Investing

Fact checked by Kirsten Rohrs Schmitt
Reviewed by Margaret James

Most entrepreneurs are risk-takers by nature, or at minimum calculated visionaries with a clear plan of action to launch a new product or service to fill a gap in the industry. On a personal level, many entrepreneurs take big risks to leave stable jobs to throw their efforts (and sometimes their own money) into launching a business.

For entrepreneurs, there is no guaranteed monthly income, no guarantee of success, and spending time with family and friends can be a challenge in the early days of launching a company. Here are some of the most common risks that every entrepreneur and investor should evaluate and minimize before starting a business.

Key Takeaways

• Entrepreneurs face multiple risks such as bankruptcy risk, financial risk, competitive risks, environmental risks, reputational risks, and political and economic risks.
• Entrepreneurs must plan wisely in terms of budgeting and show investors that they are considering risks by creating a realistic business plan.
• Entrepreneurs should also consider technology changes as a risk factor.
• Market demand is unpredictable as consumer trends can change rapidly, creating problems for entrepreneurs.

Financial Risk

An entrepreneur will need funds to launch a business either in the form of loans from investors, their own savings, or funds from family. The founder will have to put their own “skin in the game.” Any new business should have a financial plan within the overall business plan showing income projections, how much cash will be required to break even, and the expected return for investors in the first five-year time frame. Failure to accurately plan could mean that the entrepreneur risks bankruptcy, and investors get nothing.

Important

Entrepreneurs face many risks when they launch a venture, and they should take measures to insure against those that are most likely to affect them.

Strategic Risk

An impressive business plan will appeal to investors. However, we live in a dynamic and fast-paced world where strategies can become outdated quickly. Changes in the market or the business environment can mean that a chosen strategy is the wrong one, and a company might struggle to reach its benchmarks and key performance indicators (KPIs). 

Technology Risk 

New technologies are constantly emerging, particularly in the era of the Fourth Industrial Revolution. Some of these changes are characterized as “paradigm shifts” or “disruptive” technologies. To be competitive, a new company may have to invest heavily in new systems and processes, which could drastically affect the bottom line.

Market Risk

Many factors can affect the market for a product or service. The ups and downs of the economy and new market trends pose a risk to new businesses, and a certain product might be popular one year but not the next. For example, if the economy slumps, people are less inclined to buy luxury products or nonessentials. If a competitor launches a similar product at a lower price, the competitor might steal market share. Entrepreneurs should perform a market analysis that assesses market factors, the demand for a product or service, and customer behavior.

Competitive Risk 

An entrepreneur should always be aware of its competitors. If there are no competitors at all, this could indicate that there is no demand for a product. If there are a few larger competitors, the market might be saturated, or the company might struggle to compete. Additionally, entrepreneurs with new ideas and innovations should protect intellectual property by seeking patents to protect themselves from competitors.

Reputational Risk

A business’s reputation is everything, and this can be particularly so when a new business is launched and customers have preconceived expectations. If a new company disappoints consumers in the initial stages, it may never gain traction. Social media plays a huge role in business reputation and word-of-mouth marketing. One tweet or negative post from a disgruntled customer can lead to huge losses in revenue. Reputational risk can be managed with a strategy that communicates product information and builds relationships with consumers and other stakeholders.

Environmental, Political, and Economic Risk 

Some things cannot be controlled by a good business plan or the right insurance. Earthquakes, tornadoes, hurricanes, wars, and recessions are all risks that companies and new entrepreneurs may face. There may be a strong market for a product in an underdeveloped country, but these countries can be unstable and unsafe, or logistics, tax rates, or tariffs might make trade difficult depending on the political climate at any point in time.

Also, some business sectors have historically high failure rates, and entrepreneurs in these sectors may find it difficult to find investors. These sectors include food service, retail, and consulting.

59.2%

The percentage of small businesses launched in March 2021 that made it to their third anniversary, the most recent three-year data available, according to the U.S. Bureau of Labor Statistics.

What Is an Entrepreneur?

An entrepreneur is an individual who creates a new business, bearing most of the risks and enjoying most of the rewards. The process of setting up a business is known as entrepreneurship.

What Role Do Entrepreneurs Play in an Economy?

Entrepreneurs play a key role in any economy, using the skills and initiative necessary to anticipate needs and bring new ideas to market. Entrepreneurship that proves to be successful in taking on the risks of creating a startup is rewarded with profits and growth opportunities.

What Is Risk?

For an entrepreneur, risk is the potential for financial loss or failure when starting a new business. For the entrepreneur’s investors, risk is the chance that their investment’s actual gains will differ from an expected return—including the possibility of losing some or all of the investment.

The Bottom Line

The U.S. Bureau of Labor Statistics found that of the small businesses that were started in March 2021, 79.1% made it to their first anniversary (2022), 67% made it to their second anniversary (2023), and 59.2% made it to their third anniversary (2024). Entrepreneurs should expect to make some mistakes, some of which will be costly. However, with the right planning, funding, and flexibility, businesses have a better chance of succeeding.

Fact checked by Pete Rathburn
Reviewed by JeFreda R. Brown

Buy-Side Analyst vs. Sell-Side Analyst: An Overview

The main differences between these two types of analysts are the kind of firm that employs them and the people for whom they make investment recommendations.

A buy-side analyst usually works for an institutional investor such as a hedge fund, pension fund, actively managed mutual fund, or some other type of asset management firm. They conduct investment research and analysis so that they can recommend securities that their own company can invest in.

A sell-side analyst works for an investment bank, a brokerage, a commercial bank, or other firm that promotes and sells securities, and manages individual accounts. The sell-side analyst makes investment recommendations to the clients of the firm.

Key Takeaways

• The main differences between buy-side and sell-side analysts are the type of firm that employs them and the people to whom they make recommendations.
• Investment banks, market makers, and broker-dealers are typical sell-side firms. They sell investment services to the rest of the market.
• Buy-side firms are asset managers such as hedge funds, actively managed mutual funds, and other firms that invest in securities that they manage for others.
• Buy-side analysts will determine how promising an investment seems and how well it coincides with their company’s investment strategy.
• Sell-side analysts issue the often-heard recommendations of “strong buy,” “outperform,” “neutral,” or “sell.”

Buy-Side Analyst

Recommends Investments for Their Own Firm

Buy-side analysts conduct research and analysis to determine how promising an investment seems and how well it coincides with the investment strategy of their firm.

To simplify the explanation, let’s say that this firm is an actively managed mutual fund.

The buy-side analyst’s recommendations, made exclusively for the benefit of the fund that employs them, are not available to anyone outside of the fund.

If a fund employs an analyst who makes successful recommendations, it does not want competing funds to have access to the same advice.

A buy-side analyst’s success or talent is determined by the number of profitable recommendations they make.

