invest Archives | Page 12 of 208

Mar

2024

How to Convert a Traditional 401k to a Roth IRA

By Pam O’Brien | Growing Wealth, invest, Investing | Comments Off

When moving on to a new job, it may be difficult to keep track of the 401(k) left behind at your last job.

What’s more, administrative fees on the account that may have been previously covered by your employer might now shift to you—making it more expensive to maintain the 401(k) account once you’ve left the company. This may leave you wondering, can you roll over a 401(k) to a Roth IRA?

You can! In fact, one of the rollover options for a 401(k) is to convert it to a Roth IRA. For some people, especially those at a certain salary level, this may be an attractive option.

Read on to learn more about rolling over a 401(k) to a Roth IRA, and explore the benefits, restrictions, and ways to execute a rollover, so that you can decide if that’s the right financial move for you.

What Happens When You Convert a 401(k) to a Roth IRA?

Converting, or rolling over, your 401(k) to a Roth IRA means taking your money out of one retirement fund and placing it into a new one.

When you convert your 401(k) to a Roth IRA this is known as a Roth IRA conversion. However, because of some important differences between a traditional 401(k) and a Roth IRA, you will owe taxes when you make this kind of rollover.

The reason: A traditional 401(k) is funded with pre-tax dollars. You don’t pay taxes on the money when you contribute it. Instead, you pay taxes on the funds when you withdraw them in retirement. A Roth IRA, on the other hand, is funded with after-tax dollars. You pay taxes on the contributions in the year you make them, and your withdrawals in retirement are generally tax free.

Because with a 401(k) you haven’t yet paid taxes on the money in your account, when you roll it over to a Roth IRA, you’ll owe taxes on the money at that time. The money will be taxed at your ordinary income rate, depending on what tax bracket you’re in. For the 2023 and 2024 tax years, the income tax brackets range from 10% to 37%.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA account, but you typically pay investment costs for the securities in your portfolio.

Steps to Converting a 401(k) to a Roth IRA

These are the actions you’ll need to take to convert your 401(k) retirement plan to a Roth IRA.

1. Open a new Roth IRA account.

There are multiple ways to open an IRA, including through online banks and brokers. Choose the method you prefer.

2. Decide whether you want the rollover to be a direct transfer or indirect transfer.

With a direct transfer, you will fill out paperwork to transfer funds from your old 401(k) account into a Roth IRA. The money will get transferred from one account to another, with no further involvement from you.

With an indirect transfer, you cash out the 401(k) account with the intention of immediately reinvesting it yourself into another retirement fund. To make sure you actually do transfer the money into another retirement account, the government requires your account custodian to withhold a mandatory 20% tax — which you’ll get back in the form of a tax exemption when you file taxes.

The caveat: You will have to make up the 20% out of pocket and deposit the full amount into your new retirement account within 60 days. If you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.

3. Contact the company that currently holds your current 401(k) and request a transfer.

Tell them the type of transfer you want to make, direct or indirect. They will then send you the necessary forms to fill out.

4. Keep an eye out to make sure the transfer happens.

You’ll likely get an alert when the money is transferred, but check your new Roth IRA account to see that your funds land there safely. At that point, you can decide how you want to invest the money in your new IRA to start saving for retirement.

Considerations Before Rolling a 401(k) to a Roth IRA

There are a few rules to consider when rolling over 401(k) assets to a Roth IRA.

Roth IRA Contribution Limits

Contribution limits for Roth IRAs and traditional IRAs are much lower than they are for 401(k)s. For tax year 2023, you can contribute up to $6,500 in a Roth or traditional IRA. Those aged 50 and up can contribute up to $7,500, which includes $1,000 of catch-up contributions. For tax year 2024, individuals can contribute up to $7,000 in a Roth IRA, and those 50 and over can contribute up to $8,000.

By comparison, contribution limits for a 401(k) are $22,500 in 2023, and $23,000 in 2024 for those under age 50. Those aged 50 and over can make an additional $7,500 in catch-up contributions to a 401(k) in 2023 and 2024.

Income Limits for Roth IRA Eligibility

Unlike traditional IRAs, which anyone can contribute to, Roth IRAs have an income cap on eligibility. These income limits are adjusted each year to account for inflation. However, when you are rolling a 401(k) to a Roth IRA, the income limits do not apply. So if you are a high earner, a conversion from a 401(k) to a Roth IRA could be a good option for you.

What are those income caps? For tax year 2023, single filers with a modified adjusted gross income (MAGI) below $138,000 can contribute the full amount to a Roth IRA. However, those with a MAGI of $138,000 to $153,000 can only make a partial contribution to a Roth, while those who make more than $153,000 cannot contribute at all.

For individuals married filing jointly for tax year 2023, those with a MAGI of less than $218,000 can contribute the full amount, while those whose MAGI is $218,000 to $228,000 may contribute a partial amount, and those making more than $228,000 can’t contribute to a Roth IRA.

For tax year 2024, single filers with a MAGI below $146,000 can contribute the full amount to a Roth IRA, those with a MAGI between $146,000 and $161,000 can make a partial contribution, and those making more than $161,000 can’t contribute.

For individuals married filing jointly for tax year 2024, those with a MAGI under $230,000 can contribute the full amount, those whose MAGI is $230,000 to $240,000 can contribute a partial amount, and those making more than $240,000 can’t contribute to a Roth IRA.

As you can see, for high earners, the fact that these income limits do not apply to a 401(k) to Roth conversion, could be a potential reason to consider this type of rollover.

