invest Archives | Page 30 of 208

Feb

2024

2024 Tax Season: Capital Gains Tax Guide

By Carla Tardi | Growing Wealth, invest, Investing | No Comments

What Is Capital Gains Tax?

Capital gains taxes are the taxes you pay on any profits you make from selling investments, like stocks, bonds, properties, cars, or businesses. The tax isn’t applied for owning these assets — it only hits when you profit from selling them.

It’s important for beginner investors to understand that a number of factors can affect their capital gains tax rate: how long they hold onto an investment, which asset they’re selling, the amount of their annual income, as well as their marital status.

Read on to learn how capital gains work, the capital gains tax rates, and tips for lowering capital gains taxes.

Capital Gains Tax Rates Today

Whether you hold onto an investment for at least a year can make a big difference in how much you pay in taxes.

When you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. If you profit from it after owning it for at least a year, it’s a long-term capital gain.

💡 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.

Short-Term Capital Gains Tax Rates (for Tax Year 2023)

The short-term capital gains tax is taxed as regular income or at the “marginal rate,” so the rates are based on what tax bracket you’re in.

The Internal Revenue Service (IRS) changes these numbers every year to adjust for inflation. You may learn your tax bracket by going to the IRS website, or asking your accountant.

Here’s a table that breaks down the short-term capital gains tax rates for the 2023 tax year, or for tax returns that are filed in 2024.

Marginal Rate	Income — Single	Married, filing jointly
10%	Up to $11,000	Up to $22,000
12%	$11,000 to $44,725	$22,000 to $89,450
22%	$44,725 to $95,375	$89,450 to $190,750
24%	$95,375 to $182,100	$190,750 to $364,200
32%	$182,100 to $231,250	$364,200 to $462,500
35%	$231,250 to $578,125	$462,500 to $693,750
37%	$578,125 or more	More than $693,750

Long-Term Capital Gains Tax Rate By Income for Tax Year 2023 (or Tax Season 2024)

Long-term capital gains taxes for an individual are simpler and lower than for married couples. These rates fall into three brackets: 0%, 15%, and 20%.

The following table breaks down the long-term capital-gains tax rates for the 2023 tax year by income and status.

Capital Gains Tax Rate	Income — Single	Married, Filing Separately	Head of Household	Married, Filing Jointly
0%	Up to $44,625	Up to $44,625	Up to $59,750	Up to $89,250
15%	$44,626 to $492,300	$44,626 to $276,900	$59,751 to $523,050	$89,251 to $553,850
20%	$492,301 or more	$276,901 or more	$523,051 or more	$553,851 or more

A higher 28% is applied to long-term capital gains from transactions involving art, antiques, stamps, wine, and precious metals.

Additionally, individuals with modified adjusted gross incomes (MAGIs) over $200,000 and couples filing jointly with MAGIs over $250,000 — who have net investment income, may have to pay the Net Investment Income Tax (NIIT), which is 3.8% on the lesser of the net investment income or the excess over the MAGI limits.

Tips For Lowering Capital Gains Taxes

Hanging onto an investment for more than a year can lower your capital gains taxes significantly.

Capital gains taxes also don’t apply to so-called “tax-advantaged accounts” like 401(k) plans, IRAs, or 529 college savings accounts. So selling investments within these accounts won’t generate capital gains taxes. Instead, traditional 401(k)s and IRAs are taxed when you take distributions, while qualified distributions for Roth IRAs and 529 plans are tax-free.

Single homeowners also get a break on the first $250,000 they make from the sale of their primary residence, which they need to have lived in for at least two of the past five years. The limit is $500,000 for a married couple filing jointly.

For new investors, it might be helpful to know that you may deduct as much as $3,000 in losses from an investment to help offset the amount of taxes on your income.

How US Capital Gains Taxes Compare

Generally, capital gains tax rates affect the wealthiest taxpayers, who typically make a bigger chunk of their income from profitable investments.

Here’s a closer look at how capital gains taxes compare with other taxes, including those in other countries.

Compared to Other Taxes

The maximum long-term capital gains taxes rate of 20% is lower than the highest marginal rate of 37%.

Proponents of the lower long-term capital gains tax rate say the discrepancy exists to encourage investments. It may also prompt investors to sell their profitable investments more frequently, rather than hanging on to them.

Comparison to Capital Gains Taxes In Other Countries

In 2023, the Tax Foundation listed the capital gains taxes of the 27 different European Organization for Economic Cooperation and Development (OECD) countries. The U.S.’ maximum rate of 20% is roughly midway on the spectrum of comparable capital gains taxes.

In comparison, Denmark had the highest top capital gains tax at a rate of 42%. Norway was second-highest at 37.84%. Finland and France were third on the list, both at 34%. In addition, the following European countries all levied higher capital gains taxes than the U.S. (listed in order from highest to lowest): Ireland, the Netherlands, Sweden, Portugal, Austria, Germany, Italy, Spain, and Iceland.

