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Target Date Funds: What Are They and How to Choose One

A target date fund is a type of mutual fund designed to be an all-inclusive portfolio for long-term goals like retirement. While target date funds could be used for shorter-term purposes, the specified date of each fund — e.g. 2040, 2050, 2065, etc. — is typically years in the future, and indicates the approximate point at which the investor would begin withdrawing funds for their retirement needs (or another goal, like saving for college).

Unlike a regular mutual fund, which might include a relatively static mix of stocks and bonds, the underlying portfolio of a target date fund shifts its allocation over time, following what is known as a glide path. The glide path is basically a formula or algorithm that adjusts the fund’s asset allocation to become more conservative as the target date approaches, thus protecting investors’ money from potential volatility as they age.

If you’re wondering whether a target date fund might be the right choice for you, here are some things to consider.

What Is a Target Date Fund?

A target date fund (TDF) is a type of mutual fund where the underlying portfolio of the fund adjusts over time to become gradually more conservative until the fund reaches the “target date.” By starting out with a more aggressive allocation and slowly dialing back as years pass, the fund’s underlying portfolio may be able to deliver growth while minimizing risk.

This ready-made type of fund can be appealing to those who have a big goal (like retirement or saving for college), and who don’t want the uncertainty or potential risk of managing their money on their own.

While many college savings plans offer a target date option, target date funds are primarily used for retirement planning. The date of most target funds is typically specified by year, e.g. 2035, 2040, and so on. This enables investors to choose a fund that more or less matches their own target retirement date. For example, a 30-year-old today might plan to retire in 38 years at age 68, or in 2060. In that case, they might select a 2060 target date fund.

Investors typically choose target date funds for retirement because these funds are structured as long-term investment portfolios that include a ready-made asset allocation, or mix of stocks, bonds, and/or other securities. In a traditional portfolio, the investor chooses the securities — not so with a target fund. The investments within the fund, as well as the asset allocation, and the glide path (which adjusts the allocation over time), are predetermined by the fund provider.

Sometimes target date funds are invested directly in securities, but more commonly TDFs are considered “funds of funds,” and are invested in other mutual funds.

Target date funds don’t provide guaranteed income, like pensions, and they can gain or lose money, like any other investment.

Whereas an investor might have to rebalance their own portfolio over time to maintain their desired asset allocation, adjusting the mix of equities vs. fixed income to their changing needs or risk tolerance, target date funds do the rebalancing for the investor. This is what’s known as the glide path.

How Do Target Date Funds Work?

Now that we know what a target date fund is, we can move on to a detailed consideration of how these funds work. To understand the value of target date funds and why they’ve become so popular, it helps to know a bit about the history of retirement planning.

Brief Overview of Retirement Funding

In the last century or so, with technological and medical advances prolonging life, it has become important to help people save additional money for their later years. To that end, the United States introduced Social Security in 1935 as a type of public pension that would provide additional income for people as they aged. Social Security was meant to supplement people’s personal savings, family resources, and/or the pension supplied by their employer (if they had one).

💡 Recommended: When Will Social Security Run Out?

By the late 1970s, though, the notion of steady income from an employer-provided pension was on the wane. So in 1978 a new retirement vehicle was introduced to help workers save and invest: the 401(k) plan.

While 401k accounts were provided by employers, they were and are chiefly funded by employee savings (and sometimes supplemental employer matching funds as well). But after these accounts were introduced, it quickly became clear that while some people were able to save a portion of their income, most didn’t know how to invest or manage these accounts.

The Need for Target Date Funds

To address this hurdle and help investors plan for the future, the notion of lifecycle or target date funds emerged. The idea was to provide people with a pre-set portfolio that included a mix of assets that would rebalance over time to protect investors from risk.

In theory, by the time the investor was approaching retirement, the fund’s asset allocation would be more conservative, thus potentially protecting them from losses. (Note: There has been some criticism of TDFs about their equity allocation after the target date has been reached. More on that below.)

Target date funds became increasingly popular after the Pension Protection Act of 2006 sanctioned the use of auto-enrollment features in 401k plans. Automatically enrolling employees into an organization’s retirement plan seemed smart — but raised the question of where to put employees’ money. This spurred the need for safe-harbor investments like target date funds, which are considered Qualified Default Investment Alternatives (QDIA) — and many 401k plans adopted the use of target date funds as their default investment.

