Mar
23
2023
Performance Charts

5 Bullish Indicators for a Stock

By | Growing Wealth, invest, Investing | Comments Off on 5 Bullish Indicators for a Stock

When it comes to figuring out when to buy a stock, there are two main schools of thought: fundamental analysis and technical analysis. Fundamental analysis involves all the material aspects of a company: its sales, revenue, profits, and so on — the day-to-day details of operations. Technical analysis, on the other hand, involves only looking at charts. A stock chart is a visual representation of the price movement of a particular security over time.

Using different mathematical technical indicators, it’s thought that traders can sometimes anticipate future price movements based on previous patterns. And fundamentals need not be at odds with technical analysis — the most successful investors often use both methods.

Below, we’ll look at five common bullish indicators used in technical analysis and discuss how they can be used to determine a reasonable time to buy a stock or ETF.

Technical Indicators of a Bull Trend

Before getting into the specifics of technical analysis, it’s important to understand the difference between bullish indicators and bullish patterns.

Indicators represent information generated by a computer based on a dataset. That dataset comes from the price action of a security over a set time period (one hour, one day, one month, six months, one year, etc.).

Patterns, on the other hand, are identified by human eyes when charts take on a certain shape (head and shoulders, cup and handle, etc.). Some traders even program their own computer scripts to try to identify patterns automatically, leading to a kind of hybrid of patterns and indicators.

All of these methods are broadly referred to as technical analysis — the process of using charts to try to predict which way a security will move next. A pattern or indicator that tends to appear when prices are getting ready to move higher is referred to as a bullish one.

Here are five examples of bullish indicators and bullish patterns.

RSI Weakness

The Relative Strength Index (RSI) is a technical indicator that gives investors an idea of how overvalued or undervalued a security might be. This momentum indicator gauges the significance of recent price changes. The higher the RSI, the more likely the stock is overvalued, and the lower the RSI, the more likely the stock is undervalued.

The RSI is represented by a simple line graph that goes up and down between two extremes (also known as an oscillator). When the line dips below a certain level, it can indicate potential undervaluation. Meanwhile, when it rises above a certain level, it can indicate — you guessed it — overvaluation.

RSI values range from 0 to 100 but rarely fall below 20 or go higher than 80. Between 30 and 60 is a shaded area sometimes referred to as the “paint” area. An RSI within this range can still provide some insight, but it is not as reliable an indicator as an RSI that has extended to more extreme levels.

An RSI of 50 is considered neutral, whereas an RSI of 30 and lower is considered undervalued (bullish). Meanwhile, an RSI of 70 and above is considered overvalued (bearish). In other words, the lower the RSI, the more of a bullish indicator it could be.

Cup-and-Handle Pattern

The cup-and-handle pattern is among the most bullish patterns known to stock traders. There are two main parts, as the name implies: a cup and a handle.

The cup is formed when a stock moves downward, then sideways, and then upward. Once the cup has been formed, the handle can be formed by a period of slow decline. This kind of price action leads to a chart with one part resembling the bottom half of a circle (cup) followed by a slanted line at the top edge (handle).

The pattern has a long list of nuances. Many lengthy articles have been dedicated to the cup-and-handle pattern alone. Here are quick notes about identifying the pattern:

•   Ideally, the cup should be about 30% deep (having declined about 30% from its start to its lowest point).

•   The handle should form over a period of at least five days to several weeks.

•   Trading volume should surge when the handle finishes forming, at which point traders will often seek to enter into a position.

•   Conversely, an inverted cup and handle can be a sell signal. This pattern has the same shape, only it appears upside down, with the handle slanting up and the top half of a circle forming the cup.

Moving Average Golden Cross

Moving averages (MA) are another common technical indicator. A moving average is the mean of a stock’s daily closing price for a certain number of trading days. Moving averages smooth out the trend of a stock’s price and highlight any moves above or below the trend.

A moving average is denoted by a line that overlays on a price chart. While these averages don’t contain a whole lot of information in and of themselves, sometimes key averages interacting with one another can serve as major buy or sell signals.

The 50-day MA and the 200-day MA are of particular importance when they cross paths. Most of the time, the 200-day MA will be higher than the 50-day MA. But when the 50-day crosses above the 200-day, the move can be seen as a bullish indicator signifying a trend toward upward price movement.

This indicator is known as the “golden cross,” and it is regarded as relatively rare and reliable. Prices often, but not always, move up after a golden cross happens.

Golden crosses can occur with moving averages of time frames shorter than 50 or 200 days as well, but longer time frames carry more weight.