Compared With Historical Capital Gains Tax Rates

Because short-term capital gains tax rates are the same as those for wages and salaries, they adjust when ordinary income tax rates change. For instance, in 2018, tax rates went down because of the Trump Administration’s tax cuts. Therefore, so did short-term capital gains rates.

As for long-term capital gains tax, Americans today are paying rates that are relatively low historically. Today’s maximum long-term capital gains tax rate of 20% started in 2013.

For comparison, the high point for long-term capital gains tax was in the 1970s, when the maximum rate was at 35%.

Going back in time, in the 1920s the maximum rate was around 12%. From the early 1940s to the late 1960s, the rate was around 25%. Maximum rates were also pretty high, at around 28%, in the late 1980s and 1990s. Then, between 2004 and 2012, they dropped to 15%.

💡 Quick Tip: Did you know that investment losses aren’t necessarily bad news? Some losses can be used to offset gains, potentially reducing how much tax you owe. Learn more about investment taxes.

Tax Loss Harvesting

Tax loss harvesting is the strategy of selling some investments at a loss to offset the taxable profits from another investment.

Using short-term losses to offset short-term gains is a way to take advantage of tax loss harvesting — because, as discussed above, short-term gains are taxed at higher rates. IRS rules also dictate that short-term or long-term losses must be used to offset gains of the same type, unless the losses exceed the gains from the same type.

Investors can also apply losses from investments of as much as $3,000 to offset income. And because tax losses don’t expire, if only a portion of losses was used to offset income in one year, the investor can “save” those losses to offset taxes in another year.

The Takeaway

Capital gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year to adjust for inflation.

It’s important for investors to know that capital gains tax rates can differ significantly based on whether they’ve held an investment for at least a year. An investor’s income level also determines how much they pay in capital gains taxes.

An accountant or financial advisor can suggest ways to lower your capital gains taxes as well as help you set financial goals.

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

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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Feb

2024

SIMPLE IRA Contribution Limits for Employers & Employees

By Austin Kilham | invest, Investing, Preparing for Retirement | Comments Off

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a way for self-employed individuals and small business employers to set up a retirement plan.

It’s one of a number of tax-advantaged retirement plans that may be available to those who are self-employed, along with solo 401(k)s, and traditional IRAs. These plans share a number of similarities. Like 401(k)s, SIMPLE IRAs are employer-sponsored (if you’re self-employed, you would be the employer in this case), and like other IRAs they give employees some flexibility in choosing their investments.

SIMPLE IRA contribution limits are one of the main differences between accounts: meaning, how much individuals can contribute themselves, and whether there’s an employer contribution component as well.

Here’s a look at the rules for SIMPLE IRAs.

SIMPLE IRA Basics

SIMPLE IRAs are a type of employer-sponsored retirement account. Employers who want to offer one cannot have another retirement plan in place already, and they must typically have 100 employees or less.

Employers are required to contribute to SIMPLE IRA plans, while employees can elect to do so, as a way to save for retirement.

Employees can usually participate in a SIMPLE IRA if they have made $5,000 in any two calendar years before the current year, or if they expect to receive $5,000 in compensation in the current year.

An employee’s income doesn’t affect SIMPLE IRA contribution limits.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

SIMPLE IRA Contribution Limits, 2023 and 2024

Employee contributions to SIMPLE IRAs are made with pre-tax dollars. They are typically taken directly from an employee’s paycheck, and they can reduce taxable income in the year the contributions are made, often reducing the amount of taxes owed.

Once deposited in the SIMPLE IRA account, contributions can be invested, and those investments can grow tax deferred until it comes time to make withdrawals in retirement. Individuals can start making withdrawals penalty free at age 59 ½. But withdrawals made before then may be subject to a 10% or 25% early withdrawal penalty.

Employee contributions are capped. For 2023, contributions cannot exceed $15,500 for most people. For 2024, it’s $16,000. Employees who are age 50 and over can make additional catch-up contributions of $3,500 for 2023 and 2024, bringing their total contribution limit to $19,000 in 2023 and $19,500 in 2024.

See the chart below for SIMPLE IRA contribution limits for 2023 and 2024.

	2023	2024
Annual contribution limit	$15,500	$16,000
Catch-up contribution for age 50 and older	$3,500	$3,500

Employer vs Employee Contribution Limits

Employers are required to contribute to each one of their employees’ SIMPLE plans each year, and each plan must be treated the same, including an employer’s own.

There are two options available for contributions: Employers may either make matching contributions of up to 3% of employee compensation — or they may make a 2% nonelective contribution for each eligible employee.

If an employer chooses the first option, call it option A, they have to make a dollar-for-dollar match of each employee’s contribution, up to 3% of employee compensation. (If the employer chooses option B, the nonelective contribution, this requirement doesn’t apply.) An employer can offer smaller matches, but they must match at least 1% for no more than two out of every five years.

