Investing for Retirement: Guide to Emerging Markets

Guide to Investing in Emerging Markets

Investing for retirement often includes both stocks and bonds, and within your equity allocation, emerging market stocks can play an important role in diversifying your portfolio.

Emerging market investments include owning shares in companies from countries like China, India, Brazil, and South Africa, among others. There are pros and cons to owning emerging market investments, but these stocks are a significant part of the global market.

Why invest in emerging markets when building a retirement portfolio? While it’s true that they can be volatile investments, this niche can provide strong returns and diversification benefits when preparing for retirement.

Understanding Emerging Markets

Opening a retirement account and including emerging markets in your portfolio may be a successful investing strategy.

Emerging markets are economies that are in the middle between the developing and developed stages. Emerging markets risk can be high since these areas often see rapid growth and high volatility with booms and busts. Some of the most well-known and biggest countries weighted in the emerging markets index include China, Taiwan, India, Brazil, and Saudi Arabia.

Emerging market investments are generally seen as a higher-risk area of the global stock market. Volatility can spike during periods of political upheaval and when emerging market recessions strike.

As investors get older, risk must be managed through diversified investment plans. You should consider reducing emerging market exposure in your portfolio as your time horizon shortens and retirement nears.

Why Invest in Emerging Markets?

Emerging market investments have been popular for decades. It became easy to own a broad emerging market index fund within an investment portfolio in the early 2000s when exchange-traded funds (ETFs) took off. That’s also when this group of stocks started to outperform U.S. equities.

The decade of the 2000s featured strong outperformance from the high-risk, high-reward profile of emerging market investments. But volatility in these markets has also been a factor.

People like to invest in areas of the stock market that exhibit rapid growth potential along with having the potential for diversification. High economic growth rates, such as those in China and India, often attract investors seeking to benefit from stocks of those nations. Indeed, there can be periods like the 2000s when strong bull markets take place.

Moreover, owning high-growth areas within a tax-advantaged account can be a savvy retirement savings strategy. When choosing a retirement plan, it’s helpful to consider what assets to own in which account.

Can You Build a Retirement Portfolio With Emerging Markets?

Retirement and emerging markets can go together. Boosting retirement savings can be done through this group of securities. Also consider that emerging market bonds are a growing piece of the global fixed-income market.

In addition, owning emerging market investments in retirement accounts is easier than ever with low-cost ETFs and both active and passive mutual funds. Moreover, many 401(k) plans offer an emerging markets fund so you can have exposure through your workplace retirement account.

When thinking about emerging markets, you should put them in context. Emerging markets stocks represent just 11% of the global stock market. Emerging market bonds comprise roughly a quarter of the global bond market. Those are significant weights, and you can own both areas in your retirement portfolio through low-cost funds.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.


Pros of Investing in Emerging Markets

There are many pros and cons of investing in emerging markets. When you start saving for retirement, that can be a great time to own emerging market stocks since you have a long time horizon to weather volatility.

Growth Opportunity

Many people contend that higher economic growth in emerging market nations can translate into growth potential for their stock markets. What’s more, many U.S. companies have significant emerging markets exposure through their global sales. So, corporations see opportunities in this space, too.

Also consider that nearly 80% of the world’s population lives in emerging market countries, while just 11% of the global stock market is weighted to them. Investing for retirement should have at least some exposure to this area for risk-tolerant individuals.

Diversification Benefits

International investments can help offset the ebbs and flows of U.S. stocks through diversification. Consider that the domestic equity market is 61% of the global market. So if the U.S. goes into a bear market, foreign shares might outperform. Retirement investing should have a diversified approach.

Cons of Investing in Emerging Markets

Emerging markets can be volatile, and they expose investors to a host of risk factors. Political, economic, and currency risks can all hamper emerging market investments’ growth.

Due to the many risks, it’s common for retirement investors to tone down their stock allocation as they approach retirement. Reducing exposure to the emerging markets area also makes sense, but it should still be considered for your equity sleeve in retirement.

