Opening a Brokerage Account for Your Child

Opening a Brokerage Account for Your Child

Brokerage accounts for kids are generally custodial, with the parent or guardian managing the assets until the child reaches adulthood. Only the parent or guardian can open the brokerage account, even when the account bears the child’s name. When the child reaches maturity — the legal age varies by state — they would take possession of the account.

Overall, the process for how to open a brokerage account for a child is fairly straightforward.

Why open a brokerage account?

A brokerage account is an investment account that operates through a brokerage firm. When you open a brokerage account, you deposit money into it, then use that money to buy securities. You can also sell securities that you’ve purchased. Depending on where you open a brokerage account, you might be able to trade:

•   Stocks

•   Mutual funds

•   Exchange-traded funds (ETFs)

•   Real estate investment trusts (REITs)

•   Bonds

•   Foreign currencies

•   Options

•   Futures

•   Cryptocurrency

Some brokers may allow you to trade on margin, meaning you can borrow money to execute trades. (Trading on margin and investing in certain asset categories may not be available for custodial accounts, however.)

You may be charged commissions or other fees to execute trades, but there are no limits on how much you can invest. That’s roughly how a brokerage account works.

A brokerage account is not the same thing as a retirement account. When you sell assets at a profit in a brokerage account, you may have taxes due or other tax impacts. You can buy and sell investments at your own pace, withdrawing money as needed.

With an Individual Retirement Account (IRA), you can invest in many types of assets, but certain items (such as collectibles) are disallowed in most accounts. IRA holders must wait until age 59 ½ to withdraw funds without any tax penalty (some exceptions apply, such as disability). Early withdrawals from a traditional IRA are taxed at your ordinary income tax rate, plus you’ll generally incur a 10% additional penalty. When deciding on a taxable brokerage account vs. IRA, choose the one that furthers your financial goals.

Recommended: Popular Types of Retirement Plans

Can Children Have Brokerage Accounts?

They can, but they are not allowed access to the account’s money or assets. In almost all cases, such brokerage accounts are custodial, meaning the parent is responsible for managing the money until their child reaches adulthood.

Numerous discount brokers offer investment accounts for kids online. Some brokers have also introduced hybrid products for teens that allow them to save money, spend, and invest all in one place with the supervision of their parents.

If you’re looking for a hands-on way to teach kids about how markets work, a brokerage account could be a great idea. But if you want to teach them about money more gradually, a kids’ savings account might suffice for now.

Can a Child Have a Brokerage Account in Their Name?

A custodial account is technically in the child’s name, even though it’s controlled by the parent. So yes, a child can have a brokerage account in their name. Of course, they themselves can’t open the account without the help of a parent.

How to Open a Brokerage Account for a Child

Once you know how to open a brokerage account for your child, doing so isn’t too difficult.

The first step is choosing a brokerage that offers investment accounts for kids. Factors to consider in making your decision could include the range of investment options, how easy it is to access the account, and the fees.

The next step is deciding which type of account to open. There are three possibilities to choose from when opening a brokerage account for a child.

Opening a Guardian Account

A guardian account allows you to invest money on behalf of your child. All of the money in the account technically belongs to you, as does any tax liability associated with the sale of assets in the account. You (but not the child) can withdraw money from the account for any reason. Once the child turns 18, you can decide whether to hand the money in the account over to them.

Opening a Custodial Account

With a custodial account, the parent opens the account but the assets in it belong to the child. You can direct investment decisions while the child is a minor, and any tax liability is assessed at their rate. Withdrawals are allowed only for expenses benefitting the child. Once the child reaches adulthood, they automatically become the owner of the account.

Opening an IRA Account

If your child has earned income from a part-time or summer job (even babysitting or lawn mowing) for at least a year, you might consider opening a custodial IRA for them. With a custodial IRA, you direct the investments until the child turns 18 (or 21 in some states). At that point, the account becomes their property.

One key distinction: The IRA has annual contribution limits, but other types of custodial accounts do not. Each year the maximum contribution is the amount equal to the child’s total earnings; in 2023 the amount is capped at $6,500. (If a child earns no money in a given year, the maximum contribution is $0.)

The Roth IRA, which holds post-tax dollars, may be a better choice for a kid than a traditional one funded by pre-tax dollars. The benefits of the traditional IRA — such as lowering your taxable income during your earning years — won’t help a young person very much.

Types of Brokerage Accounts a Parent Can Open for a Child

When opening a custodial account for a child at a brokerage, you have two options: a Uniform Transfers to Minors Act (UTMA) account and a Uniform Gifts to Minors Act (UGMA) account. Most states recognize both account types. With either one, you control the account until the child reaches the age of termination, which in some places may be later than the age of majority.

UTMA Account

UTMA accounts allow minors to hold securities without the creation of a separate trust. This type of account permits you to hold many types of assets, including:

•   Stocks

•   Bonds

•   Mutual funds

•   Real estate

•   Fine art

•   Precious metals

•   Patents

•   Royalties

•   Shares in a family limited partnership

The IRS taxes earnings in a UTMA at the child’s tax rate, up to a certain limit. For 2023, the limit is $2,500. Any gifts made to a UTMA on behalf of your child are irrevocable, meaning once you put the money in it becomes theirs; you can’t take it back out again. Any withdrawals must be used to pay expenses for the child, such as school tuition.

UGMA Account

A UGMA account is similar to a UTMA account in terms of tax treatment and who actually owns the assets in the account. The main difference between a UGMA and a UTMA account lies in what you can invest in. For a UGMA account, those are typically limited to stocks, bonds, and mutual funds. So if you’re choosing between a UTMA and a UGMA, it’s important to consider which types of assets you’d like to keep in the account.

Investing for Kids

A brokerage account can be a useful teaching tool for helping kids to grasp such concepts as:

•   How investing works

•   Compound interest and why compounding matters

•   The importance and value of saving money

Kids who learn about money when they’re young are likely to have better financial habits as adults. Also, a study from Brigham Young University found that they have more satisfying interpersonal relationships in early adulthood because they’re less likely to stress over money.

