Paying taxes as a freelancer

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Paying taxes as a freelancer can be a bit more involved—and expensive—than paying taxes as a W-2 employee. When you’re a freelancer, you’re the boss. That’s great if you want some flexibility, but it also means you’re self-employed, so you are responsible for both the employer and employee parts of employment taxes.

When you work for someone else, your paycheck amount is your pay minus all appropriate deductions. That includes deductions for federal and state income taxes as well as Medicare and Social Security contributions.

But what you might not realize is that your employer covers part of the Medicare and Social Security amounts. As a self-employed individual, you have to pay the total amount yourself. That’s 12.4 percent for Social Security and 2.9 percent for Medicare—a total of 15.3 percent of your taxable earnings, not including federal and other income taxes.

When Do I Have to Start Paying Taxes as a Freelancer?

According to the Internal Revenue Service, if you earn $400 or more in a year via self-employment or contract work, you must claim the income and pay taxes on it. The threshold is even lower if you earn the money for church work. If you earn more than $108.28 as a church employee and the church employer doesn’t withhold and pay employment taxes, you must do so.

What Tax Forms Should I Know About?

Freelancers report their income to the IRS using a Form 1040, but they may need to include a variety of Schedule attachments, including:

  • Schedule A, which lists itemized deductions
  • Schedule C, which reports profits or losses from their freelancer business
  • Schedule SE, which calculates self-employment tax

These are only some of the forms that might be relevant to a freelancer filing federal taxes. Freelancers must also file a tax form for the state in which they live as well as with any local governments that require income tax payments.

If you’re planning to do your taxes on your own as a freelancer, it might be helpful to invest in DIY tax software. Look for options that cater specifically to home and business or self-employment situations. These software programs typically walk you through a series of questions designed to determine which forms you need to file and help you complete those forms correctly.

Six Tips for Doing Your Taxes as a Freelancer

As a freelancer, chances are you spend a lot of your time attending to clients and getting production work done. You may not have a lot of time for business organization tasks such as accounting. But a proactive approach to paying taxes as a freelancer can help you prepare to do your taxes and pay what can be a surprisingly big bill each year.

Here are six tips for handling taxes as a freelancer.

1. Keep Track of Your Income

Track your income so you know how much you may need to pay in taxes every year. Keeping track of your numbers also helps you understand whether your business is profitable and how you’re doing with income compared to past years.

You can track your income in a number of ways. Apps and software programs such as QuickBooks and Wave let you manage your freelance invoices and track income and expenses. Some also help you generate financial reports that might be helpful come tax time.

Alternatively, you can track your income in an Excel spreadsheet or even a notebook, as long as you’re consistent with writing everything down.

2. Set Money Aside in Advance

It’s tempting to count every dollar that comes in as money you can use. But it’s wiser to set money aside for taxes in advance. Depending on how much you earn as a freelancer, you could owe thousands in federal and state taxes by the end of the year, and if you didn’t plan ahead, you might not have the money to cover the tax bill.

That can lead to tax debt that comes with pretty stiff penalties and interest—and the potential for a tax lien if you can’t pay the bill.

3. Determine Your Business Structure

Make sure you know what your business structure is. Many freelancers operate as sole proprietorships. But you might be able to get a tax break if you operate as an LLC or a corporation. Talk to legal and tax professionals as you set up your business to find out about the pros and cons of each type of organization.

4. Know About Relevant Deductions

As a freelancer, you may be able to take certain federal tax deductions to save yourself some money. Tax deductions reduce how much of your income is considered taxable, which, in turn, reduces how much you owe in taxes. Here are a few common deductions that might be relevant to you as a freelancer.

Home Office

You can take the home office deduction if you’ve set aside a certain area of your home for use by the business. The IRS does have a couple of stipulations.

First, you have to regularly use the space for your business, and it can’t be something you use regularly for other purposes. For example, you can’t claim your dining room as a home office just because you sometimes work from that location.

Second, the home has to be your principal place of business, which means it’s where you do most business activity. You can’t claim the deduction if you normally work outside the home but sometimes answer work emails while you’re in the living room.

Equipment and Supplies

You can also deduct the cost of equipment and supplies that you buy for your business. That includes software purchases and relevant subscriptions, such as if you pay monthly for Microsoft 365 or annually for a domain name.

Make sure you have backup documentation for any business expenses you deduct. That means keeping receipts that show what you purchased so you can prove that the expenses were for business. You also have to be careful to keep business and personal expenses separate—art supplies for your child’s school project, for example, wouldn’t typically be considered valid business expenses.

Travel and Meals

Meals and travel expenses that are related to your business may be tax deductible. If you stay in a hotel, book a flight or incur other travel expenses that are necessary for the running of your business, you can claim them as a deduction. The same is true for 50 percent of the value of meals and beverages that you pay for as a necessity when doing business.

The IRS does set an “ordinary and necessary” rule here. For example, if you’re traveling to meet with a client and you need to eat lunch, that is likely to be considered necessary. But if you opt for a very lavish meal for no other purpose than to do so, it might not be allowed under the “ordinary” part of the rule.

Business Insurance

If you carry liability or similar insurance for your business, you can deduct it as a cost of doing business. You may also be able to deduct the cost of other insurance policies if they are necessary for your trade.

5. Estimate Your Taxes Quarterly

The IRS offers provisions for estimating your employment taxes on a quarterly basis. Self-employed individuals, including freelancers, can make these estimated tax payments, too. Paying as you go means you won’t owe a large sum every April, and if you overestimate, you may get a tax refund.

Quarterly payments are due in April, June, September and January. They can be mailed or made online. Depending on how much you earn, you may need to make quarterly estimated tax payments to avoid a penalty at the end of the year.

6. Consult a Tax Professional

As you can see just from the basic information and tips above, paying taxes as a freelancer can get complicated quickly. Consider talking to a tax professional to understand what all your obligations are and how best to reduce your tax burden using legal deductions. You might be missing a major deduction every year that could save you a lot of money.

And remember that as a freelancer, you’re running your own small business. That means paying attention to all your finances, including your credit report. If you ever want to take out a business loan or seek other funding to grow your business, you might need to rely on your good credit score.

Check your credit score, and if you find inaccurate negative information making an impact on your score, contact Lexington Law to find out how to get help disputing it.

Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.


10 Characteristics of the Best Growth Stocks (for High Investment Return)

Your investment strategy plays a major role in your profitability, or lack thereof. One of the most popular strategies investors employ is known as the growth investing strategy. The strategy is centered around finding and investing in stocks that have experienced compelling growth in recent history, and tapping into the ongoing growth potential.

But what exactly is a good growth stock?

Characteristics of the Best Growth Stocks

If you’re looking for stocks with incredible growth potential, ultimately hoping to cash in on the upward volatility to generate profits, you’re looking for stocks that display the following characteristics.

1. Stock Price Growth

For a stock to qualify as a growth stock, it has to be experiencing growth in its share price. Without price appreciation, the stock simply doesn’t fall into this category.

So, how do you determine if a stock is on an upward trend?

The easiest way is to take a look at the stock chart.

  • Look at Three-Month and One-Year Stock Charts. It will be clear whether a stock is trending upward when you look at the chart. If the share price has seen relatively consistent upward movement, there’s a strong chance you’re looking at a growth stock. It’s important to look at the chart over the past three months and one year. The three-month chart will tell you whether the trend is currently upward and the one-year chart will tell you whether the growth in the stock has been sustained over a significant period of time.
  • Forgive Dips. Even in bull markets, stocks that are climbing will dip from time to time as investors take profits or digest pieces of news. What you’re looking for is an overall performance in the upward direction, ignoring short-term dips in the data.
  • Compare the Growth to the S&P 500. The S&P 500 index is the primary benchmark of the United States market. By comparing the growth of the stock you’re interested in over the past three months and one year to growth in the S&P 500, you’ll be able to determine whether the company’s stock price has underperformed, performed in line, or outperformed the wider U.S. market. After all, the goal here is to find high-growth stocks that outperform market returns.

After looking at the charts, if you find that the stock has outperformed Wall Street averages over the past three months and one year, chances are you’ve landed on a solid opportunity to beat the market with your investing dollars.

2. Earnings Growth

Sustained gains in the value of a stock will only be possible if the company you’re investing in sustains growth in profitability. Who wants to continue piling money into a company that’s losing it all?

Determining earnings growth is a relatively simple process, thanks to a tool provided by Nasdaq. To access the tool, visit the Nasdaq website and look up the stock ticker you want to research. On the left of any stock’s profile is a link titled Earnings you can click for more details.

The resulting page will have a graph that shows the earnings per share on a quarterly basis over the past year. Look for consistent quarter-over-quarter growth in earnings. Also, pay attention to the earnings surprises. Stocks that have all positive earnings surprises consistently beat analyst expectations — a great sign for a growth stock.

3. Revenue Growth

It’s also important that the stock you invest in has a track record of impressive revenue growth. There are ways to reduce costs to inflating earnings while revenue is either plateauing or falling. These methods will only last so long, and earnings will begin to falter at some point if there isn’t real revenue growth underneath.