Bollinger Bands Width

Bollinger Bands combine a simple moving average with an additional metric — a measure of price extending one standard deviation above or below the average.

When Bollinger Bands get very close together, it often indicates that a trend change lies on the immediate horizon. That means the price might be likely to break out either higher or lower in the near future in most cases.

While this indicator is a little vaguer than the others, combining it with a few other bits of information can sometimes make it a bullish indicator.

For example, an investor might choose to look at Bollinger Bands alongside one of the other indicators mentioned here. If the RSI for a particular stock were at 40 at the same time that Bollinger Bands were close together, that might give an investor further assurance that an upward move could be on the horizon.

Piercing Pattern

The piercing pattern is simpler than most others. It marks the possibility of a short-term reversal from downward price action to upward price action based on only two days of trading.

The pattern occurs when the first day opens near its high point, closes near the low, and has an average or larger-than-average price range. Then the second day begins trading with a gap down, opening near the low and closing near the high. The close ought to form a candlestick covering at least half of the length of the first day’s red candlestick.

A piercing pattern rarely appears in perfect form. As with other patterns, the closer to perfection the setup looks, the more likely it is to be accurate. When bullish patterns like this one coincide with other bullish indicators, like a low reading on the RSI, the potential for price gains becomes strengthened.

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Other Technical Analysis Factors to Consider

It’s important to remember that technical indicators should be used together when possible. Looking at only one indicator may not always give as accurate a picture of which direction price action will head next.

Another concern is time frame. These indicators and patterns need to be looked at over a sufficient amount of time to prove effective — the longer the better, in general. Looking at price movements on a daily chart might lead to one impression, but zooming out and looking at six months or a year might result in a different (and often more accurate) assessment for the simple reason that there is more data included.

Finally, when thinking about bullish patterns and indicators, realize that most investors have access to the same public knowledge. When a bullish development occurs, millions of stock traders use technical analysis to try to identify the pattern at more or less the same time. This can lead the charts to become self-fulfilling, as everyone can buy at the same bullish point or sell at the same bearish point, regardless of anything else happening.

The Takeaway

Technical analysis, which involves only looking at stock charts, is one of the two main schools of thought when it comes to figuring out when to buy a stock. Investors using this form of analysis may look at both bullish indicators and bullish patterns to determine when it appears that prices are preparing to move higher. There are a number of these patterns and indicators investors might look at — from RSI weakness to piercing pattern — though it’s generally best to use technical indicators together and also take time frame into consideration.

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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.
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Mar
23
2023
colorful bars

How to Calculate Return on Equity

By | Growing Wealth, invest, Investing | Comments Off on How to Calculate Return on Equity

A common way to invest money is by buying stocks. But with so many choices of stocks to consider, investors may find themselves comparing one option to another — yet still feeling uncertain about what’s the best decision.

So, what’s the best way to compare a variety of stock buying options? One commonly used method is a ratio called the return on equity, also known as the “return on net worth.” By knowing how to calculate return on equity, you’ll have a helpful metric to turn to when determining how stocks stack up.

The Return on Equity Formula

The formula for return on equity is a fairly straightforward calculation that can provide a key comparative metric to investors. Here it is:

Return on Equity = Net Income/Average Shareholder Equity

The ratio helps to determine how well a particular company is managing contributions from their stockholders. The higher the number, the more efficiently the company’s management is likely generating growth from the money invested.

Investors can then compare the result for one company to the ratio of another company, and so forth.

How to Use the ROE Formula

Calculating return on equity requires two pieces of information: net income and shareholder equity. Once this information is at hand, divide net income by the shareholder’s equity — and the result is the return on investment ratio.

So, how can you find those numbers?

Net income, also called “net earnings” or the company’s “bottom line,” is a figure that’s included on a company’s income statement, also called a P&L statement or profit and loss statement.

Publicly traded companies are legally required to distribute income statements in their annual financial reports to shareholders. Many companies may choose to also include financial statements on their websites and may otherwise distribute this information. So, when calculating return on investment, the net income figure can usually be found through one of these methods.

Reverse Engineering Net Income

Net income is calculated by taking the amount of a company’s sales and then subtracting what’s called the “cost of goods sold” from the figure.

Cost of goods sold, in turn, is calculated by determining the direct costs of making products, which includes the cost of materials used and direct labor costs. It does not include indirect costs, such as marketing.

Subtract the costs of goods sold from the sales total — and then also subtract operating expenses, administrative expenses, taxes, depreciation, and so forth. What’s left is a company’s net income.

