Guide to Opening a Certificate of Deposit (CD) Account for Your Child

Guide to Opening a Certificate of Deposit (CD) Account for Your Child

A certificate of deposit (CD), or time deposit, can be a good option as a savings vehicle for a child. They allow you to deposit money for a specific term (e.g. a few months to a few years), and pay a fixed rate of interest.

CDs are relatively safe investments; they are federally insured for up to $250,000, and can offer minimal but steady growth for a period of years. They also offer parents the chance to explain the value of compound interest to their child.

Any adult can open a custodial account for a child who will assume management of the account when they reach adulthood. There are some pros and cons you should know before opening a CD account for a child, including how CDs compare to other investment vehicles for your child.

Understanding Certificate of Deposits

A certificate of deposit savings option is a bank product much like a savings account. The CD or account holder deposits the funds and agrees not to withdraw the money for a period of time, in effect, loaning the money to the bank. The bank pays the CD holder interest on the amount based on the total amount deposited and the maturity date of the CD (the term). Meanwhile, the bank invests the funds to make a return elsewhere.

You can open a CD with a bank or a credit union; this can be done in person or online. Most CDs are federally insured up to $250,000, no matter where the account is held.

If the account holder decides to withdraw the funds before the end of the term, they are typically charged an early withdrawal penalty, often forfeiting a portion of the interest. For example, if you deposit $1,000 in a 2-year CD, and you want to withdraw the funds after one year, you would only be entitled to the amount of interest earned up until that point, minus any fees or penalties.

CDs are considered a conservative investment, but the interest earned on a CD is minimal because they are low risk. When opening a CD account for a child, it’s important to consider whether the peace of mind and a lower return is what you’re after, or whether you’d like an investment that offers more growth (but possibly more risk).

Can a Child Have a Certificate of Deposit?

All things considered however, a CD for kids is a good choice because it can be a solid start to an investment plan for your child, and a way to help explain the dynamics of saving and what it means to earn interest on your principal deposit.

That said, minors cannot hold CDs. An adult must acquire a CD for the child and then transfer it when the child reaches adulthood. Depending on how much time you have, the custodial adult can also consider CD laddering, which is a technique where you hold several CDs with separate maturity dates to create steady returns.

Another point to remember about a CD for kids is that funds held in CDs and other savings accounts can affect a child’s eligibility for future financial aid. This is an important consideration, which could affect how much a family might pay for college tuition.

Who Would Own the CD?

A minor cannot apply for a CD, but they do own it. That means that the account cannot be given to anyone else.

An adult, usually a parent or legal guardian, can open a custodial account for a minor under the Uniform Gifts to Minors Act (UGMA). A custodial account allows one person to deposit funds into an account for another. The account can be transferred to the child once they reach adulthood. The age of adulthood is not federally mandated. However, in most states, it is age 18.

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How to Give a Certificate of Deposit to a Minor

Here’s how to set up a CD for a minor child, and transfer the account to them when they reach adulthood.

Select the Bank Where You Want to Purchase the CD

Decide which bank or credit union you want to hold the CD for your minor child. Compare interest rates based on the amount you intend to deposit and the term for the CD. Also, look at any penalties and fees the bank might charge.

List Yourself as the Custodian and the Child as the Owner

Fill out the form online or in person stating that you will be the custodian and the minor will be the owner of the CD. You will be asked to provide identifying information such as your Social Security number and the child’s Social Security number.

Deposit the Money in the CD

Deposit the desired amount into the CD account, taking into consideration how different amounts and terms might affect the interest rate paid.

Discuss What to Do With the Funds

Opening a CD account for a child presents a “teachable moment,” in that the minor child, who is the owner of the CD, needs to think through what the money can be used for once the CD reaches maturity. When the CD matures, you can cash it out, or renew the CD. If the child is of legal age at that point, the account is transferred to the child, you may have to contact the bank to remove your name from the account.

Recommended: What are no penalty CDs?

Are CDs a Good Choice to Help My Child Save?

CDs are among the low risk investment options, and a good way to help a child save. Anyone can open a CD, and they do not have to be related to the child.

That said, CDs are also low-yield investments, and funding a 529 college savings plan might offer more growth potential over time, if that’s your goal.

For longer-term savings, opening a Roth IRA may also be a good choice for parents hoping to provide financial security for their child.

Tax Implications of CDs for Kids

Opening a CD for kids isn’t complicated from a tax perspective. Taxes are typically due on earnings when the CD matures, but a child will likely be in a lower tax bracket than an adult, so the earnings could be taxed at a lower rate.

Specifically, if all of a child’s earnings are less than $1,050, including interest, dividends, or other earnings, the earnings are not taxed. Any earnings between $1,050 and $2,100 are taxed at the child’s rate. Any amount over $2,100 in earnings is taxed at the parent’s rate.

The custodian of a CD should be aware that they can give up to $15,000 each year to a child without owing gift taxes.

Financial Aid Implications of CD Earnings

There are some implications regarding financial aid. If a child is applying to college and has savings in a UGMA, those assets will have to be disclosed on the Free Application for Federal Student Aid (FAFSA). It may be that the student will have to pay more of their college costs than if their money had been put in a 529 college savings account.

Is a CD a good investment for a child? That depends on the length of time between the opening of the CD account, and when the child reaches the age of majority. CDs don’t earn a lot of interest, and a growth-oriented investment might earn more and grow faster if the child is younger.

If the child is a teenager, a CD will provide a guaranteed amount of money, and there is no risk of loss if the market drops.

Where Can I Find a CD for a Child?

Most banks and credit unions offer CDs, and they allow custodians to open accounts for a child. Online banks can be convenient and secure. Many offer competitive interest rates and low fees. Be sure to compare the interest rates and APY of each bank and be sure to understand the penalties that will apply if you withdraw the funds early.

The Takeaway

There are many ways to help your child save. Which one is the best depends on the ultimate use of the funds. CDs are safe, they are federally insured up to $250,000, and they may offer higher interest rates than regular savings accounts. However, other options to consider are a 529 savings account if your child is headed to college, a Roth IRA, or even a trust fund.

CDs are easy to open; most banks and credit unions offer these products. They earn interest on the amount invested as long as the funds are not withdrawn before the CD’s term. If the custodian does withdraw funds before the maturity date, the bank will charge a penalty.

Most online banks also offer CDs, and any adult can open a custodial account online for a child; they do not have to be a family member. The child is named as the owner of the account, and they will assume management of the account when they reach adulthood according to state laws.

When you’re comparing rates on different accounts, don’t overlook SoFi’s online banking app. This new all-in-one account outdoes the competition with no account or overdraft fees and up to 1.25% APY. And the new Checking and Savings is easy to manage from your phone or computer.

