Full-time vs Part-time Student

Full-time vs Part-time Student

Many schools allow students to tailor a schedule that aligns with their needs and lifestyle. However, the number of credits you take will determine whether you are enrolled full-time vs part-time. Schools generally have minimum credit amounts in order for students to be considered full- or part-time. In general, undergraduate students who are enrolled in 12 or more credit hours in a semester are considered full-time students.

A student’s status as full- or part-time could impact their financial aid package, academic workload, and the cost of attendance.

Here’s an overview of the key differences between enrolling as a part-time vs full-time student and how they might impact your education.

What is a Full-time Student?

As mentioned, schools set a minimum credit amount for full-time student status. Generally, undergraduate students are considered to be full-time when enrolled in 12 or more credit hours in a given semester. Schools that use a quarter or trimester system may have different credit thresholds to better reflect their typical course load.

For graduate school, students may take as few as nine credits to have full-time status. However, this can vary by institution, so it’s recommended to consult the department’s website or academic advisor.

Full-time enrollment may stipulate that credit-bearing courses qualify as either a major requirement, general education requirement, or eligible elective.

What is a Part-time Student?

Part-time students generally take less credit hours than their full-time peers. Most undergraduate programs define part-time status as taking fewer than 12 credits, though this can differ by institution, especially for graduate schools.

Typical college courses are three to four credits, so part-time students usually take three or fewer classes per semester. Some possible exceptions include half-semester courses or classes with both lecture and lab components.

Enrollment status is considered on a per-semester basis, meaning that students can fluctuate between part-time vs full-time college throughout their studies.

Difference Between Full-time and Part-time Students

On paper, the difference between full-time and part-time enrollment comes down to the number of credits. In practice, enrollment status can impact how students pay for their education.

Tuition Cost

Whether you study full-time or part-time will affect how much you pay for school. Typically, part-time students pay per credit hour. This allows part-time students to spread out the cost of their education over a longer period of time.

Meanwhile, full-time tuition is capped once a student reaches the credit threshold. Thus, a student may be able to pay the same in tuition for taking anywhere between 12 to 18 credits at the same institution.

Full-time students may be interested in stacking their schedules to reduce education costs. Maximizing credit hours while enrolled full-time can help stay on track or graduate early, but it’s worth noting that taking additional classes above this range can come with separate fees per extra credit hour. A more intensive course schedule could also translate to higher costs for books and materials in a given semester.

Recommended: What Is Cost of Attendance?

Financial Aid

Financial aid is another important consideration when deciding between enrolling as a full-time vs part-time student. For instance, some forms of federal student aid require students to be enrolled at least half-time (six or more credits) to qualify.

Pell Grants, which are awarded based on a student’s financial need, vary according to enrollment status. Full-time students may receive up to $6,495 for the 2021-2022 award year. Awards for part-time students are proportional to the number of credit hours a student takes. For example, a student taking nine credits would be eligible for 75% of the maximum award. Part-time students should keep in mind that eligibility for Pell Grants can’t exceed 12 academic terms.

Both full-time and half-time students can qualify for Federal Direct Loans and the Federal Work-Study program if attending a participating university for the latter. Interested students must indicate that they’d like to be considered for work-study on the Free Application for Federal Student Aid (FAFSA).

Recommended: Types of Federal Student Loans

Since financial aid awards can vary by institution, it may be beneficial to check with your school to determine how enrollment status could impact your overall financial aid package.

Student Loan Repayment

Whether studying part-time or full-time, many students borrow money to pay for education expenses. Most federal student loans do not require repayment while the student is enrolled in school at least half-time. Part-time students have to repay loans once they drop below half-time enrollment.

Borrowers with Direct Subsidized, Direct Unsubsidized, or Federal Family Education Loan, will also have a six-month grace period after graduation before loan payments are due. And if you return to half-time or full-time enrollment prior to the end of the grace period, you will be eligible for the full six-month period upon graduation. Interest on Direct Subsidized loans is covered by the U.S. Department of education while students are enrolled or during certain periods of deferment.

Graduate and professional students with PLUS loans may also receive a six-month deferment on repayment when falling below half-time status.

Borrowers with private student loans and certain federal loans may be expected to begin repayment immediately.

Scholarships

Scholarships can help pay for tuition and related educational expenses. Organizations may use a variety of criteria when awarding scholarships, including academic merit, financial need, quality of application responses, and enrollment status.

Some scholarships have eligibility requirements that require recipients to be full-time students. Still, opportunities exist for part-time students to secure scholarships.

Part-time students attending a SUNY or CUNY community college can apply for the New York State Part-time Scholarship to pay for the lesser of six credit hours or $1,500 per term. To qualify, students must take between six and 11 credits.

There are also scholarships available to help adult learners pay for college who may be studying part-time.

Recommended: Scholarships and Grants to Pay Off Student Loans

Tax Credit Eligibility

Enrollment status can have implications for your or your parents’ taxes. There are two main programs—the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC)—that can give tax credits for out-of-pocket education expenses.

The AOTC can provide an annual credit up to $2,500 per student, given they are enrolled at least half-time.

Meanwhile, the LLC is open to all students regardless of enrollment status. The maximum credit per return is 20% of eligible education expenses up to $10,000, or $2,000 total.

