InvestX Archives | Page 22 of 28

Sep

2022

What Multi-Family Homes Are and Their Pros & Cons

Multifamily Home Need-to-Knows

By Kevin Brouillard | Family Finances, Home Ownership, mortgage | Comments Off

Whether shopping for a home or investment, buyers may come across multifamily homes.

The first need-to-know, especially for financing’s sake, is that multifamily properties with two to four units are generally considered residential buildings, and those with more than five units, commercial.

Let’s look at whether multifamily homes are a good idea for homebuyers or investors.

What Is a Multifamily Home?

Put simply, a multifamily home is in a building that can accommodate more than one family in separate living spaces. Each unit usually has its own bathroom, kitchen, utility meter, entrance, and legal address.

Of the more than 100 million Americans who rent, around two-thirds live in multifamily homes.

Among the different house types are duplexes, which contain two dwelling units, while a triplex and quadruplex consist of three and four units, respectively. A high-rise apartment building is considered a multifamily property.

What about ADUs? A home with an accessory dwelling unit — a private living space within the home or on the same property — might be classified as a one-unit property with an accessory unit, not a two-family property, if the ADU does not have its own utilities and provides living space to a family member.

Multifamily Homes vs Single-Family Homes

On the surface, the differences in property types may seem as straightforward as the number of residential units. But there are other considerations to factor in when comparing single-family vs. multi-family homes as a homebuyer or investor.

Unless you plan to hire a manager, owning a property requires considerable time and work. With either type of property, it’s important to think about how much time you’re able to commit to handling repairs and dealing with tenants.

If you’re still weighing your options, here’s what you need to know about single-family and multifamily homes.

Multifamily Homes	Single-Family Homes
Comprise about 27% of U.S. housing stock.	Represent around 67% of U.S. housing stock.
Can be more difficult to sell due to higher average cost and smaller market share.	Bigger pool of potential buyers when you’re ready to sell.
Higher tenant turnover and vacancy can increase costs.	Often cheaper to purchase, but higher cost per unit than multifamily.
More potential for cash flow and rental income with multiple units.	Less cash flow if renting out, generally speaking.
Usually more expensive to buy, but lower purchase cost per unit.	More space and privacy.
Small multifamily homes (2-4 units) may be eligible for traditional financing; 5+ units generally require a commercial real estate loan.	Greater range of financing options, including government and conventional loans.

Pros and Cons of Multifamily Homes

There are a number of reasons to buy a multifamily home: Rental income and portfolio expansion are two.

And buying real estate is one ticket to building generational wealth.

But there are also downsides to be aware of, especially if you plan to purchase a multifamily home as your own residence.

So what are multifamily homes’ pros and cons? The benefits and drawbacks can depend on whether it’s an investment property or personal residence.

As Investment

Investing in multifamily homes can come with challenges. Take financing.

A mortgage for an investment property tends to have a slightly higher interest rate, the qualification hurdles are higher, and a down payment of 20% or more is usually required, though there are ways to buy a multifamily property with no money down.

Government-backed residential loans don’t apply to non-owner-occupied property, but there is a commercial FHA loan for the purchase or refinancing of apartment buildings with at least five units that do not need substantial rehabilitation. Another FHA loan program is for new construction or substantial rehabilitation of rental or cooperative housing of at least five units for moderate-income families, elderly people, and people with disabilities. Another FHA loan pertains to residential care facilities. Upfront and annual mortgage insurance premiums (MIP) apply.

Before adding a multifamily home to your real estate portfolio, take note of the pros and cons of this investment strategy.

Pros of Investing in Multifamily Homes	Cons of Investing in Multifamily Homes
Reliable cash flow from multiple rental units.	Upfront expenses can be cost prohibitive for new investors.
Helpful for scaling a real estate portfolio more quickly.	Managing multiple units can be burdensome and may require hiring a property manager.
Opportunity for tax benefits, such as deductions for repairs and depreciation.	Property taxes and insurance rates can be high.
Often appreciates over time.

As Residence

Buyers can choose to purchase a multifamily home as their own residence. As an owner-occupied multifamily home, they live in one of the units while renting out the others.

Owners can use rental income to offset the cost of the mortgage, property taxes, and homeowners insurance while building wealth.

Another advantage is financing. With a multifamily home of two to four units, an owner-occupant may qualify for an FHA, VA, or conventional loan and put nothing down for a VA loan or little down for a conventional or FHA loan. (It isn’t all hearts and flowers, though. Most VA loans require a one-time funding fee. FHA loans always come with MIP. And putting less than 20% down on a conventional loan for an owner-occupied property, short of a piggyback loan or lender-paid mortgage insurance, means paying private mortgage insurance).

What are multifamily homes’ pros and cons as residences?

Pros of Multifamily Homes as a Residence	Cons of Multifamily Homes as a Residence
Reduced cost of living frees up cash for other expenses, investments, or savings.	Vacancies can disrupt cash flow and require the owner to cover gaps in rent.
Self-managing the property lowers costs and can be more convenient when living onsite.	Being a landlord can be time-consuming and complicate relationships with tenant neighbors.
Potential for federal and state tax deductions.	Less privacy when sharing a backyard, driveway, or foyer with tenants.
Owner-occupied properties qualify for more attractive financing terms than investment properties.

