Everything You Need to Know About Taxes on Investment Income

Everything You Need to Know About Taxes on Investment Income

There are several ways investment income is taxed: You may be familiar with capital gains taxes — the taxes imposed when one sells an asset that has gained value — but it’s important to also understand the tax implications of dividends, interest, retirement account withdrawals, and more.

In some cases, for certain types of accounts, taxes are deferred until the money is withdrawn, but in general, tax rules apply to most investments in one way or another.

Being well aware of all the tax liabilities your investments hold can minimize headaches and help you avoid a surprise bill from the IRS. Being tax savvy can also help you plan ahead for different income streams in retirement, or for your estate.

Key Points

•   Investment income is taxed through various forms including capital gains, dividends, and interest.

•   Capital gains tax applies when assets are sold for a profit, with rates depending on the holding period.

•   Dividends received from stocks are taxed either at ordinary income rates or qualified rates.

•   Interest income from investments like bonds and savings accounts is taxed at ordinary income rates.

•   The Net Investment Income Tax adds a 3.8% tax on investment income for high earners.

Types of Investment Income Tax

There are several types of investment income that can be taxed. These include:

•   Dividends

•   Capital Gains

•   Interest Income

•   Net Investment Income Tax (NIIT)

Taking a deeper look at each category can help you assess whether — and what — you may owe.

Tax on Dividends

Dividends are distributions that are sometimes paid to investors who hold a certain type of dividend-paying stock. Dividends are generally paid in cash, out of profits and earnings from a corporation.

•   Most dividends are considered ordinary (or non-qualified) dividends by default, and these payouts are taxed at the investor’s income tax rate.

•   Others, called qualified dividends because they meet certain IRS criteria, are typically taxed at a lower capital gains rate (more on that in the next section).

Generally, an investor should expect to receive form 1099-DIV from the corporation that paid them dividends, if the dividends amounted to more than $10 in a given tax year.

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More About Capital Gains Tax

Capital gains are the profit an investor sees when an investment they hold gains value when they sell it. Capital gains taxes are the taxes levied on the net gain between purchase price and sell price.

For example, if you buy 100 shares of stock at $10 ($1,000 total) and the stock increases to $12 ($1,200), if you sell the stock and realize the $200 gain, you would owe taxes on that stock’s gain.

There are two types of capital gains taxes: Long-term capital gains and short-term capital gains. Short-term capital gains apply to investments held less than a year, and are taxed as ordinary income; long-term capital gains are held for longer than a year and are taxed at the capital-gains rate.

For 2023 and 2024, the long-term capital gains tax rates are typically no higher than 15% for most individuals. Some individuals may qualify for a 0% tax rate on capital gain — but only if their taxable income for the 2023 tax year is $89,250 or less (married filing jointly), or $44,625 or less for single filers and those who are married filing separately.

For the 2024 tax year, individuals may qualify for a 0% tax rate on long-term capital gains if their taxable income is $94,050 or less for those married and filing jointly, and $47,025 or less for single filers and those who are married and filing separately.

The opposite of capital gains are capital losses — when an asset loses value between purchase and sale. Sometimes, investors use losses as a way to offset tax on capital gains, a strategy known as tax-loss harvesting.

Recommended: Is Automated Tax-Loss Harvesting a Good Idea?

Capital losses can also be carried forward to future years, which is another strategy that can help lower an overall capital gains tax.

Capital gains and capital losses only become taxable once an investor has actually sold an asset. Until you actually trigger a sale, any movement in your portfolio is called unrealized gains and losses. Seeing unrealized gains in your portfolio may lead you to question when the right time is to sell, and what tax implications that sale might have. Talking through scenarios with a tax advisor may help spotlight potential avenues to mitigate tax burdens.

Taxable Interest Income

Interest income on investments is taxable at an investor’s ordinary income level. This may be money generated as interest in brokerage accounts, or interest from assets such as CDs, bonds, Treasuries, and savings accounts.

One exception are investments in municipal (muni) bonds, which are exempted from federal taxes and may be exempt from state taxes if they are issued within the state you reside.

Interest income (including interest from your bank accounts) is reported on form 1099-INT from the IRS.

Tax-exempt accounts, such as a Roth IRA or 529 plan, and tax-deferred accounts, such as a 401(k) or traditional IRA, are not subject to interest taxes.

Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT), also sometimes referred to as the Medicare tax, is a 3.8% flat tax rate on investment income for taxpayers whose modified adjusted gross income (MAGI) is above a certain level — $200,000 for single filers; $250,000 for filers filing jointly. Per the IRS, this tax applies to investment income including, but not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

For taxpayers with a MAGI above the required thresholds, the tax is paid on the lesser of the taxpayer’s net investment income or the amount the taxpayer’s MAGI exceeds the MAGI threshold.

For example, if a taxpayer makes $150,000 in wages and earns $100,000 in investment income, including income from rental properties, their MAGI would be $250,000. This is $50,000 above the threshold, which means they would owe NIIT on $50,000. To calculate the exact amount the taxpayer would owe, one would take 3.8% of $50,000, or $1,900.

💡 Quick Tip: How long should you hold onto your investments? It can make a difference with your taxes. Profits from securities that you sell after a year or more are taxed at a lower capital gains rate. Learn more about investment taxes.

Tax-Efficient Investing

One way to mitigate the effects of investment income is to create a set of tax efficient investing strategies. These are strategies that may minimize the tax hit that you may experience from investments and may help you build your wealth. These strategies can include:

•   Diversifying investments to include investments in both tax-deferred and tax-exempt accounts. An example of a tax-deferred account is a 401(k); an example of a tax-exempt account is a Roth IRA. Investing in both these vehicles may be a strategy for long-term growth as well as a way to ensure that you have taxable and non-taxable income in retirement.

   Remember that accounts like traditional, SEP, and SIMPLE IRAs, as well as 401(k) plans and some other employer-sponsored accounts, are tax-deferred — meaning that you don’t pay taxes on your contributions the year you make them, but you almost always owe taxes whenever you withdraw these funds.

•   Exploring tax-efficient investments. Some examples are municipal bonds, exchange-traded funds (ETFs), Treasury bonds, and stocks that don’t pay dividends.