Recent Underperformance

Emerging market stocks have done poorly over the last decade, particularly compared to how well the domestic stock market performed. In 2022, Russian equities were the latest area to pressure the emerging markets index hard. That stock market was forced to close, and its stocks plummeted in other markets.

Correlations Might Be Changing

Some argue that emerging markets today have more correlation to other markets, so having exposure might simply expose someone to the risks and not the benefits.

Highly Volatile

Older investors might want to steer away from the boom-and-bust nature of emerging markets. The process of evolving from an emerging market to a developed market is usually fraught with risk. In some areas, political turmoil might cascade into a full-blown economic recession.

Emerging market fixed-income investors can also suffer when high-risk currency values fall during such periods of volatility. Back in 1998, the “Asian Contagion” was an emerging markets-led debacle that caused a big decline in markets across the globe.

Uncertainty in China

China is now the biggest weighting in many emerging market indexes, up to one-third in some funds. That can be a lot in just one country, particularly in one as uncertain as China, given its one-party controlled economy.

Start Investing for Retirement With SoFi

Building a retirement portfolio often includes owning many areas of the global stock market. Emerging market investments can play a pivotal role to ensure your allocation has higher growth potential, but you must be mindful of the risks.

SoFi offers all the retirement planning tools you need, including online resources and complimentary access to financial advisors for SoFi members. When you’re ready to start investing for retirement, it only takes a small amount to open a traditional or Roth IRA account. Using the secure SoFi app, you can invest your retirement portfolio in stocks, exchange-traded funds (ETFs), fractional shares, and more. Get started now!

FAQ

Is it worth investing in emerging markets?

Strong growth potential and diversification benefits are reasons to own emerging markets for your retirement portfolio. That said, emerging markets are a small part of the global stock market. A diversified retirement portfolio should include this slice of the market, but investors also must recognize the risks. There are periods during which emerging market investments can underperform the U.S. stock market.

What is the best emerging market to invest in?

When figuring out emerging markets, you might be curious which one is the best. It is hard to say there is one in particular. Emerging market risk can be high, so to help mitigate that, owning the entire basket can help ensure the benefits of diversification.

Should my entire retirement portfolio be in emerging markets?

Building a retirement portfolio with emerging markets is common but putting all your eggs in the emerging market basket might not be the wisest move. Young investors can perhaps own a larger weight in this volatile equity area, but older investors should think about winding down their emerging markets stock exposure as they near retirement.


Photo credit: iStock/Kateywhat

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A., or SoFi Lending Corp.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
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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Understanding a Retirement Gap Analysis

Understanding a Retirement Gap Analysis

A retirement gap analysis helps individuals identify a potential shortfall between how much they have saved and what they will need in retirement.

Tallying all accounts, projecting ahead, then comparing that amount to how much a fully funded retirement costs, given your unique circumstances, can help people bridge the financial gap between the present and retirement. It’s a great way to visualize how you are tracking towards your retirement goals.

Online resources are useful, and working with an experienced financial planner can help you see your retirement gap and then take steps to reduce it.

What Is a Retirement Analysis?

A retirement analysis is a report a financial advisor creates for individuals who want to know if they are on track for retirement. Saving for retirement is an important process for those who are looking forward to a secure future with a steady stream of income.

Knowing the difference between what you have saved versus what you will need in order to retire on time is valuable information. You can take extra steps to boost your savings rate once you have a retirement gap analysis and risk assessment performed; change your investing strategy; consider purchasing an annuity or other products, and more.

A retirement gap analysis considers a range of retirement assets to determine if you are on track for retirement. Your 401(k) through your employer, any individual retirement accounts (IRAs) you might own, annuities, individual taxable brokerage accounts, and even Social Security are common assets to tally in a retirement gap analysis. The sum of those assets is then compared to what you will need in the future, so that you can retire with confidence.

How Do You Conduct a Retirement Gap Analysis?

Conducting a retirement analysis can be done using online tools or by meeting with a financial advisor. It’s all about knowing when you can retire. Often, individuals will take action to improve their financial habits and retirement savings when they see what they must do.

What Goes Into a Retirement Gap Analysis?

