Apr
01
2024

How to Invest in Real Estate: 7 Ways for Beginners

By | Financial Independence, invest, Investing | Comments Off on How to Invest in Real Estate: 7 Ways for Beginners

Real estate investing can be an effective way to hedge against the effects of inflation in a portfolio while generating a steady stream of income. When it comes to how to invest in real estate, there’s no single path to entry.

Where you decide to get started can ultimately depend on how much money you have to invest, your risk tolerance, and how hands-on you want to be when managing real estate investments.

Why Invest in Real Estate?

Real estate investing can yield numerous benefits, for new and seasoned investors alike. Here are some of the main advantages to consider with property investments.

•   Real estate can diversify your portfolio, allowing you to better balance risk and rewards.

•   Provides the opportunity to generate investment returns outside of owning securities such as stocks, ETFs, or bonds.

•   Historically, real estate is often seen as a hedge against inflation, since property prices tend to increase in tandem with price increases for other consumer goods and services.

•   Owning real estate investments can allow you to generate a steady stream of passive income in the form of rents or dividends.

•   Rental property ownership can include some tax breaks since the IRS allows you to deduct ordinary and necessary expenses related to operating the property.

•   Real estate may appreciate significantly over time, which could result in a sizable gain should you decide to sell it. However, real estate can also depreciate in value, leading to a possible loss or negative return. Investors should know that the real estate market is different than the stock market, and adjust their expectations accordingly.

There’s one more thing that makes real estate investing for beginners particularly attractive: There are many ways to do it, which means you can choose investments that are best suited to your needs and goals.

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7 Ways to Invest in Real Estate

Real estate investments can take different forms, some of which require direct property ownership and others that don’t. As you compare different real estate investments, here are some important things to weigh:

•   Minimum investment requirements

•   Any fees you might pay to own the investment

•   Holding periods

•   Past performance and expected returns

•   Investment-specific risk factors

With those things in mind, here are seven ways to get started with real estate investing for beginners.

1. Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is a company that owns and operates income-producing properties. The types of properties you might find in a REIT include warehouses, storage facilities, shopping centers, and office space. A REIT may also own mortgages or mortgage-backed securities.

REITs allow investors to enjoy the benefits of property ownership without having to buy a building or land. Specifically, that means steady income as REITs are required to pay out 90% of taxable income annually to shareholders in the form of dividends. Most REIT dividends are considered to be ordinary income for tax purposes.

Many REITs are publicly traded on an exchange just like a stock. That means you can buy shares through your brokerage account if you have one, making it relatively easy to add REITs to your portfolio. Remember to consider any commission fees you might pay to trade REIT shares in your brokerage account.

2. Real Estate Funds

Real estate funds are mutual funds that own a basket of securities. Depending on the fund’s investment strategy, that may include:

•   Individual commercial properties

•   REITs

•   Mortgages and mortgage-backed securities

Mutual funds also trade on stock exchanges, just like REITs. One of the key differences is that mutual funds are not required to pay out dividends to investors, though they can do so.

Instead, real estate funds aim to provide value to investors in the form of capital appreciation. A real estate fund may buy and hold property investments for the long term, in anticipation of those investments increasing in value over time.

Investing in a real estate fund vs. REIT could offer broader exposure to a wider range of property types or investments. A REIT, for instance, may invest only in hotels and resorts whereas a real estate mutual fund may diversify with hotels, office space, retail centers, and other property types.

3. REIT ETFs

A REIT ETF or exchange-traded fund is similar to a mutual fund, but the difference is that it trades on an exchange just like a stock. There’s also a difference between REIT ETFs and real estate mutual funds regarding what they invest in. With a REIT ETF, holdings are primarily concentrated on real estate investment trusts only.

That means you could buy a single REIT ETF and gain exposure to 10, 20 or more REITs in one investment vehicle.

Some of the main advantages of choosing a REIT ETF vs. real estate funds or individual REITs include:

•   Increased tax efficiency

•   Lower expense ratios

•   Potential for higher returns

A REIT ETF may also offer a lower minimum investment than a REIT or real estate fund, which could make it suitable for beginning investors who are working with a smaller amount of capital.

