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The rule of 55 allows workers the potential to withdraw money from an employer-sponsored retirement plan like a 401(k) without a penalty once they reach age 55. Distributions are still taxable as income but there’s no additional 10% early withdrawal penalty.

The IRS rule of 55 applies to certain 401(k) and 403(b) plans. If you have either of these types of retirement accounts through your employer, it’s important to understand how the rule of 55 works when taking retirement plan distributions.

What Is the 401(k) Rule of 55?

The 401(k) rule of 55 is an exception to standard IRS withdrawal rules for qualified workplace plans, including 401(k) plans and 403(b) plans. Typically, you can’t withdraw money from these plans before age 59 ½ without paying a 10% early withdrawal penalty. This penalty is only waived for certain allowed exceptions, of which the rule of 55 is one.

Specifically, the rule of 55 applies to “distributions made to you after you separated from service with your employer after attainment of age 55,” per the IRS. It doesn’t matter whether you quit, get laid off, or retired — you can still withdraw money from your retirement plan penalty-free, as long as the plan allows it. For qualified public safety employees, this exception kicks in at age 50 instead of 55.

How Does the Rule of 55 Work?

The rule of 55 for 401(k) and 403(b) plans allows workers to potentially access money in their retirement plans without a 10% early withdrawal penalty. This rule applies to current workplace retirement plans only. Also, the plan must allow the rule of 55 withdrawals (plans are not required to do so).

You can’t use the rule of 55 to take money from a 401(k) or 403(b) you had with a previous employer penalty-free unless you first roll over those account balances into your current workplace plan before separating from service.

This rule doesn’t apply to individual retirement accounts (IRA) either. So, you can’t use the rule of 55 to tap into an IRA before age 59 ½ without a tax penalty.

Rule of 55 Requirements

To qualify for a rule of 55 401(k) or 403(b) withdrawal, you’ll need to:

•   Be age 55 or older

•   Separate from your employer at age 55 or older

•   Leave the money in your employer’s plan (rule of 55 benefits are lost if you roll funds over to a rollover IRA)

You also need to have a 401(k) or 403(b) plan that allows for rule of 55 withdrawals. If your plan doesn’t permit early withdrawals before age 59 ½, then you won’t be able to take advantage of this rule.

Also keep in mind as you’re doing retirement planning that IRS rules require a 20% tax withholding on early withdrawals from a 401(k) or similar plan. This applies even if you plan to roll the money over later to another qualified plan or IRA.

It’s wise to consider how that withholding will affect what you receive from the plan and how much you may still owe in taxes on your 401(k) later when reporting the distribution on your return.

Public Safety Workers and the Rule of 50

Qualified public safety workers, such as firefighters, police officers, EMTs, and air traffic controllers, have the potential to take penalty-free early withdrawals from their qualified workplace plans at age 50 instead of 55. They are eligible to take distributions in the calendar year they turn 50. They must also have separated from their employer during or after the year they turned 50.

If you are a public safety employee, check with your plan administrator to make sure that the rule of 50 applies to your specific workplace plan and to ensure that you meet the definition of a qualified public safety employee.

Example of the Rule of 55

Here’s how the rule of 55 works. Say you lose your job or decide to retire early at age 55, and you need money to help pay your bills and cover lifestyle expenses. Under the rule of 55, you may take distributions from the 401(k) or 403(b) plan you were making regular or 401(k) catch-up contributions to, up until the time you left your job. You will not be charged the typical 10% early withdrawal penalty in this instance.

Also worth noting: If you decide to go back to work a year or two later at age 56 or 57, say, you can still generally continue to take distributions from that same 401(k) or 403(b) plan, as long as you have not rolled it over into another employer-sponsored plan or IRA.

Rule of 55 vs 72(t) Distributions

In addition to the rule of 55 for early distributions, there are also 72(t) distributions. These distributions allow people to make withdrawals from certain workplace retirement plans and IRAs before age 59 ½ without penalty as long as they take the withdrawals using a method known as Substantially Equal Periodic Payments (SEPP).

To do this, an individual must agree to withdraw the money according to a specific schedule defined by the IRS, using specific calculations, for at least five years or until they reach age 59 ½, whichever is longer. They will need to withdraw the total balance in their account using this method.

However, it’s important to know that once an individual begins a SEPP plan, it generally can’t be stopped or changed (with certain exceptions) or they will owe a penalty.

Should You Use the Rule of 55?

The IRS rule of 55 is designed to benefit people who may need or want to withdraw money from their retirement plan early for a variety of reasons. For example, you might consider using this rule if you:

•   Decide to retire early and need your 401(k) to close the income gap until you’re eligible for Social Security benefits

•   Are taking time away from work to act as a caregiver for a spouse or family member and need money from your retirement plan to cover basic living expenses

•   Want to take some of the money in your 401(k) early to help minimize required minimum distributions (RMDs) later

In those scenarios, it may make sense to apply the rule of 55 in order to access your retirement savings penalty-free. On the other hand, there are some situations where you may be better off letting the money in your employer’s plan continue to grow.

For instance, if your employer’s plan requires you to take a lump sum payment, this could push you into a substantially higher tax bracket. Having to pay taxes on all of the money at once could diminish your account balance more so than spreading out distributions — and the associated tax liability — over a longer period of time.