In option A, if an employee doesn’t make a contribution to their SIMPLE account, the employer does not have to contribute either.

In the second option, option B: Employers can choose to make nonelective contributions of 2% of each individual employee’s compensation. If an employer chooses this option, they must make a contribution whether or not an employee makes one as well.

Contributions are limited. Employers may make a 2% contribution up to $330,000 in employee compensation for 2023, and up to $345,000 in employee compensation for 2024.

(The 3% matching contribution rule for option A is not subject to this same annual compensation limit.)

Whatever contributions employers make to their employees’ plans are tax deductible. And if you’re a sole proprietor you can deduct the employer contributions you make for yourself.

See the chart below for employer contribution limits for 2023 and 2024.

	2023	2024
Matching contribution	Up to 3% of employee contribution	Up to 3% of employee contribution
Nonelective contribution	2% of employee compensation up to $330,000	2% of employee compensation up to $345,000

SIMPLE IRA vs 401(k) Contribution Limits

There are other options for employer-sponsored retirement plans, including the 401(k), which differs from an IRA in some significant ways.

Like SIMPLE IRAs, 401(k) contributions are made with pre-tax dollars, and money in the account grows tax deferred. Withdrawals are taxed at ordinary income tax rates, and individuals can begin making them penalty-free at age 59 ½.

Contribution limits for 401(k)s are much higher than for SIMPLE IRAs. In 2023, individuals could contribute up to $22,500 to their 401(k) plans. Plan participants age 50 and older could make $7,500 in catch-up contributions for a total of $30,000 per year. In 2024, individuals can contribute $23,000 to their 401(k), and those 50 and older can make $7,500 in catch-up contributions for a total of $30,500.

Employers may also choose to contribute to their employees’ 401(k) plans through matching contributions or non-elective contributions. Employees often use matching contributions to incentivize their employees to save, and individuals should try to save enough each year to meet their employer’s matching requirements.

Employers may also make nonelective contributions regardless of whether an employee has made contributions of their own. Total employee and employer contributions could equal up to $66,000 in 2023, or 100% of an employee’s compensation, whichever is less. For those aged 50 and older, that figure jumped to $73,500. In 2024, total employee and employer contributions are $69,000, or $76,500 for those 50 and up.

As a result of these higher contribution limits, 401(k)s can help individuals save quite a bit more than they could with a SIMPLE IRA. See chart below for a side-by-side comparison of 401(k) and SIMPLE IRA contribution limits.

	SIMPLE IRA 2023	SIMPLE IRA 2024	401(k) 2023	401(k) 2024
Annual contribution limit	$15,500	$16,000	$22,500	$23,000
Catch-up contribution	$3,500	$3,500	$7,500	$7,500
Employer Contribution	Up to 3% of employee contribution, or 2% of employee compensation up to $330,000	Up to 3% of employee contribution, or 2% of employee compensation up to $345,000	Matching and nonelective contributions up to $66,000	Matching and nonelective contributions up to $69,000.

💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

SIMPLE IRA vs Traditional IRA Contribution Limits

Individuals who want to save more in tax-deferred retirement accounts than they’re able to in a SIMPLE IRA alone can consider opening an IRA account. Regular IRAs come in two flavors: traditional and Roth IRA.

Traditional IRAs

When considering SIMPLE vs. traditional IRAs, the two actually work similarly. However, contribution limits for traditional accounts are quite a bit lower. For 2023, individuals could contribute $6,500, or $7,500 for those 50 and older. In 2024, individuals can contribute $7,000, or $8,000 for those 50 and older.

That said, when paired with a SIMPLE IRA, individuals could make $22,000 in total contributions in 2023, which is almost as much as with a 401(K). In 2024, they could make $23,000 in total contributions, which is the same as a 401(k).

Roth IRAs

Roth IRAs work a little bit differently.

Contributions to Roths are made with after-tax dollars. Money inside the account grows-tax free and individuals pay no income tax when they make withdrawals after age 59 ½. Early withdrawals may be subject to penalty. Because individuals pay no income tax on withdrawals in retirement, Roth IRAs may be a consideration for those who anticipate being in a higher tax bracket when they retire.

Roth contributions limits are the same as traditional IRAs. Individuals are allowed to have both Roth and traditional accounts at the same time. However, total contributions are cumulative across accounts.

See the chart for a look at SIMPLE IRA vs. traditional and Roth IRA contribution limits.

