Mar
06
2023
Investing in Transportation Stocks and ETFs
Do you want to invest in transportation stocks or a transportation ETF? Here’s everything you need to know to get started investing in transportation.
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SoFi
Student Loan Consolidation and Refinancing
Feb
22
2023
Guide to Building an Investment Portfolio for Beginners
Investing can seem intimidating, especially for beginners who are just starting out. But building an investment portfolio is one of the best ways to grow your wealth over time.
Before you start pondering what you want to invest in and build an investment portfolio, think this through: Why am I investing? In the end, most of what matters is achieving your financial goals. And what are you saving for? By answering these questions, you can match your goals with your investment strategy — which is important if you want to give yourself a shot at your desired financial outcome.
The Basics: What Is an Investment Portfolio?
An investment portfolio is a collection of investments, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and other assets. An investment portfolio aims to achieve specific investment goals, such as generating income, building wealth, or preserving capital, while managing market risk and volatility.
A well-diversified investment portfolio can help investors achieve their financial objectives over the long term.
Recommended: Investing for Beginners: Considerations and Ways to Get Started
Why Building a Balanced Portfolio Matters
Building a balanced investment portfolio matters for several reasons. As noted above, a balanced, diversified portfolio can help manage the risk and volatility of the financial markets. Many people avoid building an investment portfolio because they fear the swings of the market and the potential to lose money. But by diversifying investments across different asset classes and sectors, the impact of any one investment on the overall portfolio is reduced. This beginner investment strategy can help protect the portfolio from significant losses due to the poor performance of any one investment.
Additionally, a balanced portfolio can help investors achieve their long-term investment objectives. By including a mix of different types of investments, investors can benefit from the potential returns of different asset classes while minimizing risk. For example, building a portfolio made up of relatively risky, high-growth stocks and stable government bonds may allow you to benefit from long-term price growth from the stocks while also generating stable returns from the bonds.
What Is Your Risk Tolerance?
When it comes to braving risk, everyone is different. And in life, there are no guarantees. So where does that leave you? Take your risk temperature and see which type of investing you can live (and grow) with. Below are two general strategies many investors follow depending on their risk tolerance.
Aggressive Investing
An aggressive investment strategy is for investors who want to take risks to grow their money as much as possible. High risk sometimes means big losses (but not always). The idea here is to “go for it.” Find investments that feel like they have a lot of potential to generate significant gains.
Your stock picks can ride the rollercoaster, and if you opt for an aggressive investing strategy when you’re young and just starting out, you can watch them take the ride without you doing much hand-wringing.
If it doesn’t work out, you can own the loss and move on. Downturns happen. So do bull markets. And when you’re young, you can likely afford to take risks.
Conservative Investing
Conservative investing is for investors who are leery of losing a lot of their money. It may be better suited for older investors because the closer you get to your ultimate goal, the less room you will have for big drawdowns in your portfolio should the market sell off.
You can prioritize lower-risk investments as you inch closer to retirement. Research investments with more stable and conservative returns. Lower-risk investments can include fixed-income (bonds) and money-market accounts.
These investments may not have the same return-generating potential as high-risk stocks, but often the most important goal is to not lose money.
Choosing a Goal for Your Portfolio
Long- and short-term goals depend on where you are in life. Your relationship with money and investing may change as you get older and your circumstances evolve. As this happens, it’s best to understand your goals and figure out how to meet them ahead of time.
If you’re still a beginner investing in your 20s, you’re in luck. Time is on your side, and when building an investment portfolio, you have that time to make mistakes (and correct them).
You can also potentially afford to take more risks because you’ll have more time to work on reversing losses or at least shrugging them off and moving on.
If you’re older and closer to retirement age, you can reconfigure your investments so that your risks are lower and your investments become more conservative, predictable, and less prone to significant drops in value.
As you go through life, consider creating short and long-term goal timelines. If you keep them flexible, you can always change them as needed. But of course, you’d want to check on them regularly and the big financial picture they’re helping you create.
Short Term: Starting an Emergency Fund
Before you do any serious investing, making sure you have enough money stashed away for emergencies is a good idea. Loss of income, unplanned moves, health situations, auto repairs, and all of those other surprises can tap you on the shoulder at the worst possible time — and that’s when your emergency fund comes in.
It may make sense to keep your emergency money in liquid assets for short-term expenses. Liquidity helps ensure you can get your money if and when you need it. Try to take only a few risks with emergency money because you may not have time to recover if the market experiences a severe downturn.
Long Term: Starting a Retirement Fund
Think about what age you would want to retire and how much money you would need to live on yearly. You can use a retirement calculator to get a better idea.
One of the most frequently recommended strategies for long-term retirement savings is opening a 401(k), an IRA, or both. The benefit of this type of investment account is that they have tax advantages.
Another benefit of 401(k)s and IRAs is that they help you build an investment portfolio over decades: the long term.
