Preparing for Retirement Archives | Page 22 of 29

Q: Is it possible to lose your 401k?

Simply changing jobs doesn’t mean your old 401k is gone for good. It does, however, mean that you may need to spend time locating it if it’s been a while since you changed jobs.

Q: How do I find all my old 401k accounts?

The simplest way to find old 401k accounts is contacting your former employer. It’s possible your money may still be in your old plan and if not, your previous employer or plan administrator may be able to tell you where it’s been moved to.

Mar

2022

Finding Your Old 401k: Here’s What to Do

By Rebecca Lake | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

Ever wish you could click on an app called “Find my 401(k)”? It’s surprisingly easy to lose track of a 401(k) account when you change jobs or careers. The good news: The money isn’t gone, and there are ways to reclaim your missing account.

The quickest way to find old 401(k) money is to contact your former employer to see where the account is now. It’s possible that your lost 401(k) isn’t lost at all; instead, it’s right where you left it. In some cases, however, employers may cash out an old 401(k) or roll it over to an IRA on behalf of a former employee. In that case, you might have to do a little more digging to find lost 401(k) funds.

If you need to rescue an unclaimed 401(k), here’s what you need to know.

Why You Should Recover Your Old 401(k)

There’s a simple reason why you should attempt to recover a lost 401(k) account: It’s your money. Whether your old 401(k) plan holds a lot of money or a little, every penny counts when staying on track with your retirement savings.

Another important point to consider: If you’ve changed jobs multiple times, it’s possible that you could have more than one “lost” 401(k) — and taken together, that money could make a surprising difference to your nest egg.

Last, if you were lucky to have an employer that offered a matching 401(k) contribution, your missing account (or accounts) may have more money in them than you think. For example, a common employer match is 50%, up to the first 6% of your salary. If you don’t make an effort to find old 401(k) accounts, you’re missing out on that “free money” as well.

Tips for Finding an Old 401(k)

There’s no real secret to how to find old 401(k) accounts. But the process can be a little time consuming as it may require you to search online or make a phone call or two. But it can be well worth it if you’re able to locate your old 401(k).

Contact Former Employers

The first place to start when trying to find old 401(k) accounts is with your previous employer. You can contact the Human Resources department to ask what’s happening with your account.

If you had more than $5,000 in your 401(k) at the time you left your job, it’s likely that your money may still be with the employer. In that case, you have a few options for what to do with the money:

• Leave it where it is

• Transfer your 401(k) to your current employer’s qualified plan

• Rollover the account into an Individual Retirement Account (IRA)

• Cash it out

When your plan balance is less than $5,000 your employer might require you to do a 401(k) rollover or cash it out. If you’re comfortable with the investment options offered through the plan and the fees you’ll pay, you might decide to leave it alone until you get a little closer to retirement. On the other hand, if you’d like to consolidate all of your retirement money into a single account, you may want to roll it into your current plan or into an IRA.

Cashing out your 401(k) has some downsides. You would owe taxes on the money, and likely an early withdrawal penalty as well. So you may only want to consider this option if your account holds a smaller amount of money. If you had less than $5,000 in your old 401(k), it’s possible that your employer may have rolled the money over to an IRA for you or cashed it out and mailed a check to you.

Find Old Statements

If you have an old account statement, you can contact your 401(k) provider directly to find out what’s happened to your lost 401(k). This might be necessary if your former employer has gone out of business and your old 401(k) plan was terminated.

When a company terminates a 401(k), the IRS requires a rollover notice to be sent to plan participants. If you’ve moved since leaving the company, the plan administrator may have outdated address information for you on file. So you may not be aware that the money was rolled over.

Either way, your plan administrator should be able to tell you which custodian now holds your lost 401(k) funds. Once you have that information, you could reach out to the custodian to determine how much money is in the account. You can then decide if you want to leave it where it is, roll it over to another retirement account, or cash it out.

Checking With the Department of Labor

Different types of retirement plans, including 401(k) plans, are required to keep certain information on file with the IRS and the Department of Labor (DOL). One key piece of information is DOL Form 5500. This form is used to collect data for employee benefit plans that are subject to federal ERISA (Employee Retirement Income Security Act) guidelines.

So how does that help me find my 401(k)? The Department of Labor offers a Form 5500 search tool online that you can use to locate lost 401(k) plans. You can search by plan name or plan sponsor. If you know either one, you can look up the plan’s Form 5500, which should include contact information. From there, you can reach out to the plan sponsor to track down your lost 401(k).

Searching the National Registry

Another place to try is the National Registry of Unclaimed Retirement Benefits . This is an online database you can use to search for an unclaimed 401(k) that you may have left with a previous employer. You’ll need to enter your Social Security number to search for lost retirement account benefits.

