What is a Financial Asset?

You’ve probably come across the term “asset” many times in your life—long before you began saving and investing.

What is an asset? Generally, the word may be used to refer to anything of value—from a great smile to a great work ethic to a great group of friends. But when you’re talking about finances, the term asset is typically used to refer to things that have economic value to a person, a company, and/or a government.

For individuals, it can mean pretty much everything they own—from the cash in their wallet to the boat in the backyard to the baubles in a jewelry box. But usually, when people talk about their personal assets, they’re referring to:

•   Cash and cash equivalents, including checking and savings accounts, money market accounts, certificates of deposit (CDs), and U.S. government Treasury bills.
•   Personal property, including cars and boats, art and jewelry, collections, furniture, and things like computers, cameras, phones, and TVs.
•   Real estate, residential or commercial, including land and/or structures on the land.
•   Investments, such as stocks and bonds, annuities, mutual and exchange-traded funds, etc.

Those who freelance or own a company also may have business assets that could include a bank account, an inventory of goods to sell, accounts receivable (money they’re owed by their customers), business vehicles, office furniture and machinery, and, the building and land where they conduct their business.

Liquid vs. Non-Liquid Assets

When you’re building your portfolio and assessing your overall financial situation, you’ll quickly realize that all assets are not created equal.

Some assets are liquid: Liquid assets can be accessed quickly and converted to cash without losing much of their value. Cash is the ultimate liquid asset, but there are plenty of other examples.

If you can expect to find a number of interested buyers who will pay a fair price, and you can make the sale with some speed, your asset is probably liquid. Stock from a blue-chip company is an asset with liquidity. So is a high-quality mutual fund.

Some assets are non-liquid or illiquid: These assets have value, but they may not be as easy to convert into cash when it’s needed. Your car or home might be your biggest asset, for example, depending on how much of it you actually own. But It might take a while to get a fair price if you sold it—and you’ll likely need to replace it eventually.

The same goes for a business. And even if you’re willing to part with a prized collection—your “Star Wars” action figures, perhaps—you’d have to find a buyer who’s willing to pay the amount you want without delay. And if something happens to affect the market for a particular collectible—think Beanie Babies—your asset may sell at a loss or not at all.

While some investments have long-term objectives—including saving for a secure retirement—liquidity can be an important factor to consider when evaluating which assets belong in a portfolio.

Many unexpected events come with big price tags, so it can help to have some cash or cash equivalents on hand in case an urgent need comes up. General recommendations suggest having three to six months’ worth of living expenses stashed away in an emergency fund—using an account that’s available whenever you need it.

Some might also consider keeping a portion of money in investments that are reasonably liquid, such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). This way, ideally, the assets can be liquidated in a relatively quick timeframe if they are needed. (Although, of course, there’s never any guarantee.)

Finding the Right Asset Allocation

As an investor, you’re also likely to hear about the importance of “asset allocation” in your portfolio.
Asset allocation is simply putting money to work in the best possible places to reach financial goals.

The idea is that by spreading money over different types of investments—stocks, bonds, cash, real estate, commodities, etc.—an investor can limit volatility and attempt to maximize the benefits of each asset class.

For example, stocks offer the best opportunity for long-term growth, but can expose an investor to more risk. Bonds tend to have less risk and can provide an income stream, but their value can be affected by rising interest rates. Cash can be useful for emergencies and short-term goals, but it isn’t going to offer much growth, and it won’t necessarily keep up with inflation over the long term.

When it comes to volatility, each asset class may react differently to a piece of economic news or a national or global event, so by combining multiple assets in one portfolio, an investor can mitigate the risk overall.

Alternative investments such as real property, precious metals, and private equity ventures are examples of assets some investors also may choose to use to counter the price movements of a traditional investment portfolio.

An investor’s asset allocation typically has some mix of stocks, bonds, and cash—but the percentages of each can vary based on a person’s age, the goals for those investments, and/or a person’s tolerance for risk.

If for example, someone is saving for a wedding or another shorter-term financial goal, they may want to keep a percentage of that money in a safe, easy-to-access account, such as a high-yield online deposit account. An account like this would allow that money to grow with a competitive interest rate while it’s protected from the market’s unpredictable movements.

But for a longer-term goal, like saving for retirement, some might invest a percentage of money in the market and risk some volatility with stocks, mutual funds, and/or ETFs. This way the money can grow over the long-term, and there will likely be time to recover from market fluctuations.

