What Is a College Acceptance Letter? Examples Included

What Is an Acceptance Letter for College? What to Expect

An acceptance letter is a college’s formal invitation for you to enroll in their programs as a student. Depending on the type of admission you applied for, letters will be delivered from December through April. Once received, you have the option to accept or decline the offer.

Financial aid offer letters may look similar to an acceptance letter, but differ in key points. Financial aid offer letters, also known as award letters, will outline financial aid (if any) and a summary of the cost of attendance. Generally, an acceptance letter and an offer letter are sent together. In some cases, though, offer letters may be sent after acceptances.

Read on to learn more about what an acceptance letter is, what an offer letter is, when to expect an acceptance letter, and how to respond to an acceptance letter.

Basic Definition of an Acceptance Letter

Acceptance letters will generally contain the three following components:

1.    A university’s offer to enroll and reasons the applicant stood out.

2.    Details about on-campus events for prospective students.

3.    Important deadlines and information on ancillary documents, such as a financial offer letter.

Students who apply for regular decisions generally receive their decision letters in March and April, but early decision and early action decision letters may be sent as soon as December.

Offer Letter vs Acceptance Letter for College

As mentioned, an acceptance letter details whether or not a student has been admitted into a specific college. Financial aid offer letters, also known as financial aid award letters, break down the tuition cost, scholarships and grants awarded, work-study programs offered, and federal student loan options available.

In order to apply for federal financial aid, students are required to fill out the Free Application for Federal Student Aid, or FAFSA®, annually. The information provided on the FAFSA helps determine the types of aid, and aid amounts, that students qualify for.

Scholarships and grants are funds awarded to students that do not need to be repaid. Loans are either provided by the government or a private entity and are repaid by the borrower, though only federal student loans would be included as a part of a student’s federal aid package. Work-study is a federal program that offers employment to students who qualify and have filed a FAFSA.

Furthermore, colleges use the information provided on the FAFSA to determine awards based on needs and merit.

In cases when federal aid isn’t enough to pay for college, students may consider private student loans to help fill in funding gaps. Keep in mind, though, that private student loans aren’t necessarily afforded the same borrower protections as federal loans — things like income-driven repayment plans or deferment options. That is why private student loans are generally only considered after all other options have been depleted.

College Acceptance Letter College Offer Letter

•   Formal acceptance into college program

•   Excludes Cost of Attendance (COA) info

•   Shares details of optional prospective student campus events

•   Contains important deadlines, usually the date to accept/decline the offer to enroll

•   Sent with or after acceptance letter

•   Outlines Cost of Attendance (COA)

•   Shares details of scholarships and grants awarded, as well as suggested loans

•   Contains deadline to accept/decline financial offer



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College Acceptance Letter Dates

College application deadlines vary by college and so will college acceptance letter dates. Furthermore, acceptance letters are sent out on dates depending on the type of application you submitted: regular, early action, restrictive early action, or early decision.

Applying for college early is one way prospective students can complete the application and acceptance process on an early timeline. It can be a path for those who have researched colleges thoroughly and want to get into a specific college.

Early action gives you a chance to apply to several colleges at once. Restrictive early action typically allows you to apply early to a single college, with the exception of public universities. Applicants who choose these routes are not obligated to accept their offer if admitted.

Early decision applicants apply to one school early decision and, if accepted, are required to commit. If an early decision applicant is accepted, they must withdraw their application from all other schools.

Additionally, some schools offer a more flexible rolling admission process. Instead of waiting to evaluate applications after specific deadlines, schools review applications as they are submitted (on a rolling basis). Generally, they’ll continue accepting applications until all of the open slots in their program are filled.

This table provides an overview of the types of applications, their general deadlines, and information on when students may accept a decision. Keep in mind that these dates are broad guidelines, and students should confirm all deadlines with the schools of interest.

Application

Application Deadline

Decision Dates (General)

Regular Decision December, January, February March-April
Early Action November December-January
Restrictive Early Action November December
Early Decision November 1-15 (some December and January) December-January
Rolling Admission Varies by school Typically within four to six weeks of submitting an application

When Do College Acceptance Letters Arrive?

Depending on the type of application, your college acceptance letter will arrive between December and April. Financial aid offer letters will be sent with or may follow acceptance letters.

What Does a College Acceptance Letter Say?

A college letter of acceptance will share the admission decision and may offer a list of upcoming events, such as when orientation will take place. It will also contain a deadline for you to submit a final decision.

The Decision

The first paragraph gets straight to the point: you’re in! It may also detail why you stood out from other applicants.