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Schedule and Time Commitment

For many, the choice to be a part-time vs full-time student can often come down to scheduling.

As a general rule of thumb, students can expect between two to three hours of work per week for each credit they’re taking. This means that a three-credit course would require approximately six to nine hours of student engagement between class time, homework, readings, and studying.

Many students work while completing their degrees to help pay for education and living expenses. Part-time students also work according to information from the Bureau of Labor Statistics. In October 2020, 41.5% of full-time students had some type of employment while nearly 82% of part-time students were employed.

To make their schedule more feasible, part-time students may consider taking online classes while working to reduce commute times and have access to a wider selection of academic programs.

Taking night classes is another option for students to study while working.

College Experience

Whether you are enrolled as a full-time vs part-time student could impact your success and experience as a student.

In 2019, the retention rate for part-time students at postsecondary institutions was just 46.5%, compared to 76.1% for full-time students.

Enrollment status could influence aspects of campus life and extracurricular activities as well. For instance, some schools may only allow full-time students to live in student housing on campus.

Student athletes must abide by NCAA regulations, including minimum coursework requirements, to be eligible to play. Division I athletes have to enroll in at least six credits to be eligible for the following term, whereas Division II and III athletes must take nine and 12 credit hours, each.

The Takeaway

Going to college is a serious commitment. Finding a schedule that works for your personal and financial needs could make the difference in making it to graduation. Full-time undergraduates generally take a minimum of 12 credits while those opting for part-time take fewer than 12 credits. Some scholarships are only available to full-time students but other forms of aid are open to both full- and part-time students.

Regardless of enrollment status, financial aid and scholarships may not be enough to pay for college outright. To bridge the gap, a private student loan could be a solution. Private student loans do not have the same borrower protections as federal student loans, like income-driven repayment plans, so are generally considered only after all other forms of aid have been exhausted.

SoFi offers no-fee private student loans for students enrolled full or half-time. Repayment plans are flexible, helping students find an option that works for their financial plan and budget.

Interested in learning more about private student loans with SoFi? Find out what rate you qualify for in just a few clicks.

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Pros and Cons of Online School

Pros and Cons of Online School

When a course of study is offered virtually, it’s considered an online school. The ability to take classes virtually can offer benefits like flexibility and convenience to students. On the other hand, online learning can make it difficult for students to connect with their peers and professors and can make it challenging to teach concepts that require more hands-on learning.

What is Online School?

Online school is a format of education where classes are conducted virtually. Some colleges are designed specifically for online learning. Other colleges and universities may offer both in-person and remote learning options for students. Depending on the program, classes may be offered synchronously, where students attend via an online forum at a specific time; asynchronously, where lectures are recorded and can be viewed at a student’s leisure; or a hybrid model of the two.

Online learning is a nuanced topic that has had a niche position in higher ed for over a decade. And while detractors of online learning say that it can be a pale imitation of in-person learning, there are several key advantages, including convenience and cost. Here, how to consider the pros and cons of online school.

Recommended: Tips for Taking Online Classes Successfully

Pros of Online School

When schools pivoted to online learning due to the COVID-19 pandemic, the experience was generally set up ad-hoc and created to ride out the crisis. But many online programs have been constructed with online learning at the front of mind. This means that they may be thoughtfully constructed in a way that supports distance learning.

When considering online schools, make sure that the program is accredited by an organization recognized by either the U.S. Department of Education or the Council for Higher Education Accredited. This can help students avoid any online scams.

Part of analyzing whether online school will be successful for you is knowing yourself. This past year allowed a lot of people to obtain deep insight into whether working remotely—either at work or school—was productive or even enjoyable. It has also given some people confidence that, even if in-person is preferred, online is doable and may not be as challenging as they may have thought in the past. That said, if you think online school might be right for you, here are some other factors to consider.

Cost and Affordability (Potentially)

No buildings and no in-person instruction means less expensive tuition, right? Not necessarily. While some institutions that specifically invest in online learning may be less expensive, you may find that online tuition is commensurate whether or not you go in person, depending on the program.

Recommended: How to Pay For Online College

If cost is the primary factor in pursuing online education, it may be a good idea to look at universities and degree programs that specialize in online learning, as they may create pricing based on an online-first business model.

More Convenient

A huge benefit to online school is that many programs are structured knowing that students may also be juggling career and family responsibilities. This can translate into asynchronous learning—lesson modules that can be done on your own time—rather than a mandatory lecture to attend.

Still, the time commitment to online school can be intense when you’re going to school and working. Even if you don’t need to be in class at a certain time, there will still be due dates, studying, and exams to contend with.

Self-Directed Course of Study

On a similar note, many fans of online courses like that the course can be more self-directed, allowing you to take control of your education on your own timeline. This may mean you need to be more proactive about scheduling office hours with professors, blocking out time to study, and making sure that assignments are turned in on time.

Cons of Online School

While some people thrive in an online environment, some people want to have in-person interaction. Here are some cons of online school:

Limited Hands-On Experience

Some degree programs that have a lab component may be harder to mimic online. Some degrees accept virtual labs, while other degrees may require a “wet lab” (aka a hands-on lab). Make sure you know what your degree needs, and confirm that all coursework can be done entirely online. It can also be helpful to speak with current students in the program to hear any of their frustrations.