•   Considering tax implications of investment decisions. When selling assets, it can be helpful to keep taxes in mind. Some investors may choose to work with a tax professional to help offset taxes in the case of major capital gains or to assess different strategies that may have a lower tax hit.

The Takeaway

Investment gains, interest, dividends — almost any money you make from securities you sell — may be subject to tax. But the tax rules for different types of investment income vary, and you also need to consider the type of account the investments are in.

Underreporting or ignoring investment income can lead to tax headaches and may result in you underpaying your tax bill. That’s why it’s a good idea to keep track of your investment income, and be mindful of any profits, dividends, and interest that may need to be reported even if you didn’t sell any assets over the course of the year.

Some investors may find it helpful to work with a tax professional, who may help them see the full scope of their liabilities and become aware of potential investment strategies that might help them minimize their tax burden, especially in retirement. A tax professional should also be aware of any specific state tax rules regarding investment taxes.

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

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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What Are Venture Capital Firms?

Venture Capital: What Is It and How Does It Work?

Venture capital is a type of financing that’s usually provided by wealthy individuals or investment banks. Venture capital often funds startups or other small businesses, and is a form of alternative investment – for those with the means.

Venture capital doesn’t gain much attention among the public, but it’s behind many of the brands most of us engage with daily. Any consumer who logs on to Facebook or listens to their favorite song on Spotify is engaging with a company that once received financial funding from a venture capital firm.

Key Points

•   Venture capital is a form of private equity financing provided by high-net-worth investors and financial institutions to startups and small businesses with high growth potential.

•   This type of investment often includes not just monetary support but also technical assistance and managerial expertise.

•   Venture capital firms play a crucial role by connecting investors with high-potential companies, especially in environments where traditional banking support is limited.

•   The funding process involves multiple stages, including seed, early, and late stages, each catering to different development phases of a company.

•   Despite the high risks associated with venture capital investment, the potential for substantial returns makes it an attractive option for qualified investors.

What Is Venture Capital?

As noted, venture capital (VC) is a form of private equity financing typically provided by high-net-worth investors, investment banks, and other financial institutions. This type of funding is focused on startups and small businesses that demonstrate potential for significant long-term growth. In that sense, it’s a form of alternative investment.

VC can be monetary, but can also come in the form of technical assistance or managerial expertise. It is a great way to support businesses just starting out, offering them the potential to expand and succeed. In return, venture capitalists are offered ownership stakes in the company, creating a win-win partnership with the potential for both parties to benefit.

Venture capital (or VC, as it’s often called) is a huge force in the business funding market.

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What Is a Venture Capital Firm?

A venture capital firm is a company that looks for both interested investors and potential companies in which to invest. Venture capital can be critically important to startup firms, as traditional banks may be risk-averse in providing new business funding, given the relative high level of risk in picking winners in a highly competitive market environment.

The concept of venture capital firms dates back to the 1940’s, when a handful of fledgling private equity groups funded emerging companies. The VC sector accelerated in the 1970’s, in tandem with the dynamic growth of the US technology sector, and as government public policy made it easier for venture capital firms to develop and begin funding new businesses.

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What’s the Difference Between Venture Capitalists and Angel Investors?

Venture capitalists provide funding to startup enterprises on behalf of a risk capital firm, utilizing external funds. On the other hand, angel investors are affluent individuals. often referred to as “lone wolves,” who invest their own capital in entrepreneurial ventures.

Recommended: A Closer Look at Angel Investors and How to Find Them

How Does Venture Capital Work?

Venture capital starts with money — and lots of it.

A venture capital company will open a fund and start looking for qualified investors, otherwise known as limited partners. These partners, often banks, corporations or investment funds, agree to buy into the fund and invest in young companies with profit potential. In exchange for the funding, venture capital firms will give the limited partners minority equity in the company (i.e., below 50%), with the amount dependent upon how much money the partners have invested with the firm.

Once a financial commitment is obtained from enough limited partners, the venture capital firm sets out to identify promising companies. Typically, a VC funding campaign is thorough, with the venture capital firm taking a sharp look at the company’s business model, executive team, revenue history, product or service offered, and its long-term growth potential.

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What Are the Stages of VC Funding?

If there’s mutual interest, the VC firm will likely offer the target company funding at different tiers, as follows:

Seed Stage

Seed stage money is usually offered to early-stage businesses with a limited amount of funding on the table.

The company, which needs cash to grow, can use the seed-stage venture capital funding for myriad uses, including research and development, product testing and development, or even to create a concrete business plan. In return, the venture capital company will likely require a stake in the company in the form of convertible notes, preferred stock options, or private equity. Funding amounts tend to vary widely.

Early Stage

With early-stage funding, VC firms will pour more cash into a company, typically once that company has a solid product or service in the pipeline and ready to roll.

VC firms usually fund early-stage companies in letter tiers, starting with Series A, then moving on to Series B, Series C, and Series D. The average early-stage funding amount also varies by company.

Late Stage

With late-stage funding, VC firms focus on more mature businesses that have a track record for growth and revenues, but need a big cash infusion to get to the next level. The funding level at the late stage is also rolled out in lettered tiers.

After the late-stage funding is complete, expectations are typically high that the company will flourish. That hopefully leads to a profitable acquisition or an initial public offering (IPO), where the company issues stocks, goes public, and lands on a stock market exchange.

While the time frame for exiting a company varies from VC firm to VC firm, generally the goal is to turn a significant profit via an IPO or acquisition and exit the funding position in a four-to-six year time frame.

Can I Invest in Venture Capital Funds?

The average investor may find it difficult to get involved in venture capital investing, as a requirement is that investors meet certain criteria – they must be an accredited investor, which means they have a high annual income and a high net worth (more than $1 million).

However, investors can invest in stocks that are involved in venture capital, or they can look at specific types of funds that open up venture capital to average investors. That can include interval funds, which are a type of alternative investment that may give investors exposure to off-market capital – they don’t trade on the secondary market, and as such, may be tricky to track down and add to your portfolio.

It may be a good idea to speak with a financial advisor or professional to get a sense of what other potential options may be open to you for investing in venture capital, too.

What Are the Risks Associated with Venture Capital Investing?