But along with those advantages, investors should know about some of the potential drawbacks:

•   ETF values may be sensitive to interest rate changes

•   REIT ETFs may experience volatility related to property trends

•   REIT ETFs may be subject to several other types of risk, such as management and liquidity risk more so than other types of ETFs.

As always, investors should consider the risks along with the potential advantages of any investment.

4. Real Estate Crowdfunding

Real estate crowdfunding platforms allow multiple investors to come together and pool funds to fund property investments. The minimum investment may be as low as $500, depending on which platform you’re using, and if you have enough cash to invest you could fund multiple projects.

Compared to REITs, REIT ETFs, or real estate funds, crowdfunding is less liquid since there’s usually a required minimum holding period you’re expected to commit to. That’s important to know if you’re not looking to tie up substantial amounts of money for several years.

You’ll also need to meet a platform’s requirements before you can invest. Some crowdfunding platforms only accept accredited investors. To be accredited, you must:

•   Have a net worth over $1 million, excluding your primary residence, OR

•   Have an income of $200,000 ($300,000 if married) for each of the prior two years, with the expectation of future income at the same level

You can also qualify as accredited if you hold a Series 7, Series 65, or Series 82 securities license.

5. Rental Properties

Buying a rental property can help you create a long-term stream of income if you’re able to keep tenants in the home. Some of the ways you could generate rental income with real estate include:

•   Buying a second home and renting it out to long-term tenants

•   Buying a vacation home and renting it to short-term or seasonal tenants

•   Purchasing a multi-unit property, such as a duplex or triplex, and renting to multiple tenants

•   Renting a room in your home

But recognize the risks or downsides associated with rental properties, too:

•   Negative cash flow resulting from tenancy problems

•   Problem tenants

•   Lack of liquidity

•   Maintenance costs and property taxes

Further, the biggest consideration with rental properties usually revolves around how you’re going to finance a property purchase. You might try for a conventional mortgage, an FHA loan if you’re buying a multifamily home and plan to live in one of the units, a home equity loan or HELOC if you own a primary residence, or seller financing.

Each one has different credit, income, and down payment requirements. Weighing the pros and cons of each one can help you decide which financing option might be best.

6. Fix and Flip Properties

With fix-and-flip investments, you buy a property to renovate and then resell it for (ideally) a large profit. Becoming a house flipper could be lucrative if you’re able to buy properties low, then sell high, but it does take some knowledge of the local market you plan to sell in.

You’ll also have to think about who’s going to handle the renovations. Doing them yourself means you don’t have to spend any money hiring contractors, but if you’re not experienced with home improvements you could end up making more work for yourself in the long run.

If you’re looking for a financing option, hard money loans are one possibility. These loans let you borrow enough to cover the purchase price of the home and your estimated improvements, and make interest-only payments. However, these loans typically have terms ranging from 9 to 18 months so you’ll need to be fairly certain you can sell the property within that time frame.

7. Invest in Your Own Home

If you own a home, you could treat it as an investment on its own. Making improvements to your property that raise its value, for example, could pay off later should you decide to sell it. You may also be able to claim a tax break for the interest you pay on your mortgage.

Don’t own a home yet? Understanding what you need to qualify for a mortgage is a good place to start. Once you’re financially ready to buy, you can take the next step and shop around for the best mortgage lenders.

How to Know If Investing in Real Estate Is a Good Idea for You

Is real estate investing right for everyone? Not necessarily, as every investor’s goals are different. Asking yourself these questions can help you determine where real estate might fit into your portfolio:

•   How much money are you able and willing to invest in real estate?

•   What is your main goal or reason for considering property investments?

•   If you’re interested in rental properties, will you oversee their management yourself or hire a property management company? How much income would you need them to generate?

•   If you’re considering a fix-and-flip, can you make the necessary commitment of time and sweat equity to get the property ready to list?

•   How will you finance a rental or fix-and-flip if you’re thinking of pursuing either one?

•   If you’re thinking of choosing REITs, real estate crowdfunding, or REIT ETFs, how long do you anticipate holding them in your portfolio?

•   How much risk do you feel comfortable with, and what do you perceive as the biggest risks of real estate investing?

Talking to a financial advisor may be helpful if you’re wondering how real estate investments might affect your tax situation, or have a bigger goal in mind, like generating enough passive income from investments to retire early.