Tips for Choosing the Right Broker

If you’re navigating how to open a brokerage account for your child for the first time, you may not be sure what an investment broker does or how to decide where to keep the account. When you’re seeking out the right broker, here are a few key questions you could ask as you narrow down the options:

•   Does this brokerage firm offer investment accounts for kids?

•   What types of brokerage accounts for kids are available?

•   Is there a minimum initial deposit to open the account?

•   What are the fees?

•   Which investments will I be able to trade in the account?

If you have an existing brokerage account for your child, consider whether moving it to a different broker makes sense. For example, you may want to move if you believe your current brokerage is charging too much in fees. If you do decide to switch, it’s easy to request a brokerage account transfer online.

The Takeaway

A brokerage account for your child would probably take the form of a guardian account or a custodial UGMA or UTMA account. Knowing what types of assets you intend to deposit may help you determine what kind of account works best for you. For kids earning wages, a custodial IRA may be a good fit, allowing 2023 contributions of up to $6,500.

Hybrid save-and-spend accounts designed for teens can help them learn about investing while under adult supervision. In all of these cases, the parent oversees the accounts until the child reaches adulthood.

If you’re looking to open an online brokerage account for yourself, SoFi offers easy all-in-one investing. You can open an investment account with SoFi and start trading stocks, ETFs, IPOs, or even cryptocurrency if you’re 18 or older. SoFi does not offer custodial accounts. SoFi doesn’t charge management fees, and SoFi members have access to complimentary advice from professionals.

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

FAQ

Can I open a brokerage account in my child’s name?

Yes, you can open a custodial brokerage account for your child in their name. Transfers to a custodial account are irrevocable, but you’ll have control of the account and make the investment decisions until the child reaches adulthood. In the meantime, the assets in the account will belong to the child.

Can I open a brokerage account for a family member?

Generally, you can open a brokerage account for a family member only if that person is your minor child. You are allowed to establish a 529 college savings plan on behalf of other family members, including siblings, nieces, nephews, or cousins.

Can I buy stocks for my child?

Yes, you can purchase stocks for your child. You can make the purchases through a custodial account. There are also financial apps that allow you to purchase full or fractional shares of stock for your child.


Photo credit: iStock/Morsa Images

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Guide to Understanding and Tracking Robo-Advisor Returns

Investing can be complex and intimidating, so many people may seek an advisor to help them with their finances. In the past, that meant going to a financial advisor to get a tailored financial and investment plan, usually at a high cost. But in recent years, consumers have gravitated toward robo-advisors – which provide algorithm-generated investment advice to help individuals manage their money – due to their low fees and convenience.

However, even with the help of a robo-advisor, you need to understand and track the returns on your investments. In this guide, we will explain what robo-advisors are, how they work, and what you need to know about monitoring and evaluating the performance of your portfolio. By understanding the basics of robo-advisors and their returns, you can make more informed decisions about your investments and achieve your financial goals.

How Robo-advisors help investors

A robo-advisor is an automated, algorithm-based service that provides investors with financial advice. The service typically involves a questionnaire that customers complete to assess their risk tolerance and investment goals. It is then used to determine an investment strategy and portfolio of exchange-traded funds (ETFs) or other low-cost investments.

Robo-advisor algorithms typically use modern portfolio theory (MPT) and other quantitative techniques to create a diversified portfolio tailored to the investor’s needs. The algorithms used by robo-advisors are constantly updated to reflect changes in the market and make adjustments as needed to maintain the desired asset allocation.

Robo-advisors also offer tools to help investors make decisions about their finances. These can include portfolio analysis tools, risk tolerance assessment tools, and educational resources. Investors can use these tools to monitor their portfolios and make informed decisions.

Robo-advisors typically charge a fee for their services, usually a percentage of the total portfolio value. However, the fees are generally much lower than those traditional financial advisors charge.

The goal of robo-advisors is to provide a low-cost and convenient investing option to a wide range of customers, including those who may not have the resources or desire to work with a human, financial advisor.

Recommended: What Is Automated Investing?

Evaluating Robo-Advisor Performance

Evaluating the performance of a robo-advisor is critical for investors interested in using them to build wealth. By looking at the past performance of robo-advisors, investors can get an idea of the sophistication of the computer algorithm that generates the portfolio allocations. Such proprietary algorithms can be based on investment theories developed by Nobel Prize-winning economists.

An investor should evaluate robo-advisor performance by considering its overall returns and several other key metrics. By assessing the following metrics, investors can better understand the robo-advisor’s performance and how it aligns with their investment goals:

•   Returns: Compare the rate of returns of a robo-advisor’s portfolios to those of relevant benchmarks. For instance, investors can look at the returns of their robo-advisor portfolio versus the S&P 500 Index returns. If the robo-advisor performs better than the S&P 500, it may indicate a well-run robo-advisor. However, remember that past performance is not always indicative of future results, but it can provide a general idea of how the robo-advisor’s investments have performed over time.

•   Diversification: Evaluate the diversification of the robo-advisor’s portfolios within and across different asset classes. Portfolio diversification can help manage risk by spreading investments across different types of securities.

•   Rebalancing: Investigate how often and how the robo-advisor’s portfolios are rebalanced and how frequently the underlying investments are reviewed.

•   Customer Service: Check if the robo-advisor provides access to a human advisor or customer support, as this can be an important factor if you need help or have questions.

What Is the Average Robo-Advisor Return?

The average return for a robo-advisor portfolio can vary depending on several factors, such as the portfolio’s specific investments, the robo-advisor’s investment strategy, and the overall market conditions.

In general, robo-advisors tend to invest heavily in low-cost index funds and ETFs, which often track the broader market. Therefore, a robo-advisor portfolio’s returns may be similar to a mix of comparable index funds minus any management fees charged by the robo-advisor.

Recommended: ETFs vs Index Funds: Differences and Similarities, Explained

Nonetheless, returns can vary widely depending on the robo-advisor and the portfolio. For example, as of September 30, 2022, the 5-year average annual return for robo-advisors with portfolios comprising 60% stocks and 40% ranged from 2.31% to 4.44%, according to The Robo Report by Condor Capital.

