Apr
02
2024

What Is an Interval Fund?

By | invest, Investing, Terminology | Comments Off on What Is an Interval Fund?

Interval funds are closed-end mutual funds that don’t trade publicly on an exchange. These funds are so named because they offer to repurchase a percentage of outstanding shares at periodic intervals.

Investing in interval funds can be attractive since they have the potential to generate higher yields. However, they’re less liquid than other types of funds, owing to the restrictions around when and how you can sell your shares.

How Do Interval Funds Work?

Interval funds are alternative investments that work by making periodic repurchase offers to shareholders according to a schedule set in the fund’s prospectus.

Shareholders are not obligated to accept the offer but if they do, they receive a share price that’s based on net asset value (NAV). Repurchase intervals may occur quarterly, biannually, or annually.

These funds typically rely on an active management strategy, which is designed to produce returns that outpace the market. But because of the types of investments held by interval funds, as well as the fund’s structure, the trade-offs are potentially higher risk and far less liquidity.

đź’ˇ Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

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What Types of Assets Do Interval Funds Hold?

Interval funds may hold a variety of underlying investments that are different from what traditional funds may invest in, which is partly why interval funds are considered a form of alternative investing. An interval fund’s prospectus should include a detailed account of its underlying assets to help investors better understand what they’re investing in.

Recommended: Alternative Investment Guide

Private Credit

Private credit refers to lending that occurs outside the scope of traditional banking. Rather than going through a bank for a loan, businesses gain access to the capital they need through private lending arrangements.

Also referred to as direct lending or private debt, private credit helps to fill a void for businesses that have been unable to secure traditional financing. Private credit can also offer investors an opportunity, as private credit generates returns for investors in the form of interest on the loans.

Real Estate

Real estate can be an attractive investment for investors who are seeking an inflationary hedge with low correlation to the stock market. Interval funds may invest in private real estate investment trusts (REITs), private real estate funds, commercial properties, and land. Some real estate interval funds focus on real estate debt investments.

Private Equity

Private equity refers to investments in companies that are not publicly traded on an exchange. Private equity funds pool capital from multiple investors to purchase companies, overhaul them, and sell them at a profit. This type of investment can prove risky, as there are no guarantees that the company’s value will increase but if it does, the rewards for investors can be great.

Venture Capital

Venture capital is a form of private equity in which investors provide funding to startups and early-stage businesses. In exchange, investors receive an equity stake in the company. Venture capitalists have an opportunity to make their money back once the company goes public by selling their shares.

Infrastructure

Infrastructure interval funds invest in the mechanisms, services, and systems that make everyday life possible. Investments are focused on:

•   Transportation

•   Energy and utilities

•   Housing

•   Healthcare

•   Communications

These types of investments can be attractive as they tend to produce stable cash flow since a significant part of the population relies on them.

How Does the Repurchase Process Work?

An interval fund makes repurchase offers according to the schedule set in the prospectus. Shareholders should be given advance notice of upcoming repurchase offers and the date by which they should accept the offer if they prefer to do so. The fund should also specify the date at which the repurchase will occur.

In terms of the timing, it may look something like this:

•   Once shareholders are notified of an upcoming repurchase offer, they have three to six weeks to respond.

•   After the acceptance deadline passes, there may be a two-week waiting period for the repurchase to occur.

•   Investors who accepted the repurchase offer may have up to a one-week wait to receive proceeds owed to them.

The price shareholders receive is based on the per share NAV at a set date. A typical repurchase offer is 5% to 25% of fund assets. interval funds may collect a redemption fee of up to 2% of repurchase proceedings. This fee is paid to the fund to cover any expenses related to the repurchase.

What’s the Difference Between an Interval Fund and a Closed-End Fund?

Closed-end funds issue a fixed number of shares, with no new shares issued later (even to keep up with demand from investors). An interval fund is categorized as a closed-end fund legally. However, interval funds don’t behave the same way as other closed-end funds. Specifically:

•   There’s typically no initial public offering (IPO)

•   Interval funds do not trade on an exchange

•   Investors can purchase shares at any time

The third point makes interval funds more like open-end funds, but there’s a key difference there as well. Interval funds can hold a much higher percentage of assets in illiquid investments than open-end funds.

What’s the Difference Between an Interval Fund and a Mutual Fund?

Interval funds are different from traditional mutual funds, which are also a type of pooled investment. With a mutual fund, investors can buy shares to gain exposure to a wide variety of underlying assets. The fund may pay out dividends to investors or offer the benefit of long-term capital appreciation.