Today nearly all employer-sponsored plans offer at least one target date fund option; some use target funds as their default investment choice (for those who don’t choose their own investments). Approximately $1.8 trillion dollars are invested in target funds, according to Morningstar.

What a Target Date Fund Is and Is Not

Target date funds have been subject to some misconceptions over time. Here are some key points to know about TDFs:

•   As noted above, target date funds don’t provide guaranteed income; i.e. they are not pensions. The amount you withdraw for income depends on how much is in the fund, and an array of other factors, e.g. your Social Security benefit and other investments.

•   Target date funds don’t “stop” at the retirement date. This misconception can be especially problematic for investors who believe, incorrectly, that they must withdraw their money at the target date, or who believe the fund’s allocation becomes static at this point. To clarify:

◦   The withdrawal of funds from a target date fund is determined by the type of account it’s in. Withdrawals from a TDF held in a 401k plan or IRA, for example, would be subject to taxes and required minimum distribution (RMD) rules.

◦   The TDF’s asset allocation may continue to shift, even after the target date — a factor that has also come under criticism.

•   Generally speaking, most investors don’t need more than one target date fund. Nothing is stopping you from owning one or two or several TDFs, but there is typically no need for multiple TDFs, as the holdings in one could overlap with the holdings in another — especially if they all have the same target date.

Example of a Target Date Fund

Most investment companies offer target date funds, from Black Rock to Vanguard to Charles Schwab, Fidelity, Wells Fargo, and so on. And though each company may have a different name for these funds (a lifecycle fund vs. a retirement fund, etc.), most include the target date. So a Retirement Fund 2050 would be similar to a Lifecycle Fund 2050.

How do you tell target date funds apart? Is one fund better than another? One way to decide which fund might suit you is to look at the glide path of the target date funds you’re considering. Basically, the glide path shows you what the asset allocation of the fund will be at different points in time. Since, again, you can’t change the allocation of the target fund — that’s governed by the managers or the algorithm that runs the fund — it’s important to feel comfortable with the fund’s asset allocation strategy.

How a Glide Path Might Work

Consider a target date fund for the year 2060. Someone who is about 30 today might purchase a 2060 target fund, as they will be 68 at the target date.

Hypothetically speaking, the portfolio allocation of a 2060 fund today — 38 years from the target date — might be 80% equities and 20% fixed income or cash/cash equivalents. This provides investors with potential for growth. And while there is also some risk exposure with an 80% investment in stocks, there is still time for the portfolio to recover from any losses, before money is withdrawn for retirement.

When five or 10 years have passed, the fund’s allocation might adjust to 70% equities and 30% fixed income securities. After another 10 years, say, the allocation might be closer to 50-50. The allocation at the target date, in the actual year 2060, might then be 30% equities, and 70% fixed income. (These percentages are hypothetical.)

As noted above, the glide path might continue to adjust the fund’s allocation for a few years after the target date, so it’s important to examine the final stages of the glide path. You may want to move your assets from the target fund at the point where the predetermined allocation no longer suits your goals or preferences.

Pros and Cons of Target Date Funds

Like any other type of investment, target date funds have their advantages and disadvantages.

Pros

•   Simplicity. Target funds are designed to be the “one-stop-shopping” option in the investment world. That’s not to say these funds are perfect, but like a good prix fixe menu, they are designed to include the basic staples you want in a retirement portfolio.

•   Diversification. Related to the above, most target funds offer a well-diversified mix of securities.

•   Low maintenance. Since the glide path adjusts the investment mix in these funds automatically, there’s no need to rebalance, buy, sell, or do anything except sit back and keep an eye on things. But they are not “set it and forget it” funds, as some might say. It’s important for investors to decide whether the investment mix and/or related fees remain a good fit over time.

•   Affordability. Generally speaking, target date funds may be less expensive than the combined expenses of a DIY portfolio (although that depends; see below).

Cons

•   Lack of control. Similar to an ordinary mutual fund or exchange-traded fund (ETF), investors cannot choose different securities than the ones available in the fund, and they cannot adjust the mix of securities in a TDF or the asset allocation. This could be frustrating or limiting to investors who would like more control over their portfolio.

•   Costs can vary. Some target date funds are invested in index funds, which are passively managed and typically very low cost. Others may be invested in actively managed funds, which typically charge higher expense ratios. Be sure to check, as investment costs add up over time and can significantly impact returns.

What Are Target Date Funds Good For?

If you’re looking for an uncomplicated long-term investment option, a low-cost target date fund could be a great choice for you. But they may not be right for every investor.