You may also reconsider taking money from your 401(k) early if you still plan to work in some capacity. If you have income from a new full-time job or part-time job, for instance, you may not need to withdraw funds from your 401(k) at all. But if you change your mind later and decide to return to work, you can continue to take withdrawals from the same retirement plan penalty-free.

Pros and Cons of 55 Rule 401k Withdrawals

It’s important to weigh the advantages and disadvantages to the rule of 55 401(k) withdrawals before choosing to use this method. Here’s what to consider.

Pros

•   Distributions can be taken from a qualifying 401(k) without incurring an early withdrawal penalty.

•   Provides immediate access at age 55 to retirement funds for eligible individuals that need it.

•   A person may work for a new employer and earn income while taking distributions from a previous employer.

•   Rule of 55 withdrawals do not need to be repaid, unlike 401(k) loans.

Cons

•   Withdrawals are taxed at ordinary income rates.

•   The rule of 55 may not be offered by all 401(k) plans, and it is not an option for IRAs.

•   Withdrawal rules may vary — for example, some employers don’t allow partial withdrawals after a person leaves their employment, meaning the individual might need to withdraw the entire balance of their account.

•   Retirement income may be impacted over the long term since withdrawing money might reduce the growth potential of an individual’s retirement savings.

Other Ways to Withdraw From a 401(k) Penalty-Free

Aside from the rule of 55, there are other exceptions that could allow you to take money from your 401(k) penalty-free. The IRS generally allows you to do so if you:

•   Reach age 59 ½

•   Pass away (for distributions made to your plan beneficiary)

•   Become totally and permanently disabled

•   Need the money to pay for unreimbursed medical expenses exceeding 10% of your adjusted gross income (AGI)

•   Need the money to pay health insurance premiums while unemployed

•   Are a qualified reservist called to active duty

A 401(k) loan might be another option for withdrawing money from your retirement account without a tax penalty. You might consider this if you’re not planning to retire but need to take money from your retirement plan.

With a 401(k) loan, you’ll have to pay the money back with interest. Your employer may stop you from making new contributions to the plan until the loan is repaid, generally over a five-year term. If you leave your job where you have your 401(k) before the loan is repaid, any remaining amount becomes payable in full. If you can’t pay the loan off, the whole amount is treated as a taxable distribution and the 10% early withdrawal penalty also may apply if you’re under age 59 ½.

Recommended: 401(k) Loan vs Personal Loan

What to Consider Before Rolling Over Your 401(k)

If you have left or will be leaving an employer and you’re considering rolling over your 401(k) into a traditional or Roth IRA, be aware that once you do so, you will not be eligible to use the rule of 55. With an IRA, you must wait until you are age 59 ½ before taking penalty-free withdrawals.

Recommended: IRA Calculator

The Takeaway

Early retirement may be one of your financial goals, and achieving it requires some planning. Maxing out your 401(k) or 403(b) may help you save the money you’ll need to retire early, and you might be able to access the funds early with the rule of 55. You may also want to consider investing in a tax-advantaged IRA as another way to help save for retirement and work toward financial security.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

FAQ

Does getting a new job affect my rule of 55 eligibility?

No. You can typically use the rule of 55 to keep withdrawing from your 401(k) if you get another job. As long as it’s the same 401(k) you were contributing to when you left your previous job and you haven’t rolled it over into an IRA or another plan, you can still continue to take distributions from it if you get a full-time or part-time job.

How do I initiate a rule of 55 withdrawal?

To start taking the rule of 55 withdrawals, you can reach out to your plan’s administrator to make sure the plan offers rule of 55 withdrawals. If it does, you’ll need to prove that you qualify. That means establishing that you are 55 or older, and that you’re leaving your job.

Is the rule of 55 withdrawal paid as a lump sum?

Some 401(k) plans may require you to take a lump sum payment if you are using the rule of 55. That could create a big tax liability since you will need to pay income tax on the money you withdraw. In this case you might want to explore other alternatives to the rule of 55. It may also be helpful to speak with a tax professional.

Can I use the rule of 55 for an IRA?

No. IRAs, including rollover IRAs, are not eligible for the rule of 55. The rule only applies to employer-sponsored plans like 401(k)s and 403(b)s.

Does the rule of 55 apply to 403(b) plans?

Yes, the rule of 55 applies to 403(b) plans like it does 401(k) plans. However, not all 403(b) plan providers choose to allow rule of 55 early distributions. Check your plan’s specific details or contact the plan administrator.

Photo credit: iStock/bagi1998

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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.

SOIN-Q326-082

Value weighted indexes, also called cap-weighted indexes, are stock indexes that weight each individual stock according to its total market capitalization. They may be used by investors to gauge the performance of various sectors of the stock market. Indexes effectively measure a specific portion or subset of the market, which can help investors get a sense of the market’s performance.

Some of the most commonly known and used value weighted indexes include the S&P 500, Nasdaq Composite, and Wilshire 5000. While these indexes can help investors get an idea of the market’s performance, they do have drawbacks for investors to keep in mind.