It’s worth noting that an owner-occupant can move to a new residence later on and keep the multifamily home as an investment property. This strategy can help lower the barrier to entry for real estate investing, but keep in mind that loan terms may require at least one year of continued occupancy.

Who Are Multifamily Homes Right For?

There are a variety of reasons homebuyers and investors might want a multifamily home.

Multifamily homes can be helpful for entering the real estate investment business or diversifying a larger portfolio. It’s important to either have the time commitment to be a landlord or pay for a property manager.

For homebuyers in high-priced urban locations, multifamily homes may be more affordable than single-family homes, given the potential for rental income. It might be helpful to crunch some numbers with this mortgage payment calculator.

Multigenerational families who want to live together but maintain some privacy may favor buying a duplex or other type of multifamily home.

What to Look for When Buying a Multifamily Home

There are certain characteristics to factor in when shopping for a multifamily home.

First off, assess what you can realistically earn in rental income from each unit in comparison to your estimated mortgage payment, taxes, and maintenance costs. Besides what the current owner reports in rent, you can look at comparable rental listings in the neighborhood.

When looking at properties, location matters. Proximity to amenities, school rankings, and transportation access can affect a multifamily home’s rental value.

The rental market saturation is another important consideration. Buying a multifamily home in a fast-growing rental market means there are plenty of renters to keep prices up and units filled.

The vacancy rate — the percentage of time units are unoccupied during a given year — at a property or neighborhood is an effective way to estimate rental housing demand.

Depending on your financing, the condition of a multifamily home may be critical. With a VA or FHA loan, for instance, chipped paint or a faulty roof could be a dealbreaker.

Read up on mortgage basics to learn about what home loans you might use for a multifamily home and their terms.

Finding Multifamily Homes

Like single-family homes, multifamily homes are featured on multiple listing services and real estate websites. Browsing rental listings during your multifamily home search can help gauge the market in terms of vacancy rates and rental pricing.

Working with a buyer’s agent who specializes in multifamily homes can help narrow your search and home in on in-demand neighborhoods.

Alternatively, you can look into buying a foreclosed home. This may help get a deal, but it’s not uncommon for foreclosed properties to require renovations and investment.

View SoFi’s Home Mortgage Rates

Buying a multifamily home as a residence or investment property can provide rental income and build wealth.

It’s also a major financial decision. SoFi’s home loan help center is full of resources to unpack real estate terminology and equip homebuyers.

Whether you’re planning to be an owner-occupant or not will affect your financing options. SoFi offers home mortgage financing for owner-occupied primary residences, second homes, and investment properties of one to four units.

You can view your rate in just a few clicks.

Photo credit: iStock/krzysiek73

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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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Sep

2022

Investing for Retirement: Guide to Emerging Markets

Guide to Investing in Emerging Markets

By Mike Zaccardi, CMT, CFA | invest, Investing, Preparing for Retirement | Comments Off

Investing for retirement often includes both stocks and bonds, and within your equity allocation, emerging market stocks can play an important role in diversifying your portfolio.

Emerging market investments include owning shares in companies from countries like China, India, Brazil, and South Africa, among others. There are pros and cons to owning emerging market investments, but these stocks are a significant part of the global market.

Why invest in emerging markets when building a retirement portfolio? While it’s true that they can be volatile investments, this niche can provide strong returns and diversification benefits when preparing for retirement.

Understanding Emerging Markets

Opening a retirement account and including emerging markets in your portfolio may be a successful investing strategy.

Emerging markets are economies that are in the middle between the developing and developed stages. Emerging markets risk can be high since these areas often see rapid growth and high volatility with booms and busts. Some of the most well-known and biggest countries weighted in the emerging markets index include China, Taiwan, India, Brazil, and Saudi Arabia.

Emerging market investments are generally seen as a higher-risk area of the global stock market. Volatility can spike during periods of political upheaval and when emerging market recessions strike.

As investors get older, risk must be managed through diversified investment plans. You should consider reducing emerging market exposure in your portfolio as your time horizon shortens and retirement nears.

Why Invest in Emerging Markets?

Emerging market investments have been popular for decades. It became easy to own a broad emerging market index fund within an investment portfolio in the early 2000s when exchange-traded funds (ETFs) took off. That’s also when this group of stocks started to outperform U.S. equities.

The decade of the 2000s featured strong outperformance from the high-risk, high-reward profile of emerging market investments. But volatility in these markets has also been a factor.

People like to invest in areas of the stock market that exhibit rapid growth potential along with having the potential for diversification. High economic growth rates, such as those in China and India, often attract investors seeking to benefit from stocks of those nations. Indeed, there can be periods like the 2000s when strong bull markets take place.

Moreover, owning high-growth areas within a tax-advantaged account can be a savvy retirement savings strategy. When choosing a retirement plan, it’s helpful to consider what assets to own in which account.

Can You Build a Retirement Portfolio With Emerging Markets?

Retirement and emerging markets can go together. Boosting retirement savings can be done through this group of securities. Also consider that emerging market bonds are a growing piece of the global fixed-income market.

In addition, owning emerging market investments in retirement accounts is easier than ever with low-cost ETFs and both active and passive mutual funds. Moreover, many 401(k) plans offer an emerging markets fund so you can have exposure through your workplace retirement account.

When thinking about emerging markets, you should put them in context. Emerging markets stocks represent just 11% of the global stock market. Emerging market bonds comprise roughly a quarter of the global bond market. Those are significant weights, and you can own both areas in your retirement portfolio through low-cost funds.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.