Prioritizing Diversification
As mentioned above, portfolio diversification means keeping your money in more than one place: think stocks, bonds, and real estate. And once you diversify into those asset classes, you’ll need to drill down and diversify again within each sector.
Understanding Systematic Risk
Big things happen, like economic uncertainty, geopolitical conflicts, and pandemics. These incidents will affect almost all businesses, industries, and economies. There are not many places to hide during these events, so they’ll likely affect your investments too.
One smart way to fight this: diversify. Spread out. High-quality bonds, like U.S. Treasuries, tend to do well in these environments and have offset some of the negative performances that stocks usually suffer during these times.
It might also be helpful to calculate your portfolio’s beta, the systemic risk that can’t be diversified away. This can be done by measuring your portfolio’s sensitivity to broader market swings.
Understanding Idiosyncratic Risk
Smaller things happen. For instance, a scandal could rock a business, or a tech disruption could make a particular business suddenly obsolete. This risk is more micro than macro; it may occur in a specific company or industry.
As a result, a stock’s value could fall, along with the strength of your investment portfolio. The best way to fight this: diversify. Spread out. If you only invest in three companies and one goes under, that’s a big risk. If you invest in 20 companies and one goes under, not so much.
Owning many different assets that act differently in various environments can help smooth your investment journey, reduce your risk, and hopefully allow you to stick with your strategy and reach your goals.
4 Steps Towards Building an Investment Portfolio
Here are four steps toward building an investment portfolio:
1. Set Your Goals
The first step to building an investment portfolio is determining your investment goals. Are you investing to build wealth for retirement, to save for a down payment on a home, or another reason? Your investment goals will determine your investment strategy.
2. What Sort of Account Do You Want?
Investors can choose several kinds of investment accounts to build wealth. The type of investment accounts that investors should open depends on their investment goals and the investments they plan to make. Here are some common investment accounts that investors may consider:
• Individual brokerage account: This is a standard brokerage account that allows investors to buy and sell stocks, bonds, mutual funds, ETFs, and other securities. This account is ideal for investors who want to manage their own investments and have the flexibility to buy and sell securities as they wish.
• Retirement accounts: These different retirement plans, such as 401(k)s, IRAs, and Roth IRAs, offer tax advantages and are specifically designed for retirement savings. They have contribution limits and may restrict when and how withdrawals can be made.
• Automated investing accounts: These accounts, also known as robo advisors, use algorithms to manage investments based on an investor’s goals and risk tolerance.
Recommended: What Is Automated Investing?
3. Choosing Investments Based on Risk Tolerance
Once you have set your investment goals, the next step is to determine your investments based on your risk tolerance. As discussed above, risk tolerance refers to the amount of risk you are willing to take with your investments. If you are comfortable with higher levels of risk, you may be able to invest in more aggressive assets, such as stocks or commodities. If you are risk-averse, you may prefer more conservative investments, such as bonds or certificates of deposit (CDs).
Recommended: How to Invest in Stocks: A Beginner’s Guide
4. Allocating Your Assets
The next step in building an investment portfolio is to choose your asset allocation. This involves deciding what percentage of your portfolio you want to allocate to different investments, such as stocks, bonds, and real estate.
Once you have built your investment portfolio, it is important to monitor it regularly and make necessary adjustments. This may include rebalancing your portfolio to ensure it remains diversified and aligned with your investment goals and risk tolerance.
Paying Off Debt First
Student loans and credit card debt may stand in the way of pumping money into your investment portfolio. Do what you can to pay off most or all of your debt, especially high-interest debt.
Get an aggressive repayment plan going. Also, remember it can be wise to pay yourself first (by that, we mean to keep a steady flow of cash flowing into your short and long-term investments before you pay anything else).
Investing in the Stock Market
Building an investment portfolio is a process that depends on where a person is in their life as well as their financial goals. Every individual should consider long-term and short-term investments and the importance of portfolio diversification when building an investment portfolio and investing in the stock market.
These are big decisions to make. And sometimes you may need help. That’s where SoFi comes in. With a SoFi Invest® online brokerage account, you can trade stocks, ETFs, fractional shares, and more with no commissions for as little as $5. And you can get access to educational resources to help learn more about the investing process.
FAQ
How much money do you need to start building an investment portfolio?
The amount of money needed to start building an investment portfolio can vary depending on the type of investments chosen, but it is possible to start with a small amount, such as a few hundred or thousand dollars. Some online brokers and investment platforms have no minimum requirement, making it possible for investors to start with very little money.
Can beginners create their own stock portfolios?
Beginners can create their own stock portfolios. Access to online brokers and trading platforms makes it easier for beginners to buy and sell stocks and build their own portfolios.
What should be included in investment portfolios?
Experts recommended that investment portfolios should be diversified with a mix of different types of investments, such as stocks, bonds, mutual funds, ETFs, and cash, depending on the investor’s goals, risk tolerance, and time horizon. Regular monitoring and rebalancing are important to keep the portfolio aligned with the investor’s objectives.
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.