A buy-side analyst is much more concerned about being right than a sell-side analyst is. In fact, avoiding the negative is often a key part of the buy-side analyst’s job.

Many analysts pursue their job with the mindset of figuring out what can go wrong with an idea.

Broad Coverage

Buy-side analysts, in general, have broad coverage responsibilities. It is not uncommon for funds to have analysts covering the entire technology sector or industrials sector.

Many sell-side firms assign several analysts to cover particular industries within those sectors (like software, semiconductors, etc.).

Typically, there are more job opportunities for sell-side analysts because of the focus their firms place on sales.

Sell-Side Analyst

Recommends Investments for the Clients of Their Firm

Sell-side analysts are those who issue the often-heard recommendations of “strong buy,” “outperform,” “neutral,” or “sell” for the benefit of individual investors and other clients of the firms they work for.

These recommendations, and the research behind them, help clients of their firm make decisions to buy or sell securities, such as stocks or bonds.

A Focus on External Sales

For a brokerage, the sell-side analyst plays an important role because every time a client decides to place a trade, the brokerage gets a commission or charges some other transaction fee.

Another job of a sell-side analyst is to convince institutional accounts (e.g., buy-side firms) to direct their orders through the trading desk of the sell-side analyst’s firm.

To capture trading revenue, the sell-side analyst must be seen by the buy-side firm as providing valuable services, such as research. Some analysts will constantly hunt for new information or proprietary angles on the industry.

This is not to say that sell-side analysts recommend or change their opinion on a stock just to create transactions. However, it is important to realize that these analysts are paid by and ultimately answer to the brokerage, not the clients.

Furthermore, the recommendations of a sell-side analyst are called “blanket recommendations,” because they’re not directed at any one client, but rather at the general mass of the firm’s clients.

These recommendations are inherently broad and, as a result, they may be inappropriate for certain investment strategies. So if you consider a sell-side recommendation, make sure that it suits your individual investment style and goals.

Note

Buy-side firms can be the clients of sell-side firms. Sell-side analysts provide buy-side clients with the results of their research and analysis.

Key Differences

While buy-side and sell-side analysts are both responsible for performing investment research, the two positions have different, but important, roles in the financial markets.

Think of them as two sides of the financial markets coin. Buy-side analysts work for asset management firms that invest in large amounts of investments. Sell-side analysts work for firms that promote and sell investments to the public.

In addition, sell-side firms, such as brokerages and investment bankers, provide market services to other market participants. As registered members of the various stock exchanges, they act as market makers and provide trading services for their clients in exchange for a commission or spread on each trade.

Furthermore, sell-side firms can offer underwriting services, helping to launch IPOs and bond issuances for the rest of the market. And, they produce research for the consumption of buy-side firms.

It’s possible for one company, such as a large bank, to have both buy-side and sell-side aspects. To avoid potential conflicts of interest, these companies must enact Chinese wall policies to separate the two types of departments.

While sell-side analysts create investment research products for sale to other companies, buy-side analysts conduct in-house research intended only for their own firms.

Special Considerations

Sell-side analysts have a more public-facing role than those on the buy side. Because their work is consumed by outside companies, sell-side analysts must also form business relationships, attracting and advising new clients.

Buy-side analysts have more inward-facing duties. They suggest investments and help their firms manage client money. They do their best to help grow the value of their firm’s portfolio.

Buy-Side Analyst vs. Sell-Side Analyst Example

Imagine the interactions between two hypothetical firms. Asset Manager A is a buy-side firm that manages a portfolio of securities on behalf of its clients. Broker B is a sell-side firm that provides market services, such as access to the stock exchange.

Both firms employ analysts. But they have different roles. Broker B’s analysts generally produce market research for sale to buy-side firms, such as Manager A.

They evaluate different public companies, conduct technical and fundamental analysis, and deliver research to their clients with a “buy” or “sell” recommendation.

On the buy-side, Asset Manager A’s analysts will conduct their own research and compare their findings with paid research, such as that produced by Broker B.

Manager A’s buy-side analyst’s research is intended for internal consumption only, rather than for sale to other firms. Based on the buy-side analyst’s recommendations, the asset manager will buy, sell, or hold positions in various securities in anticipation of future profits.

Is Goldman Sachs Buy-Side or Sell-Side?

As one of the largest investment banks, Goldman Sachs is largely on the sell-side of the market, providing liquidity and execution for institutional investors. However, Goldman Sachs also has some buy-side arms, such as Goldman Sachs Asset Management. In order to prevent conflicts of interest between the buy-side and sell-side, the two bodies are separated by a Chinese wall policy.

Is Private Equity Buy-Side or Sell-Side?

Because private equity funds make money by buying and selling securities, they are considered to be buy-side. Like hedge funds, pension funds, and other asset managers, they invest on behalf of their clients and make profits when those assets deliver returns.

How Much Do Buy-Side Analysts Make?

According to ZipRecruiter, the average salary for a buy-side analyst is about $76,273 per year, as of February 2025. However, this figure does not account for bonuses or non-salary benefits, which can be considerable. Salary also varies by city, firm, and how many years of experience an analyst may have.

Is BlackRock Buy-Side or Sell-Side?

Because BlackRock’s business model consists largely of investing on behalf of its clients, it is considered a buy-side firm. It is the largest investment manager in the world, with $11.6 trillion in assets under management.

The Bottom Line

Buy-side analysts and sell-side analysts both handle research, analysis, and investment recommendation duties, but for companies on either side of the financial markets.

Buy-side analysts recommend investments to the managers of their own firms. These firms include hedge funds, pension funds, actively managed mutual funds, or other kind of asset manager that buys and manages large amounts of securities.

Sell-side analysts recommend investments to the clients of their firms, which typically are brokerages, investment banking firms, and large banks that promote and sell investments to the public.

Reviewed by Julius Mansa
Fact checked by Yarilet Perez

Those interested in ditching their cable TV service may wish to consider Sling TV, a service that streams live TV from the Internet without needing a television or clunky cable box. Rather, viewers can use practically any Internet-connected device, including iOS and Android devices, Xbox Ones, Roku boxes, and Windows-based devices.

Unlike other streaming services, such as Netflix or Hulu, Sling TV is strictly live, and users receive each channel as it’s playing in real-time—just as they would with traditional cable or satellite TV hookups. This article will explore Sling TV, how it works, and whether it’s worth the plunge.

Key Takeaways

• Sling TV is a service that live streams news, live sports, and other TV shows from the Internet, but without the clunky cable box.
• Viewers can use nearly any Internet-connected device, including iOS and Android devices, and Xbox Ones.
• Basic service starts at $45.99 per month and provides access to 35+ channels, and 80K+ shows and movies-on-demand.
• Extra channel bundles and DVR storage start at $6 extra per month.

How Much Does Sling TV Cost?