Value Weighted Index Explained

Value weighted indexes are often used in the investment world as a stock market evaluation tool. A value weighted index is a tool used to aggregate the performance of multiple stocks into a cohesive whole represented by a single number. In other words, it’s a way to simplify a subset of the market’s performance and make it relatively straightforward to get an idea of what’s happening in the market.

Value weighted indexes multiply current share prices by the number of shares outstanding to get the market cap for each component, or asset, of the index. These individual market caps are then totaled to get the overall value of the index.

When value weighted cap indexes began, the typical method of combining these values was by using a weighted average. For instance, if a stock’s market cap represented 10% of the overall market it would be weighted at 10%.

However, that method quickly becomes complicated as stocks are removed and added from the index, and some companies may be acquired or merged. Because of this, almost all indexes calculate a divisor to normalize the business decisions made at each company so that the index represents performance as accurately as possible without being affected by individual company decisions.

Let’s examine how different constituencies use the indexes for their particular needs, including traders, investors, and fund managers.

How Traders Use Indexes

Traders may differ from general investors in that they’re generally characterized by short-term decision-making. Traders may use indexes as a benchmark to judge the performance of their own investment strategies.

For example, a technology-focused trader might use the Nasdaq Composite to measure how well they’re meeting their own investment goals. They might also use the market index to determine when to enter or exit trades by gleaning any information they can about how the overall market is moving.

How Investors Use Indexes

Investors may differ from “traders” in that they have long-term horizons or investment goals, and thus, may be a bit more conservative in their investing approach. Similar to traders, when investing online or through a traditional brokerage, investors also use indexes as a benchmark to compare how they’re doing in comparison. But investors may also be looking for less-risky investments with broad diversification.

Exchange-traded funds, or ETFs, may align with their goals, and ETFs often seek to replicate the various indexes by holding shares in proportions to match the index. Index investing can be a relatively simple way to start investing for beginners, as it allows for a degree of built-in diversification, tends to align with market performance, and typically comes with the benefit of low transaction fees.

But further research is always required to ensure that a specific ETF aligns with an investor’s strategy. With that in mind, it may be worthwhile to review available resources to help you learn more about investing in ETFs.

How Mutual Fund Managers Use Indexes

Mutual funds pool investment resources from a number of investors to try to provide diversification across sectors, and often pursue more conservative investments. Mutual fund managers may, again, use value weighted indexes as a north star and try to match a market index’s performance, or beat it, with the goal of generating returns for investors. However, keep in mind that investors can always lose money, too.

Mutual funds are also generally aligned with an index that parallels the investment philosophy of the fund, be that stocks, bonds, commodities, etc. So, there may be mutual funds that specialize or focus on investing in certain market segments and track indexes that represent those segments.

How Hedge Funds Use Indexes

Hedge funds pool investment resources in a similar way to mutual funds, but typically follow a far more aggressive investment strategy and managers stick to an active investing style. Though they may be a bit more aggressive and less risk-averse, like other types of funds, hedge fund managers may use indexes as a benchmark to meet or beat in an attempt to generate returns for investors. Remember: There’s a potential for losses, too.

Pros and Cons of Value Weighted Indexes

Value weighted indexes have their pros and cons, of course. Here’s a quick rundown of what the advantages and disadvantages of using value weighted indexes may be for investors.

How Market Value Weighted Index Is Calculated

Theoretically, the calculation of a value weighted index and the weights assigned to each component are straightforward to calculate. But as with most things, reality is a little more complicated.

Calculate the Market Capitalization of Each Stock

To calculate a value weighted index, the first step is to multiply the price and shares outstanding (both of which are in near constant flux) of each component to get the market capitalization for each stock. For example, if you were trying to calculate a value weighted index comprising only three companies (which wouldn’t be indicative of a true index, but for simplicity’s sake, will work for an example), you’d first figure out the market capitalization of each company.

In this hypothetical example, here’s how that might look:

•   Company 1: 50 shares outstanding at a current price of $10 = $500

•   Company 2: 100 shares outstanding at a current price of $5 = $500

•   Company 3: 75 shares outstanding at a current price of $15 = $1,125

Adding those up, the entire market value of this index is $2,125.

In practice, many indexes use free-float market capitalization, which includes only shares available for public trading. These values are then combined to determine each company’s weighting in the index.

Calculate the Weighting of Each Company

To calculate the weights of each company in the index, you divide the value of the given company by the overall value of the index:

•   Company 1: $500 ÷ $2,125 = weight of 23.5%

•   Company 2: $500 ÷ $2,125 = weight of 23.5%

•   Company 3: $1,125 ÷ $2,125 = weight of 53%

So the total weight among the three companies is 100%, and Company 3 carries the highest weight.

Calculating the Index Value

Remember: Due to complications with adding and removing companies from the index, dividends paid, buybacks, mergers, etc., there must be some normalizing done to the formula to remove large fluctuations caused by anything other than core performance.

This function is accomplished by the divisor, which oftentimes performs double duty by scaling the index values much smaller, say in the thousands rather than in the trillions, resulting in the following formula.

Per S&P Global, the numerator in this formula reflects the price of each stock in the index multiplied by the number of shares used in the index, which is then summed across all of the stocks in the index. The denominator is the divisor.

