Terminology Archives | Page 6 of 76

Feb

2024

IRA vs 401(k): What Is the Difference?

By AJ Smith | Growing Wealth, invest, Investing, Preparing for Retirement, Terminology | No Comments

Table of Contents

How Are IRAs and 401(k)s Different?
Other Key Differences Between IRAs and 401(k)s
A Closer Look at IRAs
A Closer Look at a 401(k)
When Should You Use a 401(k)?
When Should You Use an IRA?
When Should You Use Both an IRA and 401(k)?

The biggest difference between an IRA vs. a 401(k) is the amount you can save. You can save over three times as much in a 401(k) vs. an IRA — $23,000 versus $7,000 for tax year 2024, and $22,500 versus $6,500 for tax year 2023. But not everyone has access to a 401(k), because these are sponsored by an employer, typically for full-time employees.

“A 401(k) is probably one of the most common retirement vehicles,” says Brian Walsh, a CFP® at SoFi. “A 401(k) will be available through work. Your employer is going to choose whether or not to make a 401(k) available to all the employees. Generally speaking, 401(k)s are the most popular retirement plan employers provide.”

Other than that, a traditional IRA and a 401(k) are similar in terms of their basic provisions and tax implications. Both accounts are considered tax deferred, which means you can deduct the amount you contribute each year — unless you have a Roth account, which has a different tax benefit.

Before you decide whether one or all three types of retirement accounts might make sense for you, it helps to know all the similarities and differences between a 401(k) and a traditional IRA and Roth IRA.

Key Points

• An IRA (Individual Retirement Account) and a 401(k) are both retirement savings accounts, but they have different features and eligibility requirements.

• IRAs are typically opened by individuals, while 401(k)s are offered by employers to their employees.

• IRAs offer more investment options and flexibility, while 401(k)s may have employer matching contributions and higher contribution limits.

• Both accounts offer tax advantages, but the timing of tax benefits differs: IRAs provide tax benefits during retirement, while 401(k)s offer tax benefits upfront.

• Choosing between an IRA and a 401(k) depends on factors like employment status, employer contributions, investment options, and personal financial goals.

How Are IRAs and 401(k)s Different?

The government wants you to prioritize saving for retirement. As a result, they provide tax incentives for IRAs vs. 401(k)s.

In that respect, a traditional IRA and a 401(k) are somewhat similar; both offer tax-deferred contributions, which may lower your taxable income, and tax-deferred investment growth. Also, you owe taxes on the money you withdraw from these accounts in retirement (or beforehand, if you take an early withdrawal).

There is a bigger difference between a Roth IRA and a 401(k). Roth accounts are funded with after-tax contributions — so they aren’t tax deductible. But they provide tax-free withdrawals in retirement.

And while you can’t withdraw the contributions you make to a traditional IRA until age 59 ½ (or incur a penalty), you can withdraw Roth contributions at any time (just not the earning or growth on your principal).

These days, you may be able to fund a Roth 401(k), if your company offers it.

Other Key Differences Between IRAs and 401(k)s

As with anything that involves finance and the tax code, these accounts can be complicated. Because there can be stiff penalties when you don’t follow the rules, it’s wise to know what you’re doing.

Who Can Set Up a 401(k)?

As noted above, a key difference between an IRA and a 401(k) is that 401(k)s are qualified employer-sponsored retirement plans. You typically only have access to these plans through an employer who offers them as part of a full-time compensation package.

In addition, your employer may choose to provide matching 401(k) funds as part of your compensation, which is typically a percentage of the amount you contribute (e.g. an employer might match 3%, dollar for dollar).

Not everyone is a full-time employee. You may be self-employed or work part-time, leaving you without access to a traditional 401(k). Fortunately, there are other options available to you, including solo 401(k) plans and opening an IRA online (individual retirement accounts).

Who Can Set Up an IRA?

Anyone can set up an individual retirement account (IRA) as long as they’re earning income. (And if you’re a non-working spouse of someone with earned income, they can set up a spousal IRA on your behalf.)

If you already have a 401(k), you can still open an IRA and contribute to both accounts. But if you or your spouse (if you’re married) are covered by a retirement plan at work, you may not be able to deduct the full amount of your IRA contributions.

Understanding RMDs

Starting at age 72, you must take required minimum distributions (RMDs) from your tax-deferred accounts, including: traditional IRAs, SEP and SIMPLE IRAs, and 401(k)s. Be sure to determine your minimum distribution amount, and the proper timing, so that you’re not hit with a penalty for skipping it.

It’s worth noting, though, that RMD rules don’t apply to Roth IRAs. If you have a Roth IRA, or inherit one from your spouse, the money is yours to withdraw whenever you choose. The rules change if you inherit a Roth from someone who isn’t your spouse, so consult with a professional as needed.

However, RMD rules do apply when it comes to a Roth 401(k), similar to a traditional 401(k). The main difference here, of course, is that the Roth structure still applies and withdrawals are tax free.

A Closer Look at IRAs

An IRA is an individual retirement account that has a much lower contribution limit than a 401(k) (see chart below). Anyone with earned income can open an IRA, and there are two main types of IRAs to choose from: traditional and Roth accounts.

Self-employed people can also consider opening a SEP-IRA or a SIMPLE IRA, which are tax-deferred accounts that have higher contribution limits.

Traditional IRA

Like a 401(k), contributions to a traditional IRA are tax deductible and may help lower your tax bill. In 2024, IRA contribution limits are $7,000, or $8,000 for those aged 50 or older. In 2023, IRA contribution limits are $6,500, or $7,500 for those aged 50 or older.

With a traditional IRA, investments inside the account grow tax-deferred. And unlike 401(k)s where an employer might offer limited options, IRAs are more flexible because they are classified as self-directed and you typically set up an IRA through a brokerage firm of your choice.

Thus it’s possible to invest in a wider range of investments in your IRA, including stocks, bonds, mutual funds, exchange-traded funds, and even real estate.