The basic service starts at $45.99 per month, with an option to choose Sling Blue and Sling Orange. Both basic plans have no contracts or set-up fees, 50 hours of free DVR storage, and easy cancellation. While Sling Blue has channels geared towards news and entertainment and allows three device streams, Sling Orange is better for sports and family-friendly networks and only allows one device stream.

However, both plans include favorites like CNN, Food Network, A&E, the History Channel, TNT, and HGTV. If these mainstays aren’t enough, you can get both for $60/month or sign up for additional channel bundles based on content type, starting at $6 per month each.

These extra packages center on themes such as sports, news, children’s programming, Hollywood, lifestyle, plus a host of Spanish offerings. Specifically, the sports package adds 10+ channels, the kids’ package adds five, and the news package adds 10+.

Users may also pay an extra $10 per month for Paramount+ and Showtime. Other channels are also available. All of the packages can be examined online, but they may not be purchased until subscribers first sign up for the basic channel lineup.

Sling Blue

• Stream on three devices

• Good for news and entertainment

• Includes NFL Network, Bravo, and Fox News

Sling Orange

• Stream on one device

• Good for sports and families

• Includes ESPN, Nick Jr., Disney Channel

Is Sling TV Cost-Effective?

Whether or not Sling TV is cost-effective largely depends on the perspective of each consumer. But by any measure, the $45.99 base package is affordable, compared to most basic cable packages.

However, the costs of adding extra packages can mount quickly. For example, adding the “Sports Extra” package of 10+ extra channels costs an extra $11, bringing the total monthly bill to $51. Meanwhile, cable bills range between $55 and $250 with an average of $83.

Both cable consumers and Sling TV consumers encounter the same frustration of invariably paying for packages containing channels they’ll never watch. Even Sling’s core line-up contains obscure channels such as Comet and IFC, which few consumers have even heard of.

What Do You Need for Sling TV?

All you need for Sling TV is an Internet-connected device such as an iOS or Android device, or you can connect it to your Samsung, Apple TV, Amazon Fire TV, or another device.

How Much Is Sling TV a Month?

The basic Sling TV packages cost $45.99 per month for 35+ channels, with upgrades starting at $6 per month.

What Channels Do You Get on Sling TV?

Sling TV includes channels such as CNN, Food Network, A&E, the History Channel, TNT, and HGTV on their basic packages, Sling Blue or Sling Orange. Sling Blue also includes the NFL Network and Fox News, while Sling Orange includes ESPN and Nick Jr.

What Are the Pros and Cons of Sling TV?

Sling TV is an affordable alternative to cable TV, which allows users to watch live channels on any Internet-connected device for just $45.99 a month. However, some users may find that the channels in the basic package don’t fit their needs, hiking up their monthly bills to include the customizations they want.

Is Sling TV Better Than Cable?

Sling TV is hailed by many as better than cable TV, as the common friction points with cable TV—such as the steep price, having to install a physical cable box, and often being locked into a contract—are relieved with a Sling TV subscription.

The Bottom Line

There’s no doubt that Sling TV is a great deal for those who can resist the temptation to add extra packages. Many Sling TV users pair this service with other streaming providers such as Hulu, CBS All Access, and Netflix to round out their viewing options.

Find out how much untapped cash you have in your home

Fact checked by Michael Logan
Reviewed by Doretha Clemon

Most homeowners understand the concept of home equity. But, some may be confused about the topic and what it entails. As a homeowner, you need to understand how home equity works. This is especially true if you want to refinance a mortgage or borrow against your residence. Knowing how to calculate the equity in your home can make you a more empowered borrower. To calculate it, subtract the balance owing on your mortgage from the total market value of your property.

Key Takeaways

• Home equity is the value of your ownership stake in your home, calculated by subtracting your mortgage balance from the property’s market value.
• Lenders may express your position as a loan-to-value, which represents the proportion of your home’s value that is debt.
• Few lenders will let you borrow against the full amount of your home equity.
• Under normal economic circumstances, you may borrow between 80% and 90% of your available equity.

How Much Home Equity Do You Have?

As noted above, your home equity value is the difference between the current market value of your home and the total sum of debts registered against it. In many cases, this is your primary mortgage. If you have a second mortgage, you’ll have to deduct this as well.

The credit available to you as a borrower through a home equity loan depends on how much equity you have. Suppose your home is worth $250,000 and you owe $150,000 on your mortgage. Simply subtract your remaining mortgage from the home’s value, and you’ll end up with $100,000 in home equity.

How Should You Appraise Your Home?

There are a few ways to appraise your property if you’re looking for a home equity loan and need to estimate the worth of your home for the loan. The most straightforward way is to hire an independent third party. This is a professional appraiser who may provide an accurate and unbiased assessment of the value of your home. Keep in mind that this can be expensive.

Numerous internet programs can estimate the value of your house based on available data, such as previous home sales in your region and local real estate trends. While these estimates may not be as precise as a professional appraisal, they can be a good place to start. Note that some forms of these loose estimates may not be accepted by a lender issuing a home equity loan.

Instead of regional data, you can also estimate your property value by tracing down specific recent house sales in your region. In some cases where regional data is not a suitable comparison, specific sale information can provide you with an indication of what comparable homes are selling for. Keep in mind that your home may have unique qualities that affect its value.

Be mindful that no matter which method you prefer, your lender may have loan requirements that dictate the method in which your property is appraised when you pursue a home equity loan.

How Much Can You Borrow?

Very few lenders will let you borrow against the full amount of your home equity. They generally allow you to borrow a maximum of 80% to 90% of available equity, depending on your lender, credit, and income. So, if you have $100,000 in home equity, as in the example above, you could get a home equity line of credit (HELOC) of $80,000 to $90,000. Race, national origin, and other non-financial considerations should never play a role in determining how much home equity you can borrow.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Here’s a second example that accounts for a few additional factors. Suppose you are five years into a 30-year mortgage on your home. A recent appraisal or assessment places the market value of your house at $250,000. You also still have $195,000 left on the original $200,000 loan. Remember, almost all of your early home mortgage payments go toward paying down interest.

If there are no other obligations tied to the house, you have $55,000 in home equity. That equals the $250,000 current market value minus the $195,000 in debt. You can also divide home equity by the market value to determine your home equity percentage. In this case, the home equity percentage is 22% ($55,000 ÷ $250,000 = 0.22).

Now, let’s suppose you also took out a $40,000 home equity loan in addition to your mortgage. The total indebtedness on the property is $235,000 instead of $195,000. That changes your total equity to just $15,000, dropping your home equity percentage to 6%.

How Should You Account for Transaction Fees?

Real estate is one of the most illiquid assets, so there is usually a cost associated with tapping into your home equity. If you sell the house, total closing costs are typically between 2% and 5% in the United States. Buyers usually pay many of these charges, but be aware that they could use these fees as an excuse to negotiate a lower sale price.