Other Forms of Weighted Market Indexes

Value weighted indexes aren’t the only index-based securities measuring tool. Investors can utilize the following market index assessment options as well.

The Price Weighted Index

Price weighted indexes are another form of weighted market index, and a good example is the Dow Jones Industrial Average.

A price weighted index weights each component based on its stock price. Therefore, a company trading at $200 will have a higher weighting than a stock trading at $5. This is despite the revenue, employment, or market capitalization of the respective companies.

The Fundamentally Weighted Index

A fundamentally weighted market index weighs companies based on some other financial criteria, such as revenues, earnings, dividend rates, or other factors. Fundamentally weighted indexes allow tremendous flexibility in creating an index to match an investing criteria and strategy.

Unweighted Index

The term “unweighted” simply means that no weight is applied when measuring a stock against an index. Instead, the measurement gives equal weight to each index component. It’s common to see unweighted versions of major indexes compared to the weighted indexes to get deeper market insights on, for example, how broad-based a market rally truly is.

The Takeaway

Value weighted indexes can be useful as performance benchmarks and to provide a quick overview of market conditions. By observing the index performance, investors may be better informed about entry and exit opportunities and can also measure their own investing performance.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.

FAQ

What is a market value weighted index?

A market value weighted index (also called a cap-weighted index) measures the performance of a group of stocks based on their market capitalization. Large companies have a greater influence on the index because their total market value is higher.

How is a value weighted index calculated?

Each company’s market capitalization is calculated by multiplying its share price by the number of shares outstanding. These values are then summed and divided by a divisor to produce the index value.

Why are value weighted indexes important to investors?

They act as benchmarks that help investors and traders evaluate market performance or compare their own returns. They also provide a simplified snapshot of how a specific market segment, or the broader market, is performing.

What are the advantages and disadvantages of value weighted indexes?

They offer broad market exposure, diversification, and typically include established companies, which may reduce volatility. However, they can be heavily influenced by the largest companies, which may distort overall performance or contribute to market bubbles.

How do value weighted indexes differ from other index types?

Unlike price-weighted indexes, which are based on share price, value-weighted indexes use market capitalization to determine weighting. Other types, such as fundamentally weighted or equal-weighted indexes, use different criteria, such as financial metrics or equal allocation.

Photo credit: iStock/tdub303

SOIN-Q126-069

ESG investing strategies continue to garner strong interest among investors, as well as corporate executives and governments. As recent climate and geopolitical events have underscored, companies today face a range of risk factors that may be mitigated by embracing certain environmental, social, and governance standards.

And while many organizations have established methods for evaluating and scoring companies on how well they meet certain ESG benchmarks, there is still no globally accepted set of standards for evaluating and rating company performance according to ESG criteria.

Thus, investors face two potential types of risk when it comes to ESG investing. First, companies have material challenges with regard to environmental, social, and governance factors, which require ongoing remediation.

But, owing to the lack of widely accepted ESG frameworks and metrics, it can be difficult for companies to evaluate their own progress toward ESG targets — and likewise for investors to then evaluate which companies meet ESG targets and which don’t.

Despite the inconsistencies in how various ESG criteria are applied from company to company, however, industry research suggests that ESG funds are competitive with funds that adhere to more conventional strategies.

The State of ESG Standards

In the last 10 years or more, the need to identify and solve for ESG risk factors has prompted numerous organizations to try to develop ESG criteria that companies must meet, as well as ways of measuring and disclosing whether they’ve attained specific ESG targets.

In theory, companies that fail to meet certain ESG criteria (e.g., efficient energy use, pollution mitigation, diversity targets, transparency in accounting) would be able to improve their efforts and thereby mitigate those risk factors.

But the persistent challenge here has been a lack of agreement about how to define and measure, and therefore uphold, meaningful positive strides in terms of key environmental, social, and governance factors.

A Range of Criteria

ESG criteria and metrics are almost impossible to describe, owing to the wide assortment of public and private (e.g., proprietary) frameworks.

These include the United Nations’ 17 Sustainable Development Goals, a set of nonbinding principles that some organizations use as guidelines, as well as frameworks for reporting and disclosures developed by other nonprofits, such as the Global Reporting Initiative (GRI) and International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards. In addition, some financial companies themselves have their own proprietary measures.

In recent years, for example, the Securities and Exchange Commission (SEC), which oversees the securities industry in the U.S., has undertaken the task of combating the practice of so-called greenwashing by permitting financial firms to label funds “ESG” only when the vast majority of holdings (80%) include ESG investments.

In addition, in March of 2024, the SEC announced a set of climate-disclosure rules that would apply to all U.S. companies of a certain size. But, in a testament to an industry riven by discord on how sustainable investing should be defined, just a month after issuing new rules that would standardize companies’ climate disclosures, the SEC responded to a spate of criticism and temporarily stayed the ruling. In June of 2026, the SEC published a proposal to rescind the climate-related disclosure rules.

Recommended: A Beginner’s Guide to Sustainable Investing

ESG vs Conventional Strategies

Conventional strategies tend to focus on financial and industry metrics such as profit and loss statements, competitive analysis, and so forth. ESG investing introduces new categories with which to evaluate companies beyond their financials. While ESG is a type of sustainable investing strategy, the term ESG is more specific in that companies must focus on positive environmental, social, and governance outcomes.