When making withdrawals at age 59 ½, you will owe income tax. As with 401(k)s, any withdrawals before then may be subject to both income tax and the 10% early withdrawal penalty.

What Are Roth Accounts?

So far, we’ve discussed traditional 401(k) and IRA accounts. But each type of retirement account also comes in a different flavor — known as a Roth.

The main difference between traditional and Roth IRAs lies in when your contributions are taxed.

• Traditional accounts are funded with pre-tax dollars. The contributions are tax deductible and may provide an immediate tax benefit by lowering your taxable income and, as a result, your tax bill.

• Money inside these accounts grows tax-deferred, and you owe income tax when you make withdrawals, typically when you’ve reached the age of 59 ½.

Roth accounts, on the other hand, are funded with after-tax dollars, so your deposits aren’t tax deductible. However, investments inside Roth accounts also grow tax-free, and they are not subject to income tax when withdrawals are made at or after age 59 ½.

As noted above, Roths have an additional advantage in that you can withdraw your principal at any time (but you cannot withdraw principal + earnings until you’ve had the account for at least five years, and/or you’re 59 ½ or older — often called the five-year rule).

Roth accounts may be beneficial if you anticipate being in a higher tax bracket when you retire versus the one you’re in currently. Then tax-free withdrawals may be even more valuable.

It’s possible to hold both traditional and Roth IRAs at the same time, though combined contribution limits are the same as those for traditional accounts. And those limits can’t be exceeded.

Additionally, the ability to fund a Roth IRA is subject to certain income limits: above a certain limit you can’t contribute to a Roth. There are no income limits for a designated Roth 401(k), however.

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Start saving today with a Roth or Traditional IRA.

A Closer Look at a 401(k)

Contributions to your 401(k) are made with pre-tax dollars. This makes them tax-deductible, meaning the amount you save each year can lower your taxable income in the year you contribute, possibly resulting in a smaller tax bill.

In 2024, you can contribute up to $23,000 to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $30,500. In 2023, you can contribute up to $22,500 each year to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $30,000.

401(k) catch-up contributions allow people nearing retirement to boost their savings. In addition to the contributions made, an employer can also match their employee’s contribution, up to a combined employer and employee limit of $69,000 in 2024 and $66,000 in 2023.

An employer may offer a handful of investment options to choose from, such as exchange-traded funds (ETFs), mutual funds, and target date mutual funds. Money invested in these options grows tax-deferred, which can help retirement investments grow faster.

When someone begins taking withdrawals from their 401(k) account at age 59 ½ (the earliest age at which you can start taking penalty-free withdrawals), those funds are subject to income tax. Any withdrawals made before 59 ½ may be subject to a 10% early withdrawal penalty, on top of the tax you owe.

When Should You Use a 401(k)?

If your employer offers a 401(k), it may be worth taking advantage of the opportunity to start contributing to your retirement savings. After all, 401(k)s have some of the highest contribution limits of any retirement plans, which means you might end up saving a lot. Here are some other instances when it may be a good idea:

1. If your employer matches your contributions

If your company matches any part of your contribution, you may want to consider at least contributing enough to get the maximum employer match. After all, this match is tantamount to free money, and it can add up over time.

2. You can afford to contribute more than you can to an IRA

For tax year 2024, you can only put $7,000 in an IRA, but up to $23,000 in a 401(k) — if you’re over 50, those amounts increase to $8,000 for an IRA and $30,500 for a 401(k).

For tax year 2023, you can only put $6,500 in an IRA, but up to $22,500 in a 401(k) — if you’re over 50, those amounts increase to $7,500 for an IRA and $30,000 for a 401(k). If you’re in a position to save more than the IRA limit, that’s a good reason to take advantage of the higher limits offered by a 401(k).

3. When your income is too high

Above certain income levels, you can’t contribute to a Roth IRA. How much income is that? That’s a complicated question that is best answered by our Roth IRA calculator.

And if you or your spouse are covered by a workplace retirement plan, you may not be able to deduct IRA contributions.

If you can no longer fund a Roth, and can’t get tax deductions from a traditional IRA, it might be worth throwing your full savings power behind your 401(k).

When Should You Use an IRA?

If you can swing it, it may not hurt to fund an IRA. This is especially true if you don’t have access to a 401(k). But even if you do, IRAs can be important tools. For example:

1. When you leave your company

When you leave a job, you can rollover an old 401(k) into an IRA — and it’s generally wise to do so. It’s easy to lose track of old plans, and companies can merge or even go out of business. Then it can become a real hassle to find your money and get it out.

You can also roll the funds into your new company’s retirement plan (or stick with an IRA rollover, which may give you more control over your investment choices).

Recommended: How to Roll Over Your 401(k)

2. If your 401(k) investment choices are limited

If you have a good mix of mutual funds in your 401(k), or even some target date funds and low-fee index funds, your plan is probably fine. But, some plans have very limited investment options, or are so confusing that people can’t make a decision and end up in the default investment — a low interest money market fund.

If this is the case, you might want to limit your contributions to the amount needed to get your full employer match and put the rest in an IRA.

3. When you’re between jobs

Not every company has a 401(k), and people are not always employed. There may be times in your life when your IRA is the only option. If you have self-employment income, you can make higher contributions to a SEP IRA or a Solo 401(k) you set up for yourself.

4. If you can “double dip.”

If you have a 401(k), are eligible for a Roth IRA, or can deduct contributions to a traditional IRA, and you can afford it — it may be worth investing in both. After all, saving more now means more money — and financial security — down the line. Once again, you can check our IRA calculator to see if you can double dip. Just remember that the IRA contribution limit is for the total contributed to both a Roth and traditional IRA.

The real question is not: IRA vs. 401(k), but rather — which of these is the best place to put each year’s contributions? Both are powerful tools to help you save, and many people will use different types of accounts over their working lives.

When Should You Use Both an IRA and 401(k)?