Investors can buy mutual fund shares at any time, but unlike an interval fund, these shares trade on a stock exchange. The fund’s share price is set at the end of the trading day. Mutual funds can offer greater liquidity to investors since you can buy shares one day and sell them the next day or even the same day.

Interval funds don’t offer that benefit as you must wait until the next repurchase date to sell your shares. An interval fund may also be more expensive to own compared to a mutual fund, as there are often additional costs that apply.

Investor Considerations

If you’re interested in alternative investments and you’re considering interval funds, there are some important things to keep in mind.

•   What is the minimum investment required and can you meet it?

•   How does your risk tolerance align with the risk profile of the fund you’re weighing?

•   What is the schedule for repurchase offers and how does that align with your liquidity needs?

•   How much will you pay to invest in the fund?

•   What is your target range for returns?

Due to their illiquid nature, it may not make sense for the average investor to tie up a large part of their portfolio in interval funds. It’s also important to keep in mind that the minimum investment may be in the five-figure range, which is often well above the minimum needed to trade mutual fund shares.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Potential Upside

The potential upside of interval funds is the possibility of earning returns that beat the average return of the stock market. Depending on the fund’s strategy and underlying investments, it’s possible to realize returns that are substantially higher than what you might get with a traditional open-end mutual fund.

Interval funds can add diversification to a portfolio and give you access to illiquid investments that might otherwise be closed off to you. While there are risks involved, interval funds may be less susceptible to market volatility as they have a lower correlation to stocks overall.

Although lack of liquidity may be problematic for some investors, it can benefit others who may be tempted to give in to investing biases. Since you can’t easily sell your shares, interval funds can prevent you from making panic-driven decisions with this segment of your portfolio.

Recommended: Why Portfolio Diversification Matters

Possible Risks

Much of the risk associated with interval funds lies in their underlying investments. If a fund is investing in private credit or venture capital, for example, and the companies the fund backs fail to become profitable, that can directly impact the returns you realize as an investor.

As mentioned, liquidity risk can also be an issue for investors who don’t want to feel locked into their investments. Even if you’re comfortable with only being able to redeem shares at certain times, there’s always market risk which could negatively affect the NAV share price you’re offered.

The Takeaway

Interval funds can be rewarding to investors, but they’re more complex than other types of mutual funds or exchange-traded funds. Weighing the pros and cons is an important step in deciding whether to invest. You may also consider talking it over with a financial advisor before adding interval funds to your portfolio.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Are interval funds a good investment?

Interval funds may be a good investment for investors who are comfortable with higher risk exposure given the potential to earn higher rewards. The complexity of these alternative investments may make them less suitable for individuals who are just getting started with building a portfolio.

What’s the difference between an interval fund and an ETF?

An exchange-traded fund (ETF) is a type of mutual fund that trades on an exchange like a stock; an interval fund is a closed-end fund that doesn’t trade on an exchange. ETFs can offer exposure to a pool of different investments, including some of the same illiquid investments that an interval fund may hold. But whereas the majority of ETFs are passively managed, most interval funds have an active portfolio manager.

Do interval funds pay dividends?

Interval funds can pay dividends though they’re not required to do so. When collecting dividends from an interval fund or any other type of mutual fund, it’s important to understand how that income will be treated for tax purposes.

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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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.

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.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.

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Apr
02
2024

Private Equity vs Venture Capital

By | Growing Wealth, invest, Investing | Comments Off on Private Equity vs Venture Capital

Venture capital and private equity funds are two different ways that companies, funds or individuals invest in other companies. While the two types of funds share some similarities, there are also key differences that you’ll want to be aware of. While many private equity and venture capital funds are privately held, some are open to individual investors.

A private equity fund might use its managerial, technological or other expertise to invest in one specific company, hoping to turn it around and improve its profitability. That would allow the fund to sell their investment for a healthy return. Venture capital firms often invest in early-stage companies or startups. They provide capital funds to these companies in exchange for a portion of the company’s equity.

Key Points

•   Private equity and venture capital are two ways that people, funds or companies invest in other companies.

•   Private equity funds often invest in a small number or even just one company at a time, usually a mature company.

•   Venture capital funds generally invest in many different companies that are early in their journey to profitability.

•   While many private equity and venture capital funds are privately held, there are some that are publicly traded and open to individual investors.

What Is Private Equity?