So, it’s important to make sure that the stocks you’re interested in are experiencing consistent and compelling growth in revenue.

To determine whether revenue is growing, simply look into the company’s last four quarterly earnings reports. Take note of the revenue reported in each quarter, keeping in mind normal peaks and valleys seen in the sector.

For example, tech companies tend to do best around the holidays, leading to strong fourth quarter revenue. As a result, companies in this space may see a plateau in revenue, or even slight declines, from the fourth quarter to the first quarter, which would be acceptable as long as revenues sequentially rise throughout the rest of the year.

Pro tip: Stock screeners like Trade Ideas and Stock Rover can help you find companies that meet or exceed most of your requirements for things like revenue growth, earnings per share, and other key metrics.

4. Market Growth

You may be noticing a trend here. The key to growth investing is finding a stock with sustained growth across all metrics, but the stock and the company it represents aren’t the only factors you should be paying attention to.

Growth in the addressable market the company you’re interested in targets is also crucially important to its ability to realize sustained gains in revenue, earnings, and ultimately share price.

If a company is beginning to capture the majority of the market it addresses, it may be going through a growth spurt, but that upward movement won’t be sustainable if the market size remains flat. At some point, the company will have saturated the market and will eventually plateau itself.

So, it’s important to look into market data to determine whether the market in which the company operates is growing at a rate capable of supporting continued upward movement in the stock you’re investing in.

To do so, simply go to your favorite search engine and type “(industry) market size” into the search bar and read through the results. In most cases, several statistics companies have performed detailed analyses of the market, determining the current market size and the size the market is expected to achieve over the next several years.

If the company you’re considering is working within a market that’s plateauing, look into how much of the market the company has already penetrated to determine how much more room is left for upward movement.

5. Free Cash Flow Growth

Money flows in and out of businesses like water. Free cash flow represents the net amount of money that flows into a business once all outflows are taken into consideration. This differs from profitability because free cash flow does not measure non-cash expenses such as depreciation.

It’s important to make sure there’s consistent growth in free cash. This can be seen by looking into the company’s balance sheets over the past four consecutive quarters.

6. A Fair Valuation

Growth stocks are notorious for reaching significant overvaluations after big runs higher, resulting in dramatic declines when investors take profits and move on to the next opportunity. While an average valuation is to be expected, risk levels increase when prices fly too high.

One of the best ways to determine if a stock is undervalued, overvalued, or valued fairly is to look at the price-to-earnings ratio, or P/E ratio. A metric commonly used by investors looking for value stocks, the P/E ratio compares the price of the stock to the earnings per share generated by the company over the course of a year.

Every industry will have its own average ratio. By comparing the ratio of the stock you’re interested in to that of the market in which it operates, you’ll be able to determine if the current value of the stock you’re interested in is fair.

7. A Strong Balance Sheet

This has little to do with growth and more to do with general investing due diligence. Any time you buy a stock, you want to make sure that the underlying company has a strong balance sheet.

The balance sheet will clearly outline the value of the assets the company owns as well as the debt it owes, giving you an idea of whether the company is sitting on a strong financial foundation.

8. Clear Competitive Advantages

In order for a company to maintain an upward trajectory, it has to have clear competitive advantages. For example, compare BlackBerry and Apple when it comes to their activities in the smartphone space.

BlackBerry was a clear pioneer, creating some of the first devices classified as smartphones. Over time, competitors came in, taking market share from the company until “BlackBerry” became “Black-What?”

On the other hand, Apple jumped in with a clear competitive advantage. The company consistently innovated new ways to use smartphones, put together an ecosystem including an app store, music service, and more. Apple continues to improve the experience for users of its smartphones to this day, many of whom refuse to switch to other devices despite there being many choices in the smartphone market. As a result, Apple is touted as one of the best growth stocks on the market today.

9. A Solid Management Team

Like a chain, a company’s team is only as strong as its weakest line, and those weak links are sometimes found in management.

When investing in a company, you’re trusting that company with your money, meaning you’re trusting the company’s management team to make moves that will lead to growth.

Why would you trust a team of people you know nothing about?

Before investing in any stock, you should dig into the management team at the helm of the company. How long have members of the team been with the company, and what have they done since taking on their positions? Where did these team members work before, and did their work with previous companies lead to positive outcomes?

These are questions you should know the answers to before you dive in.

10. Forward-Looking Growth Prospects

Finally, before buying a stock you expect to grow substantially ahead, it’s important to take a look at the company’s growth prospects. What is its story for how it will grow and expand into the future?

For example, Gevo, a company focused on the production of clean fuels, is a hot topic among growth investors at the moment. Investors are excited because the company has signed several agreements that will open the door to expanding revenues in the years ahead. Moreover, the company is working to expand its infrastructure to meet increasing demand. Based on the activities taking place at the company, investors are excited about the expectation of meaningful growth in the value of the stock moving forward.

Any growth stock you invest in should have compelling forward-looking growth prospects, such as a plan to enter a new market, a strategy for making their products or services more widely available, or new products in the pipeline.

Consider Investing in Growth ETFs

Finding and taking advantage of growth opportunities in the market can be a cumbersome process, taking quite a bit of time. If you don’t have the time to dedicate to the process, or the expertise it takes to research each and every investment opportunity before risking your money, you may want to consider investing in exchange-traded funds (ETFs) with a focus on growth strategies instead of picking individual stocks.

Although investing in growth-focused funds will reduce the amount of research required, it’s still important to look into each fund’s historic performance, expense ratio, and dividend yield before diving in.

Final Word

Investing in growth stocks has the potential to be a lucrative business. The potential to produce market-beating returns has made the growth investing strategy one of the most popular among retail and institutional investors alike.

As with any other investing strategy however, research forms the foundation of successful investment decisions. Taking the time to dive in deep and make sure the stocks you invest in display the above characteristics will greatly increase your potential profitability.


Stock Market Today: Stocks Sag Despite Slew of Earnings Beats

Wall Street finished the week on a down note Friday, ignoring even more sterling first-quarter earnings reports.

John Butters, senior earnings analyst for FactSet, says that 60% of the S&P 500’s components have reported Q1 earnings, and, so far, 86% of those companies have reported a positive earnings-per-share surprise.

“If 86% is the final percentage, it will mark the highest percentage of S&P 500 companies reporting positive EPS surprises since FactSet began tracking this metric in 2008,” he says.

Estimates have been strong, too. “The second quarter marked the second-highest increase in the bottom-up EPS estimate during the first month of a quarter since FactSet began tracking this metric in 2002, trailing only Q1 2018 (+4.9%),” Butters adds. (AMZN, -0.1%) was the latest to beat expectations, reporting profits of $15.79 per share that clobbered estimates for $9.45 and announcing a 44% surge in sales. Twitter (TWTR, -15.2%) earnings beat the Street as well, but shares plunged on disappointing numbers of “monetizable daily users” and Q2 revenue forecasts.

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The Dow Jones Industrial Average (-0.5% to 33,874), S&P 500 (-0.7% to 4,181) and Nasdaq Composite (-0.9% to 13,962) all finished in the red – and have effectively been flat over the past two weeks.

Ally Invest president Lule Demmissie suggests that investors are increasingly getting anxious. “The mindset has switched from ‘what could go right?’ to ‘what could go wrong?'” she says.

Other action in the stock market today:

  • Chevron (CVX, -3.6%) skidded after reporting first-quarter earnings. While Chevron beat on the bottom line, revenue fell short of expectations.
  • Fellow oil giant Exxon Mobil (XOM, -2.9%) also retreated today, as weakness in the energy sector overshadowed the company’s first profitable quarter in a year on stronger-than-expected revenue.
  • Skyworks Solutions (SWKS, -8.4%) was another post-earnings loser. The semiconductor name reported profit and revenue above estimates for its fiscal second quarter, but a tepid current-quarter outlook was the likely weight on shares.
  • The small-cap Russell 2000 dropped 1.3% to 2,266.
  • U.S. crude oil futures slumped 2.2% to settle at $63.58 per barrel.
  • Gold futures finished fractionally lower at $1,767.70 an ounce.
  • The CBOE Volatility Index (VIX) jumped 5.4% to 18.56.
  • Bitcoin prices plunged 4.5% to $55,470. $52,951. $57,031.60 (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)

And a quick reminder to Warren Buffett faithful that Berkshire Hathaway’s (BRK.B) annual meeting, which we preview here, will take place Saturday.

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A Boffo 100 Days for Biden

Despite Friday’s losses, President Joe Biden has now presided over one of the best market performances ever during an American president’s first 100 days in office.

For instance, the 8.6% gain for the Dow since inauguration is the best 100-day rally for any president since Lyndon Johnson, who was inaugurated in November 1963 and enjoyed a 9.2% run after 100 days. Many individual-share gains have been far more generous; 25 stocks have popped between 39% and 97% in Biden’s first few months.

And the S&P 500’s performance, on an annualized basis, puts Biden among the best presidents for investors of all time at this early stage.

Will that hold up throughout his presidency? We simply have no way of knowing. But what we do know is that Biden has clearly telegraphed his various policy proposals, from the stimulus package that cleared Congress in March to his recently proposed American Jobs Plan, and that allows investors to identify potential winners should the votes go the president’s way.