đź’ˇ Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

The Takeaway

Real estate investing is one of the most attractive alternative investments for portfolio diversification. While you might assume that property investing is only for the super-rich, it’s not as difficult to get started as you might think. Keep in mind that, depending on how much money you have to invest initially and the degree of risk you’re comfortable taking, you’re not just limited to one option when building out your portfolio with real estate.

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FAQ

How Can I Invest in Property With Little Money?

If you don’t have a lot of money to invest in property, you might consider real estate investment trusts or real estate ETFs for your first investments. REITs and ETFs can offer lower barriers to entry versus something like purchasing a rental property or a fix-and-flip property.

Is Real Estate Investing Worth It?

Real estate investing can be worth it if you’re able to generate steady cash flow and income, hedge against inflation, enjoy tax breaks, and/or earn above-average returns. Whether investing in real estate is worth it for you can depend on what your goals are, how much money you have to invest, and how much time you’re willing to commit to managing those investments.

Is Investing in Real Estate Better Than Stocks?

Real estate tends to have a low correlation with stocks, meaning that what happens in the stock market doesn’t necessarily affect what happens in the property markets. Investing in real estate can also be attractive for investors who are looking for a way to hedge against the effects of inflation over the long term.

Is Investing in Real Estate Safer Than Stocks?

Just like stocks, real estate investments carry risk meaning one isn’t necessarily safer than the other. Investing in both real estate and stocks can help you create a well-rounded portfolio, as the risk/reward profile for each one isn’t the same.

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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.

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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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.

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Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

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Mar
29
2024
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6 Top Stock Market Forums to Visit

By | Growing Wealth, invest, Investing | Comments Off on 6 Top Stock Market Forums to Visit

Stock market forums provide a place for investors to come together online and share specific financial ideas and insights. The main goal of these stock message boards is to help other participants profit in the markets. Some of the most popular stock forums take the sense of community beyond the forum format, too.

Some are financial blogs or research publications where large numbers of investors engage in discussions in the comments section beneath each article. Others are comprehensive investment communities in addition to discussions on many non-financial topics. And some stock market forums and stock message boards more closely resemble social networking sites than traditional messaging boards.

6 Top Stock Market Message Boards and Forums

Many members of the investment community generally want to help one another profit in the markets — that’s typically the common interest that draws participants together. But as with any online community, there can be heated debates, misinformation, and outright trolling in stock forums. The general rules of online interaction apply: Exercise caution when consuming information or engaging in discussions in such communities.

Here is a list of some popular stock market forums and stock message boards, including some that have investment strategies for beginners. Learn the details on how these forums work.

1. InvestorsHub

InvestorsHub is mostly oriented toward investors trying to make profit by speculating on short-term investments or trades. The stock market discussion tends to revolve around riskier securities.

Day trading of penny stocks (stocks trading at prices below $5 per share) is one of the most popular topics at InvestorsHub. The site also explores markets relating to different cryptocurrencies, FOREX, commodities, and stocks. Investors have access to tools for creating model portfolios, charting, newsletters, stock scanners and more, for free.

2. Stockaholics

Stockaholics is a financial forum and active online community that has discussions about investing, stock tips, penny stocks, and market analysis. The community is filled with many traders and investors, and it’s a place where like-minded individuals can connect to talk about the market.

On the moderated boards at Stockaholics, investors can share information, resources, and ideas. There are educational videos for new investors and also forums where they can ask questions.

Investors can also get real time market updates on the site, see streaming live charts, and read the latest financial news.

3. SeekingAlpha

SeekingAlpha (or SA for short) is a website where almost anyone can become a contributor, although only high-quality financial content usually makes the cut and gets published. The term “alpha” refers to a higher rate of return than average, so the name of the site could be translated as “investors seeking returns.”

The SA platform publishes the work of many top-notch investment advisors, money managers, and investment newsletter writers. The comments section underneath each article is where the site takes on the role of a stock market forum.

Most new investors can learn a lot from simply reading articles and comments for free on SeekingAlpha. Those who want to participate could sign up and start asking questions in the comments. More experienced investors could even try their hand at publishing their own articles on the site, then engaging with readers who comment on their articles.