SOIN1222017
Jan
24
2023
Guide to Transferring 401(k) to a New Job
It’s easy to forget about old 401(k) plans when changing to a new job. Some people forget about it because the company that manages it never reminds them. On the other hand, others are aware of their old account, but they’ve been putting off the rollover because it sounds hard.
Many companies don’t make the process easy for customers to roll over their 401(k) accounts from previous jobs. But it can be worth the inconvenience.
By not rolling it over, you might be losing some serious cash. That’s right — losing money, so it’s easy to miss. Here are a few key reasons to prioritize a 401(k) rollover.
Key Points
• Rolling over a 401(k) may save you money — if your new 401(k) plan or rollover IRA charge lower fees.
• Another reason to roll over a 401(k) is if your new plan or rollover IRA give you access to better investment options.
• You don’t have to roll over your 401(k) to a new employer’s plan, but consolidating your 401(k) savings may help you manage them better.
• If you request that the funds from a 401(k) rollover be sent to you directly, you have 60 days to send the funds to another plan or IRA account. If you miss the deadline, the IRS will typically consider the rollover a distribution, and you’ll be taxed and possibly fined for the early withdrawal.
• Some 401(k) plans offer financial services, such as financial advisor consultations, to help employees achieve their retirement goals.
3 Reasons to Transfer Your 401(k) to a New Job
It may seem easier to leave your 401(k) as it is and not worry about the hassle of transferring it to a new job. However, the following are three main reasons to rollover a 401(k):
1. You May Be Paying Hidden Fees
All sorts of fees go into effect when you open a 401(k), including record keeping, maintenance, and fund fees. Expressed in a percentage, these fees inform the expense ratio of a plan.
Employers may cover those fees until you leave the company. Once you’re gone, that cost might shift to you without you realizing it. If the fees are too high with your previous employer’s 401(k), rolling over a 401(k) can be advantageous.
Fees matter: When you pay a fee on your 401(k), you’re not just losing the cost of the fee but also all the compound interest that would grow along with it over time. The sooner you roll your plan over, the more you could potentially save.
2. You Might Be Missing Out on Better Investments
If you aren’t happy with the investment options in your old 401(k) and your new employer accepts rollover 401(k)s, you might be able to save money while investing in a broader range of investment vehicles.
401(k) accounts grow at different rates depending on which assets you invest in. If the retirement savings plan at your new company offers a selection of stocks and bonds that better aligns with your financial goals, it might be time to initiate a rollover.
The money sitting in your old 401(k) could grow faster if you roll it over into a new plan — it’s certainly worth investigating the growth rates of each. Keep in mind that investors can lose money when investing, too, so it always makes sense to consider your personal risk tolerance when deciding how to invest in your retirement accounts.
Also, if you leave your 401(k) where it is, you may think about it infrequently, so your portfolio may drift from your desired asset allocation as you age. It’s important to keep tabs on your investments to ensure they are on track and appropriate for your time horizon and goals.
3. You Could Lose Track of Your 401(k) Account
It’s common for people to lose track of old 401(k) accounts. According to some estimates, nearly 20% of all 401(k) assets in the U.S. are lost or missing. Rolling over a 401(k) to your new employer’s plan may be a way to keep track of your retirement assets.
Losing track of a 401(k) account is not necessarily the fault of an investor — it’s just logistics. It’s harder and more time-consuming to juggle multiple retirement accounts than it is to juggle one. Until you retire, you’ll manage two (or more) websites, two usernames and passwords, two investment portfolios, and two growth rates for decades.
And if you leave this next job to go to a third (or a fourth, or a fifth), the 401(k) plans could pile up, creating even more tracking work for you. Plus, when you’re no longer with an employer, you might miss alerts about changes that may occur with an old retirement plan.
Recommended: How to Roll Over Your 401(k)
Do You Have to Rollover Your 401(k) to a New Employer?
You do not necessarily have to roll over your 401(k) to a new employer or rollover your funds into an individual retirement account (IRA). If you are pleased with your old employer’s retirement plan options and fees, you can leave the funds in that 401(k), provided the employer allows it. But if you keep your money in your old employer’s 401(k), you cannot make additional contributions to the account.
If you have between $1,000 and $5,000 in your old employer’s 401(k) account, the employer may roll over your account into an IRA if you do not choose to receive the money or roll it over yourself. If you have less than $1,000 in your 401(k), the employer may send you a check of the funds, with less than 20% income tax withholding, if you do not choose to roll it over within 60 days of leaving the employer.
Recommended: What is an IRA and How Does it Work?
What to Do With Your 401(k) After Getting a New Job
When you get a new job, and you have a 401(k) from your previous employer, you have several options for what to do with the money. As mentioned above, you can leave the money in your old employer’s 401(k) plan. But if you don’t like your old employer’s 401(k) plan and options, you can do one of the following:
Roll Over a 401(k) to Your New Employer’s Plan
If your new employer offers a 401(k) plan and you are eligible to participate, you can roll the money over from your old plan to your new plan. Consolidating your 401(k)s can help you manage all of your retirement savings in one place, but it’s important to compare the fees, investment options, and other features of each plan before making a decision.