	SIMPLE IRA 2023	SIMPLE IRA 2024	Traditional and Roth IRA 2023	Traditional and Roth IRA 2024
Annual contribution limit	$15,500	$16,000	$6,500	$7,000
Catch-up contribution	$3,500	$3,500	$1,000	$1,000
Employer Contribution	Up to 3% of employee contribution, or 2% of employee compensation up to $330,000	Up to 3% of employee contribution, or 2% of employee compensation up to $345,000	None	None

The Takeaway

SIMPLE IRAs are an easy way for employers and employees to save for retirement — especially those who are self-employed (or for companies with under 100 employees). In fact, a SIMPLE IRA gives employers two ways to help employees save for retirement — by a direct matching contribution of up to 3% (assuming the employee is also contributing to their SIMPLE IRA account), or by providing a basic 2% contribution for all employees, regardless of whether the employees themselves are contributing.

While SIMPLE IRAs don’t offer the same high contribution limits that 401(k)s do, individuals who want to save more can compensate by opening a traditional or Roth IRA on their own.

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

Help grow your nest egg with a SoFi IRA.

Photo credit: iStock/FatCamera

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.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

SOIN1023162

Feb

2024

5 Investment Strategies for Beginners

By SoFi | Growing Wealth, invest, Investing | Comments Off

Investing is a powerful tool that allows you to put your money to work to help you reach future financial goals. But if you’re new to investing, you may be asking yourself what investment strategies should you pursue?

Here’s a guide to help you get started.

5 Popular Investment Strategies for Beginners

1. Asset Allocation

Once you’ve opened an investment account and you begin to build your portfolio, asset allocation is an important strategy to consider to help you balance potential risk and rewards. A typical portfolio might divide its assets among three main asset classes: stocks, bonds, and cash. Each asset class has its own risk and return profile, behaving a little bit differently under different market circumstances.

For example, stocks tend to offer the highest gains, but they are also the most volatile, presenting the most potential for losses. Bonds are generally considered to be less risky than stocks, while cash is typically more stable.

The proportion of each asset class you hold will depend on your goals, time horizon, and risk tolerance. Your goal is how much you aim to save. Your time horizon is the length of time you have before reaching your goals. And your risk tolerance is how much risk you’re willing to take to achieve your goals.

Your asset allocation can shift over time. For example, someone in their 30s saving for retirement has a long time horizon and may have a higher risk tolerance. As a result their portfolio may contain mostly stocks. As that person grows older and nears retirement, their portfolio may shift to contain more bonds and cash, which are typically less risky and less likely to lose value in the short-term.

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

2. Diversification

Another way to help manage risk in your portfolio is through diversification, building a portfolio with a mix of investments across assets to avoid putting all your eggs in one basket.

Here’s how it works: Imagine you had a portfolio consisting of stock from one company. If that stock does poorly your entire portfolio suffers.

Now imagine a portfolio consisting of many stocks, from companies of all sizes and sectors. Not only that, it also holds other investments, including bonds. If one stock suffers, it will have a much smaller effect on your overall portfolio, spreading out the risk of holding any one investment.

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*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

3. Rebalancing

Your portfolio can change over time, shifting your assets allocation and diversification. For example, if there is a bull market and stocks outperform, you may discover that you now hold a greater portion of your portfolio in stocks than you had intended.

At this point, you may need to rebalance your portfolio to bring it back in line with your goals, time horizon, and risk tolerance. In the example above, you might decide to sell some stock or buy more bonds, for instance.

4. Buy and Hold Strategy for Investing

Market fluctuations are a natural part of the market cycle. However, investors may get nervous and be tempted to sell when prices drop. When they do, investors might lock in their losses and miss out on subsequent market rebounds.

Investors practicing buy-and-hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so may help curb the tendency to panic sell, and it might also help minimize fees associated with trading.

Buy and hold might also affect an investor’s taxes. Holding a long-term investment vs. short-term one can make a big difference in terms of how much an individual pays in taxes.

If you profit from an investment after owning it for at least a year, it’s a long-term capital gain. Less than that is short-term. Capital gains tax rates can change, but generally, longer-term investments are taxed at a lower rate than short-term ones.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

5. Dollar-Cost Averaging

Dollar-cost averaging is a strategy in which individuals invest on a regular basis by making fixed investments on a regular schedule regardless of price.

For example, say an investor wants to invest $1,000 every quarter in an exchange-traded fund (ETF) that tracks the S&P 500. Each quarter, the price of that fund will likely vary — sometimes it will be up, sometimes it will be down. The amount of money the individual invests remains the same, so they are buying fewer shares when prices are high, and more shares when prices are low.

This strategy can help individuals avoid emotional investing. It’s also straightforward and can help investors stick to a plan, rather than trying to time the market.

The Takeaway

Investing is an ongoing process. Your life, goals, and financial needs will all change as your circumstances do. For example, may you get a raise at work, get married and have a child, or decide to retire early. Factors like these will change how much money you need to save and how you invest. Monitor your portfolio and make adjustments as needed.

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

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

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

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

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

SOIN0124124

Feb

2024

Understanding 401(k) Contribution Limits: 2023-2024

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

Participating in a 401(k) through your employer can be a good way to contribute to and save for your retirement. One important thing to know is that there are limits on how much you can contribute each year and the amount typically changes, as per guidelines from the IRS.