For example, a retirement gap on a chart can be a powerful visual to inspire people to save more. Performing a retirement analysis requires careful input of all assets and some assumptions about future rates of return, as well as a person’s spending habits and goals in order to determine how long their savings and other assets may last.

Assets and liabilities are analyzed, and future cash flow is projected. Conducting a retirement analysis also includes estimating how long somebody might live. Longevity risk is a key consideration, and Social Security and other annuities can help reduce the risk of running out of money. There are many facets to performing a retirement gap analysis. Seeking out the help of an experienced fiduciary advisor can be a smart move so that you are confident in your retirement plan.

How Does Communication Come Into Play?

A critical factor of a retirement analysis is the communication aspect. This is where a financial planner can show their skills.

Simply seeing numbers on a spreadsheet might not cause people to change course on their journey to retirement. Communicating a retirement gap in the right context can drive home the message that saving more today will lead to a better tomorrow.

How Does a 401(k) Plan Factor Into the Analysis?

A high-level retirement gap analysis should be mixed in with detailed cash flow planning.

Your 401(k) plan is a major account that is assessed during a retirement analysis. An employer retirement account is a large part of many workers’ overall retirement plan. A 401(k) gap can be found by analyzing the value of a participant’s pre-tax and Roth accounts versus what they will need to retire.

What’s great about a 401(k) account is that it often features an employer matching contribution, which is almost like free money so long as you meet the plan’s matching contribution requirements. Many plans will match, say, 50% of the employee’s contribution up to 6%. For a $100,000 salary, that means $3,000 per year of employer contributions, in addition to $6,000 from the employee. That’s $9,000 per year.

A 401(k) account, among other retirement plans offered through work, is a major piece of someone’s retirement asset pie. It’s simple to increase contributions to it without noticing much of a difference in your paycheck. Moreover, the auto-enrollment and auto-escalation features are great tools to help more people save more for retirement so that their 401(k) gap shrinks over time. A 401(k) analysis can be helpful for workers young and old.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.


Retirement Gap Analysis Example

Let’s run through a retirement gap analysis example to better show the steps involved.

Retirement Gap Analysis, Step-by-Step

Rationale

Retirement Income Assessment: Summing all retirement savings accounts to find a portfolio value. Identifies any potential shortfall between required monthly income and total projected income between Social Security, retirement plans, and other accounts.
Review liabilities and future spending habits. No retirement gap analysis is complete without a thorough assessment of what you owe and current and future spending.
Analyze changes to an individual’s retirement date. Can make arriving at retirement easier if more time is allowed to increase saving.
Strategize about Social Security options. Delaying benefits until age 70 will increase total payout; might reduce longevity risk.
Outlining steps to take to shore up retirement income. Increasing a 401(k) contribution rate can help narrow the retirement gap. Reducing spending and increasing your savings rate are other actions.

How to Calculate Retirement Income

Knowing if your 401(k) is enough is important, but so too is a broader look at your assets and liabilities along with what income to expect in retirement. No retirement gap analysis is complete without it.

Calculating retirement income can be done using various online calculators, but you might want to sit down with a financial planner to map out what income you, personally, will need in retirement. Variables like your spending habits, inflation, discounted cash flow rates, and possible risks all must be considered.

You can also leverage the Social Security Administration’s Retirement Estimator calculator to find out what you should expect to receive when you decide to retire. While the output is just an estimate, it can go a long way toward bridging your retirement gap if you have a gauge of what income you will have in retirement.

Another way to calculate retirement income is to sum up your retirement assets, assume a contribution rate between now and retirement along with a rate of return, then take that asset base as an amount from which to draw income during retirement.

Many planners use the “4% rule”, which states that a retiree can withdraw up to 4% of their retirement account value each year without a high risk of running out of money. This is just a rule of thumb, however, and it might not work as well today as it did decades ago.

Investing for Retirement With SoFi

Identifying where you are on your retirement journey is an important part of financial planning. Doing a retirement gap analysis is an essential part of that process. As time passes, our lives and lifestyles, our goals, and often our physical health can change. All these factors can impact how much we’ll need to spend in the future.