Prospective Student Events

Your letter may contain information on upcoming event dates and inform you on incoming ancillary documents, such as your financial offer letter.

Acceptance Deadline

The last portion of your letter will have important deadlines, including the date to accept the college’s offer. May 1st has become widely known as the deadline for students to make decisions about the college they’ll enroll in. Keep in mind that while this is a popular date for decision deadlines, colleges may have their own deadlines and applicants who applied early may have an earlier deadline.

Recommended: 7 Tips to Prepare for College Decision Day

How to Respond to College Acceptance Letter

Colleges inform students electronically, both online and by mail, or by mail only.

Some colleges will send forms to formally decline or accept their offer. Others may have you submit your decision via an online portal.

Be sure to educate yourself and stay connected to your top choice colleges’ admissions offices on how to respond to their college acceptance letter and to prevent missing important communications.

1. Weigh Your Options

College tuition is rapidly increasing — and can play a major role in your decision.

Compare financial offer letters to determine the best deal. If a college offers more aid, but has a substantial cost, then another college with less aid and a smaller price tag might impact your decision.

There are no standard offer letter forms, so cross-checking their website with your offer letter and getting advice can be helpful. You can also follow up with college admissions offices with your questions.

2. Choose Which College You Want to Attend

Of course, other factors will weigh into your decision-making. According to publisher Princeton Review , students are split nearly down the middle on how they choose colleges: 40% say they choose a college based on “best for their career interests,” and 40% say they choose a college that is the “best overall fit.”

You can break down your decision even further with the following questions:

•   How strong is the academic rigor of the program I’m pursuing? Is the program a fit for me?

•   How important is the location to me?

•   What stands out to me about the campus culture?

•   Is this institution the right fit for my financial situation?

•   Does it have strong career preparation programs and resource offices?

Choosing a college will take time. But with research and guidance, you can have more confidence in making your final decision.

3. Find Funding for the School You Choose

Financial aid from schools, private entities, and the government may help put an expensive college within reach. If your top choice is not fully covered by out-of-pocket finances and other sources of financial aid, applying for a private student loan is an option.

Also, getting a job during the summer or working while in school can help with tuition and daily needs.

Recommended: How to Pay for College

4. Decline Other College Acceptance Letters

Once you’ve accepted a school offer, be sure to notify other colleges that accepted you right away. This enables them to offer your spot to waitlisted prospective students.

The Takeaway

Your college admission acceptance letter and financial aid offer letter are key to deciding your next steps. From as early as December until April, you may receive college decision letters. Unless you applied early decision, waiting to receive all college acceptance letters can help you evaluate your options.

Funding your education will be one of the most important decisions you make. Compare your financial aid offer letters to determine which school offers the best value. Most colleges will give you until May 1 to accept or decline their offer and financial aid package (if any).

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

Photo credit: iStock/Adene Sanchez


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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.


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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

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Credit Hours: What Are They & What You Need to Know

Credit Hours: What Are They & Why They Matter

Credit hours are the building blocks of a college career. They measure progress, and define full- and part-time status and degree types such as bachelor’s and master’s. And these factors determine federal aid eligibility.

A credit hour is defined as one classroom hour and two hours of student work per week. Students who take 12 or more credit hours a semester are considered full-time. University semesters are a minimum of 15 weeks.

What Is a Credit Hour?

A credit hour is a system to measure college course loads. They were invented in 1906.

According to Encyclopedia Britannica, the Carnegie Foundation created the credit hour system to determine how to give scholarship funds to colleges. However, it quickly became a useful tool for universities to measure higher ed programs and student progress. Nearly every U.S. university adopted the system within six years.

Credits are also key in accreditation, an evaluation process that ensures a college’s academic merit. It’s granted to universities that have met minimum credit requirements and other academic standards.


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1 Credit Hour Is Equal to How Many Hours?

One credit hour is equal to one hour of classroom or direct faculty instruction and at least two hours of out of class student work per week. That means you can expect to spend three hours of work and classroom instruction per week in a one-credit course.

How Many Hours of Study Time per Credit Hour Online?

Credit hours are no different in-person than online, depending on the type of online course. There are two types: synchronous and asynchronous programs.

Synchronous programs are virtual classes that students can attend in real time. These courses may involve digital lectures, class discussions, presentations, and other styles of scheduled interactive learning. Students also work together outside of class, whether virtually or in-person. This type of program offers ease of access.

In asynchronous programs, students access pre-recorded classes and forums on their own time. Students in these programs set their own pace and manage coursework completion deadlines. Virtual attendance is not required and students may communicate with staff and their peers in board-style forums and email.

