Fact checked by Suzanne Kvilhaug

If you are having trouble with your taxes, tap one of these five free resources for help.

The Internal Revenue Service (IRS) offers two programs to help you do your taxes, the Defense Department backs one, the AARP Foundation runs one, and one is a federal grant program that provides help with tax disputes. All have answers to the tax questions you may be struggling with alone.

Key Takeaways

• Volunteer Income Tax Assistance helps people with incomes up to $67,000, limited English, or disabilities.
• Tax Counseling for the Elderly offers free tax assistance for people 60 and older.
• MilTax offers free one-on-one counseling sessions and free tax software to military members and their families.
• AARP Foundation Tax Aide aims to help people 50 and older with low and moderate incomes, but this free program is open to everyone.
• Low Income Taxpayer Clinics help taxpayers who are having disputes with the IRS. The service is provided for free or for a slight fee.

1. Volunteer Income Tax Assistance (VITA)

This IRS program has been helping taxpayers for more than 50 years. To qualify for this free tax help, you’ll need an income of $67,000 or lower. People with disabilities and people who speak limited English also qualify.

VITA sites are run by IRS partners, and the volunteers who fill out tax returns must pass tax law training that meets the IRS’s standards.

“The volunteer preparers I’ve worked with took the service very seriously, many coming back year after year to help elderly and lower-income taxpayers,” says Mark Rosinski, a certified financial planner with Dunes Financial. “Also, every VITA volunteer is required to pass IRS training before every tax season. And lastly, every return is reviewed by another preparer for a second set of eyes before filing,”

The VITA locator tool allows you to find a Volunteer Income Tax Assistance site near you by searching by zip code.

“If it’s difficult for someone to sit and wait for their return to be completed, many VITA programs now offer a drop-off program. This allows a taxpayer to drop off their documents and come back when completed, saving them time and money.” Rosinski says.

2. Tax Counseling for the Elderly (TCE)

This IRS program provides free tax help for people 60 and up. Questions about pensions and other retirement-related questions are all answered in this free program. The VITA locator tool can be used to find Tax Counseling for the Elderly sites. Like VITA, this program is managed by the IRS, and the program sites are run by IRS partners and volunteers who must pass tax law training that is up to the standards set by the IRS.

3. MilTax Free Tax Services

MilTax provides free tax software and free tax assistance for military members. Military tax experts offer one-on-one help, and the free tax software is designed for the specific tax issues of military life. MilTax helps military members file a federal tax return and up to three state returns. The service is available to military members and their families. For in-person assistance, check the VITA locator for programs on military installations.

4. AARP Foundation Tax Aide

While AARP Foundation Tax Aide offers help to everyone who reaches out, the focus of the program is helping people 50 and up with moderate to low income. Started in 1968, AARP Tax Aide is available in more than 3,600 locations across the United States. Volunteers are certified by the IRS. To find a location near you, use this locator tool.

5. Low Income Taxpayer Clinics (LITC)

These clinics offer tax help for people with low incomes who have tax disputes with the IRS. Tax services are free or for a small fee. The disputed tax amount is typically below $50,000. A clinic locator is found on the program’s website. Low Income Taxpayer Clinics also provide outreach to people who speak English as a second language.

The Bottom Line

With April 15 around the corner, it is not too late to reach out for some free tax help in filing your return. Which free service is right for you? Volunteer Income Tax Assistance is for people with disabilities, limited English, and those who make up to $67,000 a year. Tax Counseling for the Elderly offers tax assistance for people 60 and up.

AARP Foundation Tax Aide is free and open to everyone, but it aims to help taxpayers 50 and older with low and moderate incomes. MilTax offers free tax help, including free tax software, to military members and their families. If you have a dispute with the IRS, contact Low-Income Taxpayer Clinics. You’ll get tax assistance for free or a modest fee.

Reviewed by Lea D. Uradu
Fact checked by Suzanne Kvilhaug

If you are a financial professional and wish to work as an investment adviser to help individual investors manage assets their assets, or provide financial counsel, you generally need to become an investment adviser representative (IAR) under a registered investment adviser (RIA) firm.

An RIA is a firm registered with the Securities and Exchange Commission (SEC) or a state securities regulator to offer advisory services for a fee. An IAR is an individual who works for a RIA firm and has passed the necessary licensing requirements to offer investment advice. So, while the two terms and their acronym may look similar, there are important distinctions between them.

RIAs and IARs have a fiduciary duty to act in the best interest of the client and disclose any conflicts of interest. They also have specific requirements and regulations that can differ from some other types of financial advisors.

Key Takeaways

• Registered investment advisors (RIAs) are financial firms
• To form an RIA, investment advisors must pass the Series 65 exam (or equivalent).
• RIAs must register with the SEC or state authorities, depending on the amount of money they manage.
• Applying to become an RIA includes filing a Form ADV, which includes a disclosure document that is also distributed to all clients.
• Usually compensated by a percentage of assets under management, RIAs are legally required to act in a fiduciary capacity for their clients at all times.

Licensing and Qualifications

The first step to starting an RIA is for you to pass the Series 65 or Uniform Investment Advisor Law exam so that you can become an IAR. The Series 65 test is given by the Financial Industry Regulatory Authority (FINRA). The test itself covers federal securities laws and other topics related to investment advice. It has 140 multiple-choice questions, of which 10 are pretest questions that will not count toward final grade. Of the 130 scored questions, a candidate must correctly answer 92 to pass the three-hour exam.

While no other designations are required to become an IAR, most advisors will find it rather difficult to bring in business without additional qualifications. These can include other FINRA exams, such as the Series 6 or Series 7, and credentials, such as the certified financial planner (CFP) or certified financial advisor (CFA). In fact, many states allow advisors who carry the following designations in good standing to waive the Series 65. These designations include the following:

• CFP
• CFA
• Chartered investment counselor
• Chartered financial consultant
• Personal financial specialist

Here’s a list of the major terms for securities professionals:

Securities Professionals and Their Firms
Attributes	Registered Representative (RR)	Broker-Dealer (BD)	Investment Adviser Representative (IAR)	Registered Investment Adviser (RIA)
Also known as	Stockbroker	Securities dealer	Financial adviser	Financial advisory, wealth manager
Primary Regulating Bodies	FINRA	FINRA, SEC	SEC, state regulators	SEC, state regulators
Primary Services	Buying and selling securities on behalf of clients	Facilitating trading of securities	Providing financial advice and planning services	Managing investment portfolios and providing financial advice
Compensation	Commissions	Fee-based or Commission-based	Fee-based	Fee-based
Examples	Employees of major brokerages like Morgan Stanley	Morgan Stanley, Merrill Lynch, Edward Jones, UBS, Wells Fargo, as well as independent broker-dealers (IBDs)	Employees for firms like Merrill Lynch, JPMorgan, and independent RIAs.	Merrill Lynch, JPMorgan, and independent RIAs.

Federal and State Registration for RIAs

If providing investment advice or asset management services is vital to your services, the next step to becoming an RIA is to register your firm with either the SEC or the state(s) where you’ll be doing business.

Series 65 test-takers are not required to be sponsored by a broker-dealer, as they are for most other securities-related exams administered by FINRA.