Good For…

Target date funds tend to be a good fit for those who want a hands-off, low-maintenance retirement or long-term investment option.

A target date fund might also be good for someone who has a fairly simple long-term strategy, and just needs a stable portfolio option to fit into their plan.

In a similar vein, target funds can be right for investors who are less experienced in managing their own investment portfolios and prefer a ready-made product.

Not Good For…

Target date funds are likely not a good fit for experienced investors who enjoy being hands on, and who are confident in their ability to manage their investments for the long term.

Target date funds are also not right for investors who are skilled at making short-term trades, and who are interested in sophisticated investment options like day-trading, derivatives, and more.

Investors who like having control over their portfolios and having the ability to make choices based on market opportunities might find target funds too limited.

The Takeaway

Target date funds can be an excellent option for investors who aren’t geared toward day-to-day portfolio management, but who need a solid long-term investment portfolio for retirement — or another long-term goal like saving for college. Target funds offer a predetermined mix of investments, and this portfolio doesn’t require rebalancing because that’s done automatically by the glide path function of the fund itself.

The glide path is basically an asset allocation and rebalancing feature that can be algorithmic, or can be monitored by an investment team — either way it frees up investors who don’t want to make those decisions. Instead, the fund chugs along over the years, maintaining a diversified portfolio of assets until the investor retires and is ready to withdraw the funds.

Target funds are offered by most investment companies, and although they often go by different names, you can generally tell a target date fund because it includes the target date, e.g. 2040, 2050, 2065, etc.

If you’re ready to start investing for your future, you might consider opening a brokerage account with SoFi Invest® in order to set up your own portfolio and learn the basics of buying and selling stocks, bonds, exchange-traded funds (ETFs), and more. Note that SoFi members have access to complimentary financial advice from professionals.


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.

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Guide to IRA Margin Accounts

Guide to IRA Margin Accounts

An IRA margin account is a retirement account that allows investors to trade securities with unsettled cash. It’s a more lenient structure versus a cash account, where you must wait for trades to settle before using the money for further trading. But an IRA margin account isn’t a true margin account in that you can’t use leverage.

Nonetheless, an IRA margin account offers a few advantages, including the ability to defer or avoid short-term capital gains tax, and you’re protected against good faith violations. That said, there are still restrictions, so before setting up an IRA margin account, you may want to learn more about how these accounts work.

What Is an IRA Margin Account?

An IRA margin account is a more flexible means to invest for retirement. First, you can trade with unsettled funds, meaning that if you close a position you don’t have to wait the standard two days after you trade, you can use those funds right away.

There are also tax benefits. In a traditional IRA margin account capital gains taxes are deferred until funds are withdrawn. This is similar to a regular IRA, where you don’t pay taxes on contributions or gains until you withdraw your money.

But can you use margin in a Roth IRA? Yes, and there may be even more tax benefits when using limited margin in a Roth IRA. You don’t pay any capital gains because Roth accounts are tax-free, since Roth contributions are made with after-tax money).

As noted above, an IRA margin account, also called a limited margin account, lets investors trade with unsettled cash. However, a limited margin IRA is just that — limited. It is not a true margin account and does not allow you to short stocks or use leverage by borrowing money to trade with margin debits. In that sense, it is different from margin trading in a taxable brokerage account.

You can use limited margin in several IRA types. In addition to having margin IRAs with traditional and Roth accounts, rollover IRAs, SEP IRAs, and even small business SIMPLE IRAs are eligible for the margin feature. While mutual funds are often owned inside an IRA, you cannot buy mutual funds on margin.

How Does Limited Margin Work?

Limited margin works by allowing investors to trade securities without having to wait for funds to settle. You can think of it like an advance payment from positions recently sold.

The first step is to open an IRA account and request that the IRA margin feature be added. Once approved, you might have to request that your broker move positions from cash to margin within the IRA. This operational task will also set future trades to the margin type.

IRA margin accounts will state your intraday buying power — you should use this balance when day trading stocks and options in the IRA.

An advantage to trading in limited margin IRAs is that you can avoid or defer capital gains tax. Assuming you earn profits from trading, that can be a major annual savings versus day trading in a taxable brokerage account. If you trade within a pre-tax account, such as a traditional or rollover IRA, then you simply pay income tax upon the withdrawal of funds. When using Roth IRA margin, your account can grow tax-free forever in some cases.