Synchronous programs have a similar structure to in-person college classes — and therefore have similar credit hour requirements. Some universities suggest more study hours for online credits. For instance, the University of North Carolina suggests four to five hours of study time each week per credit for a bachelor’s degree program.

Asynchronous programs, on the other hand, have more loosely defined requirements for credit courses. Students meet program requirements by fulfilling coursework needs on deadline.


💡 Quick Tip: Even if you don’t think you qualify for financial aid, you should fill out the FAFSA form. Many schools require it for merit-based scholarships, too.

Credit Hour Calculator

To determine total time spent on classes in a semester, add the credits of all your courses. Multiply that number by two hours, or more depending on your university’s requirements. Then multiply that total with the weeks in a semester.

Courses can be one to six credit hours. Below is an example credit hour calculator chart to determine total hours spent on one or more credits. Rice University has a great example of a chart that converts credits to study time.

Credits

Study Hours Per Credit

Total Study and In-Person Hours Per Semester (15 Weeks)

1 2 Hours 45
3 6 Hours 135
12 24 Hours 540

How Many Credit Hours Do You Need to Graduate?

The credit hours you need depend on the degree type — but the federal minimum is the same for all. The range of credit hours required also varies by major, so be sure to check with your registrar that you have all the information you need.

Higher education programs include associate, bachelor’s, master’s, professional, and doctorate degrees. Depending on the degree, students can expect to complete around 30 to 120 credit hours.

Bachelor’s Degree Credit Hours

Bachelor’s degrees are generally 120 credits minimum and usually take four years to complete. Schools that operate on a quarterly basis (four terms a year), usually require 180 credits to graduate.

Students enrolled in a bachelor’s program complete core curriculum and various credit hour types: general education, major/minor, and elective credits.

General education courses are required courses for a degree. They often cover foundational subjects such math, English, and sciences. However, the core curriculum might vary by major. For instance, a student majoring in marketing might take intro economics courses, whereas an architect student may take intro art history courses.

Major and minor credit hours are classes related to a student’s field of study. They are categorized into lower- and upper-division credits. Students must complete lower-division courses in order to enroll in upper level courses. Internships may also be mandatory and are converted into credits (up to six).

Finally, bachelor’s programs require elective credits — courses unrelated to a student’s major and general requirements. Students sign up for courses out of interest or to complement their major.

Recommended: What Is the Difference Between BA and BS Degrees?

Master’s Degree Credit Hours

A master’s degree can range from 30 to 60 credits, and usually lasts two years. Students complete a thesis or project at the end of the program.

Master of Arts (MA), Master of Science (MS), and Master of Business Administration (MBA) are common types of masters, but vary widely in credit requirements. MAs and MSs tend to be 30 credits, while MBAs can take up to 60 credits to complete.

How Many Credit Hours Does a Course Have?

As mentioned, a college class must be at least one hour of classroom instruction and two hours of student coursework per week — the federal minimum. Courses can range from one to six credits — but typically are three to four credits.

How Do Semester Credit Hours Influence GPA?

With credit hours and GPAs, the general rule is this: More credits are better.

Your weighted GPA point values determine your GPA — where the weights are the number of credits for each class. To determine your college GPA with credits, multiply your GPA Point Value with the course’s total credits. Then divide the GPA point value total by the credit total.

For example, if you score an A in your three-credit chemistry class, it has more impact on your overall GPA than the A in your one-credit photography class. Below is an example of the impact of an 18-credit semester and a 12-credit semester on GPAs.

Course

Grade

Credits

GPA Point Value

Quality Points

Chemistry A 3 4 12
Microeconomics A 3 4 12
Psychology B 1 3 3
Computer Science B 1 3 3
Photography B 1 3 3
English A 3 4 12
Total 12 45
Quality Points/Credits 3.75 GPA

If you score all As in your three-credit courses, but all Bs in your one-credit courses, you still walk away with a 3.75 GPA.

Course

Grade

Credits

GPA Point Value

Quality Points

Chemistry B 3 3 9
Microeconomics B 3 3 9
Psychology A 1 4 4
Computer Science A 1 4 4
Photography A 1 4 4
English B 3 3 9
Total 12 39
Quality Points/Credits 3.25 GPA

In contrast, if all your one-credit courses are As, and three-credit courses are Bs, you end up with a lower GPA. The weight of the courses’ credits impacts your GPA.

What Is the Cost per Credit Hour?