Venture capital investing can be particularly attractive because of the big potential rewards – but those are paired with significant risks, too.

As for those risks, venture capital entails significant market risk, as it involves investing in small businesses and startups that have a high chance of failure. Further, there’s operational risk (that those startups won’t be able to perform as hoped) and financial risks that are associated with small businesses, too. For investors, there’s also liquidity risks, as it can be difficult to get your money back or out once it’s been deployed.

But again, the rewards may make up for those risks for some investors. There’s high return potential if you back a successful startup, and being an early-stage investor can also open up personal and professional connections in the company and a specific industry. That, too, could lead to further investment opportunities.

Are VC Investments Regulated?

Venture capital and private equity are regulated by the SEC, and venture investments, specifically, are generally subject to many of the same investment regulations as other types of investments. For instance, there are reporting requirements that may be involved, “know-your-customer” (KYC) regulations, and rules regarding the Bank Secrecy Act – concerning fraud and money laundering issues – that venture firms need to abide by.

Are Venture Capital Firms Focused on Technology?

Many venture capital firms are focused on the tech sector, but not all. Over the past decade or two, technology has been a high-growth industry, which has, in turn, attracted a lot of investor attention, including VC attention. But venture capital firms can invest in just about anything, and just about anywhere.

In recent years, the number of VC investments and the proceeds have fallen as economic conditions have grown tighter, with higher interest rates and more risk aversion among investors and businesses. But the lion’s share of VC investments are still concentrated in the tech sector, along with sectors such as industrials, health care, financials, and more.

The Takeaway

Venture capital firms use money from qualified investors like banks, corporations, or investment funds to invest in promising startups or small businesses, with the goal of turning a profit within four to six years.

When the process goes according to plan, a venture capital deal can work out well for both the VC firm and the company receiving the funding. Start-up businesses gain the benefit of cash and experience while the VC firm gets a crack at a major financial return on its investment.

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Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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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Solo 401(k) vs SEP IRA: Key Differences and Considerations

Solo 401(k) vs SEP IRA: An In-Depth Comparison for Self-Employed Retirement Planning

Self-employment has its perks, but an employer-sponsored retirement plan isn’t one of them. Opening a solo 401(k) or a Simplified Employee Pension Individual Retirement Account (SEP IRA) allows the self-employed to save for retirement while enjoying some tax advantages.

So, which is better for you? The answer can depend largely on whether your business has employees or operates as a sole proprietorship and which plan yields more benefits, in terms of contribution limits and tax breaks.

Weighing the features of a solo 401(k) vs. SEP IRA can make it easier to decide which one is more suited to your retirement savings needs.

Key Points

•   Solo 401(k) allows tax-deductible contributions, employer contributions, employee contributions, and offers the option for Roth contributions and catch-up contributions.

•   SEP IRA allows tax-deductible contributions, employer contributions, but does not allow employee contributions, Roth contributions, catch-up contributions, or loans.

•   Withdrawals from traditional solo 401(k) plans and SEP IRAs are taxed in retirement.

•   Solo 401(k) plans allow loans, while SEP IRAs do not.

•   Solo 401(k) plans offer more flexibility and options compared to SEP IRAs.

Understanding the Basics

A solo 401(k) is similar to a traditional 401(k), in terms of annual contribution limits and tax treatment. A SEP IRA follows the same tax rules as traditional IRAs. SEP IRAs, however, typically allow a higher annual contribution limit than a regular IRA.

What Is a Solo 401(k)?

A solo 401(k) covers a business owner who has no employees or employs only their spouse. Simply, a Solo 401(k) allows you to save money for retirement from your self-employment or business income on a tax-advantaged basis.

These plans follow the same IRS rules and requirements as any other 401(k). There are specific solo 401(k) contribution limits to follow, along with rules regarding withdrawals and taxation. Regulations also govern when you can take a loan from a solo 401(k) plan.

A number of online brokerages offer solo 401(k) plans for self-employed individuals, including those who freelance or perform gig work. You can open a retirement account online and start investing, no employer other than yourself needed.

If you use a solo 401(k) to save for retirement, you’ll also need to follow some reporting requirements. Generally, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if it has $250,000 or more in assets at the end of the year.

What Is a SEP IRA?

A SEP IRA is another option to consider if you’re looking for retirement plans for the self-employed. This tax-advantaged plan is available to any size business, including sole proprietorships with no employees. SEP IRAs work much like traditional IRAs, with regard to the tax treatment of withdrawals. They do, however, allow you to contribute more money toward retirement each year above the standard traditional IRA contribution limit. That means you could enjoy a bigger tax break when it’s time to deduct contributions.

If you have employees, you can make retirement plan contributions to a SEP IRA on their behalf. SEP IRA contribution limits are, for the most part, the same for both employers and employees. If you’re interested in a SEP, you can set up an IRA for yourself or for yourself and your employees through an online brokerage.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

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Diving Deeper: Pros and Cons of Each Plan

As you debate between a solo 401(k) vs. a SEP IRA as ways to build wealth for retirement, it’s helpful to learn more about how these plans work, including their benefits and drawbacks.

Advantages of Solo 401(k)s

In terms of differences, there are some things that set solo 401(k) plans apart from SEP IRAs.

With a solo 401(k), you can choose a traditional or Roth. You can deduct your contributions in the year you make them with a traditional solo 401(k), but you’ll pay taxes on your distributions in retirement. With a Roth solo 401(k) you pay taxes on your contributions in the year you make them, and in retirement, your distributions are tax free. You can choose the plan that gives you the best tax advantage.

Another benefit of a solo 401(k) is that those age 50 and older can make catch-up contributions to this plan. In addition, you may be able to take a loan from a solo 401(k) if the plan permits it.

Advantages of SEP IRAs

One of the benefits of a SEP IRA is that contributions are tax deductible and you can make them at any time until your taxes are due in mid-April of the following year.

The plan is also easy to set up and maintain.

If you have employees, you can establish a SEP IRA for yourself as well as your eligible employees. You can then make retirement plan contributions to a SEP IRA on your employees’ behalf. (All contributions to a SEP are made by the employer only, though employees own their accounts.)