Robo-Advisor Returns

Below are the returns of some robo-advisors compiled by Condor Capital’s The Robo Report. The returns shown in the table are of portfolios with a 60% stock and 40% bond asset allocation, after fees, as of September 30, 2022. All returns for periods longer than one year are annualized.

Robo-Advisor Third-Quarter 202 YTD (through 9/30/22) 2-Year 5-Year
Acorns -5.96% -21.19% -1.77% 2.51%
Ally Invest -5.84% -20.31% -1.40% 2.61%
Axos Invest -6.01% -21.43% -1.28% 3.49%
Betterment -6.17% -20.59% -0.60% 2.47%
Charles Schwab -5.78% -18.28% 0.96% 2.31%
E*Trade -6.47% -20.97% -1.55% 2.77%
Ellevest -5.24% -17.70% -0.13% 3.00%
Fidelity -4.91% -19.21% 0.09% 3.79%
Merrill Edge -5.72% -18.61% 0.55% 3.32%
Personal Capital -6.15% -19.54% 1.34% 3.21%
SoFi -4.50% -16.76% -0.62% 3.47%
Vanguard -4.93% -19.47% -0.22% 3.44%
Wealthfront -5.35% -17.08% 3.29% 4.44%
Zacks Advantage -4.02% -17.05% 2.13% 4.25%
Source: The Robo Report by Condor Capital Wealth Management

Understanding Robo-Advisor Fees

Understanding the investment fees associated with robo-advisors and how they compare to other investment options is critical for investors. Fees often eat into a portfolio’s returns, making it harder for investors to build wealth. Analyzing robo-advisor expenses will help investors to determine if the robo-advisor is a cost-effective solution for their investment needs.

Investors can better understand robo-advisor fees by analyzing the following:

•   Management Fees: This is the fee charged by the robo-advisor for managing the investor’s portfolio. It is typically a percentage of a portfolio’s assets under management and many robo-advisors charge less than 0.50%. Some robo-advisors offer management fee-free options to their clients.

•   Expense Ratios: An expense ratio is the fee charged by the underlying funds in the portfolio, such as ETFs. It is expressed as a percentage of the assets, ranging from 0.05% to 0.50% or more. Some robo-advisors include low-cost ETFs with expense ratios under 0.10%.

•   Account Minimums: Some robo-advisors may have minimum account balance requirements. A minimum account balance means investors must deposit a certain amount to open an account, which can be a headwind to opening an account if the investor starts with a small amount of capital.

•   Commissions: Some robo-advisors charge a commission when buying or selling securities, while others do not.

•   Other Fees: Some robo-advisors may charge additional fees for services such as tax-loss harvesting or closing an account.

Pros and Cons of Robo-Advisors

Robo-advisors are often appealing to many investors because of their hands of nature. However, as with any financial product or service, there are pros and cons to using a robo-advisor.

Pros and Cons of Robo-Advisors

Pros

Cons

Relatively low cost Limited personalization
Convenient Insufficient access to human advice
Diversified portfolios Fewer investment options

The pros of using robo-advisors include the following:

•   Low cost: Robo-advisors typically have much lower fees than traditional financial advisors, making them an attractive option for people who want to invest but avoid paying high fees. Some robo-advisors charge as little as 0.25% of assets under management, while traditional financial advisors may charge 1% or more. This can make a significant difference over time, especially for people with smaller portfolios.

•   Convenience: Robo-advisors are available 24/7 and can be accessed from anywhere with an internet connection, which makes it easy for people to manage their investments. This convenience can be especially beneficial for people with limited time to manage their investments.

•   Diversification: Robo-advisors use algorithms to create diversified portfolios with a mix of different index funds and ETFs in various asset classes, which can help investors reduce risk and improve returns.

The cons of using robo-advisors include the following:

•   Limited personalization: Robo-advisors use algorithms to create portfolios, which may not take into account an individual’s unique financial situation or goals. A lack of personalization can be a problem for people with complex financial situations or who have specific investment goals that a robo-advisor may be unable to accommodate.

•   Insufficient access to human advice: Investors may prefer to speak with a human advisor for financial advice and guidance. While some robo-advisors provide access to a financial advisor to help investors, it may not meet the needs of some users.

•   Fewer investment options: Some robo-advisors may have limited investment options compared to traditional financial advisors or a self-directed brokerage account. For instance, robo-advisors tend to invest in ETFs rather than individual stocks. If an investor wants to put money into a specific stock or asset, they may want to open a self-directed brokerage account in addition to a robo-advisor portfolio.

Want to start investing?

Our robo-advisors can build a portfolio to fit your
needs and risk – with no fees!


Can Consumers Lose Money With Robo-Advisors?

Consumers can lose their money with robo-advisors. As with all investments, there’s a risk of investors suffering losses.

There are some precautions that investors can consider when weighing different robo-advisors. The industry is still growing, and computer-generated financial advice may not meet all their needs. In addition, face-to-face meetings can help consumers better understand their financial profile and investment risks.

Also, if a robo-advisor shuts down, consumers may be forced to sell or accept a possibly unrelated replacement service.

Why Do People Use Robo-Advisors?

People use robo-advisors because they are often cheaper than traditional financial advisors, provide a more objective approach to financial decision-making, and offer greater convenience when managing investments.

For example, robo-advisors will automatically rebalance the portfolio according to the market conditions, investors’ risk tolerance, and investment goals. This ease of rebalancing can help investors maintain their desired risk level and ensure that their portfolio stays aligned with their investment goals.

Additionally, some robo-advisors use automated tax-loss harvesting to help investors minimize their tax liability. Tax-loss harvesting is a technique that involves selling investments that have lost value to offset capital gains from other investments, which can help reduce the amount of taxes you owe.

Investing With SoFi

Robo-advisors are a relatively new type of investment service that uses algorithms and technology to create and manage portfolios for investors. In recent years, robo-advisors have become increasingly popular as more and more people look for low-cost, convenient ways to invest their money. This has lowered the barrier to entry for many individuals, including younger people, to start investing.