The average college credit costs $477 — or about $1,431 per 3-credit class, according to the Education Data Initiative. Private four-year universities charge $1,200 per credit, or $3,600 for a three-credit class. These averages exclude Cost of Attendance (COA) such as room and board, books, and daily living expenses.

University tuition inflation has an impact on figures too. In 1963, the cost per credit was $21 per credit hour, or $187 adjusted for inflation. That’s a 255% increase to today’s credit hour rate of $477!

Recommended: What Is the Average Cost of College Tuition?

Paying for College

Higher education is a substantial spend, so it’s worth researching ways to earn aid and cut costs.

Determine what your family is expected to cover, as measured by the Student Aid Index (SAI). Apply for scholarships and grants from your school, fill out the FAFSA®, or Free Application for Federal Student Aid, which is used to determine federal aid, and look into cutting expenses like room and board.

Finally, look into undergraduate student loan options and understand the difference between private student loans vs federal student loan options. Federal loans often have lower interest rates, more flexible repayment plans, and offer subsidized loan options for students who demonstrate financial need. However, there is an annual borrowing maximum for students.

Private lenders offer competitive rates for qualifying borrowers. Repayment plans are generally determined by the individual lender. Unlike most federal student loans, private lenders will generally evaluate a borrower’s credit score and history, among other factors. Potential borrowers may be able to apply with a cosigner if they aren’t able to qualify for a private student loan on their own.

While private student loans can be a powerful tool to help fill financing gaps for college, they don’t always offer the same benefits as federal student loans, so are generally borrowed as a last-choice option.

Recommended: How to Pay for College

The Takeaway

Understanding how universities build programs with college credits will help you understand its cost. College credits define degree types, such as master’s and bachelor’s programs. The amount can also determine a student’s status and progress. Finally, these dictate the eligibility rules for federal and private lenders.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.


Photo credit: iStock/asbe

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Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility-criteria for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.


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External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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.

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Traditional vs Roth IRA: How to Choose the Right Plan

The two most common types of IRA are the traditional IRA and the Roth IRA. It’s helpful to understand the difference between Roth and traditional IRA options when saving for retirement.

Traditional IRAs are funded with pre-tax dollars, while a Roth IRA is funded with after-tax contributions. The same annual contribution limits apply to both types of IRAs, including catch-up contributions for savers aged 50 and older. For 2024, the annual contribution limit is $7,000, with an additional $1,000 allowed in catch-up contributions. For 2023, the annual contribution limit is $6,500, with an additional $1,000 allowed in catch-up contributions.

Whether it makes sense to open a traditional or Roth IRA can depend on eligibility and the types of tax advantages you’re seeking. With Roth IRAs, for example, you get the benefit of tax-free distributions in retirement but only taxpayers within certain income limits are eligible to open one of these accounts. Traditional IRAs, on the other hand, offer tax-deductible contributions, with fewer eligibility requirements.

In weighing which is better, traditional or Roth IRA plans, it’s important to consider what you need each plan to do for you. Opening a Roth IRA vs. regular IRA can allow you to save money for retirement and invest it in a variety of ways. But you may find one type of tax break (i.e. tax-deductible contributions vs. tax-free distributions) more valuable than another.

The Differences Between Traditional vs Roth IRAs

When choosing which type of retirement account to open, it’s helpful to fully understand the difference between Roth and traditional IRA options. Specifically, that means knowing:

•  Eligibility rules for making contributions to a Roth or traditional IRA
•  Tax treatment of both IRA contributions and IRA withdrawals, including early withdrawal penalties
•  Required minimum distribution requirements

The IRS has specific guidelines governing who can contribute to an IRA, the amount of contributions you can make, and how you’ll pay taxes on the money you save for your retirement. Navigating the rules can seem confusing, so it’s helpful to look at each guideline individually to get a sense of whether a Roth or traditional IRA is the better fit.

Roth IRA Traditional IRA
Annual Contribution Limits (2024 Tax Year) $7,000, plus an additional $1,000 in catch-up contributions if you’re 50 or older $7,000, plus an additional $1,000 in catch-up contributions if you’re 50 or older
Tax-Deductible Contributions? No Yes, based on income, filing status and whether you’re covered by a retirement plan at work
Early Withdrawal Penalties Contributions can be withdrawn penalty-free at any time; early withdrawals of earnings may be subject to a 10% penalty and ordinary income tax Early withdrawals of contributions earnings may be subject to a 10% penalty and ordinary income tax
Good for… Individuals who are income-eligible and want the benefit of tax-free withdrawals in retirement Individuals who want an upfront tax break in the form of deductible contributions
Required Minimum Distributions? No Yes, beginning at age 72
Tax Penalty for Missing RMDs N/A 50% of the amount you were required to withdraw

Which IRA Is Right for You?