SEP IRA contribution limits are, for the most part, the same for both employers and employees. This means that you need to make the same percentage of contribution for each employee that you make for yourself. That means if you contribute 15% of your compensation for yourself, you must contribute 15% of each employee’s compensation (subject to contribution limits).

A SEP IRA also offers flexibility. You don’t have to contribute to it every year.

However, under SEP IRA rules, no catch-up contributions are allowed. There’s no Roth option with a SEP IRA either.

Eligibility and Contribution Limits

Here’s what you need to know about who is eligible for a SEP IRA vs. a Solo 401(k), along with the contribution limits for both plans for 2023.

Who Qualifies for a Solo 401(k) or SEP IRA?

Self-employed individuals and business owners with no employees (aside from their spouse) can open and contribute to a solo 401(k). There are no income restrictions on these plans.

SEP IRAs are available to self-employed individuals or business owners with employees. A SEP IRA might be best for those with just a few employees because IRS rules dictate that if you have one of these plans, you must contribute to a SEP IRA on behalf of your eligible employees (to be eligible, the employees must be 21 or older, they must have worked for you for three of the past five years, and they must have earned at least $750 in the tax year).

Plus, the amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

Contribution Comparison

With a solo 401(k), there are rules regarding contributions, including contribution limits. For 2023, you can contribute up to $66,000, plus an additional catch-up contribution of $7,500 for those age 50 and older. In 2024, you can contribute up to $69,000, plus an extra catch-up contribution of $7,500 for those age 50 and older.

For the purposes of a solo 401(k) you play two roles — employer and employee. As an employee, you can contribute the lesser of 100% of your compensation or up to $22,500 in 2023 and up to $23,000 in 2024. If you’re 50 or older, you can contribute the $7,500 catch-up contribution in 2023 and 2024 as well. As an employer, you can make an additional contribution of 25% of your compensation (up to $330,000 of compensation in 2023 and $345,000 in 2024) or net self-employment income.

The contribution limits for a SEP IRA are the lesser of 25% of your compensation or $66,000 in 2023 and $69,000 in 2024. As mentioned earlier, there are no catch-up contributions with this plan.

And remember, per the IRS, if you have a SEP IRA, you must contribute to the plan on behalf of your eligible employees. The amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

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Key Differences That Could Influence Your Decision

When you’re deciding between a solo 401(k) vs. a SEP IRA, consider the differences between the two plans carefully. These differences include:

Roth Options and Tax Benefits

With a solo 401(k), you can choose between a traditional and Roth solo 401(k), depending on which option’s tax benefits make the most sense for you. If you expect to be in a higher tax bracket when you retire, a Roth may be more advantageous since you can pay taxes on your contributions upfront and get distributions tax-free in retirement.

On the other hand, if you anticipate being in a lower tax bracket at retirement, a traditional solo 401(k) that lets you take deductions on your contributions now and pay tax on distributions in retirement could be your best option.

Loan Options and Investment Flexibility

You may also be able to take a loan from a solo 401(k) if your plan permits it. Solo 401(k) loans follow the same rules as traditional 401(k) loans.

If you need to take money from a SEP IRA before age 59 ½, however, you may pay an early withdrawal penalty and owe income tax on the withdrawal.

Both solo 401(k)s and SEP IRA offer more investment options than workplace 401(k)s. So you can choose the investment options that best suit your needs.

The Impact of Having Employees

Whether you have employees or not will help determine which type of plan is best for you.

A solo 401(k) is designed for business owners with no employees except for a spouse.

A SEP IRA is for those who are self-employed or small business owners. A SEP IRA may be best for those who have just a few employees since, as discussed above, you must contribute to a SEP IRA on behalf of all eligible employees and you must contribute the same percentage of compensation as you contribute for yourself.

The Financial Implications for Your Business

The plan you choose, solo 401(k) vs. SEP IRA, does have financial and tax implications that you’ll want to consider carefully. Here’s a quick comparison of the two plans.

Solo 401(k) vs SEP IRA at a Glance

Both solo 401(k) plans and SEP IRAs make it possible to save for retirement as a self-employed person or business owner when you don’t have access to an employer’s 401(k). And both can potentially offer a tax break if you’re able to deduct contributions each year.

Here’s a rundown of the main differences between a 401(k) vs. SEP IRA.

Solo 401(k)

SEP IRA

Tax-Deductible Contributions Yes, for traditional solo 401(k) plans Yes
Employer Contributions Allowed Yes Yes
Employee Contributions Allowed Yes No
Withdrawals Taxed in Retirement Yes, for traditional solo 401(k) plans Yes
Roth Contributions Allowed Yes No
Catch-Up Contributions Allowed Yes No
Loans Allowed Yes No

How These Plans Affect Your Bottom Line

Both solo 401(k)s and SEP IRAs are tax-advantaged accounts that can help you save for retirement. With a SEP IRA, contributions are tax deductible, including contributions made on employees’ behalf, which offers a tax advantage. Solo 401(k)s give you the option of choosing a traditional or Roth option so that you can pay tax on your contributions upfront and not in retirement (traditional), or defer them until you retire (Roth).

Making the Choice Between SEP IRA and Solo 401(k): Which Is Right for You?

An important part of planning for your retirement is understanding your long-term goals. Whether you choose to open a solo 401(k) or make SEP IRA contributions can depend on how your business is structured, how much you want to save for retirement, and what kind of tax advantages you hope to enjoy along the way.

When to Choose a Solo 401(k)

If you’re self-employed and have no employees (or if your only employee is your spouse), you may want to consider a solo 401(k). A solo 401(k) could allow you to save more for retirement on a tax-advantaged basis compared to a SEP IRA. A solo 401(k) allows catch-up contributions if you are 50 or older, and you can also take loans from a solo 401(k).

Just be aware that a solo 401(k) can be more work to set up and maintain than a SEP IRA.

When to Choose a SEP IRA

If you’re looking for a plan that’s easy to set up and maintain, a SEP IRA may be right for you. And if you have a few employees, a SEP IRA can be used to cover them as well as your spouse. However, you will need to cover the same percentage of contribution for your employees as you do for yourself.

Remember that a SEP IRA does not allow catch-up contributions, nor can you take loans from it.