If you take out a home equity loan, you will probably have to pay some type of loan origination fee. Interest rates are also generally higher for second mortgages and HELOCs than for the original mortgage. After including these transaction costs, the amount of home equity you can use is lower than the amount you have in theory.

Home Equity and Loan-to-Value (LTV) Ratio

Another way to express equity in your home is through the loan-to-value (LTV) ratio. It is calculated by dividing the remaining loan balance by the current market value. Using the second example described above, your LTV is 78%. (Yes, it’s the flip side of your home equity percentage of 22%.) With your $40,000 home equity loan thrown in, it climbs to 94%.

Important

Potential lenders use the LTV to determine whether or not to approve your applications for additional loans.

Lenders don’t like a high LTV because it suggests you could have too much leverage and might be unable to pay back your loans. During times of economic upheaval, they can tighten their lending standards. That happened during the 2020 economic crisis. Especially for HELOCs, banks raised their credit score requirements from the 600s to the 700s. They also lowered the dollar amounts and the percentage of home equity that they were willing to lend.

Both LTV and home equity values are subject to fluctuations when the market value of a home changes. Millions of dollars in supposed home equity were wiped out during the subprime mortgage meltdown of 2007–2008. Prices don’t always go up. The long-term impact of 2020 on home equity remains uncertain.

Home prices saw global price increases through 2021 due to the stay-at-home policy and people looking for bigger homes to fit their work, schooling, and life. The growing work-from-home policies adopted by companies also incentivized many families to move to the suburbs from the city.

How Is Home Equity Calculated?

Home equity is calculated by subtracting how much you owe on all loans secured by your house from your home’s appraised value. It is the residual value of your home after all liabilities related to the home have been deducted.

Do I Need to Put 20% Equity as a Down Payment?

Many lenders and situations do not require a down payment of 20%. In order for a borrower to avoid private mortgage insurance, they must often have at least 20% equity in their home. However, this is not a requirement at acquisition as some lenders may approve loans with down payments with 5% down or less.

Is It a Good Idea to Take Equity Out of Your Home?

For some, it may be a good idea to take equity out of your own. A home equity line of credit allows a borrower to take capital from what they have already paid down on their mortgage. These funds can often be borrower at a lower rate of interest compared to other types of debt. In addition, a borrower may be in a more comfortable financial position having had minimized their mortgage by paying it down.

When Can I Get a HELOC After Buying a Home?

Many lenders offer a HELOC to borrowers within two months of the purchase of their home. There are conditions a borrower must meet to secure a HELOC such as a specific amount of equity in the home, a strong credit history, and other lender requirements.

The Bottom Line

To calculate your home equity, you’ll need to determine the current market value of your home. This can be obtained by getting a professional appraisal or using an online home value estimator. Then, subtract how much you owe on your mortgage; this residual value is your equity position.

Fact checked by Vikki Velasquez
Reviewed by Cierra Murry

As with any for-profit business enterprise, the mutual fund industry charges fees for the services it offers. Actively managed fund services consist of managing a pool of commingled assets with an investment strategy like outperforming an index over time.

Mutual funds have historically charged consumers 12b-1 fees for marketing and promoting their services to prospective investors.

Key Takeaways

• A 12b-1 fee is an annual marketing or distribution fee on a mutual fund charged to investors.
• The 12b-1 fee is an operational expense and is included in a fund’s expense ratio.
• It is generally between 0.25% and 0.75% (the maximum allowed) of a fund’s net assets and must be disclosed on the fund’s prospectus.

What Are 12b-1 Fees?

According to the Securities and Exchange Commission (SEC), 12b-1, “fees are deducted from a mutual fund to compensate securities professionals for sales efforts and services provided to the fund’s investors.”

Charging 12b-1 fees has grown controversial, and in 2025, mutual funds are commonplace,e which makes the original motivation for creating the fee much less meaningful. Funds are also much larger, with some managing over a trillion dollars in assets.

12b-1s also have a shareholder service fee, with an annual cap of 25 basis points or 0.25% of all the assets managed in a fund. With billions under management, it is difficult to see the need to charge investors to market the fund to other potential investors. Estimates of 12b-1 fees were at $10 billion annually in 2020. As of 2023, 92% of investments or sales of long-term mutual funds were funneled to no-load funds without 12b-1 fees, compared with 46% in 2000.

Note

The fee’s official name stems from a 1980 SEC rule implemented to authorize its use.

Expense Ratios

The 12b-1 fee is a component of a mutual fund’s total expense ratio. Websites, including Morningstar and Yahoo! Finance, generally list the total expense ratio by fund. It is also found on a mutual fund prospectus. The prospectus must list specific fees by each mutual fund class offered. Generally, the fund’s annual operating expenses will be broken down into components. The largest fee is usually the management fee, which is what the portfolio managers charge to run the fund.

The distribution fee, or 12b-1 fee, will also be listed. Other fees and expenses may include sales charges such as front-end and back-end sales loads that investors incur when they buy or sell a fund. There may also be other operating expenses, such as account administration fees, recordkeeping fees, and networking fees to wholesalers and other financial intermediaries that also help to sell the fund.

When Did 12b-1 Fees Begin?

According to the SEC, 12b-1 fees first emerged in the 1970s during a period when mutual funds were seeing significant redemptions and wanted an avenue to help attract new assets.

What Is a No-Load Fund?

A no-load fund is a mutual fund in which shares are sold without a commission or sales charge.

 

What Is the Average Total Expense Ratio for Mutual Funds?

According to data compiled by ICI Research, the average expense ratio for equity mutual funds was 0.42 percent in 2023.

The Bottom Line

Historically, 12b-1 fees helped firms market and sell mutual funds. These fees are part of a funds expense ratio. Since 1996, mutual fund expense ratios have dropped by 60% as investors have chosen no-load funds.

Reviewed by Margaret James
Fact checked by Vikki Velasquez

ROE and ROA Metrics

Investors use return on equity (ROE) and return on assets (ROA) ratios to gauge a company’s ability to generate earnings from its investments. Both measure a type of return, but these metrics don’t represent the same thing. Together, they provide a clearer representation of a company’s performance.

Key Takeaways

• Return on equity (ROE) and return on assets (ROA) are two financial ratios that measure how a company generates money from its investments.
• Return on equity is a company’s net income divided by shareholder’s equity.
• Return on assets is a company’s annual net income divided by total assets.
• Using the metrics together, investors get a full view of a company’s financial performance.

Return on Equity

ROE is a fundamental ratio that shows how effectively a company’s management uses investors’ money. It tells investors if the company’s value grows at an acceptable rate. This financial indicator divides the company’s net income by shareholders’ equity. Shareholders’ equity is found on the company’s balance sheet. Net income is on the income statement.