Using an IRA and a 401(k) at the same time may be a good way to save for your retirement goals. Funding a traditional or Roth IRA and 401(k) at once can allow you to save more than you would otherwise be able to in just one account.

Bear in mind that if you or your spouse participate in a workplace retirement plan, you may not be able to deduct all of your traditional IRA contributions, depending on how high your income is.

Having both types of accounts can also provide you some flexibility in terms of drawing income when you retire. For example, you might find a 401(k) as a source of pre-tax retirement income. At the same time you might fund a Roth IRA to provide a source of after-tax income when you retire.

That way, depending on your financial and tax situation each year, you may be able to strategically make withdrawals from each account to help minimize your tax liability.

The Takeaway

What is the difference between an IRA and a 401(k)? As you can see now, the answer is pretty complicated, depending on which type of IRA you’re talking about. Traditional IRAs are tax deferred, just like traditional 401(k)s — which means your contributions are tax deductible in the year you make them, but taxes are owed when you take money out.

Roth accounts — whether a Roth IRA or a Roth 401(k) — have a different tax treatment. You deposit after-tax funds in these types of accounts. And then you don’t pay any tax on your withdrawals in retirement.

The biggest difference is the amount you can save in each. For tax year 2023, it’s $23,000 in a 401(k) ($30,500 if you’re 50 and over) versus only $7,000 in an IRA ($8,000 if you’re 50+). For tax year 2023, it’s $22,500 in a 401(k) ($30,000 if you’re 50 and over) versus only $6,500 in an IRA ($7,500 if you’re 50+).

Another difference is that a 401(k) is generally sponsored by your employer, so you’re beholden to the investment choices of the firm managing the company’s plan, and the fees they charge. By contrast, you set up an IRA yourself, so the investment options are greater — and the fees can be lower.

Generally, you can have an IRA as well as a 401(k). The rules around contribution limits, and how much you can deduct may come into play, however.

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FAQ

Is a 401(k) considered an IRA for tax purposes?

No. A 401(k) is a completely separate account than an IRA because it’s sponsored by your employer.

Is it better to have a 401(k) or an IRA?

You can save more in a 401(k), and your employer may also offer matching contributions. But an IRA often has a much wider range of investment options. It’s wise to weigh the differences, and decide which suits your situation best.

Can you roll a 401(k) Into an IRA penalty-free?

Yes. If you leave your job and want to roll over your 401(k) account into an IRA, you can do so penalty free within 60 days. If you transfer the funds and hold onto them for longer than 60 days, you will owe taxes and a penalty if you’re under 59 ½.

Can you lose money in an IRA?

Yes. You invest all the money you deposit in an IRA in different securities (i.e. stocks, bonds, mutual funds, ETFs). Ideally you’ll see some growth, but you could also see losses. There are no guarantees.

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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Feb

2024

What Is a Roth IRA and How Does It Work?

By AJ Smith | Budgeting & Goals, invest, Terminology | No Comments

A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, and then withdraw the money tax free in retirement. A Roth IRA is different from a traditional IRA, which is a tax-deferred account: meaning, you contribute pre-tax dollars — but you owe tax on the money you withdraw later.

Many people wonder what a Roth IRA is because, although it’s similar to a traditional IRA, the two accounts have many features and restrictions that are distinct from each other. Roth accounts can be more complicated, but for many investors the promise of having tax-free income in retirement is a strong incentive for understanding how Roth IRAs work.

Key Points

• A Roth IRA is a retirement savings account that offers tax-free growth and tax-free withdrawals in retirement.

• Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals are not subject to income tax.

• Roth IRAs have income limits for eligibility, and contribution limits that vary based on age and income.

• Unlike traditional IRAs, Roth IRAs do not require minimum distributions during the account holder’s lifetime.

• Roth IRAs can be a valuable tool for long-term retirement savings, especially for individuals who expect to be in a higher tax bracket in the future.

What Is a Roth IRA?

A Roth IRA is a retirement account for people who want to make after-tax contributions. The trade-off for paying taxes upfront is that when you retire, all of your withdrawals will be tax free, including the earnings and other gains in your account.

That said, because you’re making after-tax contributions, you can’t deduct Roth deposits from your income tax the way you can with a traditional IRA.

Understanding Contributions vs Earnings

An interesting wrinkle with a Roth IRA is that you can withdraw your contributions tax and penalty-free at any time. That’s because you’ve already paid tax on that money before initially depositing or investing it.

Withdrawing investment earnings on your money, however, is a different story. Those gains need to stay in the Roth for a minimum of five years before you can withdraw them tax free — or you could owe tax on the earnings as well as a 10% penalty.

It’s important to know how the IRS treats Roth funds so you can strategize about the timing around contributions, Roth conversions, as well as withdrawals.

Roth IRA Eligibility

Technically, anyone can open an IRA account, as long as they have earned income (i.e. taxable income). The IRS has specific criteria about what qualifies as earned income. Income from a rental property isn’t considered earned income, nor is child support, so be sure to check.

There are no age restrictions for contributing to a Roth IRA. There are age restrictions when contributing to a traditional IRA, however.

Roth IRA Annual Contribution Limits

For 2024, the annual limit is $7,000, and $8,000 for those 50 and up. The extra $1,000 is called a catch-up provision, for those closer to retirement.

For 2023, the annual contribution limits for both Roth and traditional IRAs was $6,500, or $7,500 for those 50 or older. So, there was a $500 increase in contribution limits between 2023 and 2024.

Remember that you can only contribute earned income. If you earn less than the contribution limit, you can only deposit up to the amount of money you made that year.

One exception is in the case of a spousal Roth IRA, where the working spouse can contribute to an IRA on behalf of a spouse who doesn’t have earned income.

Other Roth IRA Details

Since Roth IRAs are funded with after-tax income, contributions are not tax-deductible. One exception for low- and moderate-income individuals is something called the Saver’s Credit, which may give someone a partial tax credit for Roth contributions, assuming they meet certain income and other criteria.