4. Motley Fool Community

The Motley Fool is a high-profile site with millions of users that covers many financial topics that may be helpful to those building an investment portfolio. Their investment forum is called the “Motley Fool Community,” which houses free discussion boards. There are boards for financial planning, learning to invest, real money stock picks, retirement planning, and stocks A to Z, among others.

The Motley Fool Community is focused on investment discussions, of course, but in addition to the typical financial topics, there are boards for things like food and drink, fun and games, religion and culture.

5. StockTwits

StockTwits was designed to be like Twitter for finance folks. The platform has more than eight million registered users, and the company is registered with the Securities Investor Protection Corporation (SIPC) and the Financial Industry Regulatory Authority (FINRA).

Users can create posts with links, charts, and specialist opinions on stocks in much the same way they can on other social media networks. When a forum member posts about a specific company or stock, he or she can mark the post with a “cashtag” so others can find it.

StockTwits also allows members to create watchlists for the stocks they want to keep an eye on.

Recommended: How to Use Social Media for Investing Tips: The Smart Way

6. Investors Hangout

Investors Hangout has free stock message boards, stock charts and quotes, and news updates. Investors can see the most active stocks of the day and view live charts. There are blog posts on investing, the markets, real estate, business, and personal finance.

Investors can ask questions of and get suggestions from other members. There are also boards on global markets.

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*Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Pros and Cons of Relying on Stock Forums for Information

Whether you’re looking for information on investing for beginners or tools for more experienced investors, stock forums can have some potential benefits, but they also may have serious drawbacks you should be aware of.

Pros

Some advantages of a stock forum may include:

Connecting with other investors.
Stock market forums and stock message boards can be a way to share ideas, opinions, and information with other investors. An individual might get diverse perspectives and potentially helpful insights, for instance.

Access to educational information and special tools.
A number of forums have valuable tools that individuals can access. This might include stock trackers, charts, and even real-time data.

Getting market analysis.
Some forums may have market analysis investors can look at for free.

Cons

When visiting a stock market forum, be sure to proceed with caution and watch out for:

Information that isn’t right for your situation.
Investment advice is not one-size-fits-all. Something recommended on a forum, even by a legitimate financial specialist, may not be right for your particular circumstances or financial goals.

Misinformation.
Some of the information may be wrong, misleading, or fraudulent.

Unverified sources.
Individuals might talk up their qualifications or financial savvy in a forum, but it’s possible that some could misrepresent themselves online. They might also have conflicts of interest that they fail to disclose, such as potential gain from promoting a certain financial or investment product.

Potential to get caught up in the hype.
Some investment strategies touted by some forums may be risky or complicated. Make sure you thoroughly understand these strategies and that you’re comfortable with the potential risks before you decide to try them. And don’t allow yourself to get swept up in hype about possible “big gains,” which could cause you to make a rash decision you might later regret. It’s best to separate your emotions from your finances.

💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

Always Do Your Own Research Before Investing

While you may find it worthwhile and even educational or enlightening to visit a stock forum or stock message board, don’t just take the information at face value. Instead, always investigate and research it thoroughly to make sure it is accurate and legitimate.

In addition, carefully evaluate whether a strategy makes sense for your financial situation, investment goals, and risk tolerance. Weigh the pros and cons and don’t make rash decisions. And finally, remember that there is no sure thing when it comes to investing. At the end of the day, you want to make sure your financial security is safe.

The Takeaway

Stock market forums are online spaces that allow investors and traders to discuss the financial markets, among other things. There are many out there, some more popular than others, and each is different in its own unique ways. Different stock market forums suit the needs of different types of investors, So, before choosing a forum, a potential user might want to consider what their investment goals are.

It’s always important to remember, too, that investors should be critical and skeptical of any tips or advice that they receive, and to do their own research and homework before making investing decisions. There’s a lot of noise on the internet, and it can be difficult to parse out what’s genuine.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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

FAQ

What are the advantages of reading a stock market forum?

Stock market forums can be a way for investors to connect with other investors to share ideas, opinions, and information. They might also get access to information from financial professionals, as well as tools like stock trackers, charts, and various data points.

What should I be wary of?

In stock market forums, it’s best to be wary of any tips and advice you may receive, and to always do your own careful research before making investing decisions. Also, be aware that sources could misrepresent themselves online, or they may have a stake or interest in a certain product. And finally, be wary of getting caught up in the hype about an investment and rushing into a decision you could later regret.