Pros of Investing in Emerging Markets

There are many pros and cons of investing in emerging markets. When you start saving for retirement, that can be a great time to own emerging market stocks since you have a long time horizon to weather volatility.

Growth Opportunity

Many people contend that higher economic growth in emerging market nations can translate into growth potential for their stock markets. What’s more, many U.S. companies have significant emerging markets exposure through their global sales. So, corporations see opportunities in this space, too.

Also consider that nearly 80% of the world’s population lives in emerging market countries, while just 11% of the global stock market is weighted to them. Investing for retirement should have at least some exposure to this area for risk-tolerant individuals.

Diversification Benefits

International investments can help offset the ebbs and flows of U.S. stocks through diversification. Consider that the domestic equity market is 61% of the global market. So if the U.S. goes into a bear market, foreign shares might outperform. Retirement investing should have a diversified approach.

Cons of Investing in Emerging Markets

Emerging markets can be volatile, and they expose investors to a host of risk factors. Political, economic, and currency risks can all hamper emerging market investments’ growth.

Due to the many risks, it’s common for retirement investors to tone down their stock allocation as they approach retirement. Reducing exposure to the emerging markets area also makes sense, but it should still be considered for your equity sleeve in retirement.

Recent Underperformance

Emerging market stocks have done poorly over the last decade, particularly compared to how well the domestic stock market performed. In 2022, Russian equities were the latest area to pressure the emerging markets index hard. That stock market was forced to close, and its stocks plummeted in other markets.

Correlations Might Be Changing

Some argue that emerging markets today have more correlation to other markets, so having exposure might simply expose someone to the risks and not the benefits.

Highly Volatile

Older investors might want to steer away from the boom-and-bust nature of emerging markets. The process of evolving from an emerging market to a developed market is usually fraught with risk. In some areas, political turmoil might cascade into a full-blown economic recession.

Emerging market fixed-income investors can also suffer when high-risk currency values fall during such periods of volatility. Back in 1998, the “Asian Contagion” was an emerging markets-led debacle that caused a big decline in markets across the globe.

Uncertainty in China

China is now the biggest weighting in many emerging market indexes, up to one-third in some funds. That can be a lot in just one country, particularly in one as uncertain as China, given its one-party controlled economy.

Start Investing for Retirement With SoFi

Building a retirement portfolio often includes owning many areas of the global stock market. Emerging market investments can play a pivotal role to ensure your allocation has higher growth potential, but you must be mindful of the risks.

SoFi offers all the retirement planning tools you need, including online resources and complimentary access to financial advisors for SoFi members. When you’re ready to start investing for retirement, it only takes a small amount to open a traditional or Roth IRA account. Using the secure SoFi app, you can invest your retirement portfolio in stocks, exchange-traded funds (ETFs), fractional shares, and more. Get started now!

FAQ

Is it worth investing in emerging markets?

Strong growth potential and diversification benefits are reasons to own emerging markets for your retirement portfolio. That said, emerging markets are a small part of the global stock market. A diversified retirement portfolio should include this slice of the market, but investors also must recognize the risks. There are periods during which emerging market investments can underperform the U.S. stock market.

What is the best emerging market to invest in?

When figuring out emerging markets, you might be curious which one is the best. It is hard to say there is one in particular. Emerging market risk can be high, so to help mitigate that, owning the entire basket can help ensure the benefits of diversification.

Should my entire retirement portfolio be in emerging markets?

Building a retirement portfolio with emerging markets is common but putting all your eggs in the emerging market basket might not be the wisest move. Young investors can perhaps own a larger weight in this volatile equity area, but older investors should think about winding down their emerging markets stock exposure as they near retirement.

Photo credit: iStock/Kateywhat

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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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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Sep

2022

Understanding a Retirement Gap Analysis

By Mike Zaccardi, CMT, CFA | invest, Investing, Preparing for Retirement | Comments Off

A retirement gap analysis helps individuals identify a potential shortfall between how much they have saved and what they will need in retirement.

Tallying all accounts, projecting ahead, then comparing that amount to how much a fully funded retirement costs, given your unique circumstances, can help people bridge the financial gap between the present and retirement. It’s a great way to visualize how you are tracking towards your retirement goals.

Online resources are useful, and working with an experienced financial planner can help you see your retirement gap and then take steps to reduce it.

What Is a Retirement Analysis?

A retirement analysis is a report a financial advisor creates for individuals who want to know if they are on track for retirement. Saving for retirement is an important process for those who are looking forward to a secure future with a steady stream of income.

Knowing the difference between what you have saved versus what you will need in order to retire on time is valuable information. You can take extra steps to boost your savings rate once you have a retirement gap analysis and risk assessment performed; change your investing strategy; consider purchasing an annuity or other products, and more.

A retirement gap analysis considers a range of retirement assets to determine if you are on track for retirement. Your 401(k) through your employer, any individual retirement accounts (IRAs) you might own, annuities, individual taxable brokerage accounts, and even Social Security are common assets to tally in a retirement gap analysis. The sum of those assets is then compared to what you will need in the future, so that you can retire with confidence.

How Do You Conduct a Retirement Gap Analysis?