The benefit of ESG and other impact investing strategies is that they can help investors put their money toward ethical companies that are doing good in the world. Again, as noted above, ESG funds may offer returns that are comparable to conventional funds.

5 Risks of Investing in ESG Stocks

As highlighted earlier, despite the steady interest in socially responsible investing strategies such as ESG, the quality and consistency of reporting frameworks and metrics have lagged.

Industries and agencies need to establish agreement about ESG frameworks, implementation, disclosures, reporting, and compliance. Given the current hurdles, investors should bear in mind relevant risk factors.

Five key risks of ESG investing include:

Lack of Support for ESG Standards

Companies can decide to embrace ESG standards and hire third-party evaluators, but if their employees and executives aren’t knowledgeable about or in support of using ESG criteria, due diligence and compliance will suffer, and the company may not reach its goals.

Weak Monitoring

Related to the lack of support for ESG frameworks and standards, many companies may lack robust systems for implementing, monitoring, and tracking ESG metrics, making it difficult to produce accurate reports and ratings.

Compliance May Not Support ESG Frameworks

Even if a company has a comprehensive set of ESG standards, they may not have a thorough compliance program that keeps tabs on ESG issues — and/or ESG standards aren’t well-integrated into risk evaluation assessments.

Inaccurate Reporting

When a company decides to adhere to a certain set of ESG standards, they also need to install control mechanisms to ensure accurate reporting. The SEC reported that many companies distributed disclosures and marketing materials, making them look more sustainable than they really were in practice, or with old information that needed updating, because they didn’t have adequate internal checks and balances.

Lack of Diligence Among Fund Managers

The SEC notes that portfolio managers need to review company policies and procedures in regard to ESG factors before investing in that firm.

Why Companies May Want to Reduce ESG Risks

Not only are the above risks to investors, but they also pose risks to companies:

•   Strategic: The idea behind ESG is that the three pillars measure a company’s overall commitment to making positive strides in those areas. If a company fails to implement ESG strategies, it could affect its long-term prospects.

•   Regulatory: Failure to comply with regulations, such as those that reduce environmental risks and prevent illicit practices, can directly impact a company’s ability to do business and meet shareholder expectations.

•   Reputational: If a company misleads investors, consumers, and other stakeholders, it could taint its reputation and lead to financial losses.

•   Financial: It has been shown that strong ESG metrics may help a company financially. Not only can false ESG reporting lead to fines, but failure to implement ESG plans can also mean a company hasn’t maximized its chance to offset certain risks and increase profits.

How ESG Mitigates Some Risk Factors

While there are risks involved with ESG-focused investing, companies that seek to embrace ESG standards may also mitigate some risk factors for investors.

Investors may benefit by investing in companies that are proactively addressing the challenges of a changing world. For example, implementing a regular risk-assessment review process may help companies identify and plan for emerging risks that may include:

•   Environmental: Preventing pollution and other hazards, complying with regulations, mitigating and adapting to climate risks, investing in renewable energy and energy-efficient systems

•   Social: Maintaining a diverse workforce, building relationships with communities, governments, and other stakeholders

•   Governance: Maintaining a strong leadership culture, preventing fraud and illicit activity, supporting transparency in accounting and management practices

With this in mind, investors may research companies or funds to assess if they’re meeting their own commitments. What are their reporting and disclosure practices? Are they using one of the more well-known standards? Is their information verified by a third party?

The Takeaway

Understanding ESG risks can help investors make more informed decisions about their investment choices. Investors interested in putting their money into sustainable companies can use existing ESG metrics to evaluate suitable options but should be aware of the potential downsides.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.

FAQ

What are the main risks of ESG investing?

Like any investment strategy, ESG investing comes with risks. One challenge is that ESG ratings and standards can vary widely, making it difficult to compare companies or funds. Investors may also encounter greenwashing, where a company or fund appears more sustainable than it actually is.

Can ESG investments perform as well as traditional investments?

ESG investments may perform similarly to traditional investments, but results can vary depending on market conditions and the specific investments involved. A company’s ESG practices are only one factor that can influence performance. So investors should consider their overall goals, risk tolerance, and investment strategy.

Why is it difficult to evaluate ESG investments?

Evaluating ESG investments can be challenging because there is no single global standard for measuring environmental, social, and governance factors. Different rating agencies may use different criteria and methodologies, which can lead to varying ESG scores for the same company. As a result, investors often need to look beyond a single rating when researching an investment.

Photo credit: iStock/gesrey

SOIN-Q126-137

When a company decides to embrace certain environmental, social, and governance (ESG) standards, ideally it will adhere to a set of ESG criteria and metrics that help the organization report its progress toward these ESG goals.

ESG reporting is considered separate from standard financial reporting. However, investors are increasingly interested in understanding a company’s progress and risk mitigation efforts in light of ESG factors.

Investors can use a company’s ESG reporting to gauge whether it is indeed making positive changes in these areas. Unfortunately, while there are more than a dozen ESG frameworks that can be used for corporate ESG reporting, no one system has been universally adopted.