By conducting a retirement gap analysis to identify any shortfalls in savings, it’s possible to make adjustments, and course-correct to get savings goals on track.

If you’re concerned about your retirement savings, you don’t need to wait. You can start investing today with SoFi by opening and funding an IRA online. SoFi offers traditional, Roth, and SEP IRA accounts that can provide tax-advantaged retirement savings. Establishing regular contributions to your 401(k) and a SoFi IRA can quickly get you in the habit of saving more for tomorrow.

Open an IRA Today

FAQ

What is a retirement gap?

A retirement gap is a difference in the amount you have saved for retirement versus how much you will need. A retirement gap analysis can be performed to help identify how much more you will need to save for retirement. Once you know the amount, you can then take steps to boost your savings and investment accounts so that you can retire on time.

How do I find out if I have a retirement account?

Many individuals have a 401(k) or another retirement plan through their employer. Check with your HR department to see if there is an account set up for you. You might also have retirement accounts established on your own through investment brokerage companies. Also consider that you can likely collect a monthly Social Security benefit in retirement. Be sure to check with the Social Security Administration.

Will my retirement account be enough for me?

This is a tough question, but an important one. Knowing how much you will need for retirement is crucial to developing a retirement savings strategy and living a confident retirement. It’s wise to meet with a financial advisor to develop a plan. You can also use online resources, tools, and calculators to help determine if your current portfolio is enough to fund your retirement.


Photo credit: iStock/MicroStockHub

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A., or SoFi Lending Corp.
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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Complete Guide to Financial Planning for Retirement

Retirement Planning: Guide to Financially Preparing for Retirement

Retirement planning might seem like a daunting task. There are many facets, including investments, cash flow planning, insurance, Social Security, taxes, and estate planning. Securing a successful retirement requires thoughtful planning and a step-by-step approach. It all starts by considering your goals and values and then making progress toward meeting them through a financial retirement plan.

Knowing when to start financial planning for retirement is important, but often today is the ideal time. Determining what age you want to call it quits from the nine-to-five grind and what your retirement lifestyle might look like are parts of retirement income planning, too.

Why Is Financial Planning for Retirement Important?

Financial planning for retirement is important because you want to genuinely enjoy your life after work. Comfort and peace of mind are vital. Different types of retirement plans can help you secure a successful retirement. A financial plan for retirement is an evolving document that details your goals and objectives. An investment policy statement includes your time horizon, taxes, liquidity needs, legal matters; and unique aspects of your life are often included.

Each person’s situation is different. That’s why it is critical to customize a retirement plan for each individual; a cookie-cutter approach is rarely the optimal solution. Often it takes working with a fiduciary advisor to build, maintain, and execute a financial retirement plan.

Can Investing Be Included in Your Financial Plan For Retiring?

Investing is a major component of retirement income planning. After choosing a retirement plan, you must go about investing to reach your goals. In general, younger people likely would take on more aggressive investment portfolios, as they have more time to endure inevitable market dips over the years. As you age, it’s common to reduce stock market exposure and increase allocations to safer investments like bonds.

The good news is that investing for retirement is easier than ever with accounts like a 401(k) through your employer and individual retirement accounts (IRAs). Knowing the difference between those accounts can help you figure out the right way to go about investing for the long term.

💡 Recommended: Differences Between a 401(k) and an IRA, Explained

Starting Your Financial Planning for Retirement

Saving for retirement should begin as soon as you hit the workforce. Many people don’t accomplish that, though. That’s ok. The best time to start your financial plan for retirement is today. Just like the old Chinese proverb: “The best time to plant a tree was 20 years ago. The second-best time is now.”

If you are in the middle of your career, it’s not too late. Consider that each dollar you set aside for your golden years can still compound to a significant amount. Beginning your financial plan now versus later means you won’t have to scramble last-minute to prepare for life after work.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.