However, you will not have to do this if providing investment services or advice is purely incidental to your practice. Professionals who are often exempt under this exception include the following:

• Accountants
• Attorneys
• Engineers
• Teachers
• Bankers
• Broker-dealers
• Publishers
• Advisors who work only with U.S. government securities
• Advisors who are registered with the Commodity Futures Trading Commission and for whom providing investment advice is not a primary line of business
• Employees of charitable organizations

SEC Registration Eligibility

Here are the SEC requirements on the type of registration an RIA needs, which depend on how much in assets you manage:

• Under $25 million of assets under management (AUM): A small adviser with less than $25 million in AUM is prohibited from SEC registration if its principal office and place of business are in a state that regulates advisers (all states except Wyoming).
• Between $25 million and $100 million of AUM:
• Required to register with the SEC if its principal office and place of business is in New York or Wyoming unless otherwise exempted.
• Prohibited from SEC registration if its principal office and place of business are in any state except New York or Wyoming, and the midsized adviser is required to be registered in that state. If the midsized adviser is not required to be registered in that state, then the adviser must register with the SEC, unless a registration exemption is available.
• Between $90 million and $110 million of AUM:
• May register with the SEC when it reaches $100 million of AUM.
• Must register with the SEC once it reaches $110 million of AUM, unless otherwise exempted.
• Once registered with the SEC, is not required to withdraw from SEC registration and register with the states until the adviser goes lower than $90 million of AUM.
• Over $110 million in AUM: A large adviser with at least $110 million of AUM is required to register with the SEC, unless otherwise exempted.

Any firm or individual who acts as an investment advisor on behalf of an investment company is also required to file with the SEC, no matter the amount of AUM.

Firms that register with the SEC are not required to file with states, but they must file a notice of SEC registration with each state where they do business. Most states don’t require registration or filing of notice if the advisor has less than five clients in the state and does not have a place of business there.

Most firms register with these entities as corporations, with each advisor acting as an investment advisor representative (IAR).

RIAs and Form ADV

The next step in registering is to create an account with the Investment Adviser Registration Depository (IARD), which FINRA manages on behalf of the SEC and states. (A few states do not require this, so advisors who only do business in those do not have to go through this process.) Once the account is open, FINRA will supply the advisor or firm with a CRD number and account ID information. Then, the RIA can file Form ADV and the U4 forms with either the SEC or states.

Form ADV is the official application document for applying to become an RIA. It has several sections, and all must be completed, although only the first section is electronically submitted to the SEC or state government for approval. Part II of the form serves as a disclosure document that is distributed to all clients. It must clearly list all services supplied to clients, as well as a breakdown of compensation and fees, possible conflicts of interest, the firm’s code of ethics, the advisor’s financial condition, educational background and credentials, and any affiliated parties.

Important

Form ADV must also be uploaded electronically into the IARD and made available to all new and prospective clients. Preparing and submitting these forms typically takes most firms a few weeks, and the SEC must respond to the application within 45 days.

Some states may respond as soon as 30 days, but requests for additional information often delay the process. All firms that register with the SEC must also create a comprehensive compliance program that covers all aspects of their practice, from trading and account administration to sales and marketing and internal disciplinary procedures.

Once the SEC approves an application, the firm can start work as an RIA, filing annual amendments to Schedule 1 of the ADV and updating all of the firm’s relevant information (such as the AUM). In addition, while the SEC has no specific financial or bonding requirements for advisors, such as a minimum net worth or cash flow, it does examine the advisor’s financial condition during the application process.

Most states require RIAs to have a net worth of at least $35,000 if they have custody of client funds and $10,000 if they do not. RIAs who fail to meet this requirement must post a surety bond. (The rules for this requirement and several other aspects of registration vary from state to state.)

IARs vs. RRs

Financial professionals become IARs and establish RIAs because it allows them greater freedom to structure their practices—more so than for RRs who also advise and buy and sell securities for individual investors, usually as employees of brokerage firms.

RRs who work for broker-dealers—aka stockbrokers—pay a percentage of their earnings as compensation for their back-office support and compliance oversight.

Brokers also usually work on commission, while most RIAs charge their customers either a percentage of assets under management or a flat or hourly fee for their services. Many RIAs also use another firm, a custodian like Schwab or Fidelity, to house their clients’ assets instead of holding the accounts in-house. This simplifies recordkeeping and administration.

Important

Despite the similar-sounding names, registered representatives (RRs) are not the same as investment advisor representatives (IARs). RRs work for a brokerage firm, serving as its representative for clients trading investments. Brokers are RRs.

Fiduciary Standard

Although the SEC and the states have the responsibility of overseeing RIAs, FINRA has tried at various points to get Congress to let it take on the task. Advisors see FINRA substantially lowering the protection given to RIA clients, as RIAs are legally required to act in a fiduciary capacity for their clients at all times. Brokers and securities licensed reps only have to meet the suitability standard, which only requires that a given transaction performed by a broker must be “suitable” for the client at that time.

What Are the Primary Steps To Becoming an RIA?

Establishing an RIA involves several key steps. First, you need to pass the Series 65 exam or have a valid Series 7 and Series 66, as this is required by most states. Second, draft your firm’s compliance documents, including Form ADV Parts 1 and 2, which describe the nature of your business, types of clients, fees, and potential conflicts of interest. Then, register with the SEC or state regulator by filing the Form ADV along with other required forms. Finally, carry out an ongoing compliance program to follow SEC regulations.

How Much Does It Cost To Start an RIA?

Costs to start an RIA can vary widely depending on a number of factors, including state registration fees, legal and compliance consulting fees, technology costs, and operational expenses. Generally, the startup cost can range from $10,000 to $50,000. However, ongoing costs such as compliance, technology, and staffing should also be considered in the budget.

Can I Operate My Ria in More Than One State?

Yes. Nevertheless, each state will have its own registration requirements, so you’ll need to ensure you follow the regulations in each state where you do business. If your RIA manages $100 million or more in client assets, you can register with the SEC at the federal level instead of with state securities authorities, which will allow you to offer services in multiple states more easily.

What Is the Fiduciary Duty of an RIA and Why Is It Important?

The fiduciary duty of an RIA is a legal obligation to act in the best interests of its clients. This means an RIA must provide investment advice that best meets the client’s needs, even if it’s not in the RIA’s own best interest. This is important as it ensures that the advice provided to clients is based only on their needs, goals, and risk tolerance, which helps to build trust and confidence in the relationship.

The Bottom Line

Registered Investment advisors enjoy greater freedom than their counterparts in the industry who work on commission. They are also required to adhere to a much higher standard of conduct, and most advisors feel strongly that this should not change.

Of course, those who register to become RIAs must also contend with the normal startup issues that most new business owners face, such as marketing, branding, and location, in addition to the registration process.

Reviewed by Amy Drury
Fact checked by Suzanne Kvilhaug

A company needs financial capital to operate its business. For most companies, financial capital is raised by issuing debt securities and by selling common stock. The amount of debt and equity that makes up a company’s capital structure has many risk and return implications. Therefore, corporate management must use a thorough and prudent process for establishing a company’s target capital structure. The capital structure is how a firm finances its operations and growth by using different sources of funds.

What You Need to Know

• A company’s capital structure is the mix of debt and equity that are used to finance its spending.
• A company’s financial leverage is the amount of debt and preferred stock in its capital structure, as opposed to common equity.
• A high degree of financial leverage can be a good thing, if it is used to purchase productive assets.
• However, an over-leveraged company can also increase its financial risk.

Use of Financial Leverage

Financial leverage is the extent to which fixed-income securities and preferred stock are used in a company’s capital structure. Financial leverage has value due to the interest tax shield that is afforded by the U.S. corporate income tax law. The use of financial leverage also has value when the assets that are purchased with the debt capital earn more than the cost of the debt that was used to finance them.

Under both of these circumstances, the use of financial leverage increases the company’s profits. With that said, if the company does not have sufficient taxable income to shield, or if its operating profits are below a critical value, financial leverage will reduce equity value and thus reduce the value of the company. 

Given the importance of a company’s capital structure, the first step in the capital decision-making process is for the management of a company to decide how much external capital it will need to raise to operate its business. Once this amount is determined, management needs to examine the financial markets to determine the terms in which the company can raise capital. This step is crucial to the process because the market environment may curtail the ability of the company to issue debt securities or common stock at an attractive level or cost.

With that said, once these questions have been answered, the management of a company can design the appropriate capital structure policy and construct a package of financial instruments that need to be sold to investors. By following this systematic process, management’s financing decision should be implemented according to its long-run strategic plan, and how it wants to grow the company over time.

