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Investing

What is a 401(k)?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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
Jamie Cattanach |

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

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Investing

SoFi Active Investing Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Well known for its lending business, SoFi has branched out more recently into investing products. SoFi Active Investing is the company’s online brokerage product, providing a platform for users to invest in individual stocks and exchange traded funds (ETFs).

SoFi Active Investing offers very limited choices for investing, and should be considered a product for people who want to learn the basics. That said, this platform’s biggest hook makes it a very attractive choice for investing beginners: it charges zero transaction fees. In addition, you can get started buying fractional shares of stock with as little as a $1, and it provides great educational resources.

SoFi Automated Investing
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The bottom line: SoFi Active Investing provides beginners with easy-to-use online brokerage that helps them invest in stocks and ETFs, and learn about the market.

  • Invest in a variety of stocks and ETFs, including fractional shares.
  • Create a personal watchlist and get real-time investing news and data.
  • Get access to other SoFi membership benefits, including rate discounts and community events.

Who should consider SoFi Active Investing

SoFi Active Investing is best for beginners who would like to gain hands-on experience in trading individual stocks. Fractional investing through the Stock Bits feature can be a very useful tool, since you can buy a small piece of a more expensive company for as little as $1.

While best suited for beginners, intermediate and even advanced traders can benefit from using SoFi’s brokerage account. SoFi doesn’t charge trading commissions like most other online brokers. More active traders can benefit from using this product and save money on fees, rather than needing to pay each time an order is executed.

Note that investors who are more focused on long-term goals and want a more hands-off approach to their portfolio might look at SoFi Automated Investing, the company’s robo-advisor platform. This SoFi product takes care of the heavy lifting for investors by offering a selection of ETF portfolios.

SoFi Automated Investing fees and features

Amount minimum to open account
  • $100 one-time deposit or $20 monthly deposit
Tradable securities
  • ETFs
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $0 full account transfer fee
  • $0 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • SEP IRA
Ease of use
Mobile appiOS, Android
Customer supportPhone, Email, 4 branch locations

Strengths of SoFi Active Investing

  • No transaction fees: While any ETFs you choose come with expense ratios, there are no transaction fees, even for trading individual stocks. You can expect to pay $4.95 (or more) at several more traditional brokerages. Robinhood is one of the few other brokers that doesn’t charge transaction fees.
  • Access to fractional shares: If you don’t have enough money to purchase a full share of stock, you can purchase fractional shares of select stocks for as little as $1.
  • Invest up to $1,000 instantly: If you have a linked bank account, and meet certain requirements, you can invest instantly, without waiting about four business days for funds to clear.
  • SoFi membership bonuses: When you open a SoFi Active Investing account, you become a SoFi member and get access to certain bonuses. These bonuses include things like rate discounts on other products, as well as invitations to exclusive events and networking opportunities.

Drawbacks of SoFi Active Investing

  • Cash balance doesn’t earn interest: The money you have sitting in the cash balance portion of your SoFi Active Investing account doesn’t earn interest. Some other brokers will pay a small amount of interest on cash that hasn’t been invested yet.
  • Not every stock comes with fractional investing: While it’s possible to buy fractional shares, the list of stocks where this is possible is limited. Not every stock comes with the ability to purchase fractional shares. SoFi updates its list of Stock Bits based on demand.

Is SoFi Active Investing safe?

SoFi Active Investing is as safe as any investment. It is important to understand that anytime you invest, you are putting your money on the line and you could lose it — this is true no matter what broker you use.

However, SoFi offers its account under SoFi Securities LLC, a broker registered with the Securities and Exchange Commission (SEC). Additionally, SoFi carries SIPC insurance, which is designed to protect investors if the broker fails. Realize, though, that the SIPC won’t protect you from economic and market events — those losses are entirely yours.

SoFi is also regulated by the Financial Industry Regulatory Authority (FINRA), which helps keep your investments safe. Before investing, it’s a good idea to use resources like FINRA’s BrokerCheck to see if there are problems related to any broker. Additionally, you can look at the Better Business Bureau to see if there are complaints against an investing company.