Step-by-Step Guide to Opening Your Account

You can typically set up a SEP IRA with any financial institution that offers other retirement plans, including an online bank or brokerage. The institution you choose will guide you through the set-up process and it’s generally quick and easy.

Once you establish and fund your account, you can choose the investment options that best suit your needs and those of any eligible employees you may have. You will need to set up an account for each of these employees.

To open a Solo 401(k), you’ll need an Employee Identification Number (EIN). You can get an EIN through the IRS website. Once you have an EIN, you can choose the financial institution you want to work with, typically a brokerage or online brokerage. Next, you’ll fill out the necessary paperwork, and once the account is open you’ll fund it. You can do this through direct deposit or a check. Then you can set up your contributions.

Additional Considerations for Retirement Planning

Besides choosing a SEP IRA or a solo 401(k), there are a few other factors to consider when planning for retirement. They include:

Rollover Process

At some point, you may want to roll over whichever retirement plan you choose — or roll assets from another retirement plan into your current plan. A SEP IRA allows for either option. You can generally roll a SEP IRA into another IRA or other qualified plan, although there may be some restrictions depending on the type of plan it is. You can also roll assets from another retirement plan you have into your SEP.

A solo 401(k) can also be set up to allow rollovers. You can roll other retirement accounts, including a traditional 401(k) or a SEP IRA, into your solo 401(k). You can also roll a solo 401(k) into a traditional 401(k), as long as that plan allows rollovers.

Can You have Both a SEP IRA and a Solo 401(k)?

It is possible to have both a SEP IRA and a solo 401(k). However, how much you can contribute to them depends on certain factors, including how your SEP was set up. In general, when you contribute to both plans at the same time, there is a limit to how much you can contribute. Generally, your total contributions to both are aggregated and cannot exceed more than $66,000 in 2023 and $69,000 in 2024.

Preparing for Retirement Beyond Plans

Choosing retirement plans is just one important step in laying the groundwork for your future. You should also figure out at what age you can retire, how much money you’ll need for retirement, and the typical retirement expenses you should be ready for.

Working on building your retirement savings is an important goal. In addition to opening and contributing to retirement plans, other smart strategies include creating a budget and sticking to it, paying down any debt you have, and simplifying your lifestyle and cutting unnecessary spending. You may even want to consider getting a side hustle to bring in extra income.

The Takeaway

Saving for retirement is something that you can’t afford to put off. And the sooner you start, the better so that your money has time to grow. Whether you choose a solo 401(k), SEP IRA, or another savings plan, it’s important to take the first step toward building retirement wealth.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.


Photo credit: iStock/1001Love

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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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How to Achieve Financial Freedom

Ever dream of leaving your job to pursue a project you’ve always been passionate about, like starting your own business? Or going back to school without taking out student loans? What about the option to retire at age 50 instead of 65 without having to worry about money?

Any of these opportunities could happen if you’re able to achieve financial freedom — having the money and resources to afford the lifestyle you want.

Intrigued by the idea of being financially free? Read on to find out what financial freedom means and how it works, plus 12 ways to help make it a reality.

Key Points

•   Financial freedom means having enough income, savings, or investments to afford the lifestyle you want without financial stress.

•   Strategies to achieve financial freedom include budgeting, reducing debt, setting up an emergency fund, seeking higher wages, and exploring new income streams.

•   Opening a high-yield savings account, contributing to a 401(k), and considering other investments are important steps towards financial freedom.

•   Staying informed about financial issues, reducing expenses, and living within your means are key to achieving and maintaining financial freedom.

•   Avoiding lifestyle creep and making smart financial decisions can help you reach your financial goals and live the life you desire.

What Is Financial Freedom?

Financial freedom is being in a financial position that allows you to afford the lifestyle you want. It’s typically achieved by having enough income, savings, or investments so you can live comfortably without the constant stress of having to earn a certain amount of money.

For instance, you might attain financial freedom by saving and investing in such a way that allows you to build wealth, or by growing your income so you’re able to save more for the future. Eventually, you may become financially independent and live off your savings and investments.

There are a number of different ways to work toward financial freedom so that you can stop living paycheck-to-paycheck, get out of debt, save and invest, and prepare for retirement.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.


*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.

12 Ways to Help You Reach Financial Freedom

The following strategies can help start you on the path to financial freedom.

1. Determine Your Needs

A good first step toward financial freedom is figuring out what kind of lifestyle you want to have once you reach financial independence, and how much it will cost you to sustain it. Think about what will make you happy in your post-work life and then create a budget to help you get there.

As a bonus, living on — and sticking to — a budget now will allow you to meet your current expenses, pay your bills, and save for the future.

2. Reduce Debt

Debt can make it very hard, if not impossible, to become financially free. Debt not only reduces your overall net worth by the amount you’ve got in loans or lines of outstanding credit, but it increases your monthly expenses.

To pay off debt, you may want to focus on the avalanche method, which prioritizes the payment of high-interest debt like credit cards.

You might also try to see if you can get a lower interest rate on some of your debts. For instance, with credit card debt, it may be possible to lower your interest rate by calling your credit card company and negotiating better terms.

And be sure to pay all your other bills on time, including loan payments, to avoid going into even more debt.

3. Set Up an Emergency Fund

Having an emergency fund in place to cover at least three to six months’ worth of expenses when something unexpected happens can help prevent you from taking on more debt.

With an emergency fund, if you lose your job, or your car breaks down and needs expensive repairs, you’ll have the funds on hand to cover it, rather than having to put it on your credit card. That emergency cushion is a type of financial freedom in itself.

4. Seek Higher Wages

If you’re not earning enough to cover your bills, you aren’t going to be able to save enough to retire early and pursue your passions. For many people, figuring out how to make more money in order to increase savings is another crucial step in the journey toward financial freedom.

There are different ways to increase your income. First, think about ways to get paid more for the job that you’re already doing.

For instance, ask for a raise at work, or have a conversation with your manager about establishing a path toward a higher salary. Earning more now can help you save more for your future needs.

5. Consider a Side Gig

Another way to increase your earnings is to take on a side hustle outside of your full-time job. For instance, you could do pet-sitting or tutoring on evenings and weekends to generate supplemental income. You could then save or invest the extra money.