Reverse Engineering Stockholder Equity

This can also be called “shareholder equity.” Information can be found on a company’s balance sheet, and the formula for shareholders’ equity is as follows: total assets minus total liabilities = SE. In other words, it’s what a company owns minus what it owes.

As another way to look at this, if all of a company’s assets (buildings, equipment, investments, and so forth) were liquidated into cash and all debts were paid off, what remained would be shareholder equity.

How to Use Return on Equity Ratios to Invest

Here’s an example of how you can make use of return on equity ratios when investing. If a company has $5 million in net income, with shareholder equity of $15 million, then return on equity can be calculated in this way: $5,000,000/$15,000,000 = 33.3%.

Using this figure as a benchmark, an investor can then compare the desirability of buying stocks from this company versus those available from another company.

When calculating the ROE ratio, an investor gains visibility into a moment in time. Investors may choose to do that before buying or selling shares — or they may track the performance of a stock over a period of time. Some investors like to see the return on equity calculation rise by 10% or more each year, as a reflection of the S&P performance.

In general, when ROE rises, it means the company is generating profit without needing as much capital — meaning without needing as much influx of cash. It demonstrates that the company is efficiently using the capital invested in the business by shareholders. When the ratio goes down, it is generally a sign of a problem.

This, however, is not universally true. There are times when return on equity artificially goes up. This can happen if a company buys back shares of its own stock or if the company has a significant amount of debt. So, although ROE is a key metric for investors to use when deciding if a particular stock is a worthwhile investment for them, it’s not a stand-alone metric.

Here are a few additional factors to consider. Because some industries as a whole typically have higher ROE ratios than others, comparisons between companies are more meaningful when done between two companies of the same industry.

Plus, in general, the more risks taken in investment choices, the higher the potential for return, as well as for loss. So, some investors with a higher tolerance for risk may choose to buy shares of stock in companies that don’t look as desirable if they have reason to believe that there is enough potential for significant financial rewards.

What Else to Consider with ROE

When buying shares of stock, an investor is buying ownership shares of the company. So, when the company does well, the stockholders typically benefit. When all goes south, the stockholders usually lose out.

This means that, when an investor knows a reasonable amount of information about the company and the industry it’s in, as well as its financial structure, better investment choices can typically be made. Other factors that influence the investor during the decision-making process include the economy, customer profiles of a business, and more.

To glean these types of insights, savvy investors often look at financial reports and figures, in addition to return on equity, when choosing how and where to invest.

Experienced investors will often take their time reviewing documents of companies that interest them, such as the financial reports that the Securities and Exchange Commission (SEC) requires public companies to file. These need to be filed quarterly, and they can provide insights into the companies’ financial performances.

Here is an overview of important information that can be found in the different types of financial documents:

•   Income statement: This document provides an overview of a company’s revenue (cash coming in), expenses of significance (cash going out), and the bottom line (the difference between what’s coming in and what’s going out). Consider what trends exist.

•   Balance sheet: Look at the company’s debt (how much they owe). Is the amount going up or down? In what ways? Consider what can be learned about the company’s financial performance from this review.

•   Cash flow statement: What did the company actually get paid in a particular quarter? This is different from what’s owed (accounts receivable) and instead focuses on when the cash arrives to the company. Does the company have steady cash flow?

Investors typically look at a company’s after-tax income (its “earnings”), which can be found in quarterly and annual financial statements. In addition to looking at the company’s current earnings, it can make sense to review its history to see how much earnings have fluctuated and whether there’s a pattern to these fluctuations. Overall, good earnings indicate a company is profitable and may be a good investment to consider.

Another figure to consider reviewing is a company’s operating margins (also known as its “return on sales”). This indicates how much a company actually makes for each dollar of its sales. This calculation involves taking the company’s operating profit and dividing it by net sales. Higher margins are typically better and may indicate good financial management.

Now, here are other financial ratios to consider, besides the return on equity ratio:

•   Price-to-earnings ratio: This allows investors to compare stock prices between companies offering shares. To calculate this ratio, take the market price of a share of stock and divide that number by the amount of earnings that a company is paying per share. This ratio allows investors to see how many years a company may need to generate enough value for a stock buy-back.

•   Price-to-sales ratio: This can be a good metric to use when reviewing a company that hasn’t made much of a profit yet — or one that’s made no profit at all, so far. To calculate this, take the value of the company’s outstanding stock in dollars and divide that number by the company’s revenue. The resulting figure, ideally, should be as close to one as possible. If the number is even lower, this is an outstanding sign.

