Feb
16
2024
Investment Tax Rules Every Investor Should Know

Investment Tax Rules Every Investor Should Know

By | Growing Wealth, invest, Investing | Comments Off on Investment Tax Rules Every Investor Should Know

Investing can feel like a steep learning curve. In addition to having a clear grasp of types of investment vehicles available and the role investments play in overall financial strategy, it’s a good idea to understand how taxes may affect your investments. Knowing tax implications of various investment vehicles and investment decisions may help an investor tailor their strategy and end up with fewer headaches at tax time.

What Is Investment Income?

Tax requirements for investments can be complicated, and it may be helpful for investors to work with a professional to see how taxes might impact a return on their investment. Doing so might also help ensure that investors aren’t overlooking anything important when it comes to their investments and taxes.

That said, it’s beneficial to enter into any discussion with some solid background information on when and how investments are taxed. Typically, investments are taxed at one or more of these three times:

•   When you sell an asset for a profit. This profit is called capital gains—the difference between what you bought an investment for and what you sold it for. Capital gains taxes are typically only triggered when you sell an asset; otherwise, any gain is an “unrealized gain” and is not taxed.

•   When you receive money from your investments. This may be in the form of dividends or interest.

•   When you have investment income that includes such things as royalties, income from rental properties, certain annuities, or from an estate or trust. This may incur a tax called the Net Investment Income Tax (NIIT).

In the following sections, we delve deeper into each of these situations that can lead to taxes on investments.

💡 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.

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Tax Rules for Different Investment Income Types

Capital Gains Taxes on Assets Sold

Capital gains are the profits an investor makes from the purchase price to the sale price of an asset. Capital gains taxes are triggered when an asset is sold (or in the case of qualified dividends, which is explained further in the next section). Any growth or loss before a sale is called an unrealized gain or loss, and is not taxed.

The opposite of a capital gain is a capital loss. This occurs when an investor sells an asset at a lower price than purchased. Why would this happen? That depends on the investor. Sometimes, an investor needs to sell an asset at a suboptimal time because they need the cash, for instance.

At other times, an investor may sell “losing” assets at the same time they sell assets that have gained as a way to minimize their overall tax bill, by using a strategy called tax-loss harvesting. This strategy allows investors to “balance” any gains by selling profits at a loss, which, according to IRS rules, may be carried over through subsequent tax years.

There are two types of capital gains, depending on how long you have held an asset:

•  Short-term capital gains. This is a tax on assets held less than a year, taxed at the investor’s ordinary income tax rate.
•  Long-term capital gains. This is a tax on assets held longer than a year, taxed at the capital-gains tax rate. This rate is lower than ordinary income tax. For the 2023 tax year, the long-term capital gains tax is $0 for individuals married and filing jointly with taxable income less than $89,250, and no more than 15% for those with taxable income up to $553,850. The long-term capital gains tax rate is 20% for those whose taxable income is more than that.

For the 2024 tax year, individuals may qualify for a 0% tax rate on long-term capital gains if their taxable income is $94,050 or less for those married and filing jointly, and no more than 15% if their taxable income is up to $583,750. Beyond that, the tax rate is 20%.

Dividend And Interest Taxes

Dividends are distributions that a corporation, S-corp, trust or other entity taxable as a corporation may pay to investors. Not all companies pay dividends, but those that do typically pay investors in cash, out of the corporation’s profits or earnings. In some cases, dividends are paid in stock or other assets.

Dividends that are part of tax-advantaged investment vehicles are not taxed. Generally, taxpayers will receive a form 1099-DIV from a corporation that paid dividends if they receive more than $10 in dividends over a tax year. All other dividends are either ordinary or qualified:

•  Ordinary dividends are taxed at the investor’s income tax rate.
•  Qualified dividends are taxed at the lower capital-gains rate.

In order for a dividend to be considered “qualified” and taxed at the capital gains rate, an investor must have held the stock for more than 60 days in the 121-day period that begins 60 days before the ex-dividend date. (Additionally, said dividends must be paid by a U.S. corporation or qualified foreign corporation, and must be an ordinary dividend, as opposed to capital gains distributions or dividends from tax-exempt organizations.)

Both ordinary dividends and interest income on investments are taxed at the investors regular income rate. Interest may come from brokerage accounts, or assets such as mutual funds and bonds. There are exceptions to interest taxes based on type of asset. For example, municipal bonds may be exempt from taxes on interest if they come from the state in which you reside.

Total Investment Income and Net Investment Income Tax (NIIT)

Net investment income tax (NIIT) is a flat 3.8% surtax levied on investment income for taxpayers above a certain income threshold. The NIIT is also called the “Medicare tax” and applies to all investment income including, but not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

NIIT applies to individuals with a modified adjusted gross income (MAGI) over $200,000 for single filers and $250,000 for married couples filing jointly. For taxpayers over the threshold, NIIT is applied to the lesser of the amount the taxpayer’s MAGI exceeds the threshold or their total net investment income.