Private equity refers to investing in companies that are not publicly traded. Unlike investing in public equities (such as by purchasing index funds or shares of stock of companies listed on a public stock exchange), private equity investors put their money into privately-held companies.

While you might not think of private companies as having shares of stock in the same way that publicly-traded companies do, most incorporated companies do have shares of stock. A small company might only have a hundred or even less shares, all owned by the initial founders of the company.

A private company that is more established, on the other hand, might have hundreds of thousands or even millions of shares owned by a wide variety of people. The stock of private companies might be owned by the founders, employees or other private equity investors.

đź’ˇ Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alternative funds through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

What Is Venture Capital?

Venture capital refers to investors and money that is invested into early-stage companies in the hope that they will generate an above-average return on investment. Venture capital investing usually refers to funds or individuals that give money to early-stage companies, but the investment can also be via managerial or technical expertise.

Venture capital money is often invested over a series of “rounds.” Initially there might be an “angel” round or “seed” round, and then Series A, B, C and so on. In each round, companies receive funding from venture capital investors in exchange for a percentage of the company’s stock, at an agreed-upon valuation.

Generally, the earlier the round of venture capital investment, the lower the valuation. This allows the earliest investors to potentially have the highest return on investment, since they also carry the largest amount of risk.

Venture capital and private equity may serve as examples of alternative investments for certain investors.

Key Differences Between Private Equity and Venture Capital

While private equity and venture capital both refer to companies or funds that invest in companies, there are a few key differences that you’ll want to be aware of:

Private Equity Venture Capital
Generally invests in already established companies Often invests in early-stage companies and/or startups
Often purchase entire companies and work to improve their profitability Purchase a portion of the companies they invest in
Generally invest more money and focus on fewer companies Firms tend to spread their money around — investing relatively fewer amounts of money in more investments

Advantages and Disadvantages

When you compare private equity vs. venture capital investing, there are a few similarities as well as advantages or disadvantages to investing in both.

In most cases, comparing the advantages and disadvantages of venture capital vs. private equity depends on your own specific situation or goal. What might be an advantage for one investor could be a disadvantage for an investor with a different risk tolerance or financial profile.

One potential advantage of investing in private equity is that private equity firms often concentrate their money in a small number of firms. This might allow the private equity investors to concentrate their expertise into improving the profitability of those companies. However, some might consider this a disadvantage, since you might lose some or most of your investment if the company is not able to turn things around.

Similarly, venture capital investors typically invest in a number of startups and early-stage companies. One advantage of investing in this manner is that you may see outsized returns if the company succeeds. However, a related disadvantage is that many companies in these early stages do not succeed, potentially wiping out your entire investment.

In that sense, it’s a high-risk, high-potentialy-reward area of investment.

Common Misconceptions

One common misconception about private equity vs. venture capital is that only investors with significant net worth can invest in these fields. While it is true that most actual private equity and venture capital investors are those with access to significant amounts of capital, there are also many private equity or venture capital funds that sell shares of the funds themselves to retail investors.

This may allow even regular individual investors to take part in investing in venture capital or private equity.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Takeaway

Private equity and venture capital funds are two different ways that companies invest in other companies. While they share a lot of similarities, there are also some key differences. One big difference is that generally, private equity funds invest more money in fewer companies while venture capital funds often invest (relatively) smaller sums of money in many companies.

While most private equity and venture capital funds are privately held, there are some that are publicly traded and open to individual investors.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Is private equity better than venture capital?

Private equity (PE) and venture capital (VC) are two forms of investing in other companies, and when comparing the difference between VC and PE, it isn’t really the case that one is better than the other. Instead, it will depend on your own specific financial situation and/or risk tolerance. You can also consider alternative investments to both private equity and venture capital.

Which is the riskier option?

Both private equity and venture capital carry some level of risk. In one manner of speaking, venture capital is riskier, since many of the early-stage companies that they invest in will not succeed. However, most venture capital funds mitigate that risk by investing in many different companies. One successful investment may pay off the losses of tens or even hundreds of unsuccessful venture capital investments.

Are there private equity or venture capital funds available to buy?

Many private equity and venture capital firms are targeted towards investors with significant assets and/or a high net worth. However, there are some funds that are publicly traded and thus available to individual investors. Make sure that you do your own research before investing in any one particular private equity or venture capital fund.

Photo credit: iStock/franckreporter
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Apr
02
2024

Can a Roth IRA Be Used for College Expenses?