In order for your name to come up in the search results, your former employer must have entered your name and personal information in that database. If they haven’t done so, it’s possible you may not find your account this way.

Starting Another 401(k)

If you’re not able to find lost 401(k) accounts you still have plenty of options for retirement savings. Contributing to your current employer’s 401(k) allows you to set aside money on a tax-deferred basis. And you might be able to grow your money faster with an employer matching contribution.

What if you’re self-employed? In that case, you could choose to open a solo or individual 401(k). This type of 401(k) plan is designed for business owners who have no employees or only employ their spouses. These plans follow the same contribution and withdrawal rules as traditional employer-sponsored 401(k) plans, though special contribution rules apply if you’re self-employed.

Investing for Retirement With SoFi

When can you retire? The answer depends on how much you have saved already, including any money that’s in an old 401(k) account or money you’ve got stashed in an IRA. SoFi offers both traditional and Roth IRAs to help you build wealth for the future. A traditional IRA offers the benefit of tax-deductible contributions. Meanwhile, a Roth IRA offers tax-free qualified withdrawals in retirement.

If you’re ready to take the next step, learn more about investing for retirement with SoFi.

FAQ

Is it possible to lose your 401(k)?

It’s possible to lose money from your 401(k) if you’re cashing it out and taking a big tax hit or your investments suffer losses. But simply changing jobs doesn’t mean your old 401(k) is gone for good. It does, however, mean that you may need to spend time locating it if it’s been a while since you changed jobs.

How do I find all my old 401(k) accounts?

The simplest way to find old 401(k) accounts is contacting your former employer. It’s possible your money may still be in your old plan and if not, your previous employer or plan administrator may be able to tell you where it’s been moved to.

Do I need my social security number to find an old 401(k)?

Generally, yes, you’ll need your Social Security number to find a lost 401(k) account. This is because your Social Security number is used to verify your identity and ensure that the plan you’re inquiring about actually belongs to you.

Photo credit: iStock/svetikd

SoFi Invest®
SoFi Invest refers to the two 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 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

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.

SOIN0322008

Mar

2022

Guide to IRA Margin Accounts

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

An IRA margin account is a retirement account that allows investors to trade securities with unsettled cash. It’s a more lenient structure versus a cash account, where you must wait for trades to settle before using the money for further trading. But an IRA margin account isn’t a true margin account in that you can’t use leverage.

Nonetheless, an IRA margin account offers a few advantages, including the ability to defer or avoid short-term capital gains tax, and you’re protected against good faith violations. That said, there are still restrictions, so before setting up an IRA margin account, you may want to learn more about how these accounts work.

What Is an IRA Margin Account?

An IRA margin account is a more flexible means to invest for retirement. First, you can trade with unsettled funds, meaning that if you close a position you don’t have to wait the standard two days after you trade, you can use those funds right away.

There are also tax benefits. In a traditional IRA margin account capital gains taxes are deferred until funds are withdrawn. This is similar to a regular IRA, where you don’t pay taxes on contributions or gains until you withdraw your money.

But can you use margin in a Roth IRA? Yes, and there may be even more tax benefits when using limited margin in a Roth IRA. You don’t pay any capital gains because Roth accounts are tax-free, since Roth contributions are made with after-tax money).

As noted above, an IRA margin account, also called a limited margin account, lets investors trade with unsettled cash. However, a limited margin IRA is just that — limited. It is not a true margin account and does not allow you to short stocks or use leverage by borrowing money to trade with margin debits. In that sense, it is different from margin trading in a taxable brokerage account.

You can use limited margin in several IRA types. In addition to having margin IRAs with traditional and Roth accounts, rollover IRAs, SEP IRAs, and even small business SIMPLE IRAs are eligible for the margin feature. While mutual funds are often owned inside an IRA, you cannot buy mutual funds on margin.

How Does Limited Margin Work?

Limited margin works by allowing investors to trade securities without having to wait for funds to settle. You can think of it like an advance payment from positions recently sold.

The first step is to open an IRA account and request that the IRA margin feature be added. Once approved, you might have to request that your broker move positions from cash to margin within the IRA. This operational task will also set future trades to the margin type.

IRA margin accounts will state your intraday buying power — you should use this balance when day trading stocks and options in the IRA.

An advantage to trading in limited margin IRAs is that you can avoid or defer capital gains tax. Assuming you earn profits from trading, that can be a major annual savings versus day trading in a taxable brokerage account. If you trade within a pre-tax account, such as a traditional or rollover IRA, then you simply pay income tax upon the withdrawal of funds. When using Roth IRA margin, your account can grow tax-free forever in some cases.