For example, consider a couple filing jointly who makes $200,000 in wages and has a NIIT of $60,000 across all investments in a single tax year. This brings their MAGI to $260,000—$10,000 over the AGI threshold. This would mean the taxpayer would owe tax on $10,000. To calculate the exact amount of tax, the couple would take 3.8% of $10,000, or $380.

Cases of Investment Tax Exemption

Certain types of investments may be exempt from tax implications if the money is used for certain purposes. These investment vehicles are called “tax-sheltered” vehicles and apply to certain types of investments that are earmarked for certain uses, such as retirement or education.

There are two types of tax-sheltered accounts:

•  Tax-deferred accounts. These are accounts in which money is contributed pre-tax and grows tax-free, but taxes are taken out when money is withdrawn. For example, a 401(k) retirement account grows tax-free until you withdraw money, at which point it is taxed.
•  Tax-exempt accounts. These are accounts—such as a Roth 401(k) or Roth IRA, or a 529 plan—in which money can be withdrawn tax-free if the funds are taken out according to qualifications. For example, money in a Roth account is not taxed upon withdrawal in retirement.

Beyond investing in tax-sheltered accounts, investors may also choose to research or speak with a professional about tax-efficient investing strategies. These are ways to calibrate a portfolio that might help minimize taxes, build wealth, and reach key portfolio goals—such as ample savings for retirement.

The Takeaway

Dividends, interest, and gains can add up, which is why it’s important for a taxpayer to be mindful of investment taxes not only at tax time, but throughout the year. Understanding the implications of sales and keeping capital gains taxes in mind when planning sales can help investors make tax-smart decisions.

Because there are so many different rules regarding taxes, some investors find it helpful to work with a tax professional. Tax law also varies by state, and a tax professional should be able to help an investor with those taxes as well.

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.

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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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.

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

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

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Feb
16
2024
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How to Invest Your 401(k)

By | Growing Wealth, invest, Preparing for Retirement | No Comments

Utilizing your 401(k) retirement account can seem daunting to beginner investors, but there are numerous strategies and tactics you can use to improve returns. Before any of that happens, though, investors will want to be sure to sign up for a 401(k) retirement account through your employer, which is often as simple as filling out a form.

As for the rest? Investing in your 401(k) doesn’t have to be complicated. From understanding your investment options and choosing your portfolio, to common mistakes to avoid, read on to get into the nitty-gritty.

How to Invest Your 401(k)

Investing in your 401(k) can often be as simple as making some basic investment choices. But it’s also good to know exactly how the account works.

As a refresher, a 401(k) is a type of tax-deferred retirement account sponsored by your employer. If you work for a non-profit, a school district, or the government instead of a company, your retirement plan might be a 403(b) or a 457(b) plan. All of these plans are employer-sponsored, meaning they pick the plan — and most of the information here applies to all three types of accounts.

You and your employer can both contribute to a 401(k). Many employers match employee contributions to some degree, and some may even contribute a portion of company profits to employees’ accounts (that’s known as a 401(k) profit-sharing plan).

Contributions are capped by the IRS: For the 2024 tax year, the maximum amount an individual might contribute to a 401(k) is $23,000, with an additional $7,500 in catch-up contributions allowed for people over age 50. The total amount that might be contributed to a 401(k), including matching funds and other contributions from an employer, is $69,000 (or $76,500 for people over age 50).

For the 2023 tax year, the maximum amount an individual could contribute to a 401(k) is $22,500, with an additional $7,500 in catch-up contributions allowed for people over age 50. The total amount that might be contributed to a 401(k), including matching funds and other contributions from an employer, is $66,000 (or $73,500 for people over age 50).

With all of that in mind, here are some things to remember as you start to invest in your 401(k), or look for ways to improve your returns.

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

Assess Your Goals

Investors should really take the time to assess their overall investment goals, and think about how their 401(k) fits into achieving those goals. Each investor will have different goals, and that means they’ll be willing to take different risks and be on different timelines as to when they want to reach those goals.

Again, this will vary from investor to investor, but before making any moves, it can be helpful to think more deeply about goals. Talking to a financial professional may be helpful, too.

Determine Your Risk Tolerance

Every investment comes with risk. The key is assessing your comfort level with risk now, and going forward. Whether you’re picking a target date fund or making your own mix of investments, you’ll want to allocate your money based on your needs and risk tolerance.

One rule of thumb when it comes to retirement investments is that the younger you are, the more risk you might be able to handle. The thinking goes that you will have more time to recover from market drops to allow riskier investments to pay off.

On the other hand, people closer to retirement may choose to adjust their investments. There, the goal would be to minimize risk, so that the savings they will soon need would not be overly impacted by a market downturn.

Look at Diversification

Diversification is critical when building a portfolio, so investors should keep an eye on what’s in their portfolio. An individual employee may not have a whole lot of say as to what exactly is going into their 401(k) investment mix, but you’ll want to keep an eye on things and stay abreast of the way that your portfolio manager is diversifying for you.