Rollover Amount Will be Taxed

You will have to pay taxes on your IRA rollover. Since your 401(k) account was funded with pre-tax dollars and a Roth IRA is funded with post-tax dollars, you’ll need to pay income tax on the 401(k) amount being rolled over in the same tax year in which your rollover takes place.

A Roth IRA is Subject to the Five-Year Rule

Once you transfer money into your new Roth IRA, it pays to keep it there for a while. If you withdraw any earnings that have been in the account for less than five years, you will likely be required to pay income tax and an additional 10% penalty. This is known as the five-year rule. After five years, any earnings withdrawn through a non-qualified distribution is subject to income tax only, with no penalties.

Penalties for Early Withdrawals

In addition to the five-year rule, non-qualified distributions or withdrawals from a Roth IRA — meaning those made before you reach age 59 ½ — can result in penalties and taxes. While there are certain exceptions that may apply, including having a permanent disability or using the funds to buy or build a first home, it’s wise to think twice and research any potential consequences before withdrawing money early from a Roth IRA.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Should You Convert Your 401(k) to a Roth IRA ?

Converting a 401(k) to a Roth IRA may be beneficial if you anticipate being in a higher tax bracket when you retire since withdrawals from the account in retirement are tax-free. And if you are a high earner, a 401(k) rollover to a Roth IRA may give you the opportunity to participate in a Roth IRA that you otherwise wouldn’t have.

Another advantage of a Roth IRA is that you can withdraw the money you contributed (but not the earnings) at any time without paying taxes or penalties. And unlike 401(k)s, there are no required minimum distributions (RMDs) with a Roth IRA. Finally, IRAs generally offer more investment options than many 401(k) plans do.

Can You Reduce the Tax Impact?

There are some potential ways to reduce the tax impact of converting a 401(k) to a Roth IRA. For instance, rather than making one big conversion, you could consider making smaller conversion amounts each year, which may help reduce your tax bill.

Another way to possibly lower the tax impact is if you have post-tax money in your 401(k). This might be the case if you contributed more than the maximum deductible amount allowed to your 401(k), for instance. You may be able to avoid paying taxes currently by rolling over the after-tax funds in your 401(k) to a Roth IRA, and the rest of the pre-tax money in the 401(k) to a traditional IRA.

In general it’s wise to consult a tax professional to see what the best strategy is for you and your specific situation.

The Takeaway

One way to handle a 401(k) account from a previous employer is by rolling it over into a Roth IRA. For some individuals, it might be the only way to take advantage of a Roth IRA, which typically has an income limit. With a Roth IRA, account holders can contribute post-tax dollars now, and enjoy tax-free withdrawals in retirement.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can I roll over my 401(k) to an existing Roth IRA?

Yes, you can roll over a 401(k) to an existing Roth IRA — or to a new Roth IRA.

Can I roll my 401(k) into a Roth IRA without penalty?

You can roll over 401(k) to a Roth IRA without penalty as long as you follow the 60-day rule if you’re doing an indirect rollover. You must deposit the funds into a Roth IRA within 60 days to avoid a penalty.

How much does it cost to roll over 401k to Roth IRA?

Typically there is no charge to roll over a 401(k) to a Roth IRA, unless you are charged processing fees by the custodian of your old 401(k) plan or the new Roth IRA. However, you will owe taxes on the money you roll over from a 401(k) to a Roth IRA. The money will be taxed at your ordinary income tax rate.

Is there a time limit when rolling over a 401(k) to a Roth IRA?

If you do an indirect rollover, in which you cash out the money from your 401(k), you have 60 days to deposit the funds into a Roth IRA in order to avoid being charged a penalty.

Is there a limit on rollover amounts to a Roth IRA?

No, there is no limit to the amount you can roll over to a Roth IRA. The standard annual contribution limits to a Roth IRA do not apply to a rollover.

How do you report a 401(k) rollover to a Roth IRA?

You will need to report a 401(k) rollover on your taxes. Your 401(k) plan administrator will send you a form 1099-R with the distribution amount. You typically report the distribution amount on IRS form 1040 when filing your taxes. You can consult a tax professional with any questions you might have.

Can you roll over partial 401(k) funds to Roth IRA?

You can typically roll over partial 401(k) funds as long as your plan allows it. Check with your plan’s administrator.

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Mar

2024

What Is a Put Option? How They Work and How to Trade Them

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

What Is a Put Option?

In options trading, a put option is the purchase of a contract that gives an investor the right, but not the obligation, to sell a specific security at a certain price by a certain date. Put options are different from call options, the purchase of which gives buyers the right, but not the obligation, to buy a particular security at a certain price by a certain date.

Investors can use put options to trade a variety of securities, including stocks, bonds, futures and commodities. Trading options can potentially lead to greater returns, but it can also amplify losses, making it a potentially riskier strategy.

Understanding certain options terminology — including what a put option is and how it works — can be helpful if you’re thinking about incorporating options trading strategies into your portfolio.

Options Basics

Before digging into the details of put options, it’s helpful to understand a little about how options trading works in general. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying security at a certain price — this is called the strike price. Options must also be exercised by a specific expiration date.

An investor who buys an options contract pays a premium to do so, which can be determined by the volatility of the underlying asset and the option’s expiration date. If the option holder does not exercise the option by the expiration date, they lose their right to buy or sell the underlying security and the option has no value.

Options are derivative investments, since they derive their value from the underlying assets. They can be bought and sold on an exchange, just like the underlying assets they’re associated with.

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

How Does a Put Option Work?