The drawback with an IRA margin account versus day trading in a taxable account is you are unable to borrow money from your broker to create margin debits. You are also unable to sell securities short with an IRA margin account. So while it is a margin account, you do not have all the bells and whistles of a full margin account that is not an IRA.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.

*For full margin details, see terms.

Who Is Eligible for a Margin IRA?

Some brokerage firms have strict eligibility requirements such as a minimum equity threshold (similar to the minimum balances required in full margin accounts). When signing up, you might also be required to indicate that your investment objective is the “most aggressive.” That gives the broker a clue that you will use the account for active trading purposes.

Another restriction is that you might not be able to choose an FDIC-insured cash position. That’s not a major issue for most investors since you can elect a safe money market fund instead.

IRA Margin Calls

An advantage to having margin in an IRA is that you can more easily avoid margin calls by not having to wait for cash from the proceeds of a sale to settle, but margin calls can still happen. If the IRA margin equity amount drops below a certain amount (often $25,000 but it can vary by broker), then a day trade minimum equity call is issued. Until you meet the call, you are limited to closing positions only.

To meet the IRA margin call, you just have to deposit more cash or marginable securities. Since it is an IRA, there are annual contribution limits that you cannot exceed, so adding funds might be tricky.

Avoiding Good Faith Violations

A good faith violation happens when you purchase a security in a cash account then sell before paying for the purchase with settled cash. You must wait for the funds to settle — the standard is trade date plus two days (T+2 settlement) for equity securities. Only cash and funds from sale proceeds are considered “settled funds.” Cash accounts and margin accounts have different rules to know about.

A good faith violation can happen in an IRA account without margin. For example, if you buy a stock in the morning, sell it in the afternoon, then use those proceeds to do another round-trip trade before the funds settle, that second sale can trigger a good faith violation. Having margin in an IRA prevents good faith violations in that instance since an IRA margin account allows you to trade with unsettled funds.

Pros and Cons of Limited Margin Trading in an IRA

Can IRA accounts have margin? Yes. Can you use margin in a Roth IRA? Yes. Should your IRA have the limited margin feature added? It depends on your preferences. Below are the pros and cons to consider with IRA margin accounts.

Pros	Cons
You can defer or avoid capital gains taxes.	You cannot trade using actual margin (i.e. leverage).
You are permitted to trade with unsettled cash.	You cannot engage in short selling or have naked options positions.
You can avoid good faith violations.	You take on more risk with your retirement money.

The Takeaway

An IRA margin account allows people investing in individual retirement accounts to trade securities a bit more freely versus a cash account. The main benefit to having an IRA with limited margin is that you can buy and sell stocks and options without waiting for lengthy settlement periods associated with a non-margin account. But remember: Unlike a normal margin account, this type doesn’t allow you to use leverage. That means a margin IRA doesn’t permit margin trading that creates margin debit balances. You are also not allowed to have naked options positions or engage in selling shares short.

That said, if you want to try out trading on margin and have the experience and risk tolerance to do so, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.

Get one of the most competitive margin loan rates with SoFi, 10%*

FAQ

Is an IRA a cash or a margin account?

An IRA can either be a cash account or a limited margin account. While a cash account only lets you buy and sell securities with a traditional settlement period, a limited margin IRA might offer same-day settlement of trades. You are not allowed to borrow funds or short sell, however.

Is day trading possible in an IRA?

Yes. You can day trade in your IRA, and it can actually be a tax-savvy practice. Short-term capital gains can add up when you day trade in a taxable brokerage account. That tax liability can eat into your profits. With a limited margin IRA that offers same-day settlement, however, you can buy and sell stocks and options without the many tax consequences of a non-IRA. The downside is that, in the case of losses, you cannot take advantage of the $3,000 capital loss tax deduction because an IRA is a tax-sheltered account. Another feature that is limited when day trading an IRA is that you cannot borrow funds to control more capital. A final drawback is that you are limited to going long shares, not short.

Can a 401k be a margin account?

Most 401k plans do not allow participants to have the margin feature. An emerging type of small business 401k plan — the solo brokerage 401k — allows participants to have a margin feature. Not all providers allow it, though. Also, just because the account has the margin feature, it does not mean you can borrow money from the broker to buy securities.

Photo credit: iStock/Drazen_

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SoFi Invest®
SoFi Invest refers to the two 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 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN0221006

Mar

2022

5 Investment Tips for Retirees

By Michael Flannelly | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A lot of personal finance advice is about saving for retirement. But the need for saving and investing doesn’t stop once you’re done working; seniors also need to maintain a sound investment strategy during retirement.

Retirees face several challenges that make investing after 65 necessary, including maintaining safe income streams, outpacing inflation, and avoiding the risk of running out of money. Here are some tips seniors may consider as they choose the right investment path during retirement.