Taking this traditional vs. Roth IRA quiz can give you a better idea of how each IRA works and which type might be best suited to your needs.

Traditional vs Roth IRA Eligibility

Anyone below age 72 who earns taxable income can open a traditional IRA.

Roth IRAs have no such age restriction—individuals can make contributions at any age as long as they have income for the year.

Roth IRAs, however, have a key restriction that a traditional IRA does not: An individual must earn below a certain income limit to be able to contribute. In 2024, that limit is $146,000 for single people (people earning more than $146,000 but less than $161,000 can contribute a reduced amount). For those individuals who are married and file taxes jointly, the limit is $230,000 to make a full contribution and between $230,000 to $240,000 for a reduced amount.

In 2023, that limit is $138,000 for single people (people earning more than $138,000 but less than $153,000 can contribute a reduced amount). For those individuals who are married and file taxes jointly, the limit is $218,000 to make a full contribution and between $218,000 to $228,000 for a reduced amount.

The ceilings are based on modified adjusted gross income, which is basically the adjusted gross income listed on one’s tax return with certain deductions added back in.

SoFi’s Roth IRA calculator lets individuals plug in income and other factors, to see which account they can contribute to and how much they can put in.

Traditional IRA Taxes vs Roth IRA Taxes

With a traditional IRA, individuals can deduct the money they’ve put in (aka contributions) on their tax returns, which lowers their taxable income in the year they invest. Come retirement, investors will pay income taxes at their ordinary income tax rate when they withdraw funds. This is called tax deferral. For individuals who expect to be in a lower tax bracket upon retirement, a traditional IRA might be preferable.

The amount of contributions a person can deduct depends on their adjusted gross income (AGI), tax filing status, and whether they have a retirement plan through their employer. This chart, based on information from the IRS , illustrates the deductibility of traditional contributions for the 2023 tax year.

 

Filing Status If You ARE Covered by a Retirement Plan at Work If You ARE NOT Covered by a Plan at Work
Single or Head of Household You can deduct up to the full contribution limit if your modified AGI is $73,000 or less. You can deduct up to the full contribution limit, regardless of income.
Married Filing Jointly You can deduct up to the full contribution limit if your AGI is $116,000 or less. You can deduct up to the full contribution limit, regardless of income, if your spouse is also not covered by a plan at work.

If your spouse is covered by a plan at work, you can deduct up to the full contribution limit if your combined modified AGI is $218,000 or less.

Married Filing Separately You’re allowed a partial deduction if your modified AGI is less than $10,000. You’re allowed a partial deduction if your modified AGI is less than $10,000.

 

With a Roth IRA, on the other hand, contributions aren’t tax-deductible. But investors won’t pay any taxes when they withdraw money they’ve contributed at retirement, or when they withdraw earnings, as long as they’re at least 59.5 years old and have had the account for at least five years.

For people who expect to be in the same tax bracket or a higher one upon retirement—for example, because of high earnings from a business, investments, or continued work—a Roth IRA might be the more appealing choice.

Roth IRA vs Traditional IRA Rules & Regulations

It’s important to understand how the IRS regulates Roth vs. regular IRAs. These rules exist to ensure that investors don’t unfairly benefit from tax breaks when using an IRA as part of their financial plan.

Specifically, the IRS regulates who can make contributions to IRAs, in what amount, and how those contributions can be withdrawn. There are also guidelines concerning when IRA distributions are mandatory. Becoming familiar with the regulations surrounding these accounts is another key step when weighing whether a traditional vs. Roth IRA makes more sense for you.

Contributions to Roth vs Traditional IRAs

Contributions are the same for both Roth and traditional IRAs. The IRS effectively levels the playing field for individuals saving for retirement by setting the same maximum contribution limit across the board.

For the 2024 tax year the IRA contribution limit is $7,000, with an extra $1,000 contribution for those age 50 or older. Individuals have until the April tax filing deadline to make IRA contributions for the current tax year. To fund an IRA for the 2024 tax year, investors have until the April 2025 tax filing deadline to do so.

For the 2023 tax year the IRA contribution limit is $6,500, with an extra $1,000 contribution for those age 50 or older. Individuals have until the April tax filing deadline to make IRA contributions for the current tax year. To fund an IRA for the 2023 tax year, investors have until the April 2024 tax filing deadline to do so.

With a Roth IRA, investors can continue making new contributions into their account, regardless of age. That might appeal to an investor who plans to delay retirement past the traditional age of 65 or 66 and continue working. As long as a person has income for the year, they can keep adding money to their Roth account.