Creating a Financial Plan for Retirement

Financial planning for retirement can seem like a challenging endeavor, but it starts with small steps. Simply investing up to the company match in your 401(k) plan and contributing to a Roth IRA are powerful first moves. As you accumulate wealth and as your life grows more complex, then reaching out to a certified financial planner (CFP)™ can go a long way toward crafting a solid financial plan for retirement.

Retirement income planning early in your financial journey is all about balancing realistic return expectations with the kind of lifestyle you want to live out during your golden years. It’s more than just investing, though. Ensuring that you have proper insurance and an estate plan in place is critical. Then as you near retirement, developing a Social Security and retirement account distribution strategy mindful of tax impacts is key.

Determining Retirement Age

Figuring out what age you want to retire is not that complicated, but retirement income planning based on that age can be complex. That’s why maintaining a financial plan for retirement is paramount. Age 65 used to be considered the typical retirement age, but in the future, 67 or 70 might be the standard. Right now, Social Security starts paying out benefits as early as age 62. Required Minimum Distributions from qualified retirement plans now begin at age 72.

That’s a lot of ages to think about. Ultimately, however, it comes down to your values and desired retirement lifestyle. If you want to retire early, then increasing your savings rate today and earning more income might be important priorities for you.

Determining Retirement Lifestyle

As with so many aspects of personal finance and financial planning, your retirement lifestyle is unique to you. Some individuals and couples want to travel the world and spend extravagantly. Others seek a more subdued and peaceful retirement. Determining what kind of life you want during retirement is the first step toward figuring out how much money you might need to be prepared well for retirement.

Consider that the median income of retirees (those age 65 and older) is slightly less than $50,000 as of 2021, according to the U.S. Census Bureau and Annuity.org. That might not afford you a very elaborate retirement. Saving more today can help you beef up your total retirement portfolio later in life. Moreover, the financial needs retirees face can change during retirement. The early years might be pricey with travel and dining out, while the latter years could see significant health-related costs.

Setting Financial Goals for Retirement

Working with a financial planner could help you outline how much money you’ll need to retire. You might first seek to pay down student loan debt and build an emergency fund before contributing large sums to retirement. Still, you should get in the habit of saving at least a small amount in your retirement accounts and then increasing that rate so that you can reach your financial goals for retirement.

You might determine that you want a lifestyle that costs, say, $80,000 per year in retirement. A financial planner can calculate how much you will need to have accumulated in your retirement accounts to ensure you can live that life. Any Social Security distribution should also be taken into consideration.

Also realize that investing in retirement still might have a time horizon of decades as people live longer. Your financial goals in retirement should always consider the appropriate time horizon and longevity risk.

Setting up Retirement Invest Account

Setting up retirement investing accounts is simpler than ever through a 401(k) or IRA. It’s also often free. With a few clicks, it can be done within minutes and without paperwork. Even for those late to the retirement income planning game, you can invest at any age today to reach your financial goals by age 65 or 70.

Financial Planning for Retirement With SoFi

You can start building your financial plan today by opening and investing in an IRA with SoFi. A Traditional IRA and Roth IRA are great tools to help grow your nest egg whether you are 25 or 55. Even a regular SoFi Invest brokerage account can be used for retirement investing.

SoFi members also have access to financial planners to help you along your retirement journey.

FAQ

How can you begin financial planning for retirement?

A long journey begins with the first step, and that applies to making a financial plan for retirement. A good rule of thumb is to set aside at least 15% of your income each year toward retirement accounts like your 401(k) or IRA. Once you start building a nest egg, then you can consider other important parts of long-term planning.

Can you include investing in a financial plan for retirement?

Yes, investments are a key piece of planning retirement income. In general, the younger you are, the more risk you can take on so that your retirement portfolio can grow larger as the market increases. Young investors have time on their side to weather the natural market swings year by year.

How soon should you begin financial planning for retirement?

You should begin financial planning for retirement as soon as possible. Areas such as investments, insurance, retirement income planning, tax management, and even personal finance topics should be managed throughout your working years in order to build a strong financial plan for retirement.