Target-Date Funds

A target-date fund is a mutual fund with a passive mix of investments aimed at a “target” retirement date. The mix of assets (stocks and bonds) typically becomes more conservative as your target retirement date nears. For people who prefer a hands-off approach, these funds might be a good investment option.

Something to keep in mind is that you don’t necessarily have to pick the target date based on when you actually plan to retire. If you feel the mix of assets is too aggressive, you might choose to select an earlier retirement year to take less risk.

Factors to Consider

Additionally, there are many factors investors will need to consider as it relates to their 401(k), such as their time horizon, expenses, and contribution levels.

•   Time horizon: How long do you plan to invest? Investors will want to keep long-term returns in mind, and their investment mix and other choices can have an impact on their returns.

•   Expenses: Investments often have expense ratios or other fees that can eat into returns, which is another thing to keep in mind.

•   Contribution levels: The more you save for retirement and the earlier you start saving, the better off you’ll likely be in retirement. If you’re lucky enough to have an employer that matches your contributions, at a minimum you’ll probably want to take full advantage of your employer match.

Remember: Maximizing your 401(k) tends to benefit you in the long run. 401(k) employer contributions vary, so it makes sense to find out how matching works at your company, and then contribute at least enough to get that “free money.”

401(k) Investing: Things to Keep In Mind

There are a couple of other things that investors may want to try and keep in mind in regard to their 401(k), such as leaving old accounts open, and over-investing in specific funds.

Putting Everything into a Money Market Fund

A money market fund is a mutual fund made up of relatively low-risk, short-term securities. It’s a tempting move, because it feels like you don’t risk losing money. You’ll want to gauge whether your investing returns are outpacing inflation, accordingly. That may be the case if your money is only being invested in a money market fund — in fact, that may be the default if employees don’t make investment selections for their portfolio. You’ll need to check with your plan provider to find out.

Leaving Old 401(k)s Open

When you leave your current employer, it’s often a good idea to roll over your 401(k) into a traditional or Roth IRA. Most 401(k) accounts have fees associated with them. While typically an employer will pay those fees while you work for them, once you’re no longer with the company, many will stop paying them for you.

By moving your money into an account of your choosing, you have more control over the fees you pay. You’ll also generally have a broader range of investment choices.

💡 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.

The Takeaway

Investing in a 401(k) retirement savings account is fairly simple, especially since you can set it up through your employer. Whether you are typically a hands-on investor or prefer a hands-off approach, you can get your 401(k) contributions up and running — and start saving money for your future.

If you have an old 401(k), as noted above, you might want to consider doing a rollover to an IRA account so you can better manage your savings in one place.

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.

FAQ

Can I invest my 401(k) on my own?

It may be possible to invest in your 401(k) on your own, as some employers offer a self-directed plan option, which gives investors more choice and say over their portfolio.

Is it possible to make my 401(k) grow faster?

To make your 401(k) grow faster, you can look at increasing your contributions (up to a specified limit), or changing your investment mix. But note that many investments with higher growth potential tend to have higher associated risks.

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

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

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.

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

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

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Feb
16
2024

Guide to Mortgage Relief Programs

By | Budgeting & Goals, Home Ownership, mortgage | Comments Off on Guide to Mortgage Relief Programs

Whether a layoff, inflation, or other bugaboo is causing you to struggle with your mortgage payments, life rafts are available.

Options for people who need mortgage relief include forbearance, loan modification, and refinancing. Here’s a closer look at each option.

What Are Mortgage Relief Programs?

Relief programs don’t magically make monthly mortgage payments disappear, but they can pause or lower those payments.

Through a perennial form of mortgage relief, mortgage forbearance, borrowers facing financial troubles may be able to defer or trim payments short term.

It’s important to know that if you even anticipate a problem making a payment, it would be smart to contact your mortgage servicer (the company you send your mortgage payments to) immediately to talk about your options.

Tardy payments damage credit scores, and late payments stay on a credit report for seven years.

Catching a Break Through Mortgage Relief

The remedies for mortgage payment anguish come in several forms.

Forbearance at Any Time

While pandemic-related laws that required lenders to provide mortgage forbearance relief to struggling homeowners expired in April 2023, many lenders offer forbearance programs to borrowers on a case-by-case basis. If you’re dealing with a short-term crisis, you can reach out to your lender and ask for mortgage forbearance, to temporarily pause or lower your mortgage payments.

Many lenders will ask for documentation to prove the hardship. They also will want to know whether the hardship is expected to last for six months or less or 12 months.

During forbearance, interest accrues and is added to the loan balance. All suspended or reduced payments will need to be paid back.

Refinancing

Homeowners coming out of forbearance may find that it’s a good time for a mortgage refinance, aiming for a lower rate and possibly different repayment term.

When choosing a mortgage term, know that the longer the term, the lower the payments, in general.

It’s generally thought that you should have at least 20% equity in your home to refinance. Your debt-to-income ratio and credit will be assessed if you apply.