$begin{aligned} &text{ROE} = frac{ text{Annual Net Income} }{ text{Average Shareholders’ Equity} } \ end{aligned}$​ROE=Average Shareholders’ EquityAnnual Net Income​​

Let’s calculate ROE for the fictional company Ed’s Carpets. Ed’s 2024 income statement shows a net income of $3.822 billion. In 2024, stockholder equity was $25.268 billion. In 2023, it was $6.814 billion.

To calculate ROE, average shareholders’ equity for 2024 and 2023 ($25.268bn + $6.814bn ÷ 2 = $16.041 bn), and divide net income for 2024 ($3.822 billion) by that average. ROE equals 0.23, or 23%. In 2024, Ed’s Carpets generated a 23% profit on every dollar invested by shareholders. Professional investors consider an ROE of 15-20% as a positive sign. However, ROE comparisons depend on the industry.

15%-20%

Many professional investors consider an ROE of 15%-20% acceptable, but ROE comparison depends on the sector or industry. For example, as of Feb. 12, 2025, Apple’s ROE averaged 146.59% over 12 months.

Return on Assets

ROA reveals the profit a company posts for every dollar of its assets, including cash in the bank, accounts receivable, property, equipment, inventory, and furniture.

$begin{aligned} &text{ROA} = frac{ text{Annual Net Income} }{ text{Total Assets} } \ end{aligned}$​ROA=Total AssetsAnnual Net Income​​

Ed’s Carpets earned $3.822 billion in 2024. Total assets were $448.507 billion. Its net income divided by total assets gives a return on assets of 0.0085, or 0.85%. In 2024, Ed’s Carpets earned less than 1% return on its assets.

Ed’s balance sheet should reveal why the company’s return on equity and return on assets were so different. The carpet maker carried an enormous amount of debt, which kept its assets high while reducing the proportional amount of shareholders’ equity. In 2024, it had total liabilities that exceeded $422 billion—more than 16 times its total shareholders’ equity of $25.268 billion.

Important

ROAs should always be compared among firms in the same sector. In Feb. 2025, food industry giant McDonald’s posted an ROA of 14.68, while tech company NVIDIA posted an ROA of 77.99.

Comparing Liabilities

ROE shows performance based on shareholder equity. ROA shows company profitability based on its total assets. The return on debt (ROD) measures how much a company profits from borrowed or leveraged funds. Financial leverage or debt separates ROE and ROA. Because ROE weighs net income only against owners’ equity, it doesn’t say how well a company uses its financing from borrowing and issuing bonds. Such a company may deliver an impressive ROE without being effective at using the shareholders’ equity to grow the company. ROA, because its denominator includes both debt and equity, can help investors see how well a company puts financing to use.

The balance sheet’s fundamental equation shows how this is true: assets = liabilities + shareholders’ equity. This equation tells us that if a company carries no debt, its shareholders’ equity and its total assets will be the same. It follows then that their ROE and ROA would also be the same. If that company takes on financial leverage, ROE would rise above ROA. The balance sheet equation—if expressed differently—can help us see the reason for this: shareholders’ equity = assets – liabilities.

By taking on debt, a company increases its assets. Therefore, when looking at ROA, the numerator (return) would stay the same, but the denominator (assets) would increase. Therefore, the ratio of returns to assets would decrease. Alternatively, a company’s returns and equity remain unchanged. Taking on debt changes a company’s assets via the cash they accept and a company’s liabilities via the obligation. Therefore, ROE remains unchanged when a company takes on debt, while a company’s ROA likely decreases.

Is a High Return on Equity Good?

ROE comparisons should be made among companies in the same sector or industry. An ROE of 15 or higher is generally considered good since it reflects how well a company is generating earnings relative to its shareholder’s equity. In this way, it shows how effectively a company is managing its capital.

What Do Changes In ROA Mean for Investors?

A ROA that rises over time indicates that the company is increasing its profits with each investment dollar it spends. A falling ROA indicates that the company might have over-invested in assets that have failed to produce revenue. 

Can ROA Be Too High?

If a company’s ROA is considerably higher relative to its industry, it may indicate that it is not investing enough into the company to take advantage of growth opportunities.

The Bottom Line

Investors should look at ROA as well as ROE. They provide a clear picture of management’s effectiveness. If ROA is sound and debt levels are reasonable, a strong ROE is a solid signal that managers are doing a good job of generating returns from shareholders’ investments. ROE is a “hint” that management is giving shareholders more for their money. On the other hand, if the ROA is low or the company is carrying a lot of debt, a high ROE can give investors a false impression about the company’s fortunes.

Correction–Jan. 30, 2023: A previous version of this article incorrectly stated that equity decreases, which causes ROE to change when debt is incurred. In reality, taking on debt does not change equity in absolute dollars, so ROE would not change.

Fact checked by Amanda Jackson
Reviewed by Erika Rasure

Only a small number of industries outside the financial services industry offer the potential for relatively inexperienced professionals to make significant income within their first year of employment. And within the financial services industry, there are few careers that offer newcomers the opportunity to earn as much as a life insurance agent does right off the bat. In fact, a hardworking insurance agent can earn more than $134,000 in their first year of sales.

But success as an insurance agent doesn’t come without a cost. It’s a tough field, and most participants burn out sooner rather than later. Insurance agents hear the word “no” far more than they hear the word “yes.” And it’s not uncommon for the word “no” to be delivered with a fair amount of obscenities and the proverbial door in the face. Additionally, many people hold insurance agents in low regard—some people even equate them to glorified con artists.

But for those who can stomach the potential rejection, the paycheck and flexibility of being a life insurance agent can be worth the effort.

Key Takeaways

• The career of a life insurance agent is lucrative but involves constant hustling, networking, and many instances of rejection before a sale is ever made.
• Life insurance agents might be given a small salary to get started but are otherwise primarily dependent on commissions to make a living.
• Finding potential customers is difficult and time-consuming; getting those customers to make a purchase once you track them down is even harder.
• A strong background in sales can get you hired; once hired, you must take a 20- to 50-hour class and pass a state-administered licensing exam.
• When looking for a job, make sure that you only apply to companies that have received favorable reviews by rating agencies like Moody’s and Standard & Poor’s.

Overview of the Insurance Field

While there are many kinds of insurance (ranging from auto insurance to health insurance), the most lucrative career in the insurance field is for those selling life insurance. Agents focusing on this end of the insurance market help families, businesses, employers, and other parties protect against financial loss when someone dies.

Insurance agents selling this type of coverage are either “captive” agents, which means they only sell insurance from one company, or “non-captive” agents, meaning they represent multiple insurance carriers. Either way, the typical insurance agent is going to spend the majority of their time engaging in some type of marketing activity to identify people who might be in need of new or additional insurance coverage, providing them with quotes from the companies they represent, and persuading them to sign the new insurance contract.