Photo credit: iStock/pixelfit

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.
Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A., or SoFi Lending Corp.
Update: The deadline for making IRA contributions for tax year 2020 has been extended to May 17, 2021.
This article is not intended to be legal advice. Please consult an attorney for advice.
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IRA vs 401(k): What Is the Difference?

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

The biggest difference between an IRA vs. a 401(k) is the amount you can save. You can save over three times as much in a 401(k) vs. an IRA — $20,500 versus $6,000. But not everyone has access to a 401(k), because these are sponsored by an employer, typically for full-time employees.

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

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

How Are IRAs and 401(k)s Different?

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

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

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

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

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

401(k)

Traditional IRA

Roth IRA

2022 Contribution limits $20,500 ($27,000 50 and older) $6,000 ($7,000 for those 50+) $6,000 ($7,000 for those 50+)
Pros Contributions are tax deductible

May include an employer match

Participants can save more

Contributions are tax deductible

No income limits*

May offer more investment choices

Qualified withdrawals are tax free

May offer more investment choices

No RMDs

Cons Participants have no control over plan options or fees

Withdrawals are taxed; may incur a penalty for early withdrawals

RMDs starting at 72

Lower contribution limits, no employer match

Withdrawals are taxed; may incur a penalty for early withdrawals

RMDs starting at 72

Lower contribution limits, no employer match

Contributions are not tax deductible

Cannot contribute if income is too high

Employer sponsor distinctions Typically offered to full-time employees; solo 401(k)s available to independent workers Not offered by an employer, but anyone with earned income can open an IRA.

*Income limits may apply if you contribute to a 401(k) and a traditional IRA. See below.

Other Key Differences Between IRAs and 401(k)s

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

Who Can Set Up a 401(k)?

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

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

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

Who Can Set Up an IRA?

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

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

Understanding RMDs

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

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

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

A Closer Look at IRAs

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

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

Traditional IRA

Like a 401(k), contributions to a traditional IRA are tax deductible and may help lower your tax bill. In 2022, IRA contribution limits are $6,000, or $7,000 for those aged 50 or older.

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

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

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

What Are Roth Accounts?

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

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

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

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

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

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

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

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

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

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A Closer Look at a 401(k)

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

In 2022, you can contribute up to $20,500 each year to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $6,500, for a total of $27,000.

401(k) catch-up contributions allow people nearing retirement to boost their savings. In addition to the contributions made, an employer can also match their employee’s contribution, up to a combined employer and employee limit of $61,000 in 2022.

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

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

When Should You Use a 401(k)?

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

1. If your employer matches your contributions

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

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

You can only put $6,000 in an IRA, but up to $20,500 in a 401(k) — if you’re over 50, those amounts increase to $7,000 for an IRA and $27,000 for a 401(k). If you’re in a position to save more than the IRA limit, that’s a good reason to take advantage of the higher limits offered by a 401(k).

3. When your income is too high

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

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

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

When Should You Use an IRA?

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

1. When you leave your company

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

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

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

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

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

3. When you’re between jobs

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

4. If you can “double dip.”

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

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

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

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

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

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

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

The Takeaway

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

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

The biggest difference is the amount you can save in each. It’s $20,500 in a 401(k) ($27,000 if you’re 50 and over) versus only $6,000 in an IRA ($7,000 if you’re 50+).

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

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

If you’re ready to open an IRA, it’s easy when you set up an Active Invest account with SoFi Invest.

Not sure what the right strategy is for you? SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

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

FAQ

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

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

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

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

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

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

Can you lose money in an IRA?

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


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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Financial Planning Tips for Your 40s

Your 40s are a pivotal point in your life. You may have a house, a family, aging parents, and a busy job by this time. College expenses for kids may be looming, as well as retirement a little farther off. Maybe you’re hatching a plan to start your own business soon or buy a beach house that’ll be your empty-nester home.

Each person will have unique financial goals in their 40s, which will depend on many factors, like lifestyle, salary, and acquired assets. Now is the perfect time to crystallize those dreams and get your money in top shape. You’re old enough to know what you want, and chances are, you have many peak earning years ahead.