Lack of Community

Some people find it hard to connect with classmates and may find group projects or virtual small groups to be much less engaging than they might otherwise have been if they had been in person.

Harder to Connect with Professors

Some professors maximize online interaction, while some may be harder to pin down and connect with. Heading to office hours, even if they are virtual, can help you build a connection and get to know the professor.

More Difficult to Access On-Campus Resources

If the online school you’re attending also has a brick-and-mortar campus, there may be resources for career development as well as on-campus events related to your department. It may be worth assessing how virtual students can tap into these resources and what resources are accessible to them.

Longer Timeframe

The flip side of a more convenient schedule means that courses may be more spread out. What could be a one or two-year program in a full-time setting could take several years if done virtually.

Additional Considerations for Online School

Being able to pursue higher education remotely can open up possibilities for many individuals. But it can be a good idea to consider how online school will fit into your life. These considerations can help you find your best fit.

Talk with Other Students

It can be helpful to speak with current students who are in a similar position as you. Talking with a student who is also juggling family or a career can help you see how the process plays out in real life.

Sit in on a lecture

Will the program allow you to virtually sit in on the lecture or see some course materials? Doing so can help you see how the program plays out in real life.

Take an Online Course

In some cases, online school can be an expensive undertaking. Prior to applying to an official degree program, consider taking a virtual course, either for fun or as a credit program towards your degree. Taking a virtual course without the pressure of a degree can help you take stock of the pros and cons for yourself, and assess whether or not online learning is right for you.

Talk with Your Employer

If you are planning to do a degree program alongside working, speak with your employer. It may be possible that they can subsidize the cost of the degree if it is relevant to your career.

Consider the cost and potential salary advancement you might get out of the program. Talking with the financial aid office, as well as the department, can help clue you into scholarships and grants, as well as filling out the FAFSA® and considering private student loan options can help you begin to get your finances in order as you figure out what your schedule may look like with online school.

The Takeaway

Going to school—whether it’s online or in-person—is a major decision. It’s important to consider pros and cons, including cost, as you assess whether it’s right for you. Speaking with people who’ve done the degree, people within your department and people in your career field or future career field can help you assess how this program could be successful for your career goals and aspirations.

Taking the time to do the research, and potentially dipping your toe into online learning with one or two courses, can help you decide how online school may fit into your life and career goals.

If you’re in the process of paying for school—online or otherwise—private student loans can help fill in any gaps between the cost of attendance and all other sources of funding like savings and federal student loans, grants, or scholarships. However, private student loans may lack many of the borrower protections that federal loans offer borrowers in case of economic hardship or unemployment.

Interested in learning more private student loans at SoFi? Find out what rate and terms you prequalify for in just a few minutes.

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SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Private Student Loans
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 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.

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 or products 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.
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What is a Stipend?

What is a Stipend?

A stipend is a fixed amount of money given to offset expenses or provide financial support while you’re engaged in a service or contributing to a project. A stipend may be paid in one lump sum, or it might be paid in a series of smaller amounts.

As you’re looking through employment opportunities, you may come across certain positions or experiences that don’t offer a salary but do offer a stipend. Stipends are also common in academia, where a stipend may be offered to grad students to TA classes, assist with research, or conduct research projects on their own.

Read on to learn more about how a stipend works, whether or not you can negotiate a stipend, and how receiving this type of payment may affect your taxes.

How Does a Stipend Differ From a Salary?

A stipend is a fixed sum of money that may be used by an organization to incentivize employees, interns, researchers, teachers, and volunteers. It’s usually meant to help offset expenses for a specified period of time, such as one year or one semester.

Typically, stipends are used in internships or apprentice situations, where the recipient of the stipend is receiving training that benefits them more than an employer.

However, some employers may offer stipends to their employees as one-off payments to help offset work-related expenses, such as travel/commuting, meals, home office expenses, cell phone, professional training, or education.

A salary, on the other hand, is an annual amount agreed upon between a company and an employee that is paid out in regular increments, either monthly, bi-monthly, bi-weekly, or weekly.

A salary may also include benefits such as vacation, insurance, and other benefits within the overall compensation package.

Recommended: What is a Good Entry Level Salary?

Who Receives a Stipend?

Historically, stipends were primarily used as part of an internship or fellowship package. These days, however, it’s not uncommon for employers to use a stipend as a “fringe benefit” added to your overall compensation package.

The stipend may be earmarked for certain expenses and your employer may ask for specific records or notekeeping to access it. Fringe benefit stipends may include:

• Transportation stipends

• Travel stipends

• Education stipends

• Clothing stipends

• Entertainment stipends

• Food stipends

The type of stipends offered usually depends on the nature of your work. For example, if you have to travel frequently for your job, your employer may give a travel stipend to allow you to have flexibility in making your travel plans.

Are Stipends Taxable?

Stipend checks aren’t considered wages so you won’t pay Social Security or Medicare taxes on them. However, you may still have to pay some taxes on a stipend.

If you are offered a stipend for an internship or work in academia, it might be called a “living” stipend, which means it is being given to you to help pay for expenses.