The use of financial leverage varies greatly by industry and by the business sector. There are many industry sectors in which companies operate with a high degree of financial leverage. Retail stores, airlines, grocery stores, utility companies, and banking institutions are classic examples. Unfortunately, the excessive use of financial leverage by many companies in these sectors has played a paramount role in forcing a lot of them to file for Chapter 11 bankruptcy.

Examples include R.H. Macy (1992), Trans World Airlines (2001), Great Atlantic & Pacific Tea Co. (A&P) (2010), and Midwest Generation (2012). Moreover, excessive use of financial leverage was the primary culprit that led to the U.S. financial crisis between 2007 and 2009. The demise of Lehman Brothers (2008) and a host of other highly levered financial institutions are prime examples of the negative ramifications that are associated with the use of highly levered capital structures.

The Modigliani and Miller Theorem on Corporate Capital Structure

The study of a company’s optimal capital structure dates back to 1958 when Franco Modigliani and Merton Miller published their Nobel Prize-winning work “The Cost of Capital, Corporation Finance, and the Theory of Investment.” As an important premise of their work, Modigliani and Miller illustrated that under conditions where corporate income taxes and distress costs are not present in the business environment, the use of financial leverage does not affect the value of the company. This view, known as the Irrelevance Proposition theorem, is one of the most important pieces of academic theory ever published. 

Unfortunately, the Irrelevance Theorem, like most Nobel Prize-winning works in economics, requires some impractical assumptions that need to be accepted to apply the theory in a real-world environment. In recognition of this problem, Modigliani and Miller expanded their Irrelevance Proposition theorem to include the impact of corporate income taxes, and the potential impact of distress cost, for purposes of determining the optimal capital structure for a company.

Their revised work, universally known as the Trade-off Theory of capital structure, makes the case that a company’s optimal capital structure should be the prudent balance between the tax benefits that are associated with the use of debt capital, and the costs associated with the potential for bankruptcy for the company. Today, the premise of the Trade-off Theory is the foundation that corporate management should use to determine the optimal capital structure for a company.

Impact of Financial Leverage on Performance

Perhaps the best way to illustrate the positive impact of financial leverage on a company’s financial performance is by providing a simple example. The Return on Equity (ROE) is a popular fundamental used in measuring the profitability of a business as it compares the profit that a company generates in a fiscal year with the money shareholders have invested. After all, the goal of every business is to maximize shareholder wealth, and the ROE is the metric of return on shareholder’s investment.

In the table below, an income statement for Company ABC has been generated assuming a capital structure that consists of 100% equity capital. The capital raised was $50 million. Since only equity was issued to raise this amount, the total value of equity is also $50 million. Under this type of structure, the company’s ROE is projected to fall between the range of 15.6% and 23.4%, depending on the level of the company’s pre-tax earnings.

In comparison, when Company ABC’s capital structure is re-engineered to consist of 50% debt capital and 50% equity capital, the company’s ROE increases dramatically to a range that falls between 27.3% and 42.9%.

As you can see from the table below, financial leverage can be used to make the performance of a company look dramatically better than what can be achieved by solely relying on the use of equity capital financing.

Since the management of most companies relies heavily on ROE to measure performance, it is vital to understand the components of ROE to better understand what the metric conveys.

A popular methodology for calculating ROE is the utilization of the DuPont Model. In its most simplistic form, the DuPont Model establishes a quantitative relationship between net income and equity, where a higher multiple reflects stronger performance. However, the DuPont Model also expands upon the general ROE calculation to include three of its parts. These parts include the company’s profit margin, asset turnover, and equity multiplier. Accordingly, this expanded DuPont formula for ROE is as follows:

$begin{aligned} text{Return on equity} &= frac{text{Net Income}}{text{Equity}}\ &=frac{text{Net Income}}{text{Sales}} times frac{text{Sales}}{text{Assets}} times frac{text{Assets}}{text{Equity}}\ end{aligned}$Return on equity​=EquityNet Income​=SalesNet Income​×AssetsSales​×EquityAssets​​

Based on this equation, the DuPont Model illustrates that a company’s ROE can only be improved by increasing the company’s profitability, by increasing its operating efficiency or by increasing its financial leverage.

Measuring Financial Leverage Risk

Corporate management tends to measure financial leverage by using short-term liquidity ratios and long-term capitalization, or solvency ratios. As the name implies, these ratios are used to measure the ability of the company to meet its short-term obligations. Two of the most utilized short-term liquidity ratios are the current ratio and acid-test ratio. Both of these ratios compare the company’s current assets to its current liabilities.

However, while the current ratio provides an aggregated risk metric, the acid-test ratio provides a better assessment of the composition of the company’s current assets for purposes of meeting its current liability obligations since it excludes inventory from current assets. 

Capitalization ratios are also used to measure financial leverage. While many capitalization ratios are used in the industry, two of the most popular metrics are the long-term-debt-to-capitalization ratio and the total-debt-to-capitalization ratio. The use of these ratios is also very important for measuring financial leverage. However, it’s easy to distort these ratios if management leases the company’s assets without capitalizing on the assets’ value on the company’s balance sheet. Moreover, in a market environment where short-term lending rates are low, management may elect to use short-term debt to fund both its short- and long-term capital needs. Therefore, short-term capitalization metrics also need to be used to conduct a thorough risk analysis.

Coverage ratios are also used to measure financial leverage. The interest coverage ratio, also known as the times-interest-earned ratio, is perhaps the most well-known risk metric. The interest coverage ratio is very important because it indicates a company’s ability to have enough pre-tax operating income to cover the cost of its financial burden.

The funds-from-operations-to-total-debt ratio and the free-operating-cash-flow-to-total-debt ratio are also important risk metrics that are used by corporate management. 

Factors in the Capital Structure Decision-Making Process

Many quantitative and qualitative factors need to be taken into account when establishing a company’s capital structure. First, from the standpoint of sales, a company that exhibits high and relatively stable sales activity is in a better position to utilize financial leverage, as compared to a company that has lower and more volatile sales.

Second, in terms of business risk, a company with less operating leverage tends to be able to take on more financial leverage than a company with a high degree of operating leverage.

Third, in terms of growth, faster-growing companies are likely to rely more heavily on the use of financial leverage because these types of companies tend to need more capital at their disposal than their slow growth counterparts.

Fourth, from the standpoint of taxes, a company that is in a higher tax bracket tends to utilize more debt to take advantage of the interest tax shield benefits.

Fifth, a less profitable company tends to use more financial leverage, because a less profitable company is typically not in a strong enough position to finance its business operations from internally generated funds.  

The capital structure decision can also be addressed by looking at a host of internal and external factors. First, from the standpoint of management, companies that are run by aggressive leaders tend to use more financial leverage. In this respect, their purpose for using financial leverage is not only to increase the performance of the company but also to help ensure their control of the company.

Second, when times are good, capital can be raised by issuing either stocks or bonds. However, when times are bad, suppliers of capital typically prefer a secured position, which, in turn, puts more emphasis on the use of debt capital. With this in mind, management tends to structure the capital makeup of the company in a manner that will provide flexibility in raising future capital in an ever-changing market environment.

Why Is Financial Leverage Bad?

Financial leverage refers to the amount of debt or debt-like instruments that a company uses to raise capital, as opposed to selling common stock. Since these costs must be repaid, a high degree of leverage increases the burden on a company’s finances and increases the likelihood that it will default on its obligations.

How Do You Calculate a Company’s Leverage Ratio?

There are several metrics to measure a company’s financial leverage, depending on whether the focus is on the company’s equity, assets, or earnings. Perhaps the most frequently-used one is the debt-to-equity ratio, which measures a company’s debt relative to its shareholder’s equity.

What Is the Optimal Financial Leverage Ratio?

There’s no hard rule about what make’s a “good” financial leverage level for a company’s capital structure, and different industries have different sources of capital. The easiest way to tell if a company is over-leveraged is to compare it with other companies in the same industry and see if they use a similar mix of debt and equity financing.