If you’re interested in using a robo-advisor to help you build your portfolio, SoFi can help. With SoFi Invest® automated investing, we recommend a portfolio of exchange-traded funds (ETFs) for you based on your goals and risk tolerance. We’ll rebalance your investments quarterly, so your money is always invested how you want it to be. And SoFi doesn’t charge a management fee.

Open an automated investing account and start investing for your future with as little as $1.

FAQ

Do robo-advisors work?

Robo-advisors can be effective tools to help people manage their money and achieve their financial goals. Robo-advisors are generally cheaper and more convenient than traditional human financial advisors. However, it is important to research each robo-advisor to ensure it is the best fit for your needs.

What are the differences between a robo-advisor and a financial advisor?

Robo-advisors are usually less expensive than financial advisors. Robo-advisors typically have low fees and minimum deposit requirements, while financial advisors often require a minimum deposit and charge a percentage of the assets they manage. Another difference is that robo-advisors provide automated and algorithm-based advice, while financial advisors provide personalized advice and guidance tailored to individual needs and goals.

Are robo-advisors good for retirees?

Robo-advisors can be a good option for some retirees because they can provide a low-cost, automated way to manage investments. However, if a retiree wants more personalized advice or help with tax and estate planning, there may be better options than a robo-advisor.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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What Is Ethereum 2.0 and When Will it Be Released?

Guide to Ethereum 2.0

Ethereum 2.0 is the latest upgrade to the Ethereum blockchain network, shifting it from a proof-of-work to a more efficient proof-of-stake consensus mechanism.

As Ethereum gained widespread recognition and adoption within the crypto space in recent years — it’s the second-largest crypto project after Bitcoin — some elements of the network required upgrades. As one of the most innovative blockchains in the DeFi space, Ethereum struggled with transaction times and scalability, among other issues.

The move from a proof-of-work consensus system to a less energy-intensive, more efficient proof-of-stake model aims to address those challenges. This massive overhaul has been termed The Merge.

What Is Ethereum 2.0?

To understand Ethereum 2.0 and its upgrades, you must have a basic understanding of what Ethereum is.

What Is Ethereum?

Ethereum is a form of crypto, of course, but Ethereum is best known as one of the most successful programmable blockchain platforms, with the capacity to support smart contracts, dApps (decentralized apps), non-fungible tokens (NFTs), and other DeFi projects.

The Ethereum native token is the Ether (ETH), and it’s used to fuel operations on the blockchain.

The Ethereum platform launched in 2015, and it’s now the second largest form of crypto next to Bitcoin (BTC), with a market capitalization of about $193 billion, as of Jan. 30, 2023.

Ethereum’s History of DeFi Innovation

The larger idea for Ethereum was to create a programmable blockchain that would enable a sort of free market environment, where developers could create decentralized applications (dApps), smart contract, and other DeFi programs without any control or interference from a third party.

Historically, Ethereum relied on a proof-of-work (PoW) consensus mechanism in order for miners to validate transactions and earn Ether (ETH) or gwei, a denomination of ETH used to pay for DeFi goods and services on the network.

In proof-of-work mining, high-powered computers solve complex mathematical puzzles needed to validate blocks of data or transactions.

Ethereum users can also create code used to build dApps and smart contracts. Smart contracts can execute transactions without a middleman, like a bank or regulator, once certain conditions are met. This innovation set Ethereum apart from other crypto projects, and it has inspired other crypto platforms to launch similar features.

Limitations of Ethereum

Because the Ethereum network has long attracted developers and other innovators, it has experienced growing pains, so to say, that have limited its ability to scale efficiently. In particular, Ethereum has been criticized for long transaction times and high fees.

Ethereum 2.0, or The Merge,”aims “to improve the network’s scalability, security, and sustainability,” according to its creators. As such, it’s hoped that improvements in those areas will be the primary ETH merge impact.

Those goals address several of the network’s key limitations: It needs to be faster, less vulnerable to threats, and eat up fewer resources. Of course, there are challenges to put these changes in place. Programmers have spent many years working on Ethereum 2.0, and though some changes have already been implemented, others will be phased in over the coming years.

How ETH 2.0 Solves Some Limitations

The most critical element of the move to Ethereum 2.0 is the transition from a proof-of-work algorithm that allows the network to be more nimble and efficient. While the proof-of-work system is still used by other crypto networks (most notably Bitcoin), many others are adopting alternatives.

The move to a proof-of-stake consensus mechanism eliminates the need for miners, which reduces the amount of resources required to keep the network’s integrity in check.

While the discussion about proof-of-work versus proof-of-stake algorithms is worthy of a conversation in and of itself (see below), the adoption of a the proof-of-stake system by Ethereum helps solve many of the issues (again, scalability, security, and sustainability) that the network previously experienced.

When Was Ethereum 2.0 Released?

The upgrades to the Ethereum network are being implemented in phases, and many features of the new network were established by late 2022.

The transition began with the introduction of the Beacon Chain in December 2020. During 2022, other upgrades were phased in, including a merge with Ethereum’s mainnet with the proof-of-stake Beacon Chain. The next phase will include a blockchain management strategy known as sharding sometime in 2023 or 2024.

What Are the Upgrades to Ethereum?

As noted above, the move toward Ethereum 2.0, or the Merge, has been accomplished in stages.

The Beacon Chain

The Beacon Chain introduced a new staking concept (proof-of-stake) to the platform. It launched before many other upgrade components because it’s a cornerstone to Ethereum 2.0’s system and needed to be in place for other components to work on top of it. The Ethereum merge date was in September 2022.

The Ethereum Mainnet Merge

The merge concerns the marriage of the existing Ethereum mainnet (Ethereum’s main network) with the Beacon Chain’s proof-of-stake protocol, as discussed.

This change is now live, and as a result, crypto mining is no longer needed to generate ETH, and instead, the network uses a staking system in order to create additional Ethereum tokens. This change has reduced the network’s energy consumption by more than 99.9%.