Read on as we take a fresh look at many stocks (and a couple of funds) that should continue to benefit if Biden continues to score policy wins.


7 Ways Biden Plans to Tax the Rich (And Maybe Some Not-So-Rich People)

President Biden’s latest economic “Build Back Better” package – the $1.8 trillion American Families Plan – isn’t kind to America’s upper crust. It would provide a host of perks and freebies for low- and middle-income Americans, such as guaranteed family and medical leave, free preschool and community college, limits on child-care costs, extended tax breaks, and more. But to pay for all these goodies, the Biden plan also includes a long list of tax increases for the wealthiest Americans (and, perhaps, some people who aren’t rich).

Whether any of the president’s proposed tax increases ever make it into the tax code remains to be seen. Republicans in Congress will push back hard on the tax increases. And a handful of moderate Democrats will probably join them, too. So, don’t be surprised if a fair number of the plan’s revenue raisers are dropped or amended during the congressional sausage-making process…or even if some new tax boosts are added.

While we don’t know yet which – if any – of the proposed tax increases will survive and be enacted into law, wise taxpayers will start studying the plan now so that they’re prepared for the final results (any changes probably won’t take effect until next year). To get you going in that direction, here’s a list of the 7 ways the American Families Plan could raise taxes on the rich. But even if you’re not particularly wealthy, make sure you read closely to see if you might be caught up in any of the proposed tax hikes, since a few of them could snare some not-so-rich people in addition to the one-percenters.

1 of 7

Increase the Top Income Tax Rate

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The 2017 tax reform law signed by former President Trump lowered the highest federal personal income tax rate from 39.6% to 37%. According to the White House, this rate reduction gave a married couple with $2 million of taxable income a tax cut of more than $36,400. President Biden wants to reverse the rate change and bring the top rate back up to 39.6%.

For 2021, the following taxpayers will fall within the current 37% tax bracket:

  • Single filers with taxable income over $523,600;
  • Married couples filing a joint return with taxable income over $628,300;
  • Married couples filing separate returns with taxable income over $314,150; and
  • Head-of-household filers with taxable income over $523,600.

(For the complete 2021 tax brackets, see What Are the Income Tax Brackets for 2021 vs. 2020?)

President Biden has said many times that he won’t raise taxes on anyone making less than $400,000 per year. But there have always been questions and a lack of clarity as to what this exactly means. For instance, does it apply to each individual or to each tax family? We still haven’t received a crystal-clear answer to that question. As a result, we’re not entirely sure if the president wants to adjust the starting point for the top-rate bracket to account for his $400,000 threshold. According to a report from Axios, an unnamed White House official said the 39.6% rate would only apply to single filers with taxable income over $452,700 and joint filers with taxable income exceeding $509,300. That would satisfy the president’s promise for single people, but it’s a bit trickier for married couples filing a joint return.

If the 39.6% rate kicks in on a joint return when taxable income surpasses $509,300, a married couple could end up being taxed at that rate even if both spouses earn well under $400,000 per year. For example, if Spouse A makes $270,000 and Spouse B makes $260,000, their combined income ($530,000) is over the $509,300 threshold. Using the 2021 tax brackets, they wouldn’t even make it into the 37% bracket (they’d be in the 35% bracket). So, each spouse would face a tax increase under the Biden plan, even though neither one of them earn over $400,000 per year.

To be fair, this type of “marriage penalty” exists for the current 37% tax bracket, since the minimum taxable income for joint filers is less than twice the minimum amount for single filers. However, the current brackets weren’t set up with a pledge not to raise taxes on anyone making less than $400,000 per year in the background. Perhaps the Biden administration will recognize this and eventually adjust the brackets to fix the marriage penalty issue.

2 of 7

Raise the Capital Gains Tax

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The American Families Plan also calls for an increase in the capital gains tax rate for people earning $1 million or more.

Currently, gains from the sale of stocks, mutual funds, and other capital assets that are held for at least one year (i.e., long-term capital gains) are taxed at either a 0%, 15%, or 20% rate. The highest rate (20%) is paid by wealthier taxpayers – i.e., single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and married couples filing a joint return with taxable income over $501,600. Gains from the sale of capital assets held for less than one year (i.e., short-term capital gains) are taxed at the ordinary income tax rates.

Under the Biden plan, anyone making more than $1 million per year would have to pay a 39.6% tax on long-term capital gains – which is almost double the current top rate. As noted above, that’s also the proposed top tax rate for ordinary income (e.g., wages). So, in effect, millionaires would completely lose the tax benefits of holding capital assets for more than one year. Plus, there’s the existing 3.8% surtax on net investment income, which would bump the overall tax rate up to 43.4% for people with income exceeding $1 million.

[Note: A summary of the American Families Plan states that application of the 3.8% surtax is “inconsistent across taxpayers due to holes in the law.” It then states that the president’s plan would apply the surtax “consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes.” No further details are provided, but this could mean expanding the surtax to cover certain income from the active participation in S corporations and limited partnerships.]

3 of 7

Eliminate Stepped-Up Basis on Inherited Property

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There’s another capital gains-related tax increase in the American Families Plan – eliminating the step up in basis allowed for inherited property. Under current law, if you inherit stock, real estate, or some other capital asset, your basis in the property is increased (“stepped up”) to its fair market value on the date that the person who previously owned it died. This increase in basis also means you can immediately sell the inherited property and avoid paying capital gains tax, because there’s technically no gain to tax. Why? Because gain is generally equal to the amount you receive from the sale minus your basis in the property. Assuming you sell the property for fair market value, the sales price will equal your basis…which results in zero gain (e.g., $1,000 – $1,000 = $0).

President Biden wants to change this result. Although details are scarce at this point, the president’s plan would nullify the effects of stepped-up basis for gains of $1 million or more ($2 million or more for a married couple) – perhaps by taxing the property as if it were sold upon death. There would be exceptions to the new rules for property donated to charity and family-owned businesses and farms that the heirs continue to operate. Other yet-to-be-determined exceptions could also be added, such as for property inherited by a spouse or transferred through a trust.

This is one of the tax changes that could impact Americans making less than $400,000 per year – perhaps only indirectly. Anyone, regardless of their own income level, can inherit property. If the heir’s basis is not adjusted upward any longer, that in essence is a tax increase on him or her. If the capital gains tax is levied before the property is transfer, that could mean there’s less to inherit – which could be considered an indirect tax on the person receiving the property. It can be a bit tricky, but there’s certainly the potential for someone inheriting property who makes less than $400,000 per year getting the short end of the stick because of this Biden proposal.

4 of 7

Tax Carried Interest as Ordinary Income

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In certain case, an investment fund manager can treat earned income as long-term capital gain. Known as the “carried interest” loophole, this lets the fund manager take advantage of the long-term capital gains tax rates, which are usually lower than the ordinary income tax rates he or she would otherwise have to pay on the income.

The American Families Plan calls for the elimination of the carried interest rules. The Biden administration sees this change as “an important structural change that is necessary to ensure that we have a tax code that treats all workers fairly.”

For a fund manager, this change would result in a potential tax increase on the affected income of up to 19.6%. For example, assuming the income is high enough, he or she could go from a rate of 23.8% (20% capital gain rate + 3.8% surtax on net investment income) to 43.4% (39.6% ordinary tax rate + 3.8% surtax on NII).

One would think that most, if not all, fund managers earn at least $400,000 per year. But if there are any of them out there making less than that amount, then this change could raise taxes on someone making less than Biden’s $400,000 per year threshold. Yeah, it’s not likely…but it’s theoretical possible.

5 of 7

Curtail Like-Kind Exchanges

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If you sell real property used for business or held as an investment and then turn around and buy other business or investment property that is the same type, you’re generally not required to recognize gain or loss for tax purposes under the “like-kind” exchange rules. Properties are of “like-kind” if they’re of the same nature or character. For example, an apartment building would generally be like-kind to another apartment building. This is true even if they differ in grade or quality.

The Biden plan would end this special real estate tax break for gains greater than $500,000. Since there are no income thresholds for the taxpayer, this change could potentially prevent someone making less than $400,000 per year (the $500,000 gain could be offset by other tax deductions, exemptions, or credits). Again, in most cases, wealthier people would be impacted by this change, but it’s possible that someone making less than $400,000 could also end up with a higher tax bill if this proposal became law.

6 of 7

Extend Business Loss Limitation Rule

picture of worried businessman looking at bad financial statementspicture of worried businessman looking at bad financial statements

Under the 2017 tax reform law, individuals operating a trade or business can’t deduct losses exceeding $250,000 ($500,000 for joint filers) on Schedule C. The excess losses may, however, be carried forward to later tax years. This rule is currently set to expire in 2027 (it was also generally suspended by the CARES Act for the 2018 to 2020 tax years).

President Biden’s American Families Plan calls for this business loss limitation rule to be made permanent. According to the plan summary, 80% of the affected business loss deductions would go to people making over $1 million. But, once again, someone making less than $400,000 could also incur a large business loss that wouldn’t be deductible after 2026 if the Biden proposal is adopted.