FAQ

What is the best way to save money for a child?

The best way to save money for a child depends on your goals. Some options include a savings account or a custodial CD, a 529 college savings account, a Roth IRA (for longer-term growth), or even a trust fund.

Can you buy a CD as a gift?

Yes. Under the Uniform Gifts to Minors Act (UGMA) any adult can gift a CD to a child.

Can I open a CD for my child?

Yes. Opening a CD account for a child is easy using a custodial account. The child will be named as the owner and you as the custodian. The owner (the child) will assume full legal ownership of the CD when they reach adulthood. The account cannot be given to anyone else but the named holder.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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Alternative Investment Guide: Definition, Types, Pros & Cons

Traditional investments include publicly traded stocks, bonds, and cash–funds that include a mix of the three. These investments typically appear in your workplace 401(k) plan and are most common in the portfolios of retail investors. Alternative investments are other asset classes that may add diversity to a portfolio.

Common alternative investments include gold, art, and real estate, but there are many different other alternative investments. Many investors like alternative, or non-conventional, investments because they perform independently of the stock market, potentially boosting returns and reducing overall losses during a market downturn. That’s particularly attractive during times of high volatility in the stock and bond markets.

However alternative investments also tend to have less liquidity, since they don’t always trade on public markets, and they can carry other risks as well, such as valuation challenges or increased use of leverage. So they’re not always appropriate for beginner investors. Let’s look into some popular alternative investment options, their potential benefits and downsides.

What Are Alternative Investments?

Alternative investments are assets other than stocks and bonds investors believe offer higher potential returns and low correlation to traditional assets like stocks and bonds. Securities regulators consider some alternative assets, like hedge funds and private equity, risky, making those assets available only to high net-worth, accredited investors.

There are, however, plenty of alternative assets, such as real estate and commodities, available to retail investors.

What Are Alternative Funds?

Generally speaking, alternative funds for the average investor refer to mutual funds or exchange-traded funds (ETFs) that use nontraditional investments and trading strategies to help them meet their fund objectives.

Alternative funds might invest beyond core investments—including stocks, bonds, cash, and cash equivalents—to focus on alternative investments such as real estate, commodities, loans, and even unlisted securities.

Alternative Funds Strategies

Alternative funds typically use a broad range of complex investment strategies. Some funds will use one single strategy, such as investing entirely in currencies, for example.

Others may use multiple strategies, and still others may be what are known as “funds of funds.” These special alternative funds can hold multiple funds that use multiple strategies. Here’s a look at some of the strategies alternative funds might use:

Hedging

Hedging is strategy to help protect investments from the risk that they will lose value. Many investing strategies use derivatives, which get their value from underlying assets such as stocks or bonds. For example, an option is one of the most common types of derivative, and gives investors the right to buy or sell a stock at a set price within a given timeframe.

Leveraging

At its most basic definition, leverage means debt. A leveraged fund is one that uses debt to increase gains within a short period of time. Leveraging can be a risky strategy because the fund that is taking on the debt is beholden to its creditors should its investments fail.

Short selling

Short selling is an investment strategy that allows investors to profit from securities when their value falls. To carry out a short sale, an investor first borrows a security from someone who owns it. The investor sells the security, and hangs on to the cash they make from the sale. At that point, the investor hopes that the price of the stock will fall, at which point they can buy back the same stock for less than they sold it for. Then they can return the shares they borrowed and keep the money that’s left over as profit.

Market neutral strategy

The aim of market-neutral funds is to provide stable returns in various market conditions. The fund does this by balancing a mix of short and long positions regardless of whether the market is moving up or down. Going “long” on a stock simply refers to buying a stock with the expectation that its value will rise. As a result, these funds can help insulate investors from market swings.

Opportunistic strategy

Investment strategies that change with market conditions as various opportunities arise.

Alternative Investment Strategies

There are several ways that alternative investments can make money. Each alternative investment is different, so investors should consider what their goals are when choosing assets to buy. Alternative investments typically fall into one of three categories:

•   Income: Some alternative investments provide a steady source of income, such as a rental property or a franchise.

•   Growth: This type of investment appreciates in value over time. Growth investments include assets like art and wine.

•   Balance: Some investments provide a balance of growth and income, such as a rental property, which might offer cash flow (in rent payments) as well as capital appreciation.

25 Alternative Investment Ideas

The following is not a full list of alternative investment options, but it does cover many of the more common options.

1. Real Estate

Real estate is one of the oldest asset classes available to investors. Aside from owning your home, you can invest in real estate by owning a rental property, flipping a house, investing in commercial real estate, industrial real estate, or other options. Investors can also buy into Real Estate Investment Trusts, or REITs.

Investing in real estate requires some knowledge, skill, and luck, but this popular alternative investment generally does well in all economic cycles.

2. Precious Metals

Precious metals such as gold and silver are popular alternative investments. Some investors consider them a safe store of value and a good hedge against inflation.

Investors can get exposure to precious metals by buying them directly or through exchange-traded funds (ETFs) or mining stocks. Precious metals have high liquidity levels, but they can still be very volatile during stock market drops.

3. Commodities

Individuals can invest in natural resources, including agriculture, metal, and energy. This includes raw materials such as coffee, sugar, beef, and corn. Generally, investors participate in commodity trading using futures contracts or ETFs.

4. Oil and Gas Limited Partnerships (LPs)

Oil and gas companies need ongoing investment to continue operating. Investors can buy into oil and gas LPs for exploration, land development, income, services, and support. While often featuring high yields, these investments can have complicated tax impacts.

5. Equity Crowdfunding

Investors can buy a slice of startup companies through equity crowdfunding platforms. This differs from traditional crowdfunding in that investors actually own equity in the company. This is considered a risky investment, because if the startup fails, investors may lose all of their money. On the other hand, if a startup does well, investors can see significant gains.

6. Art

Investing in art has traditionally been something only available to high net worth individuals, but there are some new ways to buy into this market through shares and crowdfunding. Interested investors can also buy into index funds that track with the art market.

7. Wine

High-end wine is an investment because wineries only produce a limited number of bottles produced each year. As the years go by, the number of bottles of each particular type of wine decreases, making each bottle more valuable, as long as demand for it continues. Wine can also be a play on climate change in that growing conditions could be negatively impacted by shifts in temperature and precipitation patterns.

8. Private Equity / Angel Investing

Individuals can invest in private companies through angel investing or private equity. This may be done individually or through a private equity firm. This is considered a high-risk investment, but if a private company goes public or gets acquired, these investments can do quite well.