Note that the deadline for IRA contributions is Tax Day of the following year. So for tax year 2023, the deadline for IRA contributions is April 15, 2024. But, if you file an extension, you cannot further postpone your IRA contribution until the extension date and have it apply to the prior year.

Roth IRA Income Restrictions

In addition, with a Roth there are important income restrictions to take into account. Higher-income individuals may not be able to contribute the full amount to a Roth IRA; some may not be eligible to contribute at all.

It’s important to know the rules and to make sure you don’t make an ineligible Roth contribution if your income is too high. Those funds would be subject to a 6% IRS penalty.

For 2023:

• You could contribute the full amount to a Roth as long as your modified adjusted gross income (MAGI) was less than $138,000 (for single filers) or less than $218,000 for those married, filing jointly.

• Single people who earned more than $138,000 but less than $153,000 could contribute a reduced amount.

• Married couples who earned between $218,000 and $228,000 could also contribute a reduced amount.

For 2024 the numbers have changed and the Roth IRA income limits have increased:

• For single and joint filers: in order to contribute the full amount to a Roth you must earn less than $146,000 or $230,000, respectively.

• Single filers earning more than $146,000 but less than $161,000 can contribute a reduced amount. (If your MAGI is over $161,000 you can’t contribute to a Roth.)

• Married couples who earn between $230,000 and $240,000 can contribute a reduced amount. (But if your MAGI is over $240,000 you’re not eligible.)

If your filing status is…	If your 2023 MAGI is…	If your 2024 MAGI is…	You may contribute:
Married filing jointly or qualifying widow(er)	Up to $218,000	Up to $230,000	For 2023 $6,500 or $7,500 for those 50 and up. For 2024 $7,000 or $8,000 for those 50 and up.
	$218,000 to $228,000	$230,000 to $240,000	A reduced amount^*
	Over $228,000	Over $240,000	Cannot contribute
Single, head of household, or married filing separately (and you didn’t live with your spouse in the past year)	Up to $138,000	Up to $146,000	For 2023 $6,500 or $7,500 for those 50 and up. For 2024 $7,000 or $8,000 for those 50 and up.
	From $138,000 to $153,000	From $146,000 to $161,000	Reduced amount
	Over $153,000	Over $161,000	Cannot contribute
Married filing separately^**	Less than $10,000	Less than $10,000	Reduced amount
	Over $10,000	Over $10,000	Cannot contribute

^*Consult IRS rules regarding reduced amounts.
^**You did live with your spouse at some point during the year.

Advantages of a Roth IRA

Depending on an individual’s income and circumstances, a Roth IRA has a number of advantages.

• No age restriction on contributions. With a traditional IRA, individuals must stop making contributions at age 72. A Roth IRA works differently: Account holders can make contributions at any age as long as they have earned income for the year.

^* You can fund a Roth and a 401(k). Funding a 401(k) and a traditional IRA can be tricky, because they’re both tax-deferred accounts. But a Roth is after-tax, so you can contribute to a Roth and a 401(k) at the same time (and stick to the contribution limits for each account).

• Early withdrawal option. With a Roth IRA, an individual can generally withdraw money they’ve contributed at any time, without penalty (but not earnings on those deposits). In contrast, withdrawals from a traditional IRA before age 59 ½ may be subject to a 10% penalty.

• Qualified Roth withdrawals are tax-free. Investors who have had the Roth for at least five years, and are at least 59 ½, are eligible to take tax- and penalty-free withdrawals of contributions + earnings.

• No required minimum distributions (RMDs). Unlike IRAs, which require account holders to start withdrawing money after age 73, Roth IRAs do not have RMDs. That means an individual can withdraw the money as needed, without fear of triggering a penalty.

Disadvantages of a Roth IRA

Despite the appeal of being able to take tax-free withdrawals in retirement, or when you qualify, Roth IRAs have some disadvantages.

• No tax deduction for contributions. The primary disadvantage of a Roth IRA is that your contributions are not tax deductible, as they are with a traditional IRA and other tax-deferred accounts (e.g. a SEP IRA, 401(k), 403(b)).

• Higher earners often can’t contribute to a Roth. Affluent investors are generally excluded from Roth IRA accounts, unless they do what’s known as a backdoor Roth or a Roth conversion. (There are no income limits for converting a traditional IRA to a Roth, but you’ll have to pay taxes on the money that goes into the Roth — though you won’t face a penalty.)

• The 5-year rule applies. The 5-year rule can make withdrawals more complicated for investors who open a Roth later in life. If you open a Roth or do a Roth conversion at age 60, for example, you must wait five years to take qualified withdrawals of contributions and earnings, or face a penalty (some exceptions to this rule apply; see below).

Last, the downside with both a traditional or a Roth IRA is that the contribution limit is low. Other retirement accounts, including a SEP-IRA or 401(k), allow you to contribute far more in retirement savings. But, as noted above, you can combine saving in a 401(k) with saving in a Roth IRA as well.

Recap: Roth IRA Withdrawal Rules

Because Roth IRA withdrawal rules can be complicated, let’s review some of the ins and outs.

Qualified Distributions

Since you have already paid tax on the money you deposit, you’re able to withdraw contributions at any time, without paying taxes or a 10% early withdrawal penalty.

For example, if you’ve contributed $25,000 to a Roth over the last five years, and your investments have seen a 10% gain (or $2,500), you would have $27,500 in the account. But you could only withdraw up to $25,000 of your actual deposits.

Withdrawing any of the $2,500 in earnings would depend on your age and the 5-year rule.

The 5-Year Rule

What is the 5-year rule? You can withdraw Roth account earnings without owing tax or a penalty, as long as it has been at least five years since you first funded the account, and you are at least 59 ½. So if you start funding a Roth when you’re 60, you still have to wait five years to take qualified withdrawals.

The 5-year rule applies to everyone, no matter how old they are when they want to withdraw earnings from a Roth.

There are some exceptions that might enable you to avoid owing tax or a penalty.