By | Going to College, invest, Investing | Comments Off on Can a Roth IRA Be Used for College Expenses?

A Roth IRA can be used to pay for college expenses, and it is possible to do so without incurring taxes or penalties. However, there are disadvantages of using a Roth IRA for college, and it’s important to weigh the pros and cons.

A Roth IRA is designed to help individuals save for retirement. While you can also use a Roth IRA for college expenses, you’ll want to understand the potential ramifications.

Here’s what you need to know about using a Roth IRA for college, plus other college savings options, to help make the best decision for your situation.

Can You Use a Roth IRA for College?

You can use a Roth IRA to help pay for college. However, as mentioned, a Roth IRA is primarily a vehicle for saving for retirement. You contribute after-tax dollars to the account (meaning you pay taxes on the contributions in the year you make them), and the money in the Roth IRA grows tax-free. You can generally withdraw the funds tax-free starting at age 59 ½. However, if you withdraw the money early, you may be subject to a 10% penalty.

But there are some ways to make early withdrawals from your Roth IRA to help pay for college without being penalized. Because you contribute to a Roth IRA with after-tax dollars, you can withdraw the contributions (but not the earnings) you’ve made to a Roth at any time without paying a penalty. You could then use those contributions to help pay for college.

Just be aware that there are annual contribution limits to a Roth IRA. In tax year 2023, you can contribute up to $6,500 (or $7,500 if you’re 50 or older), and in 2024 you can contribute up to $7,000 ($8,000 for those 50 or older). How much you’ve contributed will affect how much you have in contributions to withdraw, of course.

Another way to use a Roth IRA to pay for college without being penalized is by taking advantage of one of the Roth IRA exceptions that allow you to withdraw money from your account early. One of the exceptions is for qualified higher education expenses.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Do You Have To Pay Penalties if You Use a Roth IRA for College?

Typically, if you take out money from your Roth IRA before age 59 ½ , you will be subject to taxes and penalties. However, IRA withdrawal rules grant a few exceptions to this rule, and one of the exceptions is for qualified higher education expenses.

If you pay qualifying higher education expenses to a qualified higher education institution for your child, yourself, your spouse, or your grandchildren, you won’t have to pay the 10% penalty for withdrawing funds from a Roth IRA. Qualified higher education expenses include things like tuition, fees, books and supplies. However, you will still have to pay taxes on any earnings you withdraw from your Roth IRA.

Pros and Cons of Using a Roth IRA for College

Whether using a Roth IRA for college is right for you depends on your particular situation. Here are the pros and cons you’ll want to consider.

Pros of Tapping Into a Roth IRA for College

Advantages of using a Roth IRA for college expenses include:

•   You might not have to borrow as much money to pay for college. Using a Roth IRA for college expenses may reduce the need for student loans. And for some students, using money from a Roth IRA might make the difference between being able to afford to attend college or not.

•   You won’t be penalized for withdrawing the money. Because of the exception for qualified higher education expenses, you can take out the money to pay for those expenses without having to pay the 10% penalty.

•   If you withdraw just your contributions, you won’t owe taxes on that money.

Cons of Tapping Into a Roth IRA for College

These are the drawbacks of using a Roth IRA to pay for college:

•   Your retirement savings will take a hit. This is the biggest disadvantage of using the money in a Roth IRA for college. While there are other ways to help cover the cost of college, there are generally fewer options to help you save for retirement if you spend your Roth IRA funds on college expenses.

•   Because of possible compounding returns, even a few thousand dollars withdrawn from your Roth IRA today might mean missing out on tens of thousands of dollars of potential growth by the time you’re ready to retire years from now.

•   Eligibility for financial aid could be affected. Another possible downside of using a Roth IRA for college is that the money you withdraw generally counts as income on the FAFSA (Federal Application for Federal Student Aid). That may limit financial aid you could receive, including grants and loans.

Roth IRA vs 529 for College

Before you decide to use a Roth IRA for college savings, you might want to consider a 529 plan. With a 529, you can save money for your child to go to college and withdraw the funds tax-free as long as they’re used for qualified higher education expenses.

A 529 plan has more generous contribution limits than a Roth IRA does, and other extended family members may also contribute to the plan. In addition, while 529 contributions aren’t deductible at the federal level, many states provide tax benefits for 529s.

đź’ˇ Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Which College Expenses Can a Roth IRA Be Used For?

According to the IRS, a Roth IRA can be used to pay for qualified higher education expenses. These qualified expenses include tuition, fees, books and supplies, and equipment required for enrollment or attendance.