There are two refi options for low- to moderate-income homeowners whose current mortgage is owned by Fannie Mae or Freddie Mac. Fannie Mae’s RefiNow and Freddie Mac’s Refi Possible are designed to help those homeowners get better mortgage rates and reduce upfront costs.

Someone with a VA loan can look into an interest rate reduction refinance loan, and an FHA loan borrower may look into an FHA Streamline Refinance or standard conventional refi.


💡 Quick Tip: Lowering your monthly payments with a mortgage refinance from SoFi can help you find money to pay down other debt, build your rainy-day fund, or put more into your 401(k).

Loan Modification

Homeowners who expect a permanent change in finances, or who are exiting forbearance but don’t qualify for refinancing, can ask for a loan modification.

Loan modification may result in a lower interest rate, a lower principal balance, an extension of the repayment term, or a combination.

You might have to prove the hardship to be approved.

Recommended: Loan Modification vs. Refinancing

Applying for Mortgage Relief

Again, when homeowners realize that they might have trouble making their monthly mortgage payment, they would be doing themselves a favor by contacting their loan servicer.

This applies to primary homes, multifamily property, and vacation homes.

Suffering in silence does no good. Working with your mortgage servicer could lead to one of the mortgage relief options described above or an agreement to try a short sale to avoid foreclosure.

A deed in lieu (an arrangement where you give your mortgage lender the deed to your home) is also sometimes used to avoid foreclosure.

Recommended: 6 Ways to Lower Your Mortgage Payment

What to Do During Forbearance

A homeowner in mortgage forbearance might want to keep track of the following:

•   Automatic payments. Any automatic payments or transfers to mortgage accounts should be paused by the borrower during the forbearance period. It’s unlikely the payments will be paused automatically, so it might be best to double-check.

•   Credit scores. On any loan, deferring payments shouldn’t affect credit scores, but homeowners might want to keep an eye on their scores in the event of an error.

•   Savings account. Now might be a good time to set aside any extra income to pay for the mortgage once forbearance ends.

•   Any changes to income. If a borrower’s income is restored during forbearance, they might need to contact their lender.

•   Property taxes and insurance payments. If homeowners insurance and taxes are paid through an escrow account, it should go into forbearance along with the mortgage. Homeowners who do not have an escrow account may be on the hook for those payments.

Homeowners interested in an extension of a forbearance period need to ask their mortgage servicer.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

How to Repay Forbearance

Homeowners who received Covid hardship forbearance are not required to repay their paused payments in a lump sum when the forbearance period ends.

For those with Fannie Mae and Freddie Mac loans, options include a repayment plan with higher mortgage payments, putting the missed payments at the end of the loan, and a loan modification.

Borrowers with FHA loans can put the money owed into a no-interest lien that comes payable if they sell the home or refinance the mortgage. Or they can negotiate to lower their mortgage payments with a loan modification.

Options for USDA and VA loan repayment include adding the missed payments to the end of the loan, and loan modification.

In general, a homeowner can expect one of the following scenarios:

•   Repaying the forbearance amount in a lump sum.

•   An amount is added to the borrower’s monthly payment until the forbearance amount is repaid in full.

•   The forbearance amount is added to the end of the loan.

Recommended: Guide to Buying, Selling, and Updating Your Home

The Takeaway

Federal mortgage relief programs help homeowners who are experiencing hardship. General mortgage forbearance is possible during most any household setback. Refinancing could be an answer for some borrowers who are coming out of forbearance.

SoFi can help you save money when you refinance your mortgage. Plus, we make sure the process is as stress-free and transparent as possible. SoFi offers competitive fixed rates on a traditional mortgage refinance or cash-out refinance.

A new mortgage refinance could be a game changer for your finances.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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

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16
2024
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Retirement Plan Options for the Self-Employed

By | invest, Investing, Life & Career, Preparing for Retirement | No Comments

Being your own boss is great, and the retirement plan options when you’re self-employed — like a SEP-IRA or solo 401(k) — can be surprisingly robust.

Not only do you have more options in terms of self-employed retirement plans than you might think, some of these plans come with higher contribution limits and greater tax benefits than traditional plans. That’s especially true since the passage of the SECURE 2.0 Act, which has favorably adjusted the rules of many retirement plans.

What Are Self-Employed Retirement Plans?

In some ways, self-employed retirement plans aren’t so different from regular retirement plans. You can set aside money now, select investments within the account, and continue to contribute and invest for the long term.

Similar to traditional retirement plans, you have two main categories most self-employed plans fall into:

•   Tax-deferred retirement accounts (e.g traditional, SEP, or SIMPLE IRAs and solo 401(k) plans). The amount you can save varies by the type of account. The money you set aside is deductible, and you don’t pay tax on that portion of your income. You do pay taxes on the funds you withdraw in retirement.