5 Tips for Investing After Retirement

1. Assess Income Sources and Budget

Once in retirement, seniors likely don’t have an income stream from a steady paycheck. Instead, retirees utilize a mix of sources to pay the bills, such as Social Security, withdrawals from retirement and savings accounts, and perhaps passive sources of income such as rental properties. This change, going from relying on a regular salary to relying on savings and investments to fund a particular lifestyle, can be daunting.

Retirees should first understand where their income is coming from and how much is coming in to help navigate this financial change. This initial step can help establish a budget that allows the retirees to comfortably cover expenses and map out discretionary spending or new investments in their golden years.

2. Understand Time Horizon and Risk

Retirees must consider time horizon and risk in post-retirement investment plans. Time horizon is the amount of time an individual has to invest before reaching a financial goal or needing the investment earnings for living expenses.

Time horizon significantly affects risk tolerance, which is the balance an individual is willing to strike between risk and reward. Generally speaking, seniors with a time horizon of a decade or more may invest in riskier assets, such as stocks, because they have time to ride out any short-term downturns in the market. Individuals with a short time horizon of just a few years may stick to more conservative investments, such as bonds, where they can benefit from capital preservation and interest income.

3. Consider Diversification

Diversification involves spreading out investment across different asset classes, such as stocks, bonds, real estate, and cash. Diversification also involves spreading investments out among factors such as sector, size, and geography within each asset class.

It is important to consider diversification when investing after retirement. Diversification helps investors protect their portfolios from the risk and volatility unique to a specific type of investment. Retirees do not want to concentrate a portfolio with any one asset, which may increase volatility during a period when they want a low risk tolerance.

Recommended: Why Portfolio Diversification Matters

4. Rebalance Regularly

A retiree’s financial goals, risk tolerance, and time horizon generally affect the desired asset allocation in an investment portfolio. However, those initial goals and risk considerations can change during a retiree’s golden years. Additionally, the market is constantly in flux, shifting the proportions of assets a person holds. It may make sense to rebalance the assets inside a portfolio regularly.

Rebalancing a portfolio can be thought of like the routine upkeep of your investments. For example, if a portfolio has an asset allocation of 70% bonds and 30% stocks and the stocks do well during a year, they might make up a higher percentage of a portfolio than planned. By the end of the year, the asset allocation may be 65% bonds and 35% stocks. The investor may want to rebalance by selling stock and buying more conservative assets, such as bonds, to ensure the portfolio’s asset allocation is in line with their goals. Alternatively, they may use other income to make new bond investments.

5. Keep an Eye on Inflation

Retirees living on a fixed income may be negatively affected by rising inflation. As prices increase, the fixed income that an individual relies on will be worth less the following year. For example, if an individual receives $1,000 a month in a fixed income and inflation rises by a 4% annual rate, then that $1,000 monthly income will be worth $960 in today’s money.

Investments that pay out a fixed interest rate, such as bonds, are most vulnerable to inflation risk as inflation may outpace the earned interest rate.

Investors can help protect themselves against inflation risk by owning assets that tend to outpace inflation, such as stocks, real estate, or inflation-protected securities.

Recommended: How Does Inflation Affect Retirement?

Smart, Safer Investment Options for Retirees

Retirees have a lot of choices when it comes to making new investments. But, their financial goals, age, and risk tolerance can impact which investments they choose to make. Here are a few investments for seniors in retirement with those factors in mind.

Cash

Cash is the most stable way to hold money, and it is a necessary part of a retiree’s financial portfolio. Keeping cash on hand can help cover necessities like housing, utilities, food, and clothes.

Retirees can put a portion of their cash in a money market account or a high-yield savings account to earn interest while having easy access to their cash. However, the interest paid out in typical savings or checking accounts tends to be very low and may not beat the inflation rate. That means the money in these accounts may slowly lose its value over time.

Bonds

Bonds generally don’t offer the same potential for high returns as stocks and other assets, but they have advantages for investing after retirement. Bonds typically pay interest regularly, such as twice a year, which provides investors with a predictable income desired in retirement. Also, if investors hold a bond to maturity, they get back their entire principal, which can help preserve their savings while investing.

Various types of bonds help investors preserve capital and realize interest income during retirement, including relatively safe U.S. Treasuries. Additionally, Treasury-Inflation Protected Securities (TIPS) are bonds that hedge against inflation, which can be helpful for retirees worried about rising prices.

Stocks

Stocks are considered a risky investment; they tend to be more volatile than more conservative assets like bonds or certificates of deposit. Though investing in stocks can lead to significant returns, it also means there is the potential for big losses that many retirees may not be able to stomach. However, retirees shouldn’t write off investing in stocks because there is a potential for losses. There is value in investing in stocks for seniors.