9. Cryptocurrencies

A newer addition to the list of alternative investments, cryptocurrency is becoming widely accepted as a potential growth asset. As the cryptocurrency market matures, and regulation improves, more mainstream institutions are adding crypto to their portfolios. For investors who don’t want diversification within their crypto investments, there are now cryptocurrency ETFs available.

For those concerned about the volatility of crypto, stablecoins may provide a more palatable way to get exposure. Many of the most popular stablecoins are pegged to the U.S. dollar and priced at a constant $1 per token. Interest rates can range from 4% to 9%. They are not FDIC insured nor should be considered as safe as short-term bonds.

10. Collectibles

Collectible investments include coins, Beanie Babies, baseball cards, comic books, and other items that are only available in limited quantities. Collectibles are only worth what someone else is willing to pay for them.

So although a particular baseball card or vintage toy in its original box technically might be worth a certain amount, an investor will only make money if they can find someone willing to pay. Most collectibles are too common to actually have much value, but they can be fun to have. You can even invest in virtual collectibles via non-fungible tokens (NFTs).

11. Burial Plots

People interested in an alternative to traditional real estate can buy and sell burial plots in cemeteries for a profit. Burial plot investors purchase plots directly from the cemetery, hold onto them, and then sell them later, potentially at a higher cost.

12. Hedge Funds

A hedge fund is a pooled investment fund that invests in a wide range of assets, from public companies to commodities futures. They tend to invest in riskier assets, and sometimes they sell short— actually betting against a company’s success — which can be risky.

Most hedge funds require investors to be accredited, while others are available to all investors. The funds available to non-accredited investors are called funds of funds, because they are funds of hedge funds. This is an indirect way to invest in hedge funds.

13. Distressed Debt

Investing in distressed debt means buying up a company’s debt and hoping that they will be able to pay it back. Investing in distressed debt financial instruments is extremely risky because the issuing companies are failing or near bankruptcy, so there is a lower likelihood that they will be able to pay it back. However, if they do, the returns are typically high. A similar strategy could be investing in ETFs that hold very high yield fixed income securities.

14. Structured Notes

Structured notes are popular in Europe and are gaining traction in the U.S. A structured note is issued by a financial institution, and it has both bond and derivative components. The goal of a structured note is to payout an amount based on market conditions. Essentially, you often give up some upside to protect against severe declines.

An investor or advisor can create a structured note by tailoring the maturity of the bond piece, choosing among underlying assets, aiming for a certain payoff, and deciding on the level of protection they want. Fees have come down in this area, but they can still be pricey. Also, the structured note is backed by the credit of the issuer, so there is default risk.

15. Tax Liens

When property owners can’t pay property taxes and default on their loans, some municipal governments sell their tax liens in auctions. This allows the municipalities to collect the taxes owed plus additional interest. Investors who purchase these tax liens get the right to collect payments on the liens. In some cases, if the property owner can not pay, the lienholder could end up owning the foreclosed home.

16. Income-Based Repayment (IBR) Plans

With IBR loans, accredited investors can invest in offerings that have payouts based on student loan debts being paid back. Sites offering these products analyze schools and historical default rates in an attempt to ensure a high repayment rate.

17. Mineral Rights

People who own properties with minerals on them can sell the rights to mine those minerals to mining companies. Minerals can include things like diamonds, coal, or oil. Investors can also buy mineral rights and turn them into an income source.

18. Farmland

Like any real estate, farmland tends to increase in value over time. Owners of farmland can also sharecrop or lease out the land to earn income. This tends to be a long-term investment.

19. Timberland

The value of trees typically rises over time, so investors can buy into timberland with the goal of earning a profit after the harvest of the trees. Timberland is a real asset, and it has historically produced returns above those in the stock market.

20. Equipment Leasing

This long-term investment allows investors to buy into funds that own equipment that gets leased out to companies. This could include medical supplies, construction vehicles, or other types of equipment.

21. Trade Finance

When companies ship materials and products across borders, they have to pay import and export fees on those goods. To finance these costs, companies take out loans or get private investment. Investors can help finance these trades and get paid back with interest.

22. Marine and Aviation Finance

It’s extremely expensive to build and purchase ships and planes, so companies take out loans or get private investment to finance these operations. This type of investment can be risky, since changes in tariffs or the global economy can affect the market, but there is also significant potential for gains.

23. Film

A risky but fun investment, films have the potential to make a lot of money if they do well, but countless factors go into making them a success. Without an in-depth knowledge of the industry, film investing is very challenging to get into, though there are hedge funds and private equity funds that invest in films.

24. Franchise

One way for investors to bring in steady income and make a profit from growth is by buying a franchise. A few well-known franchises are McDonald’s, Taco Bell, and Dunkin’ Donuts. Investors can buy one or more locations, giving them an instant business with brand recognition. These franchises can bring in income and also make money when they’re sold. However, investing in franchises is a lot of work and not a passive investment.

25. Intellectual Property

Intellectual property (IP) includes things like images, inventions, and names. IP has the potential to continue increasing in value forever, but it’s challenging to choose which IP you want to invest in. One method is seeking out the next big brand, which is known as brand investing.

Pros of Alternative Investments

There are many reasons investors might consider adding alternative investments to their portfolio. They may offer protection from the volatility of the stock market and potential for high returns. Below are some of the benefits of alternative investments.

•   Increased portfolio diversification

•   Reduced risk exposure to the stock market

•   Potential for higher-than-average returns (for example, top hedge funds aim for returns between 25-30 percent)

•   Some alternative can hedge against inflation and rising interest rates

•   May have lower transaction costs

•   Appeal to an individual’s personal areas of interest, such as art or wine

•   A portfolio that includes some alternatives you hand-pick can make it easier to stick to a long-term strategy versus a one-size-fits-all portfolio chosen for you by someone else. This notion is based on the behavioral bias known as the endowment effect, which states that people value items they own more than the same asset someone else owns.

Cons of Alternative Investments

Like any investment, alternative investments come with their share of downsides. It’s important for investors to do their due diligence when researching and considering alternative investments.

These are a few cons to consider:

•   Often limited to accredited investors (net worth of at least $1 million or an individual income of at least $200,000) and qualified purchasers allowed to invest in riskier securities that are not registered with financial regulators

•   Can be less liquid than traditional investments due to limited availability of buyers and lack of a convenient market. Sometimes investors must hold their money in the asset for five or more years.

•   May have high minimum investment requirements

•   May have high upfront investment fees

•   May have less available data and transparency about performance

•   Often higher risk or volatility

•   May lack a clear legal structure since they aren’t required to register with the SEC

•   It can be difficult to determine value if the asset is rare and has few transactions

•   Vulnerable to fraud and investment scams since they are unregulated

•   Alternative assets may have lower levels of accessibility, since you may not find them in a 401(k) or traditional IRA account.