A put option is a specific type of options contract. Here’s an example: The buyer of the put option has the right, but not the obligation, to sell shares of an underlying asset at the agreed-upon strike price up until the option’s expiration date. Meanwhile, the seller of the put option has an obligation to buy those shares from the buyer if the buyer chooses to exercise the put option.

Put options increase in value as the price of the underlying security decreases. Likewise, put options lose value as the price of the underlying stock increases. Depending on where the underlying asset’s price is in relation to a put option’s strike price, the option can be one of the following:

• In the money: An in-the-money put option has a strike price that’s higher than the underlying asset’s price.

• At the money: An at-the-money (or on-the-money) put option has a strike price that’s equal to the underlying asset’s price.

• Out of the money: An out-of-the-money put option has a strike price that’s below the underlying asset’s price.

Of the three, the in-the-money put option is more desirable because it means a put option has intrinsic value. If you’re the buyer of a put option and that option is in the money, it means you can sell the underlying asset for more than what it’s valued at by the market.

Put Option Example

An example might make things even more clear.

Assume you own shares of XYZ stock. The stock is currently trading at $50 a share but you believe its price will dip to $40 per share in the near future.
You purchase a put option which would allow you to sell the stock at its current price of $50 per share. The options contract conveys the right to sell 100 shares of the stock, with a premium of $1 per share.

If your hunch about the stock’s price pays off and the price drops to $40 per share, you could exercise the option. This would allow you to sell each of the 100 shares in the contract for $10 more than what it’s worth, resulting in a gross profit of $1,000. When you factor in the $1 per share premium, your net profit ends up being $900, less any commission fees paid to your brokerage.

Difference Between Put and Call Option

It’s important to understand the difference between put and call options in trading. A call option is an options contract that gives the buyer the right, but not the obligation, to purchase shares of an underlying asset at the strike price by the expiration date. The seller of the call option is obligated to sell those shares to the call option buyer, should they decide to exercise the option.

Like put options, call options can also be in the money, at the money, or out of the money. An in-the-money call option has a strike price that’s below the underlying asset’s actual price. An out-of-the-money call option has a strike price that’s above the underlying asset’s actual price.

Here’s a simple way to think of the differences between put options and call options: With buying put options, the goal is to sell an underlying asset for more than its market value. With buying call options, the goal is to buy an underlying asset for less than what it’s worth.

Pros and Cons of Trading Put Options

Options trading may appeal to a certain type of investor who’s comfortable moving beyond stock and bond trading. Like any other investment, put options can have both advantages and disadvantages. Weighing them both in the balance can help you decide if options trading is something you should consider pursuing.

Pros	Cons
• Low initial investment required compared to trading stocks. • The option buyer has the right but no obligation to sell the underlying asset. • Higher return potential, on a percentage basis.	• Losses may be amplified. • The option seller has the obligation to buy the underlying asset at the strike price if the buyer decides to execute the contract, which could result in greater downside for the seller. • Unforeseen volatility may drastically affect price movements.

Pros

Cons

• Low initial investment required compared to trading stocks.

• The option buyer has the right but no obligation to sell the underlying asset.

• Higher return potential, on a percentage basis.

• Losses may be amplified.

• The option seller has the obligation to buy the underlying asset at the strike price if the buyer decides to execute the contract, which could result in greater downside for the seller.

• Unforeseen volatility may drastically affect price movements.

Pros of Trading Put Options

• Lower investment. When you purchase a put option, you’re paying a premium and your brokerage’s commission fees. When you purchase shares of stock, you may be investing hundreds or even thousands of dollars at a time. Between the two, put options may be more attractive if you don’t want to tie up a lot of cash in the markets.

Also, buying a put option gives you the right to sell a particular asset at a set strike price but you’re not required to do so. You can always choose to let the option expire; you’d just be out the premium and commission fees you paid.

• Return potential. Trading put options can be lucrative if you’re able to sell assets at a strike price that’s well above their actual price. That might result in a higher profit margin than if you were trading the underlying asset itself.

Cons of Trading Put Options

• Loss amplification. While trading put options can potentially lead to better returns, it can also potentially amplify your losses. If you’re selling put options, you’re obligated to sell the underlying asset at the strike price, even if that strike price is not in your favor.

• Volatility. Volatility can threaten returns with put options if an asset’s price doesn’t move the way you were expecting it to. So it’s possible you might walk away with lower gains than anticipated if you choose to exercise a put option during a period of heightened volatility.

How Do You Trade Put Options?

It’s possible to trade put options inside an online brokerage account that allows for options trading (not all of them do). When deciding which put options contracts to buy, it’s important to consider:

• Where the underlying asset is trading currently

• Which way you think the asset’s price is most likely to move

• How much of a premium you’re willing to pay to purchase an options contract

It’s also important to consider the expiration date for a put option. Keep in mind that options with a longer expiration period may come with a higher premium.

Different Put Option Styles

There’s a difference between European-style and American-style put options.

With European-style options, you can only exercise the option on its expiration date.

With American-style put options you can exercise the option at any time between the date you purchased it and its expiration date, offering more flexibility for the investor.

Put Option Trading Strategies

Different options trading strategies can be used with put options. These strategies vary in terms of reward potential and risk exposure. As you get more familiar with how to trade stock puts, you might begin exploring more advantaged techniques. Here are some of the most common put option plays.

Long Put

A long put strategy involves purchasing a put option with the expectation that the underlying asset’s price will fall. For example, you might want to buy 100 shares of XYZ stock which is trading at $100 per share, which you believe will drop to $90 per share. If the stock’s price drops to $90 or below, you could exercise your contract at the higher $100 per share price point.