Final thoughts

SoFi Active Investing is a good choice for beginners who want to start active trading. It’s possible to invest in individual stocks and fractional shares without paying transaction fees. You can open an account fairly easily, and when you link a bank account, you can invest instantly.

There are other brokers, like Robinhood, that provide access to individual stocks without high costs, and if you don’t trade very frequently, established brokers like Charles Schwab and Ally Invest can be good choices, even with transaction fees.

However, it’s important to note that SoFi is relatively new to the investment space, and you might not have access to some of the tools commonly available with more established brokers. Additionally, if you’re not sure that you’re ready for active investing, it can make sense to start with a robo-advisor. SoFi’s Automated Investing product might be a good choice, or you might consider another well-known investment product, like Ellevest, Wealthfront or Betterment.

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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.

Miranda Marquit
Miranda Marquit |

Miranda Marquit is a writer at MagnifyMoney. You can email Miranda here

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Investing

M1 Finance Review

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

M1 Finance is an online investing platform that combines robo-advisor functionality with certain features more typically found on conventional broker platforms. This makes M1 Finance a somewhat unique product: It offers curated investment portfolios for different goals and risk tolerances, together with the ability to build your own investment portfolios.

No matter which way you choose to compile your investments, M1 Finance lands squarely in the robo-advisor camp, as it manages them for you automatically and handles all the necessary rebalancing. M1 offers taxable, trust and retirement accounts, and users can open up to five accounts under one login. Best of all, M1 charges no annual management fees.

M1 Finance
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The bottom line: This highly customizable robo advisor is a good option for investors who have gotten beyond the beginner stage, as well as more experienced investors.

  • Build your own investment portfolios choosing from an array of stocks and exchange traded funds (ETFs)
  • M1’s curated investment portfolios give you preset options
  • Robo-advisor technology and dynamic rebalancing keep your investments on track

How does M1 Finance work?

M1 Finance refers to investment portfolios as “pies,” and the different stocks and ETFs added to each portfolio “pie” as “slices,” which you may find either charming or goofy. When you sign up with M1 and choose your first pie — one designed by M1, one with “slices” you’ve selected yourself, or a mix of the two — the platform shows you how it would have performed over the last 10 years (this is called a “backtest” in the professional investing world).

After establishing a portfolio “pie,” you complete a quick series of questions about yourself, including income, net worth, liquidity, and investment time horizon. M1 then asks you to link up a bank account to fund your investments. Once linked, you can fund your first pie, and may choose more portfolio pies.

If you decide to build your own portfolio pies, you can choose from more than 4,000 individual stocks and more than 1,900 ETFs. Each pie can hold up to 100 slices. M1 requires a minimum balance of just $100, and charges no fees to manage your portfolios. M1 makes its money from interest on cash deposits, interest on margin loans, and through the annual fee on their optional M1 Plus membership, among other things.

For users who want the platform to choose investments for them, M1 Finance offers curated pies, from target retirement portfolios (sorted by conservative to aggressive) to socially responsible investing portfolios. There’s even a “Cannabis Pie” that offers exposure to publicly traded cannabis producing, manufacturing and distributing companies.

Who should consider M1 Finance

M1 Finance has features that would appeal to both journeymen and more experienced investors. The latter will like the build-your-own portfolio option, while all users will appreciate curated portfolios based on things like your target retirement date or your desired mix of stocks and bonds. If you feel comfortable choosing your investment approach, you can set up automatic investments that will fund your account over time.

For true beginners, the M1 platform might be a little too DIY. Although you can choose from the site’s pre-selected investment mixes, there are no recommendations based on your time horizon or other measures — you’re on your own to select one. If you need help, there are no advisors available, as with some other robo-advisors — you must submit a support request via contact form.

M1 Finance fees and features

Current promotions

Current M1 clients get $25 off their first year of M1 Plus, M1's premium product.