6. Explore New Income Streams

You can get creative and brainstorm opportunities to create new sources of income. One idea: Any property you own, including real estate, cars, and tools, might potentially serve as money-making assets. You may sell these items, or explore opportunities to rent them out.

7. Open a High-Yield Savings Account

A savings account gives you a designated place to put your money so that it can grow as you keep adding to it. And a high-yield savings account typically allows you to earn a lot more in interest than a traditional savings account. As of February 2024, some high-yield savings accounts offered annual percentage yields (APYs) of 4.5% compared to the 0.46% APY of traditional savings accounts.

You can even automate your savings by having your paychecks directly deposited into your account. That makes it even easier to save.

8. Make Contributions to Your 401(k)

At work, contribute to your 401(k) if such a plan is offered. Contribute the maximum amount to this tax-deferred retirement account if you can — in 2024, that’s $23,000, or $30,500 if you’re age 50 or older — to help build a nest egg.

If you can’t max out your 401(k), contribute at least enough to get matching funds (if applicable) from your employer. This is essentially “free” or extra money that will go toward your retirement.

9. Consider Other Investments

After contributing to your workplace retirement plan, you may want to consider opening another investment retirement account, such as an IRA, or an investment account like a brokerage account. You might choose to explore different investment asset classes, such as mutual funds, stocks, bonds, or rate of return, stocks are notoriously volatile. If you’re thinking about investing, be sure to learn about the stock market first, and do research to find what kind of investments might work best for you.

It’s also extremely important to determine your risk tolerance to help settle on an investment strategy and asset type you’re comfortable with. For instance, you may be more comfortable investing in mutual funds rather than individual stocks.

10. Stay Up to Date on Financial Issues

Practicing “financial literacy,” which means being knowledgeable about financial topics, can help you manage your money. Keep tabs on financial news and changes in the tax laws or requirements that might pertain to you. Reassess your investment portfolio at regular intervals to make sure it continues to be in line with your goals and priorities. And go over your budget and expenses frequently to check that they accurately reflect your current situation.

11. Reduce Your Expenses

Maximize your savings by minimizing your costs. Analyze what you spend monthly and look for things to trim or cut. Bring lunch from home instead of buying it out during the work week. Cancel the gym membership you’re not using. Eat out less frequently. These things won’t impact your quality of life, and they will help you save more.

12. Live Within Your Means

And finally, avoid lifestyle creep: Don’t buy expensive things you don’t need. A luxury car or fancy vacation may sound appealing, but these “wants” can set back your savings goals and lead to new debt if you have to finance them. Borrowing money makes sense when it advances your goals, but if it doesn’t, skip it and save your money instead.

The Takeaway

Financial freedom can allow you to live the kind of life you’ve always wanted without the stress of having to earn a certain amount of money. To help achieve financial freedom, follow strategies like making a budget, paying your bills on time, paying down debt, living within your means, and contributing to your 401(k).

Saving and investing your money are other ways to potentially help build wealth over time. Do your research to find the best types of accounts and investments for your current situation and future aspirations.

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


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

FAQ

How can I get financial freedom before 30?

Achieving financial freedom before age 30 is an ambitious goal that will require discipline and careful planning. To pursue it, you may want to follow strategies of the FIRE (Financial Independence Retire Early) movement. This approach entails setting a budget, living below your means in order to save a significant portion of your money, and establishing multiple streams of income, such as having a second job in addition to your primary job.

What is the most important first step towards achieving financial freedom?

The most important first step to achieving financial freedom is to figure out what kind of lifestyle you want to have and how much money you will need to sustain it. Once you know what your goals are, you can create a budget to help reach them.

What’s the difference between financial freedom and financial independence?

Financial freedom is being able to live the kind of lifestyle you want without financial strain or stress. Financial independence is having enough income, savings, or investments, to cover your needs without having to rely on a job or paycheck.


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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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How to Know When to Sell a Stock

Knowing when to sell a stock is a complex enterprise, even for the most sophisticated investors. In a perfect world you’d sell a stock when you’d made a profit and wanted to capture the gains. But even that scenario raises questions of your target amount (have you made enough?) and timing (would it be better to hold the stock longer?).

Similar questions arise when the stock is losing value. Is it a true loser or is the company just underperforming? Should you sell and cut your losses — or would you be locking in losses just before a rebound?

Adding to the above there are questions of personal need, opportunity costs, tax considerations, and more that investors must keep in mind as they decide when to sell their stocks. Fortunately there is a fairly finite list of considerations, as well as different order types like market sell, stop-loss, stop-limit, and others that give investors some control over the decision of when to sell a stock.

Key Points

•   Knowing when to sell a stock is complex, considering factors like profit, timing, personal needs, taxes, and investment style.

•   Factors to consider when deciding to sell a stock include goals, company fundamentals, economic trends, volatility, and taxes.

•   Some investors rarely sell stocks, while others sell more frequently based on their investment goals and desired returns.

•   Reasons to sell a stock include loss of faith in the company, opportunity cost, high valuation, personal reasons, and tax considerations.

•   Reasons to hold onto a stock include potential growth, belief in long-term performance, economic forecasts, and avoiding emotional decision-making.

When Is a Good Time to Sell Stocks?

There are a few ways to approach the question of when to sell stocks. Risk, style, investing goals, and how much time you have are all critical variables. Perhaps the most relevant answer is “when you need to,” as that criterion alone requires specific calculations that depend on your overall plan, the type of investor you are, your risk tolerance, market conditions (i.e. stock market fluctuations), and of course the stock itself.

When deciding when to sell a stock, you might weigh:

•   How the stock fits into your goals

•   Company fundamentals

•   Economic trends

•   Your hoped-for profit

•   Volatility and/or losses

•   Taxes

In addition, whether you sell your stocks will boil down to your investment style — are you day trading or employing a buy-and-hold strategy? — how much risk you’re willing to assume, and your overall time horizon and other goals (i.e. tax considerations).

Many investors who are simply investing for retirement may rarely sell stocks. After all, over time the average stock market return has been about 10% (not taking inflation into account).

And while there are no guarantees, in general the old saying that “time in the market is better than timing the market” tends to hold true.

