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What is a 401(k)?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

You already know that saving for retirement is one of the most important financial decisions you can make. But how, exactly, should you go about it?

The best way to save for retirement is to invest your money so it can go to work for you. The magic of compound interest can turn today’s spare change into tomorrow’s nest egg.

If you’re a full-time employee, chances are the most readily-accessible investment plan available to you is a company-sponsored 401(k). But what, exactly, is that alphabet-soup-sounding retirement account? And how does it work?

What is a 401(k)?

A 401(k) is an employer-sponsored investment account. It helps you save for retirement by combining the powers of time, consistency, compound interest and hefty tax benefits to help set you up for your golden years.

Like other retirement accounts, 401(k)s are available in both traditional and Roth varieties.

In a traditional 401(k), your contributions are tax-deductible (and thus reducing your total taxable income for the year), and grow tax-free until you withdraw them — at which point they are subject to regular income tax.

With a Roth 401(k), your contributions will count toward your taxable income for the year, but they are not taxed upon withdrawal.

Your employer has control over whether or not to offer a 401(k), employee participation eligibility, and at what point the funds you contribute will be fully under your ownership — a process called “vesting,” which we’ll get to later in this post.

(Psst: if your employer doesn’t offer a 401(k) plan, you still have some valuable savings options.)

How does a 401(k) work?

A 401(k) is funded primarily by elective contributions — the portion of your wages that is automatically deducted from your paycheck each period. You have control over how much you contribute to your 401(k), although there are limits imposed by the IRS. For 2019, you can contribute up to $19,000 of your personal income.

Once the funds are deducted from your paycheck, they’re invested in a portfolio of your choosing. You’ll have the opportunity to choose from a variety of available options — an average of eight to 12 alternatives, according to FINRA. These may include individual stocks and bonds, but mutual funds are the most common option.

Depending on where you work, you may also have access to an employer match program — and if you do, it’s a very good idea to take advantage of it to maximize your 401(k) returns. An employer match means just that: your employer will match your 401(k) contributions — dollar for dollar— up to a certain percentage, which basically means free money to put toward your retirement.

Of course, employer matches aren’t limitless. The average match hovers between 3% and 6%, according to Malik S. Lee, a Certified Financial Planner at Atlanta-based financial advisory firm Felton & Peel. Some generous employers will match paycheck contributions up to 8%, or even higher — Lee said he’s seen some Georgia universities matching as high as 10%.

No matter how much — or how little — your employer contributes, it’s well worth it to take advantage of your employer match.

Say you’re making $30,000 and putting 4% of that toward your 401(k), for a total annual contribution of $1,200. An employer match of just 1% puts an additional $300 into your 401(k), which increases your total annual contribution to $1,500.

That might not seem like much. But thanks to the exponential nature of compound interest, that extra $300 could make a big difference down the road. After 10 years of contributions and investments growing at a relatively modest 6% annual interest rate, you’d have $15,816.95 without the employer match, but $19,771.19 with it. That’s a difference of nearly $4,000!

More on employer match programs: Getting vested

Not every employer allows new hires to start contributing to their 401(k) plan as soon as they start — and those who do may not grant ownership of employer contributions immediately. Vesting, the process of earning total control of your retirement account, means your employer’s 401(k) contributions will not be taken back or forfeited upon your resignation or dismissal. Remember, vesting applies only to employer contributions. You’ll always own 100% of the funds you put into your account.

Many employers will gradually vest their employers based on the time they’ve worked for the company. For instance, you may start at 0% and achieve 20% vesting after the first six months of employment, then 40% by the end of the year, and so on.

Other employers utilize a “cliff” method of vesting, wherein employees are 0% vested for a longer period of time (such as the first two years of employment). They achieve 100% vestment after a certain threshold (say, three years).

According to the IRS, “All employees must be 100% vested by the time they attain normal retirement age under the plan or when the plan is terminated” — that is, if the employer decides to end their 401(k) program entirely.