Stock trading fees
  • $0 per trade
Amount minimum to open account
  • $100
Tradable securities
  • Stocks
  • ETFs
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $100 full account transfer fee
  • $100 partial account transfer fee
  • $20 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • SEP IRA
  • Trust
Mobile appiOS, Android
Customer supportPhone, Email

Strengths of M1 Finance

  • No fees: M1 charges no fees to manage your portfolio, and requires only $100 to start investing, after which you can invest in increments of $10. There is, however, an inactivity fee if you have less than $20 in your account and there’s no activity for 90 or more days, and the site charges to close accounts: $100 for outgoing transfers, for instance, and $100 to terminate each IRA.
  • Customizable portfolios: Unlike some robo-advisors that lock you into their investment selections based on your risk tolerance, M1 Finance gives you a lot of leeway. You can select your own stocks and funds you’d like to go into your investment pie, or you can go with one of the site’s professionally curated pies, such as “Moderately Aggressive” or “Responsible Investing.” You can also choose a combination of the two approaches, filling part of your pie with your picks and part of your pie with theirs.
  • Fractional shares: M1 allows investors to buy fractional shares of stocks and funds, so every dollar you point toward your portfolio will be used when you purchase investments.
  • Rebalancing: Using a method it calls Dynamic Rebalancing, M1 will rebalance your portfolio as you deposit and withdraw cash, and the site will reinvest your dividends once your cash balance reaches $10, or whatever threshold you’ve chosen.
  • Additional features: With M1 Borrow, users with accounts with a balance of at least $10,000 can borrow up to 35% of their portfolio at 4.25%. M1 Spend allows users to keep cash in a checking account, and if you sign up for M1 Plus for $125 a year (currently on special for $100), you’ll earn 1.5% APY on your cash.

Drawbacks of M1 Finance

  • Too much freedom: Unlike most robo-advisors, which typically recommend pre-baked investment portfolios for you based on your answers to questions about goals and risk tolerance, M1 lets you invest in whatever you want. This could be bad news if someone loads up their portfolio with stocks without doing any research, or might be overwhelming for an investor who wants more hand-holding.
  • Not much guidance: The site’s setup includes questions like, “What is your liquid net worth?” without any explanation for beginners about what that might mean. The site also asks users to rate their risk tolerance — low, medium, high — without any accompanying details. Many other robo-advisors provide greater amounts of background detail on the investing process, and offer more advice for novice investors.
  • Not for day traders: M1 makes trades just once every day, during the “trading window,” at 9 am Central Time. If you’re looking to capitalize on daily stock price fluctuations, this may not be your ideal platform.
  • No tax-loss harvesting: Although M1 uses a tax minimization strategy to reduce the taxes you owe when you sell securities, there is no tax loss harvesting offered. When you request a withdrawal from your account, an algorithm sells securities in the order of: losses that offset future gains, lots that result in long-term gains, and then lots that result in short-term gains.

Is M1 Finance safe?

M1 Finance has all of the typical protections in place. It is a registered broker/dealer with the Financial Industry Regulatory Authority (FINRA), a member of the Securities Investor Protection Corporation (SIPC) and carry SIPC insurance that protects against the loss of cash and securities held by a customer up to $500,000. They also have supplemental SIPC insurance, and M1 Spend and M1 Plus accounts are FDIC insured up to $250,000.

M1 has also taken measures to protect personal information. Your data is never stored on any device, and all information is encrypted in transit and at rest. The connection to your bank is managed via an electronic key — M1 doesn’t store your bank credentials.

Final thoughts

M1 Finance offers features that will appeal to both experienced and beginner investors, from highly customizable portfolios to pre-set investment mixes that users can set on auto-pilot. Although there’s not much guidance on the site, users can open an IRA, choose a target date retirement mix, set up automatic investments and they’re set — or they can fill a portfolio with 100 individual stocks and ETFs of their choosing. With no management or trading fees, users are paying just the expenses on the investments themselves, and you can invest as little as $10 at a time. Compared to other robo-advisors charging higher fees and offering fewer investment options, there’s a lot to like here.

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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.

Kate Ashford
Kate Ashford |

Kate Ashford is a writer at MagnifyMoney. You can email Kate here