•   After-tax retirement accounts (typically designated as Roth IRAs or Roth 401(k) accounts). Here you can also save up to the prescribed annual limit, but the money you save is after-tax income and cannot be deducted. That said, withdrawals in retirement are tax free.

A note about Roth eligibility: Roth IRAs come with income limits. If your income is higher than the prescribed limit, you may not be eligible. Roth 401(k) plans do not come with income restrictions. Details below.

Understanding Beneficiary Rules for Self-Employed Plans

The rules that apply to inherited retirement accounts are extremely complicated. If you’re the beneficiary of an IRA, solo 401(k) or other retirement account, you may want to consult a professional as terms vary widely, and penalties can apply.

Administrative Factors to Consider

When selecting a self-employed retirement plan, it’s important to weigh the set up, administrative, and IRS filing rules. Some plans are easier to establish and maintain than others.

Given that running a plan can add to your overall time and personnel costs, it’s important to do a cost-benefit analysis when choosing a retirement plan when you’re a freelancer, consultant, or small business owner.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Types of Self-Employed Retirement Plans

The IRS outlines a number of retirement plans for those who are freelance, self-employed, or who run their own businesses. Here are the basics.

Traditional and Roth IRAs

What they are: One of the most popular types of retirement plans is an IRA — or Individual Retirement Arrangement.

As noted above, there are traditional IRAs, which are tax deferred, as well as Roth IRAs, which are after-tax accounts.

Suited for: While anyone with earned income can open a traditional or Roth IRA, these accounts can also be used specifically as self-employed retirement plans. They are simple to set up; and most financial institutions offer IRAs.

That said, IRAs have the lowest contribution limits of any self-employed plans, and may be better suited to those who are starting out, or who have a side hustle, and can’t contribute large amounts to a retirement account.

Contribution limits. There is no age limit for contributing to a traditional or Roth IRA, but there are contribution limits (and for Roth IRAs there are income limits; see below).

For tax year 2024, you can contribute up to $7,000 annually to either type of IRA, with an additional $1,000 catch-up contribution allowed for people over 50 years old. (For tax year 2023, you may contribute $6,500 per year, $7,500 with the catch-up provision, until April 15, 2024.)

Note that your total annual combined contributions across all your IRA accounts cannot exceed those limits. So if you’re 35 and contribute $3,000 to a Roth IRA for 2024, you cannot contribute more than $4,000 to a traditional IRA in the same year, for a maximum total annual contribution of $7,000.

Income limits: There are no income limits for contributing to a traditional IRA, but Roth IRAs do come with income restrictions. In 2024, that limit is $146,000 for single people (people earning more than $146,000 but less than $161,000 can contribute a reduced amount). For those individuals who are married and file taxes jointly, the limit is $230,000 to make a full contribution, and between $230,000 to $240,000 for a reduced amount.

Tax benefits: The main difference between a traditional vs. Roth IRA is the tax treatment of the money you save.

•   With a traditional IRA, the contributions you make are tax-deductible when you make them (unless you’re covered by a retirement plan at work, in which case conditions apply). Withdrawals are taxed at ordinary income rates.

•   With a Roth IRA, there are no tax breaks for your contributions, but qualified withdrawals are tax free.

Withdrawal rules: You owe ordinary income tax on withdrawals from a traditional IRA after age 59 ½. You may owe a 10% penalty on early withdrawals, i.e. before age 59 ½. There are exceptions to this rule for medical and educational expenses, as well as other conditions, so be sure to check with a professional or on IRS.gov.

The rules and restrictions for taking withdrawals from a Roth are more complex. Although your contributions to a Roth IRA (i.e. your principal) can be withdrawn at any time, investment earnings on those contributions can only be withdrawn tax-free and without penalty once the investor reaches the age of 59½ — and as long as the account has been open for at least five years (a.k.a. the 5-year rule).

Required Minimum Distributions (RMDs): You are not required to take minimum distributions from a Roth IRA account. You are required to take minimum distributions from a traditional IRA starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.

Solo 401(k)

What it is: A solo 401(k) is a self-employed retirement plan that the IRS also refers to as a one-participant 401(k) plan. It works a bit like a regular employer-backed 401(k), except that in this instance you’re the employer and the employee. There are contribution rules for each role, but this dual structure enables freelancers and solo business owners to save more than a standard 401(k) would allow.

Suited for: A solo 401(k) covers a business owner who has no employees, or employs only their spouse.

Contribution limits:

•   As the employee: For 2024, you can contribute up to $23,000 or 100% of compensation (whichever is less), with an additional $7,500 in catch-up contributions allowed if you’re over 50, for a total of $30,500.

•   As the employer: You can contribute up to 25% of your net earnings, with separate rules for single-member LLCs or sole proprietors.

Total contributions cannot exceed a total of $69,000, or $76,500 if you’re 50 and over.

You can not use a solo 401(k) if you have any employees, though you can hire your spouse so they can also contribute to the plan (and you can match their contributions as the employer), further reducing your taxable income.