Though taxes will not be taken out, this stipend is likely considered taxable income and you will need to set aside some of your stipend money to pay any taxes owed at the end of the year.

In some academic settings, however, a stipend may be considered a scholarship, and earmarked for educational purposes only (rather than living expenses). In this case, the stipend may not be taxable.

If you’re offered a stipend for academic work, it can be a good idea to speak with a financial professional or your financial aid office to understand how the stipend is meant to be used and how it will be treated tax-wise.

Stipends offered by companies to their employers may or may not be taxable—-it depends on how the company structures the stipend.

In order to keep a stipend non-taxable, a company must set up a reimbursement plan in which employees complete expense reports proving that all business-related expenses are being reimbursed through the payment of the stipend.

For example, if you’re given a travel stipend to go to a client meeting, then the stipend may not be taxable if you provide adequate expense documentation of how the stipend was used and how each payment was an acceptable business expense.

If expenses are not documented — or if the stipend is a “perk” of working at the company, such as a commuting stipend or stipend for in-office meals — then the stipend may be taxable.

If your company is offering you a stipend, it can be a good idea to ask your employer, as well as a tax professional, about any tax implications.

How to Use a Stipend

If you accept an internship or other position that offers a stipend to help cover expenses, it can be a good idea to consider how the money will be spent and set up a budget for basic living expenses.

Unlike a salary or wages, you may need to make a stipend stretch several months. A good first step is to assess your monthly expenses, including:

• Housing

• Food

• Transportation

• Amount set aside for potential taxes

• In case of emergency expenses

A stipend is not generally expected to cover all of the expenses you may incur, so you may need to find ways to stretch your money, such as moving in with a friend or relative, or bring in extra income by getting a side gig or part-time job.

Recommended: Why Having Emergency Savings Should Be a Financial Priority

Can You Negotiate a Stipend?

There may be some wiggle room, but how much (if any) will depend on several factors, including what the stipend is for, the field you’re in, and the reason for asking for an increased stipend.

For example, if you are a student who received a stipend to do international research, you may find that the cost of travel and lodging is more than the organization or school offering the stipend anticipated. This could be something you could bring to the organizer’s attention, to see if there’s any wiggle room in allocating more dollars.

In addition to assessing your expenses (to see if the stipend will be enough), you may also want to look at similar positions and review what their stipends are. If other positions are offering more, you may want to consider asking for that amount.

In some cases, however, a school, organization, or company may not have wiggle room to access more money and may offer the same stipend to interns or apprentices across the board.

Doing some research and framing the conversation respectfully can be helpful as you navigate the next steps and whether or not the stipend package makes sense for your financial needs.

The Takeaway

A stipend is a predetermined amount of money that is often paid to certain individuals, such as trainees, interns, and students, to help offset some of their expenses.

A stipend can make certain stepping stones toward a degree or job more attainable and affordable.

However, stipends can have financial implications if you’re not aware of how the stipend may be taxed and what records are necessary for any incurred expenses during the stipend.

As you plan for life with a stipend, it can be a good idea to set up a budget and track your expenses to make sure you don’t run out of money mid-program.

With a SoFi Money® cash management account you can easily track your weekly spending right in the dashboard of the SoFi app.

Make it easy to manage your finances with SoFi Money.

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Investing During a Recession

Investing during a recession can be daunting for many investors, but a few guardrails can help you weather a downturn — and maybe even make the best of it.

While no one knows exactly and when a down market will turn positive, history has shown that it typically does. The last major recession, coming after the 2008 financial crisis, gave way to an 11-year bull market that put a lot of money in investors’ pockets. Between March 9, 2009 and March 5, 2020, the S&P 500 delivered a cumulative return of 462.1%, according to FactSet.

In other words, just because your investments may be trending downward, don’t let fear lead you to make impulsive decisions like pulling your money out of the market and locking in losses. Read on to learn why staying the course can have an upside, and sometimes entering the market even in the depths of a downturn might offer some long-term rewards.

What You Need to Know About Investing in a Recession

A recession is often defined as a period of two consecutive quarters of decline in the nation’s real Gross Domestic Product (GDP) — the inflation-adjusted value of all goods and services produced in the United States. However, the National Bureau of Economic Research, which officially declares recessions, now takes a broader view — including indicators like wholesale-retail sales, industrial production, employment, and real income.

The point is that the markets tend to price in those indicators, so much so that you may see the prices of stocks start to drop (and bond prices start to rise) even before a recession is officially called. That stock volatility can give investors the jitters — and that emotional state that can be contagious in a way.

Behavioral finance experts have dubbed this tendency “herd mentality” — which means that you’re more likely to behave in a similar way to a larger group than you realize. Combine that behavioral bias with another common one — loss aversion — and you can see how emotions can lead some investors to make impulsive choices in a moment of panic or doubt.

The good news (there is some good news here): History shows that most recessions don’t last as long as you might think — about 11 months, according to the National Bureau of Economic Research (NBER). So while an economic downturn can be scary while it lasts, it’s likely that time is on your side.