Conducting a retirement analysis can be done using online tools or by meeting with a financial advisor. It’s all about knowing when you can retire. Often, individuals will take action to improve their financial habits and retirement savings when they see what they must do.

What Goes Into a Retirement Gap Analysis?

For example, a retirement gap on a chart can be a powerful visual to inspire people to save more. Performing a retirement analysis requires careful input of all assets and some assumptions about future rates of return, as well as a person’s spending habits and goals in order to determine how long their savings and other assets may last.

Assets and liabilities are analyzed, and future cash flow is projected. Conducting a retirement analysis also includes estimating how long somebody might live. Longevity risk is a key consideration, and Social Security and other annuities can help reduce the risk of running out of money. There are many facets to performing a retirement gap analysis. Seeking out the help of an experienced fiduciary advisor can be a smart move so that you are confident in your retirement plan.

How Does Communication Come Into Play?

A critical factor of a retirement analysis is the communication aspect. This is where a financial planner can show their skills.

Simply seeing numbers on a spreadsheet might not cause people to change course on their journey to retirement. Communicating a retirement gap in the right context can drive home the message that saving more today will lead to a better tomorrow.

How Does a 401(k) Plan Factor Into the Analysis?

A high-level retirement gap analysis should be mixed in with detailed cash flow planning.

Your 401(k) plan is a major account that is assessed during a retirement analysis. An employer retirement account is a large part of many workers’ overall retirement plan. A 401(k) gap can be found by analyzing the value of a participant’s pre-tax and Roth accounts versus what they will need to retire.

What’s great about a 401(k) account is that it often features an employer matching contribution, which is almost like free money so long as you meet the plan’s matching contribution requirements. Many plans will match, say, 50% of the employee’s contribution up to 6%. For a $100,000 salary, that means $3,000 per year of employer contributions, in addition to $6,000 from the employee. That’s $9,000 per year.

A 401(k) account, among other retirement plans offered through work, is a major piece of someone’s retirement asset pie. It’s simple to increase contributions to it without noticing much of a difference in your paycheck. Moreover, the auto-enrollment and auto-escalation features are great tools to help more people save more for retirement so that their 401(k) gap shrinks over time. A 401(k) analysis can be helpful for workers young and old.

Retirement Gap Analysis Example

Let’s run through a retirement gap analysis example to better show the steps involved.

Retirement Gap Analysis, Step-by-Step	Rationale
Retirement Income Assessment: Summing all retirement savings accounts to find a portfolio value.	Identifies any potential shortfall between required monthly income and total projected income between Social Security, retirement plans, and other accounts.
Review liabilities and future spending habits.	No retirement gap analysis is complete without a thorough assessment of what you owe and current and future spending.
Analyze changes to an individual’s retirement date.	Can make arriving at retirement easier if more time is allowed to increase saving.
Strategize about Social Security options.	Delaying benefits until age 70 will increase total payout; might reduce longevity risk.
Outlining steps to take to shore up retirement income.	Increasing a 401(k) contribution rate can help narrow the retirement gap. Reducing spending and increasing your savings rate are other actions.

How to Calculate Retirement Income

Knowing if your 401(k) is enough is important, but so too is a broader look at your assets and liabilities along with what income to expect in retirement. No retirement gap analysis is complete without it.

Calculating retirement income can be done using various online calculators, but you might want to sit down with a financial planner to map out what income you, personally, will need in retirement. Variables like your spending habits, inflation, discounted cash flow rates, and possible risks all must be considered.

You can also leverage the Social Security Administration’s Retirement Estimator calculator to find out what you should expect to receive when you decide to retire. While the output is just an estimate, it can go a long way toward bridging your retirement gap if you have a gauge of what income you will have in retirement.

Another way to calculate retirement income is to sum up your retirement assets, assume a contribution rate between now and retirement along with a rate of return, then take that asset base as an amount from which to draw income during retirement.

Many planners use the “4% rule”, which states that a retiree can withdraw up to 4% of their retirement account value each year without a high risk of running out of money. This is just a rule of thumb, however, and it might not work as well today as it did decades ago.

Investing for Retirement With SoFi

Identifying where you are on your retirement journey is an important part of financial planning. Doing a retirement gap analysis is an essential part of that process. As time passes, our lives and lifestyles, our goals, and often our physical health can change. All these factors can impact how much we’ll need to spend in the future.

By conducting a retirement gap analysis to identify any shortfalls in savings, it’s possible to make adjustments, and course-correct to get savings goals on track.

If you’re concerned about your retirement savings, you don’t need to wait. You can start investing today with SoFi by opening and funding an IRA online. SoFi offers traditional, Roth, and SEP IRA accounts that can provide tax-advantaged retirement savings. Establishing regular contributions to your 401(k) and a SoFi IRA can quickly get you in the habit of saving more for tomorrow.

Open an IRA Today

FAQ

What is a retirement gap?

A retirement gap is a difference in the amount you have saved for retirement versus how much you will need. A retirement gap analysis can be performed to help identify how much more you will need to save for retirement. Once you know the amount, you can then take steps to boost your savings and investment accounts so that you can retire on time.

How do I find out if I have a retirement account?

Many individuals have a 401(k) or another retirement plan through their employer. Check with your HR department to see if there is an account set up for you. You might also have retirement accounts established on your own through investment brokerage companies. Also consider that you can likely collect a monthly Social Security benefit in retirement. Be sure to check with the Social Security Administration.