Non-Qualified Withdrawals

Non-qualified withdrawals of earnings from a Roth IRA depends on your age and how long you’ve been funding the account.

• If you meet the 5-year rule, but you’re under 59 ½, you’ll owe taxes and a 10% penalty on any earnings you withdraw, except in certain cases.

• If you don’t meet the 5-year criteria, meaning you haven’t had the account for five years, and if you’re less than 59 ½ years old, in most cases you will also owe taxes and a 10% penalty.

There are some exceptions that might help you avoid paying a penalty, but you’d still owe tax on the early withdrawal of earnings.

Exceptions

Again, these restrictions apply to the earnings on your Roth contributions. (You can withdraw direct contributions themselves at any time, for any reason, tax and penalty free.)

You can take an early or non-qualified withdrawal prior to 59 ½ without paying a penalty or taxes, as long you’ve been actively making contributions for at least five years, in certain circumstances, including:

• For a first home. You can take out up to $10,000 to pay for buying, building, or rebuilding your first home.

• Disability. You can withdraw money if you qualify as disabled.

• Death. Your heirs or estate can withdraw money if you die.

Additionally you can avoid the penalty, although you still have to pay income tax on the earnings, if you withdraw earnings for:

• Medical expenses. Specifically, those that exceed 7.5% of your adjusted gross income.

• Medical insurance premiums. During a time in which you’re unemployed.

• Qualified higher education expenses.

Not only are the early withdrawal restrictions looser than with a traditional IRA, the post-retirement withdrawal restrictions are lesser, as well. Whereas account holders are required to start taking distribution of funds from their IRA after age 73, there is no pressure to take distribution from a Roth IRA at any age.

Roth IRA vs Traditional IRA

There are certain things a Roth IRA and a traditional IRA have in common, and several ways that they differ:

• It’s an effective retirement savings plan: Though the plans differ in the tax benefits they offer, both are a smart way to save money for retirement.

• Not an employer-sponsored plan: Individuals can open either type of IRA through a financial institution, and select their own investments or choose an automated portfolio.

• Maximum yearly contribution: For 2023, the annual limit is $6,500, with an additional $1,000 allowed in catch-up contributions for individuals over age 50. For 2024 it’s $7,000, and $8,000 if you’re 50 and older.

There are also a number of differences between a Roth and a traditional IRA:

• Roth IRA has income limits, but a traditional IRA does not.

• Roth IRA contributions are not tax deductible, but contributions you make to a traditional, tax-deferred IRA are tax deductible.

• Roth IRA has no RMDs. Individuals can withdraw money when they want, without the age limit imposed by a traditional IRA.

• Roth IRA allows for penalty-free withdrawals before age 59 ½. While there are some restrictions, an account holder can typically withdraw contributions (if not earnings) before retirement.

Is a Roth IRA Right for You?

How do you know whether you should contribute to a Roth IRA or a traditional IRA? This checklist might help you decide.

• You might want to open a Roth IRA if you don’t have access to an employer-sponsored 401(k) plan, or if you do have a 401(k) plan but you’ve already maxed out your contribution there. You can fund a Roth IRA and an employer-sponsored plan.

• Because contributions are taxed immediately, rather than in retirement, using a Roth IRA can make sense if you are in a lower tax bracket or if you typically get a refund from the IRS. It may also make sense to open a Roth IRA if you expect your tax bracket to be higher in retirement than it is today.

• Individuals who are in the beginning of their careers and earning less might consider contributing to a Roth IRA now, since they might not qualify under the income limits later in life.

• A Roth IRA can be helpful if you think you’ll work past the traditional retirement age.

The Takeaway

A Roth IRA has many of the same benefits of a traditional IRA, with some unique aspects that can be attractive to some people saving for retirement. With a Roth IRA you don’t have to contend with required minimum distributions (RMDs); you can contribute to a Roth IRA at any age; and qualified withdrawals are tax free. With all that, a Roth IRA has a lot going for it.

That said, not everyone is eligible to fund a Roth IRA. You need to have earned income, and your annual household income cannot exceed certain limits. Also, even though you can withdraw your Roth IRA contributions at any time without owing a penalty, the same isn’t true of earnings.

You must have been funding your Roth for at least 5 years, and you must be at least 59 ½, in order to make qualified withdrawals of earnings. Otherwise, you would likely owe taxes on any earnings you withdraw — and possibly a penalty. Still, the primary advantage of a Roth IRA — being able to have an income stream in retirement that’s completely tax free — can outweigh some of the restrictions for certain investors.

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

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

FAQ

Are Roth IRAs insured?

If your Roth IRA is held at an FDIC-insured bank and is invested in bank products like certificates of deposit (CDs) or money market account, those deposits are insured up to $250,000 per depositor, per institution. On the other hand, if your Roth IRA is with a brokerage that’s a member of the Securities Investor Protection Corporation (SIPC), and the brokerage fails, the SIPC provides protection up to $500,000, which includes a $250,000 limit for cash. It’s important to note that neither FDIC or SIPC insurance protects against market losses; they only cover losses due to institutional failures or insolvency.

How much can I put in my Roth IRA monthly?

For tax year 2023, the maximum you can deposit in a Roth or traditional IRA is $6,500, or $7,500 if you’re over 50. How you divide that per month is up to you. You just can’t contribute more than the annual limit.

Who can open a Roth IRA?

Anyone with earned income (i.e. taxable income) can open a Roth IRA, but your income must be within certain limits in order to fund a Roth.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN1223001

Feb

2024

How to Earn Residual Income

By Melanie Mannarino | Growing Wealth, Terminology | Comments Off

What is residual income — and how do you get more of it? Read on to learn how to calculate residual income as well as how to make your numbers grow.

Feb

2024

What Is Leverage in Finance?

By Samuel Becker | Growing Wealth, invest, Investing, Terminology | Comments Off

Leverage in finance involves using a relatively small amount of capital to make larger trades or investments, increasing the potential of larger returns. In the world of finance, it’s critical to understand leverage if you plan to day trade or make other types of short-term investments, and the additional risks involved.