By staying the course and sticking with your investment strategy (and not yielding to emotion), the market recovery could help you recoup any losses and possibly see some gains — especially if you buy the dip (when prices are low). As investors witnessed firsthand during the market swoon that accompanied the arrival of the pandemic in March of 2020, sometimes declines don’t last very long.

How to Make Money Investing in a Recession

To that end, it’s worth remembering there are some investments that do better than others during recessions. For starters, recessions are bad news for highly leveraged, cyclical, and speculative companies. These types of companies may not have the resources to withstand a rocky market.

By contrast, the companies that have traditionally survived and even outperformed during a downturn are companies with very little debt and strong cash flow. If those companies are in traditionally recession-resistant sectors, like basic consumer goods, utilities, defense contractors, and discount retailers, they may deserve closer consideration.

Recommended: What Types of Stocks Do Well During Volatility?

Some investors might also seek out even more defensive positions during a recession, by buying real estate, precious metals (e.g. gold), or trading for established, dividend-paying stocks.

Bear in mind that every recession impacts different sectors in different ways. During the Great Recession of 2008-09, financial companies suffered — because it was a financial crisis. In 2020, biotech companies tended to thrive, but investments in energy companies have been hit harder owing to fluctuating oil prices. As an investor, you have to do the math on where the risks and opportunities lie during a recession.

Stick to Your Investment Strategy During a Recession

During a recession, it’s important to remember two key tenets that will help you stick to your investing strategy. The first is: While markets change, your goals don’t. The second is: Paper losses aren’t real until you cash out.

The first refers to the fact that investors go into the market because they want to achieve certain financial goals. Those goals are often years or decades in the future. But as noted above, the typically shorter-term nature of a recession may not ultimately impact those longer-term financial plans.

The second tenet is a caveat for the many investors who watch their investments — even their long-term ones — far too closely. While markets can decline, and account balances can fall, those losses aren’t real until an investor sells their investments. If you wait, it’s possible you’ll see some of those paper losses regain their value.

Key Recession Concept #1: Dollar-Cost Averaging

While it’s important for investors to stay true to their long-term strategy during a recession, what about investing new money? This is where the concept of dollar-cost averaging is an important one for investors to keep in mind.

Dollar-cost averaging, simply put, is a systematic way of investing a fixed amount of money on a regular basis. It’s often used to describe the way most people invest, on a paycheck-by-paycheck basis, through workplace 401(k) and 403(b) plans.

This approach spreads the cost basis out over a long period of time, and a wide range of prices. By doing so, it provides a degree of insulation against market fluctuations. During times of rapidly rising share prices, the investor will have a higher cost basis than he or she otherwise would have had. During times of collapsing stock prices, the investor will have a lower cost basis than he or she otherwise would have had.

Taken altogether, then, dollar-cost averaging can help you pay less for your investments on average over time, and help to improve long-term returns.

Key Recession Concept #2: Rebalancing

Investors try to gauge how close or far they are from their goals, because your time horizon determines how you invest. For instance, a younger investor may have a portfolio that’s heavier in growth stocks, and lighter when it comes to bonds and cash.

For an investor who’s nearing a major goal, like retirement, the priority may be the safety and security or investments like high-quality (but lower-yielding) bonds. Over time, investors need to rebalance the allocation of different asset classes in their portfolio. A younger investor may start out with an allocation of, say, 70% stocks and 30% bonds and cash. As you near retirement, that equity allocation would likely shift toward 50% stocks or even lower.

These changes happen over the life of every investor. But the good news for some investors is that a recession can act as a chance to look at their portfolios, and to rebalance them.

A recession can also be a chance to sell out of a mix of investments, owing to tax considerations. By selling stocks or mutual funds that have appreciated alongside ones that have lost value, investors can take advantage of tax-loss harvesting. This strategy allows investors to use investments that have declined in value to offset investment gains and potentially reduce their annual tax bill.

When an investor wants to reduce capital gains taxes they owe on investments they’ve sold, tax-loss harvesting can allow an investor to deduct $3,000 in losses per year. As such, the strategy can be the silver lining on investments that just didn’t work out.

A Recession May Offer Investors New Opportunities

Investing during a recession is really what you make of it. While market volatility can spark investor worries, it’s possible to manage your emotions, stay in control of your investment strategy, and possibly come out ahead.

Certainly, you could get started investing today by opening an account with SoFi Invest®, so that you lay the groundwork for your financial plans sooner rather than later. Then you could be in a better position to take advantage of new opportunities, if and when another recession comes along.

SoFi Invest offers an active investing solution that allows you to choose your stocks and ETFs without paying SoFi commissions. SoFi Invest also offers an automated investing solution that invests your money for you based on your goals and risk, without charging a SoFi management fee.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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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A Guide to Tax-Efficient Investing

Any time you make money from your investments you need to consider the impact taxes might have on your earnings. Fortunately, there are a range of tax-efficient investment strategies that can help minimize the bite taxes take out of your gains.

What is tax-efficient investing, and how does it work? By understanding the tax implications of different types of accounts, as well as the investments you choose (e.g. stocks, bonds, mutual funds), you can determine the most tax-efficient strategies for your portfolio.

Tax-efficient investing is important for two reasons. Not only can these strategies help you keep more money in your pocket, tax-efficient investing can enable you to keep more of your money invested in the market, with the potential for growth.