Will my retirement account be enough for me?

This is a tough question, but an important one. Knowing how much you will need for retirement is crucial to developing a retirement savings strategy and living a confident retirement. It’s wise to meet with a financial advisor to develop a plan. You can also use online resources, tools, and calculators to help determine if your current portfolio is enough to fund your retirement.

Photo credit: iStock/MicroStockHub

Sep

2022

How to Roll Over Your 401(k)

By AJ Smith | Budgeting & Goals, Building Your Career, Growing Wealth, invest, Investing, Life & Career | No Comments

It’s pretty easy to rollover your old 401(k) retirement savings to an IRA, a new 401(k), or another option — yet millions of workers either forget to rollover their hard-won retirement savings, or they lose track of the accounts.

According to a 2021 study by Capitalize, some 24 million 401(k) accounts seem to be forgotten or “lost”, with an average balance of about $55,000 in these dormant accounts.

Given that a 401(k) rollover just takes a couple of hours and, these days, minimal paperwork, it makes sense to know the basics so you can rescue your 401(k), roll it over to a new account, and add to your future financial security.

How Does Rolling Over Your 401(k) Work?

Many people wonder how to rollover a 401(k) when they leave their jobs. First, you need to know the difference between a transfer and a rollover.

A transfer is when you move funds between two identical types of retirement accounts. For example, if a person moves money from an old 401(k) to a new 401(k), a traditional IRA to another traditional IRA, or from an old Roth IRA to a new Roth IRA — that’s a transfer. It’s the most direct way to move funds from one tax-advantaged account to another.

A rollover is when you move money between two different types of retirement accounts. For example: You might rollover a 401(k) to an IRA.

💡 Recommended: What Is an IRA and How Does It Work?

Bear in mind, rollover accounts can be different, but must have the same tax treatment. You can’t rollover a tax-deferred traditional 401(k) to a Roth IRA without doing some kind of Roth conversion.

Steps to Roll Over Your 401(k)

Here are the basic steps, with more detail to follow:

1. Decide whether you want to roll it over to an IRA (a common option); transfer the funds to another employer’s 401(k); or set up an account like a self-directed IRA.

2. Set up the rollover account. Remember that rollovers have to be apples to apples in terms of tax treatment: a tax-deferred 401(k) to a traditional IRA; a Roth 401(k) to a Roth IRA.

3. Contact your former employer or 401(k) plan sponsor to initiate the rollover. (Depending on which rollover option you choose, the process or paperwork may be slightly different.)

4. Generally, the funds are sent to you in a check although they can be wired to a rollover IRA at a new institution, for example. Either way, you have 60 days to deposit the funds in another tax-deferred account, or you will owe taxes on the money and possibly a penalty.

Benefits of Rolling Over Your 401(k)

Once you understand how to roll over a 401(k), it’s easy to understand what the advantages are. First and foremost, by doing a rollover, you ensure that you are in charge of your retirement funds (which is important, after years of investing in your 401(k)).

Other pros include:

• Your investment account costs will likely be lower once you do a rollover, because leaving your savings in your old 401(k) when you’re no longer an employee means you may pay higher account management fees. Fees matter, and can substantially reduce your savings over time.

• You may have more investment choices. Typically, when you do a rollover from a 401(k) to an IRA at a new institution, your investment options increase which might improve portfolio returns and could further reduce fees.

• If you don’t want a self-directed portfolio, where you choose the investments in your rollover, you may be able to choose a robo-advisor or automated portfolio so there’s less for you to manage.

• If you have more than one 401(k) from various jobs, you can consolidate them as part of the rollover process.

Disadvantages of Rolling Over a 401(k)

Since you want to avoid retirement mistakes, it’s also important to consider some of the reasons why a rollover may not be the best idea.

• First, if you have a lot of appreciated company stock, you may be able to pay a lower tax rate on the gains if you transfer the stock to a brokerage account.

• While a rollover account at a different institution may provide more investment options, if you keep your 401(k) where it is, you may be able to buy investments at the cheaper institutional rate.

• If you do a rollover, you may lose some of the federal legal protections that come with 401(k) plans. For example, the money in your 401(k) is typically protected from creditors or collections, whereas the money in an IRA is shielded by state laws, which can vary.

• In some cases, your employer may allow you to withdraw funds from your 401(k) without paying the usual 10% penalty, if you are 55 or older when you leave your job.

Pros and Cons of Doing a 401(k) Rollover

Pros	Cons
Potentially lower investment fees, which can impact savings over time.	If you have company stock in your 401(k), it might save on taxes if you transfer the stock to a brokerage rather than doing a rollover.
More investment choices; more control over your portfolio.	Investment options may cost less in a 401(k) vs. an IRA.
The option to switch to a robo advisor if you prefer an automated approach.	Keeping your 401(k) may offer legal protection from creditors or collections.
Ability to consolidate accounts.	Keeping your money in your 401(k) could give you penalty-free access before age 59 ½ vs. an IRA.

When Is a Good Time to Roll Over a 401(k)?

Once you know how to roll over a 401(k), and you’ve decided that’s your next step, doing it as soon as you leave your job is likely the best time. But you can generally do a rollover any time. It’s your money. If you decide to do the rollover five years after leaving your job, that’s a better time than never.