Short Put

A short put is the opposite of a long put. In a short put strategy, you’re writing or selling the put option with the expectation that the underlying security’s price will rise or remain above the strike price until it expires. The payoff comes from being able to collect the premium on the option even if the buyer doesn’t exercise it.

Recommended: How to Sell Options for Premium

Married Put

A married put strategy involves holding a long position in an underlying security while also purchasing an at-the-money option for the same security. The idea here is to minimize downside risk by holding both the asset itself and an at-the-money put option.

Long Straddle

A long straddle strategy involves buying both a call option and a put option for the same security, with the same strike price and expiration date. By straddling both sides, you can still end up turning a profit regardless of which the underlying asset’s price moves.

The Takeaway

Options trading may be right for retail investors who are comfortable taking more risk in exchange for a chance to potentially earn higher returns. Getting familiar with put options and how a stock put works is the first step.

Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

Trade options with low fees through SoFi.

Photo credit: iStock/Drazen_

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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.
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Mar

2024

Investing in Real Estate Investment Trusts (REITs)

By Rebecca Lake | Financial Independence, invest, Investing | Comments Off

With REIT investing, you gain access to income-producing properties without having to own those properties outright. REITs may own several different kinds of properties (e.g. commercial, residential, storage) or focus on just one or two market segments.

Real estate investment trusts or REITs can be a great addition to a portfolio if you’re hoping to diversify. REIT investing might appeal to experienced investors as well as beginners who are looking to move beyond stocks and bonds.

What Is a REIT?

A REIT is a trust that owns different types of properties that generate income. REITs are considered a type of alternative investment, because they don’t move in sync with traditional stock and bond investments.

Some of the options you might find in a REIT can include:

• Apartment buildings

• Shopping malls or retail centers

• Warehouses

• Self-storage units

• Office buildings

• Hotels

• Healthcare facilities

REITS may focus on a particular geographic area or property market, or only invest in properties that meet a minimum value threshold.

A REIT may be publicly traded, meaning you can buy or sell shares on an exchange the same as you would a stock. They can also be non-traded, or private. Publicly traded and non-traded REITs are required to register with the Securities and Exchange Commission (SEC), but non-traded REITs aren’t available on public stock exchanges.

Private REITs aren’t required to register with the SEC. Most anyone can invest in public REITs while private REITs are typically the domain of high-net-worth or wealthy investors.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

How Do REITs Work?

With REIT investing individuals gain access to various types of real estate indirectly. The REIT owns and maintains the property, collecting rental income (or mortgage interest).

Investors can buy shares in the REIT, which then pays out a portion of the collected income to them as dividends.

To sum it up: REITs let investors reap the benefits of real estate investing without having to buy property themselves.

REIT Qualifications

Certain guidelines must be met for an entity to qualify as a REIT. The majority of assets must be connected to real estate investment. At least 90% of taxable income must be distributed to shareholders annually as dividend payouts.

Additionally, the REIT must:

• Be organized in a way that would make it taxable as a corporation if not for its REIT status

• Have a board of trustees or directors who oversee its management

• Have shares that are fully transferable

• Have at least 100 shareholders after its first 100 as a REIT

• Allow no more than 50% of its shares to be held by five or fewer individuals during the last half of the taxable year

• Invest at least 75% of assets in real estate and cash

• Generate at least 75% of its gross income from real estate, including rents and mortgage interest

Following these rules allows REITs to avoid having to pay corporate tax. That benefits the REIT but it also creates a secondary boon for investors, since the REIT may be better positioned to grow and pay out larger dividends over time.

Types of REITs

The SEC classifies three categories of REITs: equity, mortgage, and hybrid. Each type of REIT may be publicly traded, non-traded, or private. Here’s a quick comparison of each one.

• Equity REITs own properties that produce income. For example, an equity REIT might own several office buildings with units leased to multiple tenants. Those buildings generate income through the rent the tenants pay to the REIT.

• Mortgage REITs don’t own property. Instead, they generate income from the interest on mortgages and mortgage-backed securities. The main thing to know about mortgage REITs is that they can potentially produce higher yields for investors, but they can also be riskier investments.

• Hybrid REITs own income-producing properties as well as commercial mortgages. So you get the best (and potentially, the worst) of both worlds in a single investment vehicle.

Aside from these classifications, REITs can also be viewed in terms of the types of property they invest in. For example, there are storage-unit REITs, office building REITs, retail REITs, healthcare REITS, and more.

Some REITs specialize in owning land instead of property. For example, you might be able to own a stake in timberland or farmland through a real estate investment trust.

How Do REITs Make Money?

REITs make money from the income of the underlying properties they own. Again, those income sources can include:

• Rental income

• Interest from mortgages

• Sale of properties

As far as how much money a REIT can generate, it depends on a mix of factors, including the size of the REIT’s portfolio, its investment strategy, and overall economic conditions.

Reviewing the prospectus of any REIT you’re considering investing in can give you a better idea of how it operates. One thing to keep in mind with REITs or any other type of investment is that past performance is not an indicator of future returns.

How to Invest in REITs

There are a few ways to invest in REITs if you’re interested in adding them to your portfolio. You can find them offered through brokerages and it’s easy to open a trading account if you don’t have one yet.

REIT Shares

The first option for investing in REITs is to buy shares on an exchange. You can browse the list of REITs available through your brokerage, decide how many shares you want to buy, and execute the trade. When comparing REITs, consider what it owns, the potential risks, and how much you’ll need to invest initially.

