glance.

Feature	HSA	FSA
Eligibility	Must have a high-deductible health plan	No specific health plan requirement
Ownership	Account owned by the individual	Account owned by the employer
Contribution Limits	$4,150 for individuals, $8,300 for families (2024)	$3,200 per year (2024)
Funds Rollover	Unused funds roll over year to year	Generally, “use-it-or-lose-it” policy
Portability	Remains with the individual if they change jobs	Typically not portable
Investment Options	Can be invested in stocks, bonds, and mutual funds	No investment options
Tax Advantages	Contributions and earnings aren’t taxed; distributions are tax-free if used for eligible medical expenses.	Contributions are pretax; distributions are tax-free and can only be used for eligible medical expenses.
Contribution Changes	Can change contribution amounts anytime	Contribution amount is typically set at the beginning of the year
Access to Funds	Funds are available as they are deposited	Full annual election amount available from the start of the year

Similarities Between HSA and FSA

Despite their differences, HSAs and FSAs share several similarities:

• Funds from either type of account can be used for qualified medical expenses.

• With both accounts, you can save significantly on medical expenses due to tax advantages.

• Employers are allowed to contribute to both HSAs and FSAs (though this is not common with FSAs).

• You can access funds immediately with either type of account. With an FSA, however, you’ll have access to full elected contribution at the start of the year.

Can You Have an HSA and FSA at the Same Time?

Generally, no. However, there is one exception: If you have a limited-purpose FSA (LPFSA), which only covers dental and vision expenses, you can contribute to both an HSA and an LPFSA. This allows you to put more pretax dollars aside for your healthcare expenses than you could with an HSA alone.

Just keep in mind that you can’t “double dip,” meaning you cannot get reimbursed twice for the same expense — you must decide which account you want to use for reimbursement.

Recommended: HSA vs. HMO: What’s the Difference?

How Do You Choose Between an HSA and FSA?

Choosing between an HSA and FSA depends on your healthcare needs, financial situation, and employment status.

Scenarios When You Should Consider an HSA

• You have a high-deductible health plan. If you have an HDHP, you are eligible for an HSA. The tax advantages and ability to save for future healthcare expenses can make opening an HSA a smart choice.

• You’re interested in long-term savings. HSAs allow you to roll over unused funds year to year, making them ideal for long-term healthcare savings. And at age 65, you can treat an HSA like a traditional 401(k) or IRA — you can withdraw funds for any reason, though you will pay taxes on any funds not used for qualified medical expenses.

• You want to grow your healthcare savings. HSAs offer investment options like stocks, bonds, and mutual funds.

• You want to be able to take your healthcare savings with you if you leave your job. HSAs are portable and remain with you even if you change jobs, providing consistent coverage regardless of employment status.

Recommended: 15 Easy Ways to Save Money

Scenarios When You Should Consider an FSA

• You don’t have (or want to enroll in) an HDHP. FSAs do not require a high-deductible health plan, making them accessible regardless of current health insurance.

• You have fairly predictable healthcare costs. If you’re able to anticipate regular healthcare expenses each year, an FSA can help you save money by using pretax dollars for these predictable costs. If you over-contribute, however, you forfeit any unused balance (unless your employer allows a grade period or a certain amount to roll over).

• Your employer offers FSA contributions. Some employers offer contributions to FSAs, providing additional savings and making FSAs a valuable benefit.

• You want to have immediate access to your healthcare savings. FSAs provide immediate access to the full annual contribution amount at the beginning of the year, which can be beneficial for upfront medical expenses.

The Takeaway

Both HSAs and FSAs offer valuable tax advantages and can help you manage healthcare costs, but they cater to different needs and situations.

If you have a high-deductible health plan and want long-term savings with investment opportunities, an HSA can be a great choice. On the other hand, if you don’t have a high-deductible health plan and your employer offers an FSA, you’ll likely want to take advantage of this benefit. An FSA can help you save for (and save money on) healthcare expenses in the coming year.

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Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

Is it better to have an HSA or FSA?

It depends on your healthcare plan and employment situation. A health savings account (HSA) can be a good fit if you have a high-deductible health plan (HDHP), since it offers higher contribution limits and allows you to carry funds forward. An FSA can work well if your employer offers this benefit, you do not have an HDHP, and you have predictable healthcare expenses (since these plans are often “use-it-or-lose-it”).

Is it good to have both an HSA and FSA?

Generally, you cannot contribute to or spend from a health savings account (HSA) and a flexible spending account (FSA) simultaneously, as both accounts are designed for medical expenses and have overlapping benefits.

However, there is one exception: You can have an HSA and a limited-purpose FSA (LPFSA) at the same time. An LPFSA specifically covers dental and vision expenses. This combination can be beneficial if you have significant dental and vision expenses in addition to regular medical costs, providing comprehensive coverage and enhanced tax advantages.

What happens if I switch from an HSA to an FSA?

If you switch from a health savings account (HSA) to a flexible savings account (FSA), you can no longer contribute to your HSA once your FSA becomes active. However, you still own the HSA and can use the remaining HSA funds for qualified medical expenses. In addition, the funds in your HSA will continue to grow tax-free.

Can I have an HSA if my wife has an FSA?

If your wife’s flexible savings account (FSA) is a general-purpose FSA, which covers a range of medical expenses, you cannot contribute to a health savings account (HSA). However, if her FSA is a limited-purpose FSA (LPFSA), which only covers dental and vision expenses, you can contribute to your HSA.

It’s important to review the specific rules and eligibility criteria for both accounts and coordinate with your spouse to optimize your tax savings and healthcare benefits.

Photo credit: iStock/zimmytws

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