Rolling over a 401(k) might seem intimidating or inconvenient at first, especially if you’re moving onto your second job and this is the first time you’ll be rolling over a 401(k). The actual process of rolling over a 401(k) isn’t too complicated once you’ve decided where your existing funds will go.
Roll Over a 401(k) to an IRA
An IRA is another option for your 401(k) funds. Rolling a 401(k) into an IRA can give you more control over your investments and potentially lower fees, but they do not come with employer-provided benefits, such as matching contributions.
Recommended: IRA vs 401(k): What Is the Difference?
Cash Out Early
There is always the option of cashing out your 401(k). Should you choose to cash out your 401(k) and you’re younger than 59 ½ years old, you will have to pay taxes on the money, and perhaps an additional 10% early withdrawal fee.
There are some circumstances when the 10% fee is waived (but not the income tax), such as when the funds will be used for eligible medical expenses, among other circumstances.
What Happens to Your 401(k) if You’ve Been Fired?
If you’ve been fired, your 401(k) account is typically unaffected, and you will still have access to the funds you’ve contributed to the account and vested employer contributions, known as the 401(k) vested balance. However, you lose your right to any remaining unvested funds following voluntary or involuntary termination.
Nonetheless, the rules regarding your access to the funds may depend on the terms of the specific 401(k) plan and the reason for your termination.
Recommended: What Happens to Your 401(k) When You Leave a Job?
How Long Do You Have to Transfer Your 401(k)?
If you are rolling over your 401(k) to a new employer’s plan or an IRA, you generally have 60 days from the date you receive the funds to deposit them into the new account. If you do not complete the rollover within 60 days, the funds will be considered a distribution and subject to taxes and penalties if you are under the age of 59 ½.
Advantages of Rolling Over Your 401(k)
Rolling over your 401(k) to a new plan can benefit your overall financial plan. Here are a few ways this transition might help your financial well-being.
One Place for Tax-Deferred Money
Transferring your 401(k) to your new employer’s plan can help consolidate your tax-deferred dollars into one account. Keeping track of and managing one account may simplify your money management efforts.
A Streamlined Investment Strategy
Not only does consolidating your previous 401(k) with your new 401(k) make money management more straightforward, it can also streamline your investment strategies.
Financial Service Offerings
Some 401(k) plans offer financial services, such as financial advisor consultations, to help employees achieve their retirement goals. If your previous employer didn’t provide this service and your new plan does, taking advantage of this offering may help you achieve an investment plan that meets your exact goals rather than a standardized option.
Disadvantages of Transferring 401(k) to a New Job
While there are several advantages to a 401(k) rollover to a new job, there are also some potential disadvantages. Some drawbacks of rolling over a 401(k) from a previous employer to a new employer’s plan include the following:
• Loss of certain investment options: The new employer’s plan may offer different investment options than the previous one, limiting your ability to diversify your portfolio.
• Increased fees: The new employer’s plan may have higher fees associated with it, which could reduce the overall growth of your investment over time.
• Delays: The process of rolling over your 401(k) can take time, which could cause delays in accessing your funds.
How to Roll Over Your 401(k)
So, how do you transfer your 401(k) to a new job? If you decide to roll your funds into your new employer’s 401(k), you’ll most likely need to:
1. Contact the plan administrator to arrange the rollover. You may need to choose the types of investment you would like before you initiate the rollover. If not, you can take a lump-sum transfer and allocate the funds gradually to different investments of your choosing.
2. Complete any forms required by your employer for the rollover.
3. Request that your former plan administrator sends the funds via electronic transfer or a check so you can move the funds directly to the new plan administrator.
You may have to wait until your employer’s next open enrollment period to complete the rollover, but you might consider using that time to research the plan’s investment options so you’ll be ready when the time comes.
401(k) Rollover Rules
You may select a direct, trustee-to-trustee, or indirect rollover when requesting a transfer. With a direct rollover, the check is made out to the financial institution (for your benefit). Because the funds are directly deposited into the new account, no taxes are withheld. Similarly, a trustee-to-trustee transfer occurs between plan administrators but the funds change hands electronically.
With an indirect rollover, the check is payable to you, with 20% withheld for taxes. You’ll have 60 days to roll over the funds (80% of your previous plan) into an IRA or other retirement plan. If you want to contribute the full amount of your previous plan, you can add money to bring the lump contribution back up to the balance before rollover. At that point, you’d be able to count the 20% withheld as taxes paid.
Rolling Over a 401(k) Into an IRA
If you choose to roll your 401(k) funds into an IRA that’s not employer-sponsored, a direct rollover is a method that takes most of the guesswork out of the transfer. This means the funds will be taken from your previous account and rolled directly into the new one.
Doing it this way should prevent your previous lender from sending you a check, resulting in unforeseen early withdrawal tax situations.