In general, leverage means doing a lot with a little. Think about how you may use an actual, physical lever to turn a switch, for instance. The switch itself may be small, and require a turn that’s a quarter of an inch to flip from off to on. But by using a lever — which is much bigger, physically, than the switch itself — the work becomes easier.

Key Points

• Leverage in finance involves using a small amount of capital to make larger trades or investments, potentially increasing returns.

• Leverage can be achieved through borrowing money or trading on margin, allowing investors to make increased dollar investments.

• While leverage can amplify gains, it also magnifies losses and comes with additional risks and costs.

• Different types of leverage exist, including financial leverage used by businesses to raise capital and operating leverage used to analyze fixed and variable costs.

• Leverage can be used in personal finance, such as taking out a mortgage, and is also utilized by professional traders to potentially increase profits.

What Is Leverage?

In finance, leverage refers to using a small amount of capital to do a relatively big amount of work — making big investments with a small amount of money. The rest of the money used to make the investment is borrowed, or investors are trading on margin.

In short: Leverage is about borrowing capital to make bigger bets in an effort to increase returns.

How Leverage Works

In leveraged investing, the leverage is debt that investors use as a part of their investing strategy. While it’s easy to think that all debt is bad, in fact it can actually be useful when folded into a specific investing tactic, although it also introduces additional risks and costs.

Leverage typically works like this: A person or company wants to make an outsized investment, but doesn’t have enough capital to do it. So, they use the capital they do have in conjunction with margin (borrowed money) to make a leveraged investment. If they’re successful, the return on their investment is far greater than it would’ve been had they only invested their own capital.

The risk, of course, is that those returns do not materialize, putting the investor in debt. Investors will also need to consider how their overall costs could increase, as they’ll likely pay interest on the money they borrow, too.

Example of Leverage

Here is an example of how leverage could be used:

Let’s say that you found a startup. To get the company off the ground, you take in $10 million from investors, but you want to expand operations fast — hire employees, ramp up research and development efforts, and build out a distribution network.

You can do that with the $10 million, but if you were to borrow another $10 million, you would be able to double your efforts. That would allow you to hire more employees, improve your products faster, and distribute them further and wider, though you’d need to pay interest on the loan, too, factoring into overall costs.

That $10 million you borrowed is allowing you to do more with less. Of course, you run the risk that the company won’t be able to sustain a quick growth pace, in which case you may not be able to pay back the loan, or end up paying additional costs for interest and fees. But if things do work out, you’d be able to grow faster and accrue more value than if you hadn’t taken on any additional debt.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Pros and Cons of Leverage

On the surface, leverage can sound like a powerful tool for investors — which it can be. But it’s a tool that can cut both ways: Leverage can add to buying power and potentially increase returns, but it can also magnify losses, and put an investor in the hole.

What’s important to remember is that there are both pros and cons to a tool like leverage.

Pros of Leverage	Cons of Leverage
Adds buying power	Increased risks and costs
Potential to earn greater returns	Leveraged losses are magnified
For investors, it’s generally easy to access	It can be more complex than meets the eye

Leverage vs Margin

Margin is a type of leverage that is specifically tied to use in the financial markets by investors. It is basically like a line of credit for a brokerage or investment account.

Here’s how margin works: An investor has a cash balance, which acts as collateral, and there are interest rates at play, like any other type of loan. With a margin account, investors can tradesome, but not all stocks or other assets on margin.

Using margin, an investor can effectively supercharge their potential gains or losses. It’s also important to note — and it’s worth repeating over and over — that using margin as an investor can increase overall costs and risks. Not every investor will be comfortable assuming those risks and costs (such as interest charges), so you’ll want to know what you’re doing before using margin.

Margin and leverage are related, and it’s easy to confuse the two. Even if you know what margin trading is and how margin accounts work, it’s important to make sure you know what the differences are. This chart should help.

Leverage vs Margin
Leverage	Margin
A loan from a bank for a specific purpose	A loan from a brokerage for investing in financial instruments
May involve a cash injection to be used for a specific purpose	No cash is exchanged; acts as a line of credit
Can be used by businesses or individuals; May take the form of a mortgage or to expand inventory	Can be used to create leverage and increase investment buying power

Types of Leverage

So far, we’ve mostly discussed leverage as it relates to the financial markets for investors. But there are other types of leverage, too.

Financial Leverage

Financial leverage is used by businesses and organizations as a way to raise money or access additional capital without having to issue additional shares or sell equity. For instance, if a company wants to expand operations, it can take on debt to finance that expansion.

The main ways that a company may do so is by either issuing bonds or by taking out loans. Much like in the leverage example above, this capital injection gives the company more spending power to do what it needs to do, with the expectation that the profits reaped will outweigh the costs of borrowing in the long run.

Operating Leverage

Operating leverage is an accounting measure used by businesses to get an idea of their fixed versus variable costs.

When discussing financial leverage, math needs to be done to figure out whether a company’s borrowing is profitable (called the debt-to-equity ratio). When calculating operating leverage, a company looks at its fixed costs as compared to variable costs to get a sense of how the costs of borrowing are affecting its profitability.

Leverage Investing

Leverage trading is the use of borrowed money to try and increase profits or returns. A company can use leverage investing by purchasing a new factory, allowing it to expand its ability to create products, and as such, increase profitability. An individual investor can borrow money to buy more stocks, increasing their potential returns.

It’s important to keep in mind, though, that leverage trading, or the use of borrowed money to invest, increases overall costs for investors, as they will need to pay interest on the money they borrow, and may be subject to other fees, too.

With that in mind, there are a few ways that leverage can be used in investing, either by individuals, or organizations.

Buying on Margin

Margin is a form of leverage, and trading on margin means that an investor is using money borrowed from their brokerage to execute a trade. In other words, an investor is borrowing money from their trading platform or brokerage — paying an applicable interest rate to do so, which can vary and should be considered as a part of overall trading costs — and making trades with it. It’s similar to using a credit card for investing, in some ways.