Read on for a description of each of these strategies to learn which might make the most sense for you. Because taxes can be complicated, be sure to consult a tax professional to address questions specific to your particular situation.

At a Glance: Types of Tax-Efficient Accounts

Investment accounts can generally be divided into three categories based on how they’re taxed: taxable, tax-deferred, and tax-exempt. Tax-deferred and tax-exempt accounts are generally used for retirement (like a 401(k) or Roth IRA), and they’re often considered more tax advantageous than a taxable account for long-term investing.

As a quick summary, here are the three main account types, their tax structure, and what that means for the types of investments you might hold in each.

Types of Accounts When Taxes Apply Investment Implications
Taxable
(e.g. brokerage or investment account)
Investors deposit post-tax funds and owe taxes on profits from securities they sell, and from interest and dividends. Investors may want to choose investments with a lower tax impact (e.g. long-term stocks, municipal and Treasury bonds).
Tax-deferred (e.g. 401(k), 403(b), traditional, SEP, and Simple IRAs) Investors contribute pre-tax money, but owe taxes on withdrawals (usually in retirement).* Investments here grow tax free until funds are withdrawn, giving investors more tax flexibility when choosing securities.
Tax-exempt
(e.g. Roth 401(k), Roth IRA)
Investors deposit post-tax funds and don’t owe taxes on withdrawals.** These accounts offer the most tax flexibility as investments grow tax free and investors withdraw the money tax free.
*Withdrawal rules and restrictions apply.
**Income limits apply. Withdrawal rules and restrictions apply.

Taxable Accounts

In order to understand tax-deferred and tax-exempt accounts, it helps to first understand taxable accounts, which are also called brokerage accounts or investment accounts. A taxable account has no special tax benefits.

Taxable accounts can be opened in the name of an individual or trust, or as a joint account. Money that is deposited into the investment account is post-tax, i.e. income taxes have already been paid or will be paid on those funds (similar to the money you’d put into your checking or savings accounts).

Taxes come into play when you sell investments in the account and make a profit. You may owe taxes on the gains you realize from those investments, as well as earned interest and dividends.

With some securities, like individual stocks, the length of time you’ve held an investment can impact your tax bill. Other investments may generate income or gains that require a different tax treatment.

For example:

•  Capital gains. The tax on an investment gain is called capital gains tax. If an investor buys a stock for $10 and sells it for $50, the $40 is a “realized” gain and will be subject to either short- or long-term capital gains tax. The tax rate will be higher or lower depending on how long the investor held the investment — more or less than a year — and their personal income tax bracket and filing status.

•  Interest. Interest that is generated by an investment, such as a bond, is typically taxed as ordinary income. In some cases, bonds may be free from state or local taxes. If you sell a bond or bond fund at a profit, short- or long-term capital gains tax could apply.

•  Dividends. Dividends are distributions that may be paid to investors who hold certain dividend-producing stocks. Dividends are generally paid in cash, out of profits and earnings from a corporation — and can be taxed as short- or long-term capital gains within a taxable account.

Recommended: How Do Dividends Work?

But the terms are different when it comes to tax-deferred and tax-exempt accounts — and understanding where the differences lie is crucial to a tax-efficient strategy.

Tax-deferred Retirement Accounts

A 401(k), 403(b), traditional IRA, SEP IRA, and Simple IRA fall under the tax-deferred umbrella, a tax structure typical of retirement accounts. They’re considered tax efficient for a couple of reasons.

•  Pre-tax contributions. First, the money you contribute to a tax-deferred account is not subject to income tax; you owe taxes when you withdraw the funds later, e.g. in retirement. Thus the tax is deferred.
This means the amount you contribute to a tax-deferred account for a given year can be deducted from your taxable income, potentially reducing your tax bill for that year.

Speaking hypothetically: If your taxable income for a given year is $100,000, and you’ve contributed $5,000 to an IRA, your taxable income would now be $95,000. And you wouldn’t pay taxes on the $5,000 contribution until you withdrew that money later, likely in retirement.

•  Tax-free growth. The money in a tax-deferred retirement account grows tax free. Thus you don’t incur any taxes until the money is withdrawn.

•  Potentially lower taxes. By deducting the contribution from your taxable income now, you may avoid paying taxes at your highest marginal tax rate. The idea is that investors’ effective (average) tax rate might be lower in retirement than their highest marginal tax rate while they’re working.
That said, it’s hard to bank on this particular tax advantage, as tax rates could change. And while some people tend to fall into a lower tax bracket when they retire, that’s not always the case.

The Tradeoffs of Tax-free Growth

Because of the advantages tax-deferred accounts offer investors, there are restrictions around contribution limits and the timing (and sometimes the purpose) of withdrawals.

•  Contribution limits. The IRS has limits for how much you can save in tax-deferred accounts. For example, the maximum contribution for a 401(k) is $19,500 in 2021, with an additional $6,500 allowed for those age 50 and older. (An employer’s match is not counted toward the contribution limit.)

◦  The maximum contribution to a traditional IRA is $6,000 for 2021, with an additional $1,000 for those 50 and over.