Typically, a life insurance agent receives anywhere from 30% to 90% of the amount paid for a policy (also known as the premium) by the client in the first year. In later years, the agent may receive anywhere from 3% to 10% of each year’s premium, also known as “renewals” or “trailing commissions.”

Let’s look at an example of how a life insurance agent earns:

Insurance Sales Commission Example

Uni the insurance agent sells Ryan a whole life insurance policy that covers Ryan for the rest of their life (assuming they continue to make their premium payments). Uni’s insurance company pays a 90%/5% commission on whole life policies, which means the selling agent receives 90% of the first year’s premium and 5% of future renewals.

The policy costs Ryan $100 per month or $1,200 per year. Thus, in the first year, Uni will make a $1,080 commission on selling this life insurance policy ($1,200 × 90%). In all subsequent years, Uni will make $60 in renewals, as long as Ryan continues to pay the premiums ($1,200 × 5%). An agent selling one or two policies per week at this commission level could make $50,000 to $100,000 in their first year as an agent.

Life Insurance Agent Qualifications

As mentioned before, a life insurance agent is not a profession for the thin-skinned or faint of heart. In fact, more than any other factor, including education and experience, life insurance agents must possess a fighting spirit. They must be people who love the thrill of the hunt, the rush of a sale, and see rejection as a steppingstone to eventual success. A career in life insurance sales is not ideal for those who view themselves as introverted, soft-spoken, or afraid of conflict.

The vast majority of life insurance companies have no formal education requirements for becoming an agent. While many prefer college graduates, this general rule is constantly overlooked in favor of the “right” candidates. Previous experience in the insurance industry is not required because most medium and large insurance carriers have internal programs to train their salespeople about the products they’re going to sell.

While it may prove easy for a tenacious go-getter to get hired at a reputable insurance company, there is one nonnegotiable hurdle that stands between a potential insurance agent and their commissions: state licensing. Insurance agents are currently licensed by the individual state or states where they’ll sell insurance. This generally requires passing a state-administered licensing exam, as well as taking a licensing class that typically runs 20–50 hours.

100%

The sales commission that life insurance agents might earn in the first year if they are on a commission-only salary; that’s the highest commission for any type of insurance.

Getting Hired to Sell Insurance

If you feel like a career in life insurance sales is for you, there are a couple of steps to take in order to find your first job. First and foremost, you’ll need to put together a resume that highlights your entrepreneurial spirit. You’ll want to include anything that shows you taking initiative to make things happen, whether it was starting your own business or taking someone else’s business to the next level. Life insurance agents have to be driven and have the ability to be self-starters. Resumes that show a track record of that kind of behavior will help you get your foot in the door.

Once you have your resume polished, you’ll want to begin finding positions and applying. It’s imperative that you don’t feel pressured to take the first position that comes along, because working for the wrong company can burn you out and haunt you for the rest of your insurance career. Ideally, you want to work for a well-known company with a good reputation among consumers, other agents, and insurance rating agencies.

Perhaps the best place to start in deciding where to apply is to visit the insurance company rating websites for AM Best, Moody’s, or Standard & Poor’s. From there, you’ll be able to build a list of companies that have ratings of “A” or higher in your state. These companies will typically offer the most secure products at reasonable prices, with an emphasis on compensating and keeping quality agents.

Important

The work of a life insurance agent is grueling; many agents don’t last more than a year. On the upside, this means that there are constant vacancies and it can be relatively easy to get started as a new hire.

Be Sure to Follow Up

Once you’ve created this list, begin looking at each company. Due to the high turnover rate of insurance agents, most companies prominently post their job listings by geographical area, which makes them easily searchable for you. When you find a company in your area that seems to fit your personality, apply for the position and make sure you follow the company’s instructions on its site.

Follow up with phone calls on a weekly basis until you hear an answer either way. Many insurance company recruiters will decline to interview a potential agent who doesn’t first make a follow-up call; this is considered to be a strong indicator of a potential agent’s tenacity. During your interview, continue to communicate your entrepreneurial and “never-say-quit” personality; most managers will hire someone based on these factors over all the others combined.

If you’re lucky enough to land the job, you can expect your first 12 months to be spent handing out a lot of business cards and making a lot of phone calls. Your sales manager will be the first to remind you that your only “purpose” in life is to find potential clients. In fact, they’ll be far more interested in how many contacts you’re making each week than how well you know their product line.

You can expect to struggle financially for the first few months until your first sales commissions start rolling in. While some companies offer a salary to keep newbies from starving, this is becoming more rare. Many agents are now lucky to be compensated for one to two months of training before being put on a “commission-only” basis.

A Few Warnings

While the life insurance industry promises great rewards for those who are willing to work hard and put up with a good amount of rejection, there are two pitfalls you need to be aware of. First, you will most likely be expected to market to your friends and family. While that might be tempting and seem like a great idea to get you started, it can also burn a lot of bridges with people you care about.

Second, you should visit your state insurance commissioner’s website and check out the complaint history against companies that you’re considering working for. What you’ll typically find is insurance companies that maintain less than an “A” rating, as well as those that sell insurance using a multilevel marketing scheme, have a much higher incidence of complaints than the larger, more established companies.

Accepting a job with the wrong insurance company can potentially burn you out and ruin your dreams of a promising career. If a career in life insurance sales is something you truly desire, take your time and wait for the right opportunity at the right company. Doing so will maximize your chances of long-term success.

What Is Life Insurance?

Life insurance is a contract between an insurance company and a policy owner in which the insurer guarantees to pay a sum of money to one or more named beneficiaries when the insured person dies. In exchange, the policyholder pays premiums to the insurer during their lifetime.

What Is an Insurance Agent?

An insurance agent is a person who sells insurance policies for an insurance company. They can help individuals and businesses find the right coverage and policies, and are paid a commission for their services. They either work for an agency or as independent contractors.

What Is the Job Outlook for Insurance Sales Agents?

Employment of insurance sales agents is projected to grow 6% through 2033, faster than the average for all occupations. About 47,100 job openings for insurance sales agents are projected annually, on average, through 2033. There were 547,600 insurance sales agent jobs in the United States as of 2023, the most recent data available, according to the U.S. Bureau of Labor Statistics.

The Bottom Line

Being a life insurance agent is a tough field, with burnout, constant hustling, networking, and many instances of rejection before a sale is ever made. But for those who can stomach all of this, the paycheck and flexibility can be worth the effort.

Reviewed by Margaret James
Fact checked by Suzanne Kvilhaug

Proper management of working capital is essential to a company’s fundamental financial health and operational success as a business. A hallmark of good business management is the ability to utilize working capital management to maintain a solid balance among growth, profitability, and liquidity.

A business uses working capital in its daily operations; working capital is the difference between a business’s current assets and current liabilities or debts. Working capital serves as a metric for how efficiently a company is operating and how financially stable it is in the short term. The working capital ratio, which divides current assets by current liabilities, indicates whether a company has adequate cash flow to cover short-term debts and expenses.