How much can you contribute to a 401(k)?

As mentioned above, there are limits to how much you can put into your 401(k) while still enjoying the tax benefits the account offers. The IRS sets these limits annually and they change from time to time.

For example, in 2018, employees could contribute up to $18,500 of their personal income to their 401(k) plans, but that figure has been raised to $19,000 for 2019. For more information on 401(k) contribution limits, see this MagnifyMoney article.

How much should you contribute?

The answer to this question seems obvious: as much as possible. But as in all parts of our financial lives, your mileage may vary depending on your circumstances. For example, you may still be paying down high-interest debt or trying to bolster your emergency fund, either of which makes hefty retirement contributions more difficult. Getting started is the key, because the earlier you start, the more time you’ll have on your side to take advantage of compound interest.

“You always want to put something away inside your 401(k),” Lee said. “Even if you’re trying to pay down debt or build your emergency reserve.” Ideally, you’ll want to meet your employer match if it’s available — but even if not, you should still contribute what you can.

Accessing your savings: How 401(k) withdrawals work

Generally, you can’t withdraw from your 401(k) savings before the age of 59 and a half without paying an additional 10% tax penalty. The withdrawal will also be taxed as regular income at the time it is taken out of the account.

However, you’ll be required to take minimum distributions once you hit age 70 and a half, unless you own more than 5% of the company or have not yet retired.

There are several exceptions in both cases. For instance, you may be eligible for penalty-free distributions before the age of 59 and a half if you can demonstrate financial hardship or you have a qualifying disability. (See the IRS guidelines for a full details)

You will also incur the 10% penalty if you take money out to perform an indirect rollover, which we’ll go over next.

Got a new gig? 401(k)s are portable

These days most of us hold more than one job over the course of our lifetimes. Fortunately, when you get a shiny new job, your old 401(k) can come with you!

The easiest way to bring your 401(k) funds along on your career move is to ask your account custodian to initiate a direct rollover. Your funds will either be transferred directly to your new account, or the custodian will write a check made out to the new account in your benefit. In either scenario, you’ll never have direct access to the money, which means you won’t incur any penalties or taxes during the process.

You can also opt for an indirect rollover, allowing you to cash in the account and then reinvest it manually; however, this route does come with some tax-related rules and limitations. The IRS requires the administrator to withhold 20%, which means you’ll receive only 80% of the amount you see reflected in your 401(k) account balance. In order to avoid the tax penalty and make up the difference in the form of a tax credit, you’ll need to reinvest the total amount within 60 days of initiating the rollover, which means pulling a potentially significant chunk from your own pocket. Since 401(k)s are eligible to be rolled over into just about every type of retirement account available, a direct transfer is a much more sensible option.

The 401(k) is the workhorse of retirement accounts — one of the most readily-accessible and powerful financial tools in the American earner’s arsenal. If you have access to one through your employer, start taking advantage of it today. You’ll thank yourself tomorrow.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
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Jamie Cattanach is a writer at MagnifyMoney. You can email Jamie here

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Investing

Ally Invest Managed Portfolios Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Ally Invest Managed Portfolios is a robo-advisor option from a trusted online-only financial institution.

It can make managing your money simple: Just answer a few basic questions about your goals and risk tolerance and your funds are invested for you. However, while fees are competitive, they aren’t the lowest among other robo-advisors’ offerings.

If you don’t mind the lack of bonus for opening the account, and you want to take a hands-off approach to building wealth, Ally Invest may be a good option.

Ally Invest Managed Portfolios
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The Bottom Line: Ally Invest Managed Portfolios is a decent robo-advisor that’s competitive with other managed portfolios online. But its lack of tax-loss harvesting, and fees that slightly exceed competitors may prompt you to look elsewhere if you’re not already an Ally customer.