Traditional IRAs, on the other hand, don’t allow individuals to make contributions indefinitely. As long as a person is working, they can make contributions—but only up to age 72. After that, they can no longer continue putting money into their account.

Withdrawals from Roth vs Traditional IRAs

Generally with IRAs, the idea is to leave the money untouched until retirement. The IRS has set up the tax incentives in such a way that promotes this strategy. That said, it is possible to withdraw money from an IRA before retirement.

With a Roth IRA, an individual can withdraw the money they’ve contributed (not counting any money earned in appreciation) at any time. They can also withdraw up to $10,000 in the earnings they’ve made on investing that money without paying penalties as long as they’re using the money to pay for a first home (under certain conditions).

With a traditional IRA, an investor will generally pay a 10% penalty tax if they take out funds before age 59.5. There are some exceptions to this rule, as well.

These are the IRS exceptions for early withdrawal penalties:
Disability or death of the IRA owner. In this case, disability means “total and permanent disability of the participant/IRA owner.”

Qualified higher education expenses for you, a spouse, child or grandchild.
Qualified homebuyer. First time homebuyers can withdraw up to $10,000 for a down payment on a home.
Unreimbursed medical expenses. These include health insurance premiums paid while unemployed and expenses greater than 7.5% of your AGI.

Required Minimum Distributions from IRAs

The IRS doesn’t necessarily allow investors to leave money in your IRA indefinitely. Traditional IRAs are subject to required minimum distributions, or RMDs. That means an individual must start taking a certain amount of money from their account (and paying income taxes on it) by April 1 of the year after they reach age 72—whether they need the funds or not. Distributions are based on life expectancy and your account balance.

If an individual doesn’t take a distribution, the government may charge a hefty 50% penalty on the amount they didn’t withdraw.

For those who don’t want to be forced to start withdrawing from their retirement savings at a specific age, a Roth IRA may be preferable. Roth IRAs have no RMDs. That means a person can withdraw the money as needed, without fear of triggering a penalty. Roth IRAs might also be a vehicle for passing on assets to your heirs or beneficiaries, since you can leave them untouched throughout your life and eventual death if you choose to.

The Takeaway

For most people, if not all, an IRA can be a great way to bolster retirement savings, even if one is already invested in an employer-sponsored plan like a 401(k).

When it comes to retirement, every cent counts, and starting as early as possible can make a big difference—so it’s always a good idea to figure out which type will work for you sooner than later.

SoFi Invest® offers traditional and Roth IRAs. For individuals who want to make investments in addition to their retirement accounts, SoFi also offers an Active Investing platform, where investors can buy stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

Sign up for SoFi Invest and get started today.


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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.

Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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Mutual Funds vs Index Funds: Key Differences

Mutual funds and index funds are similar in many ways, but there are some key differences that investors need to understand to effectively implement them into an investment strategy. Those differences might include investing style, associated fees and taxes, and how they work.

The choice between an index fund and an actively managed mutual fund can be a hard one, especially for investors who are unsure of the distinction. The differences between index funds and other mutual funds are actually few — but may be important, depending on the investor.

What’s the Difference between Index Funds and Mutual Funds?

Index funds and mutual funds are similar in many ways, but they do differ in some others, such as how they work, associated costs, and investment style.


💡 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.

How They Work

Index funds are a type of mutual fund, interestingly enough. Index funds are distinguished by their investing approach: Index funds invest in an index, and only change the securities they hold when the index changes, or to realign their holdings to better match the index they invest in.

Rather than rely on a portfolio manager’s instincts and experience, an index fund tracks a particular index. There are benchmark indexes across all of the different asset classes, including stocks, bonds, currencies, and commodities. As an example, the S&P 500® Index tracks the stocks of 500 of the leading companies in the United States.

An index fund aims to mirror the performance of a given benchmark index by investing in the same companies with similar weights. With these funds, it’s not about beating the market, it’s about tracking it, and as such, index funds typically follow a passive investment strategy, known as a buy-and-hold strategy.

A mutual fund is an investment that holds a collection — or portfolio — of securities, such as stocks and bonds. The “mutual” part of the name has to do with the structure of the fund, in that all of its investors mutually combine their funds in this one shared portfolio.

Mutual funds are also called ’40 Act funds, as they were created in 1940 by an act of Congress that was designed to correct some of the investment abuses that led to the Stock Market Crash of 1929. It created a regulatory framework for offering and maintaining mutual funds, including requirements for filings, service charges, financial disclosures, and the fiduciary duties of investment companies.