Stock investments may help ensure a portfolio experiences capital gains that outpace inflation and have enough income in the later decades of their retirement. It may not make sense for older investors to chase returns from higher risk stocks like tech start-ups. Instead, retirees may look for proven companies whose stocks offer steady growth. Retirees may consider investing in companies that provide stable dividend payouts that generate a regular income source.

Certificates of Deposit

Certificates of deposit, otherwise known as CDs, are low-risk investments that may offer higher interest rates than typical savings accounts. Investors put their money in a CD and choose a term, or length of time, that the bank will hold their money. The term length is generally anywhere from one month to 20 years, and during this period, the investor can’t touch the money until the term is up. Once the term is over, the investor gets the principal back, plus interest. Typically, the longer the investor’s money is in the account, the more interest the bank will pay.

Annuities

Annuities can provide retirees with a regular income, bolster the gains from other investments, and supplement savings. In short, an annuity is a contract with an insurance company. The buyer pays into the annuity for a certain number of years, and the insurance company pays back the money in monthly payments. Essentially, an individual is paying the insurance company to take on the risk of outliving their retirement savings.

The Takeaway

Investing for retirement should begin as soon as possible, ideally through a tax-advantaged retirement account. But the need for a sound investing strategy doesn’t stop once you hit retirement. You need to ensure that your savings and investments are working for you throughout your golden years.

Another step that can help you manage your retirement savings is doing a 401(k) rollover, where you move funds from an old account to a rollover IRA.

SoFi makes the rollover process seamless and simple — which helps to avoid any kind of penalty. There are no rollover fees or taxes, and you can complete your 401(k) rollover quickly and easily.

Help grow your nest egg with a SoFi IRA.

SoFi Invest®
SoFi Invest refers to the two 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 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

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

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.

SOIN20096

Mar

2022

How Does Inflation Affect Retirement?

By Paulina Likos | invest, Investing, Preparing for Retirement | Comments Off

For retirees on a fixed income, inflation can have a significant influence on their ability to maintain their budget. That’s because as inflation rises over time, that fixed income will lose value.

That could mean that retirees need to scale back their spending or even make drastic changes to ensure that they don’t run out of money. Inflation spiked 7.5% in January 2022, the highest annual increase in 40 years.

Two-thirds of older Americans are worried that inflation will negatively impact their inflation, according to a survey by American Advisors Group . However, by planning ahead, it is possible to minimize some of the impact of inflation on your nest egg.

What Is Inflation?

Inflation is the rate at which prices of goods and services increase in an economy over a period of time. This can include daily costs of living including, such as gas for your car, groceries, home expenses, medical care and transportation. Inflation may occur in specific segments of the economy or across all segments at once.

There are multiple causes for inflation but economists typically recognize that inflation occurs when demand for goods and services exceeds supply. In an expanding economy where more consumers are spending more money, there tends to be higher demand for products or services which can exceed its supply, putting upward pressure on prices.

When inflation increases, the purchasing power of money, or its value, decreases. This means as the price of things in the economy goes up, the number of units of goods or services consumers can buy goes down.

When purchasing power declines, the value of your savings and investments goes down. While the dollar amount does not change, the amount of goods or services those dollars can buy falls. In retirement, inflation can be especially harmful, since retirees typically don’t have an income that goes up over time.

Concerns about inflation may even push back the age at which some people think they can afford to retire.

How Can Inflation Impact Retirement?

Inflation eats away at the value of each individual dollar, including savings and investments, so it’s important to keep in mind the inflation rate for retirement planning. There are several strategies you can use when investing during inflation.

For those saving for retirement, it’s important to keep in mind that the cost of living in the future will be higher than it is today. For example, if rent costs $1,000 today but next year if there’s inflation, that cost could rise to $1,100. Over a decade or more, that price could double or triple.

5 Ways to Minimize the Impact of Inflation on Retirement

While inflation can seem like a challenging or even scary part of retirement, there are several investment opportunities that may help you maintain purchasing power and reduce the risk of inflation.

1. Invest Your Savings in the Stock Market

Investing in stocks is a great way to fight inflation. A diversified portfolio that includes equities may generate long-term returns that are higher than long-term inflation. While past performance does not guarantee future returns, over the past 10 years, the average annualized return for the S&P 500 has been roughly 13%. Even when inflation is factored in, investors still have substantial returns when investing in stocks.

However, stocks are risk assets, which means they are sensitive to market volatility. These price swings may not feel comfortable to investors who are in retirement so retirees tend to allocate a smaller portion of their portfolio to equities to manage market risk.