The Takeaway

It’s possible to use a Roth IRA to help pay for qualified higher education expenses, and you typically won’t be subject to a penalty for doing so. However, taking funds out of your Roth IRA means you won’t have that money available for retirement. You’ll also lose out on any gains that may have compounded throughout the years. That could impact your retirement savings or even delay your retirement date.

Instead of using a Roth IRA for college, you may want to consider other ways to save for college that might better fit your financial needs, such as a 529 plan. That way you can save for both college and retirement.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Can you use a Roth IRA for college?

Yes, it is possible to use a Roth IRA for college expenses. If you withdraw money from a Roth IRA for qualified higher education expenses, you generally will not be subject to the 10% early withdrawal penalty. Tuition, fees, books, supplies, and equipment needed for enrollment or attendance are usually considered qualified expenses.

Is a Roth IRA better than a 529 for college?

Deciding whether to use a 529 plan or a Roth IRA for college will depend on your specific financial situation. In many cases, a 529 plan may make more sense than a Roth IRA for college savings. You can generally contribute more to a 529 plan each year than you can to a Roth IRA, there are tax advantages to the plan, and other relatives can also contribute to it. Plus, by using a 529, you won’t be taking money from your retirement savings.

Can I withdraw from my IRA for college tuition without penalty?

Yes, you can use a Roth IRA to pay for college tuition without penalty in most cases because tuition is generally considered a qualified higher education expense. However, to avoid taking money from your retirement savings, you may want to consider other college saving options instead, such as a 529 plan.

Photo credit: iStock/Tempura

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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.

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.

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Catch-Up Contributions, Explained

By | invest, Investing, Preparing for Retirement | Comments Off on Catch-Up Contributions, Explained

Catch-up contributions allow individuals 50 and older to contribute additional money to their workplace retirement savings plans like 401(k)s and 403(b)s, as well as to individual retirement accounts (IRAs).

Catch-up contributions are designed to help those approaching retirement age save more money for their retirement as they draw closer to that time.

Learn how catch-up contributions work, the eligibility requirements, and how you might be able to take advantage of these contributions to help reach your retirement savings goals.

What Is a Catch-Up Contribution?

A catch-up contribution is an additional contribution individuals 50 and older can make to a retirement savings plan beyond the standard allowable limits. In addition to 401(k)s, 403(b)s, and IRAs, catch-up contributions can also be made to Thrift Savings Accounts, 457 plans, and SIMPLE IRAs.

Catch-up contributions were created as a provision of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. They were originally planned to end in 2010. However, catch-up contributions became permanent with the Pension Protection Act of 2006.

The idea behind catch-up contributions is to help older individuals who may not have been able to save for retirement earlier in their careers, or those who experienced financial setbacks, to “catch up.” The additional contributions could increase their retirement savings and improve their financial readiness for their golden years.

While employer-sponsored retirement plans are not required to allow plan participants to make catch-up contributions, most do. In fact, nearly all workplace retirement plans offer catch-up contributions, according to a 2023 report by Vanguard.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with an IRA account. The money you save each year in a Traditional IRA is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Catch-Up Contribution Limits: 2023-2024

Each year, the IRS evaluates and modifies contribution limits for retirement plans, primarily taking the effects of inflation into account. The standard annual contribution limit for a 401(k) in 2023 is $22,500, and $23,000 for 2024. For a traditional or Roth IRA, the standard contribution limit is $6,500 in 2023, and for 2024 the limit is $7,000.

Catch-up contributions can be made on top of those amounts. Here are the catch-up contribution limits for 2023 and 2024 for some retirement savings plans.

Plan 2023 Catch-Up Limit 2024 Catch-Up Limit
IRA (traditional or Roth) $1,000 $1,000
401(k) $7,500 $7,500
403(b) $7,500 $7,500
SIMPLE IRA $3,500 $3,500
457 $7,500 $7,500
Thrift Savings Account $7,500 $7,500

This means that you can make an additional $7,500 in catch-up contributions to your 401(k) for a grand total of up to $30,000 in 2023 and $30,500 in 2024. And with traditional and Roth IRA catch-up contributions of $1,000 for both years, you can contribute up to $7,500 in 2023 and $8,000 in 2024 to your IRA.

Catch-Up Contribution Requirements

In order to take advantage of catch-up contributions, individuals need to be age 50 or older — or turn 50 by the end of the calendar year. If eligible, they can make catch-up contributions each year after that if they choose to — up to the annual contribution limit.