How Much Should Go Toward Alternative Investments?

It is really up to each individual to decide how much they want to allocate to alternative investments. Since alternative assets tend to be riskier investments, you may want to limit the total portion of your portfolio that you invest into any alternative asset class.

You must weigh your risk and return objectives as well as how much liquidity you desire. If you are willing to give up your money for many years, you might be able to capture what’s called the “illiquidity premium,” which is additional return due to the inability to convert the investment into cash. If you are risk-seeking and have ample liquidity with other investments, you can perhaps allocated more toward high-risk, high-return alternatives.

Alternative Investment Comparisons

Alternative Investments vs Traditional Investments

Alternative investments have important differences from traditional investments, but there are similarities, too. Traditional investments include positions in stocks, bonds, cash, and diversified funds. Alternatives, by contrast, commonly include real estate, commodities, private equity, and hedge funds. Cryptocurrency and non-fungible tokens are among the newer types of “alts” you can find.

Alternative investments usually exhibit lower liquidity versus stocks and bonds, less regulation, lower transparency, higher fees, and complicated tax impacts. They may also have limited historical performance for you to review.

Alternative assets have appeal as investment opportunities because they may help further diversify a portfolio of stocks and bonds, while also potentially increase returns.

Alternative Funds vs Hedge Funds

Investors may see alternative mutual funds and hedge funds discussed in the same breath, but there are some key differences between the two. Chief among them: The Investment Company Act of 1940 limits the operations of alternative mutual funds. These rules do not apply to unregistered hedge funds.

Protections under this act include limits on leverage and illiquid investments, diversification requirements, daily pricing, and rules governing the redeemability of fund shares. These regulars act as safeguards that protect consumers. Hedge funds are not subject to these limitations so they are free to pursue strategies not limited by the same regulations.

What’s more, hedge fund advisors are allowed to charge investors a “2/20” performance fee for advising the fund. This fee structure refers to a 2% annual management fee charged by the company for managing the assets and a 20% performance incentive fee charged against any profit made above a certain level. Alternative mutual funds and ETFs are not allowed to charge investors this kind of fee.

The Takeaway

Alternative investments have the potential for high returns and are a good way to diversify your portfolio and reduce risk. The sheer scope and variety of these investments means investors can look for one (or more) that suits their investing style and financial goals.

The first step for any investor who plans to add alternative investments to their portfolio is deciding which ones are of personal interest, and compliment their risk tolerance and investing goals. It’s important to research and do due diligence on any alternative investment option in order to make the best purchasing decisions and reduce risk. While some alternative investments are less accessible, others can be purchased through funds and ETFs.

One way to start investing in alternative investments is by using an online platform like the SoFi Invest® online brokerage. The trading platform lets members research and track their favorite stocks and assets, and build their portfolio right from their phone — buying and selling stocks, ETFs, cryptocurrencies, and more with a few clicks.

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For additional disclosures related to the SoFi Invest platforms described above, please visit https://www.sofi.com/legal/.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer to sell, solicitation to buy or a pre-qualification of any loan product offered by SoFi Lending Corp and/or its affiliates.
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Understanding Portfolio Diversification

Portfolio diversification involves investing your money across a range of different asset classes — such as stocks, bonds, and real estate — rather than concentrating all of it in one area. Studies have shown that by diversifying the assets in your portfolio, you may offset a certain amount of investment risk and thereby improve returns.

Taking portfolio diversification to the next step — further differentiating the investments you have within asset classes (for example, holding small-, medium-, and large-cap stocks, or a variety of bonds) — may also be beneficial.

Building a diversified portfolio is only one of many financial tools that can help mitigate risk and improve performance. But there is a lot of research behind this strategy, so it’s a good idea to understand how it works and how it might benefit your financial plan.

What Is Portfolio Diversification and Why Does It Matter?

When you invest in stocks and other securities, you may be tempted to invest your money in a handful of sectors or companies where you feel comfortable. You might justify this approach because you’ve done your due diligence, and you feel confident about those sectors or companies. But rather than protecting your money, limiting your portfolio like this could make you more vulnerable to losses.

To understand this important aspect of portfolio management, it helps to know about the two main types of risk.

•   Systematic risk, or market risk, is caused by widespread events like inflation, geopolitical instability, interest rate changes, or even pandemics like Covid. You can’t manage systematic risk through diversification, though; it’s part of the investing landscape.

•   Unsystematic risk is unique or idiosyncratic to a particular company, industry, or place. Let’s say, for example, a CEO is implicated in a corruption scandal, sending their company’s stock plummeting; or extreme weather threatens a particular crop, putting a drag on prices in that sector. This is unsystematic risk.

While investors can’t do much about systematic risk, portfolio diversification can help mitigate unsystematic risk. That’s because even if one investment is hit by a certain negative event, another holding could remain relatively stable. So while you might see a dip in part of your portfolio, other sectors can act as ballast to keep returns steady. This is why diversification matters.

You can’t protect against the possibility of loss completely — after all, risk is inherent in investing. But building a portfolio that’s well diversified helps reduce your risk exposure because your money is distributed across areas that aren’t likely to react in the same way to the same occurrence.

A Look at How to Build a Diversified Portfolio

You may have heard of the 60-40 rule, which is a basic rule-of-thumb for asset allocation: You invest 60% of your portfolio in equities and 40% in fixed income and cash. The formula varies according to your age, investment objectives, and/or risk tolerance. But this model reflects the basic principles of diversification: By investing part of your portfolio in equities and part in bonds/fixed income, you can manage some of the risk that can come with being invested in equities.

If you’re invested 100% in equities, for example, you’re more vulnerable to a market downturn that’s due to systematic risk, as well as shocks that come from unsystematic risk. By balancing your portfolio with bonds, say, which usually react differently than stocks to market volatility, you can offset part of that downside.

Of course, that also means that when the market goes up, you likely wouldn’t see the same gains as you would if your portfolio were 100% in equities.

By the same token, if your portfolio is invested 100% in bonds, you might be shielded from certain risk factors that plague equities, but you likely wouldn’t get as much growth either.

A 60-40 portfolio is an example of simple diversification (sometimes called naive diversification) — which means investing in a range of asset classes. Proper diversification would have you go deeper, and invest in several different stocks (domestic, international, tech, health care, and so on), as well as an assortment of fixed income instruments.

3 Tips for Building a Diversified Portfolio

To attain a diversified portfolio, it’s important to think through your asset allocation, based on your available capital and risk tolerance. It’s also important to spread investments out within each asset class.