Read on for financial planning tips for your 40s, including:

•   Why it’s not too late to start budgeting and saving in your 40s

•   What are the right financial goals for 40-year-olds

•   Ways to save for children’s college expenses

•   How to save for retirement

•   What financial goals you should meet in your 40s.

Why Turning 40 Is a Big Deal

Where personal finances are concerned, your 40s are a big deal. You’re most likely approaching the height of your career and earning potential. Research from the Bureau of Labor Statistics says that primetime for earnings usually hits between age 35 and 54.

But you may also have many more expenses, such as planning for college for your children, planning for retirement, and caring for aging parents. Your 40s are a complicated decade where sound financial planning is crucial for a secure future.

Why It Is Not Too Late to Start Financial Planning in Your 40s

If there is one thing that is certain in life, it is uncertainty. Things change. Many people return to school in their 40s to boost their earning potential. Some take the plunge and dive into an entrepreneurial venture. Some leave the workforce entirely to focus on raising a family.

Whatever your life brings at this stage, you still have a couple of decades to plan for the years ahead, including your retirement, so set some goals now. It’s advisable to set long-term goals (5+ years), mid-term goals (2 to 5 years), and short-term goals (1 to 2 years). Having this staggered approach can help you balance your varied aspirations. Different timelines can demand different tactics.

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Financial Planning Tips in Your 40s

So how exactly can you successfully manage your money in your 40s? Here are some tips for developing a financial strategy, saving money in your 40s, and more.

Pay Off Credit Cards and High-Interest Loans

Pay off as much high-interest debt as you can. This debt, typically the kind charged on credit cards, can be a major drain on your finances. Currently, credit card interest rates hover near 20%, which can throw a wrench in your budget if you’re carrying a balance.

You don’t need to stop using plastic completely, but you do want to whittle down what you owe. Credit cards can actually boost your credit score if you use them wisely and pay off the balance each month. If you can’t easily prioritize this debt and pay it down, options include:

•   Getting a balance transfer credit card, which will allow you to pay no or low interest for a period of time and catch up on payments

•   Taking out a debt consolidation loan at a lower rate to pay off the cards

•   Talking with a low- or no-fee credit counselor for guidance.

Invest in Physical and Mental Health

Healthcare can be one of the biggest expenses a person faces, so it pays to take care of yourself. The healthier you are, the fewer services and interventions you will likely need, and the less you will pay in deductibles each year. Most importantly, your quality of life and ability to earn will be so much greater if you are physically and mentally healthy. Take steps to assess your wellness and address any issues that are brewing. Also make sure that you choose the right health insurance plan for your specific situation.

If you have aging parents, talk to them about their health insurance plan and finances so that you understand how they are handling their wellness costs and have peace of mind.

Look More Closely at Retirement

At age 40, many people decide now is the right time to start saving for retirement. Or perhaps they already have a retirement plan or a 401(k) through their employer that they haven’t revisited recently.

Whatever your exact situation, your 40s are a good time to focus on your plan. You might think about increasing your 401(k) contributions, opening a Roth IRA, or finding a taxable investment account. Also, if you get a raise or bonus, why not put a chunk of it towards saving for your future?

You’ll likely want to consider how much of a nest egg you will need to retire and whether your current plan will get you there. If you pay for a professional financial planner, they can help you figure out how to save money in your 40s and maintain your desired standard of living into retirement.

Plan for Children’s Expenses (College, Careers)

It can be a shock when you realize that your baby is suddenly heading to college, and the cost of paying for their education may be an even greater surprise—and not necessarily a pleasant one. It can be very expensive. That’s why, when it comes to budgeting for couples or single parents, paying for higher education is often a major (and majorly challenging) goal.

There are saving plans specifically designed for college; for instance, 529 plans offer many benefits. If your children are not headed to college, other savings options like certificates of deposit (CDs) might be a better way to invest in their future. Teach your children sound financial management skills so you won’t be supporting them in their adulthood.

Some people go back to school in their 40s to help them move to the next level at work or prepare for a new career. If you are among them, create a budget that includes all your expenses and income. Project those numbers into the next few years to help you plan your life and stay on track financially.