Others, who are looking to turn a profit on a weekly or monthly basis, may sell much more frequently. It’s more a matter of looking at what you’re hoping to generate from your investments, and how fast you’re hoping to generate it.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.


*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.

8 Reasons You Might Sell a Stock

There are several reasons that could prompt you to think about selling your stock.

1. When You No Longer Believe in the Company

When you bought shares of a certain company, you presumably did so because you believed that the company was promising and you wanted to invest in its stock, and/or that the share price was reasonable. But if you start to believe that the underlying fundamentals of the business are in decline, it might be time to sell the stock and reinvest those funds in a company with a better outlook.

There are many reasons you may lose faith in a stock’s underlying fundamentals. For example, the company may have declining profit margins or decreasing revenue, increased competition, new leadership taking the company in a different direction, or legal problems.

Part of the task here is differentiating what might be a short-term blip in the stock price due to a bad quarter or even a bad year, and what feels like it could be the start of a more sustained change within the business.

Recommended: Tips on Evaluating Stock Performance

2. Due to Opportunity Cost

Every investment decision you make comes at the cost of some other decision you can’t make. When you invest your money in one thing, the tradeoff is that you cannot invest that money in something else.

So, for each stock you buy you are doing so at the cost of not buying some other asset.

Given the performance of the stock you’re currently holding, it might be worth evaluating it to see if there could be a more profitable way to deploy those same dollars. Exchange-traded funds (ETFs) that provide easy access to other asset classes — like bonds or commodities — have also created competition to simply holding company stocks.

This is easier said than done, however, because we are often emotionally invested in the stocks that we’ve already purchased. Nonetheless, it’s important to include an evaluation of opportunity costs as part of your overall decision about when to sell a stock.

3. Because the Valuation Is High

Often, stocks are evaluated in terms of their price-to-earnings (P/E) ratios. The market price per share is on the top of the equation, and on the bottom of the equation is the earnings per share. This ratio allows investors to make an apples-to-apples comparison of the relative earnings at different companies.

The higher the number, the higher the price as compared to the earnings of that company. A P/E ratio alone might not tell you whether a stock is going to do well or poorly in the future. But when paired with other data, such as historical ratios for that same stock, or the earnings multiples of their competitors or a benchmark market, like the S&P 500 Index, it may be an indicator that the stock is currently overpriced and that it may be time to sell the stock.

A P/E ratio could increase due to one of two reasons: Because the price has increased without a corresponding increase in the expected earnings for that company, or because the earnings expectations have been lowered without a corresponding decrease in the price of the stock. Either of these scenarios tells us that there could be trouble for the stock on the horizon, though nothing’s a sure bet.

4. For Personal Reasons

It’s also possible that you may need to sell a stock for personal reasons, such as:

•   You need the cash (owing to a job loss, emergency, etc.)

•   You no longer believe in the mission of the company

•   Your risk tolerance has changed and you’re moving away from equities

•   You want to try another strategy other than active investing, for example automated investing, where your investment choices are largely guided by the input of a sophisticated algorithm.

Since personal reasons may also have emotions attached to them, it’s wise to balance out your personal feelings with an evaluation of other reasons to sell the stock.

5. Because of Taxes

Employing a tax-efficient investing strategy shouldn’t outweigh making decisions based on other priorities. Still, it’s important to take taxes into account when making decisions about which stocks to keep and which stocks to sell.

When purchased outside of a retirement account, gains on the sale of an investment are subject to capital gains tax rules. It may be possible to offset some capital gains with capital losses, which are triggered by selling stocks at a loss.

This strategy is known as tax-loss harvesting.

For example, if an investor sells a security for a $25,000 gain, and sells another security at a $10,000 loss, the loss could be applied so that the investor would only see a capital gain of $15,000 ($25,000 – $10,000).

If you’re considering this as part of a self-directed trading strategy, you may want to consult a tax professional, as the rules can be complicated in terms of short-term vs. long-term gains, replacing a stock you sell with one that’s substantially different, as well as how to carryover losses.

•   Understanding how a tax loss can be carried forward

The difference between capital gains and capital losses is called a net capital gain. If losses exceed gains, that’s a net capital loss.

•   If an investor has an overall net capital loss for the year, they can deduct up to $3,000 against other kinds of income — including their salary and interest income.

•   Any excess net capital loss can be carried over to subsequent years (known as a tax-loss carryover or carry forward) and deducted against capital gains and up to $3,000 of other kinds of income — depending on the circumstances.

•   For those who are married filing separately, the annual net capital loss deduction limit is only $1,500.

Recommended: Unrealized Gains and Losses Explained

6. To Rebalance a Portfolio

If you’re looking to make some tweaks to your investment strategy for one reason or another, you may want to sell some stocks as a part of a strategy to rebalance your portfolio. The reason for rebalancing is to keep your portfolio anchored on the asset allocation that you prefer.

As some investments rise and fall over time, your asset allocation naturally shifts. Some asset classes might exceed the percentage you originally chose, based on your risk tolerance.

Investors are encouraged to rebalance their portfolios regularly — but not too often — as market and economic conditions can and do change. An annual rebalancing strategy is common.

This typically involves taking a look at your desired asset allocation, thinking about your risk tolerance (and how it may have changed), and deciding how you may want to change the different asset classes that comprise your portfolio, if at all.

7. Because You Made a Mistake

You may want to sell stocks if you simply made a mistake. Perhaps the company or sector is not a priority for you, or not a good bet in your eye. Maybe a stock is too risk or volatile. Maybe you bought into a company because it was in the news, or friends were raving about it (a.k.a. FOMO trading).

All of these conditions can happen to investors, and knowing when to sell a stock sometimes means owning up to a mistake.

Recommended: Guide to Financially Preparing for Retirement

8. You’ve Met Your Goals

In the best case, of course, you might want to sell a stock once you’ve met your goals. Perhaps the price is right, or you’re ready to retire, or you’ve crossed some other threshold where you no longer need to hold onto the stock.
In that case, the decision to sell will likely come down to timing and taxes. Or, if you’re preparing to retire, you may also want to consider whether you’re holding the stock in a tax-deferred account or not.

💡 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.

4 Reasons You Might Not Want to Sell a Stock

In addition to weighing possible reasons for selling a stock, there are counter arguments for holding onto your shares.