•   Earnings per share: This metric helps investors to know how much money they might receive if the company liquidates. So, if this number is consistently going up, this may entice more people to buy shares because this at least suggests they’d get more for their investment dollars if liquidation happened.

Earnings per share can be calculated by taking the company’s net income and subtracting a certain type of dividends (preferred stock), and then taking that figure and dividing it by the number of outstanding common stock shares. Preferred stocks don’t have voting rights attached to them like common stocks do, but they receive a preferential status when earnings are paid out.

•   Debt-to-equity: Investors use this metric to try to determine the degree that a company is using debt to pay for its operations. To calculate this figure, take the company’s total liabilities and then divide that number by the total shareholder equity. A high ratio indicates that the company is borrowing to a significant degree.

•   Debt-to-asset ratio: Investors may decide to compare debts to assets of a company — and then compare the resulting ratio with other similar companies to determine how significant a debt load a company has. It may be wise to calculate this within the context of a particular industry.

What Is a Good Rate of Return?

First, consider that, when cash is kept under the mattress at home, the rate of return is zero percent. And, when factoring in inflation, this means the person is actually losing money over time. Keeping money in a checking account can amount to virtually the same thing.

There is no guaranteed return on investment in stocks. That’s because of variations in the market, varying degrees of risk taken by investors, and so forth. There are, however, historical precedents that indicate how stock ownership over the long haul can often allow the investor to weather economic fluctuations for an ultimately positive result. And, when looking at the average annual return on investments for stocks since 1926, that number has been 10%.

A topic mentioned in this post is risk tolerance. This is the amount of risk that a particular investor is comfortable taking — here’s a quiz to help investors determine their risk tolerances. By knowing your risk tolerance, you’ll have a better idea of what’s a “good” rate of return based on the level of risk you’re taking, knowing that higher risk can net higher returns.

Things to consider when determining how much risk to take include:

•   Financial factors: How much could a person afford to lose without it having a negative impact on their financial security? When people are young, they typically have much more time to recover from a big market loss, so they may decide it’s okay to be more aggressive. People closer to retirement age, though, may decide to be more protective of their assets. It’s important to review current financial obligations, from mortgage payments to college tuition, to make an informed decision, as well.

•   Emotional risk: Some people feel energized when taking risks while others feel stressed. A person’s emotional responses to risk taking can play a key role in their risk tolerance when investing.

The Takeaway

Even the most experienced investors can become frustrated when choosing which stocks to buy. By knowing how to calculate return on equity, investors can have a comparative metric to turn to that can help them evaluate and compare different companies.

To use return on equity effectively, however, you’ll need to know where to find the revenant numbers and what to look out for. Also remember the ROE isn’t the only metric to consider — you’ll also want to take into consideration information found in financial documents, other financial ratios, your own risks tolerance, and more.

And if you’re feeling overwhelmed, consider an online investing platform like SoFi’s to make your investing experience easier. SoFi members can benefit from personalized advice, access to SoFi events, and much more.

Take a step toward reaching your financial goals with SoFi Invest.

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.

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Mar
23
2023
Simple IRA vs. Traditional IRA

Is a SIMPLE IRA the Same as a Traditional IRA?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Is a SIMPLE IRA the Same as a Traditional IRA?

One of the most popular retirement accounts is an IRA, or Individual Retirement Account. IRAs allow individuals to put money aside over time to save up for retirement, with tax benefits similar to those of other retirement plans.

Two common IRAs are the SIMPLE IRA and the Traditional IRA, both of which have their own benefits, downsides, and rules around who can open an account. For investors trying to decide which IRA to open, it helps to know the differences between SIMPLE IRAs and Traditional IRAs.

SIMPLE IRA vs Traditional IRA: Side-by-Side Comparison

Although there are many similarities between the two accounts, there are some key differences. This chart details the key attributes of each plan:

SIMPLE IRA Traditional IRA
Offered by employers Yes No
Who it’s for Small-business owners and their employees Individuals
Eligibility Earn at least $5,000 per year Under 70 ½ years old and earned income in the past year
Tax deferred Yes Yes
Tax deductible contributions Yes, for employers and sole proprietors only Yes
Employer contribution Required No
Fee for early withdrawal 10% plus income tax, or 25% if money is withdrawn within two years of an employer making a deposit 10% plus income tax
Contribution limits $15,500 in 2023
$16,000 in 2024		 $6,500 in 2023
$7,000 in 2024
Catch-up contribution $3,500 additional per year for people 50 and over $1,000 additional per year for people 50 and over

SIMPLE IRAs Explained

The SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is set up to help small-business owners help both themselves and their employees save for retirement. It’s a retirement plan that small businesses with fewer than 100 employees can offer employees who earn at least $5,000 per year.