To get people to invest, the portfolio managers of a given mutual fund offer a unique investment perspective or strategy. That could mean investing in tech stocks, or only investing in the fund manager’s five best ideas, or investing in a few thousand stocks at once, or only in gold-mining stocks, and so on.

Fees and Taxes

There may be different associated costs with index funds and mutual funds as well.

Mutual-fund managers generally charge investors a management fee, which comes from the assets of the fund. Those fees vary widely, but an active manager will generally charge more, as they have to pay the salaries of analysts, researchers, and the stock pickers themselves. Passive managers of index funds, on the other hand, simply have to pay to license the use of an index.

An actively-managed mutual fund may charge an expense ratio (which includes the management fee) of 0.5% to 0.75%, and sometimes as high as 1.5%. But for index funds, that expense ratio is typically much lower — often around 0.2%, and as low as 0.02% for some funds.

Investing Style

The two also differ on a basic level in that index funds are a passive investing vehicle and mutual funds are typically actively managed. That means that investors who want to take a hands-off approach may find index funds a more suitable choice, whereas investors who want a guiding hand in their portfolio may be more attracted to mutual funds.

Mutual Funds vs. Index Funds: Key Differences

Mutual Funds

Index Funds

Overseen by a fund manager Track a market index
May have higher associated costs Typically has lower associated costs
Active investing Passive investing

Index vs Mutual Fund: Which is Best for You?

There’s no telling whether an index or mutual fund is better for you — it’ll depend on specific factors relevant to your specific situation and goals.

When deciding how to invest, everyone has their own unique approach. If an investor believes in the expertise and human touch of a fund manager or team of professionals, then an actively managed fund like a mutual fund may be the right fit. While no one beats the market every year, some funds can potentially outperform the broader market for long stretches.

But for those individuals who want to invest in the markets and not think about it, then the broad exposure — and lower fees — offered by index funds may make more sense. Investing in index funds tends to work best when you hold your money in the funds for a longer period of time, or use a dollar-cost-average strategy, where you invest consistently over time to take advantage of both high and low points.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

Index funds and mutual funds are similar investment vehicles, but there are some key differences which include how they’re managed, costs associated with them, and how they function at a granular level.

The choice between index funds and other mutual funds is one with decades of debate behind it. For individuals who prefer the expertise of a hands-on professional or team buying and selling assets within the fund, a mutual fund may be preferred. For investors who’d rather their fund passively track an index — without worrying about “beating the market” — an index fund might be the way to go.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Do index funds outperform mutual funds?

Actively-managed funds, such as mutual funds, tend to underperform the market as a whole over time. That’s to say that most of the time, a broad index fund may be more likely to outperform a mutual fund.

Do people prefer index funds over mutual funds, or mutual funds over index funds?

The types of funds that investors prefer to invest in depends completely on their own financial situation and investment goals. But some investors may prefer index funds over mutual funds due to their hands-off, passive approach and lower associated costs.

Are mutual funds riskier than index funds?

Mutual funds may be riskier than index funds, but it depends on the specific funds being compared — mutual funds do tend to be more expensive than index funds, and tend to underperform the market at large, too.


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.

Claw Promotion: Customer must fund their Active Invest account with at least $10 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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How taxes and fees impact return on investment

Taxes, Fees, Commissions, and Your Investments

Earning returns can be exhilarating. But it’s important to remember that they don’t necessarily represent the money that goes in the bank. Commissions, taxes, and other fees impact the returns any investor makes on their investment.

Just how big a bite these investment expenses take out of an investor’s assets isn’t always instantly clear. But by understanding the fees they pay, and the taxes they’re likely to owe, investors can better plan for the money they’ll actually receive from their investments. And they can also take concrete steps to minimize the effects of fees and taxes.

Investment Expenses 101

There are a few different types of investment expenses an investor may come across as they buy and sell assets. Here are the most common ones.

Fund Fees

Mutual funds are a very popular way for investors to get into the market. They’re the vehicles that most 401(k), 403(b), and IRAs offer investors to save for retirement. But these funds charge fees, starting with a management fee, which pays the fund’s staff to buy and trade investments.

Investors pay this fee as a portion of their assets, whether the investments go up or down. (With employer-sponsored retirement accounts, the employer may cover the fees as long as the account holder is employed by the company.) Management fees vary widely, with some index funds charging as little as .10% of an investor’s assets. But other mutual funds may charge more than 2%.