  • The minimum deposit to invest in Ally Invest Managed Portfolios is $100
  • The management fee is 0.30%, no matter how high your account balance
  • Customer service is available 24/7, but there are no local branches to visit

Who should consider Ally Invest Managed Portfolios?

If you’re looking for a robo-advisor that allows you to build a diversified portfolio without a lot of advanced knowledge about investing, Ally Invest Managed Portfolios has you covered.

You’ll answer a few questions about your age; timeline for investing and risk tolerance; and whether you’re investing for retirement, wealth-building or a big purchase. Then, Ally Invest comes back with a recommended portfolio you can accept or tweak.

You can open a joint, custodial or Individual taxable account with Ally Invest Managed Portfolios, or can opt for a Traditional IRA, Roth IRA or Rollover IRA. Unfortunately, unlike with Ally Invest’s self-directed accounts, there’s no promotion or bonus for transferring funds into a managed portfolio. And, you’ll need quite a bit of money to get started — more than many competitors in the robo-advisor industry require.

Still, if you don’t mind the lack of brick-and-mortar locations and marginally higher fees, Ally Invest is a worthy competitor to consider when looking for help managing your money.

Ally Invest Managed Portfolios fees and features

Amount minimum to open account
  • $100
Management fees
  • 0.30%
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Current promotions

Ally Invest offers a $50 cash bonus plus free trades if you deposit or transfer at least $10,000. Bonuses go up from there and increase up to a cash bonus of as much as $3,500 if you deposit or transfer at least $2 million in assets.

Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account (ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Portfolio
  • Ally managed portfolios cover 3 asset classes and 9 major market segments
Automatic rebalancing
Tax loss harvesting
Offers fractional shares
Ease of use
Mobile appiOS, Android, Windows Phone
Customer supportPhone, 24/7 live support, Chat, Email

Strengths of Ally Invest Managed Portfolios

Ally Invest Managed Portfolios has some significant advantages worth considering:

  • Investing in a diversified portfolio is easy. You’ll answer basic questions about your investment goals and Ally Invest will suggest a portfolio with an appropriate mix of U.S. and foreign bonds, international and U.S. stocks, and cash. You can also tweak the suggestions Ally Invest Managed Portfolios makes, so you take on more or less risk based on your comfort level.
  • Ally requires a low minimum deposit of just $100 to open a managed portfolio account. While some of Ally’s competitors (such as Betterment) don’t have a minimum deposit requirement at all, $100 still falls on the very low side of the scale and makes this account extremely accessible to new investors.
  • Ally Invest Managed Portfolios offers automatic portfolio rebalancing. This helps to ensure you remain invested in the right mix of assets if certain investments under- or over-perform.
  • Customer service. Ally Invest offers phone, Email, and chat support. Customer service agents are available 24/7 with little or no wait. Agents will do their best to provide answers, although it may take a little time if your questions are technical since you may need to be transferred to an investment advisor.

Drawbacks of Ally Invest Managed Portfolios

You’ll also want to consider the potential downsides of choosing Ally Invest Managed Portfolios.

  • Ally Invest Managed Portfolios charges fees that are slightly higher than several competitors. You’ll pay .30% for Ally’s robo-advisor service, compared with .25% for Betterment’s digital account or for Wealthfront.
  • Ally Invest Managed Portfolios currently does not offer tax loss harvesting, which involves selling investments at a loss to offset taxable gains (although they do offer tax advantaged portfolios which add municipal bonds to Ally’s core portfolios). Competitors such as Betterment do offer this feature. However, Ally representatives indicate tax loss harvesting is expected to be rolled out in 2019 and investors with managed portfolios will be able to transition their accounts into a portfolio with tax loss harvesting.
  • No physical branches. If you’d prefer to go into a branch for local customer support, you’ll need to look elsewhere, such as E-Trade, which has more than 30 branches across the country.
  • Mobile apps aren’t very advanced. While Ally Invest allows you to use mobile apps on iPhone and Android phones to access basic account information, the offered apps aren’t as feature-rich as competitors such as Betterment.