Given that margin concerns interest charges and additional costs, using it to trade or invest involves additional risks, particularly for inexperienced investors.

Leveraged ETFs

ETFs, or exchange-traded funds, can also have leverage baked into them. Leveraged ETFs are tradable funds that allow investors to potentially increase their returns by using borrowed money to invest in an underlying index, rather than a single company or stock. Leveraged ETFs utilize derivatives to increase potential returns for investors.

Using Borrowed Money to Invest

While many investors utilize margin, it’s also possible to borrow money from an outside source (not your broker or brokerage) to invest with. This may be appealing to some investors who don’t have high enough account balances to meet the thresholds some brokerages have in place to trade on margin. For example, a platform may require an investor to have a minimum balance of $25,000 in their account before they’ll offer the investor margin trading.

If an investor doesn’t have that much, looking for an outside loan — a personal loan, a home equity loan, etc.— to meet that threshold may be an appealing option.

But, as mentioned when discussing margin, borrowing money to invest can rope in additional risk, and investors will need to consider the additional costs associated with borrowing funds, such as applicable interest rates. So, before doing so, it may be a good idea to consult a financial professional.

Leverage in Personal Finance

The use of leverage also exists in personal finances — not merely in investing. People often leverage their money to make big purchases like cars or homes with auto loans and mortgages.

A mortgage is a fairly simple example of how an individual may use leverage. They’re using their own money for a down payment to buy a home, and then taking out a loan to pay for the rest. The assumption is that the home will accrue value over time, growing their investment.

Leverage in Professional Trading

Professional traders tend to be more aggressive in trying to boost returns, and as such, many consider leverage an incredibly important and potent tool. While the degree to which professional traders use leverage varies from market to market (the stock market versus the foreign exchange market, for example), in general most pro traders are well-versed in leveraging their trades.

This may allow them to significantly increase returns on a given trade. And professionals are given more leeway with margin than the average investor, so they can potentially borrow significantly more than the typical person to trade. Of course, they also have to stomach the risks of doing so, too — because while it may increase returns on a given trade, there is always the possibility that it will not.

Leveraged Products

There are numerous financial products and instruments that investors can use to gain greater exposure to the market, all without increasing their investments, like leveraged ETFs.

Volatility and Leverage Ratio

A leverage ratio measures a company’s debt situation, and gives a snapshot of how much debt a company currently has versus its cash flows. Companies can use leverage to increase their profitability by expanding operations, etc., but it’s a gamble because that profitability may not materialize as planned.

Knowing the leverage ratio helps company leaders understand just how much debt they’ve taken on, and can even help investors understand whether a company is a potentially risky investment given its debt obligations.

The leverage ratio formula is: total debt / total equity.

Volatility is another element in the mix, and it can be added into the equation to figure out just how volatile an investment may be. That’s important, given how leverage can significantly amplify risk.

💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Leverage can help investors, buyers, corporations and others do more with less cash on hand in their accounts at a given time. But there are some important considerations to keep in mind when it comes to leverage. In terms of leveraged investing, it has the potential to magnify gains — but also to magnify losses, and increase total costs.

Utilizing leverage and margin as a part of an investing or trading strategy has its pros and cons. But investors should give the risks some serious consideration before getting in over their heads. It may be a good idea to speak with a financial professional accordingly.

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

FAQ

What is leverage in simple terms?

In simple terms, the concept of leverage means to do a lot with a little. As it relates to finance or investing, this can mean using a small amount of capital to make large or outsized trades or investments.

What is an example of leverage?

An example of leverage could be a mortgage, or home loan, in which a borrower makes a relatively small down payment and borrows money to purchase a home. They’re making a big financial move with a fraction of the funds necessary to facilitate the transaction, borrowing the remainder.

Why do people want leverage?

Leverage allows investors or traders to make bigger moves or take larger positions in the market with only a relatively small amount of capital. This could lead to larger returns — or larger losses.

Photo credit: iStock/StockRocket

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN1023160

Feb

2024

What Does It Mean If the Fed Is Hawkish or Dovish?

By Kim Franke-Folstad | Financial Independence, invest, Terminology | Comments Off

The Federal Reserve has two primary long-range goals: controlling inflation (hawkish) and maximizing employment (dovish). But these two aims can be at odds, and thus the Fed is often called hawkish or dovish.

While you may be thinking that monetary policy is for the birds, the Fed’s posturing, be it hawkish or dovish at any given time, is incredibly important for setting expectations and determining economic outcomes. That’s critical for investors to understand.

Key Points

• The Federal Reserve has two primary goals: controlling inflation (hawkish) and maximizing employment (dovish).

• Monetary policy decisions are made by the Federal Reserve, which can take a hawkish or dovish stance based on its goals.

• Hawkish monetary policy focuses on low inflation and may involve raising interest rates, while dovish policy prioritizes low unemployment and may involve lowering rates.

• The Federal Open Market Committee (FOMC), consisting of 12 members, is responsible for deciding monetary policy.

• Hawkish and dovish policies can impact savers, spenders, and investors through changes in interest rates and economic outcomes.

Who Decides Monetary Policy?

The Federal Reserve, the central bank of the United States, decides monetary policy. And, as mentioned, it can take different postures in achieving its goals. In fact, the Fed is striving to balance what can seem like opposing scenarios. For example:

• A monetary hawk is someone for whom keeping inflation low is the top concern. So if the Federal Reserve seems to be embracing a hawkish monetary policy, it might be because it’s considering raising interest rates to control pricing and fight inflation.

• A dove is someone who prioritizes other issues — especially low unemployment over low inflation. If the Fed seems to tilt toward a dovish monetary policy, it could signify that it plans to keep rates where they are — at least for the time being — because growth and employment are doing fine. Or it may plan to lower rates to stimulate the economy and add jobs.

It’s important to note that the Federal Reserve’s decisions on monetary policy aren’t left to just one person.