The Bottom Line

In essence, corporate management utilizes financial leverage primarily to increase the company’s earnings per share and to increase its return-on-equity. However, with these advantages come increased earnings variability and the potential for an increase in the cost of financial distress, perhaps even bankruptcy.

With this in mind, the management of a company should take into account the business risk of the company, the company’s tax position, the financial flexibility of the company’s capital structure, and the company’s degree of managerial aggressiveness when determining the optimal capital structure.

Reviewed by Michael J Boyle
Fact checked by Timothy Li

Recessions seem to occur every decade or so in modern economies, and they seem to regularly follow periods of strong economic growth. This pattern recurs with striking consistency, but is it inevitable? Can a recession be avoided, or is it an unavoidable feature of a modern capitalist economy?

Key Takeaways

• Modern, capitalist economies exhibit readily observable cycles of booming growth followed by periods of recession and eventual recovery.
• Many people assume that these cycles are more or less inevitable.
• Understanding what causes recessions is the key to knowing whether they are inevitable.
• Numerous explanations for recessions have been proposed, focusing on different factors in the economy.
• The most powerful and comprehensive of these theories implies that while recessions are not logically inevitable, they are here to stay, given current economic circumstances.

What Is a Recession?

A recession is an economic period marked by negative real growth, declining output, depressed prices, and rising unemployment, which often follows a period of strong economic growth as measured by these same variables. Recessions are characterized by an unusual, simultaneous, and large grouping of business errors, which some economists call “malinvestments.”

Faced with financial loss and declining margins, businesses scale back production or fail entirely, and business managers (or the new owners) reallocate resources tied up in the failed projects to different uses. During the period of transition, some of these resources will need to be repriced (in terms of goods prices, asset values, or in the case of labor, wages), and some will remain idle for some time until a new use is found. As this process proceeds, the economy recovers.

Note

The National Bureau of Economic Research (NBER) determined that February 2020 was officially the peak and end of economic expansion that started following the Great Recession, as the U.S. economy contracted in the wake of the COVID-19 pandemic. At two months, the recession that came after was the shortest on record, lasting from February 2020 to April 2020.

Causes of Recessions

The key issue as to whether this process of growth to recession to recovery is inevitable is: What causes the cluster of business errors to occur? Why can businesses not continue to grow and asset prices continue to rise indefinitely?

Economists have developed numerous explanations for these clusters of business failures. Some rely on psychological factors. These explanations point out that people can be prone to excessive optimism and confidence or pessimism and fear, leading to the propagation and collapse of market bubbles and persistent deficiencies of aggregate demand.

Some of this can even be reproduced experimentally through simulations or experiments on a very limited scale. Such theories are popular, but in general fail to actually explain how a large-scale cluster of business errors can occur across markets and asset classes in an entire economy, as happens during a recession.

Others point to economic shocks, which are random events such as wars or epidemics, that can negatively affect production, consumer demand, or the costs of key goods and commodities in an economy. These kinds of things can certainly hurt businesses across an economy all at once. However, it doesn’t explain why recessions seem to occur with such regularity or why they consistently follow periods of notably strong growth. After all, economic shocks are, by nature, random events. There is no particular reason for random shocks to follow patterns like these, which are easily observed. Random negative shocks may be inevitable, but that doesn’t show why the observed boom-and-bust patterns in the economy should be inevitable.

Other economists explain the recurrent cycle of growth and recession in purely financial terms. These often involve errors by the central bank or monetary authority that supplies money to the economy. Maybe too much new money leads to excessive inflation, but too little may lead to tightening credit conditions and defaults leading to debt deflation, and this is why we have recessions.

Each of these types of explanations for the cycle of growth and recession that can be seen over the decades seems to have some power and perhaps some bit of truth. But none of them really shows that recessions are inevitable, or that a cycle of expansion and contraction in the economy should really exist at all.

These theories fail to explain why monetary authorities should err so greatly and with such apparent regularity as to cause a readily visible cycle of boom and bust in the economy. Essentially these theories simplify the question from “Why do clusters of severe business errors occur?” to “Why should severe clusters of central bank errors occur with such regularity?”

An Alternative Explanation

Another alternative explanation for recessions comes from Austrian Business Cycle Theory (ABCT). This theory takes a deeper look at many of the factors discussed above. It focuses on how central banking and monetary policy interact with real economic events and the psychology and incentives faced by investors, producers, and consumers in the economy. By looking at how all these things relate to each other, we can get a more complete view of how business cycles work and whether they are inevitable.

In ABCT, the key cause of recessions is the creation of new money in the form of loans and corresponding deposits by the banking system, known as fiduciary media of exchange. Banks, and especially central banks, do this not out of an error in calculating the correct monetary policy, but because it is their essential business model. This sets in motion a series of investments in the economy by distorting the incentives of investors, consumers, and savers in favor of debt-financed investment and consumption and a simultaneous decrease in savings. 

Note

The expansion of credit in the banking system sets in motion the cycle of boom and inevitable bust.

This creates a temporary illusion of a strong economy as prices and spending across the economy rise—but because the plans of investors, consumers, and savers are fundamentally in conflict, this illusion cannot last. Business investment projects previously expected to be profitable under the illusion of distorted incentives and the optimistic exuberance of the boom are eventually revealed to be a cluster of errors.

Often, this revelation of the cluster of errors may be triggered in part by some random economic shock, but not necessarily. The conflicts that arise as investors, consumers, and savers try to increase both present and future consumption while decreasing savings often take the form of real constraints and bottlenecks in supply chains that may resemble random economic shocks, though they are nonetheless systematically caused by the initial overissuance of new money and credit. These lead to business failures, rising unemployment, debt deflation, and all the economic pain of a recession.

Recessions Are Inevitable—at Least for Now

In the end, once the process of the artificial boom in the economy by the issuance of credit is set in motion, then the ensuing bust and recession are indeed inevitable. But this does not mean that recessions are always and generally inevitable, other than after episodes of inappropriate creation of money and credit. Recessions are not logically inevitable in any economy, but are contingent upon the monetary practices and institutions that a society adopts. 

However, for better or for worse, all modern, capitalist economies include banking systems based on fractional reserve lending coordinated by central banks that routinely and continuously issue new fiduciary media into the economy. As long as this is the case, then the cycles of boom and bust that we regularly experience, as described by ABCT, will unfortunately be inevitable. Given the ubiquity and entrenched position of the current monetary arrangements, for now, recessions are just part of how our economy works.

Important

For the time being, given existing monetary institutions, recessions are inevitable.

Why Are There Always Booms and Busts in the Economy?

There are natural tendencies for the economy to experience booms and busts due to the way that modern capitalism functions. During periods of growth and expansion, firms may begin overproducing goods, increasing aggregate supply relative to actual demand. Banks, likewise, may overextend credit to borrowers who might have gotten in over their heads. This leads to businesses going bankrupt and/or having to sell assets at low prices to raise cash to pay their debts.

As prices fall across the board in response to excess supply or excessive debts in the business sector, this sets off a chain reaction throughout the economy as producers cut back production in the face of falling prices, leading to layoffs and more bankruptcies. Eventually, the economy contracts back to something closer to a normal level of production and employment.

What Causes a Recession?

A recession occurs when economic output declines from one period to the next, but recessions can be caused by several factors affecting the economy.

Sometimes a downturn can be triggered by a financial crisis or a large fall in asset prices, such as housing or other investments. Other times, it can be due to a structural change, such as a shift in the composition of an economy from producing goods toward producing services or vice versa. Another cause can be a natural event like an earthquake or a drought that causes a decline in the production of key goods and services.

How Do Central Banks and Governments Fight Recessions?

While recessions may be somewhat natural in terms of macroeconomic cycles, governments and central banks can and do intervene to both lessen the severity and duration of an economic downturn. Central banks like the Federal Reserve can enact an accommodative monetary policy, such as lowering interest rates to make it easier to borrow for consumption and investment. The government can also enact expansionary fiscal policy such as lowering taxes and increasing federal spending to spur aggregate demand.