7 of 7

Increase Enforcement Activities

picture of yellow road sign saying "IRS Audit Ahead"picture of yellow road sign saying "IRS Audit Ahead"

Biden wants to increase tax enforcement activities aimed at high-income Americans – and give the IRS an extra $80 billion over a 10-year period to do it. While this really isn’t a tax increase, it certainly could result in wealthier Americans pay more in taxes. The idea is to “increase investment in the IRS, while ensuring that the additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000.” The IRS would also focus resources on large corporations, other businesses, and estates. The audit rate for Americans making less than $400,000 per year wouldn’t increase under the president’s plan.

The American Families Plan summary also states that financial institutions would be required to “report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are.” The income of wealthier Americans disproportionately comes from investments and small businesses, which are harder for the IRS to verify than other sources of income like wages. As a result, the Treasury Department estimates that up to 55% of taxes owed on some of these less visible income streams goes unpaid. And more of that unpaid tax is owed by people with higher incomes. The proposal would funnel additional information to the IRS about the hard-to-verify income without burdening taxpayers.

All-in-all, the White House claims that the increased tax enforcement efforts would raise $700 billion in revenue over a 10-year period.


Guide to merchant cash advances – Lexington Law

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Merchant cash advances are becoming a popular form of credit for all types of businesses. Once a tool offered mostly by credit card companies, merchant cash advance loans are now available to many businesses through payment processes including PayPal, Stripe and Square.

If you process payments regularly through certain services, that might make this form of credit readily available to you—but is it a good choice for your business? Find out more below.

What Is a Merchant Cash Advance?

A merchant cash advance is a type of debt tied to the revenue your business processes via credit cards or through a specific payment processor. Some providers, such as Stripe and PayPal, refer to this debt as working capital loans, but others simply call it a cash advance.

Depending on the provider of the merchant cash advance, this form of debt can have different impacts on your credit and future revenue.

How Does a Merchant Cash Advance Work?

While the details of merchant cash advances vary according to provider and contract, the basic principles are typically the same. You apply to borrow money via your merchant network or payment processor. That entity usually works with a partner bank to provide the loan.

Whether or not you get the loan and how much you’re approved for usually depends on how much revenue you generated within the past year or so. In some cases, the bank may also check your personal or business credit.

Once the loan is approved, you receive the funds quickly. In some cases, it’s less than 24 hours. Within a few days, loan repayments begin via holdback processes.

What Is a Holdback?

Holdbacks are the amount that is withheld from your revenue to pay back the merchant cash advance. When you accept one of these advances, you agree that the payment processor can take a certain percentage of your daily receipts processed through that agency in payment of the loan.

For example, if you borrow $20,000 and agree to a 10 percent holdback, then 10 percent of your revenue processed through that payment processor each day is held back until you pay off the loan. If you have $1,000 in revenue for a specific day, then you would only receive $900 of it.

Merchant Cash Advances: Pros

Merchant cash advances are popular with many businesses because they’re easy and convenient. Check out some of the benefits of this financing source below.

You Don’t Have to Risk Your Assets

This form of debt is tied to your future sales and isn’t secured by any of your assets. If your sales through the relevant channel are less than expected and you don’t meet the minimum payment requirements of the cash advance agreement, you might be billed or turned over to collections.

But, the merchant doesn’t have the ability to force the sale of your assets to recoup the debt in the same way it would if you used those assets for collateral.

You Can Get Money Quickly

Merchant cash advances are one of the fastest ways to access funds via credit. In some cases, once approved, these entities might fund your merchant account within minutes.

Because many banks determine whether you qualify for these advances based primarily on the strength of your revenue, you also usually aren’t required to provide a lot of documentation. The payment processor already has all the information they need about how much revenue you process through them.

You Can Use the Money However You Like

Typically, as long as you’re using the funds for business purposes, you can use the money as you like. You aren’t tied to a specific loan purpose or rules about whether the funds are for working capital or equipment investments.

Merchant Cash Advances: Cons

As with any form of debt, merchant cash advances aren’t perfect for every situation, and they do come with some downsides. Learn about the potential disadvantages below so you can make the most informed decision for your business.

It’s a Short-Term Solution

Merchant cash advances can be a great short-term solution for cash flow issues that are temporary in nature. For example, if you need to invest in more inventory for a holiday season before the higher revenues associated with that season roll in, merchant cash advances can help you do that.

But it’s still only a short-term solution, and if your business doesn’t generate enough income to cover expenses on an ongoing basis, cash advances are at best a metaphorical money Band-Aid that covers up real issues.

Before you rely heavily on these advances in the long term, make sure you fully understand your business’s financial state and are managing accounts and cash appropriately.

Your APR Could Be Very High

The debt obviously isn’t free. Often, merchant cash advances come with flat fees that are baked into the loan. The amount you pay might be determined in part by how much you borrow and what holdback rate you agree to.

For example, if you borrow $5,000 and agree to a 30 percent holdback to pay it off faster, you might pay a smaller fee than if you borrow $5,000 and agree to a 10 percent holdback, which would lead to a longer repayment time.

Fees for cash advances can be thousands of dollars, and when you convert those fees into an APR, you might be surprised that the cash advance isn’t quite as affordable as you thought.

Depending on the terms, how much you want to borrow and how you can pay it back, you might be better off with the APR on a traditional business loan if your credit is good enough to support one.

Merchant Cash Advance Companies Aren’t Federally Regulated

Companies that offer merchant cash advances aren’t typically federally regulated. That means you don’t always have the same protections as a consumer that you would have when dealing with a traditional lender. If you decide that this type of funding is right for your business, make sure you deal with known, reputable organizations to help protect yourself.

Is a Merchant Cash Advance Right for Your Business?

Whether a merchant cash advance is right for your business is a personal decision, but you can ask yourself the following questions to help you make this determination.

  • Can you afford to lose a certain percentage of your income through this revenue stream in the near future? If your profit margins are very low or you’re already barely covering bills, you may struggle once that percentage is being held back.
  • Are you using the cash advance to fund growth or get through a temporary, known issue, or are you using it as a Band-Aid for larger financial problems? If it’s the latter, a merchant advance may at most delay the problems a little bit, but it’s not likely to solve them.
  • Do you understand all the terms of the cash advance, and is this the most affordable way you can get financing for your business? Compare options and ensure that a business loan, a line of credit or another financing method isn’t an option or wouldn’t be less costly in the long run.

Merchant Cash Advances and Your Credit

How merchant cash advances are impacted by your credit—or impact your credit—depend on the way the lender operates. In many cases, you don’t need good credit because approvals are based on your historical revenue numbers.

Some lenders don’t check your credit at all, but others do, and that can lead to a hard inquiry. If you default on the loan, you might also end up with a negative collections item on your credit report. Balancing personal and business credit can be complex.

If you discover that your two worlds are colliding, consider Lexington Law’s credit repair services to help address any inaccurate negative items on your personal credit report.

Reviewed by Daniel Woolston, an Assistant Managing Attorney at Lexington Law Firm. Written by Lexington Law.

Daniel Woolston is the Assistant Managing Attorney in the Arizona office. Mr. Woolston was born in Houston, Texas and raised in Sugar Land, Texas. He received his B.S. in Political Science at Brigham Young University and his Juris Doctorate at Arizona State University. After graduation, Mr. Woolston worked as a misdemeanor and felony prosecutor in Arizona. He has conducted numerous jury trials and hundreds of other court hearings. While at Lexington Law Firm, Mr. Woolston dedicates his time to training paralegals and attorneys in credit repair, problem solving, and ethical and legal compliance. Daniel is licensed to practice law in Arizona, Oklahoma, and Nevada. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.


What Are Bonds – Basics of Investing in Corporate vs. Municipal Bonds

When building a balanced investing portfolio, you’ll want to include bonds in your asset allocation. These assets provide safety and stability, offering relatively slow growth and reliable returns.

As you begin to research which bonds to buy, you’ll realize there are several different types of bonds,  with the two most common being corporate bonds and municipal bonds.

What’s the difference, and what are the pros and cons that come along with investing in each type of bond? Let’s review the basics of bonds and then look at the two types side by side to help you choose which is right for you.

What Are Bonds?

Bonds are a form of fixed-income security known for providing a relatively safe store of value that are often used to offset risk in a well-balanced investment portfolio. Bonds are essentially loans given to the issuer by the investor, making them a debt instrument.

Investors make money by investing in bonds in one of two ways:

  • Coupon Rates. The most common return on investment derived from bonds is known as the coupon rate, or the interest rate on the bond. As with many other types of loans, the investor pays the full face value of the bond upon purchase and receives interest payments until the maturity date of the bond, at which point their initial investment is returned to them.
  • Premium. In some cases, bonds can be purchased at a discount to their face value. When the bond matures, the investor receives the full face value of the asset, providing a return on investment. For example, an investor may purchase a $1,000 bond for $950. Once the bond matures, the full $1,000 is repaid, leaving the investor with $50 in profits.

What Are Municipal Bonds?

Municipal bonds are commonly referred to as muni bonds, or simply munis. These bonds are issued by local governments, generally on the state or county level, and should not be confused with Treasury bonds, which are issued on a federal level and backed by the full faith and security of the U.S. federal government.