Read on to find out about the 401(k) contribution limit for 2023 and 2024.

Overview of 401(k) Contribution Limits

The IRS reviews and often adjusts annual 401(k) contribution limits. The amount you can contribute to your 401(k) is increasing in 2024.

Changes in Contribution Limits for 2024

In 2024, you can contribute up to $23,000 in your 401(k). If you’re age 50 or older, you can contribute an additional $7,500 to your 401(k) plan for a grand total of $30,500 in annual contributions for 2024.

Yearly Contribution Limits Explained

The IRS reviews the annual contribution limits for 401(k)s, typically in the fall of each year, and adjusts them when necessary to account for inflation. The IRS changed the yearly 401(k) contribution limits (also known as elective deferral limits) for 2023 and 2024.

2023 Contribution Limits

For 2023, you can contribute up to $22,500 to your 401(k). Those age 50 and up may contribute additional catch-up contributions of $7,500 — for a total contribution limit of $30,000.

2024 Contribution Limits

For 2024, the IRS is raising the 401(k) contribution limit once again. You may contribute up to $23,000 to your 401(k) in 2024. However, the catch-up contribution limit for older employees is not changing in 2024; instead it will remain at the 2023 level. That means those age 50 and up may contribute an additional $7,500 to their 401(k) for 2024, for a total of $30,500.

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

Employer Contributions and Catch-Up Provisions

One of the factors that makes a 401(k) a good vehicle for saving for retirement is that an employer may also contribute to the plan on your behalf.

And for older employees, the opportunity to make catch-up contributions to help save for retirement can be especially helpful.

Understanding Employer Match Limits

Your employer can make matching contributions to your 401(k) in addition to the funds you contribute. Matching funds may be based on the amount you choose to contribute.

For example, your employer might offer matching funds if you contribute 5% or more of your salary, as an incentive to get you to save. It’s a good idea to save at least the minimum amount to receive an employer’s match. If you don’t, you could be giving up free money.

There is an overall limit on how much you and your employer can contribute to your 401(k) plan each year. The combined limit for employer plus employee contributions in 2023 cannot exceed 100% of your income or is $66,000, whichever is lower. The 2024 combined limit is 100% of your income or $69,000, whichever is lower.

Catch-Up Contributions for Older Investors

If you are over the age of 50, your retirement contribution limit increases. The 401(k) catch-up contribution lets you fill in gaps in your retirement savings as you get closer to retirement. In 2023 and 2024, you can make up to $7,500 in catch-up contributions.

Roth 401(k) vs Traditional 401(k) Limits

In addition to traditional 401(k)s, there are other types of employer-sponsored retirement accounts, such as a Roth 401(k). The main difference between a traditional 401(k) and a Roth 401(k) is that contributions to a Roth 401(k) are made after-tax, while contributions to a traditional 401(k) are made with pre-tax dollars. Money grows inside a Roth 401(k) account tax-free and is not subject to income tax when you withdraw it.

Like a traditional 401(k), a Roth 401(k) has contribution limits.

Understanding Roth 401(k) Limits

Employee contribution limits for Roth 401(k)s are $22,500 for 2023, and $23,000 for 2024, the same as traditional 401(k)s. Roth 401(k) catch-up contribution limits for those 50 and up are $7,500 in 2022 and 2023 — also the same as catch-up contribution limits for traditional 401(k)s.

Comparing Traditional 401(k) Limits

Here’s a side-by-side comparison of traditional 401(k) contribution limits for 2023 and 2024.

Traditional 401(k)	2023	2024
Employee contribution limit	$22,500	$23,000
Catch-up contribution limit	$7,500	$7,500
Combined employee and employer contribution limit	$66,000	$69,000

Managing Multiple 401(k) Plans

You may have multiple 401(k) plans, including some with previous employers. In that case, the same yearly contribution limits still apply.

Contribution Limits with Multiple Employers

Even if you have 401(k) plans with multiple employers, you must abide by the same annual contribution limits across all your plans. So, for 2023, the maximum you can contribute to all your 401(k) plans is $22,500, and for 2024, the maximum amount you can contribute is $23,000. You can split these total amounts across the different plans, or contribute them to just one plan.

After-Tax 401(k) Contribution Rules

Some 401(k) plans allow for after-tax contributions. What this means is that as long as you haven’t reached the maximum combined limit of your plan — which is $66,000 in 2023 — you can make after-tax contributions up to the maximum combined limit.

For instance, if you contribute $22,500 to your 401(k) in 2023, and your employer contributes $5,000 through an employer match, you can contribute an additional $38,500 in after-tax dollars, if your plan allows it, to reach the $66,000 maximum.

Excess Contributions and Their Implications

Figuring out how much you want to contribute to your 401(k) can be tricky. And you’re not allowed to go over the contribution limits or you may face penalties.