Note that 401(k) contribution limits are per person, not per plan (similar to IRA rules), so if either you or your spouse are enrolled in another 401(k) plan, then the $69,000 limit per person must take into account any contributions to that other 401(k) plan.

Income limits: There is a limit on the amount of compensation that’s allowed for use in determining your contributions. For tax year 2024 it’s $345,000.

Tax benefits: A solo 401(k) has a similar tax setup as a traditional 401(k). Contributions can be deducted, thus reducing your taxable income and potentially the amount of tax you owe for the year you contribute. But you owe ordinary income tax on any withdrawals.

Withdrawal rules: You can take withdrawals from a solo 401(k) without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability (you can find a list of exceptions at IRS.gov), but you may owe a 10% penalty as well as income tax on the withdrawal.

Required Minimum Distributions (RMDs): You are required to take minimum distributions from a solo 401(k) starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.

Simplified Employee Pension (or a SEP-IRA)

What it is: A SEP-IRA, or Simplified Employee Pension plan, is similar to a traditional IRA with a streamlined way for an employer (in this case, you) to make contributions to their own and their employees’ retirement savings. Note that when using a SEP-IRA, the employer makes all contributions; employees do not contribute to the SEP.

Suited for: A key difference in a SEP-IRA vs. other self-employment retirement plans is that it’s designed for those who run a business with employees. Employers have to contribute an equal percentage of salary for every employee (and you are counted as an employee). Again, employees may not contribute to the SEP-IRA.

That means, as the employer, you can not contribute more to your retirement account than to your employees’ accounts (as a percentage, not in absolute dollars). On the plus side, it’s slightly simpler than a solo 401(k) to manage in terms of paperwork and annual reporting.

Contribution limits: For 2024, the SEP-IRA rules and limits are as follows: you can contribute up to $69,000 or 25% of an employee’s total compensation, whichever is less. Be sure to understand employee eligibility rules.

As the employer you can contribute up to 20% of your net compensation.

Note that SEP-IRAs are flexible: Contribution amounts can vary each year, and you can skip a year.

Income limits: For tax year 2024 there is an income cap of $345,000 on the compensation.

Tax benefits: Employer and employees can deduct contributions from their earnings, and withdrawals in retirement are taxed as income.

Withdrawal rules: You can take withdrawals from a SEP-IRA without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability (you can find a list of exceptions at IRS.gov), but you may owe a 10% penalty as well as income tax on the withdrawal.

Required Minimum Distributions (RMDs): You are required to take minimum distributions from a SEP-IRA starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.

New rules under SECURE 2.0: Starting in 2024, SEP-IRA plans can now include a designated Roth option. But not all plan providers offer the Roth option at this time.

💡 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.

SIMPLE IRA

What it is: A SIMPLE IRA (which stands for Savings Incentive Match Plan for Employees) is similar to a SEP-IRA except it’s designed for larger businesses. Unlike a SEP plan, individual employees can also contribute to their own retirement as salary deferrals out of their paycheck.

Suited for: Small businesses that typically employ 100 people or less.

Contribution limits for employers: A small business owner who sets up a SIMPLE plan has two options.

•   Matching contributions. The employer can match employee contributions dollar for dollar, up to 3%.

•   Fixed contributions. The employer can contribute a fixed 2% of compensation for each employee.

Employer contributions are required every year (unlike a SEP-IRA plan), and similar to a SEP, contributions are based on a maximum compensation amount of $345,000 for 2024.

Contribution limits for employees: Employees can contribute up to $16,000 to a SIMPLE plan for 2023, and additional $3,500 for those 50 and up.

Tax benefits: Employer and employees can deduct contributions from their earnings, and withdrawals in retirement are taxed as income.

Withdrawal rules: Withdrawals are taxed as income. If you make an early withdrawal before the age of 59 ½ , you’ll likely incur a 10% penalty much like a regular 401(k); do so within the first two years of setting up the SIMPLE account and the penalty jumps to 25%.

Required Minimum Distributions (RMDs): You are required to take minimum distributions from a SEP-IRA starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.

New rules under SECURE 2.0: Starting in 2024, the federal law permits employers that provide a SIMPLE plan to make additional contributions on behalf of employees, as long as the amount doesn’t exceed 10% of compensation or $5,000, whichever is less. This amount will be indexed for inflation.

Under these new rules, student loan payments that employees make can be treated as elective deferrals (contributions) for the purpose of the employer’s matching contributions.

In addition, SIMPLE plans can now include a designated Roth option, but not all plan providers offer the Roth option at this time.

Defined-Benefit Retirement Plan

Another retirement option you’ve probably heard about is the defined-benefit plan, or pension plan. Typically, a defined benefit plan pays out set annual benefits upon retirement, usually based on salary and years of service.

Typically pension plans have been set up and run by very large entities, such as corporations and federal and local governments. But it is possible for a self-employed individual to set up a DB plan.

These plans do allow for very high contributions, but the downside of trying to set up and run your own pension plan is the cost and hassle. Because a pension provides fixed income payments in retirement (i.e. the defined benefit), actuarial oversight is required annually.