Choose or Revisit Insurance Plans

In addition to health insurance mentioned above, your 40s can be a good time to consider disability insurance. If something happens to you and you cannot work, you could be forced to use your retirement and emergency funds sooner. Whether you choose short-term vs. long-term disability insurance, a policy can protect you by providing a safety net.

Death is an unavoidable life event, so review your life insurance policy (could you get a better deal elsewhere?) and be sure you have drafted a will. Parents who plan and pay for their funerals ahead of time ease the burden on dependents. The median cost of a traditional funeral is around $7,848, according to the National Funeral Directors Association. An insurance policy, a payable-on-death account, or prepaying at a funeral home can be good options to fund end-of-life expenses.

If you are shopping for life insurance, there are many online comparison tools that let you quickly see some different offers and how they stack up. It’s an easy way to start the process.

Keep Emergency Funds in Good Shape

Life is full of unexpected twists and turns. Some of them are not so fun, like having your car conk out, the roof leak, or your job suddenly come to an end. In times like those, you will need access to funds to cover your costs. That’s why having an emergency fund is important; with enough money to cover three to six months’ worth of your basic living expenses in a savings account, you’ll have peace of mind. If you don’t yet have a rainy day fund, start putting money aside each month (even just $25). Funnel any “found money” (say, a tax refund) to this savings account too.

Invest in a Diversified Portfolio

Growing your wealth often involves investing. While it does carry risk, it can yield big rewards. For instance, the annualized Standard and Poor’s (S&P) 500 return over the last 10 years was a healthy 14.7%. You might invest on your own, with a broker, or with automated financial planning. The vehicles you choose will depend on your risk tolerance. Some people invest in CDs and bonds, which are relatively low risk, while others enjoy speculating on the stock market. Manage your risk by never investing more than you can afford to lose.

Some people prefer to invest in stocks using dollar-cost averaging—investing a fixed dollar amount regularly, regardless of the share price—which can help you to build a diversified portfolio while minimizing volatility over the long term.

How Technology Can Make Managing Finances Easier

Managing finances and investments is so much easier in the digital age. Mobile banking and finance apps mean that you can manage your finances from your armchair 24/7. Online lenders offer favorable investment and savings options, and online trading platforms allow anyone to trade on the stock markets.

Where Should I Be Financially by 40?

Financial goals by age 40 vary. One rule of thumb is to save 15% of your income each year, but this figure is subjective and depends on many factors, including your existing assets.

The Takeaway

It’s never too late to take control of your finances. In your 40s, you are likely entering your prime earning years, so it’s a good moment to focus on paying down debt, preparing for the next chapter of your children’s lives, and saving and investing to get ready for retirement. With some wise money moves, you’ll be set to make the most of this decade and beyond.

One path to help pump up your cash: Choosing a bank that could help your money grow faster, like SoFi. Open an online bank account with direct deposit, and you’ll earn an ultra competitive 2.00% APY and pay zero fees. Plus, we make checking your balance and completing transfers super quick and easy.

Bank smarter with SoFi.

FAQ

What financial goals should a 40-year-old have?

Ideally, a 40-year-old would be building a nest egg for retirement, paying down high-interest debt, and finding ways to sensibly pay for children’s college fees and meet other financial obligations. How much anyone needs to achieve these goals depends on many factors, such as lifestyle, income, and financial obligations.

How much should a 40-year-old have saved?

How much a 40-year-old should have saved depends on their current and future lifestyle and needs. A rule of thumb is to save 15% of your income each year towards retirement, but it will be different for everyone.

How can I build my wealth in my 40s?

You can build wealth in your 40s by paying down high-interest debt, choosing the right savings and investment vehicles, and planning for retirement.


Photo credit: iStock/shapecharge

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SoFi members with direct deposit can earn up to 2.00% annual percentage yield (APY) interest on all account balances in their Checking and Savings accounts (including Vaults). Members without direct deposit will earn 1.00% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. Rate of 2.00% APY is current as of 08/12/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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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