There are two common types of munis on the market today:

  1. Revenue Bonds. Revenue bonds are bonds issued by a municipality that are backed by the revenue generated from a specific project. For example, local municipal governments often issue water and sewer bonds, which are paid back with the revenue collected by the local government for the provision of clean drinking water and sewage services to residents within the locality.
  2. General Obligation Bonds. General obligation bonds aren’t backed by any project revenue. Instead, they’re backed by the taxing authority of the issuers at hand and paid back with tax dollars paid for local income taxes, sales taxes, property taxes, or any other tax revenue received by the local authorities that issued the muni.

What Are Corporate Bonds?

Rather than being issued by a local, state, or federal government, these bonds are debt instruments issued by corporations; they act as loans made from the bondholder to the corporation that issued the security. There are different categories of corporate bonds, including:

  • Collateral Trust Bonds. Collateral trust bonds use collateral other than real estate to secure the bond. For example, a company may secure bond issues with shares of stock, bonds, or other securities.
  • Debenture Bonds. Debenture bonds are corporate bonds that aren’t secured by any collateral. These bonds are generally issued by corporations with the best credit ratings, because companies with poor credit won’t be able to attract investors to these securities.
  • Convertible Debentures. Convertible bonds give the investor the ability to convert the bond into a specified number of shares at a specified time. For example, a company may sell a convertible bond that may be converted into 25 shares of its common stock after two years. Because these bonds can be converted into common stock, they are generally more attractive to investors, but it’s a tradeoff. These types of bonds generally come with low coupon rates.
  • Guaranteed Bonds. Guaranteed bonds are guaranteed not only by the corporation that issues them, but also by a second company. This greatly reduces the level of risk because another company guarantees to step in and fulfill the obligations of repaying the bond if the original borrower defaults.
  • High-Yield Bonds. High-yield bonds, also known as junk bonds, are bonds that have been rated by rating agencies to be below investment grade. These companies generally have significantly high credit risk and must offer higher yields in order to attract investors.

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Key Factors to Consider

There are several factors you should take into account when making a decision to buy either corporate or municipal bonds. Some of the most important of these factors include the quality of the entity issuing the bond, the tax implications, yield, liquidity, and how the money raised through the issuance of the bond will be used.

Here’s how corporate and municipal bonds compare:

Quality of Issuer

One of the first details you should look into before purchasing a bond or any other debt instrument is the quality of the issuer. Bond issuers will have different credit ratings, meaning that when you invest in the securities they’ve made available, you’ll be taking on credit risk.

There are two agencies that provide bond issuer credit ratings: Moody’s and Standard & Poor’s. Moody’s rating scale ranges from C to AAA, with AAA being the best possible rating. Standard & Poor’s follows a scale ranging from D to AAA, with AAA also being the best possible rating.

Higher ratings mean the bond is generally at lower risk of the issuer defaulting. After all, if the entity that issues the security fails to meet its obligations, those who invest in it stand to lose.

Corporate Bonds Come With Higher Default Rates

Corporate bonds are issued by corporations, and every corporation is different. Some make more money than others, some are managed by better management teams, and some will fulfill their obligations consistently while others fail.

Compared to municipal bonds, instruments issued by corporations come with a higher default risk, making it especially important to pay attention to how rating agencies rate the bond in question before you invest.

The good news is that even corporations rarely default. According to the Corporate Finance Institute, only about 0.13% of corporations that issue a bond will default.

Municipal Bonds Come With Lower Default Risk

Municipal bonds are generally an even safer bet than corporate bonds. According to, only about 0.08% of munis end up in default. Because these bonds are issued by local governments, entities known for top-notch credit quality, and generally rated AAA by S&P Global, investors can rest assured that they will be paid as agreed in the vast majority of cases.

Tax Implications

Any time you make money — whether from a side hustle, income from your day job, or investment returns — you typically have to pay taxes. However, not all income is taxed equally. Here are the tax implications you’ll need to consider when deciding whether to invest in corporate or municipal bonds.

How Corporate Bonds Are Taxed

Bonds issued by corporations are often called taxable bonds because earnings generated through these investments will be susceptible to both federal income tax and state income tax at the general income tax rate. The exact rate you’ll pay on your returns depends on your tax bracket.

How Municipal Bonds Are Taxed

Gains generated through investments in municipal bonds are always tax exempt on the federal level and are often tax free on the state level as well. The tax exemption is essentially a “thank you” from both federal and local governments for using your investment dollars to invest in projects that support your community.

While in the vast majority of instances, munis are exempt from state and local taxes, there are some cases in which this is not true. For example, if you purchase a municipal bond offered by a municipality other than the one in which you reside, your local authorities may choose to tax returns on that bond at the standard local income tax rate.

For example, if you live in New York City and you invest in a municipal bond issued by a government body in Florida New York City may charge you its normal local tax rate on the returns generated through that investment.


Returns on bonds are known as yields, and they vary wildly from one to another depending on the credit of the issuing entity, the maturity date of the bond, and other factors.

Generally speaking, here’s how yields compare between corporate and municipal bonds:

Corporate Bonds Generally Have Higher Yields

Local governments are highly trusted entities that are known for maintaining excellent credit. On the other hand, corporations will vary wildly in financial strength and creditworthiness.

Because corporations are usually less creditworthy than governments, bonds issued by corporations generally offer higher interest rates. After all, if the yields on corporate bonds were the same as the yields on government bonds, nobody would lend to riskier corporations. Who would want to buy a bond from a corporation when the same returns can be generated by investing in lower-risk munis?

Munis Provide Small Gains

Bonds issued by the government come with a lower default risk and therefore are the safer option for investors. However, when investing, safer options generally provide lower returns, and municipal bonds are no exception.

The extremely low default risk is considered in the pricing of these bonds, resulting in lower interest rates, smaller interest payments, and lower overall returns.

That is, until you account for taxes. For example, a high income earner may find that investing in municipal bonds is a better fit because they are exempt from state and federal taxes. By contrast, much of the returns on corporate bonds would be erased by taxes for an investor in the highest tax bracket.


Liquidity should always be a consideration for investors, whether they’re investing in bonds or any other asset. Liquidity refers to the ease or difficulty of converting an investment back into cash if desired.

Investors will find it difficult to convert bonds with low levels of liquidity into cash prior to their maturity dates, while bonds with high levels of liquidity are easy to offload and turn into spendable money on demand.

Corporate Bonds Are Often Less Liquid

While any form of bond can be sold on a secondary market, for a bond to be sold, there must be a buyer. In some cases, investments in high-risk bonds and other bonds issued by corporations may become illiquid if no other investors are interested in purchasing them.

Moreover, bond liquidity decreases in general in times of economic and market positivity. During bull markets, investors tend not to want their money tied up in fixed-income assets, instead focusing on the larger potential for returns offered by stocks.

Municipal Bonds Are Highly Liquid

The municipal bond market is very active, with these bonds often being easier to offload than bonds issued by corporations. That’s because muni bonds are issued by entities that are all but guaranteed to cover their obligations while providing tax benefits, making them attractive investments for high income earners.

How Funds Are Used

Investors are becoming increasingly concerned with the way in which their investments are spent. In fact, there’s an entire movement surrounding social impact investing, or investing in assets that use your funds to make an impact for causes you care about.

So, how exactly is your money spent when you invest in these two different types of bonds?

How Corporations Use Money Raised Through Bond Sales

Corporations may be looking to raise money for a wide variety of reasons. Some of the most common are:

  • Working Capital. It costs money to make money, and running a business can be a very expensive endeavor. In some cases, corporations will have their money tied up in inventory, new equipment, and other assets necessary to keep it moving in the right direction and need working capital for general purposes. Companies can issue bonds as a way to raise cash for their operational needs today by promising to repay investors in the future.
  • Acquisitions. Companies often acquire one another, merging two companies into one in transactions where the sum of all parts has a greater value than the original assets. However, acquisitions are expensive business, and corporations often need additional funding to execute merger and acquisition agreements.
  • Research. Research and development are major expenses for just about every publicly traded company on the market today. In some cases, corporations will issue bonds in order to fund this research.

How Municipalities Use Money Raised Through Bond Sales

The vast majority of bonds issued by government agencies are issued to fund public projects.

For example, when a major thoroughfare is riddled with potholes or your county’s library is in need of repair, governments often issue bonds in order to cover the costs associated with these projects. Governments can repay investors either through revenue generated by the project they fund or through tax revenues.

The Verdict: Should You Choose Corporate or Municipal Bonds?

As you can see above, there are several reasons to invest in both types of bonds, with each having its own list of pros and cons. As with any other investment vehicle, each type of bond will be suitable for different investors with different goals.

You Should Invest In Corporate Bonds If…

Bonds issued by corporations are best suited for bond investors who have a relatively low income tax burden and are looking to generate larger gains out of their safe-haven investments. These bonds are best suited for investors who:

  • Are In a Low Tax Bracket. Returns from bonds issued by corporations are taxed at the standard income tax rate, which varies wildly depending on the amount of money you earn on a regular basis. As your tax rate increases, bonds issued by corporations become less attractive than tax-exempt munis.
  • Are Willing to Accept Higher Levels of Risk. Based on historical default rates, corporations are nearly twice as likely to default on bond obligations than governments. As a result, corporate bond investors should be comfortable with a higher level of risk.
  • Want to Generate Larger Returns. Due to the higher risk associated with bonds issued by publicly traded companies, these bonds come with higher yields than bonds issued by governments.