As retirement nears, some people may wish to slowly shift their investments to an allocation that carries less risk.

Getting Some Help with the Mix

If you’re new to investing and feeling a little daunted by the many asset choices available, one option is to look at diversifying your allocation by purchasing ETFs or mutual funds.

These funds give investors who might not have the money or time to research and buy individual securities access to a basket of assets—different stocks and bonds—that are professionally managed.

Though investing in a mutual fund or ETF doesn’t guarantee those investments will increase in value over time, it’s a way to avoid some of the complicated decision-making and constant market-watching that can make investing stressful.

And you can use ETFs and/or mutual funds in your portfolio whether you choose to be a hands-on investor or take a more hands-off approach.

With SoFi Invest®, for example, investors can DIY their asset allocation with active investing, and pick out stocks or ETFs. Or they can or sit back and let SoFi do most of the work with automated investing.

Either way, one-on-one help is available from SoFi advisors, who can help set up a portfolio with asset allocation percentages that work toward individual goals.

The Importance of Rebalancing

Choosing that original asset allocation is important—but maintenance and portfolio rebalancing is also key over time. As people attain some of their short- or mid-range goals—paying for that wedding, for instance, or getting the down payment on a house—they may wish to consider where the money will go next, and what kind of account it should be in.

As life changes, it is possible that the original balance of stocks vs. bonds vs. other investments is no longer appropriate for a person’s current and future needs. As a result, they may want to become more aggressive or more conservative, depending on the situation.

Rebalancing also may become necessary if the success—or failure—of a particular asset group alters a portfolio’s target allocation.

If, for example, after a big market rally or long bull run (both of which we’ve experienced in recent years) a 60% allocation to stocks becomes something closer to 75%, it may be time to sell some stock and get back to that original 60%. This way, an investor can protect some of the profits while buying other assets when they are down in price.

Yes, it may be tempting to stick with a particular asset class that’s performing well—after all, the goal of investing is to make money. But too much of a good thing could become a problem if the market shifts—so there’s a reason to get back to that original percentage.

You can do your rebalancing manually or automatically. Some investors check in on their portfolio regularly (monthly, quarterly or annually) and adjust it if necessary. Others rebalance when a set allocation shifts noticeably.

With automated investing through an account like SoFi Invest®, investors can set a goal (or goals) with SoFi advisors and know that their investment account will automatically correct to the chosen percentages if they get too far out of whack.

The Value of Knowing What You Own

Knowing where your money is invested and having some idea of each asset’s value can provide a better understanding of your overall financial well-being.

Ready to do some math? Your assets are what you own. Liabilities are what you owe (debts such as credit card balances, student loans, car loans, etc.). The difference is your net worth. And tracking your net worth over time can help you make a plan to reach your financial goals.

If you’re only using your checking and savings statements to monitor your money, you may be missing out on some key information that could affect your financial planning.

Putting the big picture down on a balance sheet or tracking it with an app can help you see what you’re doing right and what might be going wrong. With this insight, you can adjust your investments and financial plan as you see fit.

The assets you accumulate will likely change over time, as will your needs and your goals. So, it’s important to know the purpose of each asset you own—as well as which ones are working for you and which ones aren’t. Here are some questions you can ask yourself as you mindfully manage your assets:

1. Are you getting the maximum return on your investment, whether it’s a savings account or an investment in the market?
2. How does the asset make money (dividends, interest, appreciation)? What must happen for the investment to increase in value?
3. How does the asset match up with your personal and financial goals?
4. How liquid is the investment? How hard would it be to sell if you needed money right away?
5. What are the risks associated with the investment? What is the most you could lose? Can you handle the risk financially and emotionally?

If you aren’t sure of the answers to these questions, you may wish to get some help from a financial advisor who, among other things, can work with you to set priorities, suggest strategies for investing, assist you in coming up with the right asset allocation to suit your needs, and draw up a coordinated and comprehensive financial plan.

Ready to start investing? A SoFi advisor can help you look at what you have, what you might need, and how you can maintain the right mix. To get complimentary, personalized advice, check out SoFi Invest® today.


External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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What To Invest In Besides Your 401k

Investing has taken on increasing complexity in recent years. The wide range of options can make it difficult to determine which investment accounts are right for you. Contributing to a 401k through your employer is a smart way to begin saving for retirement.