However, there are a handful of ESG frameworks that are commonly used for ESG reporting. By understanding the current state of ESG reporting and how it works, investors can be in a better position to decide which investments reflect their own values.

ESG Basics

Like many types of sustainable investing, ESG may be referred to in different ways, including green investing, socially responsible investing (SRI), and impact investing.

The three pillars of ESG are based on specific environmental, social, and governance factors. Environmental standards help assess the ways a company works to preserve and protect the physical environment. Social factors include the treatment of workers, communities, customers, suppliers, and vendors. Governance criteria track issues of leadership, fraud prevention, accounting practices, data privacy, and more.

Common ESG Criteria Companies Use

As a rule of thumb, when learning about ESG frameworks and metrics, it’s important for those interested in green investing to consider how these may or may not apply to different companies across various industries. A retail company may commit to reporting certain metrics that are relevant to its products and manufacturing, whereas a biotech firm would likely embrace other standards.

The following are some ESG factors commonly used as standards in ESG frameworks:

Environmental factors: These can help ESG investors assess a company’s energy use and carbon emissions, its management of air, water, and ground pollutants, its efforts to preserve biodiversity (e.g., limiting deforestation), and its environmental initiatives.

Social factors: These reflect a company’s commitment to fair labor practices, safe working conditions, equitable hiring, engagement with local communities, product safety, and sustainability throughout the supply chain (e.g., sustainable material sourcing and green shipping).

Governance factors: These can include fair and transparent accounting methods, committing to a diverse board and management, avoiding conflicts of interest in leadership, being accountable to shareholders, and upholding shareholder rights.

ESG Reporting Frameworks

As mentioned above, there are more than a dozen ESG reporting frameworks. These have been created by business organizations, nonprofits, and others. It’s not mandatory that companies use these frameworks when doing ESG reporting, although there are ongoing efforts by the Securities and Exchange Commission and the European Union to create required reporting standards.

Existing frameworks are generally voluntary guidelines of which metrics should be reported, how they should be disclosed, and how often.

Recommended: Sustainable Investing Guide for Beginners

Although the frameworks can be useful tools, the fact that there are so many of them means that it’s hard to compare companies and gauge which data and ESG metrics are most meaningful.

Nonetheless, a number of governmental and nongovernmental organizations have worked to develop standards to help companies be more transparent about their commitment to meeting certain ESG criteria. Here is a summary of three of the most commonly used ESG frameworks:

Global Reporting Initiative (GRI)

The GRI is an independent entity that helps businesses and governments evaluate and report their progress in terms of certain ESG standards.

Although this is a voluntary framework, according to a 2024 report by global accounting firm KPMG, some 71% of the world’s biggest companies by revenue have adopted GRI reporting standards, making it the most widely adopted framework.

International Financial Reporting Standards (IFRS) Sustainability Disclosure Standards

The IFRS Foundation set up the International Sustainability Standards Board (ISSB) in 2021, largely because a growing number of companies were looking for a more efficient method for ESG reporting. The ISSB then built upon several existing sustainability standards in order to create the voluntary IFRS Sustainability Disclosure Standards that many companies now follow.

Sustainability Accounting Standards Board (SASB) Standards

Related to the IFRS Sustainability Disclosure Standards are the SASB Standards, which were established to provide a way for companies across 77 different industries to report key ESG metrics. Although the SASB Standards were absorbed by the IFRS Foundation, they are still maintained as a separate set of standards by the ISSB for companies that prefer to use this method.

Benefits of ESG Metrics

There are several upsides of ESG reporting for both companies and investors. These include:

•   Companies can track and report their progress toward ESG goals using a common set of standards.

•   This layer of transparency incentivizes companies to be accountable for their progress (or lack thereof).

•   Companies may save money by adhering to certain ESG standards, potentially improving efficiency or reducing waste.

•   Companies that abide by ESG standards may help mitigate certain risk factors.

•   Adhering to an ESG framework helps build trust and a positive image with investors, communities, and other stakeholders.

Key ESG Metrics

Environmental, social, and governance standards encompass a large number of potential issues that companies can be responsible for. Here are a few.

Carbon Footprint

Measuring a company’s carbon footprint and its progress toward reducing it is one of the most common ESG metrics. Lowering carbon emissions can help companies become more efficient, comply with emissions regulations, lower pollutants, and more.

Steps that a company might be taking to reduce their footprint include:

•   Switching factories and offices to renewable energy

•   Switching to electric transport or reducing the use of conventional transport

•   Reducing waste

•   Switching to raw materials that result in fewer emissions

•   Reusing and recycling materials

•   Purchasing carbon offsets and carbon removal to cancel out any emissions that it cannot eliminate

Energy Efficiency

Another important ESG metric is energy efficiency. Energy efficient companies not only seek to minimize the use of fossil fuels and conventional forms of energy, but to shift to a meaningful use of renewable energy sources.

In addition to the environmental benefits, companies using less energy may save money, potentially increasing profits and benefitting both the companies and investors.