Key Takeaways

• The goal of working capital management is to maximize operational efficiency.
• Efficient working capital management helps maintain smooth operations and can help to improve the company’s earnings and profitability.
• Management of working capital includes inventory management and management of accounts receivable and accounts payable.

The Importance of Working Capital Management

Working capital is a daily necessity for businesses, as they require a regular amount of cash to make routine payments, cover unexpected costs, and purchase basic materials used in the production of goods.

Efficient working capital management helps maintain smooth operations and can help to improve the company’s earnings and profitability. Management of working capital includes inventory management and management of accounts receivable and accounts payable. The main objectives of working capital management include maintaining the working capital operating cycle and ensuring its ordered operation, minimizing the cost of capital spent on the working capital, and maximizing the return on current asset investments.

Working capital is an easily understandable concept, as it is linked to an individual’s cost of living, and therefore can be understood in a more personal way. Individuals need to collect the money that they are owed and maintain a certain amount on a daily basis to cover day-to-day expenses, bills, and other regular expenditures.

Breaking Down Working Capital Management

Working capital is a prevalent metric for the efficiency, liquidity, and overall health of a company. It is a reflection of the results of various company activities, including revenue collection, debt management, inventory management, and payments to suppliers. This is because it includes inventory, accounts payable and receivable, cash, portions of debt due within a year, and other short-term accounts.

The needs for working capital vary from industry to industry, and can even vary among similar companies. This is due to several factors, including differences in collection and payment policies, the timing of asset purchases, the likelihood of a company writing off some of its past-due accounts receivable, and in some instances, capital-raising efforts that a company is undertaking.

Important

When a company does not have enough working capital to cover its obligations, financial insolvency can result and lead to legal troubles, liquidation of assets, and potential bankruptcy.

Working capital management is essentially an accounting strategy with a focus on the maintenance of a sufficient balance between a company’s current assets and liabilities. An effective working capital management system helps businesses not only cover their financial obligations but also boost their earnings.

Managing working capital means managing inventories, cash, accounts payable, and accounts receivable. An efficient working capital management system often uses key performance ratios, such as the working capital ratio, the inventory turnover ratio, and the collection ratio, to help identify areas that require focus in order to maintain liquidity and profitability.

What Is Working Capital?

Working capital is the difference between a company’s current assets and its current liabilities. It’s a commonly used measurement to gauge the short-term financial health and efficiency of an organization.

Current assets include cash, accounts receivable, and inventories of raw materials and finished goods. Examples of current liabilities include accounts payable and debts.

What Is Working Capital Management?

Working capital management is a business strategy designed to manage a company’s working capital. It ensures that a company operates efficiently by monitoring and using its current assets and liabilities to their most effective use.

What Are Some Real-World Examples of Working Capital Management?

Real-world examples of working capital management include:

• Apple Inc. (AAPL), which closely manages its inventory levels, negotiates favorable payment terms with suppliers, and carefully monitors its accounts receivable and accounts payable
• Walmart Inc. (WMT), which negotiates favorable payment terms with suppliers and whose supply chain and inventory management system allows it to minimize inventory holding costs while meeting customer demand

The Bottom Line

Working capital management aims to maximize a company’s operational efficiency. Efficient working capital management not only helps maintain smooth operations, but also can help to improve earnings and profitability and maintain a solid balance between growth and liquidity.

Reviewed by Thomas J. Catalano
Fact checked by Michael Rosenston

Many people struggle to set aside the money they need to build up their retirement nest eggs, month by month. Fortunately, a nonrefundable tax credit, known as the retirement savings contributions credit, can make it substantially easier to save.

Usually referred to as the Saver’s Credit, it provides individuals and families with modest incomes a tax break above and beyond any deductions that they may receive from contributions to their individual retirement accounts (IRAs) or employer-sponsored plans.

By reducing the person’s income tax bill for the year, the credit offsets the cost of funding a retirement account, ultimately bolstering their long-term savings over time.

Key Takeaways

• A tax credit reduces the amount of taxes owed dollar for dollar. That’s better than a tax deduction, which reduces the taxpayer’s total taxable income.
• The saver’s tax credit is available to eligible taxpayers who contribute to an employer-sponsored retirement plan, ABLE plan, or a traditional and/or Roth IRA.
• The amount of the credit is determined by a number of factors, including the person’s retirement plan contributions, tax filing status, and adjusted gross income (AGI).
• This credit is not available to people under age 18, full-time students during any part of five calendar months (not necessarily consecutive) during the tax filing year, or anyone claimed as a dependent by another taxpayer.
• You can use Form 8880 to calculate and claim the saver’s tax credit.

What Is the Saver’s Tax Credit?

The saver’s tax credit is available to eligible taxpayers who contribute to employer-sponsored 401(k), 403(b), SIMPLE, SEP, thrift savings plans (TSPs), or governmental 457 plans. It is also available to those who contribute to traditional or Roth IRAs.

Those who make contributions to these types of accounts on behalf of other people with disabilities and their families (known as ABLE accounts) also are eligible for the saver’s tax credit.

AGI Determines Amount of Credit

Your adjusted gross income (AGI) determines your credit amount, which can be either 50%, 20%, or 10% of a maximum contribution amount. The maximum contribution amount that qualifies for the credit is $2,000, or $4,000 for married couples filing jointly.

The credit rate that you can apply depends on your AGI and filing status. If your income rises above the maximum AGI limit, you can’t claim the credit.

For the 2024 tax year, the maximum AGI limits were $76,500 for married couples filing jointly; $57,375 for heads of household; and $38,250 for singles and married individuals filing separately. Income beyond these maximums disqualified you from claiming the credit.

For the 2025 tax year, the maximum AGI limits are $79,000 for married couples filing jointly; $59,250 for heads of household; and $39,500 for singles and married individuals filing separately. Income beyond these maximums disqualifies you from claiming the credit.

Below are the credit rates and AGI thresholds that apply to the different filing statuses for tax years 2024 and 2025.

Who Is Eligible?

To be eligible for the saver’s tax credit, an individual must be at least 18 years old by the end of the applicable tax year and cannot be claimed as a dependent on another’s tax return. Also, they may not enroll as a full-time student during any part of five calendar months (not necessarily consecutive) during the tax filing year.

The Effect of the Saver’s Tax Credit

Claiming the saver’s tax credit when contributing to a retirement plan can reduce an individual’s income tax burden in two ways. First, the contribution to the retirement plan qualifies as a tax deduction. As a bonus, the saver’s tax credit reduces the actual taxes owed, dollar for dollar.

Consider the following examples:

Barbara is married and works in a clothing store as a clerk. She earned $38,000 in 2024. In addition, she contributed $1,000 to her IRA. Her husband, who is unemployed, had zero earnings. After deducting her IRA contribution, the AGI shown on her joint return is $37,000. In this case, Jill is entitled to claim a 50% credit of $500 ($1,000 × 0.50) for that IRA contribution.