The drawback with an IRA margin account versus day trading in a taxable account is you are unable to borrow money from your broker to create margin debits. You are also unable to sell securities short with an IRA margin account. So while it is a margin account, you do not have all the bells and whistles of a full margin account that is not an IRA.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 10%* and start margin trading.


*For full margin details, see terms.

Who Is Eligible for a Margin IRA?

Some brokerage firms have strict eligibility requirements such as a minimum equity threshold (similar to the minimum balances required in full margin accounts). When signing up, you might also be required to indicate that your investment objective is the “most aggressive.” That gives the broker a clue that you will use the account for active trading purposes.

Another restriction is that you might not be able to choose an FDIC-insured cash position. That’s not a major issue for most investors since you can elect a safe money market fund instead.

IRA Margin Calls

An advantage to having margin in an IRA is that you can more easily avoid margin calls by not having to wait for cash from the proceeds of a sale to settle, but margin calls can still happen. If the IRA margin equity amount drops below a certain amount (often $25,000 but it can vary by broker), then a day trade minimum equity call is issued. Until you meet the call, you are limited to closing positions only.

To meet the IRA margin call, you just have to deposit more cash or marginable securities. Since it is an IRA, there are annual contribution limits that you cannot exceed, so adding funds might be tricky.

Avoiding Good Faith Violations

A good faith violation happens when you purchase a security in a cash account then sell before paying for the purchase with settled cash. You must wait for the funds to settle — the standard is trade date plus two days (T+2 settlement) for equity securities. Only cash and funds from sale proceeds are considered “settled funds.” Cash accounts and margin accounts have different rules to know about.

A good faith violation can happen in an IRA account without margin. For example, if you buy a stock in the morning, sell it in the afternoon, then use those proceeds to do another round-trip trade before the funds settle, that second sale can trigger a good faith violation. Having margin in an IRA prevents good faith violations in that instance since an IRA margin account allows you to trade with unsettled funds.

Pros and Cons of Limited Margin Trading in an IRA

Can IRA accounts have margin? Yes. Can you use margin in a Roth IRA? Yes. Should your IRA have the limited margin feature added? It depends on your preferences. Below are the pros and cons to consider with IRA margin accounts.

Pros

Cons

You can defer or avoid capital gains taxes. You cannot trade using actual margin (i.e. leverage).
You are permitted to trade with unsettled cash. You cannot engage in short selling or have naked options positions.
You can avoid good faith violations. You take on more risk with your retirement money.

The Takeaway

An IRA margin account allows people investing in individual retirement accounts to trade securities a bit more freely versus a cash account. The main benefit to having an IRA with limited margin is that you can buy and sell stocks and options without waiting for lengthy settlement periods associated with a non-margin account. But remember: Unlike a normal margin account, this type doesn’t allow you to use leverage. That means a margin IRA doesn’t permit margin trading that creates margin debit balances. You are also not allowed to have naked options positions or engage in selling shares short.

That said, if you want to try out trading on margin and have the experience and risk tolerance to do so, SoFi can help. With a SoFi margin account, you can increase your buying power, take advantage of more investment opportunities, and potentially increase your returns.

Get one of the most competitive margin loan rates with SoFi, 10%*

FAQ

Is an IRA a cash or a margin account?

An IRA can either be a cash account or a limited margin account. While a cash account only lets you buy and sell securities with a traditional settlement period, a limited margin IRA might offer same-day settlement of trades. You are not allowed to borrow funds or short sell, however.

Is day trading possible in an IRA?

Yes. You can day trade in your IRA, and it can actually be a tax-savvy practice. Short-term capital gains can add up when you day trade in a taxable brokerage account. That tax liability can eat into your profits. With a limited margin IRA that offers same-day settlement, however, you can buy and sell stocks and options without the many tax consequences of a non-IRA. The downside is that, in the case of losses, you cannot take advantage of the $3,000 capital loss tax deduction because an IRA is a tax-sheltered account. Another feature that is limited when day trading an IRA is that you cannot borrow funds to control more capital. A final drawback is that you are limited to going long shares, not short.

Can a 401k be a margin account?

Most 401k plans do not allow participants to have the margin feature. An emerging type of small business 401k plan — the solo brokerage 401k — allows participants to have a margin feature. Not all providers allow it, though. Also, just because the account has the margin feature, it does not mean you can borrow money from the broker to buy securities.


Photo credit: iStock/Drazen_

*Borrow at 10%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
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.