Invest in a Range of Stocks or an Index Fund

Diversifying a stock portfolio requires thinking about a number of factors, including quantity, sector, the risk profile of different companies, and so on.

•   Quantity. Instead of owning shares of just one company, a portfolio may have a margin of protection when it’s invested in many stocks (perhaps dozens or even hundreds).

•   Sector. You may want to think about a range of sectors, e.g. consumer goods, sustainable energy, agriculture, energy, and so on.

•   Variety in the types of stocks you are selecting is also an important factor. A mix of small-, mid-, and large-cap companies can be valuable.

   You can further diversify by style. Some investors may opt for a mix of cyclical versus defensive companies, those closely tied to economic growth cycles versus ones that aren’t. Some investors may prefer value vs. growth stocks, companies that are underpriced rather than those that demonstrate faster revenue or earnings growth.

One common way to diversify a stock portfolio is to avoid picking individual stocks and invest instead in a mutual fund or ETF that offers exposure to dozens of companies or more. This is known as passive investing, as opposed to active. But it can be an effective way to add diversification.

Invest in Fixed Income

Bonds are a good way to diversify your portfolio because they perform very differently from stocks. Bonds tend to be less risky than stocks, but they aren’t risk free. They can be subject to default risk or call risk — and can also be subject to market volatility, especially when rates rise or fall. But bonds generally move in the opposite direction from stocks, and so can serve to counterbalance the risk associated with a stock portfolio.

Also, though bond yields can be lower than the return on some stocks, you generally can predict the amount you’ll get from bond investments.

Instead of being subject to market volatility, with bonds you know exactly how much you will receive and when. Your returns are likely to be lower, but bonds can.

You can diversify your mix of bonds, as well. High-yield bonds offer higher interest rates, but have a greater risk of default from the borrower. Short-term Treasury bonds, on the other hand, tend to be safer, but the return on investment isn’t as high.

You can consider green bonds, which typically invest in sustainable organizations or municipal projects, as well as municipal bonds, which can offer tax benefits. And you can expand your options, and create more diversification, when you invest in bond mutual funds, or exchange-traded bond funds.

Consider Investing in Real Estate

The housing market and equity market can influence each other — case in point: the 2008 recession, when widespread troubles in real estate led to a stock market crash. But they don’t always have such a strong relationship. When stocks or bonds drop, real estate prices can take much longer to follow.

Conversely, when the markets improve, housing can take a while to catch up. Also, every real estate market is different. Location-specific factors that have nothing to do with the broader economy can cause prices to soar or plummet.

These are all factors to consider when investing in real estate. In addition, there are different types of investments, like Real Estate Investment Trusts or REITs, which can provide access to certain markets.

How Portfolio Diversification May Protect Your Nest Egg

Although creating a well-diversified portfolio may help improve performance, the real aim is to minimize the impact of unwanted or unforeseen risk factors on your nest egg. To that end, researchers have run countless portfolio simulations, based on historic market data, to test the outcome of different asset allocation strategies.

Of course past performance is no guarantee that outcomes of those portfolio allocations will be the same in the future. But the research is interesting in that it suggests certain strategies might be effective in mitigating risk. For example, an all-stock portfolio tends to have an historic return that’s similar to the stock market return on average: about 9%.

But the highest and lowest returns for certain years might be difficult for some investors to stomach.

Introducing greater diversification, by way of bonds and fixed income instruments, actually can create a portfolio with similar returns, but lower volatility over time. The more low-risk investments enter the picture, the lower the overall return tends to be, but so is the amount of volatility.

Other Ways to Diversify Your Investments

While stocks, real estate, and bonds are among the most common investments, you can diversify your portfolio by putting money into alternative investments, including assets you think will accumulate value over time. For example, some people invest in art, wine, cars, or even non-fungible tokens (NFTs). Of course, knowing something about the area you want to invest in, or consulting experts, is a smart idea before you get started.

Another possibility is to opt for low-risk short-term investments, such as certificates of deposit (CDs). A CD is a savings account that requires you to keep your funds locked up for a set amount of time (typically a few months to a few years), in exchange it pays you a fixed interest rate that may be higher than a traditional savings account.

A diversification strategy can also involve holding some funds in cash, just in case the bottom falls out on other investments.

Another strategy for diversification is to invest in both U.S. and foreign stocks. Spreading out your investments geographically might protect you from market volatility concentrated in one area. When one region is in recession, you may still have holdings in places that are booming. Also, emerging and developed markets have different dynamics, so investing in both can potentially leave you with less overall risk.

The Takeaway

Portfolio diversification is one of the key tenets of long-term investing. Instead of putting all your money into one investment or a single asset class like stocks or bonds, diversification spreads your money out across a range of securities. Investors should make sure they vary their investments in a way that matches their goals and tolerance for risk.

If you’re ready to build your own diversified portfolio, you’ve come to the right place. When you open an Active Invest account with SoFi Invest, you can buy and sell stocks, ETFs, IPO shares, fractional shares, and more. Trading is easy using SoFi’s secure app on your phone or computer. And SoFi members have access to complimentary financial advice from professionals.

Get started on SoFi Invest today.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
SOIN0622014

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What Is a Crypto Wallet? A Guide to Safely Storing Crypto

What Is a Crypto Wallet? A Guide to Storing Crypto Safely

A crypto wallet is a place to store your cryptocurrencies when you’re not using them. Knowing how to properly secure your assets with a crypto wallet will go a long way toward helping to keep your crypto safe from hackers. Cryptocurrency wallets come in different forms. By learning about the types of cryptocurrencies and wallets, deciding how much money you want to put into cryptocurrencies, and knowing how you plan to use them, you can decide which type of wallet is best for you.

What Is a Crypto Wallet?

As cited above, a crypto wallet is a place to store your cryptocurrencies. You may think of a crypto wallet as being similar to how a tangible leather wallet holds fiat currency — your $1s, $5s, and $20s. When secured properly in wallets, cryptocurrencies are difficult to counterfeit or steal.

To understand what a crypto wallet is, it’s important to know how cryptocurrencies are created and used. So, we review cryptocurrency briefly below.

What Is Cryptocurrency? — A Recap

A cryptocurrency is a virtual — that is, almost-real — type of “money,” or exchange of value. Cryptocurrencies, whether they’re used as an exchange of value, or not are not physical coins or bills, or even images or digital files. Cryptocurrency (crypto) consists of computer code that is cryptographically secured. There are many types of cryptocurrencies, which, typically, are built on blockchain technology.