Opening a new retirement account online is relatively straightforward, but there are some steps to opening an IRA that might be worth reviewing before you start. Once your funds are rolled over, you can choose the investments that work for your retirement goals.
Recommended: Rollover IRA vs. Traditional IRA: What’s the Difference?
Here are the general steps to roll over a 401(k) into an IRA:
1. Choose an IRA custodian: This is the financial institution that will hold your IRA account. Some popular choices include brokerage firms, banks, and credit unions.
2. Open an IRA account: Once you have chosen an IRA custodian, you need to open an IRA account. You will need to provide personal information such as your name, address, and Social Security number.
3. Request a 401(k) distribution: Contact the plan administrator of your old employer’s 401(k) and request a distribution of your account balance. You will need to specify that you want to do a “direct rollover” or “trustee-to-trustee” transfer to your new IRA account, since these are the most straight forward transfers.
4. Provide IRA custodian information: Give your old employer’s 401(k) plan administrator the IRA custodian’s name, address, and account information, so they know where to send the funds.
5. Wait for the funds to be transferred: The process of transferring funds can take several weeks, so be patient.
6. Monitor the account: Once the rollover is complete, monitor your IRA account to ensure that it has been funded and that the balance is correct.
7. Invest your funds: Once the funds have been transferred to your IRA account, you will need to invest with the transferred funds.
Remember that your 401(k) plan administrator may have specific procedures for rolling over your account, so be sure to follow their instructions. Also, there are some rules to follow, such as the 60 days rollover rule; it’s essential to consider these to avoid penalties.
The Takeaway
There are many benefits to rolling over a 401(k) after switching jobs, including streamlining your retirement accounts and directing your money to suit your individual financial needs and goals. While some may view it as inconvenient, going through the process, whether you want to roll over a 401(k) into your new employer’s plan or an IRA, may help you build wealth for retirement.
If you have an old 401(k) you’d like to roll over to an online IRA, SoFi Invest® can help. With a SoFi Roth or Traditional IRA, investors can access investment options, member services, and our robust suite of planning and investment tools. And SoFi makes the 401(k) rollover process seamless and straightforward — with no need to watch the mail for your 401(k) check. There are no rollover fees, and you can complete your 401(k) rollover quickly and easily.
FAQ
Should I roll over my 401(k) to new employer?
Rolling over your 401(k) to your new employer may be a good idea if the new plan offers better investment choices or if consolidation leads to lower account fees. Another benefit is convenience — it’s easier to manage one account than two. That said, if control is most important to you, rolling over your 401(k) to an IRA may be the better option.
How long do you have to move your 401(k) after leaving a job?
You typically have 60 days from the date of distribution to roll over your 401(k) from your previous employer to an IRA or another employer’s plan. Otherwise, it will be considered a taxable distribution and may be subject to penalties. However, some 401(k) plans may have different deadlines for rolling over your funds, so check with your plan administrator for specific details.
How do I roll over my 401(k) from my old job to my new job?
To roll over your 401(k) from your old job to your new job, you should contact the plan administrator of your new employer’s 401(k) plan and request a direct rollover or trustee-to-trustee transfer from your old plan to your new plan. Provide the necessary account and personal information and follow the instructions provided by the plan administrator to complete the rollover process.
What happens if I don’t roll over my 401(k) from my previous employer?
You generally are not required to roll over a 401(k) from a previous employer to your new employer’s 401(k) or an IRA. However, some experts recommend rolling over a 401(k) to a single account to simplify your retirement investments.
You may also be interested in:
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.
SOIN1222025
Jan
20
2023
What Is Income Tax Withholding and How Does It Work?
“What happened?!” may be your response when you look at your paycheck and see all of those deductions, whittling your hard-earned cash down to a (much) lower figure than you expected.
And perhaps, if you look more closely, you’ll notice a line on your paystub that shows a major amount of money subtracted and think, What is withholding tax? And why do they take so much?
Federal and state withholding taxes are funds that your employer takes out and sends to the government. To put it another way, this is what “taxes withheld” means; the funds have gone to help federal programs. These taxes have a purpose, and in the long run, you’ll probably be glad they are deducted from your check rather than owed as a mega lump sum on Tax Day.
But that said, it can be wise to learn more about what income tax withholding is and what those funds do. Read on learn answers to such questions as:
• What is tax withholding?
• What are factors that determine withholding taxes?
• How can you calculate withholding taxes?
What is Income Tax Withholding?
Many people think their taxes are due mid-April, but did you realize that, if you are a salaried employee, you are actually paying your taxes throughout the year? When you see those federal and possibly state and local taxes being whisked out of each paycheck, that’s exactly what is happening.
So what does withholding tax mean, and how does it work? A withholding tax is an amount, based on your salary, that your employer sets aside and then pays directly to the government on your behalf. It’s a credit against the full amount of personal income tax you will owe for the year. By doing this, your employer is helping you avoid paying all of your annual taxes come April.
That said, how much is deducted from your paycheck can vary depending on a variety of factors. You are able to designate what portion of your check goes toward your taxes on the IRS W-4 form (more on that in a bit).