You Should Invest In Municipal Bonds If…

Municipal bonds are worth considering if you’re an investor with a generally low risk tolerance, you’re a high income earner and tax implications mean quite a bit to you, or you’re interested in funding public projects with your safe-haven investing dollars. These bonds are best suited for you if:

  • You’re In a High Tax Bracket. High-income earners are taxed at a higher rate. Because bonds issued by the government are generally tax-free investments, they are well suited for investors who have a relatively high tax burden, acting not only as safe havens, but also tax havens.
  • You Have a Low Risk Tolerance. Municipal bonds are about as safe as investments come. Most local governments have never defaulted and enjoy a high credit rating; investments in these entities are very unlikely to result in default.
  • You’re Looking For a Store of Value. Investments in bonds issued by the government are a great store of value, which is what makes them so attractive as safe-haven investments. Even in times of economic concern, these bonds are known to generate returns rather than losses.
  • You’re Interested in Funding Public Projects. Government bonds are used to fund public projects that improve conditions for the community around you. Not only are these investments capable of generating returns and stability, there’s a feel-good effect involved in making these investments.

Both Are Great If…

If you aren’t in the uppermost income tax brackets, have a moderate tolerance for risk, and are looking to generate greater diversification across your safe-haven investments, you might invest in a mix of corporate and municipal bonds. This approach offers you a balance of the larger gains from corporate bonds and the tax benefits from munis. Investors who would benefit most from a mix between the two:

  • Want Higher Returns While Minimizing Tax Burden. By investing in both types of bonds, you’ll reduce your tax burden compared to corporate bond investments alone while enjoying higher earnings potential than provided by municipal bond investments alone.
  • Have a Moderate Tolerance for Risk. Bonds in general — with the exception of junk bonds — are relatively safe investments. However, some assets within the class are safer than others. Mixing corporate investments into your portfolio of municipal investments will lead to a slight increase in the overall risk level across your portfolio. As an investor, you’ll have to be comfortable with that added risk in exchange for the greater returns.
  • Want High Levels of Diversification. Diversification helps to reduce risk across investment portfolios. By investing in multiple assets across multiple categories, investors don’t have to fear detrimental declines should one, or even a handful, of these assets experience losses.

Final Word

Deciding between corporate and municipal bonds is a decision that should be based on your comfort with risk and your needs for yield and liquidity from your safe-haven investments

It’s also important to consider your returns from a tax perspective. Compare the yields on bonds issued by corporations to those on available munis to make sure the increased returns aren’t outweighed by the taxes you’d pay on your gains.

As is always the case, investors should take the time to research the bonds they’re investing in, considering historic returns, the issuer of the bond, and where the money they’re investing is going. By doing your research before making your investment, you’ll rest assured that they fall in line with your goals.


Stock Market Today: Powell’s Presser Pumps the Market’s Brakes

Federal Reserve Chair Jerome Powell gave investors reason for pause on Wednesday afternoon in a modestly lower day for stocks.

The Fed itself, following its latest two-day policy meeting, announced it would keep its benchmark rate near zero, stating that “indicators of economic activity and employment have strengthened” amid policy support and progress on COVID vaccinations.

“With no meaningful change to monetary policy or communication, this meeting was simply a message to market participants to sit back and observe as the economic recovery continues to unfold,” says Charlie Ripley, senior investment strategist for Allianz Investment Management.

But Powell managed to get traders to zigzag a bit in his ensuing press conference.

Investors cheered after he said it could be “some time” before the economy hits its targets, and that the Fed is “not thinking about thinking about tapering” (emphasis ours). But those quick gains reversed after Powell dropped an F-bomb – “froth” – when describing U.S. equity markets.

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All the major indices lost ground by the closing bell. The Dow Jones Industrial Average dropped 0.5% to 33,820, weighed down by Amgen (AMGN, -7.2%) and Boeing (BA, -2.9%), which both reeled in the wake of disappointing earnings reports. The S&P 500 (off marginally to 4,183) and Nasdaq Composite (-0.3% to 14,051) also finished in the red.

Other action in the stock market today:

  • Visa (V, +1.6%) was one of the Dow’s best performers. The payments giant reported stronger-than-expected fiscal second-quarter earnings and revenue, and said payments volume jumped 11% over the three-month period.
  • F5 Networks (FFIV, -9.1%) took a notable dive after the tech name last night reported earnings. For its fiscal second quarter, FFIV beat on both the top and bottom line, but the company’s guidance for the current quarter came in below estimates.
  • The small-cap Russell 2000 actually finished in the black, gaining 0.1% to 2,304.
  • U.S. crude oil futures jumped 1.5% to settle at $63.86 per barrel. Boosting prices to their highest finish in six weeks was data that showed a smaller-than-anticipated weekly rise in domestic crude inventories and a commitment from OPEC+ to continue easing back on oil production. 
  • Gold futures slipped 0.3% to $1,773 an ounce.
  • The CBOE Volatility Index (VIX) declined 1.2% to 17.35.
  • Bitcoin prices improved by 1.2% to $55,470. (Bitcoin trades 24 hours a day; prices reported here are as of 4 p.m. each trading day.)
stock chart for 042821stock chart for 042821

Run, Economy, Run!

Powell might keep Wall Street guessing, but economic improvement seems a settled matter.

In addition to the Fed’s nod of confidence, Barclays economists on Wednesday upwardly revised their official Q1 GDP growth forecasts by half a percentage point to 5.5% – aligning it with Kiplinger economists’ expectations.

“At the time of our previous Q1 GDP forecast revision (see US GDP Tracking , April 16, 2021), we were still missing some key source data for private inventory investment and international trade,” say Barclays economists. “We had viewed risks to those forecasts as being to the downside and refrained from fully reconciling our official forecast with the tracking estimates until these components were informed by hard data.

“With the March estimates in hand, we now fully reconcile our official forecast with the tracking estimate.”

Largely speaking, this continues to augur well for the prospects of so-called “recovery stocks,” barring any exogenic shocks. Yes, that’s bound to be a boon for restaurants, airlines, cruise lines and other consumer-facing businesses. But if it powers a vehicle or helps get something built, chances are its fortunes could continue to improve, too.

Take these five commodity picks, for instance, that include a wide range of mining and even forestry opportunities.

Oil stocks should be on the menu, too. U.S. crude oil has shot up by more than 30% year-to-date, translating to much more profitable operations for a host of energy plays that have spent years slimming down operations amid far leaner prices. These seven plays in particular have managed to attract a horde of bullish calls of late.

Kyle Woodley was long BA as of this writing.


How to Know When to Sell a Stock

For many investors, buying and researching what stocks to buy can be interesting. The desire to identify a winning stock pick taps into our human nature. We like to talk about what investments to integrate into our portfolios in the hope of turning a profit.

On the other hand, human nature can sometimes make it difficult for us to let go of shares, whether a stock has generated profits or delivered losses. It can feel like a tricky decision to make.

Here are some ideas to keep in mind if you are wondering when to sell a stock for profit or sell one at a loss.

Selling a Stock 101

Here are some steps to selling a stock:

  1. Whether by phone or via an online brokerage account platform, let your broker know which stock holdings you’d like to sell.

  2. Specify which order type you’re interested in. This can determine at what price level your stock is sold.

  3. Fill out any other information your broker requires in order to initiate the sale. For instance, some accounts may have a “time in force” option, or when the order expires. Keep in mind, the trade date is different from the settlement date. It usually takes two days for a trade to settle.

  4. Click “Sell” or “Submit Order.”

Recommended: What is Trade vs. Settlement Date?

Different Sell Order Types

Market Sell Order: This order type involves selling a stock immediately. The order will be executed without the investor specifying any price level to sell at. It’s important for investors to know however that because share prices are constantly shifting, they might not get the exact price they see on their stock-data feed.

Limit Sell Order: These limit orders involve selling a stock at a specific price.

Stop-Loss Sell Order: A stop-loss order is a level at which an automatic sell order kicks in. In other words, an investor specifies a price at which the broker should start selling, should the stock hit that level. This can also be referred to as a “Sell Stop Order.”

Stop-Limit Sell Order: An order that’s executed if your stock drops to a certain price, but only if the shares can be sold at or above the limit price specified.

Different Ways to Sell Stocks

There are desktop platforms and mobile phone apps that offer brokerage services. These are likely the most common ways individual or retail investors are selling stocks these days. However, another option is through a financial advisor. This is a person who has been entrusted to handle certain financial responsibilities and you can send them a stock sale order to execute.

Recommended: Are Financial Advisors Worth It?

5 Reasons You Might Sell a Stock

There are several reasons you might want to consider selling a stock. Here are a couple. Please note that none of these amount to a recommendation. They are ways to think about the decision.