The Bottom Line

Recessions, or economic contractions, are likely an inevitable function of the usual operations of a modern capitalistic economy. Unfortunately, recessions can lead to high levels of unemployment, lower asset prices, investment losses, and firms going out of business. But they also show us something very important about how modern economies work: that unchecked growth and credit expansion funded by banks is unsustainable when it occurs without regard for fundamental constraints on the supply of goods and services.

Reviewed by Amy Drury
Fact checked by Michael Rosenston

What Are Dividends?

A dividend is a method of redistributing a company’s profits to shareholders as a reward for their investment. Companies are not required to issue dividends on common shares of stock, though many pride themselves on paying consistent or constantly increasing dividends each year. When a company issues a dividend to its shareholders, the dividend can be paid either in cash or by issuing additional shares of stock. The two types of dividends affect a company’s balance sheet in different ways.

Key Takeaways:

• Companies issue dividends to reward shareholders for their investment.
• Dividends paid can be in the form of cash or additional shares called stock dividends.
• Cash dividends affect the cash and shareholder equity on the balance sheet; retained earnings and cash are reduced by the total value of the dividend.
• Stock dividends have no impact on the cash position of a company. They are deducted from retained earnings, and impact the shareholders equity section of the balance sheet. 

Understanding Dividends

When most people think of dividends, they think of cash dividends. However, companies can also issue stock dividends. When a company issues a stock dividend, it distributes additional quantities of stock to existing shareholders according to the number of shares they already own. Stock dividends impact the shareholders’ equity section of the corporate balance sheet, while cash dividends reduce retained earnings.

Retained Earnings on the Balance Sheet

Retained earnings are the amount of money a company has left over after all of its obligations have been paid. Retained earnings are typically used for reinvesting in the company, paying dividends, or paying down debt. While net profit is the amount of income that remains after accounting for the cost of doing business in a given period, retained earnings are the amount of income accrued over the years that has not been reinvested in the business or distributed to shareholders.

Cash Dividends on the Balance Sheet

Cash dividends affect two areas on the balance sheet: the cash and shareholders’ equity accounts. Investors will not find a separate balance sheet account for dividends that have been paid. However, after the dividend declaration and before the actual payment, the company records a liability to its shareholders in the dividend payable account.

After the dividends are paid, the dividend payable is reversed and is no longer present on the liability side of the balance sheet. When the dividends are paid, the effect on the balance sheet is a decrease in the company’s retained earnings and its cash balance. In other words, retained earnings and cash are reduced by the total value of the dividend.

By the time a company’s financial statements have been released, the dividend is already paid, and the decrease in retained earnings and cash are already recorded. In other words, investors will not see the liability account entries in the dividend payable account. 

For example, assume a company has $1 million in retained earnings and issues a 50-cent dividend on all 500,000 outstanding shares. The total value of the dividend is $0.50 x 500,000, or $250,000, to be paid to shareholders. As a result, both cash and retained earnings are reduced by $250,000 leaving $750,000 remaining in retained earnings.

The ultimate effect of cash dividends on the company’s balance sheet is a reduction in cash for $250,000 on the asset side, and a reduction in retained earnings for $250,000 on the equity side.

Stock Dividends on the Balance Sheet

While cash dividends have a straightforward effect on the balance sheet, the issuance of stock dividends is slightly more complicated. A company’s executive management might want to issue stock dividends to its shareholders if the company lacks excess cash on hand or if they want to decrease the value of existing shares, driving down the price-to-earnings ratio (P/E ratio) and other financial metrics. Stock dividends are sometimes referred to as bonus shares or a bonus issue.

Stock dividends have no impact on the cash position of a company and only impact the shareholders’ equity section of the balance sheet. The larger the dividend the larger the impact on the share price. A stock split may seem similar, but it is different because it dividends existing shares, and a dividend hands out new shares.

When a stock dividend is declared, the total amount to be debited from retained earnings is calculated by multiplying the current market price per share by the dividend percentage and by the number of shares outstanding. If a company pays stock dividends, the dividends reduce the company’s retained earnings and increase the common stock account. Stock dividends do not result in asset changes to the balance sheet but rather affect only the equity side by reallocating part of the retained earnings to the common stock account.

For example, say a company has 100,000 shares outstanding and wants to issue a 10% dividend in the form of stock. If each share is currently worth $20 on the market, the total value of the dividend would equal $200,000. The two entries would include a $200,000 debit to retained earnings and a $200,000 credit to the common stock account. The balance sheet would be balanced following the entries.

Virtually trade stocks, options, and cryptocurrency

Fact checked by Yarilet Perez
Reviewed by Margaret James

The Investopedia Simulator is designed to help anyone learn the mechanics of buying and selling securities in a risk-free environment by simulating activities investors experience when placing orders through a broker.

The Investopedia Simulator will track the value of a user’s portfolio when adding or closing positions. Users can also compare results to other practicing investors’ performances through Simulator games.

Key Takeaways

• The Investopedia Simulator is a virtual trading tool designed to help potential investors improve their skills at trading and investing.
• It has powerful tools for conducting research and placing simulated trade orders.
• It tracks the value of investing positions close to real-time.
• Simulator users can participate in games in which they compare their investment performance to those of others.

Getting Started 

To access the Simulator, create an account by clicking Get Started. The free account only requires an email, username, and password.

A new account has a default virtual balance of $100,000 to buy virtual shares that track the same as real shares. It is easy to discover how the Investopedia Simulator works just by exploring the interface and trying out its functions for Stocks and Crypto. Users are directed to Your Portfolio. On the top right, two options allow users to toggle.

Stocks Simulator

The Stocks interface includes four functional areas: portfolio, trade, research, and games.

• Portfolio: List the positions users are holding and the current value of those positions based on market data.
• Trade: Permits users to see price quotes and place orders like the functionality of an actual broker.
• Research: Helps users study price charts and review company information behind the stocks available for simulated trading.
• Games: Users can join up with simulated investing competitions or even start one of their own.  

Note

The portfolio section shows performance history, including annualized returns, remaining cash, and buying power. The historical trade data can be sorted into stocks, options, and short-selling positions. A small panel displays the user’s rank among all other active Simulator users.  

How and What to Trade

Investors may review the business statements of a company before deciding to buy stock. This fundamental analysis helps investors put money into a stock with a long-term investing strategy. Other investors are comfortable simply reviewing price charts and conducting technical analyses of stocks. 

The Investopedia Simulator’s research section helps users by clicking on one of the ticker symbols displayed on the research page. A stock screener is included so users can specify one or more attributes of companies they’d like to research.

Selecting the trade tab helps users execute orders. Users specify whether they are making a stock or option trade and then specify the ticker symbol or the underlying stock of the option contracts they want to trade.

Users can review the price at which the stock is currently trading. Trading actions include: buying, selling, shorting, or buying to cover. This is the same functionality on retail broker accounts with margin trading. However, only the most common three order types used in retail broker accounts are available: market, limit, or stop orders. The Simulator runs on data that is delayed by about 20 minutes.

Important

A max link allows users to see the maximum number of shares they can buy based on the available virtual cash in the Simulator account. Users who want a portfolio with more than one stock position should avoid buying the maximum number of shares. 

Using the Simulator With a Group

The Investopedia Simulator hosts investing contests among friends, colleagues, and classmates. The Simulator’s functions make these games easy to get started and conduct. Both stock and option trades can be included in the challenge for a wider range of experiences.  

For use by friends, family, students, and the like, the Simulator uses the Investopedia Trading Game as the default starting contest. However, users can join any of the thousands of public games that run without an end date. In the Games section, search for games in the Join Game section. Users can be members of multiple games simultaneously.