Ways that companies can improve their energy efficiency include:

•   Using energy-efficient bulbs and natural light when possible

•   Turning off lights and appliances/equipment when not in use

•   Increasing the use of electric or hybrid vehicles

•   Minimizing air travel and shipments or investing in green shipping options

•   Managing the use of heat, refrigeration, and air conditioning

Employee and Worker Health and Safety

The health and safety of workers is a key social metric in light of ESG standards. Companies that go beyond legal compliance with federal Occupational Health and Safety Standards (OSHA) may demonstrate a deeper commitment to protecting their workforces in terms of total worker health — physically, mentally, and environmentally.

Efforts may include providing:

•   Proper equipment and training

•   Fire protection and emergency procedures

•   Abatement of safety hazards

•   Psychological support systems

Evaluations of employee health and safety can indicate to investors how good a company is at managing risk and operational procedures that can impact the bottom line. It also includes a holistic take on how the workforce is faring in order to help ensure lower turnover and avoid burnishing a company’s reputation.

Product Manufacturing and Safety

The way products are made and how safe they are are also important ESG metrics. There is greater awareness of whether materials are sourced responsibly and a focus on supply chain transparency. In addition to meeting standards for sourcing and supply chain transparency, reporting can include:

•   The number of product recalls

•   Product certifications

•   Adherence to federal and state regulations

•   Disclosure of fines or legal action related to product manufacturing

Product safety is also essential in a financial sense because a commitment to reliable products builds consumer trust and fosters bottom-line stability.

Composition of the Board of Directors

The structure, makeup, and practices of the board of directors are vital ESG metrics relating to governance. Having diverse voices and opinions on the board, and checks and balances in place to prevent corruption, is key to the success and sustainability of a business.

Companies that disclose their leadership practices may be more accountable than those that don’t. Either way, it’s incumbent on investors to consider a company’s governance structure within a meaningful context (i.e., the relevant industry and the company’s mission and goals).

Diversity and Inclusion

In terms of meeting social standards, companies must foster diversity amongst employees and leadership. Adhering to clear standards around equitable hiring and labor practices can support a stronger, potentially more effective workforce.

Establishing a positive and inclusive company can range from hiring to education to including multiple languages in the workplace.

The Takeaway

ESG standards and reporting frameworks, while far from perfect, can provide investors with metrics for evaluating companies’ ability to uphold certain environmental, social, and governance factors.

Although there isn’t one set of standards for ESG reporting as yet, thousands of companies worldwide use various ESG frameworks to support their disclosures. It’s important for investors to look into the metrics companies report and make decisions for themselves about the criteria that are important to them.

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FAQ

What does ESG reporting mean?

ESG reporting is the disclosure of a company’s information regarding environmental, social, and governance issues. While environmental standards assess how a company works to preserve and protect the natural environment, social standards look at how it treats its workers, communities, customers, suppliers, and vendors. Governance reporting assesses such issues as leadership, fraud prevention, accounting practices, and data privacy.

What are examples of ESG?

ESG reporting considers a wide range of factors. A company’s carbon footprint, energy efficiency, employee health and safety, product manufacturing and safety, board of director composition, and diversity and inclusion measures may be assessed.

What ESG reporting frameworks exist?

There are more than a dozen different frameworks. Examples include the Global Reporting Initiative, the International Financial Reporting Standards Sustainability Disclosure Standards, and the Sustainability Accounting Standards Board Standards.

Photo credit: iStock/grapestock

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Sports card investing typically involves buying and selling sports cards in the hope that the cards you collect will increase in value over time. If you collect sports cards as a hobby, you might be interested in exploring how your collection could fold into your overall investment strategy, if at all, and considering its potential to generate returns over time.

Are sports cards a good investment? They may be for investors who understand how the market for sports cards works and how to identify investment opportunities. Like any other investment, however, there are risks to be aware of, especially when it comes to alternative investments like sports cards. Here’s a closer look at how investing in sports cards works.

History of Investing in Sports Cards

Sports cards have a lengthy history, dating back to the 19th century. The earliest known baseball card was issued in 1865 by the Brooklyn Atlantics, who were dominant in the New York City sports scene at the time, according to Library of Congress records. The team’s “carte de visit,” or visiting card, was handed out to fans as souvenirs.

More athletic organizations followed suit, issuing sets of trading cards featuring lithographic portraits and later, photographic prints of individual players. These early sports card sets were often included in packs of candy or tobacco and were used as a marketing tactic by companies to get consumers to buy their products.

Interest in sports card trading grew throughout the early 20th century, and collectors began to realize how valuable these cards could be. Baseball cards were joined by football cards, and later, basketball cards.

By the 1980s, the market for sports cards investing and trading was beginning to take off. Investing in sports cards and other sports memorabilia has become a way to diversify and potentially generate returns over time, outside of traditional stocks and bonds, though cannot guarantee profit nor fully protect in a down market.

As an alternative investment, sports cards offer the potential to combine your investment strategy with your passions if you’re a true sports enthusiast. But it’s important to know that alternative investments can be high risk, illiquid, and whether or not sports card investing provides returns can depend on a number of factors. (SoFi offers funds with alternative investments, but it does not offer sports card investing.)

The Sports Card Market

Sports card investments are seeing a resurgence in recent years, and as of 2026, the sports trading card market is estimated at $14.5 billion, and expected to grow to almost $25 billion by 2033. Some of the most sought-after cards in the market trade for millions of dollars, including a T206 Honus Wagner baseball card which sold for $6.606 million at auction in 2021, and a card featuring basketball players Michael Jordan and Kobe Bryant, which sold for $12.9 million in 2025.