What is the most popular stock market forum?

One of the most popular stock market forums is the Motley Fool Community, which has millions of members. The site offers free news and commentary about the stock market, financial planning, investments, and retirement saving, among other topics.

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

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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

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.

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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Mar
28
2024
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Roth IRA vs Traditional IRA: Main Differences, Explained

By | Growing Wealth, invest, Investing, Terminology | No Comments

Two of the most popular types of IRA are the traditional IRA and the Roth IRA. It’s helpful to understand the difference between Roth vs. traditional IRA when saving for retirement.

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

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

In weighing which is better, traditional IRA vs. Roth IRA, it’s important to consider what you need each plan to do for you.

Key Differences Between Roth and Traditional IRAs

When choosing which type of retirement account to open, it’s helpful to fully understand the difference between Roth vs. traditional IRA options. Here are the main differences between the two types.

Eligibility

Anyone who earns taxable income can open a traditional IRA. Previous rules that prohibited individuals from opening or contributing to a traditional IRA once they reached a certain age no longer apply.

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

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

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

The ceilings are based on modified adjusted gross income (MAGI).

đź’ˇ Quick Tip: How much does it cost to open an IRA account? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Taxes

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

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

2023 Filing Status

 If You ARE Covered by a Retirement Plan at Work

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

If your spouse is covered by a plan at work, you can deduct up to the full contribution limit if your combined MAGI is $218,000 or less.
Married Filing Separately You’re allowed a partial deduction if your MAGI is less than $10,000. You’re allowed a partial deduction if your MAGI is less than $10,000.

With a Roth IRA, on the other hand, contributions aren’t tax-deductible. But individuals won’t pay any taxes when they withdraw money they’ve contributed at retirement, or when they withdraw earnings, as long as they’re at least 59 ½ years old and have had the account for at least five years.

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

Contributions

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

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

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

As mentioned above, there is no age limit to making contributions to a Roth IRA or a Traditional IRA. As long as a person has income for the year, they can keep adding money to either type of IRA account, up to the limit.

Withdrawals

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

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

With a traditional IRA, an investor will generally pay a 10% penalty tax if they take out funds before age 59 ½ . There are some exceptions to this rule, as well.

These are the IRS exceptions for early withdrawal penalties:

•   Disability or death of the IRA owner. In this case, disability means “total and permanent disability of the participant/IRA owner.”

•   Qualified higher education expenses for you, a spouse, child or grandchild.

•   Qualified homebuyer. First-time homebuyers can withdraw up to $10,000 for a down payment on a home.

•   Unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

Health insurance premiums paid while unemployed.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Required Minimum Distributions (RMDs)

The IRS doesn’t necessarily allow investors to leave money in your IRA indefinitely. Traditional IRAs are subject to required minimum distributions, or RMDs. That means an individual must start taking a certain amount of money from their account (and paying income taxes on it) when they reach age 73—whether they need the funds or not. Distributions are based on life expectancy and your account balance.

If an individual doesn’t take a distribution, the government may charge a 25% penalty on the amount they didn’t withdraw.

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

For a helpful at-a-glance comparison of all the differences between a Roth vs traditional IRA, this chart looks at each guideline individually.

Roth IRA

 Traditional IRA
Good for… Individuals who are income-eligible and want the benefit of tax-free withdrawals in retirement Individuals who want an upfront tax break in the form of deductible contributions
Age Limit No, you can make contributions at any age as long as you have earned income for the year No, you can make contributions at any age as long as you have earned income for the year
Income Eligibility Yes, you must earn below a certain income limit to be able to contribute No, anyone with earned income for the year can contribute
Funded With Funded with after-tax contributions Funded with pre-tax dollars
Annual Contribution Limits (2024 Tax Year) $7,000, plus an additional $1,000 in catch-up contributions if you’re 50 or older $7,000, plus an additional $1,000 in catch-up contributions if you’re 50 or older
Tax-Deductible Contributions? No Yes, based on income, filing status and whether you’re covered by a retirement plan at work
Withdrawal Rules Contributions can be withdrawn penalty-free at any time; earnings can be withdrawn penalty-free and tax-free after 5 years and age 59 ½ Penalty-free withdrawals after age 59 ½; taxed as ordinary income
Early Withdrawal Penalties Early withdrawals of earnings may be subject to a 10% penalty and ordinary income tax Early withdrawals of contributions and earnings may be subject to a 10% penalty and ordinary income tax
Required Minimum Distributions? No Yes, beginning at age 73
Tax Penalty for Missing RMDs N/A 25% of the amount you were required to withdraw