One way to potentially determine the percentage of a retirement investment portfolio that should go towards stocks is to subtract your age from 100. For example, if you are 70 years old, a 30% allocation toward stocks may be suitable, but this can range depending on your risk tolerance and other sources of income.

2. Use Tax-Advantaged Retirement Vehicles

One of the ways retirees can increase their purchasing power is to reduce the amount of their money they need to pay in taxes. For example, a traditional 401(k) retirement account is not taxed until money is withdrawn from it.

Tax-advantaged retirement accounts are beneficial for retirees because the money grows tax-free. In 401(k)s and most Individual Retirement Account (IRA), you pay income tax on withdrawals in retirement, when you might be in a lower tax bracket. With Roth IRAs, you’ll pay taxes on the money you put into the account, but it will be tax-free in retirement.

3. Do Not Over- Allocate Long-Term Investments With a Low Rate of Return

Risk averse investors may be tempted to stay invested in securities that are not subject to major price swings, or even to keep their money in a savings account. However, theoretically, the lower risk investors take, the lower the reward. When factoring in fees and inflation, ultra-conservative investments may only break even or perhaps lose value over time.

While they offer a guaranteed return, for example high-yield savings accounts typically don’t earn enough interest to beat inflation in the long run. Since savings account rates are not higher than inflation rates, the buying power of your savings will continue to decline. That’s particularly important for retirees who are often living off their savings and investments, rather than off of an income that rises with inflation.

That’s why even retirees may want to keep a portion of their investments in the stock market.

4. Buy Inflation-Protected Securities

Treasury inflation-protected securities or TIPS are backed by the federal government and help protect investments against inflation. The principal value of the investment increases when inflation goes up and if there’s deflation the principal adjusts lower per the consumer price index.

TIPS have fixed coupon rates based on the principal value of the investment. When inflation increases, the value of the principal rises and the coupon payment will increase. Investors consider these bonds among the safest investments because they are issued by the U.S. Treasury and backed by the full faith of the U.S. government.

5. Buy Real Estate

Retirees may also consider investing in real assets. Real estate is often a good inflation hedge because it holds intrinsic value. During periods of inflation, real estate may not only be able to preserve its value, but it can also increase in value. One of the daily costs impacted by inflation is the cost of housing.

That’s why rental income from real estate historically has kept up with inflation. Investing in real estate as a real asset or even in real estate investment trusts (REITs), can be a great way for retirees to diversify their investment portfolio, reduce volatility, and add to their fixed-income.

Inflation Calculator for Retirement

It’s important to factor inflation into your plans as you’re saving for retirement. One way to do that is using a retirement calculator, like this one from the Department of Labor, which accounts for how inflation will impact your purchasing power in the future. That calculator uses a 3% inflation rate for retirement planning, but inflation fluctuates and could be higher or lower in any given year.

The Takeaway

While inflation can have an impact on a retirement portfolio, there are ways to protect the purchasing power of your money over time. Allocating a portion of your portfolio to stocks and other investments aimed at minimizing the impact of inflation can help. Another way to curb the impact of inflation during retirement is to reduce expenses, which allows the money that you have to go further.

With inflation rising, starting to save for retirement as early as possible can help you accrue the compounded returns necessary to counteract rising prices in the future. One way to get started is by opening an IRA account on the SoFi Invest® brokerage. Users can open a Roth or traditional IRA with SoFi Invest.

FAQ

Is inflation good or bad for retirees?

A small amount of inflation each year is a normal part of the economic cycle. But over time, inflation eats away at the value of the dollar and purchasing power of your nest egg is diminished. This can have a negative effect on a retirement investment portfolio or savings.

How can I protect my retirement savings from inflation?

There are several Investing strategies you can use to protect retirement savings from inflation. These include diversifying your portfolio with inflation hedges including TIPS, real estate, and investments that provide a high rate of return. It’s important to keep saving for retirement even if you don’t have a 401(k).

Does your pension increase with inflation?

Some pensions have a cost of living adjustment on their monthly payments, so they increase over time. However, this is not the case for all pensions. When inflation increases this can affect your benefits.

Photo credit: iStock/RgStudio

SoFi Invest®
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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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

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

SOIN0122011

Feb

2022

Your Guide to Keogh Plans and How They Work

By Ashley Kilroy | invest, Investing, Preparing for Retirement | Comments Off

Keogh retirement plans are one type of tax-deferred retirement plan that self-employed individuals and their employees use to invest and grow their savings. Although they’re relatively uncommon today,

Keogh plans are still an option that some high-income savers may use to save for their golden years, however a tax law change in 2001 that made other options more appealing has resulted in declined use of such plans.

The IRS now refers to Keogh accounts as HR-10s or qualified retirement plans. For most self-employed individuals, however, there are other savings options that offer similar benefits with a lower administrative burden for the account holder.