The Takeaway

When you’re an entrepreneur, freelance, or otherwise self-employed, it may feel as if you’re out on your own, and your options are limited in terms of retirement plans. But in fact there are a number of options to consider, including various types of IRAs and a solo 401(k).

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.


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

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

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Feb
15
2024
Throwing a Gender Reveal Party on a Budget

6 Cheap Gender Reveal Ideas for Those on a Tight Budget

By | Budgeting & Goals, Family Finances, money | Comments Off on 6 Cheap Gender Reveal Ideas for Those on a Tight Budget

Congratulations! If you’re reading this, it probably means you or someone you care about is starting a family (or adding to one). One popular way to celebrate is with a gender reveal party: It’s a fun way to get all the expectant parents’ loved ones involved before the new addition arrives.

But gender reveal parties, like any kind of get-together, can quickly get expensive. Renting a space, ordering flowers and decorations, and wrangling the menu can add up. Which can be an issue, especially if the couple that is expecting or the person hosting is trying to also save for, say, the baby’s nursery or a baby shower.

So read on for six gender reveal party ideas that will be a fun way to share the news without breaking the bank.

Cheap Gender Reveal Ideas

When ​​saving for a baby, it’s vital to protect your finances, even during celebrations. Sure, you want to share the excitement in a stylish way, but there are cribs, strollers, and lots of diapers to be bought! To help you pull off a gender reveal on a budget, read on.

💡 Quick Tip: Make money easy. Enjoy the convenience of managing bills, deposits, and transfers from one online bank account with SoFi.

1. Keep It Small

You can save money by downsizing your event. Instead of inviting anyone and everyone, try including just friends and family. Not only will a smaller party keep costs low, but it will make the event more personal and a whole lot less frantic. An intimate gathering with those closest to you can be a lovely way to celebrate learning a baby’s gender. Plus, it allows the host or guest of honor to get more quality time with each invitee.

However, you may want to run this by the expectant mother if you are organizing the party on her behalf. She should have the last say about the invite list so that no one significant gets missed.

2. Choose a Cheap or Free Venue

You can hold a gender reveal party anywhere. When you think about it, it’s a very accommodating event without a lot of rules about the dress code, timing, or the activities involved. So, you can likely make any location work, whether it’s at home, a local restaurant, or elsewhere.

•   Be creative with the location. Instead of a full (pricey) restaurant meal, could you host a party at a local coffee bar (some host events)? Or could you do an afternoon tea at a favorite eatery, before they open for dinner? These kinds of options can help you save a considerable amount of money.

•   When picking where to have the party, you may need to factor in the size of your guest list and the type of gender reveal you want. For example, if you plan to use a gender-reveal powder cannon, you probably need a venue outdoors.

•   Rented venues can be expensive, so for a gender reveal on a budget, consider hosting at home.

•   Look at other cheap locations like a nearby green space. Many gender reveal parties are happily hosted in a local park. You bring cushions, a picnic blanket, and all the trimmings, and you’re set, without the cost of renting.

3. Send Digital Invites

Invitations are where many people let their creativity shine. But physically mailing them out may not be the most cost-effective option; you’ll have to buy the cards and spend money on postage, too. If you are looking for a way to send fun invites but for a fraction of the price and time, consider digital versions.

•   There are apps and websites that offer digital invite services. You can find a wide range of gender-reveal invitation templates on them. Spend a few minutes scrolling; you may find some totally free options, or you might spend anywhere from $10 to $20 on them. You can also find fun graphics and animations to make them unique.

•   These resources make planning a party more straightforward for the host. That’s because they usually come with a function that lets guests RSVP digitally, so you can keep track of who is coming. You can also usually automate updates and reminders.

•   Where to start? Try exploring Punchbowl, Evite, and Paperless Post for some great evite options.

4. Make Your Own Decorations

Similar to birthday parties, a gender reveal party isn’t complete without a few decorations. Here are some ways to keep costs down:

•   Easy DIY décor can include banners, streamers, candles, and table centerpieces. Often, you only need cardstock, ribbon, and paper to get creative. You might also be able to find printable images online. Sayings like “Whether pink or blue, we love you” and the like can be a fun way to underscore the reason everyone has gathered.

•   Use what you already have — outside. Anyone with a green thumb can take advantage of their garden to liven up their party. You can set the whole event up outdoors if the weather is nice or use flowers to decorate your home. For example, fresh flowers in mason jars or dollar-store vases are a simple but effective centerpiece.

•   A quick reminder: Even if the parents know the gender already, decorations shouldn’t give it away. Instead, aim for a gender-neutral look or a mix of pinks and blues so that nothing spoils the surprise.

5. Do a Potluck

Hosting a gender reveal party that includes a meal can get very pricey, very fast. No matter the size of your guest’s appetite, you have to purchase food per head. Some recommend around a half-pound of meat and half a bottle of wine for each person at an event. That alone could rack up a bill equal to a few months’ worth of baby supplies.