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Choosing the Right Target Date Funds for Retirement

Target Date Fund Basics

Target date funds are becoming increasingly common when it comes to saving for retirement. A target date fund is a mutual fund with a passive mix of investments curated based on when you’re likely to retire.

They are also sometimes referred to as “set it and forget it” funds, and are relatively popular investment options because they are fairly easy to understand and offer a decent return on investment. You simply put your money in a fund with the target date you plan to retire—and you don’t have to think about it on the daily.

Target date funds surpassed the $1 trillion mark in 2017 —meaning that over $1 trillion in our retirement savings are now invested in these funds—and about nine in 10 employer retirement plans now offer target date funds as an option. Target date funds are, simply, funds organized around a target date for retirement.

For example, a 2050 fund means you are hoping to use those retirement funds in 2050. The idea is that by picking a fund aimed at a specific date, the mix of investments can change as you near that date.

This means you might have riskier investments with the potential for greater return earlier in the fund’s life, when retirement is decades away. Your investments gradually become less risky as retirement nears.

However, it should be noted—as with all investments—target date funds are not without inherent risk. You can lose or gain money if the stocks, bonds, or mutual funds you’re invested in go up or down. The return on investment is never guaranteed.

Additionally, even if two funds have the same target date (or similar names), it doesn’t mean they’re the same. The underlying strategy, risk, and asset allocation varies among the best target date funds.

How Target Date Funds Work

Typically, target date funds are mutual funds with a passively managed mix of assets. A mutual fund is a portfolio of stocks, bonds, and securities. You buy into the fund, as do other investors, essentially pooling your money and allowing you to buy a mix of assets you might otherwise not be able to purchase as an individual. Passively managed means you’re not actively trading stocks and securities.

How a specific target date fund shifts its asset mix over time is called its “glide path.” You’ll probably want to research the glide path before committing to a fund. You’ll also want to consider how much risk you want to take. Even though target date funds generally become more conservative over time, the specific risk and asset allocation varies from fund to fund.

How to Pick the Best Target Date Fund for You

The best target date funds are the ones that match your needs, offer the right level of risk for your desired return, and have low management fees. The average target date fund asset-weighted expense ratio for 2017 was 66 basis points—which means 0.66%. And the typical investor pays 0.47% in fees because so many target date funds come from low-cost providers.

That same report found that Vanguard Group, Fidelity, and T. Rowe Price make up nearly 70% of target date fund assets. In addition to considering fees, here are some other issues to weigh when picking the best target date funds for you.

Pick the Right Target Date

You can choose the year you’re hoping to retire, but it’s not a requirement. If you want to be slightly more conservative, you could consider a target date that’s sooner than you plan to retire.

However, you should make these choices consciously (and plan accordingly—don’t pick a date sooner than your actual retirement and then be surprised when there’s not as much return as you want).

And check in regularly to update your target date as necessary—something most people don’t do. One research paper analyzed 34,000 participants in target date funds and found that investors were more likely to pick a target date ending in “0” rather than one ending in “5,” simply because it’s easier to round to zero.

Assess Your Risk Tolerance

A big question with any investment—and target date funds are no different—is how much risk you want and are willing to tolerate. Your risk tolerance can also change over time, and you may want to change the mix of your investments as that happens.

Do you want your target date fund to carry you to retirement or through retirement?

Some target date funds are “to” retirement, meaning they’ll hit their most conservative allocation at the target date and then won’t change much once you retire. But other target date funds are “through” retirement, meaning they continue to adjust and rebalance their mix of funds even after you retire.

Check in on the mix of investments and the fund’s glide path

It’s probably not a great idea to really “set it and forget it.” You’ll want to check in periodically to ensure your fund still meets your needs. Although many employers may automatically enroll you in a target date fund, it doesn’t mean you have to stay in the fund.

If you’re going to want to be more actively involved in investing for your retirement or more aggressive than a traditional asset allocation strategy, then a target date fund might not be right for you. Additionally, if you’re going to need or want more customization, then you might want a different investment product.

Before you decide on products and investment strategies, think about what your financial plans are and your goals for retirement. As a first step, use our retirement calculator to figure out how much you should be saving.

Investing with SoFi Invest®

It’s never too early—or too late—to take control of your retirement savings. If you’re ready to start actively preparing for retirement, consider investing with SoFi Invest. When you open a invest account at SoFi, you’ll gain access to a team of financial advisors who will work with you to create a long-term financial plan. You can get started with as little as $100, with no SoFi management fees.

Ready to invest for your future? Check out SoFi Invest today.


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SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
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.
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