The sports card investment market extends to not only baseball or football cards, but a variety of other trading cards including:

•   Character cards

•   Image cards

•   Autograph cards

•   Pokémon cards

•   Magic: The Gathering cards

•   Yu-Gi-Oh! cards

•   Cardfight! Vanguard cards

Some of these specialty cards rival the performance of the most in-demand sports cards. One of the rarest and most valuable Pokémon cards, for instance, was valued at $5.275 million at auction. In early 2026, a Pikachu card sold for $16.5 million.

How to Invest in Sports Cards

Investing in sports cards typically involves simply buying them. You can buy packs of cards, or even boxes, and then open those packs to see what’s in them — essentially, hoping that you’ll find a rare or valuable card. You can also go out on the market and try to track down specific cards that have value, or that you believe have value. Perhaps they’re selling for under market rate, or you believe they’ll be worth more in the future than you’d pay for them now? In that case, you can make an investment and hope it pays off.

In effect, though, buying cards is really the main way to invest in sports cards. You could also look into buying fractional shares of certain high-value cards on some investment platforms, too.

Key Factors That Influence Card Value

A crucial factor when investing in sports cards is knowing what’s valuable and what’s not. There’s one simple rule of thumb to remember: Sports cards are worth what someone is willing to pay for them.

Sports card valuations are determined by a variety of factors, including their age and rarity. Developing a trained eye can help with your decision-making when trading investment sports cards.

Player Performance and Popularity

Player performance and popularity can make a difference in how much a sports card commands at an auction or in the trading market. A card featuring a high-profile player with an impressive list of career achievements is likely to have a higher valuation than the card of an average player.

Savvy collectors consider not just current but future popularity when deciding which cards to invest in. For example, they might buy up rookie cards for a number one draft pick if expectations are high that the player will have a stellar career.

Scarcity also factors in. Limited edition or autographed cards may hold more value and appeal for collectors if there are fewer of them in the trading market.

Card Condition and Grading

The card’s condition also factors in when determining what a sports card investment is worth. Cards that are in mint condition, for instance, generally have a higher value than a card that has some minor wear and tear.

It’s possible for sports card investors to have their cards professionally graded. Grading is the process of having a professional evaluate your cards to determine what they’re worth and rating them on a scale of 1 to 10. The higher the grade, the better the condition the card is in and the more it’s likely to be worth.

A perfect “10 card” would have:

•   Four perfectly-sharp corners

•   A correctly-centered image that is in sharp focus

•   No damage or wear to its original coating

•   No staining

•   No writing or stray in/pencil marks

Professional grading services know exactly what to look for, including how to spot fake cards which is one of the biggest risks associated with alt investments in sports cards.

Risks and Challenges in the Sports Card Market

Is collecting sports cards a good investment? Most investments carry some degree of risk and sports are no different.

If you’re interested in how to get into sports card investing it’s important to understand these risk factors:

•   Counterfeiting/fraud. Sports cards are a target for counterfeiting, which could put you at risk of making a bad investment if you can’t tell the difference between a fake and the real thing.

•   Inaccurate grading. You may rely on a pro grading service to tell you what your sports cards are worth, but it’s possible they’re valuation is off track. If the grader’s assessment is incorrect your cards could end up over or undervalued.

•   Volatility and unpredictability. The sports card trading market can be unpredictable and card valuations don’t always hold steady. If a player has a poor season, for instance, or gets traded to an underwhelming team, that could affect the value of your collectible cards and lead to a lower than expected rate of return.

Lastly, there’s the risk of simply getting it wrong. You might believe that a particular player’s card values are going to take off so you sink a chunk of money into buying them. Only, their career doesn’t go as planned or the market takes an unexpected turn and now you’re out the money that you’ve invested.

Recommended: Alternative Investment Definition

The Takeaway

You have different options for how to invest in sports cards, including buying cards at auction, trading through online marketplaces, or opting for digital versions with non-fungible tokens (NFTs). Regardless of your investing preferences, think about how much risk you’re comfortable taking on and what percentage of your portfolio you want to dedicate to sports card investments for the short and long term.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

FAQ

How important is card grading in sports card investing?

One of the first things you’ll hear about when researching how to start investing in sports cards is grading. Grading is what sets the standard for how much a sports card or another type of trading card is worth. There are numerous companies that offer grading services and it’s important to research them carefully to find a reputable grader to work with.

What sports typically have the most valuable cards?

Some of the most valuable sports card investments have historically been baseball cards, which makes sense since those were the first kind of trading cards to hit the market. Basketball and football cards can also be highly valuable if they belong to in-demand players. And surprisingly, rare Pokémon and other gaming cards can also command impressive prices.

What is the difference between a vintage and modern sports card?

Sports card collectors don’t always agree about what constitutes a vintage vs. modern card. For many collectors, the cutoff is 1980; cards produced before that year are vintage while cards produced after are modern. If you have a mixed collection of cards from different years, a grader can help you figure out which ones are vintage and which ones are not.

Photo credit: iStock/smodj

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