Certain retirement plans may have other allowances for catch-up eligibility. For instance, with a 403(b), in addition to the catch-up contributions for participants based on age, employees with at least 15 years of service may be able to make additional contributions, depending on the rules of their employer’s plan.

To maximize the advantages of catch-up contributions, it’s a good idea to become familiar with the rules of your plan as part of your retirement planning strategy.

Benefits of Catch-Up Contributions

There are a number of benefits to making catch-up contributions to eligible retirement plans.

•   Increased retirement savings: By helping to make up for earlier periods of lower contributions to your retirement savings plan, catch-up contributions allow you to increase your savings and potentially grow your nest egg in the years closest to retirement.

•   Possible tax benefits: Making catch-up contributions may help lower your taxable income for the year you make them. That’s because contributions to 401(k)s and traditional IRAs are made with pre-tax dollars, giving you a right-now deduction. And contributions beyond the standard limits could lower your taxable income for the year even more. (Of course, you will pay tax on the money when you withdraw it in retirement, but you may be in a lower tax bracket by then.)

•   Additional security: Making catch-up contributions may give you an extra financial cushion as you approach retirement age. And those contributions may add up in a way that could surprise you. For instance, if you contribute an additional $7,500 to your retirement account from age 50 to 65, assuming an annualized rate of return of 7%, you could end up with more than $200,000 extra in your account.

đź’ˇ Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How to Make Catch-Up Contributions

To make catch-up contributions to an employer-sponsored plan, contact your plan’s administrator or log into your account online. The process is typically incorporated into a retirement savings plan’s structure, and you should be able to easily indicate the amount you want to contribute as a catch-up.

To make IRA catch-up contributions, contact your IRA custodian (typically the institution where you opened the IRA) to start the process. In general, you have until the due date for your taxes (for example, April 15, 2024 for your 2023 taxes) to make catch-up contributions.

Finally, keep tabs on all your retirement plan contributions, including catch-ups, to make sure you aren’t exceeding the annual limits.

The Takeaway

For those 50 and up, catch-up contributions can be an important way to help build retirement savings. They can be an especially useful tool for individuals who weren’t able to save as much for retirement when they were younger. By contributing additional money to their 401(k) or IRA now, they can work toward a goal of a comfortable and secure retirement.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Do you get employer match on catch-up contributions?

It depends on whether your plan allows employer matching for catch-up contributions. Not all plans do. Even if your employer does match catch-up contributions, they might set a limit on the total amount they will match overall. Check with your plan administrator to find out what the rules are.

Are catch-up contributions worth it?

Catch-up contributions can be beneficial to older workers by helping them potentially build a bigger retirement nest egg. These contributions may be especially helpful for those who haven’t been able to save as much for retirement earlier in their lifetime. Making catch-up contributions might also provide them with tax benefits by lowering their taxable income so that they could possibly save even more money.

How are catch-up contributions taxed?

For retirement savings plans like 401(k)s and traditional IRAs, catch-up contributions are typically tax deductible, lowering an individual’s taxable income in the year they contribute. However, catch-up contributions to Roth IRAs are made with after-tax dollars. That means you pay taxes on the money you contribute now, but your withdrawals are generally tax-free in retirement.

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Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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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2024

What Is Private Credit?

By | Growing Wealth, invest, Investing | Comments Off on What Is Private Credit?

Private credit refers to lending from non-bank financial institutions. Also referred to as direct lending, private credit allows borrowers (typically smaller to mid-sized businesses) to seek financing through avenues other than a standard bank loan.

This type of arrangement can remove barriers to funding for businesses while creating opportunities for investors, as a type of alternative investment. Private credit funds allow institutional and individual investors to pool capital that is used to extend loans and generate returns through interest on those loans.

What Are the Different Types of Private Credit?

Private credit investments can adhere to various investment strategies, each offering a different level of risk and rewards. Within a capital structure, certain types of private credit take precedence over others regarding the order in which they’re repaid.

Senior Lending

In a senior lending arrangement, secured loans are made directly to non-publicly traded, middle-market companies. These loans sit at the top of the capital structure or stack and assume priority status for repayment should the borrowing company file for bankruptcy protection.

Senior debt tends to have lower interest rates than other types of private credit arrangements since the loan is secured by business collateral. That means returns may also be lower, but the preferred repayment status reduces credit risk for investors.