• If you allocate too much, that means more than necessary is taken out, and you will likely receive a tax refund when you file your taxes.
• If you set aside too little, you will probably owe a balance or have what’s known as a “tax bill” due during tax season to make up the difference.
Your federal withholding tax rate depends on your income and tax bracket.
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Factors That Determine Tax Withholding
There are several factors that determine just how much tax is withheld from your paycheck, whether it arrives as a paper check or via direct deposit. Here are some of the factors that control the amount:
• How much you earn; it’s likely that the more you earn, the higher the rate at which taxes are withheld
• What your filing status is (for instance, single; married, filing singly; or married, filing jointly)
• How many (if any) withholding allowances are claimed. Typically, if you claim a higher number of allowances, that means your tax deductions are lower. This will free up more cash to flow your way on each payday, but you might owe taxes when you file. If you have a lower number of allowances, that means more money is taken out for taxes, and you could wind up getting a refund when your tax return is processed.
• Whether an employee decides to have additional money withheld each pay period so they won’t owe takes in April. Some individuals may ask their employers to withhold, say, an extra $100 or more per pay period if they find they typically owe taxes at year’s end.
Recommended: How to Reduce Your Taxable Income
What Is State Income Tax Withholding?
If you live in a state that charges state income tax, you will also see tax withholding for that on your paycheck. In terms of the different types of taxes collected, there are just nine states that don’t tax earned income. In other words, you will not pay state taxes if you live in:
• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming.
The concept of tax withholding works in the same way at the state level as it does at the federal: A certain portion is put toward your future state tax bill, and you may either owe or get a refund, depending on how much you paid in.
Quick Money Tip:Direct deposit is the fastest way to get an IRS tax refund. More than 9 out of 10 refunds are issued in less than 21 days using this free service, plus you can track the payment and even split the funds into different bank accounts.
What Is the Purpose of Tax Withholding?
As briefly mentioned above, tax withholding saves you from owing a huge bundle of taxes in April. If people were left to their own devices to set aside money for taxes, well, that might not always be a success. It can be hard to save money from your salary. Every time you receive your paycheck, there are bills to pay, dinners out and movies to tempt you, and vacations to plan and take.
If you received your gross vs. net income, you might spend more than you mean to and then wind up owing a large sum to the IRS when tax-filing takes place. This is one reason why the IRS spreads out the federal income tax withheld across paychecks throughout the year.
You don’t see the taxes you pay as such a large sum when bits are taken throughout the year, and you likely don’t miss that money the way you would if you paid all at once.
And the government probably prefers to receive revenue from federal withholding throughout the year rather than all at once. This money is put toward healthcare programs, education, infrastructure, and other things that keep the country moving forward.
Recommended: Your Guide to Filing Taxes for the First Time
Tax and Employment Documents to Know
When you are first hired at a company, you fill out a W-4 form that includes your salary and tax withholding. Whether you are single or married and whether you have dependents or other withholding allowances will determine how much of each paycheck is diverted toward your federal tax bill. You may also opt to have additional funds withheld from each paycheck.
Then when tax time rolls around, you will receive IRS Form W-2. This includes information on how much income you earned in a given tax year, as well as how much you paid in federal, state, and other taxes.
You’ll use this W-2 to file your taxes, and it will determine whether you receive a tax refund, owe more taxes, or break even.
Calculating Income Tax Withholding
It can take a bit of tweaking to find that balance between overpaying in federal withholding and having to pay more when you file your taxes.
Some people like getting a tax refund because it’s a lump sum they can put toward debt or invest. But realize that overpaying is a bit like giving the government a free loan throughout the year!
While there may be fast ways to get a tax refund, perhaps you’d rather just hold onto that money in the first place. If you better balanced what is taken out of your paychecks, you could take the excess you would have paid and invest it.
If you’re wondering what is a withholding tax allowance that’s right for you, there’s help. The IRS has a Tax Withholding Estimator you can use based on your current situation. In general, the more allowances or exemptions you have, the less taxes that will be taken out of your pay. And the opposite is true: The fewer the exemptions, the higher the amount of taxes that will be withheld.
While you aren’t asked to fill out a new W-4 each year, you may request one if you think you need to adjust the withholding amount.
Some of the times it might be wise to adjust how much income tax is withheld include:
• Starting a new job or position
• Having a child
• Getting married or divorced
• Buying a house.
Quick Money Tip:Typically, checking accounts don’t earn interest. However, some accounts will pay you a bit and help your money grow. An online bank account is more likely than brick-and-mortar to offer you the best rates.
Can I Be Exempt from Tax Withholding?
To be exempt from tax withholding means that no federal taxes will be withheld from your pay. You might also have no state or local taxes (if applicable) deducted. Here are the ways in which someone might qualify to be exempt from such taxes:
• If all of your federal income tax was refunded because you have no tax liability and you expect the same thing to happen this year, then you may be exempt from withholding taxes. (But note, Social Security and some other taxes may still be withheld as part of other types of payroll deductions.)