Create a Stock Trading Game

To get started, click Games and then click Create Game. Each game has optional features that increase the Simulator experience’s realism. There are tooltips throughout the form that appear. Users can click on the little blue “i” next to words for a detailed explanation of what each field is for and then choose the following:

• Game name: Make it something the group will remember and is unique.
• Game description: What should the group know about the purpose and goals of the game?
• Game type: Is the game’s membership exclusive or something anyone can join?
• Starting cash: By default, everyone gets $100,000 to start, but users can increase or decrease the amount to between $1,000 and $1 million.
• Date range: When will the game begin and end?
• Trading features: Will the group be able to trade on margin, short sell, or trade options? Can members view each other’s portfolios?
• Advanced game rules: Users can determine market delay, commissions, forced diversification, minimum pricing, quick sell restrictions, margin rules, and more.

Click Create Game. Private games require a password. Leaders should provide the group with instructions that include the game name, password, and other specifics such as date range and starting cash. To track the group’s performance, check the Leaderboard under Games.

Crypto Simulator

The crypto environment in the Investopedia Simulator allows users to look up and trade 25 of the most popular cryptocurrencies. The top 11 coins featured are:

• Bitcoin (BTC)
• Ethereum (ETH)
• Tether (USDT)
• USD Coin (USDC)
• BNB (BNB)
• Binance USD (BUSD)
• XRP (XRP)
• Cardano (ADA)
• Solana (SOL)
• Dogecoin (DOGE)
• Polkadot (DOT)

When users click the Trade button, it brings up this list with the financial details about the coin, including price, percentage change, market cap, launch date, circulating supply, total supply, 52-week high and low, today’s high and low, and previous close. Within a crypto portfolio, users can track the performance of their trades over the last week, month, three months, six months, and one year.

Are There Classes Available on How to Trade Stocks?

Yes. Classes are available from companies such as Udemy or at the university level. A high-quality online stock trading course partners well when using a stock simulator.

Are There Other Stock Trading Simulators?

While Investopedia offers one of the best options on the market, it is not the only paper-trading platform. Charles Schwab offers Thinkorswim, and the SIFMA Foundation offers The Stock Market Game.

What Does Paper Trading Mean?

A simulated stock trading platform is a paper trading platform. A paper trade is a simulated trade that allows investors to practice buying and selling financial assets without risking real money. They are an excellent way to test a new investment strategy or to learn how the financial markets work.

The Bottom Line

The Investopedia Simulator allows interested investors to practice trading skills no matter their level of investing experience. Users have access to research tools, the ability to see the value of investing positions, and the opportunity to compete with other users.

Reviewed by Amy Drury
Fact checked by Vikki Velasquez

Gearing ratios form a broad category of financial ratios, of which the debt-to-equity ratio is the predominant example. Accountants, economists, investors, lenders, and company executives use gearing ratios to measure the relationship between owners’ equity and debt.

Gearing ratios are one way to differentiate financially healthy companies from troubled ones. All companies balance the advantages of leveraging their assets with the disadvantages of borrowing risks.

Key Takeaways

• Gearing ratios constitute a broad category of financial ratios.
• The debt-to-equity ratio is a gearing ratio.
• Accountants, economists, investors, and other financial professionals use gearing ratios to measure the relationship between owners’ equity and debt.

Gearing vs. Leverage

“Gearing” refers to the use of debt. Gearing is a leverage analysis of the owner’s equity, often expressed as a ratio in financial analysis. Gearing ratios focus on leverage more than other ratios used in accounting or investment analysis. The underlying principle assumes that some leverage is good, but too much places an organization at risk.

At a fundamental level, gearing can be differentiated from leverage. Leverage refers to the amount of debt incurred to invest and obtain a higher return, while gearing compares debt with total equity—or an expression of the percentage of company funding through borrowing. This difference is found when comparing the debt ratio and the debt-to-equity ratio.

Gearing and leverage are used interchangeably. European entities tend to use the term “gearing” while Americans refer to it as “leverage.”

What Is the Debt-to-Equity Ratio?

The debt-to-equity ratio compares total liabilities to shareholders’ equity. It is one of the most widely and consistently used leverage/gearing ratios, expressing how much suppliers, lenders, and other creditors have committed to the company versus what the shareholders have committed.

Different variations of the debt-to-equity ratio exist, and unofficial standards are used among separate industries. For example, banks often have preset restrictions on the maximum debt-to-equity ratio of borrowers for different types of businesses defined in debt covenants.

A D/E ratio below 1 may be considered relatively safe, whereas values of 2 or higher might be considered risky. For example, A ratio of 1.5 indicates a company has $1.50 of debt for every $1 of equity.

What Gearing Ratios Mean for Investors

Gearing or leverage ratios help investors understand a company’s economic health and if an investment is worthwhile or not. A company with a high gearing ratio generally has a riskier financing structure than a company with a lower gearing ratio. However, regulated entities typically have higher gearing ratios because they can operate with more debt.

Companies in monopolistic situations may operate with higher gearing ratios because their strategic marketing position puts them at a lower risk of default. Industries that use expensive fixed assets typically have higher gearing ratios because these fixed assets are often financed with debt.

Is a High Debt-to-Equity Ratio a Bad Indicator?

Debt-to-equity, like all gearing ratios, reflects a business’ capital structure. A higher ratio is not always a poor indicator, because debt can be a cheaper source of financing and comes with increased tax advantages.

What Affects a Company’s Gearing Ratios?

The size and history of specific companies must be considered when analyzing gearing ratios. Large, well-established companies can push their liabilities to a higher percentage of their balance sheets without raising serious concerns. Companies that do not have long track records of success are much more sensitive to high debt burdens.

What Are Types of Gearing Ratios?

Besides the Debt-to-Equity ratio, other gearing ratios include the times interest earned ratio and the shareholder-equity ratio. The TIE ratio shows how well a company can pay the interest on its debts. The shareholder-equity ratio shows how much of a company’s assets are funded by issuing stock rather than borrowing money.

​

The Bottom Line

Debt is inherently risky so investors favor businesses with lower gearing ratios. Gearing ratios include the debt-to-equity ratio. For investors, lower ratios commonly means companies can support their debt and have a decreased probability of bankruptcy in the event of an economic downturn.

Synchrony Bank offers CD accounts with APYs as high as 4.40%

Fact checked by Hans Daniel Jasperson

Synchrony Bank is an online bank that offers a wide variety of financial services, including certificates of deposit (CDs) with terms that range from three months to five years. Synchrony Bank CD rates of up to 4.35% are competitive with some of the best CDS for some term lengths.

Another benefit is the fact that Synchrony’s CDs feature no minimum balance requirements. Synchrony Bank also has two specialty CDs available for savers who are interested in bump-up CD accounts and no-penalty CD options.

Synchrony CD Overview

Synchrony CD Rates Overview
	CD Term	APY
Standard CD	3 months-60 months	0.25%-4.35%
Bump-up CD	24 months	3.00%
No-penalty CD	11 months	0.25%
IRA CD	3 months-60 months	0.25%-4.15%

Compare Synchrony Bank CD Rates

Before you open a new CD, it’s wise to shop around and compare offers from multiple banks. As you research the best CD interest rates, account features, balance requirements, and benefits that several financial institutions have to offer, you’ll be in a better position to decide if a CD from Synchrony Bank is right for you. 

Synchrony Bank CD: Key Features

Synchrony CDs Key Features
	CD Term	APY	Minimum Balance
Standard CD	3 months-60 months	0.25%-4.35%	None
Bump-up CD	24 months	3.00%	None
No-penalty CD	11 months	0.25%	None
IRA CD	3 months-60 months	0.25%-4.15%	None

In addition to competitive annual percentage yields (APYs), especially on its long-term CD products, Synchrony Bank CDs feature no minimum balance requirements. Outside of the no-penalty CD, you will incur an early withdrawal penalty if you attempt to withdraw some or all of the principal funds from your account prior to its maturity date. Early withdrawal penalties range from 90 to 365 days’ worth of simple interest at the current APY, depending on the terms of your account.