1. Selling a Stock When You No Longer Believe in the Company

When you bought the stock, you presumably did so because you believed that the company was promising and/or that the price was reasonable.

If you start to believe that the underlying fundamentals of the business are in decline, it might be time to sell the stock and reinvest those funds in a company with a better outlook.

There are many reasons you may lose faith in a company’s underlying fundamentals. For example, the company may have declining profit margins or decreasing revenue, increased competition, new leadership taking the company in a different direction, or legal problems.

Part of the trick here is differentiating what might be a short-term blip in the stock price due to a bad quarter or even a bad year and what feels like it could be the start of a more sustained change within the business.

2. Selling a Stock Due to Opportunity Cost

Every decision you make comes at the cost of some other decision you can’t make. When you spend your money on one thing, the tradeoff is that you cannot spend that money on something else.

Same goes for investing—for each stock you buy, you are doing so at the cost of not holding some other stock.

No matter the performance of the stock you’re currently holding, it might be worth evaluating to see if there could be a more profitable way to deploy those same dollars. Exchange-traded funds (ETFs) that provide easy access to other asset classes–like bonds or commodities–as well as newer markets like different types of cryptocurrencies have also created competition to simply holding plain-vanilla company stocks.

This is easier said than done because we are emotionally invested in the stocks that we’ve already purchased. It may be a good idea to try and be as objective as possible during the evaluation and re-evaluation processes.

3. Selling a Stock Because the Valuation Is High

Oftentimes, stocks are looked at in terms of their price-to-earnings ratios. The market price per share is on the top of the equation, and on the bottom of the equation is the earnings per share. This ratio allows investors to make an apples-to-apples comparison of the relative earnings at different companies.

The higher the number, the higher the price as compared to the earnings of that company. A P/E ratio alone might not tell you whether a stock is going to do well or poorly in the future.

But when paired with other data, such as historical ratios for that same stock, or the earnings multiples of their competitors or a benchmark market, like the S&P 500 Index, it may be an indicator that the stock is currently overpriced and that it may be time to sell the stock.

A P/E ratio could increase due to one of two reasons. First, because the price has increased without a corresponding increase in the expected earnings for that company.

And two, because the earnings expectations have been lowered without a corresponding decrease in the price of the stock. Either of these scenarios tells us that there could be trouble for the stock on the horizon, though nothing’s a sure bet.

4. Selling a Stock For Personal Reasons

Though not an analytical reason to sell, it is possible that you may need to sell a stock for personal reasons, such as needing the money for living expenses or in the home-buying process. If this is the case, you may want to consider a number of factors in choosing which stock to sell.

You may make the decision based purely off of which stocks you feel have the worst forward-looking prospect for growth while keeping those that you feel have a better outlook. Or, you may make the decision based on tax reasons.

5. Selling a Stock Because of Taxes

A tax strategy shouldn’t outweigh making decisions based on investment principles. Still, some people may take the rules of taxation into account when making decisions about which stocks to keep and which stocks to sell.

When purchased outside of a retirement account, gains on the sale of an investment like stock are subject to capital gains tax.

It may be possible to offset some capital gains with capital losses, which are acquired by selling stocks at a loss. If you’re considering this strategy, you may want to consult a tax professional. One strategy that some people use is automated tax-loss harvesting, or purposely selling some investments at a loss in order to offset the tax consequences of another profit-generating investment.

When Not to Sell a Stock

Before discussing valid reasons you may want to sell a stock, let’s talk about what might not be a good reason to sell a stock: Making a knee-jerk reaction to the recent performance of that stock.

This can be classified as attempting to time the market. Even the experts cannot always buy at the bottom and sell at the top. Know that there is no perfect equation and that it is not science.

It can be tempting to sell a stock based on a big dip or bump in price, but the recent price movement alone might not give a complete picture of the current value of a stock.

It may help to remember that a stock is something that trades in an open marketplace and that prices shift due to the buying and selling of these stocks.

This is especially the case in the short term. Therefore, price changes may have as much to do with investor sentiment or outside forces (such as geopolitical or economic events or announcements) as they do with the health of the underlying company.

The Takeaway

If making the decision about when to sell a stock is causing you to lose sleep, it may be time to consult the help of a professional or seek out investment strategies that don’t require making such a decision.

You may want to differentiate between index funds and managed funds. Index funds mimic some particular part of the overall stock market and don’t involve an active manager. For example, an S&P 500 mutual fund (or ETF) holds all 500 companies held in the S&P 500 index. With the purchase of just this one fund, you are actually buying into the 500 stocks that are currently measured by the S&P 500 index.

With SoFi Invest®’s Automated Investing, a robo-advisor service, you can get an investment portfolio of ETFs built for you using your goals, risk tolerance, and investing time horizon as a guide. An alternative is SoFi’s Active Investing platform, which allows you to actively buy, sell, and trade stocks, ETFs and fractional shares.

Check out SoFi Invest today.

SoFi Invest®
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8 Great Vanguard ETFs for a Low-Cost Core

Vanguard is best known as one of the foremost pioneers of low-cost investing, including in the exchange-traded fund (ETF) space. It’s hardly alone in low costs anymore, of course. Providers such as Schwab, iShares and SPDR have all hacked away at each other with ever-shrinking fees.

But don’t sleep on Vanguard ETFs.

The provider isn’t always No. 1 among the cheapest index funds like it used to be, but it remains a low-cost leader across several classes. No matter where you look, it’s usually among the least expensive funds you can buy.

And expenses matter. Let’s say you put $100,000 into Fund A and another $100,000 into Fund B. Both funds gain 8% annually, but Fund A charges 1% in fees while Fund B charges 0.5%. In 30 years, that investment in Fund A will be worth a respectable $744,335. But Fund B? It’ll be worth $865,775. That’s about $120,000 lost to fees and missed opportunity cost as those expenses suck away returns that could compound over time.

Here, then, are eight of the best low-cost Vanguard ETFs that investors can use as part of a core portfolio. All of these index funds are among the least expensive in their class and offer wide exposure to their respective market areas.

Data is as of April 22. Yields represent the trailing 12-month yield, which is a standard measure for equity funds. All eight ETFs also are available from Vanguard as mutual funds.

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Vanguard S&P 500 ETF

Blue chipsBlue chips
  • Market value: $217.7 billion
  • Dividend yield: 1.5%
  • Expenses: 0.03%

Any portfolio can use a fund that tracks the Standard & Poor’s 500-stock index. Every year, investors are reminded that the majority of active portfolio managers are unable to beat their benchmark indexes, and that includes a wide swath of large-cap managers that simply can’t top the S&P 500.

And it does pay to merely match the index. The S&P 500 has returned an average of just less than 10% annually between 1930 and the start of 2021. Based on the “rule of 72,” the index has doubled investors’ money about every seven years during that time.

If you can’t beat ’em, join ’em.

The Vanguard S&P 500 ETF (VOO, $378.99), iShares Core S&P 500 ETF (IVV) and the SPDR Portfolio S&P 500 ETF (SPLG), at just 3 basis points each (a basis point is one one-hundredth of a percentage point), are the cheapest ways to track the S&P 500.

The S&P 500 is an index of 500 mostly large-cap companies (those with market values of more than $10 billion) and a few mid-cap companies ($2 billion to $10 billion in market value) that trade on U.S. exchanges. And the bigger the company is, the greater its representation in the index. Right now, Apple (AAPL), Microsoft (MSFT) and (AMZN) are the three largest companies in the index. Thus, they also represent the largest percentages of assets in S&P 500 trackers such as VOO.

Learn more about VOO at the Vanguard provider page.

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Vanguard High Dividend Yield ETF

Wad of cashWad of cash
  • Market value: $36.1 billion
  • Dividend yield: 3.0%
  • Expenses: 0.06%

Dividends are cash payments that many companies pay out (typically regularly, say, every quarter) as a way of rewarding shareholders for hanging on to the stock. This isn’t altruism – it’s a great way of compensating executives and other insiders who hold massive piles of shares. But ultimately, this benefit trickles down to all of us.

Each stock might deliver only a dollar or two every year, but over time, across many shares, that adds up in a big way. A Hartford Funds study shows that between December 1960 and December 2020, a $10,000 investment in the S&P 500 became $627,161 simply based on price returns alone. But the total return – that is, what you would accumulate from collecting dividends and then reinvesting them – was more than five times that at $3.8 million.

Dividends also are a critical source of income for retirees, who often rely on regular cash payouts to help pay their ongoing expenses.

The Vanguard High Dividend Yield ETF (VYM, $102.41) immediately sticks out among the best Vanguard ETFs for this purpose. VYM tracks an index of high-yielding, primarily large-cap stocks whose dividend yields are better than the market average.

While there are literally hundreds of ETFs that deliver more yield, most of them invest in other areas of the market that might be more income-friendly but either carry higher risk or little to no growth potential. VYM, however, currently provides shareholders with double the broader market’s yield while still keeping them invested in blue chips with some appreciation potential.

Top holdings include familiar large caps JPMorgan Chase (JPM), Johnson & Johnson (JNJ) and Procter & Gamble (PG).

Learn more about VYM at the Vanguard provider page.