These two steps — the launch of the Beacon Chain, and the mainnet merge — paved the way for the next part of the transition: The introduction of shard chains.

Shard Chains

By introducing shard chains, which is scheduled to happen within the next year or two, the Ethereum network will have more capacity and speed, giving it the ability to handle more traffic.

“Sharding” is a bit technical, but it basically means that a database will split up to disperse the load of transactions on the network. Sharding reduces congestion and speeds up transactions, allowing the network to store and process more data in a shorter amount of time. Plus, more people will be able to participate on the network after it is sharded.

Ethereum 2.0 Staking

Remember: Ethereum 2.0 represents a full transition to a proof-of-stake protocol from a hybrid system that uses both proof-of-stake and proof-of-work.

Staking, in general, is the process of locking up cryptocurrencies to earn rewards. It’s like putting your cash in a savings account and accruing interest. Staking is a process used to validate data and transactions in a blockchain network, which is why and how Ethereum uses it.

Recommended: What Is Crypto Staking?

Understanding Proof-of-Stake

With a proof-of-stake system, users validate block transactions based on the number of coins they hold. Basically, the more ether a user has, the more mining power they possess. As discussed, mining isn’t necessary under a proof-of-stake algorithm (not the case for proof-of-work).

That means that the process requires less energy and mining power — fewer resources overall — to keep the network running.

The Difference Between Proof-of-Stake and Proof-of-Work

Proof-of-work, conversely, is the original algorithm used by blockchain networks. On this protocol, users “mine” new coins, as they would on the Bitcoin blockchain, to earn rewards.

Mining is extremely energy intensive, which is one reason Ethereum 2.0 is moving to proof-of-stake.

Recommended: Is Crypto Mining Still Profitable in 2023?

A proof-of-stake algorithm will also bring less risk onto the network, has stronger support for sharding, and is more efficient — all upgrades over the proof-of-work system.

Summary: Ethereum vs Ethereum 2.0

To wrap it all up, Ethereum 2.0’s rollout is designed to make some significant improvement over the old Ethereum network, and make it more secure, sustainable, and increase its scalability. Here’s a brief rundown of the major differences, as they relate to crypto investors:

Ethereum vs. Ethereum 2.0

Ethereum

Ethereum 2.0

Proof-of-work algorithm Proof-of-stake algorithm
Required mining to generate ETH Users stake tokens to earn ETH rewards
Slower and more resource-intensive More secure and energy-efficient

What Will Happen to My ETH?

There is no immediate impact to ETH holders as a result of the rollout of the Ethereum 2.0 project. While the network is getting upgrades, there’s no change to ETH itself, and investors shouldn’t need to do anything. Be suspicious of anyone who says otherwise, as crypto scammers may try to take advantage of the transition.

As for how the rollout has impacted prices for Ethereum? It’s hard to say for sure, as there are numerous factors affecting crypto prices at any given time. You can, however, check the ETH price now to get a sense of the value of your Ethereum holdings.

The Takeaway

Ethereum 2.0 is a series of upgrades to the Ethereum network, which introduces a new proof-of-stake system that makes the network, as a whole, more efficient and secure. While the multi-year rollout of the upgrade has begun, hopes are that Ethereum will become bigger and safer over time, while reducing its environmental impact, setting it apart from other types of cryptocurrency.

If you’re interested in trading Ethereum, a one way to get started is by opening a brokerage account on the SoFi Invest online trading platform. You can use it to trade several types of cryptocurrency, as well as to purchase other investments, such as stocks or exchange-traded funds (ETFs).

Trade crypto and get up to $100 in bitcoin! (Offer is available through 12/31/23; terms apply.)

FAQ

Has Ethereum 2.0 come out yet?

Ethereum 2.0 is a series of upgrades that are being rolled out in phases, some of which have come out, or have gone live. The process is not complete, though, and likely will finish within the next couple of years.

Did Ethereum 2.0 replace Ethereum?

Yes and no. Ethereum and Ethereum 2.0 are still more or less the same as they were, but the network has changed or been replaced, in a sense. Ethereum 2.0 isn’t so much a replacement for Ethereum, as it is an upgrade to its system.

How are Ethereum and Ethereum 2.0 different?

The most impactful difference between Ethereum and Ethereum 2.0 is the introduction of a proof-of-stake consensus system, which makes the network faster, more secure, and more scalable, while reducing the amount of resources needed to generate new ETH.


Photo credit: iStock/Pekic

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
2Terms and conditions apply. Earn a bonus (as described below) when you open a new SoFi Digital Assets LLC account and buy at least $50 worth of any cryptocurrency within 7 days. The offer only applies to new crypto accounts, is limited to one per person, and expires on December 31, 2023. Once conditions are met and the account is opened, you will receive your bonus within 7 days. SoFi reserves the right to change or terminate the offer at any time without notice.

First Trade Amount Bonus Payout
Low High
$50 $99.99 $10
$100 $499.99 $15
$500 $4,999.99 $50
$5,000+ $100

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woman writing in notebook

Investment Opportunities in 2023

Investment opportunities are different ways to put your money to work, and they can include any number of things, such as buying assets and waiting for them to appreciate, or investing in real estate or a business opportunity.

There are varying degrees of risks and potential rewards with each option, but if you’re looking to put your money to work this year, you may want to consider a range of ideas.

Every idea has to be vetted, of course, and it’s important to do your due diligence before investing. Only you can decide which opportunities make sense, given your goals and long term plans.

What Is an Investment Opportunity?

An investment opportunity is exactly what it sounds like: It’s an opportunity, but not a guarantee, that you can put your money into a stock, a mutual fund, a new business, a type of cryptocurrency, that may offer the potential for growth.

While there are countless options for investors, investing typically involves using a brokerage account or investing platform to buy securities. There is a wide range of financial products on the market, and a good percentage of them can be purchased using a brokerage account.

Investments can be volatile, or at least subject to change. Virtually all investments rise and fall in value. Some are more reactive to economic issues or global politics. For that reason, it’s often useful for investors to evaluate the opportunities that may be trending in a certain year, bearing in mind all the relevant risks and investment costs.