That said, if you have a low balance in your 401(k) account — for example, less than $5,000 — your employer might require you to do a rollover. And if you have a balance lower than $1,000, your employer may have the right to cash it out. Be sure to check the exact terms with your employer.

In most instances, you have 60 days from the date you receive an IRA or 401(k) distribution to then roll it over into a new qualified plan. If you wait longer than 60 days to deposit the money, it will trigger tax consequences, and possibly a penalty. One rollover per year is allowed under the rules.

5 Things You Can Do With Your Old 401(k)

If you’re still asking yourself, But how do I rollover my 401(k)?, here are five possible choices that might make sense when deciding how to handle your old account.

Option 1: Leave Your 401(k) Where It Is

Is it ever a good idea to let sleeping 401(k)s lie? Sometimes, yes.

For instance, maybe your old job was with a super-hip, savvy startup that chose a stellar plan with multiple investment options and low administration fees that stayed in place even after you left your job. This is rare! But the point is: If you’re happy with your portfolio mix and you have a substantial amount of cash stashed in there already, it might behoove you to leave your 401(k) where it is.

Other than that, you probably want to make sure you’re in charge of your money — not your former employer.

Also, besides any additional fees you might end up paying, racking up multiple 401(k)s as you change jobs could lead to a more complicated withdrawal schedule at retirement.

Option 2: Roll Over Your 401(k) Into an IRA

If your new job doesn’t offer a 401(k) or other company-sponsored account like a 403(b), don’t worry: You still have options that’ll keep you from bearing a heavy tax burden. Namely, you can roll your 401(k) into an IRA, or Individual Retirement Account.

The entire procedure essentially boils down to three steps:

1. Open a new IRA that will accept rollover funds.

2. Contact the company that currently holds your 401(k) funds and fill out their transfer forms using the account information of your newly opened IRA. You should receive essential information about your benefits when you leave your current position. If you’ve lost track of that information, you can contact the plan sponsor or the company HR department.

3. Once your money is transferred, you can reinvest the money as you see fit. Or you can hire an advisor to help you set up your new portfolio. It also may be possible to resume making deposits/contributions to your rollover IRA.

Option 3: Roll Over Your 401(k) to Your New Job

If your new job offers a 401(k) or similar plan, rolling your old 401(k) funds into your shiny, new 401(k) account may be both the simplest and best option — and the one least likely to lead to a tax headache.

That said, how you go about the rollover has a pretty major impact on how much effort and paperwork is involved, which is why it’s important to understand the difference between direct and indirect transfers.

How to Roll Over Your 401(k): Direct vs Indirect Transfers

Here are the two main options you’ll have if you’re moving your 401(k) funds from one company-sponsored retirement account to another.

A direct transfer, or direct rollover, is exactly what it sounds like: The money moves directly from your old account to the new one. In other words, you never have access to the money, which means you don’t have to worry about any tax withholdings or other liabilities.

Depending on your account custodian(s), this transfer may all be done digitally via ACH transfer, or you may receive a paper check made payable to the new account. Either way, this is considered the simplest option, and one that keeps your retirement fund intact and growing with the least possible interruption.

Another viable, but slightly more complex, option, is to do an indirect transfer or rollover, in which you cash out the account with the express intent of immediately reinvesting it into another retirement fund, whether that’s your new company’s 401(k) or an IRA (see above).

But here’s the tricky part: Since you’ll actually have the cash in hand, the government requires your account custodian to withhold a mandatory 20% tax. And although you’ll get that 20% back in the form of a tax exemption later, you do have to make up the 20% out of pocket and deposit the full amount into your new retirement account within 60 days.

For example, say you have $50,000 in your old 401(k). If you elected to do an indirect transfer, your custodian would cut you a check for only $40,000, thanks to the mandatory 20% tax withholding.

But in order to avoid fees and penalties, you’d still need to deposit the full $50,000 into your new retirement account, including $10,000 out of your own pocket. In addition, if you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.

Option 4: Cashing Out Your 401(k)

One recent review of 401(k) accounts found that 21% of Americans who left their jobs during the pandemic also cashed out their 401(k) accounts. Generally speaking, withdrawing these retirement funds is not a good idea, and here’s why.

Because a 401(k) is an investment account designed specifically for retirement, and comes with certain tax benefits — e.g. you don’t pay any tax on the money you contribute to your 401(k) — the account is also subject to strict rules regarding when you can actually access the money, and the tax you’d owe when you did.

Specifically, if you take out or borrow money from your 401(k) before age 59 ½, you’ll likely be subject to an additional 10% tax penalty on the full amount of your withdrawal — and that’s on top of the regular income taxes you’ll also be obligated to pay on the money.

Depending on your income tax bracket, that means an early withdrawal from your 401(k) could really cost you, not to mention possibly leaving you without a nest egg to help secure your future.

This is why most financial professionals generally recommend one of the next two options: rolling your account over into a new 401(k), or an IRA if your new job doesn’t offer a 401(k) plan.

Option 5: Rolling Your 401(k) Over to a Self-Directed IRA

A self-directed IRA, sometimes called a SDIRA, is an unusual type of retirement account — and it’s not widely available. That’s because these types of accounts aren’t just for traditional securities, but for alternative investments normally not permitted in traditional IRAs: i.e. real estate, collectibles (like art and jewelry), commodities, precious metals, and more.