Deciding Which Is Right for You

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

The Takeaway

For most people, an IRA can be a great way to bolster retirement savings, even if they are already invested in an employer-sponsored plan like a 401(k). You just have to decide which type of IRA is better for you—a Roth or traditional IRA.

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

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Which is better, a Roth or Traditional IRA?

A Roth IRA may be better if you expect to be in a higher income tax bracket in retirement. That’s because with a Roth, you make contributions with after-tax dollars, the money in the account grows tax-free, and you generally withdraw the funds tax-free in retirement. A traditional IRA may be better for you if you expect to be in a lower tax bracket in retirement because you’ll pay taxes on withdrawals then. You can take deductions on your traditional IRA contributions upfront when you make them.

What are the benefits of a Roth IRA vs a Traditional IRA?

Because you make after-tax contributions to a Roth IRA, your money generally grows in the account tax-free and you make tax-free withdrawals in retirement. In addition, with a Roth IRA, you can withdraw your contributions at any time without penalty, and you do not have to take required minimum distributions (RMDs) like you do with a traditional IRA.

What are the disadvantages of a Roth IRA vs a Traditional IRA?

Disadvantages of a Roth IRA include the restriction that you must earn below a certain income limit to be eligible to contribute to a Roth. In addition, you will not get a tax deduction from contributions made to a Roth IRA. However, you will generally be able to withdraw the funds tax-free in retirement.

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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.

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.

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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Mar
26
2024
Guide to Cross-Collateralized Loans

Understanding Cross-Collateralization: What It Is & How It Works

By | Family Finances, personal_loan | Comments Off on Understanding Cross-Collateralization: What It Is & How It Works

One type of loan that isn’t often discussed is cross-collateralized, also known as cross-collateral loans, which is a type of secured loan. If someone is looking to take out multiple loans through the same financial institution, it’s important that they understand what cross-collateralization is and when it can happen.

So, what is a cross-collateralized loan? Keep reading to find out.

What Is Cross-Collateralization?

Cross-collateralization is when a lender uses the collateral you put up for one loan, such as a car, to secure another loan you take out with that same lender. Collateral is an asset that acts as a loan guarantee. If the borrower fails to make their loan payments, the lender has the option to seize the collateral or to force the sale of the collateral to recoup its losses.

How Does Cross-Collateralization Work?

The way that cross-collateralization works is that the same form of collateral is used to back more than one loan. The collateral used needs to guarantee the loan value. For example, if someone takes out an auto loan, the car (which equates to the value of the loan) is used as collateral. Once that loan is partially paid off, the lender may be willing to use the car as collateral for a second loan. Generally, for cross-collateralization to work, that car also needs to be worth the same or more than the value of the both loans.

A common example of cross-collateralization is a second mortgage. If someone takes out a second mortgage on their home, the home is going to be used as collateral for both the primary mortgage used to purchase the home and the new second mortgage.

While cross-collateralization can involve using the same asset for similar loan types, it doesn’t have to happen this way. For example, a lender can use a borrower’s car as collateral for a new loan that isn’t an auto loan (such as a personal loan), even though the car is already being used as collateral for the auto loan.


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When Is Cross-Collateralization Used?

It’s more common to come across cross-collateralization in practice at credit unions and auto lenders. Unlike banks, credit unions are owned by the members of the credit union. To help protect this group against various losses, credit unions often use cross-collateralization to gain some extra security. Credit unions tend to have more favorable loan terms than larger financial institutions and banks, and members may secure those better terms by agreeing to cross-collateralization.

An example of this would be if a credit union member wants to finance their car through their credit union. Fast forward six months, and they want to take out an unsecured loan with a low-interest rate. The reason the credit union can offer an unsecured loan to the member at such a great rate is because they are actually securing the loan with the existing collateral from the member’s car loan.