The Importance of Mining

Mining is a process that’s fundamental in creating and validating cryptocurrencies. But mining Bitcoin, for example, is more than just creating bitcoin tokens. Mining also plays a critical role in the decentralized global system by which miners validate and secure all Bitcoin transactions — and earn bitcoin themselves.

How does mining Bitcoin work — i.e., how does a miner actually mine Bitcoin? It goes back to the blockchain technology that Bitcoin is built on. Although the word mining implies that the reward lies in extracting a precious ore — or creating a Bitcoin — in fact miners rely on super-charged computer systems to validate blocks of digital transactions to do their crypto mining.The miners are part of a community, project, platform, or network instead of a company or firm. These crypto projects sponsor the launch of new crypto coins.

Decentralization: A Defining Feature of Crypto

Cryptocurrencies are part of a decentralized finance (DeFi) system, which originally meant that there should be no third party involved in financial transactions between individuals. Traditionally, the financial services sector in the United States has relied on centralized authorities such as banks, financial advisors, and clearinghouses as go-betweens.

The concept of decentralization is a defining feature of cryptocurrency.

The network of any one cryptocurrency is just a ledger of amounts and transactions, similar to what you see when you log into your bank account. You can view your holdings, and send and receive crypto via both public and private addresses.

How Buying and Selling Cryptocurrency Works

There are dozens of online exchanges where you can purchase and sell cryptocurrencies. Many of these allow you to link your bank account directly to the exchange, so you can easily transfer between U.S. dollars and crypto. You also may transact with individuals directly using wallet applications or paper wallets. QR codes are commonly used as a quick way to send crypto, or you can send out your full public address.

Note: Depending on which cryptocurrency you are using, it can take as much as an hour for your transaction to finish. Don’t panic if your funds don’t transfer immediately.

Yes, SoFi offers crypto trading.

With 30 coins to trade from and no-fee crypto purchases1, our app offers a secure way to trade crypto 24/7.

Get up to $100 in Bitcoin after your first trade2.


Types of Cryptocurrency Wallets

Cryptocurrency wallets are used to store your private keys. These keys must be matched with your public keys to move crypto from one wallet to another. Some wallets can be used to store multiple types of cryptocurrency, while others can store only one kind of crypto.

Some wallets are convenient for buying and selling crypto quickly, but other kinds of wallets may be more secure.

Public and Private Wallets

Your public wallet address is what you give to someone when you want them to send you cryptocurrency. Anyone can look up that address and see how much you hold and your past transactions. However, the address is simply a string of numbers and letters, so unless someone knows it belongs to you, your holdings and transactions are anonymous. This transparency combined with anonymity is part of what appeals to many people about cryptocurrencies.

Crypto holders do not publish their private wallet address, nor do they give it to anyone. That would be like giving someone the password to your email account or a password-protected document containing personal information. The private key is what’s used to sign off on transactions. So, if someone has access to both your public and private keys, they now have control over your holdings. However, the chances of a hacker matching up potential public and private keys are highly improbable because of the way they’re encrypted.

The two main categories of crypto wallets are hardware (“cold”) and software (“hot storage”) wallets.

Hot Crypto Wallets (Software)

When you choose to have a crypto exchange store your holdings, the exchange uses what’s called a “hot wallet.” The reason it’s hot is that it’s connected to the internet at all times — so, always online, hot with electricity.

Web-based wallets:

You can access hot storage wallets on the internet by logging into exchanges or wallet-service providers. Some popular hot storage exchanges include Coinbase and Gemini. These exchanges hold your private keys. Although they implement the best, multi-layered, and most current security tech possible, exchanges are still vulnerable to hacks.

In general, it’s best not to store large amounts of crypto in online exchanges. You can move your crypto holdings into the exchange when you want to send or sell it, but otherwise it’s wise to keep it in cold storage.

Desktop wallets:

Desktop wallets are types of software that you can download onto your PC or Mac desktop computer. They store and manage your private keys, just like any other wallet would, but they frequently have a few more features than you’ll find in other types of wallets. These are somewhat more secure, as they often give you access to your private keys, and are stored directly on your computer.

However, if your computer or phone breaks or gets lost, your crypto holdings could be lost along with it. In the unfortunate event that this does happen, if you have written down both your public and private keys, you likely would be able to recover your funds. If given the option, it’s always a good idea to keep a second copy of your address written down in a safe place.

Mobile wallets:

A mobile wallet is software that you can install on your mobile smartphone if you intend to manage your finances from your hone. As with an old-fashioned physical wallet (with all the slots), mobile wallets can store the important cards you use frequently — your credit, debit, ID, gift, and transit cards. In this way, you can conduct transactions using a mobile device instead of a physical card.

Hot Wallets (Software): Advantages and Disadvantages

Advantages

Disadvantages

Don’t need to worry about losing your private keys; exchange keeps them If your computer or mobile device is lost or stolen, you could lose all your funds
Reputable exchanges have state-of-the-art security Even with top-notch security, exchanges are still vulnerable to hacks because always online
Immediate access to your funds; convenience; always online Third-party dependent; most exchanges don’t give access to your private keys; you never have full control of your account
Ease of use; good for beginners to store small amounts of crypto Centralized servers sometimes cannot handle unlimited number of transactions: possibility of periodic delays

Cold Wallets (Hardware)

Cold storage hardware wallets are offline, and may be in the form of a physical hardware device or a piece of paper. Yes, you can simply write down your public and private address on a piece of paper and use that to recover your funds.

Although vulnerable to loss, fire, or flood, a paper wallet is arguably the most secure type of wallet, as it doesn’t connect to any device, software, or network which could be broken or compromised. You can even create a printout of a QR code for your cold wallet to make it easier to use.

It’s possible to generate paper wallets from reputable sources such as Bitcoinpaperwallet and BitAddress. If you do use one of these services, make sure you go through the steps to disconnect from the internet as you create the wallet. Once your wallet is created, you might want to laminate it or seal it in a plastic bag to store in a safe place.

Popular hardware wallets include the Trezor and Ledger devices. These are physical devices that plug into your computer, and store your private keys. This way, your private keys are never online, but you can still conveniently buy and sell digital assets without needing to upload an address from a piece of paper. Both Trezor and Ledger support multiple types of cryptocurrencies.

You can also purchase physical coins, such as physical Bitcoin (BTC) that come preloaded with a certain amount of the cryptocurrency. These can be useful for offline trading, may be a fun collector’s item, and generally are created with a tamperproof seal to hide the private key. A further delineation of hardware wallets are hardware security modules (HSMs). These devices handle only the keys and signing of data, but not the signing of complete transactions.