You might buy shares of just one REIT or several. If you’re buying multiple REITs that each hold a variety of property types, it’s a good idea to review them carefully. Otherwise, you could end up increasing your risk if you’re overexposed to a particular property sector.

REIT Funds

REIT mutual funds allow you to own a collection or basket of investments in a single vehicle. Buying a mutual fund focused on REITs may be preferable if you’d like to diversify with multiple property types.

When researching REIT funds, consider the underlying property investments and also check the expense ratio. The expense ratio represents the annual cost of owning the fund. The lower this fee is, the more of your investment returns you get to keep.

Again, you can find REIT mutual funds offered through a brokerage. It’s also possible to buy them through a 401(k) or similar workplace retirement plan if they’re on your plan’s list of approved investments.

REIT ETFs

A REIT exchange-traded fund (or ETF) combines features of stocks and mutual funds. An ETF can hold multiple real estate investments while trading on an exchange like a stock.

REIT ETFs may be attractive if you’re looking for an easy way to diversify, or more flexibility when it comes to trading.

In general, ETFs can be more tax-efficient than traditional mutual funds since they have lower turnover. They may also have lower expense ratios.

Benefits and Risks of REITs

Are REITs right for every investor? Not necessarily, and it’s important to consider where they might fit into your portfolio before investing. Weighing the pros and cons can help you decide if REITs make sense for you.

Benefits of REITs

• Dividends. REITs are required to pay out dividends to shareholders, which can mean a steady stream of income for you should you decide to invest. Some REITs have earned a reputation for paying out dividends well above what even the best dividend stocks have to offer.

• Diversification. Diversifying your portfolio is helpful for managing risk, and REITs can make that easier to do if you’re specifically interested in property investments. You can get access to dozens of properties or perhaps even more, inside a single investment vehicle.

• Hands-off investing. Managing actual rental properties yourself can be a headache. Investing in REITs lets you reap some of the benefits of property ownership without all the stress or added responsibility.

• Market insulation. Real estate generally has a low correlation with stocks. If the market gets bumpy and volatility picks up, REITs can help to smooth the ride a bit until things calm down again.

💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

Risks of REITs

• Liquidity challenges. Buying REIT shares may be easy enough, but selling them can be a different matter. You may need to plan to hold on to your shares for a longer period than you’re used to or run into difficulties when trying to trade shares on an exchange.

• Taxation. REIT investors must pay taxes on the dividends they receive, which are treated as nonqualified for IRS purposes. For that reason, it might make sense to keep REIT investments inside a tax-advantaged IRA to minimize your liability.

• Interest rate sensitivity. When interest rates rise, that can cause REIT prices to drop. That can make them easier to buy if the entry point is lower, but it can make financing new properties more expensive or lower the value of the investments the REIT owns.

• Debt. REITs tend to carry a lot of debt, which isn’t unusual. It can become a problem, however, if the REIT can no longer afford to service the debt. That can lead to dividend cuts, making them less attractive to investors.

The Takeaway

REITs can open the door to real estate investment for people who aren’t inclined to go all-in on property ownership. REITs can focus on a single sector, like storage units or retail properties, or a mix. If you’re new to REITs, it’s helpful to research the basics of how they work before diving into the specifics of a particular investment.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

How do I buy a REIT?

You can buy shares of a REIT through a broker if it’s publicly traded on an exchange. If you’re trying to buy shares of a private REIT, you can still go through a broker, but you’ll need to find one that’s participating in the offering. Keep in mind that regardless of how you buy a REIT, you’ll need to meet minimum investment requirements to purchase shares.

Can I invest $1,000 in a REIT?

It’s possible to find REITs that allow you to invest with as little as $1,000 and some may have a minimum investment that’s even lower. Keep in mind, however, that private or non-traded REITs may require much larger minimum investments of $10,000 or even $50,000 to buy in.

Can I sell my REIT any time?

If you own shares in a public REIT you can trade them at any time, the same way you could a stock. If you own a private REIT, however, you’ll typically need to wait for a redemption period to sell your shares. Redemption events may occur quarterly or annually and you may pay a redemption fee to sell your shares.

What is the average return on REITs?

The 10-year annualized return for the S&P 500 United States REIT index, which tracks the performance of U.S. REITs, was 2.34%. Like any sector, however, REITs have performed better and worse over time. Also, the performance of different types of REITs (self-storage, strip malls, healthcare, apartments, etc.) can vary widely.

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SOIN0124113

Mar

2024

Black Swan Events and Investing, Explained

By Melanie Mannarino | Growing Wealth, invest, Investing | Comments Off

The term “black swan event” is widely used in finance today to describe an unanticipated event that severely impacts the financial markets.

The name stems from the discovery of avian black swans by Dutch explorer De Vlamingh while exploring Australia in the late 1600s. Historians credit de Vlamingh with separating the “expected” (i.e., a white swan, which were plentiful) with the “unexpected” (i.e., a black swan, which was a rare sighting).

Writer, professor and former Wall Street trader Nassim Nicholas Taleb popularized the financial theory of “black swan” events in his 2007 book The Black Swan: The Impact of the Highly Improbable.

“A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences,” Taleb wrote in his book. “Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.”

Taleb described the occasional — but highly problematic — arrival of black swans on the investment landscape, and outlined what, in his opinion, economists and investors could do to better understand those events and protect assets when they occur.

What Is a Black Swan Event?

According to Taleb, a black swan event is identifiable due to its extreme rarity and to its catastrophic potential damage to life and health, and to economies and markets. Taleb also notes in the book that once a black swan landed and devastated everything in its path, it was obvious in hindsight to recognize the event occurred.