• Another consideration: Certain types of income are considered exempt. For instance, money paid to foster parents for their taking care of children in their homes may be tax-free. Payments from workers’ compensation is another example of funds that may be tax-exempt.
The Takeaway
No one likes the idea of taxes, but the fact is that money is put toward things we all enjoy, like smooth roads and education programs. And federal withholding from your paycheck keeps you from having a giant bill when you file taxes.
The important thing is to understand how much is being withheld and knowing whether you need to modify your W-4 to find a better balance between overpaying and owing more money in taxes.
FAQ
Does the government pay for income tax withholdings?
Money that is withheld from your earnings, known as income tax withholding, goes to the government. These dollars help pay for federal programs that benefit citizens and keep our country running, from education to transportation to economic security expenses.
How can someone qualify for withholding exemption?
To qualify as tax-exempt, you would have to have had all taxes refunded and have no liability in the previous year and expect the same status in the current tax year. Another consideration: Some forms of income may be tax-exempt, such as payments for in-home foster care of children or for workers’ compensation.
Why has my employer withheld too much income tax?
If your employer withheld too much income tax, then you will likely get a refund at tax time. You can update your withholding on your W-4 form; the more allowances you have, the lower the taxes that will be taken out.
Why has my employer withheld too little income tax?
If you wound up owing the IRS money at tax time, the issue could be that you have too many exemptions or allowances claimed on your W-4 form, meaning your employer is not withholding enough money from your paycheck. Adjust your W-4, knowing that the lower your number of allowances, the higher the level of taxes that will be taken out and sent to the IRS on your behalf.
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.
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.
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 members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
SOCO21007
Jan
19
2023
Delayed vs Real-Time Stock Quotes
Stock quotes, which may be seen on financial news networks or websites, are typically reported in real time, or with a delay. The main difference? Real-time quotes are the most up-to-date, while delayed quotes lag behind real-time quotes by several minutes, in most cases.
Which one is better? For the average investor who isn’t making changes to their portfolio, real-time quotes may be more precise than they need. For those investors, delayed stock quotes may suffice. Here’s what you need to know about the difference between real-time stock quotes and delayed quotes.
What Are Real-Time Stock Quotes?
Real-time stock quotes relay price information for various securities in real-time, or instantaneously. In other words, a real-time stock quote is the actual and immediate stock price at any given point in time. The quotes reflect demand for a security on stock markets around the world.
How Real-Time Quotes Work
Stock quotes include ticker symbols that denote the stock of a specific company or firm, and the price of a stock’s current (real-time) valuation. Those values are determined by trading activity — supply and demand, in other words. Those values also fluctuate during the trading day.
The letters and numbers comprising a quote — either real-time or delayed — reflect different types of investments or commodities and their prices — the price at which they’re currently trading. Typically the ticker symbol is similar in some way to the company name, and you can use it to look up the stock price.
For example, the ticker AAPL is Apple; XOM is the ticker for ExxonMobil; JNJ is the ticker for Johnson & Johnson; UDMY is Udemy; LULU is Lululemon.
Those symbols, when displayed on a ticker tape, are generally followed by or attached to their current trading price.
Real-time quotes are provided by many sources, including financial news networks and websites. Many online trading brokerages also offer their clients access to them as well. Real-time stock quotes provide traders and active investors with more accurate information.
What Are Delayed Quotes?
Delayed stock quotes are valuations of securities that are not in real-time — they’re delayed, as the name indicates. Depending on the source of the quote, the information relating to stock or share prices can be delayed by several minutes, or even up to 20 minutes.
It’s not unusual, for instance, you may login to your investment brokerage and see delayed stock quotes relaying information about the value of your current investments. There will likely be a note telling you how delayed the data is (15 minutes, for example), so that you know the pricing isn’t in real-time.
Most people should be able to tell if a quote is delayed, too, if the price remains static for minutes at a time. Real-time quotes, on the other hand, can fluctuate second-by-second, depending on the security and the source.
For investors involved in day trading, delayed quotes wouldn’t be sufficient; these investors require up-to-the-minute (or to the second) price quotes in order to execute their strategies. But for the majority of buy-and-hold investors, knowing the very latest price of a security may not matter to their long-term plans.
How Delayed Quotes Work
Delayed stock quotes work the same way that real-time quotes do, in that they reflect current market conditions and data relating to security values. But the reporting is delayed for a variety of reasons.
The most common reason that you may come across a site or information source with delayed stock quotes is that fetching and reporting real-time quotes is costly and resource-consuming. As such, companies may opt to report delayed quotes instead.
Real-Time vs Delayed Stock Quotes
Real-time streaming stock quotes change second to second, and can showcase the volatility of stock prices. When stock exchanges are open, trading is constant, and the dynamics of supply and demand for specific stocks change their prices rapidly. So, watching real-time streaming stock quotes means seeing those price fluctuations occur in real time, as the name implies. That can have implications for how traders and investors make decisions.