It’s worth noting that the grace period on CDs with Synchrony Bank lasts for a short 10 days after your maturity date arrives. During this window you can add additional cash to your account, renew your CD, transfer the cash to a different account, or withdraw your money.

If you don’t take any action, the online bank will automatically renew the CD on your behalf at the end of the 10-day grace period and mail you a renewal notice. This isn’t an unusual practice where CDs are concerned, but it’s still important to be aware of and to have a plan for what you want to do with your money when your CD matures.

Below are more key features to consider regarding CDs from Synchrony Bank. 

When you’re shopping for a new certificate of deposit, it’s important to look beyond the interest rates a bank offers you. Although earning a high return on your savings does matter, it’s also important to pay attention to other account features when you open a CD and understand how those details might impact you. 

Pros and Cons of Synchrony Bank CDs

Pros

• Some competitive rates

• No minimum balance requirement

Cons

• Some non-competitive rates

• Early withdrawal penalties

Pros Explained

• Some competitive rates: You can find rates of up to 4.35% with Synchrony Bank, which is higher than many other CDs.
• No minimum balance requirement: Unlike with many CDs, Synchrony Bank CDs do not have minimum balance requirements.

Cons Explained

• Some non-competitive rates: While some of Synchrony’s CDs have fairly high rates, others are as low as 0.25%. You can easily find higher rates by shopping around.
• Early withdrawal penalty: Though many CDs have an early withdrawal penalty as Synchrony CDs do, you can find some CDs that do not have this if the flexibility is important to you.

About Synchrony Bank

As an online bank, Synchrony Bank offers competitive interest rates on its savings, money market, and CD accounts. The bank also partners with hundreds of retailers to provide co-branded credit cards specific to each retailer.

Synchrony Bank has financing for healthcare procedures and purchases available through its CareCredit product. It does not offer checking accounts, mortgages, investments, or other products that you may find at other financial institutions.

Synchrony Bank offers the following banking products:

• Savings Account
• Money Market Account
• CDs
• Credit Cards

Alternatives to Synchrony Bank CDs

• High-yield savings accounts: If you’re willing to open an online savings account elsewhere, you may be able to earn higher rates than what Synchrony Bank offers. See the best high-yield savings account rates to compare how much you could earn.
• High-yield checking accounts: You may find relatively high rates with some checking accounts. Be aware of their requirements and limits. The best high-interest checking accounts give you easy access to your money.
• Certificates of deposit (CDs): Synchrony Bank offers fairly competitive rates on its CDs. You can also choose from a range of CDs from other financial institutions.
• Money market account: Money market account can also provide a return on your savings. Check the best money market account rates to see how it compares.
• Treasury securities: These government-backed bills, notes, and bonds sometimes offer even higher rates than CDs and may be more liquid. 

Frequently Asked Questions (FAQs)

Are Synchrony Bank CDs Worth It?

CDs may be worth considering, and Synchrony Bank CDs in particular, under the following circumstances:

• You prefer a (virtually) risk-free way to grow your savings. 
• Keeping your cash locked in a CD for a set period of time isn’t an inconvenience.
• The CD rates at Synchrony Bank, combined with its benefits (like no minimum deposit) seem like a good fit for your financial goals.

Are Synchrony Bank CDs FDIC-Insured?

Synchrony Bank is a member of the Federal Deposit Insurance Corporation (FDIC). Therefore, deposit accounts with the bank (including CDs) are insured up to $250,000 per ownership category.

Should I Get a Synchrony Bank CD?

CD rates at Synchrony Bank are pretty competitive compared to other online banks and credit unions. While the highest rate CD at Synchrony Bank might not be the highest APY available on any CD, the bank does offer higher APYs than many of its competitors where long-term CDs are concerned. 

If you’re looking for a bank that doesn’t require a minimum deposit, Synchrony stands out. Furthermore, the financial institution offers a wide range of CD terms and specialty CD products that can give savers added flexibility when looking for low-risk ways to save money.

Your Guide to CDs

• What Is a Certificate of Deposit (CD)?
• What Is a Brokered CD?
• What Is a CD Ladder?
• Pros and Cons of CDs
• How to Invest With CDs
• How to Open a CD
• How to Close a CD
• CDs vs. Annuities
• CDs vs. Stocks
• CDs vs. Mutual Funds
• CDs vs. ETFs
• CDs vs. Savings Accounts
• Short-Term vs. Long-Term CDs
• CD Rates News
• Best 1-Year CD Rates
• Best 18-Month CDs
• Best Jumbo CD Rates
• Best 6-Month CD Rates
• Best 3-Month CD Rates
• Best Bank CD Rates

We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation.

Fact checked by Vikki Velasquez

A 457 plan is a tax-advantaged retirement savings plan primarily used by employees of state and local governments, as well as certain non-profit organizations. Like 401(k) and 403(b) plans, it allows workers to defer a portion of their salary into an investment account, where it grows tax-free until withdrawal. However, 457 plans have unique withdrawal rules, tax implications, and rollover restrictions that retirees need to understand to optimize their distributions.

Key Takeaways

• There are three main types of 457 plans—governmental 457(b), non-governmental 457(b), and 457(f)—and they each have different rules for withdrawals, rollovers, and taxes.
• Governmental 457(b) plans offer flexible withdrawals and rollovers, while non-governmental 457(b) plans restrict rollovers and have fewer distribution options.
• 457(f) plans are reserved for highly compensated employees and require what’s known as a “substantial risk of forfeiture.”
• If you’re a non-profit or government employee with a 457, it’s important to understand your type of plan to ensure you make tax-efficient decisions and avoid common pitfalls.

“457 plans can be confusing because of the different types,” says Justin Pritchard, founder of Approach Financial Planning, pointing out that there are both governmental and non-governmental 457 plans. He explains that governmental 457(b) plans function similarly to other workplace retirement plans, allowing pre-tax and Roth contributions, while non-governmental 457 plans come with stricter withdrawal and rollover limitations.

Here’s how a 457 plan functions after retirement, the different types of plans, and what to consider when deciding how to manage your funds.

Types of 457 Plans

There are two main types of 457 plans: eligible 457(b) plans and ineligible 457(f) plans. While both are designed to help employees save for retirement, they differ in their rules for contributions, withdrawals, and tax treatment.

Additionally, there are important differences between governmental and non-governmental 457(b) plans. Still, 457 plans provide a critical source of supplemental income for many retirees in the government, education, and nonprofit sectors.

Eligible 457(b) Plans

Eligible 457(b) plans are available to most employees of state and local governments, as well as some non-profit organizations (in which case they are non-governmental plans). Governmental 457(b) plans are “especially good for those who retire early or need flexibility” because—unlike IRAs and 401(k) plans—they allow withdrawals before the age of 59½ without the usual 10% penalty, giving retirees more control over their cash flow, Pritchard says. Participants can roll over the balance from a governmental 457(b) plan into an IRA, 403(b), or another 401(k) plan.

Ineligible 457(f) Plans

Reserved for highly compensated employees at non-governmental organizations, 457(f) plans have different rules. Contributions still grow tax-deferred, but the IRS requires that funds be at a “substantial risk of forfeiture.” To impose this risk, employers may, for example, designate a vesting schedule. This means that if an employee leaves their job before the designated vesting period or the normal retirement age, they may forfeit some or all of their savings.

Once you retire, your withdrawal options depend on whether you participated in a governmental or non-governmental 457 plan.

Governmental 457(b) Plans

These plans offer flexible withdrawal options, allowing retirees to take lump sums, periodic payments, or roll over their funds into an IRA or another qualified retirement plan. Since there is no early withdrawal penalty, retirees can access their funds at any time, but they will owe income tax on pre-tax contributions and earnings.