7 Investment Opportunities to Potentially Build Wealth

7 Potential Ways to Invest and Build Wealth

1. Bonds and Bond Funds

One common conservative investment strategy is to seek a small-but-safe return from bonds.

Governments, municipalities, and companies issue bonds to investors who lend them money for a set period of time. In exchange, the issuer pays interest over the life of the loan, and returns the principal when the bond “matures.” Individuals can buy them on bond markets or on exchanges.

Upon maturity, the bond-holder gets their original investment (known as the principal) back in full. In other words, a bond is a loan, with the investor loaning another party money, in exchange for interest payments for a set period of time.

Different Types of Bonds

There are many different types of bonds. The most common, and generally considered to be the lowest-risk category of bonds might be the U.S. Treasury bonds, typically called treasuries.

The Treasury regularly auctions off both short-term and long-term Treasury bonds and notes. These bonds are, generally, thought to be one of the safest investments on the market, as they’re guaranteed by the U.S. government. The only way for investors to lose their entire investment would be for the U.S. government to become insolvent, which has never occurred.

Governments are not the only entities that issue bonds. Corporations can also raise money by offering corporate bonds. These types of bonds tend to be riskier, but they often pay a higher rate of interest (known as the yield).

A bond’s price is the inverse of its yield. This means that as the price of a bond falls, its yield goes up (and vice versa).

One of the simpler ways to gain exposure to bonds might be through various ETFs.

For new investors, one of the simpler ways to gain exposure to bonds might be through various exchange-traded funds (ETFs) that are invested in bonds.

Other ETFs may include some bonds as part of a broader bundle of securities.

Recommended: What Is Capital Appreciation?

2. Real Estate or REITs

Real estate is the largest asset class in the world, with a market cap well into the hundreds of trillions of dollars.

When thinking about investing in real estate, residential properties may be one of the first things that comes to mind, such as buying a single family home. But owning property, like a home, can come with an array of responsibilities, liabilities, and expenses. In that way, it’s different from owning a stock or bond.

Annual property taxes, maintenance and upkeep, and paying back mortgage interest can add to the cost of treating a home as an investment. It’s also worth remembering that residential properties can appreciate or depreciate in value, too.

Other real-estate investment options involve owning multi-family rental properties (like apartment buildings or duplexes), commercial properties like shopping malls, or office buildings. These tend to require large initial investments, but those who own them could reap significant returns from rental income. (Naturally, few investments guarantee returns and rental demands and pricing can change over time).

For people with smaller amounts of capital, investing in physical real estate might not be a realistic or desirable option. Fortunately for these investors, some investment opportunities can provide exposure to real estate without the hassle and liability of owning physical property. One common way to do this is through Real Estate Investment Trusts, or REITs.

Like other investments, there are pros and cons of REITs, but companies can be classified as REITs if they derive at least 75% of their income from the operation, maintenance, or mortgaging of real estate. Additionally, 75% of a REITs assets must also be held in the form of real property or loans directly tied to them.

There are many different types of REITs. Some examples of the types of properties that different REITs might specialize in include:

•   Residential real estate

•   Data centers

•   Commercial real estate

•   Health care

Shares of a REIT can be purchased and held in a brokerage account, just like a stock or ETF. To buy some, it’s often as simple as looking up a specific REIT’s ticker symbol.

REITs are popular among passive-income investors, as they tend to have high dividend yields because they are required by law to pass on 90% of their amount of their income to shareholders.

Historically, REITs have often provided better returns than fixed-income assets like bonds, although REITs do tend to be higher-risk investments.

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3. ETFs and Passive Investing

Passive investing, which refers to exchange-traded funds (ETFs), mutual funds, and other instruments that track an index and do not have an active manager, have become increasingly popular over the years.

•   Weighing the merits of passive vs. active investing is an ongoing debate, with strong advocates on both sides. In recent years, assets held in passive instruments have outpaced active funds.

   Passive investing tends to be lower cost compared with active investing, and over time these strategies tend to do well.

•   An ETF is a security that usually tracks a specific industry or index by investing in a number of stocks or other financial instruments.

ETFs are commonly referred to as one type of passive investing, because most ETFs track an index. Some ETFs are actively managed, but most are not.

These days, there are ETFs for just about everything — no matter your investing goal, interest area, or industry you wish you invest in. Small-cap stocks, large-cap stocks, international stocks, short-term bonds, long-term bonds, corporate bonds, and more.

Some potential advantages of ETFs include lower costs and built-in diversification. Rather than having to pick and choose different stocks, investors can choose shares of a single ETF to buy, gaining some level of ownership in the fund’s underlying assets.

Thus investing in ETFs could make the process of buying into different investments easier, while potentially increasing portfolio diversification (i.e., investing in distinct types of assets in order to manage risk).

4. Automated Investing

Another form of investing involves automated portfolios called robo advisors.

Robo advisors aren’t exactly passive or active, as they can have aspects of both. Typically, the robo advisor offers a menu of pre-set portfolios that include a variety of stocks, REITs, bonds, ETFs, or other securities that provide exposure to different asset classes.

The process of working with a robo advisor might begin with the investor inputting their investing goals, risk tolerance, and time horizon. Based on the answers, a robo advisor will automatically allocate an investor’s capital according certain styles: e.g. “conservative,” “moderately conservative,” “aggressive,” and so on.

Generally speaking, more conservative portfolios tend to have greater investments into bonds and large-cap dividend stocks (safer assets), while riskier, or more aggressive portfolios tend to invest more into small-cap stocks, international stocks, and real estate.

For investors who would rather “set it and forget it” than have to pick and choose securities, robo advisors could be one automated investment option.

5. Gold and Silver

Investing in precious metals is another way to put your money to work.

Gold is one of the most valued commodities. For thousands of years, gold has been prized because it is scarce, difficult to obtain, has many practical uses, and does not rust, tarnish, or erode.

Silver has historically held a secondary role to gold, and today, serves more of an industrial role. For those looking to invest in physical precious metals, silver will be an affordable option.