While there are minor drawbacks to investing in your workplace 401k, like limited control over investment options, administrators, or investment fees, it’s still a great place to start if the option is available to you.

With the tax deferment benefits and employer-matched contributions, 401ks can be especially advantageous. It is important to start saving for retirement as early in your career as possible, because the longer you save, the more you can potentially benefit from compound interest.

But once you’ve reached the max 401k contribution, your next consideration should be where to invest besides your 401k. There are a number of viable options, depending on your overall financial strategy and goals. Let’s dive in.

What Is the Max 401k Contribution?

The current limit on 401k contributions is $19,500 (age 50 and older can contribute an additional $6,500 as a catch-up contribution). The limit for your 401k contribution and your employer match is $56,000. The $6,500 catch-up amount for age 50 and older would be in addition to the $55,000 limit.

Understanding IRAs

While 401k plans are sponsored by your employer, an IRA (Individual Retirement Account) enables you to save for retirement on your own. You can absolutely have both. The IRA limit is currently at $6,000—and those age 50 and older can contribute an additional $1,000 annually.

A traditional IRA is tax-deferred, which means you don’t pay tax until you withdraw your funds, hopefully in retirement. When investing in a Roth IRA, on the other hand, you pay tax on your income before you make contributions to your Roth IRA.

While there are no initial tax benefits, this allows your investment to grow tax-free, and you do not have to pay income tax when you withdraw funds in retirement.

If you are single or married and filing separately, and you earn more than $139,000, you’ll no longer be allowed to contribute to a Roth IRA. If you are married and filing jointly, The Roth IRA income limit is $206,000.

Related Content: What is an Ira?

Additional rules and requirements exist depending on your specific situation. There are no income limits for traditional IRAs, though there are income limits on the tax deductions traditional IRAs entitle you to.

As you can see, it can become challenging to keep up with the complex array of qualifications, limits and other requirements related to IRA contributions. Limits can vary depending on your income status and career shifts, and potentially on new federal tax rules.

You may find it beneficial to enlist the help of a tax attorney along with your financial advisor to help guide you toward an investment strategy that makes sense for you.

Beyond the 401k and IRA

A 401k and IRA aren’t your only options. If you’d like to use your invested savings sooner than retirement, an after-tax investment account might be right for you.

When searching for an investment account, you’ll generally want to look for an account that offers low fees, a low minimum balance requirement, and flexibility as you consider new places to invest. Ideally, your account will be easy to use and give you access to a financial advisor.

You’ll also want to look for an account that helps you diversify your investments. While investing can be risky, spreading your investments over many different asset classes, sectors, companies, or countries is a way to help reduce some overall portfolio risk.

It’s also important to rebalance your investments regularly to ensure your portfolio is aligned with your risk tolerance. Your individual risk tolerance can inform your investment strategy, and regular rebalancing can help keep that investment strategy on track.

SoFi Invest

At SoFi, we offer automated investing. We take the stress out of investing by helping you with the hard part: goal setting, rebalancing, and diversifying your money. We can also work with you to help establish your baseline retirement goals and to map out a plan.

By curating diverse portfolios and rebalancing your investments automatically, a SoFi account can be a helpful part of your overall investment approach.

If you’re trying to determine which investment account is for you, consider a SoFi Invest account. A SoFi Invest® account offers no SoFi management fees, low minimums, and complimentary access to our team of financial advisors.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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How Does the Stock Exchange Work?

You hear a lot about the stock market in the news and on TV. And it can seem confusing—even a little nefarious—but it doesn’t have to be.

First thing to know is there isn’t one stock market, there are many stock exchanges and markets. The second is that a stock is just a share of a company. Stocks can be bought, sold, or traded. (There are also more complicated financial configurations, such as a futures contract, which is an agreement to buy or sell a stock at a predetermined point in the future at a predetermined price.)

The reason this all works is because the people buying and selling on the market have different theories about how things are going to work out down the road. For example, I might think the value of a certain company is going to go up, and you might think it’s going to go down. Market crashes happen when everyone is trying to sell at the same time.

Stock exchanges are a big part of the overall economy. Understanding what a stock exchange is and how it works will help you understand how it affects you and your investments.

What Is a Stock Exchange? How Does It Work?

A stock exchange is simply a market where stocks are traded, sold, and bought. Exchanges are generally organized by an institution or association that hosts the market. Those who want to buy or sell stocks or bonds commonly go through a broker, who is licensed to trade on the exchanges.