These accounts are considered self-directed because, first, they are only available through certain financial firms that will custody SDIRA accounts, not manage them. Second, SDIRA custodians can’t give financial advice, so all the due diligence and asset management falls to the investor.

While you can consider doing a rollover to a SDIRA, be sure that setting up such an account makes sense for your current holdings, or whether a traditional IRA or Roth might do just as well.

The Takeaway

It’s not difficult to rollover your 401(k), and doing so can offer you a number of advantages. First of all, when you leave a job you may lose certain benefits and terms that applied to your 401(k) while you were an employee. Once you move on, you may pay more in account fees, and you will likely lose the ability to keep contributing to your account.

Rolling over your 401(k) — to a new employer’s plan, or to an IRA — gives you more control over your retirement funds, and could also give you more investment choices.

There are some instances where you may not want to do a rollover, for instance when you own a lot of your old company’s stock, so be sure to think through your options.

If you know that moving your 401(k) money over to an IRA is the right thing, SoFi makes it super easy. Once you open an investment account with SoFi Invest and set up a traditional or Roth IRA account, you can transfer the funds from your old 401(k) and either keep the same (or similar investments), or choose new ones.

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

FAQ

How can you roll over a 401(k)?

It’s fairly easy to roll over a 401(k). First decide where you want to open your rollover account (usually an IRA), then contact your old plan’s administrator, or your former HR department. They typically issue a check that can be sent directly to you or to the rollover account at a new institution.

What options are available for rolling over a 401(k)?

There are several options for rolling over a 401(k), including transferring your savings to a traditional IRA, or to the 401(k) at your new job. You can also leave the account where it is, although this may incur additional fees. It’s generally not advisable to cash out a 401(k), as replacing that retirement money could be challenging.

Does SoFi allow you to roll over your 401(k)?

Yes, you can rollover funds from a 401(k) to a rollover IRA with SoFi.

To initiate the rollover, set up an account with SoFi Invest, and contact your 401(k) plan administrator or the HR department of your previous employer.

Aug

2022

Guide to Yankee Certificates of Deposit

By Rebecca Lake | Growing Wealth, Investing, money | Comments Off

A Yankee certificate of deposit is a special type of CD that’s issued domestically by a branch of a foreign bank.

Yankee CDs, sometimes referred to as YCDs in finance, have several features that set them apart from other types of CDs, including higher minimum deposit requirements, short terms, and a lack of FDIC protection.

For those reasons, it’s helpful to understand how a Yankee certificate of deposit investment works and the potential risks involved.

What Is a Yankee Certificate of Deposit?

What are Yankee certificates of deposit? And how does a certificate of deposit work? Let’s compare the two.

First, a regular CD is a deposit account that requires investors to lock up their cash for a fixed period of time (typically a few months to a few years), and in exchange pays a higher interest rate than a traditional savings account. CDs purchased at a bank are generally FDIC insured up to $250,000 (CDs bought at a credit union are NCUA insured up to the same amount).

By contrast, a Yankee certificate of deposit is a CD account that’s issued by a branch of a foreign bank in the U.S., to U.S. customers. In general, the term of a Yankee certificate deposit is less than a year, and the minimum deposit required is more in line with a jumbo CD.

So, for example, a Canadian bank that has branches in the U.S. could offer Yankee CDs to U.S. residents. Even though the CDs would be issued by a foreign bank, they would still be subject to U.S. regulation by the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board. But a Yankee certificate of deposit would not be federally insured.

Foreign banks that operate in the U.S. can issue Yankee CDs in order to generate capital for making loans or investments. These CDs can be purchased at issuance or on the secondary market.

Recommended: What is Liquid Net Worth

How Yankee CDs Work

As noted above, Yankee CDs work much the same as other types of deposit accounts that are CDs. There are some differences, however, with regard to:

• Minimum deposits

• Interest rates

• Maturity terms

• Investment risk

Minimum Deposits

Though you might be able to invest in a standard CD with $500 or $1,000, a Yankee certificate of deposit investment might require an initial deposit of $1 million or more. Scotiabank, for instance, issues its Yankee CDs in increments of $250,000 while UBS requires a $1 million minimum deposit for Yankee CDs offered through its Stamford, CT, branch.

A CD of this size issued by a U.S. institution could be categorized as a negotiable CD or NCD. NCDs have a face value of $100,000 or more. But Yankee CDs are not negotiable CDs because they are not FDIC insured.

Fixed and Variable Rates

Interest rates for Yankee CDs may be fixed or variable, which is another difference from other CDs which typically offer a fixed rate, making them more predictable instruments for fixed-income investors.

Shorter Terms

Maturity terms for a Yankee certificate of deposit tend to be shorter (one to three years, depending on the issuer), while regular CDs can have terms ranging from 28 days up to 10 years. The investor cannot access their cash until the CD matures, without triggering an early withdrawal penalty.

Potential Risk

Perhaps the biggest difference between Yankee CDs and other types of CDs is the level of risk involved. Generally speaking, CDs are considered to be safe investments since they offer a practically guaranteed rate of return, and deposits are federally insured up to a certain amount. Yankee CDs, on the other hand, carry certain risks including credit risk and the possibility of lower-than-expected returns if you’re choosing a variable-rate option.

Recommended: Average Savings by Age

Why Does a Yankee CD Matter?

Yankee CDs are not something the everyday investor is likely to be concerned with. After all, most people don’t have $1 million or $50 million to invest into a single CD.