Buying physical gold or bullion (which comes in coins and bars) isn’t the only way to invest in gold and silver. There are many related securities that allow investors to gain exposure to precious metals. There are ETFs that tend to track the prices of gold and silver, respectively. Other ETFs provide an easy vehicle for investing in gold and silver mining stocks. So, there are some different ways to invest in the field.

Companies that explore for and mine silver and gold tend to see their share prices increase in tandem with prices for the physical metals. But historically, mining stocks have outperformed simply holding metals by a factor of about 4-to-1 on average.

Gold, silver, and related securities are sometimes considered to be “safe havens,” meaning most investors perceive them as low risk. This asset class tends to perform well during times of crisis (and conversely tends to drop when the economy is going well), but past trends don’t guarantee that gold will perform one way or the other.

6. Investing in Startups

While gold is often considered to be one of the safer investments, startup investing is often considered to be one of the riskiest.

Whereas gold is a real asset almost certain to retain most or all of its value, startup investments are effectively bets on the potential of a new company, and that company might fail; in fact, there’s a good chance that it will. But it’s the high-risk, high-reward and potentially huge returns from startup investing that make it attractive to investors.

Imagine buying a little piece of a tech company when those companies were still in their infancy. When held throughout the years, an investment like that could grow enormously in value.

Angel investing and venture capital are two common ways that startups raise capital. They are both types of equity financing, whereby a business funds or expands its operations by offering investors a stake of ownership in the company. If the company does well, investors stand to profit. Because standard business loans tend to require some kind of assets as collateral (which newer companies, that might be information-based, likely do not have), raising funds in this way is sometimes the only solution startups have.

Venture capital is often associated with the tech industry, due to the large number of entrepreneurs in the industry who have turned to venture capital funds to start their businesses. This type of fund targets new companies and aims to help them grow to the next level.

Angel investing is similar to venture capital, but even riskier. An angel investor might be an individual who’s willing to help fund an otherwise struggling company.

Before running off to look for small companies to invest in, know that startup investing requires good business acumen, an eye for promising ideas, and high risk tolerance. In some cases, to, you may need to qualify as an “accredited investor” to invest in startups. Do a little homework, accordingly!

7. Bitcoin and Cryptocurrencies

If we’ve learned anything over the past few years, it’s that cryptocurrencies are volatile. But despite 2022’s “crypto winter,” the crypto markets can still be an attractive option for investors. And there are ways to build a well-balanced crypto portfolio.

Cryptocurrencies are widely considered a high-risk asset class. Some cryptocurrencies have periodically displayed extraordinary gains relative to the value of fiat currencies, in addition to phenomenal losses.

Despite these fluctuations, certain investors have begun to include many types of crypto in their asset portfolios.

Again, as with other higher-risk investments, there’s no way to predict which way the crypto markets may go. Investors may want to consider how crypto volatility can impact their choices.

Average Rate of Return for the Investment Opportunities

Each of the aforementioned investment opportunities comes with its own set of caveats. For instance, it’s pretty much impossible to guess what types of returns you’d see from investing in ETFs without knowing the specific ETFs you’re investing in. The same holds true for cryptocurrencies, and other assets.

But for some of the previously discussed asset classes, there are some historical returns for different asset classes over the past decade, as of August 2022.

•   U.S. Stock Market: 13.8%

•   Bonds: 1.6%

•   Real Estate: 8.8%

•   Gold: 0.8%

Importance of Finding Good Investing Opportunities

There is no requirement to invest one’s money. But leaving your cash…in cash…can also be risky. No one wants their wealth eroded by inflation.

Though the global economy hadn’t seen serious inflation on a wide scale for decades until 2022, today’s rising prices effectively mean that the value of every dollar you own is diminished as time goes on.

As such, finding investment opportunities that present chances for your money to grow faster than the rate of inflation, while weighing all the appropriate risks, is a powerful incentive.

After all, some investments rise while others fall, and things change. That’s why investors need to be on the lookout for new and different opportunities.

The Takeaway

The investment opportunities described above are just some potential points of entry for investors in 2023. Investors can look to the stock, bond, or crypto markets for new ways to put their money to work — or consider active strategies vs. passive (i.e. index) strategies. They can look at commodities, like precious metals, or automated portfolios.

All these investment opportunities come with their own set of potential risks and rewards. There are no guarantees that choosing X over Y will increase your investment returns. It’s up to each investor to weigh these options, especially in light of current economic trends, such as inflation and rising rates.

SoFi Invest® helps individuals begin investing with ease, thanks to the secure, streamlined SoFi platform. When you set up an Active Invest account, you can choose from stocks, ETFs, IPO investing, crypto, and more. You don’t pay SoFi commissions, and you can get started with just a few dollars.

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

FAQ

What is the best investment opportunity right now?

The best investment opportunity at any given time will depend on the specific investor, and their individual goals, time horizon, and risk tolerance. Opportunities rise and fall over time, in reaction to economic and market trends, so investors should consider their personal preferences to determine what’s best for them.

What is the safest investment with the highest return?

Historically speaking, investing in a stock market index like the S&P 500 earns an average annual return of about 10% over time. But that’s just an average, and there are years when the market is down considerably. As such, it may not be “safe,” but over time, the market tends to bounce back.

Why are investment opportunities important?

Investing your money in the right ways can help it grow, and keep ahead of inflation. And because there are no guarantees for any one asset class or investment type, it helps to know where the opportunities lie so you can balance and/or diversify your own assets according to your own goals and time horizon.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected] Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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Everything You Need to Know About Taxes on Investment Income

Everything You Need to Know About Taxes on Investment Income

There are several ways investment income is taxed: You may be familiar with capital gains taxes — the taxes imposed when one sells an asset that has gained value — but it’s important to also understand the tax implications of dividends, interest, retirement account withdrawals, and more.

In some cases, for certain types of accounts, taxes are deferred until the money is withdrawn, but in general tax rules apply to most investments in one way or another.

Being well aware of all the tax liabilities your investments hold can minimize headaches and help you avoid a surprise bill from the IRS. Being tax savvy can also help you plan ahead for different income streams in retirement, or for your estate.