Keogh Plan Definition

A Keogh plan is a type of retirement plan available to self-employed individuals and their employees. Those eligible to establish a Keogh plan include partnerships, small businesses, sole proprietorships, and limited liability companies (LLCs). Once set up, employers fund Keogh plans are employer-funded and with tax-deferred contributions.

Keogh plan rules require that if you set up a Keogh and you have employees, you must set up Keogh plans for any workers who have logged at least 1,000 hours for you over the past three years.

Referred to as qualified plans or HR-10s by the IRS, Keogh plans have some similarities to 401(k)s. However, Keogh plans differ from 401(k)s because of their high annual contribution limits, particularly for small businesses.They work best for specific categories of self-employed individuals, such as financial professionals, dentists, and lawyers.

In recent years, Keogh plans have fallen out of favor, with most self-employed workers opting for Solo 401(k)s or SEP IRAs instead.

What Is a Keogh Plan?

Like other types of retirement plans, you contribute money to a Keogh plan to grow for retirement under a tax shelter. The Keogh plan then uses those funds to invest in various assets, like exchange-traded funds (ETFs), bonds, or stocks.

You can make these contributions to a Keogh to lower your taxable income because you make these contributions before taxes. You deduct the amount contributed from your taxes each year you do so. As a result, taxes on the plan’s total value only come due once you start making withdrawals in retirement.

Keogh Withdrawals

Once you hit age 59 ½, you become eligible to withdraw from your Keogh plan. You can determine how you want to receive your money when you retire, either in one lump sum or installments. It is also up to you how much you receive in each installment and their payment frequency.

There are consequences if you withdraw early or delay, though. Taking money out of your plan before age 59 ½ typically results in a 10% penalty along with income tax. Once you hit 70 ½, you must take distributions from the account. If not, you incur a 50% penalty tax on the withdrawal you should have taken.

These are the same early withdrawal penalties you see in more popular tax-deferred retirement accounts, including traditional IRAs and 401(k)s.

Types of Keogh Plans

When starting a retirement fund, you will encounter multiple options. Keogh plans also come in different forms, and one may suit you more than the other. These are the two variations you should know:

Defined-Contribution Plans

A defined-contribution plan requires you to decide how much money you put into the fund each year. You can do this either through profit-sharing or money purchasing. Your business pays into the account along with the former, whereas the latter means you contribute a fixed amount of income annually.

In 2022, profit-sharing allows you to contribute up to 100% of your compensation or $61,000, whichever is less. However, you can decide your contribution amount each year with a profit-sharing plan.

Alternatively, a money-purchase plan lets you choose your Keogh plan contribution limit from the outset. Limits cannot be changed. It also abides by the same IRS limits as a profit-sharing plan.

Defined-Benefit Plans

Defined-benefit plans are pension plans based on your years of employment and your salary. They prioritize guaranteed, set benefits, so you choose a pension goal and then put money in the account to fund it. For 2022, your annual benefit cannot exceed $245,000 or 100% of your mean compensation over your three highest consecutive calendar years, whichever is less.

These plans typically involve complex calculations to find the right balance of contribution and investment. They use personal factors like age and return goals to inform these calculations.

Pros of Keogh Plan

There are certain advantages to Keogh plans which may make them a retirement option for self-employed individuals to consider. For example, Keogh plans are a versatile savings vehicle. Depending on your retirement goals, you can open one as a defined-benefit or defined-contribution plan.

In addition, Keogh plans come with high contribution limits. So, they appeal to people who want to pursue more aggressive saving strategies.

Cons of Keogh Plan

Keogh plans do face their share of limitations. For example, they are restricted to self-employed workers and specific types of self-employed persons. Common-law employees, partners, and independent contractors cannot open a Keogh plan. Only those who work for or own an unincorporated business can qualify.

Keogh plans also require substantial administrative paperwork compared to other retirement accounts like traditional IRAs or a SEP IRA. Many times, someone opening a retirement plan can do so on their own. But a Keogh plan requires complex calculations that may require professional help.

Keogh Plan vs 401(k)

Keogh plans are less popular these days than alternatives like a 401(k) plan. Although the two share some traits, certain factors give 401(k) an advantage.

A 401(k) is a commonly offered employer-sponsored retirement plan based on the defined-contribution format. In 2022, most participants can contribute up to $20,500 in 2022. Participants 50 and older can contribute an additional $6,500.

That means 401(k) participants have lower contribution limits than those in a defined-benefit Keogh plan, who can contribute up to $245,000 for 2022.

But Keogh plans have a limited reach. They are only available to self-employed individuals and their employees. On the other hand, 401(k) plans are widely accessible to workers. So whether you work in a traditional office setting or freelancing, you may have the opportunity to open a 401(k).