Handling Over-Contribution

If you contribute too much to your 401(k), you could be charged a 10% fine. You might also owe income tax on the excess amount.

Fortunately, many 401(k) plans have automatic cut-offs in place to help you avoid excess contributions. However, if you change jobs or you have more than one 401(k) plan, you might accidentally contribute too much. If you realize you’ve done this, you have until April 15 to request that the excess contributions be returned to you, along with any earnings those contributions made while they were in your 401(k). You can report excess contributions when you file your taxes using form 1099-R.

Strategies to Avoid Excess Contributions

To avoid making excess 401(k) contributions:

• Check the maximum contribution limits each year.

• If you get a raise, reassess your contribution amount to make sure you’re not exceeding it.

• If you have more than one 401(k) plan, review your contributions across all of your plans to make sure you’re not exceeding the maximum contribution limits.

Maximizing Your 401(k) Contributions

When you have a 401(k), you’ll want to get the most out of it to help you save for retirement. Here’s how.

Ideal Contribution Strategies

To maximize your 401(k):

• Start contributing to the plan as soon as you can. The earlier you start saving, the more time your money has to grow.

• Contribute at least enough to get the employer match on your 401(k). If you don’t, you are essentially passing up free money.

• Keep track of all your 401(k) plans to make sure you don‘t exceed the annual contribution limits. And if you have a 401(k) from a previous employer, you might want to do a 401(k) rollover to potentially get more out of the plan.

Balancing 401(k) with Other Retirement Plans

Along with your 401(k), you can open other types of retirement accounts to help you save for your golden years. For instance, consider opening a traditional IRA or a Roth IRA, which are both tax-advantaged plans. You can save up to $6,500 in 2023 (and $7,000 in 2024) in a traditional or Roth IRA, plus an extra $1,000 each year if you are over age 50 — and that’s in addition to what you can save in your 401(k).

Having more than one type of retirement plan could potentially help you reach your financial goals faster. Not only can you put away more money for your retirement, an IRA typically gives you more investing options that a 401(k) does, making it more flexible. It can also assist you with diversifying your portfolio to help manage risk and potentially help grow your retirement savings.

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

FAQ

What is the maximum 401(k) contribution for 2023?

The maximum 401(k) contribution limit for 2023 is $22,500. Those aged 50 and up may contribute an additional $7,500 in 2023.

Are 401(k) contribution limits changing in 2024?

Yes, 401(k) contribution limits are changing in 2024. The 401(k) contribution limit in 2024 is $23,000. Individuals who are 50 and older can contribute an additional $7,500 to their 401(k) in 2024.

Can I contribute 100% of my salary to a 401(k)?

If you make less than $23,000 annually, you may be able to contribute 100% of your salary to a 401(k). However, your specific 401(k) plan may limit the amount you can contribute.

You should also note that there is an overall limit on how much you and your employer can contribute to your 401(k) plan each year. The combined limit for employer plus employee contribution in 2023 cannot exceed 100% of your income or is $66,000, whichever is lower. The 2024 combined limit is 100% of your income or $69,000, whichever is lower.

Is there a salary cap for 401(k) contributions?

Yes, there are income limit rules for 401(k) contributions. The amount of compensation eligible for 401(k) contributions in 2023 is $330,000. Anything above that amount of compensation is not eligible for contribution. What this means is that while you can contribute up to the maximum employee contribution, which is $22,500 in 2023, your employer can only match up to the income limit.

What happens if I exceed the 401(k) max?

If you contribute too much to your 401(k), you could be charged a 10% penalty. You might also owe income tax on the excess amount. If you realize you’ve exceeded the 401(k) maximum, you have until April 15 to request that the excess contributions be returned to you, along with any earnings the contributions made while they were in your 401(k). You can report excess contributions on form 1099-R when you file your taxes.

How much can I contribute to a 401(k) if I’m 50 years of age or older?

If you are 50 or older, you can contribute up to $30,000 in your 401(k) in 2023, and up to $30,500 in 2024. This includes an additional $7,500 each year in catch-up contributions.

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.

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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SOIN1023166

Feb

2024

Guide to Forex Margin: Requirements, Terms, and Examples

What Is Margin in Forex Trading?

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

Forex margin trading is when foreign exchange traders borrow money from their brokers in order to make bigger trades than they would otherwise be able to based on their capital position. Like all margin trading, the risks of forex margin trading are higher, but the practice can also produce higher profits.

Traders who engage in forex margin trading are using leverage as part of their investing strategy.

What Is Forex Margin?

Forex margin is similar to the margin trading used in futures markets. Traders deposit money into a margin account as a good faith deposit, which allows them to open, hold and trade forex using leverage (with their account balance as collateral). This lets the traders control trades worth much more than they would otherwise.