There are a growing number of online brokers, where you can choose to make many of the trades yourself or opt for a diversified fund that has a makeup designated by what kinds of stocks, bonds, and commodities you want.

Or you can work with a traditional broker or financial advisor, who will advise you on your overall retirement investments and wealth planning. Even they, however, do much of their trading electronically at this point.

If a company is “listed” on an exchange, it means that the company can be traded on that exchange. Not all companies are listed because each exchange regulates which companies meet their requirements. Companies not listed on the exchange are traded “over-the-counter,” or OTC for short.

Even now, you don’t have to buy or sell stocks on an exchange, even if they are listed there. You’re allowed to sell your official stocks on your own, but it isn’t particularly convenient. It was the need for convenience and some rules that led people to form stock exchanges in the first place.

Regulatory authorities set U.S. regulations that stop insider trading and dictate who can legally trade. Buyers and sellers are able to trade at the exchange when it’s open during business hours.

You might think you don’t personally make trades or need to know about stock exchanges, but odds are a portion of your retirement savings are actually in a portfolio of stocks and bonds. In the long run, the market typically offers an average 10% return when inflation is taken into account —though obviously, it can go up and down in the short run.

Different Types of Securities

Securities are any financial asset that you can trade, which includes:

Stocks: Represent an ownership percentage in a company and often pay dividends to stockholders.

Bonds: Long-term debt. Earnings come from the interest being paid on the debt. Bonds typically pay interest in set intervals.

Commodities: Goods like corn, oil, and gold. Sold on a commodity exchange.

Why Do We Have Stock Exchanges?

Dating back to the 1400s and 1500s, there have long been exchanges or markets where individual, government, and business debts were traded, sold, and bought.

But it wasn’t until the Dutch East India Company started selling shares in its company with its multiple shipping ventures, to offset the risk of any one individual expedition, that stocks and bonds came into existence.

Almost all companies need to raise capital. One way they do so is by selling shares in their company. But the people who buy those shares need to know they’ll also be able to sell or trade their shares in the future. (Fewer people would want to own a portion of a company if they knew they’d be stuck with it forever and ever, regardless of circumstance.)

The lack of rules early on led to lots of companies issuing shares they couldn’t back up, and then going out of business or leaving shareholders high and dry. London banned companies from issuing shares until 1825. Although the New York Stock Exchange (NYSE) wasn’t the first—it wasn’t even the first in the U.S.—it officially became the New York Stock & Exchange Board in 1817 and traded stocks from its very first day.

What is the New York Stock Exchange? Also known as the NYSE, it’s just one of many stock exchanges in the world. It’s also the biggest one in the world, valued at almost $23 trillion in market capitalization. But there are 16 other exchanges valued at over $1 trillion, like the NASDAQ, which is also based in New York, the London Stock Exchange, and the Tokyo Stock Exchange (also known as the Japan Exchange Group).

How Does the Stock Market Work?

The stock market is a term that encompasses all trades made through avenues like stock exchanges, over-the-counter venues, and computerized trading methods.

It facilitates the buying and selling of shares between:
•  Companies and investors via IPOs (primary market).
•  Investors and investors via stock exchanges like the NYSE or NASDAQ (secondary market).

Prices in the stock market can fluctuate with supply and demand for different shares. For example, if there’s high demand for a stock, its price will likely be higher.

How a Stock Exchange Factors Into The Overall Stock Market

Even if you don’t trade stocks—and the vast majority of stocks are owned by the top 10% of richest people—the stock exchanges and stock market still affect you. That’s because they affect the overall market. How?

When people talk about “the market” what they’re typically referring to is the trends of all stocks, bonds, commodities, and futures across multiple exchanges. To this end, stock market indices are important.

An index weights a selected set of stocks to create an average. For example, the S&P 500 calculates 500 of the largest U.S. companies’ market capitalization. The Dow Jones Industrial Average is made up of 30 large publicly traded U.S. companies. By watching the value of these indices each day, investors can get a sense of the overall markets’ trends.

The reason you should care is that the overall market can be predicted by, but also influenced by, the stock market. There are a number of reasons a given stock price could go up or down, and the stock market overall simply reflects the aggregate of all those individual stock prices.

That means that stock market rises and falls do not necessarily cause the economy to rise or fall. But, often a stock market drop or crash can precipitate a recession. In some cases, this is because the drop in stock prices reflect larger economic issues, like during the 2008-09 recession. In some instances, it is because the stock market drop erodes consumer confidence, which then leads to less consumer spending and causes an economic decline.