People often blame the sitting president or the chairman of the Federal Reserve if they don’t like the way interest rates are going — whether that’s up or down. But the Fed’s direction is determined by a group of central bankers, not by the Fed chair alone.

The 12 members of the Federal Open Market Committee (FOMC), who typically meet eight times a year to review economic conditions and vote on the federal funds rate, are responsible for deciding the country’s monetary policy. And they may have varying opinions about what the economy needs. So you might hear that the Fed is hawkish or dovish, or you may hear that an individual policymaker — or policy influencer — is a hawk while another is a dove.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Why Would the Fed Take a Hawkish Stance?

fed hawkish stance

When fiscal policy advisors in the government or banking industry are described as favoring a hawkish or “contractionary” monetary policy, it’s usually because they want to tighten the money supply to protect the economy from inflation and promote price stability.

If the price of goods and services rises due to inflation, consumers can lose their purchasing power. A moderate inflation rate is considered healthy for the economy. It encourages people to spend or invest their money today, rather than sock it away in a low-interest savings account where it could slowly lose value. The FOMC has determined that an inflation rate of around 2% is optimal for employment and price stability.

If inflation rises above that level for a prolonged period of time, the Fed may decide to pump the brakes to control inflation and keep the U.S. economy on track.

The Fed has several tools for controlling inflation, including raising its federal funds rate and discount rate, selling government bonds, and increasing the reserve requirements for banks. When access to money gets more expensive, consumers and businesses typically borrow less and save more, economic activity slows, and inflation stays at a more comfortable level.

Why Would the Fed Take a Dovish Stance?

A dovish or expansionary monetary policy is the opposite of hawkish monetary policy.

If the Fed is worried about the economy’s growth, it may decide to give it a boost by lowering interest rates, purchasing government securities by central banks, and lowering the reserve requirements for banks. Or, if it thinks employment and growth are on track, it might keep interest rates the same.

With lower interest rates, businesses can borrow more money to expand and potentially hire more workers or raise wages. And when consumers are in a low-interest rate environment created by a dovish monetary policy, they may be more likely to borrow money for big-ticket items like cars, homes, home improvements, and vacations. That increased consumption can also create more jobs. And doves tend to prefer low unemployment over low inflation.

Is It Possible to Be Both Hawkish and Dovish?

Yes. Some economists (and FOMC members) don’t take a completely hawkish or dovish attitude toward monetary policy. They are sometimes referred to as neutral or “centrists,” because they don’t appear to prioritize one economic goal over another. Fed Chair Jerome Powell, for example, has been called a hawk, a dove, a “cautious hawk,” a “cautious dove,” neutral, and centrist in various media reports.

And the media frequently pondered where Powell’s predecessor, U.S. Treasury Secretary Janet Yellen, stood on the hawk-dove continuum.

The current (as of 2023) FOMC includes members who have been identified as hawkish, dovish, and neutral. That mix of viewpoints can make it difficult to guess the group’s next move — so anxious investors are keeping a close eye out for clues as to what could happen next.

How Do Hawkish vs Dovish Policies Affect Savers, Spenders, and Investors?

Interest rates frequently rise and fall as the economy cycles through periods of growth and stagnation, and those fluctuations impact everyone. Whether you’re a saver, spender, or investor — or, like most people, all three — you can expect those rate changes to eventually impact your bottom line.

For Savers

Savings account rates are loosely connected to the interest rates the Fed sets, so you might not see a difference right away if there’s a cut or a hike.

When the Fed lowers the federal funds rate, however, financial institutions may move to protect their profits by lowering the interest paid on high-yield savings accounts, money market accounts, and certificates of deposit (CDs). That can be frustrating, and it may be tempting to give up on saving or move money to riskier investments. But specialists generally recommend keeping an emergency fund with at least three to six months’ worth of living expenses stashed in a low-risk account that’s easy to access and isn’t tied to the markets.

Savers may want to check out the more competitive rates offered by online accounts. Because online-only financial institutions have a lower overhead, they typically out-yield brick-and-mortar banks’ savings accounts, regardless of what the Fed is doing with its rates.

For Spenders

An increase or decrease in the federal funds rate can indirectly affect the prime rate banks offer their most credit-worthy customers. And it is often used as a reference rate, or base rate, for other financial products, including car loans, mortgages, home equity lines of credit, personal loans, and credit cards.

If interest rates go down, and borrowing gets cheaper, it can encourage consumers to go out and make those purchases — both big and small — that they’ve been wanting to make.

If those interest rates go up, on the other hand, consumers tend to be deterred from borrowing and spending. They might decide to wait for rates to drop before financing a house, a car, or an expensive purchase like an appliance or home renovation.

Impulse spending also can be affected. Spenders might choose to save their money instead — especially if the interest rate goes up on CDs, money market accounts, and other savings vehicles. Or consumers may focus on paying down credit card debt and other loans to avoid paying high interest on big balances, especially if those obligations carry a variable interest rate.

For Investors

There are no guarantees as to how any investment will react to changes in interest rates made by the Fed. Some assets (like bonds) can be more directly impacted than others. But nearly every type of investment you might have could be affected.

One way to reduce your risk exposure is to create a diversified portfolio, with a mix of assets — from stocks and bonds to real estate and commodities, and so on — that won’t necessarily react in the same way to changes in the interest rate (or other economic factors). If your investments all trend up or down together, your portfolio isn’t properly diversified.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Takeaway

The Federal Reserve has two primary goals: overseeing U.S. monetary policy in order to stabilize prices and control inflation — a stance that’s considered hawkish or contractionary — and maximizing employment, which is considered dovish. While these two aims can seem at odds, the Fed has been striving to take a mostly dovish or neutral stance in recent years.

A recent bout of inflation, however, forced the Fed to change its stance in 2022 and raise interest rates. It’ll likely change its stance again when inflation cools. It’s a never-ending game of posturing, all with the goal of maintaining low unemployment and stable prices.

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

Photo credit: iStock/drnadig