Should the borrowing company fail, senior loans would hold an initial claim on the business’s assets. Those may include cash reserves, equipment and property, real estate, and inventory. That significantly reduces the risk of investors losing their entire investment in the event of bankruptcy.

Junior Debt

Junior or subordinated debt is debt that follows behind senior lending obligations in the capital stack. Loans are made directly to businesses with rates that are typically higher than those assigned to senior debt. Junior debt is most often unsecured though lenders can impose second lien requirements on business assets.

Investors may generate stronger returns from junior debt, but the risk is correspondingly higher. Should the borrowing business go bankrupt, junior debts would only be repaid once senior financing obligations have been satisfied.

Mezzanine Debt

Mezzanine debt is a private credit term that’s often used interchangeably with junior debt, but it has a slightly different meaning. In mezzanine lending, the lender may have the option to convert debt to equity if the company defaults on repayment. There may be some collateral offered but lenders also consider current and future cash flows when making credit decisions.

Compared to junior or senior debt, mezzanine debt is riskier but it has the potential to produce higher yields for investors as the interest rates are usually higher. The risk to borrowers is that if the company defaults, they’ll be forced to give up an ownership share in the business.

Distressed Credit

Distressed credit is extended to companies that are experiencing financial or operational stress and may be unable to obtain financing elsewhere. The obvious benefit to investors is the possibility of earning much higher returns since this type of private credit generally carries higher rates. However, that’s balanced by a greater degree of risk.

Risk may be mitigated if the company can effectively utilize private credit capital to restructure and stabilize cash flow. Should the company eventually file for bankruptcy protection, distressed debt investors would take precedence over equity holders for repayment.

Special Financing

Specialty financing refers to lending that serves a specific purpose and doesn’t fit within the confines of traditional bank lending. This type of private credit is also referred to as asset-based financing since lending arrangements typically involve the acquisition of an asset that is used as collateral for the loan.

Equipment financing is one example. Say that a construction business needs to purchase a new backhoe. They could get an equipment loan to buy what they need, using the backhoe they’re purchasing to secure it.

đź’ˇ Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alt funds through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

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Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Potential Benefits of Investing in Private Credit

Private credit investing can be an attractive option for investors who are interested in diversifying their portfolios with alternative investments. Here are some of the primary reasons to consider private credit as an asset class.

Income Potential

Private credit can provide investors with current income if they’re collecting interest payments and fees on an ongoing basis. The more private credit investments someone holds in their portfolio, the more opportunities they have to generate regular cash flow.

Return Potential

Investing in private credit may deliver returns at a level well above what you might get with a standard portfolio of stocks, bonds, and mutual funds. The nature of private credit is such that borrowers may expect to pay higher interest rates than they would for a traditional bank loan. That, in part, is a trade-off since private credit offers lower levels of liquidity than other investments.

Investors benefit as long as borrowers repay their debt obligations on time. The exact return profile of any private credit investment depends on the interest rate the lender requires the borrower to pay, which can directly correspond to their risk profile and where the debt is situated in the capital stack.

Diversification

Like other alternative investments, private credit can introduce a new dimension into a portfolio, allowing for greater diversification of that portfolio. Private credit tends to have a lower correlation with market movements than stocks or bonds, which may help insulate investors against market volatility, to a degree.

Additionally, investors have an opportunity to diversify within the private credit segment of their portfolios. For example, an investor may choose to invest in a mix of senior lending, mezzanine debt, and specialty financing to spread out risk and generate varying levels of returns.

What Are the Risks of Investing in Private Credit?

Like any other investment, private credit can present certain risks to investors. Weighing those risks against the potential upsides can help determine whether private credit is the right investment for you.

Borrower Default

Perhaps the most significant risk factor associated with private credit investments is borrower default. Should the borrower fail to repay their debt obligations, that can put the value of your investment in question. In a worst-case scenario, you may be forced to wait out the resolution of a bankruptcy filing to determine how much of your investment you’ll be able to recover.

Again, it’s important to remember that borrowers who seek private credit may have been turned down for traditional bank financing elsewhere. So, your credit risk has already increased. If you have a lower risk tolerance overall, private credit may not be the best fit for your portfolio.

Illiquidity

Private credit investments are less liquid than other types of investments since they operate on a fixed term. It can be difficult to exit these investments ahead of schedule without facing the possibility of a sizable loss if you’re forced to sell at a discount.