When the stock market goes down, stocks and funds may mirror the dip. But you don’t need to necessarily worry. Sometimes it can make sense to invest when the market is down. To understand what stock exchanges mean for your personal investments and retirement funds, it can help to get some advice.

At SoFi, members have access to financial planners who can offer personalized advice. If you’re ready to start online investing, SoFi Invest® offers an Active Investing platform, where investors can buy stocks, ETFs, fractional shares, or invest in IPOs. For a limited time, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.

Download the SoFi Invest mobile app today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Claw Promotion: For the full terms and conditions of SoFi’s Claw Promotion, click here. Probability of a customer receiving $1,000 is 0.028%.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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How Do Mutual Funds Work?

When it comes to your finances, the old saying rings true: Don’t put all your eggs in one basket. The vast majority of financial planners advise investing in many different types of stocks, bonds, and other assets, not just a couple that sound interesting.

But especially when you’re starting out, you probably don’t have enough money to spread it across all different types of investments. That doesn’t have to stop you—in fact, that’s exactly where mutual funds come in.
In this guide, we’ll cover everything you need to know about mutual funds: What they are, how they work, and whether they’re right for you.

What Are Mutual Funds?

Mutual funds were designed for people to get started investing with small amounts of money. You can think of them as suitcases filled with different types of securities, such as stocks and bonds. Buying even one share of the fund immediately invests you in all the individual securities the fund holds.

The benefit? Instant diversification. Say you invest in a mutual fund that holds stocks of every company in the S&P 500. If one company in the S&P 500 goes bankrupt, your fund might lose some value, but you most likely won’t lose everything. But if your whole investment was in that one company’s stock, you’d lose all or most of your money.

What Types of Mutual Funds Are There?

Mutual funds can invest in stocks, bonds, real estate, commodities, and more. There are over 20,000 mutual funds that cover every investing strategy you can imagine. Some common strategies include:

Asset Class Funds: Asset classes are groups of similar assets that share similar risks, such as stocks, bonds, cash, or real estate. Some funds specialize in a particular type of investment or asset class—for example, large cap growth stocks or high yield bonds. These mutual funds assume that you or your adviser will choose the strategic mix of funds that’s right for you.t

Sector or Industry Funds: Some funds will attempt to represent all or most of the stocks in a particular sector or industry. What’s the difference? Sectors are broader than industries—for example, oil is an industry, but energy is a sector that also includes coal, gas, wind, and solar companies. The stocks in each industry or sector share similar characteristics and risks.

Target Date Funds: A target date fund will provide you with a mix of asset classes (for example, 20% bonds and 80% stocks). They assume you will terminate the fund at some year in the future, usually when you retire, and they shift to less risky investments as the target year approaches.

Target-date funds are intended to be a generic, low-cost solution to retirement saving and. They can be a good choice for a 401(k) investment if you don’t have the time or expertise to pick funds.

Speaking of picking funds…

How Are Mutual Funds Managed?

Mutual funds can be managed actively or passively. Passively managed funds attempt to track an index, such as the Russell 2000 (an index of 2,000 small-cap U.S. companies). In other words, if one company leaves the index and another one joins, the fund sells and buys those company’s stocks accordingly. The risk and return of these funds is very similar to the index.

Actively managed mutual funds attempt to beat the performance of an index. The idea is that with careful investment selection, they will get higher returns than the index.

What Are the Costs of Investing in Mutual Funds?

All mutual funds have some expenses, but they can vary a lot from one fund to another. It’s important to understand them, because fund expenses can have a big impact on your returns over time.

Another problem with actively managed funds is that they typically cost you more. Why? These funds are paying people who make investment decisions, and they are making more trades, which have transaction costs.

You won’t get a bill, but your returns on the fund will be reduced by the fund’s expenses. Some brokerage firms also charge commission for buying mutual funds.

A good alternative to actively managed funds are index ETFs, which brings us to:

What Are Exchange Traded Funds (ETFs)?

Mutual funds have been around since the 18th century, but the industry is constantly innovating. The latest idea is Exchange Traded Funds (ETFs). Traditional (old-school) mutual funds are issued by the fund sponsor when you buy them and redeemed when you sell them.

They are priced once a day, after the market closes, at the value of all the underlying securities in the fund divided by the number of fund shares—their net asset value (NAV). The investment choices in most 401(k) plans are these kinds of funds.