Instead, consider a potluck.

•   A potluck can save you significant costs in the food department.

•   It’s a great way to bond as a community or family. Everyone plays a role. You may find that having a number of people contributing makes the endeavor more creative.

•   Hosting a potluck does take a bit of organization to make sure, say, that not everyone brings a dessert, but the savings and sense of teamwork may be well worth it.

6. Opt for These Ways to Do the Reveal

The most important part of a gender reveal party is the reveal itself. But, you don’t have to pay for expensive fireworks, a band, or an entire room of balloons to make a statement. Some budget-friendly ideas include:

•   Gender reveal confetti or powder cannons

•   A giant balloon filled with colored confetti; pop it to reveal the gender

•   Cupcakes or cake with the gender color inside

•   A pinata filled with either pink or blue ribbons and glitter

You can also set the stage with color-themed food and drink. Some hosts like to have pitchers of fun fruit drinks, one tinted pink and the other blue with berries.

Recommended: A Guide to Using Savings Clubs

Setting Your Gender Reveal Party Budget

Your budget will obviously vary with the type of party you are planning. If you have a backyard potluck for 10 close friends it will, of course, be much more affordable than a meal for a few dozen guests at a rented space.

For example, let’s say you choose a large venue; that alone may cost you upwards of $200 to rent. In addition, decorating the location may be expensive, anywhere from $50 to $100 and up. That’s because there is more space to cover than your garden or living room. Plus you’ll need to factor in the food as well. Ka-ching! And double ka-ching if you live in a major city; your costs are likely to be higher.

That said, only you and your loved ones know what will be the right way to celebrate the upcoming birth. Just like putting together a budget for a baby, be methodical.

Budget Beforehand

Sit down early in the planning process and create a budget for your party. If there is more than one host, pool your resources and determine the total you can spend. It’s essential to do this before you start party planning.

•   Go line by line, item by item. Write down what you need and estimate the cost. That way, you know exactly what you need to buy and how much it will cost. Otherwise, there’s every chance that you’ll discover your cheap gender reveal party wound up being a high-cost celebration.

•   Understand where the funds are coming from. Is the expectant couple or individual footing the bill? If you are organizing, who else might contribute? Sometimes family members of the parents-to-be are also willing to help. They may contribute some cash or offer to bring items to the event.

Stick to Your Budget

It sounds self-explanatory: Stick to the budget you make. However, any party planner knows that it’s easier said than done, whether you have a baby shower, birthday, or anniversary on your hands.

•   Hold yourself and the team that’s organizing the event accountable. It’s very easy to dip a little further into your funds for extra decorations, more flowers, or a beautifully decorated dessert. While those gestures are nice, they come at a financial cost. You may need to separate your “party fund” from your savings account. Or, if you have a co-host, report your spending to each other. You’ll be less inclined to go overboard that way.

•   Play around with your distribution of funds. For instance, maybe you have a baker in the family who can bake a fab gender reveal cake. In that case, you can put more money toward a venue. Or, perhaps you are hosting a potluck version of a gender reveal party. That frees up some cash for decorations or how you handle the big reveal.

It’s a balancing act, for sure, but with a little planning and a strong commitment to your budget, you can host a gender reveal party that won’t leave you with debt to pay off.

Recommended: Budgeting for Beginners

The Takeaway

Hosting a gender reveal on a budget may take a bit of extra planning. But spending less won’t make the event any less memorable. Instead, think of it as an opportunity to test your creative muscles and come together as loved ones. Play around with your budget to find the best party plan. Maybe you host it at a restaurant but it’s a tea party instead of a full meal. Or perhaps you gather in someone’s yard or a local park and then have enough to splurge on an amazing cake. It’s all about balance.

Whether you’re expecting a baby or simply planning a party for one of your besties, life is expensive. That’s why finding a banking partner that offers competitive interest rates and low (or no fees) can be important.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

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FAQ

What is a good budget for a gender reveal party?

Budgets will vary depending on the host’s means and goals and the expectant parents’ desires. However, you can stretch a fund further with a more relaxed event. For example, a small barbecue in your backyard with a few friends won’t cost as much as a luxe rented location but may make up for that with the warm, intimate vibe.

Who usually throws a gender reveal party?

There is no norm; anyone can throw a gender reveal party, from a close family member to the parents to a best friend. It’s all good! In some cases, there are even multiple hosts. This allows everyone to take on a smaller financial burden than a singular host. The only rule is to keep the gender a secret during planning.

How much should a gender reveal cake cost?

The cost of gender reveal cake can vary in price depending on where you buy it, how big it is, and how ornate it is. Prices often land in the range of $25 to $50. However, features like surprise candy inside will likely run you more money. And if you purchase a cake from a highly rated patisserie in a big city it will probably be considerably more expensive than one at a local bakery in the suburbs.

Photo credit: iStock/Ievgeniia Shugaliia

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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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