In that sense, private credit investments are similar to bonds which also lock investors in for a preset period. For that reason, it’s important to consider what type of time frame you’re looking for when making these investments.

Recommended: Short-Term vs Long-Term Investments

Underwriting

While banks often have strict underwriting requirements that borrowers are expected to meet, private credit allows for more flexibility. Lenders can decide who to extend credit to, what collateral to require if any, and what terms a borrower must agree to as a condition of getting a loan.

That’s good for borrowers who may have run into trouble getting loans elsewhere, but it ups the risk level for investors. If you’re investing in private credit funds that are less transparent when it comes to sharing their underwriting processes or detailed information about the borrower, that can make it more difficult to make an informed decision about your investments.

Ways to Invest in Private Credit

Private credit has traditionally been the domain of institutional investors, though retail investors may be able to unlock opportunities through private credit funds.

These funds allow investors to pool their capital together to make investments in private credit, similar to the way a traditional mutual fund or hedge fund might work. You’ll need to find an investment company or bank that offers access to private credit investments, including private credit funds, funds if you’re interested in adding them to your portfolio.

One caveat is that private credit investments may only be open to selected retail investors, specifically, those who meet the SEC’s definition of an accredited investor, who is someone that fits the following criteria:

•   Has a net worth of $1 million or more, excluding their primary residence

•   Reported income over $200,000 individually or $300,000 with a spouse or partner for the previous two years and expects to have income at the same level or higher going forward

Investment professionals who hold a Series 7, Series 65, or Series 82 securities license also qualify as accredited.

đź’ˇ Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Who Should Invest in Private Credit?

Given its risk profile, private credit may not be an appropriate investment choice for everyone. In terms of who might consider private credit investments, the list can include people who:

•   Are interested in diversifying their portfolios with alternative investments.

•   Can comfortably assume a higher level of risk for an opportunity to generate higher returns.

•   Understand the time commitment and the risks involved.

•   Would like to support business growth through their investments.

•   Meet the requirements for a private credit investment (i.e., accredited status, minimum buy-in, etc.)

Private credit investments may be less suitable for someone who’s hoping to create some quick returns or is more risk-averse.

How Does Private Credit Fit in Your Portfolio?

If you’re able to invest in private credit, it’s important to consider how much of your portfolio you’d like to allocate to it. While you might be tempted to devote a larger share of your investment dollars to private credit, it’s wise to consider how doing so might affect your overall risk exposure.

Choosing a smaller allocation initially can allow you to test the waters and determine whether private credit investments make sense for you. That can also minimize the amount of risk you’re taking on as you explore new territory with your investments.

When evaluating private credit funds, it’s helpful to consider the fund manager’s track record and preferred investment strategy. A more aggressive strategy may yield better returns but it may mean accepting more risk, which you might be uncomfortable with. Also, take a look at what you might pay in management fees as those can directly impact your net return on investment.

The Takeaway

Private credit is a form of financing sought outside of traditional bank loans. For investors, it may be classified as an alternative investment, and it has its pros and cons in an investor’s portfolio.

Private credit can benefit investors and businesses alike, though in different ways. If you’re an accredited investor, you may consider private credit along with other alternative investments to round out your portfolio. Evaluating the risks and the expected rewards from private credit investing can help you decide if it’s worth exploring further.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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FAQ

Is Investing in Private Credit Worth It?

Investing in private credit could be worth it if you’re comfortable with the degree of risk that’s involved and the expected holding period of your investments. Private credit investing can deliver above-average returns while allowing you to diversify beyond stocks and bonds with an alternative asset class.

What’s the Difference Between Private Credit and Public Credit?

Public credit refers to debt that is issued or traded in public markets. Corporate bonds and municipal bonds are two examples of public credit. Private credit, on the other hand, originates with private, non-bank lenders and is extended to privately-owned businesses.

Why is Private Credit Popular?

Private credit is popular among businesses that need financing because it can offer fewer barriers to entry than traditional bank lending. Among investors, private credit has gained attention because of its return potential and its use as a diversification tool.

What Is the Average Return on Private Credit?

Returns on private credit investments can vary based on the nature of the loan agreement. When considering private credit investments it’s important to remember that the higher the return potential, the greater the risk you may be taking on.

Is Private Credit a Loan?

Private credit arrangements are loans made between a non-bank entity and a privately owned business. These types of loans allow companies to raise the capital they need without having to meet the requirements that traditional bank lenders set for loans.

Photo credit: iStock/Adene Sanchez

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
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