Cold Wallets (Hardware): Advantages and Disadvantages

Advantages

Disadvantages

Very secure; don’t connect to any device, software, or network that could become compromised Vulnerable to loss, fire, or flood, or other kind of destruction
Highly portable; can carry with you, attached to any computer Might need technical knowledge to set up
Come with option to set up recovery phrase Longer transaction times; can be expensive

Storing and Securing Your Crypto Wallet

The most important part of selecting your wallet type is making sure that your stored crypto and your crypto transactions are secure. Many of the most popular exchanges store your private keys for you, but don’t give you access to them. Though it can be convenient to hold crypto in exchanges, not having access to your private keys could make you vulnerable to hackers and even scams. So, you may decide to use cold storage for your crypto holdings, moving only as much into hot storage as you plan to send or sell at any given time.

Part of trying to keep your information secure might include being wary of any emails you receive that come from exchanges or wallet apps. Check the email address to make sure it’s legitimate, and never send your private keys over email; even better, don’t send them at all. It’s always wise to double-check all of your transactions before hitting the send button, And check the website address when you visit an exchange or online wallet. Fake email and website addresses can look convincingly similar to the real ones.

Crypto Wallets: A Quick Review

Although cryptocurrency wallets are used mainly to store and transact cryptocurrencies, there are other uses for this technology. Tokens or digital information stored on a blockchain could represent anything from goods in a supply chain, or a plane ticket, to a set of dental records. Blockchains can also store personal information such as your identity, tax history, voting information, and more. In the future, we may find ourselves using blockchain-based wallets in many facets of our lives.

Before you purchase cryptocurrencies, think about how you plan to use and access them. If you’re planning to purchase crypto and hold it for the long term, a secure cold storage wallet is probably your best option. If you want to access cryptocurrency from your phone, you may want to download an app from a particular exchange or wallet provider.

Also, think about which cryptocurrencies you want to hold and look into the options available for each coin. Doing your due diligence on both the coin and the wallet might help keep you from getting scammed. Despite that some exchanges have been hacked, there are plenty of reputable options to choose from.

Getting Professional Insights and a New Cryptocurrency Wallet

Cryptocurrencies are still new, volatile, and risky. For this reason, you may not be ready to start trading them.

Or, you may be excited about jumping in early while the industry is young. Either way, gaining professional insights into your investment strategy and using state-of-the-art tools can help you build a strong, diversified portfolio.

On SoFi Invest, investors can start trading cryptocurrencies with as little as $10. New SoFi members who buy at least $50 worth of crypto in the first seven days are eligible for a bonus of up to $100 in bitcoin. See full terms at sofi.com/crypto. You may trade cryptocurrencies like Bitcoin, Cardano, Dogecoin, Ethereum, and Litecoin, 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors’ crypto holdings secure from theft.

Get started trading crypto on SoFi Invest today.

FAQ

What is a paper crypto wallet?

Typically, a paper wallet contains both a public and a private key, which is what you need to trade on your crypto account. These keys are just two strings of characters and two quick response (QR) codes that you may print out on a piece of paper — thus, a paper wallet. They are considered noncustodial cold-storage wallets, which means that you control the keys yourself (some are controlled by crypto exchanges), and they are not connected to the internet.

The cryptocurrency industry no longer recommends using paper wallets, as today there are safer methods of storing and trading crypto. Some still like them, however, and you can still create a paper wallet if you wish.

Do you need to have a crypto wallet to trade cryptocurrencies?

The short answer is “Yes.” Crypto wallets are not flat, physical objects with storage slots that can be made of fine leather or synthetics. But, as with your fiat cash, cryptocurrency is an asset that needs to be stored somewhere safe when you’re not using it. So, in that sense, you do need to have a place to keep your crypto holdings — whether we call it a “wallet,” or something else.

You do have choices, however, as there are various types of wallets. Among the first things to decide is whether you want to keep your own wallet or have a crypto exchange store your holdings for you. Some believe that a good goal might be to work toward keeping your crypto holdings yourself, in a cold storage wallet. But, if you’re just getting started in crypto, or if you lose or misplace things easily, then it might be wise to keep the crypto in hot storage with a regulated, reputable exchange.

What kind of crypto wallet is safest?

One way of answering this question would be to search the internet for “safer, safest, secure, and most secure,” crypto wallets. You’ll find that more than 150 makes and models of hardware wallets return — some with pictures of the small electronic devices and some with just descriptions. You also may choose to limit your search to your favorite news feeds, crypto portals, and so on — whatever’s most comfortable. Just make sure that they are professional and reputable sites.

You could start with say the first 10 hits that come up. Check to see if any makers’ names recur repeatedly. Then, note how many times those repeat names are cited as being the “best for security,” or something like that.

Once you’ve determined that XYZ model has the best security features, then you may consider other qualities that are important for you, personally. After safety, the sites rank the wallets’ features in terms of “the best for…” android users, advanced users, digital storage, beginners, mobile users, Bitcoin-only investors, desktop, simplicity, durability, coins supported, accessibility, software, and — well you get the picture.

In this way, you can be assured that you’ve found a highly rated safe wallet, with the extra features and conveniences you want and need.

How easy is setting up a cryptocurrency wallet?

In this instance, the word “easy” is highly relative. While setting up a crypto wallet might be relatively easy for a developer or engineer, it might be confusing, frustrating, or downright painful for those who are not technically minded.

As a newcomer to crypto, can you even imagine reading through a set of small-print instructions that are long, dense with new terminology that you may not know, and which might even have been (poorly) translated from another language!

For some, the concept of a crypto wallet may indeed be easier to grasp than its setup instructions. But here’s where technology might come to our rescue — in the form of online videos! It could be a good place to start. And written instructions don’t usually come with devices any more anyway. So, browse the internet for videos about how to set up XYZ crypto wallet in a style that appeals to you, and enjoy!


Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.


Photo credit: iStock/Elena Perova
SOIN19149

1 SoFi will assess a fee for each crypto transaction outside of automatic direct deposit purchases. For more information, visit sofi.com/invest/buy-cryptocurrency.

You need both a SoFi Invest crypto account and a SoFi Invest active investing account to get access to no-fee crypto purchases with direct deposit. Active investing and brokerage services are provided by SoFi Securities LLC, Member FINRA/SIPC. Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

2 Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on June 30th, 2022. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100
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All You Need to Know About IRA Certificates of Deposit (CDs)

All You Need to Know About IRA Certificates of Deposit (CDs)

An IRA CD is simply an individual retirement account (IRA), in which the investor has opened one or more certificates of deposit (CDs).

In other words, an IRA CD is a traditional, Roth, or other type of IRA account where the funds are invested at least partly in CDs.