•  Restrictions on early withdrawals. For 401(k) plans and IRAs, there is a 10% penalty if you withdraw money before age 59½, with some exceptions. You would also owe taxes on the amount you withdrew. Some exceptions apply (e.g. taking an emergency loan from your 401(k) and other qualifying events).

•  Required withdrawals. At age 72, investors must begin to take withdrawals; these are called required minimum distributions, or RMDs, and this additional income can have tax implications. Although RMDs were suspended during 2020 owing to the pandemic, the policy is back in effect for 2021.

◦  There are no RMDs for Roth IRAs (see tax-exempt accounts below).

The terms governing required distributions can be complex, and the penalty for missing or skipping an RMD can be onerous. Consult a tax professional for guidance.

Tax-exempt Retirement Accounts

Tax-exempt accounts include retirement accounts like the Roth IRA and Roth 401(k), and also 529 College Savings Plans and Health Savings Accounts (HSAs).

When you contribute money to a tax-exempt account, you use post-tax funds — money that’s already been taxed. Although that means you can’t deduct contributions from your taxable income, the money grows tax free — just as it does in a tax-deferred account — but the real tax advantage here is that you get to withdraw the money free of taxes.

As with all investment accounts, there are different rules and restrictions that apply. For the purposes of this guide, we’ll focus on the rules pertaining to Roth accounts. The rules governing 529 plans and HSAs are somewhat different: These accounts do allow tax-free withdrawals, but only for qualified educational or health-related expenses.

Withdrawal Rules

Roth accounts, whether an online IRA account or a 401(k), are the only retirement accounts that permit tax-free withdrawals.

Because contributions to Roth accounts are made post-tax, there is also more flexibility on when the money can be withdrawn. You can withdraw the amount of your contributions tax and penalty free at any time. However earnings on those investments may incur a penalty for early withdrawal, with some exceptions.

Recommended: What Is the Roth IRA 5-Year Rule?

For example, if you contributed $5,000 to a Roth IRA, and that amount grew to $7,000, you could withdraw the $5,000 at any time. But, with some exceptions, the $2,000 in investment gains could be penalized for early withdrawal if you’re younger than 59½ and have held the account for less than five years.

Contribution Limits

It’s also possible to earn too much to be eligible to contribute to a Roth IRA, so be sure to consult a tax professional on the current income limits for Roth accounts.

Contribution limits for Roth IRAs and 401(k)s are similar to their traditional, tax-deferred counterparts. For 2021, you can contribute a maximum of $6,000, with an additional $1,000 in catch-up contributions available to investors over 50. An investor can contribute up to $19,500 to a Roth 401(k), with an additional $6,500 in catch-up contributions.

A Roth account may make sense for an investor who has a low overall tax rate (and those who meet the income requirements). Because of this, Roth accounts tend to be popular with younger investors. Other investors may simply prefer to pay income taxes now and not have to worry about the tax bill in retirement.

Types of Tax-Efficient Investments

When deploying a tax-efficient investment strategy, it’s crucial to know how an investment is going to be taxed because ideally you’d want more tax-efficient investments in a taxable account. Conversely, you may want to hold investments that can have a greater tax impact in tax-deferred and tax-exempt accounts, where investments can grow tax free.

Next, it is helpful to know that some investment types are more tax efficient in their construction — so you can make the best investment choices for the type of investment account that you have. For example, ETFs are considered to be more tax efficient than mutual funds because they don’t trigger as many taxable events. Investors can trade ETFs shares directly, while mutual fund trades require the fund sponsor to act as a middle man, activating a tax liability.

There’s an important lesson here: Investments that are less tax efficient might make sense to hold in a tax-sheltered account, like a retirement account, because no profit-related taxes are levied on the earnings in those accounts.

Investment types that are more tax efficient might be better suited for taxable accounts, where an investor must pay both capital gains tax and income tax on interest earned.

Here’s a list of some tax-efficient investments:

•  ETFs: These are similar to mutual funds but more tax efficient due to their construction. Also, most ETFs are passive and track an index, and thus tend to be more tax efficient than their actively managed counterparts (this is also true of index mutual funds versus actively managed funds).

•  Treasury bonds: Investors will not pay state or local taxes on interest earned via Treasury bonds.

•  Municipal bonds: These are bonds issued by local governments, often to fund municipal buildings or projects. Interest is generally exempt from federal taxes, and state or local taxes if the investor lives within that municipality.

•  Stocks that do not pay dividends: When you sell a non-dividend-paying stock at a profit, you’ll likely be taxed at the long-term capital gains rate, assuming you’ve held it longer than a year. That’s likely lower than the tax you’d pay on ordinary dividends, which are generally taxed as income at your ordinary tax rate.

Note that actively trading stocks can have additional tax implications (more on that in the following section).
Typically, tax consequences will vary from person to person. A tax professional can help navigate tricky tax questions.

Tax-Efficient Trading Strategies

It may also be possible to minimize taxes by incorporating a few trading strategies as you manage your investments.

Minimizing Capital Gains Tax

Securities that are sold at an investment gain may be subject to capital gains tax (within a taxable account). But capital gains tax has two rates: short term, for investments held less than a year, when gains are taxed as ordinary income, and long term, for investments held longer than a year.