A SIMPLE IRA is similar to a Traditional IRA, in that a plan participant can make tax-deferred contributions to their account, so that it grows over time with compound interest. When the individual retires and begins withdrawing money, then they must pay income taxes on the funds.

With a SIMPLE IRA, both the employer and the employee contribute to the employee’s account. Employers are required to contribute in one of two ways: either by matching employee contributions up to 3% of their salary, or by contributing a flat rate of 2% of the employee’s salary, even if the employee doesn’t contribute. With the matching option, the employee must contribute money first.

There are yearly employee contribution limits to a SIMPLE IRA: in 2023, the annual limit is $15,500, with an additional $3,500 in catch-up contributions permitted for people over age 50. In 2024, the annual limit is $16,000, with an additional $3,500 in catch-up contributions permitted for people over age 50.

Benefits and Drawbacks of SIMPLE IRAs

It’s important to understand both the benefits and downsides of the SIMPLE IRA to make an informed decision about retirement plans.

SIMPLE IRA Benefits

There are several benefits — for both employers and employees — to choosing a SIMPLE IRA:

•   For employers, it’s easy to set up and manage, with online set-up available through most banks.

•   For employers, management costs are low compared to other retirement plans.

•   For employees, taxes on contributions are deferred until the money is withdrawn.

•   Employers can take tax deductions on contributions. Sole proprietors can deduct both salary and matching contributions.

•   For employees, there is an allowable catch-up contribution for those over 50.

•   For employers, the IRA plan providers send tax information to the IRS, so there is no need to do any reporting.

•   Employers and employees can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.

SIMPLE IRA Drawbacks

Although there are multiple benefits to a SIMPLE IRA, there are some downsides as well:

•   Employers must follow strict rules set by the IRS.

•   Other employer-sponsored retirement accounts have higher limits, such as the 401(k), which allows for $22,500 per year in 2023 and $23,000 in 2024. (Check out our IRA calculator to see what you can contribute to each type of IRA.)

•   If account holders withdraw money before they reach age 59 ½, they must pay a 10% fee and income taxes on the withdrawal. That penalty jumps to 25% if money is withdrawn within two years of an employer making a deposit.

•   There is no option for a Roth contribution to a SIMPLE IRA, which would allow account holders to contribute post-tax money and avoid paying taxes later.

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What Is a Traditional IRA?

The Traditional IRA is set up by an individual to contribute to their own retirement. Employers are not involved in Traditional IRAs in any way. The main requirements to open an IRA are that the account holder must have earned some income within the past year, and they must be younger than 70 ½ years old at the end of the year.

Pros and Cons of Traditional IRAs

When it comes to benefits and downsides, there’s not too much of a difference between Traditional vs. SIMPLE IRAs, given what an IRA is. That being said, there are a few that are unique to this type of plan.

Traditional IRA Pros

Some of the upsides of a Traditional IRA include:

•   It allows for catch-up contributions for those over age 50.

•   One can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.

•   Contributions are tax-deferred, so taxes aren’t paid until funds are withdrawn. If you’re hoping to pay taxes now instead of later, you might weigh a Traditional vs. Roth IRA.

Traditional IRA Cons

Meanwhile, downsides to a Traditional IRA include:

•   They have much lower contribution limits than a 401(k) or a SIMPLE IRA, at $6,500 in 2023 and $7,000 in 2024.

•   Penalties for early withdrawal are also the same: if you withdraw money before age 59 ½, you’ll pay a 10% fee plus income taxes on the withdrawal.

Is a SIMPLE IRA or Traditional IRA Right for You?

The SIMPLE IRA and Traditional IRA are both individual retirement accounts, but the SIMPLE is set up through one’s employer — typically a small business of 100 people or less. The Traditional IRA is set up by an individual. In other words, whether a SIMPLE IRA is an option for you will depend on if you have an employer that offers it.

There are many similarities in the attributes of the plans, if you’re choosing between a SIMPLE IRA vs. Traditional IRA. However, two major distinctions are that the SIMPLE IRA requires employer contributions (though not necessarily employee contributions) and allows for a higher amount of employee contributions per year.

Can I Have Both a SIMPLE IRA and a Traditional IRA?