For tax year 2025, if Barbara earns $42,000 (her husband remains unemployed) and contributes $2,000 to her IRA, her AGI on her joint return would be $40,000. That means she can claim a 50% credit of $1,000 ($2,000 × 0.50).

How to Claim the Saver’s Tax Credit

Taxpayers who contribute to qualified employer-sponsored retirement plans, IRAs, or ABLE plans are required to complete IRS Form 8880 to claim the saver’s tax credit.

Those whose income does not exceed the limits for their tax filing status can use this form to report their and their spouse’s total contributions to claim the credit.

You also enter your adjusted gross income to determine the amount of your credit. Once calculated, you must enter the credit amount on Form 1040 and then file Form 8880 with your return.

Important

The saver’s tax credit was initially made available for tax years 2002 to 2006 under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). It became permanent under the Pension Protection Act of 2006 (PPA).

When Are Retirement Savings Not Eligible?

Any money contributed to a retirement account that exceeds the allowable limit must be divested from the account within a specific time frame. The returned portion of the contribution is not eligible for the saver’s tax credit.

Similarly, if an individual changes jobs and consequently rolls money over from one retirement account into another—say, from an employer-sponsored 401(k) to a traditional IRA—then that contribution is likewise ineligible for the saver’s tax credit.

How Can I Get the Saver’s Tax Credit?

To be eligible for the saver’s tax credit, you must be at least 18 years old, not a full-time student during any part of five calendar months (not necessarily consecutive) during the tax filing year, and not claimed as a dependent on another’s tax return. Your adjusted gross income (AGI) must not exceed the saver’s tax credit limit for your filing status, and you must have made contributions to a qualified retirement or ABLE plan for the tax filing year. To claim the credit, file Form 8880 with your tax return.

Who Qualifies for the Saver’s Tax Credit?

The saver’s tax credit is designed to help people with modest incomes save for retirement. It does this by deducting from their income tax bill some portion of the amount they contribute to retirement accounts. To qualify, your AGI must fall below a certain maximum amount.

For the 2024 tax year, the maximum income limits were $76,500 for married couples filing jointly; $57,375 for heads of household; and $38,250 for singles and married individuals filing separately.

For the 2025 tax year, the maximum income limits are $79,000 for married couples filing jointly; $59,250 for heads of household; and $39,500 for singles and married individuals filing separately.

How Much Is the Saver’s Tax Credit?

The saver’s tax credit is 10%, 20%, or 50% of a contribution to a qualified retirement plan (QRP). The maximum contribution amount that qualifies is $2,000 ($4,000 for married couples filing jointly). The credit cannot exceed $2,000 for married couples filing jointly or $1,000 for single filers.

The Bottom Line

The saver’s tax credit can effectively boost an individual’s retirement savings power. Those who qualify for this credit and don’t capitalize on this opportunity are squandering a simple way to add significant value to their nest eggs. So be sure to check it out when you prepare your tax return.

Correction—Feb. 12, 2025: This article has been corrected to state that an individual may not be a full-time student during any part of five calendar months (not necessarily consecutive) during the tax filing year to be eligible for the saver’s tax credit.

It’s important to understand the tax implications

Fact checked by Timothy Li
Reviewed by Marguerita Cheng

A qualified domestic relations order (QDRO) is a court order that divides the assets that are in certain retirement plans, including 403(b)s and 401(k)s. Before using the money to buy a house, you should first consider the tax implications.

Key Takeaways

• A qualified domestic relations order (QDRO) is a court order used to divide certain retirement-specific assets during a divorce.
• Assets distributed from a qualified plan under a QDRO are exempt from the 10% early withdrawal penalty.
• Any money distributed directly to an ex-spouse will be subject to mandatory withholding tax.

Can You Use a QDRO to Buy a House?

Funds distributed from a qualified plan under a QDRO can be used to buy a home, but you should understand the payment options and tax implications.

Assets distributed from a qualified plan under a QDRO are exempt from the usual 10% early withdrawal penalty set by the Internal Revenue Service (IRS).

Recipients can opt to have a portion of the amount processed as a direct rollover to their traditional individual retirement account (IRA) and the balance paid to them to buy a home. The amount processed as a direct rollover to an IRA will not be subject to withholding tax.

Important

Any amounts that you receive directly (instead of rolling over to a retirement plan) will be subject to mandatory withholding tax. This withholding can include 20% for federal taxes held by the plan and an additional amount for state taxes, depending on the state.

Distribution Options

Assets can be rolled over to a traditional IRA and have the distributions paid over time. Amounts paid to recipients for at least five years or until age 59½, whichever is longer, are exempt from the 10% early-distribution penalty, provided the payments meet certain requirements.This option is commonly referred to as substantially equal periodic payments or 72(t) distributions.

To convert the assets to a Roth IRA, beneficiaries must first roll over the funds to a traditional IRA. The funds can then be converted from the traditional IRA to the Roth IRA. However, taxes will be owed on the converted amount for the year the conversion occurs. Then, in retirement, withdrawals will be penalty- tax-free, as long as you’re at least 59 ½ years old and have had the Roth account for at least five years.

Warning

Some qualified retirement plans will not distribute assets under a QDRO until the plan participant—in this case, a former spouse—experiences a triggering event, such as reaching retirement age or leaving an employer. Plans may also consider the QDRO a triggering event.

Are There Exceptions to the 10% Early Withdrawal Penalty for IRAs and 401(k)s?

When an individual withdraws from an IRA or defined-contribution retirement plan before age 59½, these early distributions trigger a 10% early withdrawal tax unless an exception applies. Some exceptions include paying for qualified medical expenses or higher education costs. For more exceptions, visit the IRS website.

Which Retirement Plans Are Subject to a QDRO?

A qualified domestic relations order (QDRO) is a court order used to divide specific types of retirement plans, including qualified plans, such as 401(k) and 403(b) plans. A QDRO must comply with the Employee Retirement Income Security Act (ERISA). ERISA provides a regulatory framework for employer-sponsored retirement plans to protect participants and their beneficiaries. IRAs are not subject to ERISA and are divided using a “transfer incident to divorce.”

Can There Be Additional Beneficiaries Named on a QDRO?

Other than an ex-spouse, dependents may qualify to receive the ordered benefits. In such instances, the alternate payee is a minor or is determined to be legally incompetent. The order can require the benefit plan to make a payment to an individual with legal responsibility for that payee. This can include a guardian or trustee who serves as the agent of the individual.

The Bottom Line

Retirement assets need to be addressed separately during divorce proceedings. Although money can be disbursed to help pay for the purchase of a home, you should consider how and when to use these funds when considering tax penalties.