Is Ally Invest Managed Portfolios safe?

Whenever you invest your money, there’s a risk you may lose some or all of it. This is no different with Ally Invest Managed Portfolios. The assets your robo-advisor invests you in could decline in value and your portfolio could lose money.

But Ally Invest is as safe as any trusted online brokerage, and there’s little risk of losing assets if the investment firm goes bankrupt. Ally Invest is in compliance with regulatory requirements according to FINRA’s Broker Check tool. Ally Invest is also a member of the FDIC and SIPC, both of which ensure cash in bank and brokerage accounts respectively.

Final thoughts

Ally Invest Managed Portfolios is a viable choice for investors looking for an easy, hands-off way to invest — especially with its low $100 minimum deposit requirement. Ally also promises to offer a broad range of socially-responsible portfolios, which should interest investors who want to consider more than just financial returns. But the lack of a promotional offer, higher management fees, and the fact tax loss harvesting isn’t currently offered makes Ally a less-than-ideal option for investors looking for the most affordable way to build a diversified portfolio. If you want a lower-cost option that does offer tax-loss harvesting, consider robo-advisors such as Betterment or Wealthfront.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
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Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here

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SogoTrade Review 2019

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

SogoTrade is a relatively new face in the world of discount brokers, having joined the fray in 2010. While less well-known than some of its larger peers, SogoTrade quickly set itself up as a low-cost player that could offer high-volume traders prices that undercut those larger competitors. And even low-volume investors have a way to get those low commissions without significant amounts of trading. SogoTrade is a solid choice for frequent or high-volume traders, such as penny stock traders.

SogoTrade
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The bottom line: SogoTrade offers a low-frills experience at a competitive price.

  • Volume-based pricing that can lower trading costs substantially
  • Discounts on commissions for prepaid trades
  • Limited education and research offerings

Who should consider SogoTrade

SogoTrade really pitches itself to high-volume traders who need a low-cost way to get in and out of the market. If you’re in this demographic, SogoTrade may be for you. The ability to trade up to 100,000 shares for one low flat rate (not including stocks below $1 a share, which have an additional per-share fee) also may lure penny stock traders. Investors who aren’t in these two categories will find SogoTrade a harder sell.

SogoTrade is not especially well-suited to beginners, with limited education and research components, though it does have some of each. Those investors who don’t need those features may still find the broker an apt choice, however, especially if they’re willing to take advantage of SogoTrade’s discounts for prepaid trades.

SogoTrade fees and features

Current promotions

100 free trades in the first 30 days

Stock trading fees
  • $4.88 per trade (fewer than 150 trades per quarter)
  • $2.88 per trade (150 or more trades per quarter)
Option trading fees
  • $4.88 / trade + $0.50 / contract (fewer than 150 trades per quarter)
  • $2.88 / trade + $0.50 / contract (150 or more trades per quarter)
Amount minimum to open account
  • $0
Margin rate range6.25% - 11.00%
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Options
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $75 full account transfer fee
  • $75 partial account transfer fee
  • $50 annual inactivity fee if account drops below $100 and has not made at least one trade
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SEP IRA
  • Trust
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Mobile appiOS, Android
Customer supportPhone, Chat, Email
Research resources
  • SEC filings
  • Mutual fund reports
  • Earnings press releases