Types of Investment Income Tax

There are several types of investment income that can be taxed. These include:

•   Dividends

•   Capital Gains

•   Interest Income

•   Net Investment Income Tax (NIIT)

Taking a deeper look at each category can help you assess whether — and what — you may owe.

Tax on Dividends

Dividends are distributions that are sometimes paid to investors who hold a certain type of dividend-paying stock. Dividends are generally paid in cash, out of profits and earnings from a corporation.

•   Most dividends are considered ordinary (or non-qualified) dividends by default, and these payouts are taxed at the investor’s income tax rate.

•   Others, called qualified dividends because they meet certain IRS criteria, are typically taxed at a lower capital gains rate (more on that in the next section).

Generally, an investor should expect to receive form 1099-DIV from the corporation that paid them dividends, if the dividends amounted to more than $10 in a given tax year.

More About Capital Gains Tax

Capital gains are the profit an investor sees when an investment they hold gains value when they sell it. Capital gains taxes are the taxes levied on the net gain between purchase price and sell price.

For example, if you buy 100 shares of stock at $10 ($1,000 total) and the stock increases to $12 ($1,200), if you sell the stock and realize the $200 gain, you would owe taxes on that stock’s gain.

There are two types of capital gains taxes: Long-term capital gains and short-term capital gains. Short-term capital gains apply to investments held less than a year, and are taxed as ordinary income; long-term capital gains are held for longer than a year and are taxed at the capital-gains rate.

For 2022 and 2023, the capital gains tax rates are typically no higher than 15% for most individuals. Some individuals may qualify for a 0% tax rate on capital gain — but only if their taxable income is $83,350 or less (married filing jointly), or $41,675 or less for single filers and those who are married filing separately.

The opposite of capital gains are capital losses — when an asset loses value between purchase and sale. Sometimes, investors use losses as a way to offset tax on capital gains, a strategy known as tax-loss harvesting.

Recommended: Is Automated Tax-Loss Harvesting a Good Idea?

Capital losses can also be carried forward to future years, which is another strategy that can help lower an overall capital gains tax.

Capital gains and capital losses only become taxable once an investor has actually sold an asset. Until you actually trigger a sale, any movement in your portfolio is called unrealized gains and losses. Seeing unrealized gains in your portfolio may lead you to question when the right time is to sell, and what tax implications that sale might have. Talking through scenarios with a tax advisor may help spotlight potential avenues to mitigate tax burdens.

Taxable Interest Income

Interest income on investments is taxable at an investor’s ordinary income level. This may be money generated as interest in brokerage accounts, or interest from assets such as CDs, bonds, Treasuries, savings accounts.

One exception are investments in municipal (muni) bonds, which are exempted from federal taxes and may be exempt from state taxes if they are issued within the state you reside.

Interest income (including interest from your bank accounts) is reported on form 1099-INT from the IRS.

Tax-exempt accounts, such as a Roth IRA or 529 plan, and tax-deferred accounts, such as a 401(k) or traditional IRA, are not subject to interest taxes.

Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT), now more commonly known as the Medicare tax, is a 3.8% flat tax rate on investment income for taxpayers whose adjusted gross income (AGI) is above a certain level — $200,000 for single filers; $250,000 for filers filing jointly. Per the IRS, this tax applies to investment income including, but not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

For taxpayers with an AGI above the required thresholds, the tax is paid on the lesser of the taxpayer’s net investment income or the amount the taxpayer’s AGI exceeds the AGI threshold.

For example, if a taxpayer makes $150,000 in wages and earns $100,000 in investment income, including income from rental properties, their AGI would be $250,000. This is $50,000 above the threshold, which means they would owe NIIT on $50,000. To calculate the exact amount the taxpayer would owe, one would take 3.8% of $50,000, or $1,900.

Tax-Efficient Investing

One way to mitigate the effects of investment income is to create a set of tax efficient investing strategies. These are strategies that can minimize the tax hit that you may experience from investments and allow you to grow your wealth. These strategies can include:

•   Diversifying investments to include investments in both tax-deferred and tax-exempt accounts. An example of a tax-deferred account is a 401(k); an example of a tax-exempt account is a Roth IRA. Investing in both these vehicles may be a strategy for long-term growth as well as a way to ensure that you have taxable and non-taxable income in retirement.

   Remember that accounts like traditional, SEP, SIMPLE IRAs, as well as 401(k) plans and some other employer-sponsored accounts, are tax-deferred — meaning that you don’t pay taxes on your contributions the year you make them, but you almost always owe taxes whenever you withdraw these funds.

•   Exploring tax-efficient investments. Some examples are municipal bonds, exchange-traded funds (ETFs), Treasury bonds, and stocks that don’t pay dividends.

•   Considering tax implications of investment decisions. When selling assets, it can be helpful to keep tax in mind. Some investors may choose to work with a tax professional to help offset taxes in the case of major capital gains or to assess different strategies that may have a lower tax hit.

The Takeaway

Investment gains, interest, dividends — basically any money you make from securities you sell — can be subject to tax. But the tax rules for different types of investment income vary, and you also need to consider the type of account the investments are in.

Underreporting or ignoring investment income can lead to tax headaches and may result in you underpaying your tax bill. That’s why it’s a good idea to keep track of your investment income, and be mindful of any profits, dividends, and interest that may need to be reported even if you didn’t sell any assets over the course of the year.

Some investors may find it helpful to work with a tax professional, who can help them see the full scope of their liabilities and help them become aware of potential investment strategies that could help them minimize their tax burden, especially in retirement. A tax advisor will also be aware of any specific state tax rules regarding investment taxes.

If you’re ready to set up your own portfolio, opening an Active Invest account with SoFi Invest makes the process secure and hassle free. You can buy and sell stocks, exchange-traded funds (ETFs), IPO shares, and more. Even better, SoFi members have access to complimentary financial advice from professionals who can help answer their questions.

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


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
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 prequalification for any loan product offered by SoFi Bank, N.A.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
SOIN0123028

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