Forex (also known as foreign exchange or FX) is a global trading market in which investors trade national currencies. Forex trading is the largest and most liquid market in the world. Currencies trade in what are called “pairs.” For example, the Euro (EUR) versus the United States dollar (USD) appears as the EUR/USD currency pair with the Euro being the base currency and the USD being the term currency.

Traders use the FX market to hedge against foreign currency and interest rate risk. Geopolitical risks are also managed while speculators take part alongside hedgers. The forex market is both a spot (cash) market and a derivatives market. Forwards, futures, currency swaps, and options trade in the FX market.

How Does Forex Margin Work?

Forex margin works by allowing a trader to hold large positions with a relatively small amount of collateral. When you trade with leverage, you amplify risk and return.

While there is no standard amount of margin in the forex market, it is common for traders to post 1% margin, which allows them to trade $100,000 of notional currency for every $1,000 posted.

For example, let’s say you want to trade forex on margin to speculate on the price of the EUR relative to the USD. You must open an FX trading account with a firm that offers this type of trading. Before trading, you must make a deposit into your margin account.

Let’s assume the broker requires 1% margin to trade EUR/USD. You seek to control $50,000 worth of that currency pair, so you post a deposit of $500. After opening the account and posting margin, you execute a buy order on the EUR/USD pair for $50,000 of notional currency at $1.20 per Euro.

If EUR/USD moves from $1.20 to $1.212, that 1% advance moves your position value from $50,000 to $50,500. Your unrealized profit is $500, or 100% of your initial deposit. If EUR/USD declines 1%, you have an unrealized loss of $500. You could face a margin call or a forced liquidation if prices move against you enough.

💡 Quick Tip: One of the advantages of using a margin account, if you qualify, is that a margin loan gives you the ability to buy more securities. Be sure to understand the terms of the margin account, though, as buying on margin includes the risk of bigger losses.

Forex Margin Requirements

Forex margin requirements vary by broker. Variables such as liquidity and volatility impact the amount of margin you need to trade FX. The less liquid the trading environment and the more volatile the currency pair, the higher your margin requirement will generally be. The broker wants you to be able to trade freely but must balance the credit (or default) risk of its customers. Trading with small margin amounts means you have high leverage.

Typical margin requirements range from 50% on the high end to 0.5% on the low end. Those figures correspond to 2:1 leverage and 200:1 leverage, respectively. Knowing your leverage ratio helps you grasp your account’s risk. Brokers determine forex margin requirements based on your credit profile and how much default risk they want to take on.

Forex Margin Terms

You’ll need to understand forex margin terms to navigate this volatile trading arena:

• Equity: Your account balance after adding current profits and subtracting current losses from your cash

• Margin Requirement: Your required deposit to trade with leverage

• Used margin: Margin set aside to keep existing trades active

• Free margin: Available margin to open new positions

• Margin level in forex: A measure of how well funded your account is. Divide your equity by used margin, then multiply that by 100 to find your margin level in forex.

• Leverage: The use of borrowed capital to enhance returns

• Pip: A measurement representing the smallest unit of value in a currency quote. Pip stands for “percentage in point.”

• Spread: The difference between the bid and ask prices

What Is Margin Level in Forex?

Your margin level in forex is the ratio between equity and used margin. It is a straightforward calculation expressed as a percentage. It is your account’s equity percentage multiplied by 100. If you’re trading a currency pair other than the currency in your account, you may have to also do a currency conversion to determine your forex margin in that denomination.

Margin Level = (Equity / Used Margin) x 100%

For example, if you have $5,000 of equity with $1,000 of margin, then your margin level is 500%. The lower the margin level in forex, the less free margin you have available to trade. If your margin level dips low enough, your broker might issue a margin call or an automatic stop out on your position.

While margin level minimums vary depending on the brokerage firm used, many brokers set a minimum margin level at 100%. That means if your equity is equal to or less than your margin used, you will not be able to open new trades.

Forex Margin Example

Let’s say you wish to go long the USD/JPY currency pair. Assume your account balance is $2,000 and you trade a notional value of $10,000. Also assume the margin requirement on this pair is 5%. Your required margin is the notional value multiplied by the margin requirement.

$500 = $10,000 x .05

Now compare the required margin (which is also your used margin) of $500 to your $2,000 of equity.

Your margin level is $2,000 / $500

400% = ($2,000 / $500) x 100%

Your margin level, 400%, is safely above the 100% minimum margin level in forex to avoid margin calls and automatic liquidation from your broker. You can also open new trades so long as your margin level remains above the 100% minimum.

Pros and Cons of Trading Forex on Margin

There are both benefits and drawbacks to using margin when trading currencies. Here’s a look at some of them.

Pros

Pros of using margin to trade forex include that it can enhance return potential, more buying power means access to many trading opportunities and currency pairs, and that the forex markets are open 24 hours a day, five and a half days a week. Depending on how you like to trade, that can be an attractive feature.