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Vanguard Small-Cap ETF

Small puppySmall puppy
  • Market value: $44.9 billion
  • Dividend yield: 1.1%
  • Expenses: 0.05%

While dividends are treasured by people on the back half of their investing timeline, younger investors typically are expected to pile into growth to build their portfolios. And a common place to find growth is in small-cap stocks.

Small caps range between $300 million and $2 billion in market value, and it’s their very size that gives them so much growth potential. Just consider the effort it would take to double revenues from $1 million to $2 million … but then think about the effort it would take to double revenues from $1 billion to $2 billion. Naturally, the underlying shares of these high-growth companies tend to move higher, faster, than larger, less explosive companies.

Of course, smaller companies might only have one or two revenue streams, leaving them much more vulnerable to industry disruption. And if they get caught up in the tide of a broader-market swoon, they usually won’t have the cash hoards and access to capital that larger companies can use to keep their heads above water. But you can mitigate that risk somewhat by investing in numerous small caps at once.

The Vanguard Small-Cap ETF (VB, $219.21) holds about 1,460 mostly small-cap stocks. That huge portfolio shields you from single-stock risk – the potential for a big drop in one stock to have an outsize negative effect on your portfolio. Even the top 10 holdings, which include the likes of Ohio-based medical equipment company Steris (STE) and casino REIT VICI Properties (VICI), represent less than 1% of the overall portfolio.

While VB is among the best Vanguard ETFs you can own, it isn’t risk-free. In fact, it can be one of your most volatile fund holdings. That’s because small caps as a whole tend to struggle when investors become more defensive. But when risk appetites swell again, VB can help you enjoy the resulting growth without worrying about one company imploding and setting you back.

Learn more about VB at the Vanguard provider page.

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Vanguard Information Technology ETF

Concept art of technologyConcept art of technology
  • Market value: $44.2 billion
  • Dividend yield: 0.8%
  • Expenses: 0.10%

Certain areas of the market ebb and flow depending on market and economic conditions, so you might want to be a little more tactical with your holdings.

Utilities, for instance, tend to do well when investors are nervous because utility companies have dependable earnings that pay considerable dividends. Financial stocks typically do well when the economy is expanding and can benefit when interest rates rise, as that allows them to charge more for products such as loans and mortgages without paying out much more in interest to customers.

Technology is one of the better sector bets simply because it’s becoming more pervasive in every aspect of the human experience. We use more technology at home and at work. Other sectors – whether it’s utilities, health care or industrials – are incorporating more technology into their operations. Seemingly, there’s always somewhere that technology can keep growing.

As a result, technology ETFs have become a hot commodity, and Vanguard is among the lowest-cost ETF options in the space.

The Vanguard Information Technology ETF (VGT, $379.39) is the best Vanguard ETF for the job. This robust portfolio of about 330 stocks includes consumer-tech stocks such as Apple, software companies like Microsoft, component companies such as Nvidia (NVDA) and even payments-tech firms like Visa (V) and PayPal Holdings (PYPL). And that just scratches the surface.

Just remember: A number of seemingly technology-related stocks aren’t actually classified as tech stocks. For instance, companies such as Facebook (FB) and Google parent Alphabet (GOOGL) were once considered technology companies, but now are in the ranks of the communication services sector.

Learn more about VGT at the Vanguard provider page.

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Vanguard Real Estate ETF

real estatereal estate
  • Market value: $37.7 billion
  • Dividend yield: 3.5%
  • Expenses: 0.12%

Investors seeking out a more targeted income play than, say, the VYM have a few areas to explore, including the real estate sector.

Real estate investment trusts (REITs) are businesses that typically own and sometimes operate physical real estate such as office buildings or shopping malls, though sometimes they can hold real estate “paper” such as mortgage-backed securities. And their rules are designed to make them dividend-friendly. REITs aren’t required to pay federal income taxes, but in exchange, they must distribute at least 90% of their taxable income as dividends to shareholders.

The result is a typically high yield on many REITs, which explains why the Vanguard Real Estate ETF (VNQ, $97.21) is paying out more than double the S&P 500 in dividends right now.

The VNQ holds a diverse selection of real estate – apartment buildings, offices, strip malls, hotels, medical buildings, even driving ranges. Right now, its top holdings include telecom infrastructure company American Tower (AMT), logistics and supply-chain REIT Prologis (PLD) and data center REIT Equinix (EQIX).

The S&P 500 doesn’t provide investors with an even distribution of all its sectors, and real estate is woefully sparse in many large-cap funds, including S&P 500 trackers. Thus, while you might use some sector funds to occasionally amplify your holdings in a particular sector, it might behoove you to hold a REIT fund such as VNQ in perpetuity to improve your exposure to this income-happy part of the market.

Learn more about VNQ at the Vanguard provider page.

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Vanguard FTSE All-World ex-US ETF

  • Market value: $33.4 billion
  • Dividend yield: 2.0%
  • Expenses: 0.08%

There are several ways to diversify your portfolio. You can hold different types of assets (stocks, bonds and commodities), you can diversify by style (growth versus value), you can diversify simply by numbers (owning more stocks to lower single-stock risk) … and you can diversify geographically.

The Vanguard FTSE All-World ex-US ETF (VEU, $62.19) is a bargain-priced fund that plugs you into more than 3,500 stocks from nearly 50 countries across the globe. The primary focus is developed markets (countries with more established economies and stock markets, but typically lower growth) in areas such as western Europe and the Pacific, though a little more than a quarter of the fund is invested in emerging-market countries in regions such as Latin America and southeast Asia.

Right now, Japan (16.5%) makes up the largest country weight, followed by China (11.1%) and the U.K. (9.3%). But VEU’s investments span countries large and small, including even a little exposure to the likes of Poland, Colombia and the Philippines.

Also noteworthy is that this is a predominantly large-cap fund holding the likes of chipmaker Taiwan Semiconductor (TSM) and Swiss food titan Nestle (NSRGY). Many developed-market blue chips yield significantly more than their American counterparts; hence, VEU typically delivers more income than VOO.

For the record, numerous Vanguard ETFs fit the international bill depending on your specific needs. Income hunters can target big dividends in mostly developed countries via Vanguard International High Dividend Yield ETF (VYMI), while growth-oriented investors can trade the Vanguard FTSE Emerging Markets ETF (VWO) that targets markets such as China and India.

Learn more about VEU at the Vanguard provider page.

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Vanguard Total Bond Market ETF

  • Market value: $73.3 billion
  • SEC yield: 1.3%*
  • Expenses: 0.035%

Bonds – debt issued by governments, corporations and other entities that pay a fixed income stream to holders – are an important asset class for many investors. Typically, investors nearing or in retirement that are trying to protect their wealth lean on bonds. Of course, they also become uber-popular in times of unrest, such as the current stock market correction.

But bonds are problematic because they’re harder to invest in on an individual basis than stocks, and they’re far more difficult to research in large part because individual debt securities typically get little to no media coverage.

Many investors instead depend on funds for their bond exposure, which is where the Vanguard Total Bond Market ETF (BND, $85.44) comes in.

There are several targeted Vanguard ETFs that range from short-term corporate debt to long-term U.S. Treasuries, but if you’re looking for an inexpensive way to invest in a wide swath of the bond world, BND has you covered. Vanguard Total Bond Market holds a massive trove of more than 10,000 debt securities, including Treasury/agency bonds, government mortgage-backed securities, corporate debt and even some foreign bonds.

All of BND’s bonds have an investment-grade rating, which means that the major credit agencies perceive all of these to have a high likelihood of being repaid. It also has a duration (a measure of risk for bonds) of 6.6 years, which essentially means if interest rates rise by one percentage point, the index should lose 6.6%. Thanks to a Fed funds rate that’s still nearly zero, BND is paying out a lean 1.3% – just a little less than the S&P 500 right now.

* SEC yield reflects the interest earned after deducting fund expenses for the most recent 30-day period and is a standard measure for bond and preferred-stock funds.

Learn more about BND at the Vanguard provider page.

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Vanguard Emerging Markets Government Bond ETF

globe on stock newspaperglobe on stock newspaper
  • Market value: $2.7 billion
  • SEC yield: 3.9%
  • Expenses: 0.25%

Whether it’s stocks or bonds, you typically have to take on a little more risk to get a little more yield. The Vanguard Emerging Markets Government Bond ETF (VWOB, $78.97) is an example of how to make this kind of compromise without going overboard.

VWOB allows you to invest in the sovereign debt of about 50 developing countries, ranging from China and Mexico to Angola and Qatar. As you would imagine, when you invest in developing countries such as these, you’re going to take on a bit more risk. A little more than 60% of the fund’s debt holdings have an investment-worthy score, with the rest deemed “junk” by the major credit rating agencies.

The downside to junk? A higher risk of default. The upside? A higher yield. That’s why you’re getting so much more yield than BND right now.

You’re also defraying risk a bit by investing a basket of 730 holdings across so many countries. The effective maturity (how long before the average bond in the portfolio matures) of 13.4 years is a little on the long side, however, which means VWOB’s holdings are at greater risk from rising interest rates.

Learn more about VWOB at the Vanguard provider page.