Exchange Traded Funds (ETFs) trade on stock exchanges throughout the day. You buy them from and sell them to another investor—just like a stock.

Since the assets in the fund are constantly changing value throughout the day, and the fund price is set by market supply and demand, it might trade a little higher or lower than its NAV at different points in the day, but ETFs generally track their NAV very closely. Both traditional funds and ETFs can be actively or passively managed.

ETFs have two advantages—liquidity and cost. Even though you may pay a commission for buying or selling them—just like a stock, they generally have lower expenses that more than make up for it.

Since they can be bought or sold whenever the market is open, you don’t have to wait until the end of the day to buy or sell. This liquidity can be a big advantage on days when the market is way up or way down.

Why Should I Invest in Mutual Funds?

Most investors need growth to reach their goals. Stocks offer the potential for growth, but they can be risky. A lot can go wrong with a company over time. Mutual funds are a better choice because they use diversification to reduce that risk significantly.

For most small investors, index funds may be a great option. With index funds you are not betting on a fund manager to “beat the market”—you own the market. Plus, the expenses of index funds are generally lower than actively managed funds.

What Funds Should I Buy in My 401(k)?

Most 401(k)s and other employer retirement plans don’t offer ETFs and still use traditional mutual funds. No problem—there are plenty of good traditional funds. Funds between U.S. stocks (both large and small), international, and emerging markets stocks, investment grade bonds, and high yield bonds.

Unless you or your advisor have decided on a specific allocation of your assets between stock and bond funds, a target date fund is a good choice. It contains a mix of stock and bond funds tailored to your time to retirement. Plus, if you stay with your company, it will adjust that mix to be less risky as you get older.

Retirement Hack: Don’t want to pay an advisor? Find a target date fund with a date close to when you plan to retire and use their mix of stocks and bonds. You can also check if you are on track for retirement.

Not sure what the right investment strategy is for you? An investment account with SoFi makes it easy: Our technology helps you determine the right asset allocation mix for you, while SoFi financial planners are available to offer you complimentary, personalized advice.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Retirement Savings: Which Retirement Plan is Right for You?

If you’re like most people, you might be a bit overwhelmed by all the different types of retirement savings plans out there.

And that’s fair: The choices are confusing for two reasons. First, each of the common retirement plans was created by a separate law, and each has its own set of rules that are similar, but not the same. Second, the names are weird.

Some of them are named after the person who proposed them–like Senator William Roth of Delaware. Others, like the 401(k) and 403(b), are named after sections of the IRS code. Best of all, none of these names contain any useful information for people who are trying to choose among them.

But don’t let that stop you from doing your research and choosing the plan that’s right for you. After all, they’re all designed to give you tax breaks to help you save and invest for retirement. Here, we’ll break them down, as well as offer some guidance on how you might use them.

401(k)s and Similar Employer-Sponsored Plans

If your employer offers one, the best place to start investing for retirement is with an employer-sponsored plan. The law determines what kind of employer can offer which kind of plan. In the private sector, this is usually a 401(k); the 403(b) and 457(b) are similar plans in the government, academic, and nonprofit worlds.

What every employer’s plan has in common is:

-Your employer chooses the plan.

-You decide how much money to contribute.

-Contributions are deducted from your paycheck.

-You decide how to invest your contributions among the investment choices your plan offers (usually, different types of mutual funds).

-Your money can’t be withdrawn without penalty until you retire (or if you die or become disabled).

-If you leave the job, you may “rollover” your balance to another employer’s plan or individual retirement arrangement (IRA) without paying any taxes or penalties.

From there, though, the rules vary based on the specific plan type and the choices your employer makes. For example, your employer may (or may not) match some portion of your contribution or make contributions from other sources, such as profit sharing.

Employer contributions may vest over a period of years and you can lose them if you quit before you’re fully vested. Retirement contribution limits vary by the type of plan and your age. (For example, the maximum you can put in your 401(k) in 2020 is $19,500 per year. If you are over age 50, you can save an additional $6,500 in “catch-up” contributions.)

The age of retirement can vary by the type of plan, as do the rules if you need to take out money beforehand. Some plans allow you to withdraw money to fund education or a first home, and some permit you to borrow money for any reason.

In short, it all depends, and your HR department is the best source for specific rules for your plan.
How much should you contribute to your 401(k)? If your employer matches contributions, be sure you contribute at least enough to get the full matching funds. It’s free money.