Governmental 457(b) plan funds are taxed at the time of distribution. Events that allow participants to trigger a distribution include:

• Attainment of age 70 ½
• Severance from employment
• Unforeseeable emergency (see above)
• Plan termination
• Qualified domestic relations order
• Small account distribution ($5,000 or less)
• Age 59 1/2 for in-service distributions
• Permissible EACA withdrawals

Gregory Young, principal at Ahead Full Wealth Management, emphasizes that retirees should carefully plan their withdrawals to manage tax implications. Aligning 457(b) distributions with other income sources like pensions or Social Security can help minimize tax liability, he says.

Non-Governmental 457(b) Plans

These plans are more restrictive. Unlike governmental 457(b) plans, non-governmental 457(b) balances are not held in trust, meaning the employer retains ownership of the funds until distribution.

Unlike governmental 457(b) plans, non-governmental plans don’t allow in-service distributions when participants reach age 59 1/2 or EACA withdrawals. Additionally, funds may be taxed either at distribution or when made available to the participant, whichever occurs earlier. Some employers require retirees to withdraw funds in a lump sum or within a set time frame, leading to potential tax burdens. Additionally, these funds cannot be rolled over into an IRA or 401(k), which makes planning your distributions even more important.

457(f) Plans

For 457(f) plans, the entire balance is considered taxable income once the risk of forfeiture is removed, which often occurs at retirement. This can result in a significant tax bill, particularly if the lump sum payout pushes the retiree into a higher tax bracket. Retirees should consider working with a financial advisor to explore ways to mitigate the tax impact, such as planning strategic income distribution over multiple years, says Young.

Required Minimum Distributions (RMDs)

Like other retirement plans, retirees must generally begin taking required minimum distributions (RMDs) from their 457(b) plans starting at age 73 (or age 75 if you were born on or after 1960). The amount of the RMD is calculated based on the account balance and life expectancy, and failing to take the required amount can result in a penalty of 25% (or 10% if withdrawn within 2 years).

However, if you are still working for your employer at 73, you can delay taking your required minimum distribution until you actually retire so long as you do not own at least 5% of the business sponsoring your plan.

Rollover and Transfer Rules

How you manage your 457 plan after retirement largely depends on whether it’s a governmental or non-governmental plan.

Governmental 457(b) Plans

Retirees with governmental 457(b) plans have several options for managing their funds. They can leave the money in the plan, roll it over into an IRA, or transfer it to another employer-sponsored plan, such as a 401(k) or 403(b). Rolling over funds into a Roth IRA is also an option, though it would trigger an immediate tax liability.

Non-Governmental 457(b) Plans

Rollover options for non-governmental 457(b) plans are far more limited. Unlike governmental plans, these funds can only be rolled over into another non-governmental 457 plan. This restriction makes it important for retirees to plan their distributions carefully to avoid unexpected tax burdens.

457(f) Plans

Designed for high earners, 457(f) plans do not allow rollovers to IRAs or other retirement accounts. Once an employee separates from service and the funds are distributed, they become fully taxable. As a result, retirees with large 457(f) balances may want to explore strategies such as charitable giving or installment distributions to manage their tax liability.

Strategic Considerations for Retirees

Managing a 457 plan after retirement requires careful planning to minimize taxes and avoid common pitfalls. For example, Michael Becker, a partner at St. Louis-based Toberman Becker, cautions against attempting rollovers unless you understand that by doing so, you’ll be forfeiting your ability to withdraw from the plan before the age of 59½ penalty-free.

Additionally, retirees should consider coordinating withdrawals with other income sources, such as Social Security and pensions, to optimize their tax bracket each year. This can help avoid higher marginal tax rates and unnecessary penalties. If you’re unsure about the implications, you should consider working with a financial advisor who can develop a withdrawal strategy that aligns with your income needs and tax situation.

The Bottom Line

A 457 plan is a valuable retirement savings vehicle, but its post-retirement rules vary depending on whether the plan is governmental or non-governmental. Governmental 457(b) plans offer more flexibility with rollovers and distributions, while non-governmental and 457(f) plans come with stricter withdrawal and tax rules.

Retirees should carefully review their plan’s rules, consider tax implications, and develop a strategic withdrawal plan to ensure their savings last throughout retirement. And don’t forget that consulting with a financial advisor can help you navigate the complexities of 457 plans and optimize distributions for you and your family’s long-term financial security.

Investing isn’t just about picking winners; it’s about avoiding costly mistakes. Barry Ritholtz, a financial expert and author of the 2025 book How Not To Invest, argues that many investors lose money not because they lack skill but because they fall into predictable traps. Ritholtz is the chief investment officer of the financial planning and asset management firm Ritholtz Wealth Management.

“You don’t have to be smarter than everyone else—just less stupid,” he said.

So, what are some of these wealth-destroying mistakes, and how can you steer clear of them?

Key Takeaways

• Barry Ritholtz’s new book How Not to Invest warns investors of common pitfalls.
• Trusting financial forecasts is a losing game. Instead, focus on reliable long-term strategies.
• Emotional investing leads to costly mistakes; preparation and discipline are key.
• An excessive fear of risk can be just as damaging as reckless investing.

1. Falling into the Forecasting Trap

Investors love predictions—price targets, earnings forecasts, and market outlooks. But Ritholtz warns, “The media thrives on feeding ‘the daily beast’—constantly churning out content to keep people engaged.”

In reality, most economic forecasts fail because markets are inherently unpredictable and influenced by random events.

How To Avoid It:

• Curate a reliable network. “Build your own ‘all-star team’ of experts who don’t just get lucky but have a defensible, rational process,” Ritholtz said.
• Ignore bold predictions. Specific forecasts might sound convincing, but they often mislead. Instead, focus on time-tested investment principles and take seriously experts who admit that they don’t know.
• Think probabilistically. Investing is about putting the odds in your favor over time.

2. Emotional Investing

Market volatility triggers fear and greed, leading to rash decisions. “Plan ahead when you have the luxury of being rational and objective—not when the market is on fire,” Ritholtz said.

The worst mistakes—panic selling or chasing a hot stock—often occur when emotions take over.

How To Avoid It:

• Automate investing. Setting up regular contributions through dollar-cost averaging or using an automated approach like a robo-advisor removes emotional decision-making.
• Have a crisis plan. “Think of it like a fire drill,” Ritholtz said. “You don’t figure out what to do only when the flames are already at the door.”
• Look long-term. Markets recover. Reacting to short-term swings can derail long-term success.

3. Focusing Too Much on Avoiding Losses

Much of Ritholtz’s strategy is about avoiding unnecessary mistakes. But an excessive fear of risk can be just as damaging as reckless investing. “Overly cautious investors often miss good opportunities,” he said. Sitting on too much cash or refusing to invest can mean losing out to inflation and market gains.

How To Avoid It:

• Find balance. Don’t take extreme risks that put your financial future in danger, but avoiding reasonable risk entirely is its own mistake.
• Invest for your goals. A well-diversified portfolio tailored to your risk tolerance can help you stay in the game.
• Get expert guidance. If your finances are complex, consider a competent financial advisor, accountant, and attorney.

But Ignore ‘Spending Shamers’

Spending wisely is just as important as investing wisely. Many personal finance gurus today push extreme frugality, encouraging people to live below their means, but Ritholtz argues that financial health isn’t about denying yourself joy—it’s about making smart, intentional choices. “Ignore the spending shamers,” he said. “Being responsible doesn’t mean you can’t enjoy life.”

So, live within your means, but maximize it. “Look, if you want a boat—OK, but buy the one you can afford and will use. Make sure you’re getting value from your purchases,” he said.

How To Avoid Overspending:

• Set financial priorities. Decide what truly matters to you and allocate funds accordingly.
• Avoid lifestyle inflation. Just because you make more money doesn’t mean you have to spend more.
• Spend on experiences, not just stuff. Long-term happiness often comes from meaningful experiences rather than material goods.

The Bottom Line

The biggest investment mistakes aren’t about picking the wrong stocks, they’re about falling into predictable traps. “If you avoid unforced errors, you’ll already be ahead of most investors,” Ritholtz said. Focus on long-term strategies, manage risk wisely, and let the markets work in your favor.