It can be a difficult concept for investors. Who, after all, throughout the history of the stock market, would leave their finances unprotected from a black swan onslaught if they knew the event was imminent? By definition, predicting the arrival of a black swan is largely outside the realm of probability. All anyone needs to know, Taleb maintains, is that black swans occur and investors should not be surprised when they do happen.

Taleb outlines three indicators that signal the arrival of a black swan event. Each is meaningful in truly understanding a black swan scenario.

1. Black swan events are outliers. No similar and prior event could predict the arrival of a particular black swan.

2. Black swan events are severe, and they inflict widespread damage. That damage also has a severe impact on economies, cultures, institutions, and on families and communities.

3. They’re usually seen in the rear view mirror. When black swans occur and eventually dissipate, recriminations take its place. While the specific black swan event wasn’t predicted, observers say the event could have and should have been prevented.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

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Black Swan Event Examples

It’s become common for politicians and investors to call any negative event a “black swan” event, whether or not it meets Tasam’s definition. However, history has no shortage of true black swan events, which led to large, unpredictable market corrections.

The following events are considered some of the most infamous among economists and historians.

The Soviet Union’s Historic Collapse

Economists consider the collapse of the Soviet Union in 1991 a major black swan. Only 10 years earlier, the Russian empire was considered a major global economic and military threat. A decade later, the Soviet Union was no more, significantly shifting the global geopolitical and economic stage.

The 9/11 Terrorist Attacks

In hindsight, the United States might have seen the attacks on the World Trade Center in New York and the Pentagon in Washington, D.C. coming. International terrorism had long been a big risk management issue for the U.S. government, but the severity of the attack left the world stunned – and plunged the U.S. into a serious economic decline. Stocks lost $1.4 trillion in value the week after the attacks.

The Dot-com Bubble

In the late 1990s, investors were indulging in irrational exuberance and nowhere was that more clear than with the nation’s stock market — particularly with white-hot technology stocks. With an army of Internet stocks in the IPO pipeline, overvalued tech stocks plummeted, taking the entire stock market down in the process. The damage was staggering, with the Nasdaq Index losing 78% of its value between March 2000 and October 2002.

The 2008-2009 Financial Crisis

After a series of high-risk derivative bets by major banks, mounting losses in the U.S. mortgage market, and the collapse of Lehman Brothers, the U.S. economy teetered on the edge of disaster — a scenario it would take almost a decade to correct. The unemployment rate doubled to more than 10%, domestic product declined 4.3%, and at its worst point, the S&P 500 plummeted 57%, creating a bear market.

It’s worth noting that although some people have referred to the Covid-19 pandemic as a black swan event, Taleb does not consider it to be one since he feels there was enough historical precedence to foresee it.

Why Do Black Swan Events Happen?

Since black swan events are virtually impossible to predict, there is no concrete answer as to why they happen. The world is complicated, with many different factors — political, financial, environmental, and social, among others — impacting one another and setting off chains of events that could potentially become black swan events in scope and magnitude.

💡 Quick Tip: Distributing your money across a range of assets — also known as diversification — can be beneficial for long-term investors. When you put your eggs in many baskets, it may be beneficial if a single asset class goes down.

Can You Predict a Black Swan Event?

By its very definition, it’s nearly impossible to predict a specific black swan event. This makes it hard to prepare for black swans as you would for other investment risks.

Instead, investors may want to focus on making sure they’re prepared, generally, for the unknown. Here’s how to help do that:

• Be pragmatic. Investors are better off knowing unanticipated negative events do exist and could arrive on their doorstep at any time. Keep in mind the possibility of black swans and consider building an expectation of stock volatility into your overall portfolio-management strategy.

• Don’t get bogged down by long-term forecasts. Don’t rely solely on expert predictions or far-off investment outlooks, since unexpected events, including black swans can happen at any time and it’s normal for markets to fluctuate. Instead, consider building a more conservative element into your investment portfolio, one that relies more on protecting your assets, so you’re not tempted to make rash moves during a black swan event. Have a candid conversation with your financial advisor, or educate yourself if you don’t have a financial advisor, about how proper diversification may help build a portfolio that balances the need for performance with the need for protection.

• Don’t panic when a black swan event happens. As tempting as it might be to try to get out of a market during a black swan event and get back in when it fades away, resist the urge to engage in market timing.

• Look for opportunities. Putting money into the markets during a black swan event can be difficult and potentially risky, but investing in a down market may yield positive returns over the long-term.

Rather than trying to time the market, consider using a dollar-cost averaging strategy, in which you make regular purchases — even during a black swan event.

The Takeaway

For long-term investors, the prudent stance on black swan events is to acknowledge their existence, build some protection into your investment portfolio to help mitigate potential damage, and be ready to take full advantage of a market upturn once the black swan flies away.

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

FAQ

What is a black swan event in recent years?

One of the most recent black swan events was the 2008-2009 financial crisis known as the Great Recession. That’s when a series of high-risk derivative bets by major banks, mounting losses in the U.S. mortgage market, and the collapse of Lehman Brothers, the biggest U.S. bankruptcy ever, pushed the U.S. economy to the edge of disaster.

What was the biggest black swan event?

The Great Depression of 1929 was probably the most infamous black swan event. It started with the U.S. stock market crash in October 1929 and led to a worldwide drop in stock prices. The U.S. economy shrank by 36% between 1929 and 1933, many banks failed, and the U.S. unemployment rate skyrocketed to more than 25%. It was the longest and most severe economic recession in modern history.