1. Because a Stock Went Up

As mentioned, most stock prices will go up at some point, and you may want to hold onto your stock in the hope that it will continue to grow. That’s a valid reason, especially if you’re thinking long term.

Just bear in mind that there are no guarantees, and past performance is no guarantee of future results, as the industry mantra goes. So even if a stock’s price is rising, you may want to have a few other reasons for not selling the stock.

2. Because a Stock Went Down

Just as a stock may go up, the price will also go down at some point. At those moments it may be tempting to cut your losses before you accrue even bigger ones — especially if you believe that the stock’s value will continue to drop.

But, again, it may be helpful to think longer term rather than what’s happening today. The stock price might rebound, and you may only lock your losses in by selling. Analyzing the company fundamentals as well as the economic climate can help you make this decision.

Recommended: What Happens If a Stock Goes to Zero?

3. Because of an Economic Forecast

Economic forecasting uses a range of economic indicators — such as interest rates, consumer confidence, the rate of inflation, unemployment rates — to predict or anticipate economic growth. But economic forecasting is not an exact science, and it’s wise to consider other factors.

In addition, economic forecasts come and go. This is especially the case in the short term. Therefore, changes in stock prices may have as much to do with investor sentiment or outside forces (such as political or economic events or announcements) as they do with the health of the underlying company.

4. Because Everyone Else Is Selling

Understanding the impact of other investors on your own decisions is equally important. While you may think you’re capable of remaining calm in the face of media hype and headlines, as numerous behavioral finance studies have shown it’s surprisingly easy to get caught up in what other investors are doing.

If you find yourself questioning your own investment plan or your own logic, think twice to make sure the impulse to sell isn’t brought on by strong emotions or by the opinions of others.

Selling a Stock 101

These are the basic steps required to cash out and sell stocks:

1.    Whether by phone or via an online brokerage account platform, let your broker know which of your stock holdings you’d like to sell.

2.    Specify which order type (more on that below). This can determine at what price level your stock is sold.

3.    Fill out any other information your broker requires in order to initiate the sale. For instance, some accounts may have a “time in force” option, or when the order expires. Keep in mind, the trade date is different from the settlement date. It usually takes a couple of days for a trade to settle.

4.    Click “Sell” or “Submit Order.”

Different Sell Order Types

There are several different stock order types that can be useful in different situations.

Market Sell Order

This order type involves selling a stock immediately. The order will be executed without the investor specifying any price level to sell at. It’s important for investors to know however that because share prices are constantly shifting, they might not get the exact price they see on their stock-data feed. There may also be a difference due to delayed versus real-time stock quotes to consider as well.

Generally speaking, the advantage of using a market order is that your trade is likely to be executed quickly. That’s especially true for bigger or more popular stocks, which tend to be more liquid. But again: the biggest potential drawback is that you might not get the exact price you thought you were due to market volatility.

Limit Sell Order

Limit orders involve selling a stock at a specific price. For example, if you’re buying stocks, you can specify a price that you’re willing to pay — the trade will then be executed at that price, or lower.

If you’re selling stocks, the inverse is true — your stock will be sold at the specified price, or higher.

The upside to using limit orders is that they give investors some semblance of control by allowing them to name their price. The investor can then walk away, and let their brokerage handle the execution for them.

The downsides, though, include the fact that the trade may never execute if the specified price isn’t reached, and that using limit orders may take some practice and experience to properly execute.

Stop-Loss Sell Order

A stop-loss order is a level at which an automatic sell order kicks in. In other words, an investor specifies a price at which the broker should start selling, should the stock hit that level. This can also be referred to as a “sell-stop order.” But note that there are other types of stop-loss orders, such as buy-stop orders, and trailing stop-loss orders.

Stop-loss orders can be useful in that they can prevent investors from losing more than they’re comfortable with, or that they can afford to lose. They, as the name implies, are a very useful tool to prevent losses. But depending on overall market conditions, they can also work against an investor. If there’s a short-term drop in share prices, for instance, it’s possible that an investor could miss out on gains if share prices rebound in the medium or long term.

Stop-Limit Sell Order

A stop-limit sell order is an order that’s executed if your stock’s price drops to a certain price, but only if the shares can be sold at or above the limit price specified. They are, in effect, a sort of bridge between stop and limit orders. These types of orders can help investors dodge the risk that a stop order executed at an unexpected price, giving them more control over the price at which a sell order will execute.

Different Ways to Sell Stocks

There are desktop platforms and mobile phone apps that offer brokerage services. These are likely the most common platforms individual or retail investors use to currently buy or sell stocks. However, another option is through a financial advisor.

Financial advisors are professionals who have been entrusted to handle certain financial responsibilities and you can send them a stock sale order to execute. They can do a number of other things for you, too, including proffer advice and help you formulate an investing strategy. But there are costs to using financial advisors, so it may not be worth it, depending on how involved in the markets you are.

The Takeaway

There are times when it may be a good idea to sell your stocks, and others when it’s not. For example, if you’ve lost faith in a company, need a cash infusion, or are doing some portfolio rebalancing, it may be a good time to sell shares of a certain stock.

On the other hand, if you’re unnerved that your stock’s price fell after a bad earnings report, you may want to hold on and let things play out. It’s difficult, and is a true test of your risk tolerance. But over time, it should become easier and more natural as you gain experience as an investor.

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


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

FAQ

How can you tell when to sell a stock?

There’s no exact science, and determining whether it’s a good time to sell a stock will come down to the individual investor’s strategy, risk tolerance, and time horizon. However, you can also keep an eye on a stock’s valuation, consider your opportunity costs, and weigh other factors in order to make the decision.

Should you ever sell stocks when they’re down?

You can sell stocks when they lose value for any number of reasons, but it’s wise to make sure you’re doing so as a part of an overall investing strategy, e.g. tax-loss harvesting, and not simply because you’re making an emotional or impulsive decision based on current market conditions.

How much profit do I need before I sell a stock?

There’s no exact science or answer to determine how much of a return you’d need to see before you sell a stock. That’s up to the specific investor, and there may be times when selling a stock at a loss is preferable for tax purposes or other reasons.


Photo credit: iStock/FotoDuets

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