Cons

Some of the downsides of trading forex on margin are that trading with high leverage can quickly lead to big losses and margin calls, trading forex on margin creates more volatility, which can increase stress, and that forex markets are less regulated than some other markets. In short: there’s more risk to take into consideration.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Is There a Difference Between Leverage and Margin in Forex?

Leverage and margin are similar concepts, but they’re different. One way to think of the differences is that a trader can use margin to increase their leverage. Margin is the tool, and leverage is the force behind the tool, which can be used to potentially increase returns (or losses).

The Takeaway

Currency trading is a liquid market that is open more hours per week than regular stock markets. Forex trading involves posting a margin deposit that allows traders to have exposure to large notional values of a currency. There are advantages and disadvantages to know as well as risks to consider.

If you do have the experience and the risk tolerance to try out trading on margin, you could increase your buying power, take advantage of more investment opportunities, and potentially increase your returns. But don’t forget the risks involved.

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

FAQ

How much margin should you use for Forex trading?

It depends on your comfort level and risk tolerance. If you seek maximum risk, then you might be comfortable with a low margin amount. Those with a lower risk tolerance might prefer to trade with a higher margin deposit. You can typically have a leverage ratio anywhere from 1:1 to 500:1.

What is a bad margin level in Forex trading?

You want to have a forex trading margin level above 100%. A margin percentage any lower means you might not be able to open new trades.

Can you trade Forex without leverage?

Yes, you can trade forex without leverage by only trading with your margin deposit.

What is free margin in forex trading?

Free margin is the amount of money available to open new forex positions. It is your account’s equity after subtracting the margin used.

What is a good margin level in forex?

Generally, a good margin level in forex would be above 100%, but depending on how experienced of a trader you are, it can be much higher.

What does 5% margin mean in forex?

The margin percentage refers to how much cash a trader needs to put down to open a trade. So, if the requirement is 5% margin, a trader must put down 5% of the overall trade amount to open a position.

Photo credit: iStock/eggeeggjiew

2024 Tax Season: Capital Gains Tax Guide

What Is Capital Gains Tax?

Capital Gains Tax Rates Today

Short-Term Capital Gains Tax Rates (for Tax Year 2023)

Long-Term Capital Gains Tax Rate By Income for Tax Year 2023 (or Tax Season 2024)

Tips For Lowering Capital Gains Taxes

How US Capital Gains Taxes Compare

Compared to Other Taxes

Comparison to Capital Gains Taxes In Other Countries

Compared With Historical Capital Gains Tax Rates

Tax Loss Harvesting

The Takeaway

SIMPLE IRA Contribution Limits for Employers & Employees

SIMPLE IRA Basics

SIMPLE IRA Contribution Limits, 2023 and 2024

Employer vs Employee Contribution Limits

SIMPLE IRA vs 401(k) Contribution Limits

SIMPLE IRA vs Traditional IRA Contribution Limits

Traditional IRAs

Roth IRAs

The Takeaway

5 Investment Strategies for Beginners

5 Popular Investment Strategies for Beginners

1. Asset Allocation

2. Diversification

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

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

3. Rebalancing

4. Buy and Hold Strategy for Investing

5. Dollar-Cost Averaging

The Takeaway

Understanding 401(k) Contribution Limits: 2023-2024

Overview of 401(k) Contribution Limits

Changes in Contribution Limits for 2024

Yearly Contribution Limits Explained

2023 Contribution Limits

2024 Contribution Limits

Employer Contributions and Catch-Up Provisions

Understanding Employer Match Limits

Catch-Up Contributions for Older Investors

Roth 401(k) vs Traditional 401(k) Limits

Understanding Roth 401(k) Limits

Comparing Traditional 401(k) Limits

Managing Multiple 401(k) Plans

Contribution Limits with Multiple Employers

After-Tax 401(k) Contribution Rules

Excess Contributions and Their Implications

Handling Over-Contribution

Strategies to Avoid Excess Contributions

Maximizing Your 401(k) Contributions

Ideal Contribution Strategies

Balancing 401(k) with Other Retirement Plans

FAQ

What is the maximum 401(k) contribution for 2023?

Are 401(k) contribution limits changing in 2024?

Can I contribute 100% of my salary to a 401(k)?

Is there a salary cap for 401(k) contributions?

What happens if I exceed the 401(k) max?

How much can I contribute to a 401(k) if I’m 50 years of age or older?

What Is Margin in Forex Trading?

What Is Forex Margin?

How Does Forex Margin Work?

Forex Margin Requirements

Forex Margin Terms

What Is Margin Level in Forex?

Forex Margin Example

Pros and Cons of Trading Forex on Margin

Pros

Cons

Is There a Difference Between Leverage and Margin in Forex?

The Takeaway

FAQ

How much margin should you use for Forex trading?

What is a bad margin level in Forex trading?

Can you trade Forex without leverage?

What is free margin in forex trading?

What is a good margin level in forex?

What does 5% margin mean in forex?

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