If you’re able to invest in a Yankee CD, however, it’s possible that you could earn a higher rate of return for your money. That’s important if you’re working on building wealth and want to diversify your portfolio.

Are CDs smart investments? They can be, if you’re comfortable leaving money in a CD account until it reaches maturity. Again, with a Yankee certificate of deposit you may be looking at a one- to three-year wait until the CD matures. So given the higher deposit requirements involved, it’s important to consider how comfortable you are typing up larger amounts for that long, and what kind of return you can expect.

From a banking perspective, Yankee CDs matter because they’re a source of capital for foreign banks, which may need U.S. dollars to cover domestic obligations.

Yankee CDs: Real World Example

Scotiabank is one example of a Canadian bank that offers Yankee CDs to U.S.-based savers. The bank, headquartered in Toronto, offers both floating-rate and fixed- rate Yankee certificates of deposit. The bank’s floating-rate products have maturity terms ranging from two to three years, with minimum deposits of $250,000 and target principal amounts ranging from $50 million to $90 million.

The fixed-rate Yankee CD earns an impressive yield and requires a minimum deposit of $250,000, with a target principal amount of $100 million. The maturity period for this CD is also two years. Scotiabank offers these CDs exclusively to institutional investors who are accredited.

Special Considerations for Yankee CDs

There are two important things to keep in mind with a Yankee certificate of deposit investment. First, investors assume a certain amount of credit risk with these CDs.

The quality of these CDs is determined by the credit rating of the issuing bank. Banks with lower credit ratings may be more likely to default on financial obligations, including the payment of interest to CD holders. Tying up large amounts of money in Yankee certificates of deposit issued by banks with questionable credit ratings could therefore be risky.

Second, it’s important to keep in mind that FDIC protection does not apply to these CDs. Ordinarily, CDs issued at FDIC-insured banks are protected up to $250,000 per depositor, per financial institution, per account ownership type, in the rare event that the bank fails. With Yankee CDs, you don’t have that reassurance that your money is safe should the worst happen.

How to Open a Yankee CD

Opening a Yankee isn’t that different from opening any other type of CD. Here are the main steps involved:

• Locate banks that offer Yankee CDs in the U.S.

• Compare the Yankee certificates of deposit available, including the minimum deposit and interest rate.

• Complete the application to open an account.

• Make your initial deposit.

As noted, it’s important to choose a financial institution with good credit ratings. So you may want to take the additional step of checking credit ratings with Moody’s or Fitch Ratings to measure the bank’s financial health and strength.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!

Alternatives to Yankee CDs

If you’re looking for CD options that may be more accessible than Yankee CDs, there are some other possibilities. You could use any of the following to reach your savings goals:

• Standard CDs. A standard CD is a regular CD offered by a bank or credit union that pays interest and has a reasonable minimum deposit.

• Jumbo CDs. Jumbo CDs are similar to standard CDs but have larger minimum deposit requirements. For example, you may need $10,000 or more to open a jumbo CD.

• No-penalty CDs. A no-penalty CD allows you to withdraw money from your C before its maturity date without triggering an early withdrawal penalty.

• Bump up CDs. Raise your rate or bump up CDs allow you to raise your interest rate once or twice during the CD term. This type of CD might be attractive if you expect rates to rise.

• Add-on CDs. An add-on CD allows you to make additional deposits to your account after your CD has been opened. Ordinarily, CDs don’t allow additional deposits.

You may also consider CD-secured loans if you’re interested in a CD product that can help you build credit. With a CD-secured loan your CD serves as collateral. Your money stays in the CD until maturity, earning interest. Meanwhile, you make payments to the loan which can be reported to the credit bureaus.

Once the CD matures, you can withdraw the principal and interest or roll it into a new CD. You also get the benefit of on-time payment history, which can help to improve your credit score.

The Takeaway

A Yankee certificate of deposit is issued domestically by a branch of a foreign bank to U.S. investors. Yankee CDs are designed to help investors earn a solid return while allowing foreign banks to raise capital via U.S. investors. Due to their high minimum deposit requirements (as much as $1 million or more), these CDs may be better suited to some investors than others; they’re sometimes restricted to institutional investors.

Yankee CDs may offer competitive rates, but they are not federally insured like most U.S.-issued CDs.

If you’re committed to seeing your money grow slowly and steadily over time, the good news is you don’t have to miss out on a great rate when saving money. If you’re banking with SoFi, you can take advantage of SoFi’s all-in-one Checking and Savings. You can sign up for an account right from your phone and pay zero account fees — and if you qualify and sign up with direct deposit, you can earn a competitive APY.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

Can you lose money on a certificate of deposit?

Certificates of deposit (CDs) are generally a safe, secure way to save money. It’s possible, however, to lose money with a Yankee CD if the bank that issued it is unable to meet its financial obligations and pay interest to investors as scheduled.

What are the cons of a certificate of deposit?

Certificates of deposit may offer lower rates of return compared to other investments, which means your money has potential for growth. With bank CDs, savers may face early withdrawal penalties if they take money from their accounts before the CD matures.

How do I redeem a certificate of deposit?

If your CD is reaching maturity or you need to withdraw money for any other reason, you can visit a branch to redeem your CD or do so online if your bank allows it. You’ll need to specify how much money you want to withdraw and where that money should be sent if you’re redeeming CDs online.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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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