Beyond that, it depends on your circumstances. In general, you should start saving for retirement as early as you can, and save as much as you can, increasing your contributions every time you get a raise or a bonus.

IRA Accounts

Of course, not everyone is employed by a company that offers a retirement plan, which is where Individual Retirement Arrangements (IRAs) come in. Initially, they were intended for people who had no company pension plan, but they are available to many people who do.

IRAs come in two forms—Traditional or Roth—and the difference is tax treatment. With a Roth IRA, your contributions are not tax-deductible, but your distributions in retirement are tax-free. With a traditional IRA, money you contribute is not taxed, but your withdrawals in retirement are taxed as ordinary income. Which should you choose?

If you are not paying a high tax rate now, it might be smart to opt for a Roth, since you could be in a higher tax bracket when you retire. But if you need a deduction to motivate you to save—go with a Traditional IRA.

In Traditional IRAs there’s a 10% penalty if you take your money out before age 59½, and you must start taking distributions at 70½.

In Roth accounts, the early distribution penalty only applies to earnings, not contributions and you don’t need to start withdrawals at any time. In both cases, you pay no tax on dividends, interest, or capital gains that accumulate while assets are in the account. So your retirement nest egg isn’t being taxed every year.

Contributions rules are complicated. Broadly, you can contribute $6,000 each year (or $7,000 if you are 50 or older). However, there are limits that depend on your age, income, marital status, and whether you have an employer-sponsored plan. To know how much you can contribute, try our IRA calculator.

Most investment firms offer IRAs and let you invest in most things they offer (such as stocks, bonds, and mutual funds). If you want to make your own investment decisions, or don’t like the investments in your company’s plan, you might want an IRA instead, even though the contribution limits are usually lower. Depending on your income, you may be able to contribute to both an employer plan and an IRA.

Types of Self Employed Retirement Plans

If you’re self-employed or a contractor, you also have access to another set of retirement plans. The good news: Contribution limits are higher than an IRA or a 401(k), since you are both the employer and the employee.
There are two choices:

SEP IRA: This is basically a Traditional IRA account with much higher contribution limits—up to $57,000 in 2020. Your contribution is based on your net earnings. That’s net of your Social Security contribution, so the calculation is complicated, but the IRA calculator can estimate it for you. (Read more about the SEP IRA.)

Solo 401(k): This is a 401(k) with simplified reporting requirements, since it only has one participant—you. You can make an $19,000 employee contribution plus an employer contribution equal to the amount you could contribute to a SEP IRA with the same net earnings. The maximum contribution is still $56,000 though.

Old-School Pension Plans

If you work for the military, the government, and some large companies, you might have a pension plan. These are becoming much less common as more employers turn retirement responsibility over to their employees, but they’re still out there, so they’re worth a mention. There are two broad types of pension plans:

Defined Benefit Pension: These plans pay you an income for life when you retire. The amount you get is usually determined by a formula based on your income and years of service. For example: the average of your final 5 years of salary times 3% for each year of service, up to a max of 80%. So if you worked for 20 years, and averaged $100,000 in your last 5 years, you’d get $60,000. There are often several payout options, so be sure you understand them before you’re ready to retire.

Defined Contribution Pension: This pension plan defines the amount the company will contribute—usually a fixed percentage of your salary each year. Your money in this plan will generally vest over time. If you leave in the first few years you probably lose all or most of it. The longer you stay, the more of it you own and can take with you when you leave. Some plans invest it for you, but most let you choose how your money is invested.

Participation in both of these is automatic. You don’t generally need to contribute to these plans, but it’s important to understand their value if you have one. If you are in the military or work for the government or a firm that has one of these, they are an important part of your compensation.

If you have a pension plan or your employer makes profit sharing contributions to a contributory plan, be sure you understand the vesting schedule before you decide to change jobs. You don’t want to quit the week before you start to vest.

Rollover Your 401(k) to an IRA

Of course, most people will change jobs several times in their career. After a few job changes you can find yourself losing track of old plans with former employers.

It may be smart to consolidate your retirement accounts by rolling them over into an IRA to make it easier to manage your money. You generally can’t rollover a plan from your current employer, but you can with past ones.

Have questions about retirement? Consider working with a SoFi financial planner today. We can help you pick online investments in your current plan, rollover old plans with former employers, and get your retirement plan on track.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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