What are the attributes that identify a black swan event?

According to Nassim Nicholas Taleb, who popularized the black swan theory, the attributes that identify a black swan event are: 1) black swan events are rare and no similar or prior event could predict them, 2) black swan events are severe and inflict widespread damage, and 3) after the fact, observers say the black swan event could have and should have been prevented.

Photo credit: iStock/by Martin Nancekievill

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

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.

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

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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SOIN0124084

Mar

2024

What Is a Stock Split? How Does It Affect Investors?

By Michael Flannelly | Growing Wealth, invest, Investing | No Comments

Table of Contents

What is a Stock Split?
Types of Stock Splits
Why Do Companies Conduct Stock Splits?
Pros and Cons of Stock Splits
Examples of Stock Splits Throughout History
What Happens When A Stock You Own Splits?

A skyrocketing share price is usually a good thing for a company; investors expect the company to continue growing in the future. However, a stock trading with a hefty price tag may frighten away smaller investors, who may perceive the stock as too rich for their blood. That means many investors might pass over the company’s stock for other stocks with a lower per share price tag.

To combat this, a company may conduct a stock split. This action brings down the price of the company’s stock so that shares look more attractive to more investors, even though the company’s value remains the same. The idea is that investors can invest, and the company gets more marketability and liquidity on the stock market.

Learn more about a stock split and how it works.

What Is a Stock Split?

A stock split is when a company increases the number of its outstanding shares on the stock market, which lowers the price of its shares, but its market capitalization (sometimes referred to as market cap) stays the same. This is also known as a forward stock split.

For example, if an investor owns 10 shares of a company with a stock price of $100 and the company announces a 5-to-1 stock split, the investor will then own 50 shares of the stock trading at $20 per share after the stock split. Despite the split, the shareholder still owns $1,000 worth of stock.

A stock split may also be referred to as a one-time stock dividend, since the company is giving out additional shares to stockholders.

What Is a Reverse Stock Split?

In a reverse stock split, a company swaps each outstanding share of the company’s stock for a fraction of a share. A company often conducts a reverse stock split when the share price is low and the company is looking to increase the share price.

For example, in late July 2021, General Electric (GE) completed a 1-for-8 reverse split of its shares to boost the stock’s share price. The reverse split increased its share price from less than $13 pre-split to more than $100 post-split; the company replaced every eight shares held by an investor with one share.

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

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Types of Stock Splits

A number of different ratios can be used to split a stock. When the bigger number comes first in the ratio (such as 2 for 1) it means that the number of outstanding shares will increase—this is a forward stock split. In other words, the stock split ratio can reveal the number of new shares that will be created.

Here are some common stock split types and what they mean.

5 for 1 (5:1)

With a 5 for 1 stock split, for every one share of stock that currently exists, four new shares will be created, for a total of five shares. The share price will adjust downward accordingly, but the company’s market capitalization will stay the same.

2 for 1 (2:1)

In a 2 for 1 stock split, one new share of stock is created for every share that already exists, for a total of two shares. Again, the price for each share will adjust accordingly. A 2 for 1 stock split is one of the most common stock splits.

3 for 1 (3:1)

With a 3 for 1 split, for every share of existing stock, two more shares of stock are created, for a total of 3 shares.

3 for 2 (3:2)

Another fairly common stock split is the 3 for 2 split. In this case, one new share of stock is created for two already-existing shares, for a total of three shares.

Why Do Companies Conduct Stock Splits?

Companies will often split their stock when the share price gets too high. By splitting the stock, a company lowers its share price and makes it more affordable to retail investors, even though the company’s value stays the same.

For example, retail investors may be more likely to buy a chunk of shares of a stock trading at $20 rather than shares trading at $100 or more. This move to reduce the individual share price helps increase the stock’s liquidity in the market.

Pros and Cons of Stock Splits

There are several potential benefits of stock splits, but there are some possible disadvantages of the practice as well.

Pros

Some advantages of a stock split include:

The stock may become more accessible to more investors.

If a stock’s price is very high, smaller investors may be less likely to buy it. Splitting the stock and making it more affordable can result in more investors purchasing the stock.

The stock may have greater liquidity.

Creating more outstanding shares of the stock can make it easier to buy and sell it. For many investors, greater liquidity means they can more readily access their money by selling the stock if they need the funds. Liquidity is typically an important consideration when building a portfolio.

The stock’s price may rise.

Companies that undergo a stock split often do so because their stock price is rising, signaling investor confidence in the company. So, the announcement of a stock split is an indication that the company is doing well. Investors may want to put money into the company, pushing the share price up even before the stock split.

Following the stock split, the stock’s share price may go up because the lower price makes it more affordable to smaller retail investors that may not be able to purchase shares at, say, a $1,000 price. There becomes an increased demand for the lower share price.

Cons

Stock splits can also have drawbacks, such as:

Expensive and complicated.

In order to conduct a stock split, a company must get legal oversight of the process and meet regulatory requirements, which can be costly. A stock split does not change the company’s market cap, so the company must determine whether a split is worth the expense involved.

May attract too many investors.

A company may prefer to keep ownership of its shares exclusive. However, with a stock split, many more investors may be able to afford to buy the stock, meaning the shares would lose their exclusive equity ownership.

Potential for the share price to drop in the future.

It’s possible that once a stock is split and its share price is reduced, the price might drop even lower in the future, which lowers the value of the stock. For instance, if a company’s performance suffers, the face value of the stock might drop more in response.