In addition to the management fee, the fund may also charge for advertising and promotion expenses, known as the 12b-1 fee. Plus, mutual fund investors may have to pay sales charges, especially if they buy funds through a financial planner, or an investment advisor. While the maximum legal sales charge for a mutual fund is 8.5%, the common range is between 3% and 6%.

One way to understand how much of a bite these mutual fund fees take out of an investment on an annual basis is to look at the expense ratio.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Advisor Fees

Investors may also face fees when they hire a professional to help manage their money. Some advisors charge a percentage of invested assets per year. More recently, some advisors have simplified the cost by simply charging an hourly fee.

Broker Fees and Commissions

Even investors who want to manage their own portfolios typically pay a broker for their services in the form of fees and commissions. These fees and commissions may be based on a percentage of the transaction’s value, or they may be rolled into a flat fee. Another factor that may influence the fee: whether an investor uses a full-service broker or a discount broker.

How to Minimize the Cost of Investing

No matter how an investor approaches the market, they can expect to pay some fees. It’s up to each individual to decide whether or not those fees are worth it. For some, paying a professional for hands-on advice is worth the extra annual 1% fee (or more) of their invested assets. For others, minimizing costs may be a priority. Among many options, there are a few investing opportunities that stand out as relatively low-cost.

Index Funds

When investing in mutual funds, one type of fund has established itself as the least expensive in terms of fees: Index funds. That’s because these funds track an index instead of paying analysts and managers to research and trade securities. When it comes to index funds vs. managed funds, proponents typically cite the lower fees.

Automated Investing Platforms

People seeking investing advice or guidance who don’t want to pay typical fees might want to explore automated investing platforms, also known as “robo-advisors.” Some of these platforms charge annual advisory fees as low as .25%. That said, these platforms often use mutual funds, which charge their own fees on top of the platform fees.

Discount Brokerage

Investors who manage their own portfolio may opt for a discount or online brokerage. These brokers tend to charge flat fees per trade as low as $5, with account maintenance fees also often as low as $0 to $50 per account.

How Taxes Eat into Investing Profits

There are typically two kinds of taxes that investors have to worry about. The first is income tax, and the second is capital gains tax. In general, income taxes apply to investment earnings in the form of interest payments, dividends, or bond yields. Capital gains, on the other hand, apply to the returns an investor realizes when they sell a stock, bond, or other investment. (The exception: The IRS taxes short-term investments, which an investor has held for less than a year, at that investor’s marginal income tax rate.)

By and large, capital gains tax rates are lower than income tax rates. Income tax rates for high-earners can be as high as 37%, plus a 3.8% net investment income tax (NIIT). That means the taxes on those quick gains can be as high as 40.8%—and that’s not including any state or local taxes.

The taxes on long-term capital gains are lower across the board. For tax year 2023, for investors who are married filing jointly and earning less than $89,250, the capital gains tax rate is 0%. It goes up depending on income, with couples making between $89,250 and $553,850 paying 15%, and those with income above that level paying 20%.

For tax year 2024, those who are married and filing jointly with taxable income up to $94,050 have a capital gains tax rate of 0%. Couples making between $94,050 and $583,750 have a rate of 15%, and those with income above that have a tax rate of 20%.


💡 Quick Tip: Automated investing can be a smart choice for those who want to invest but may not have the knowledge or time to do so. An automated investing platform can offer portfolio options that may suit your risk tolerance and goals (but investors have little or no say over the individual securities in the portfolio).

Strategies to Minimize Taxes

There are a few ways an investor can minimize the impact of taxes on their investments. One popular way to take advantage of the tax code is by investing through a retirement plan, such as a 401(k), 403(b), or IRA. All of these plans encourage people to save for retirement by offering attractive tax breaks.

For tax-deferred accounts like a 401(k) or traditional IRA, the tax break comes on the front end. Retirees will have to pay income taxes on their withdrawals in retirement. On the other hand, retirement accounts like a Roth 401(k) or Roth IRA are funded with after-tax dollars, and money is not taxed upon withdrawal in retirement.

Another approach some investors may want to consider is tax-loss harvesting. This strategy allows investors to take advantage of investments that lost money by selling them and taking a capital loss (as opposed to a capital gain). That capital loss can help investors reduce their annual tax bill. It may be used to offset as much as $3,000 in non-investment income.

The Takeaway

Fees and taxes typically do have an impact on an investor’s returns on investments. How much they eat into profit varies, and is largely dependent on what the investments are, how they are being managed, and how long an investor has had them. Other factors include the investor’s income level, and whether they’ve also lost money on other investments.

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 with as little as $5 with a SoFi Active Investing account.


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.

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.

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.

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.


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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