Strengths of SogoTrade

  • Volume-based pricing: SogoTrade has a multitiered system for charging commissions — one that’s highly advantageous for frequent traders and even penny stock traders who transact thousands (or even tens of thousands of shares) at a time. SogoTrade’s basic commission is $4.88 per trade — and with Charles Schwab and Fidelity both at $4.95, that’s not substantially different. But if you’re making more than 150 trades per quarter, SogoTrade slashes the fee to just $2.88 per trade (150 or more trades per quarter) . That’s great for high-volume traders. And for penny stock traders? SogoTrade’s commission allows you to trade up to 100,000 shares for the same flat rate, though you’ll have to pay a supplement for stocks trading below $1 per share. That supplemental fee comes to $0.0003 per share (10% of principal max) or 0.25% of principal.
  • Discounts for prepaid trades: Even if you’re not a frequent trader, you can reduce your commission to $3.88 or $2.88 per trade by buying prepaid packs of trades at that rate. SogoTrade allows you to buy 20 trades for $3.88 per trade or 50 trades for $2.88 per trade, and they cover stock trades and the base commission for options. So that could be an attractive (albeit unconventional) option for realizing low-cost trades without trading a lot. However, the prepaid trades are valid for only a year after purchase, so it’s a “use ‘em or lose ‘em” scenario.
  • Low options commissions: Given its rabid focus on low costs, it’s not surprising that SogoTrade also has low commissions on options. Pricing ranges from $2.88 to $4.88, depending on volume or whether you buy prepaid trades. Then options trades tack on a $0.50 per-contract fee, which is toward the lower end of the range. For example, Fidelity and Schwab charge their base rate plus $0.65 per contract. Even the low-cost Interactive Brokers typically charges $0.70 per contract, though with no base commission and volume pricing for very large orders. Always nice for traders executing more complicated options orders, SogoTrade charges only one base rate for multilegged options orders. So those complex three- and four-leg trades won’t ring up any extra base fees.

Drawbacks of SogoTrade

  • Limited education and research: For beginners, the lack of substantial educational support at SogoTrade may be a deal breaker. While there are some resources on the site, the entire education section feels more like an afterthought than a valuable addition to the SogoTrade experience. For example, the site’s educational links refer to articles on a third-party site. Similarly, while the broker offers a research center on its site, it feels too basic — even if it does offer some key functionality, such as identifying stocks at 52-week highs and lows and linking to a company’s press releases and SEC filings. The broker does point you in the direction of a free third-party monthly newsletter and stock reports. These resources may be a place to begin for newer investors, but more experienced traders will already have their own preferred resources lined up, so this likely won’t be much of a drawback for them.
  • Cheap but maybe not cheap enough: There’s no question that SogoTrade is targeting customers who are looking to minimize commissions. But the broker looks somewhat caught in the middle here. For the same base commission, rivals like Schwab provide a better educational and research component. Meanwhile, at the other end, cut-rate brokers can offer lower commissions, with Just2Trade providing $2.50 trades without customers having to pony up for prepaid trades (and no expiration dates on trades either).

Is SogoTrade safe?

SogoTrade is a relatively new player in the discount brokerage space, having debuted in 2010, but that doesn’t mean it’s not covered by the same protections as larger and more well-established brokers. Investors’ accounts are covered by the Securities Investor Protection Corporation (SIPC), which protects their value up to $500,000, including a cash limit of $250,000 in the event that the brokerage ceases to operate.

In addition, the broker’s clearing firm, Apex, has coverage up to an aggregate $150 million, with a maximum of $37.5 million for any single account, including a cash-only maximum of $900,000. Of course, these coverages do not protect against declines in the value of the securities in the portfolio.

Final thoughts

Cheap trades really are the priority at SogoTrade, and it shows throughout the website. If you’re a high-volume trader and can meet SogoTrade’s quarterly trade threshold, you may find a home here with the broker’s $2.88 fees. Even lower-volume traders who don’t mind the clunkiness of prepaying for trades may find SogoTrade interesting.

Still, SogoTrade seems caught in the middle of the market, especially for newer investors and many low-volume traders. Its service doesn’t offer enough education and research, relative to Schwab and Fidelity, for its base commission, and it’s not as cheap as other discount rivals such as Just2Trade and eOption (especially for options trades), brokers that are just as cutthroat about costs.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

James F. Royal, Ph.D.
James F. Royal, Ph.D. |

James F. Royal, Ph.D. is a writer at MagnifyMoney. You can email James here

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