Examples of Stock Splits Throughout History

Here are some notable stock splits from the last couple of decades:

• Apple (AAPL): The computer giant split its stock by a 4-to-1 ratio in August 2020. Prior to the split, the stock was trading at around $500. After the split, the stock traded at about $124.

• Netflix (NFLX): The entertainment company announced a 7-to-1 stock split in July 2015. Before the split, the stock was trading at nearly $800 per share. After the split, the stock traded at about $114.

• Nike (NKE): The sports apparel company split its stock by a 2-to-1 ratio in December 2015. Prior to the split, the stock was trading at around $128 per share. After the split the stock traded at about $64 per share.

• Nvidia (NVDA): The technology company engaged in a 4-to-1 stock split in July 2021. Before the split, Apple’s stock was trading at around $750, and after the split, the shares were priced near $187.

• Tesla (TSLA): The electric car manufacturer split its stock by a 5-to-1 ratio in August 2020. Before the split, the stock was trading at around $2,200. After the split, the stock traded at around $440. Tesla’s shares rallied during the next two years, so the company declared a 3-to-1 stock split in August 2022, bringing the stock price down to around $300 from nearly $900 per share.

What Happens When a Stock You Own Splits?

If an investor owns stock in a company that announces a split, it will not materially affect the investment. As mentioned above, if an investor owns $1,000 worth of stock and a company splits its stock, an investor will still own $1,000 worth of stock after the split.

The additional shares at the lower share price will be automatically added to an investor’s account by the broker.

A stock split does not dilute the ownership of existing shareholders like a new stock issue may do. After a stock split, an investor still owns the same percentage of the company.

Recommended: Understanding Stock Dilution

The Takeaway

When a company announces a stock split, it can be tempting for investors to buy the stock because it will be more affordable on a per share basis. However, investors should be wary of making rash decisions simply because a stock may look more affordable and attractive. After all, the value of the company is still the same.

For most investors, it’s wise to make financial decisions that line up with their long-term investment and wealth-building goals, regardless of a stock’s price tag.

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

FAQ

Are stock splits a good thing?

Generally, a stock split is considered to be a good thing. It typically happens when the price of a company’s stock is high. The high price and value of the stock tends to be a positive sign reflecting that the company is doing well. Splitting the stock may encourage more investment in it, which could then drive up the price of the stock and be beneficial.

Do stocks do better after a split?

It is possible that a stock might do better after a split, but this isn’t always the case. The stock may be bought by more investors, which could drive up its share price. But even after a stock split, the company’s market capitalization doesn’t change. And it’s possible that a stock could drop in price after a split.

Is a stock split bullish or bearish?

A forward stock split, in which more shares of stock are created, is generally considered bullish, since it typically indicates that the company is performing well. However, a reverse stock split, which reduces the total number of shares of a stock, is usually considered bearish, since it may indicate that a company has underperformed.

SOIN0124054

How to Convert a Traditional 401k to a Roth IRA

What Happens When You Convert a 401(k) to a Roth IRA?

Steps to Converting a 401(k) to a Roth IRA

1. Open a new Roth IRA account.

2. Decide whether you want the rollover to be a direct transfer or indirect transfer.

3. Contact the company that currently holds your current 401(k) and request a transfer.

4. Keep an eye out to make sure the transfer happens.

Considerations Before Rolling a 401(k) to a Roth IRA

Roth IRA Contribution Limits

Income Limits for Roth IRA Eligibility

Rollover Amount Will be Taxed

A Roth IRA is Subject to the Five-Year Rule

Penalties for Early Withdrawals

Should You Convert Your 401(k) to a Roth IRA ?

Can You Reduce the Tax Impact?

The Takeaway

FAQ

Can I roll over my 401(k) to an existing Roth IRA?

Can I roll my 401(k) into a Roth IRA without penalty?

How much does it cost to roll over 401k to Roth IRA?

Is there a time limit when rolling over a 401(k) to a Roth IRA?

Is there a limit on rollover amounts to a Roth IRA?

How do you report a 401(k) rollover to a Roth IRA?

Can you roll over partial 401(k) funds to Roth IRA?

What Is a Put Option? How They Work and How to Trade Them

What Is a Put Option?

Options Basics

Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

How Does a Put Option Work?

Put Option Example

Difference Between Put and Call Option

Pros and Cons of Trading Put Options

Pros of Trading Put Options

Cons of Trading Put Options

How Do You Trade Put Options?

Different Put Option Styles

Put Option Trading Strategies

Long Put

Short Put

Married Put

Long Straddle

The Takeaway

Investing in Real Estate Investment Trusts (REITs)

What Is a REIT?

Alternative investments, now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

How Do REITs Work?

REIT Qualifications

Types of REITs

How Do REITs Make Money?

How to Invest in REITs

REIT Shares

REIT Funds

REIT ETFs

Benefits and Risks of REITs

Benefits of REITs

Risks of REITs

The Takeaway

FAQ

How do I buy a REIT?

Can I invest $1,000 in a REIT?

Can I sell my REIT any time?

What is the average return on REITs?

Black Swan Events and Investing, Explained

What Is a Black Swan Event?

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Black Swan Event Examples

The Soviet Union’s Historic Collapse

The 9/11 Terrorist Attacks

The Dot-com Bubble

The 2008-2009 Financial Crisis

Why Do Black Swan Events Happen?

Can You Predict a Black Swan Event?

The Takeaway

FAQ

What is a black swan event in recent years?

What was the biggest black swan event?

What are the attributes that identify a black swan event?

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