Investing in CDs within an IRA can offer some tax advantages. Keep reading to learn more how an IRA CD works, the pros and cons of using an IRA CD, and whether it might make sense for your retirement plan.

Recommended: What is an IRA and How Does it Work?

What Is an IRA CD?

An IRA CD is an IRA where your money is invested in certificates of deposit. To understand why this might make sense as part of an overall retirement plan, let’s consider the two types of accounts.

How Does a CD Work?

A CD or a certificate of deposit is a type of savings or deposit account that offers a fixed interest rate for locking up your money for a certain period of time, known as the term. An investor deposits funds for the specified terms (usually a few months to a few years), and cannot add to the account or withdraw funds from the account until the CD matures.

In exchange, for keeping your money in a CD, the bank will offer a higher interest rate compared with a traditional savings account. But the chief appeal for retirement-focused investors is that CDs can provide a steady rate of return, versus other securities in a portfolio which may entail more risk.

Recommended: How Investment Risk Factors into a Portfolio

How Does an IRA Work?

An IRA or individual retirement account is a tax-advantaged account designed for retirement planning. There are different IRA types to choose from, such as a traditional IRA, Roth IRA, or SEP IRA. By contributing to this type of account, you can have your money grow tax-free or tax-deferred, depending on the type of IRA you open.

Think of an IRA as a box in which you place your retirement investments. With an IRA, investors have the flexibility to invest in a variety of securities for their portfolio.

For this reason, it might make sense for some investors to include CDs as part of their asset allocation within the IRA.

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How Do IRA CDs Work?

If you choose to put your retirement money in an IRA, you have the chance to choose investments that might include stocks, mutual funds, bonds — and also CDs. By investing in CDs within an IRA, you can add to your portfolio’s diversification. Unlike equities, CDs can offer a steady rate of return.

Also by investing in an IRA CD, you no longer have to pay taxes on the interest gains, and the money can grow taxed deferred.

But if you withdraw funds prior to the CD’s maturity date, you will face an early withdrawal penalty. Once the IRA CD matures, you can either renew it or take your money and invest it in the stock market for potentially higher returns.

How much can you contribute to an IRA CD? It depends on the type of IRA account you choose. Traditional and Roth IRAs have contribution limits of $6,000 per year, or if you are 50 or older, the contribution limit is $7,000 per year. The contribution limits for SEP IRAs are typically higher.

If you choose an IRA CD with a bank or credit union backed by the Federal Deposit Insurance Corp., or FDIC, your money in the IRA CD is insured for up to $250,000. This means that if the bank goes under for any reason, your retirement funds are covered up to that amount.

Which CDs Can You Use in an IRA CD?

Opening an IRA CD is only the first step. Next, investors must consider which investments to place in the account.

You can invest in stocks, bonds, and other investments — including CDs. You can choose to put your money in various types of CDs, including short-term CDs, long-term CDs, jumbo CDs.

You can even create a CD ladder within your IRA to help provide steady income.

Pros of IRA CDs

IRA CDs have unique characteristics that can benefit account holders as they think about how to handle their retirement funds:

•   Compared to investing in the stock market where investment returns can be volatile and unpredictable, IRA CDs are low-risk cash investments that guarantee a fixed return.

•   With an IRA CD, there are similar tax benefits that come with a traditional IRA. Investors can enjoy tax benefits such as growing your account with pretax dollars while having your earnings accumulate tax-deferred until you reach retirement.

Cons of IRA CDs

There are some cons associated with IRA CDs to keep in mind:

•   With an IRA CD, you have to keep your money locked away for a period of time that varies depending on the maturity date you choose. During this time, you cannot access your funds in the event you need capital.

•   In the event you decide to withdraw cash prior to the IRA CD’s maturity, you will incur early withdrawal penalties. After age 59 ½ there is no penalty for withdrawing cash.

•   While putting your retirement funds in an IRA CD is a safer and lower-risk option than investing in the stock market, the returns can be quite low. If you are in retirement and are concerned about the stock market’s volatility, an IRA CD could be a safer option than other securities, but if you are many years away from retirement, an IRA CD may not yield enough returns to outpace inflation over time.

Who Should and Should Not Invest in an IRA CD?

IRA CDs are a safe way to invest money for retirement, but are best suited for pre-retirees who are looking to de-risk their investments as they approach retirement age.

However, if you are many years away from retirement, an IRA CD is probably not the best option for you because they are low-risk and low-return retirement saving vehicles. In order to see growth on your investments you may need to take on some risk.

If you decide an IRA CD is the right option for you, you also must determine if you are comfortable with keeping your money stowed away for a period of time. Account holders can choose the length of maturity that best suits them.

Typical Process for Opening an IRA CD

The first step is to open an IRA at a bank, brokerage, or other financial institution. Decide if a traditional, SEP, or Roth IRA is right for you. You can set up the IRA in-person or online. Once you open an IRA account, now you can buy the CD.

Choose the CD that fits your minimum account requirements and length of maturity preference. Typically, the shorter CD maturity, the lower the minimum to open the account. When considering maturity, you also should compare rates. The longer the maturity the higher the rate of return.

The Takeaway

If you’re looking to add diversification to the cash or fixed-income part of your portfolio, you might want to consider opening an IRA CD — which simply means funding a CD account within a traditional, Roth, or SEP IRA. Bear in mind that CDs offer very low interest rates, though, and your money might see more growth if you chose other securities, such as bonds or bond funds.

That said, because CDs are very low risk and you earn a steady rate of return, it might make sense for your retirement plan to give up growth potential in favor of that steady return.

If you’re thinking about how to earn a steady rate of return on your savings, consider an account with SoFi. When you open a high yield bank account, you pay no SoFi account fees or management fees. With the special “vaults” feature you can separate your savings from your spending, and earn competitive interest on your total balance (account holders with direct deposit can earn 1.25% APY).

Get started today.

FAQ

What is the difference between an IRA CD and a regular CD?

A standard CD is a separate account you open at a bank or credit union. An IRA CD is where the CD is funded within the IRA itself.

With a regular CD you withdraw the funds penalty free when the CD matures. With an IRA CD you can withdraw the funds penalty free starting at age 59 ½, per the rules and restrictions of the IRA.

What happens when an IRA CD matures?

Once your IRA CD matures, you’ll receive the principal plus interest. Then you can either leave the IRA CD as is or renew it. You cannot withdraw the funds from an IRA CD until age 59 ½, as noted above.

Can you lose money in an IRA CD?

It’s unlikely as IRA CDs are low-risk. If you open an IRA CD with a federally insured institution, your funds can be covered up to $250,000.


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