Using real-time stock quotes can be useful for active traders or investors, or high-frequency traders — professionals who are making numerous stock trades every day or week and may be managing other people’s portfolios, too. For these traders, knowing stock prices down to the minute helps inform their decision to buy or sell. That real-time price, ultimately, determines their stock trading profit (or loss).
There’s also after-hours trading to keep in mind, too. Stock markets have trading hours — the New York Stock Exchange (NYSE) and NASDAQ are open between 9:30 am and 4 pm, for example. At other times, investors may still be able to swap securities, but prices are much more volatile after-hours, and because it’s difficult to get real-time quotes after-hours, values can change dramatically before stock markets reopen.
Investors can also execute a market-on-open trade, during which a transaction completes as soon as the markets do open.
While security prices do fluctuate, they generally don’t fluctuate all that much over a relatively short interval (15 minutes, for example). And since the average investor may not be all that interested in minute-by-minute price fluctuations, using a delayed stock quote could provide all the information they need.
Think about it this way: If an investor were looking to rebalance their portfolio — something they may only do two or three times per year — a real-time stock quote isn’t going to give them much more actionable information than a delayed stock quote to help them make an informed decision.
Delayed stock quotes also don’t relay the second-by-second volatility of the market, which can be hard for some investors to digest.
Why Do Stock Quotes Get Delayed?
As mentioned, delayed stock quotes are lagging because they require resources to gather and report. The information is out there, and is collected by firms that supply quotes and pricing information to other companies. Depending on the individual security and the source of the information, a delay is likely the result of a company opting to supply delayed quotes rather than real-time quotes to consumers in order to save on costs.
As such, a small percentage of quote-providers offer consumers real-time market information — and often only to those who pay for it. That’s not to say that real-time data isn’t available for free, but the gathering and reporting can be costly, which is why some providers use delayed quotes.
How Real-Time Quotes Affect Your Investment Strategy
One big question investors may have: How do these two different types of stock quotes actually affect someone’s investment strategy? That depends largely on whether you’re into active investing, and how often they’re swapping positions in their portfolio.
Real-time stock quotes are mainly used by day traders, or active investors who are executing trades on a daily or hourly basis. In those cases, the relatively small fluctuations in price due to market volatility, which occur in real time, can determine whether a trade is profitable or not.
Real-time stock quotes are mainly used by day traders, or active investors who are executing trades on a daily or hourly basis.
For example, if a trader was trying to time a trade to execute at a specific price, a delayed quote might be useless. The time lag could cause them to miss their window, and bobble the trade.
How Delayed Quotes Affect Your Investment Strategy
As noted, if investors are only rebalancing their portfolios every so often, real-time quotes won’t matter all that much to their investing strategies. They aren’t trying to turn a profit from day-trading, in other words, and are taking a longer-term approach to their investing.
As such, for long- or medium-term investors who may only occasionally buy or sell securities, delayed quotes will do the trick. If you’re not checking on your portfolio every day and are only considering asset allocation every few months, there isn’t much of an advantage to looking at real time quotes over delayed ones.
Real-time quotes do provide more information than delayed quotes, though, in that they’re more precise. That can help you if you’re weighing decisions regarding eithershort-term vs long-term investments.
Deciding Which Stock Quote is Right for You
Most investors may not give much thought to real-time versus delayed stock quotes, unless they are active traders, as discussed. Whether or not you need up-to-the-minute quotes really depends on whether you’re doing a lot of trading, and doing that trading within tight time frames in which seconds or minutes matter. So, real-time quotes can give you more insight as to when it’s time to buy, sell, or hold.
Accordingly, if you’re more of a passive investor, you can probably stick to delayed stock quotes to get a broader idea of a security’s value.
The Takeaway
Real-time stock prices are updated to the second; delayed stock prices might be updated every 15 minutes, every hour, or every day, depending on the provider and the security involved.
For investors who aren’t looking to profit from small price fluctuations, it won’t make much of a difference if the quotes they’re using are delayed or not. That said, it’s never a bad idea to use real-time trading data, if an investor has access to it.
Investors can put their knowledge of real-time stock market information to use today. Using SoFi Invest®, investors can set up an Active Invest account to harness the power of real-time trading. Whether an investor is checking their holdings every day, or trying to make the best decision to align with long-term financial plans, SoFi Invest provides fast and accurate data that can be used to empower investors of all levels.
FAQ
What is a delayed stock quote?
A delayed stock quote is a quote that does not relay real-time value information regarding stock or security values. Instead, the information is delayed by around 15 or 20 minutes, in many cases.
What are real-time stock quotes?
Real-time stock quotes reflect the current market value of a security in real time — meaning up-to-the-minute, or second. Real-time quotes fluctuate constantly based on supply and demand for a security on the market.
Are real-time quotes better than delayed quotes?
Real-time quotes aren’t necessarily better than delayed quotes, but they do reflect more current information which can be better for active investors or day traders.
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.
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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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