For investments held longer than a year, most investors will only pay either 0% or 15%, depending on their income tax bracket. Those who earn more than $434,550 (filing single) are subject to a higher 20% rate, but these tax rates can still be significantly lower than those applied to the capital gains on short-term investments. Short-term capital gains can be taxed up to 37% depending on your income tax bracket.

Tax-Loss Harvesting

Within taxable accounts, there may be an additional way to minimize some of the tax bill created by selling profitable investments: tax-loss harvesting. This advanced move involves canceling out an investment gain with an investment loss.

For example, an investor wants to sell a few investments and the sale would result in $2,000 in capital gains. Tax-loss harvesting rules allow them to sell investments with $2,000 in total capital losses, effectively canceling out the gains. In this scenario, no capital gains taxes are due for the year.

Note that even though the investor sold the investment at a loss, the “wash sale” rule prevents him from buying back the same investment within 30 days after those losses are realized. This rule prevents people from abusing the ability to deduct capital gain losses, and applies to trades made by the investor, the investor’s spouse, or a company that the investor controls. Because this strategy involves the forced sale of an investment, many investors choose to replace it with a similar — but not too similar — investment. For example, an investor that sells an S&P 500 index fund to lock in losses could replace it with a similar U.S. stock market fund.

Recommended: What Are the Benefits of Tax Loss Harvesting?

Tax-Loss Carryover

Tax-loss harvesting rules also allow an investor to claim some of that capital loss on their income taxes, further reducing their annual income and potentially minimizing their overall income tax rate. In 2021, this can be done with up to $3,000 in realized investment losses, or $1,500 if you’re married but filing separately.

Should your capital losses exceed the federal $3,000 max claim limit ($1,500 if you’re married and filing separately), you have the option to carry that loss forward and claim any amounts excess of that $3,000 on your taxes for the following year. For example, if you have a total of $5,000 in capital losses for this year, by law you can only claim $3,000 of those losses on your 2021 taxes. However, due to tax-loss carryover, you are able to claim the remaining $2,000 as a loss on your 2022 tax form in addition to any capital gains losses you happen to experience during the 2022 year. This in turn lowers your capital gains income and the amount you may owe in taxes.

Tax-Efficiency Through Diversification

A highly effective method for minimizing the tax impact on your investments is by diversifying your portfolio. A well-considered combination of taxable, tax-deferred, and tax-exempt accounts can help mitigate the impact of taxes on your investment earnings.

For example, with some investments — such as IRAs — your current tax bracket can have a substantial impact on the associated tax on withdrawals. Having alternate investments to pull from until your tax bracket is more favorable is a smart move to avoid that excess tax.

Also, with multiple investment accounts, you could potentially pull early retirement income from a tax-free Roth IRA and leave your company-sponsored 401(k) to grow until RMDs kick in.

Having a variety of investments spread across account types gives you an abundance of options for many aspects of your financial plan.

•  Need to cover a sudden large expense? Long-term capital gains are taxed significantly less than short-term capital gains, so consider using those funds first.

•  Want to help with tuition costs for a loved one? A 529 can cover qualified education costs at any time, without incurring a penalty.

•  Planning to leave your heirs an inheritance? Roth IRAs are tax free and transferrable. And because your Roth IRA does not have required distributions (as a traditional IRA would), you can allow the account to grow until you pass it on to your heir(s).

Creating a Tax-Efficient Investment Strategy

Once you understand the tax rules that govern different types of investment accounts, as well as the tax implications of your investment choices, you’ll be able to create a strategy that minimizes taxes on your investment income for the long term. Ideally, investors should consider having a combination of tax-deferred, tax-exempt, and taxable accounts to increase their tax diversification. To recap:

•  A taxable account (e.g. a standard brokerage account) is flexible. It allows you to invest regardless of your income, age, or other parameters. You can buy and sell securities, and deposit and withdraw money at any time. That said, there are no special tax benefits to these accounts.

•  A tax-deferred account (e.g. 401(k), traditional IRA, SEP IRA, Simple IRA) is more restrictive, but offers tax benefits. You can deduct your contributions from your taxable income, potentially lowering your tax bill, and your investments grow tax free in the account. Your contributions are capped according to IRS rules, however, and you will owe taxes when you withdraw the money.

•  A tax-exempt account (e.g. a Roth IRA or Roth 401(k)) is the most restrictive, with income limits as well as contributions limits. But because you deposit money post-tax, and the money grows tax free in the account, you don’t owe taxes when you withdraw the money in retirement.

Whether you’d like to open a taxable, tax-deferred, or tax-exempt account, an online investing app like SoFi Invest® can help. There are no SoFi fees to open an account and to buy investments. Trading stocks, ETFs, and cryptocurrency is user-friendly with SoFi Invest. Investors can stay up to date on breaking news, conduct research on investments, and place trades, all from within the SoFi app.

Best of all, SoFi offers access to financial planners at no additional charge. Question about saving, investing, or debt-payoff strategy? No problem. SoFi financial advisors are here to help.

For additional questions or specific advice regarding your personal tax situation, it’s best to consult a tax professional.

Ready to jumpstart your tax-efficient investing strategy? Open a traditional IRA, Roth IRA, or SEP IRA with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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