Self-employed workers can open an individual 401(k), also called a solo 401(k) or a one-participant 401(k). This qualified retirement plan functions almost identically to traditional 401(k)s. So, self-employed individuals can contribute the standard contribution limit ($20,500 for 2022) and an additional 25% of net earnings.

Also, Keogh plans tend to come with administrative burdens that 401(k)s do not. So, the latter is generally easier to set up and consistently manage.

Keogh Plan	401(k)
Choice between defined-contribution plan or defined-benefit plan	Defined-contribution plan only
Pre-tax contribution and taxed withdrawals	Pre-tax contributions and taxed withdrawals
No loans	Can take a loan out on the balance
Withdrawal age starts at age 59 ½	Withdrawal age starts at age 59 ½
Withdrawals required by age 72	Withdrawals required by age 72 unless working
Higher contribution limits (with defined-benefit plan)	Accessible to wider range of companies, including owners or self-employed workers

The Takeaway

Regardless of which type of retirement account you use, it’s important to start saving for retirement as soon as possible. The earlier you start, the more time you’ll have to benefit from compound returns as your savings grow through the decades.

While SoFi does not offer Keogh plans, it does allow users to start saving for retirement. Once you open an account on the SoFi Invest® online brokerage, you can start saving for retirement via a traditional individual retirement account, a Roth IRA, or a SEP.

FAQ

Who qualifies for a Keogh plan?

Keogh plans are for self-employed workers and their employees. You are eligible to open a Keoph as long as you operate as a small business owner, partner, sole proprietorship, or limited liability company (LLC). However, independent contractors, common-law employees, and single members of a partnership cannot open a Keogh plan.

What is the difference between a Keogh plan and a 401(k)?

Both Keogh plans and 401(k)s are retirement savings vehicles, but they have different eligibility rules, contribution limits, and administrative requirements. Keogh plans are solely for self-employed workers, have higher contribution limits (with defined-benefit plans), and come with more administrative paperwork.

In comparison, 401(k)s are available to a broader range of workers, including company-salaried employees and self-employed individuals. They have lower contribution limits, but they are simple to set up.

Are Keogh plans still available?

Keogh plans are still available, although you may hear them called qualified plans or HR-10s. They are only available to self-employed workers and their employees, though.

Photo credit: iStock/Weekend Images Inc.

Finding Your Old 401k: Here’s What to Do

Why You Should Recover Your Old 401(k)

Tips for Finding an Old 401(k)

Contact Former Employers

Find Old Statements

Checking With the Department of Labor

Searching the National Registry

Starting Another 401(k)

Investing for Retirement With SoFi

FAQ

Is it possible to lose your 401(k)?

How do I find all my old 401(k) accounts?

Do I need my social security number to find an old 401(k)?

Guide to IRA Margin Accounts

What Is an IRA Margin Account?

How Does Limited Margin Work?

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.

Who Is Eligible for a Margin IRA?

IRA Margin Calls

Avoiding Good Faith Violations

Pros and Cons of Limited Margin Trading in an IRA

The Takeaway

FAQ

Is an IRA a cash or a margin account?

Is day trading possible in an IRA?

Can a 401k be a margin account?

5 Investment Tips for Retirees

5 Tips for Investing After Retirement

1. Assess Income Sources and Budget

2. Understand Time Horizon and Risk

3. Consider Diversification

4. Rebalance Regularly

5. Keep an Eye on Inflation

Smart, Safer Investment Options for Retirees

Cash

Bonds

Stocks

Certificates of Deposit

Annuities

The Takeaway

How Does Inflation Affect Retirement?

What Is Inflation?

How Can Inflation Impact Retirement?

5 Ways to Minimize the Impact of Inflation on Retirement

1. Invest Your Savings in the Stock Market

2. Use Tax-Advantaged Retirement Vehicles

3. Do Not Over- Allocate Long-Term Investments With a Low Rate of Return

4. Buy Inflation-Protected Securities

5. Buy Real Estate

Inflation Calculator for Retirement

The Takeaway

FAQ

Is inflation good or bad for retirees?

How can I protect my retirement savings from inflation?

Does your pension increase with inflation?

Your Guide to Keogh Plans and How They Work

Keogh Plan Definition

What Is a Keogh Plan?

Keogh Withdrawals

Types of Keogh Plans

Defined-Contribution Plans

Defined-Benefit Plans

Pros of Keogh Plan

Cons of Keogh Plan

Keogh Plan vs 401(k)

The Takeaway

FAQ

Who qualifies for a Keogh plan?

What is the difference between a Keogh plan and a 401(k)?

Are Keogh plans still available?

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