Yes, it is possible for an individual to have both a SIMPLE IRA through their employer and also a Traditional IRA on their own — though they may not be able to deduct all of their Traditional IRA contributions. The IRS sets a cap on deductions per calendar year.

In 2023, single people with an AGI (adjusted gross income) of more than $73,000 are restricted to a partial deduction; those with AGI above $83,000 may not take a deduction at all. Married couples filing jointly with an AGI of $116,000 to $136,000 may take a partial deduction; those with AGI above $136,000 may not take a deduction at all.

In 2024, single people with an AGI (adjusted gross income) of more than $77,000 are restricted to a partial deduction; those with AGI above $87,000 may not take a deduction at all. Married couples filing jointly with an AGI of $123,000 to $143,000 may take a partial deduction; those with AGI above $143,000 may not take a deduction at all.

Can You Convert a SIMPLE IRA to a Traditional IRA?

If you’re hoping to convert a SIMPLE IRA to a Traditional IRA, you’re in luck — you can roll over a SIMPLE IRA into a Traditional IRA. However, you can’t roll over the funds from a SIMPLE IRA to a Traditional IRA within the first two years of opening a SIMPLE IRA. Otherwise, you’ll get hit with a 25% penalty in addition to the regular income tax you must pay on your withdrawal.

Once that two-year period is up, however, you can roll over the money from your SIMPLE IRA — even if you’re still working for that employer. Just note that you can only roll over money from a SIMPLE IRA one time within a 12-month period.

Can You Max Out a Traditional and SIMPLE IRA the Same Year?

While you cannot max out a SIMPLE IRA and another employer-sponsored retirement plan like a 401(k), you can max out both a Traditional IRA and a SIMPLE IRA.

The maximum contribution for a SIMPLE IRA in 2023 is $15,500 (plus $3,500 in catch-up contributions), while the maximum for a Traditional IRA is $6,500 (plus $1,000 in catch-up contributions). This means that you could contribute a total of $22,000 across both plans in a year — or $26,500 if you’re 50 or older.

The maximum contribution for a SIMPLE IRA in 2024 is $16,000 (plus $3,500 in catch-up contributions), while the maximum for a Traditional IRA is $7,000 (plus $1,000 in catch-up contributions). This means that you could contribute a total of $23,000 across both plans in a year — or $27,500 if you’re 50 or older.

Are SIMPLE IRAs Most Similar to 401(k) Plans?

There are a lot of similarities between SIMPLE IRAs and 401(k) plans given that they are both employer-sponsored retirement plans. However, while any employer with one or more employees can offer a 401(k), SIMPLE IRAs are reserved for employers with 100 or fewer employees. Additionally, contribution limits are lower with SIMPLE IRAs than with 401(k) plans.

Another key difference between the two is that while employers can opt whether or not to make contributions to employee 401(k), employer contributions are mandatory with SIMPLE IRAs. On the employer side, SIMPLE IRAs generally have fewer account fees and annual tax filing requirements.

Opening an IRA With SoFi

Understanding the differences between retirement accounts like the SIMPLE and Traditional IRA is one more step in creating a personalized retirement plan that works for you and your goals. While a SIMPLE IRA is only an option if your employer offers it, you’ll want to weigh the pros and cons of a SIMPLE IRA vs. Traditional IRA if both are on the table for you. As we’ve covered, the two types of IRAs share many similarities, but a SIMPLE IRA is not the same as a Traditional IRA.

If you’re looking to start saving for retirement now, or add to your investments for the future, SoFi Invest® online retirement accounts offer both Traditional and Roth IRAs that are simple to set up and manage. By opening an IRA with SoFi, you’ll gain access to a broad range of investment options, member services, and a robust suite of planning and investment tools.

Find out how to further your retirement savings goals with SoFi Invest.

FAQ

Do you pay taxes on SIMPLE IRA?

Yes, you will pay taxes on a SIMPLE IRA, but not until you withdraw your funds in retirement. You’ll generally have to pay income tax on any amount you withdraw from your SIMPLE IRA in retirement. However, if you make a withdrawal prior to age 59 ½, or if money is withdrawn within two years of an employer making a deposit, you’ll have to pay income taxes then, alongside an additional tax penalty.

Is a SIMPLE IRA better than a Traditional IRA?

When comparing a SIMPLE IRA vs. traditional IRA, it’s important to understand that each has its pros and cons. If your employer offers a SIMPLE IRA, they require employer contributions, and they have higher contributions. At the end of the day, though, both allow you to save for retirement through tax-deferred contributions.

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.

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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