The lender is legally obligated to disclose cross-collateralization, and the borrower must consent. It’s important to ask about cross-collateralization practices when taking out a new loan, however. Rather than verbally explaining the cross-collateralization to you, a lender could simply include a clause in the loan agreement allowing it to cross-collateralize any collateral you used on any loan with that lender. The wording in such a clause can vary by lender.

Once a form of collateral is being used to secure multiple loans, the borrower can’t sell that collateral. If the borrower isn’t aware that the collateral they put up for their original loan is also being used to secure the second loan, this could come as an unpleasant surprise. For example, a borrower might try to sell their car after paying off their car loan, believing they own it free and clear, only to discover that they can’t sell it until they pay off a second “unsecured” loan they have with that lender.

How Can You Get Out of Cross-Collateral Loans?

Getting out of a cross-collateralized loan without paying it off in full can be difficult. Plus, it can be challenging and expensive to move a cross-collateral loan to another lender, which can leave a borrower stuck with whatever rates and terms were offered to them when they took out the loan. That’s why it’s a good idea to read the fine print of any loan agreements before signing and confirming whether a bank or credit union plans to start a cross-collateral loan.

Pros and Cons of Cross-Collateral Loan

Pros

 Cons
Typically easy to qualify for Larger risk of losing collateral
Potentially low cost Tied to just one lender
Allows borrowers to leverage existing assets May get stuck with unfavorable terms

There are some major advantages and disadvantages associated with cross-collateral loans that are worth taking into consideration before signing any loan documents.

Benefits

Here’s a look at some of the benefits of a cross-collateral loan.

•   Ease of qualification: Because cross-collateral loans are secured, they can be easier to qualify for than unsecured loans, for which the lender takes on more risk. Applicants with low credit scores may find it easier to qualify for this type of loan than some others.

•   Lower cost: Cross-collateral loans tend to be less expensive than unsecured loans. This type of loan tends to come with lower interest rates, which could lead to savings over the life of the loan. (However, they may come with longer repayment terms, which could increase total interest cost.)

•   Allows borrowers to leverage existing assets. Cross-collateral loans use an asset that is already trapped in an existing loan, and allows the borrower to get more value out of it by using it to ensure more loans.

Drawbacks

There are also some serious downsides associated with cross-collateral loans that are worth thinking carefully about.

•   Larger risk: If the borrower isn’t able to repay their debts, the lender can seize the asset acting as collateral.

•   Tied to just one lender: With a cross-collateral loan, more than one loan is being secured by the same asset all through one lender. This can make it hard and expensive to ever switch to a lender offering more favorable terms.

•   Unfavorable terms: Cross-collateral loans can have stricter terms to meet in order to protect the lenders on subsequent loans.



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Cross-Collateralization and Bankruptcy

Cross-collateralization can become particularly complex during bankruptcy. For example, a borrower of a cross-collateral loan (using their car as collateral) who files for Chapter 7 bankruptcy will be required to either reaffirm the debt or surrender their car.

If they choose to reaffirm the debt and that loan is with a financial institution that has secured other sources of debt to the car, then they will need to pay off all of those debts in order to keep their car. Don’t forget, that borrower may not even be aware that some of their loans were cross-collateralized.

How cross-collateralization affects bankruptcy depends on the type of bankruptcy filed. Anyone dealing with cross-collateralization complications during bankruptcy may find that consulting a bankruptcy attorney will help them determine what their next steps should be.

Recommended: Getting Approved for a Personal Loan After Bankruptcy

Applying for SoFi’s Personal Loans

If you’re looking for an alternative to a cross-collateralized loan with your existing bank or credit union, you may want to investigate taking out an unsecured personal loan through a different financial institution. Personal loans can be used to finance a variety of expenses, including large purchases, home repairs/renovations, medical expenses, car repairs, weddings, vacations, and more.

SoFi personal loans offer competitive fixed rates and same-day funding. Checking your rate takes just a minute

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Is cross-collateralization legal?

Yes, cross-collateralization is legal. Many banks and credit unions practice cross-collateralization.

Who can and can’t cross-collateralize?

Borrowers who already have a secured loan at a financial institution may qualify for cross-collateralization. Lenders don’t always inform borrowers verbally that they are participating in cross-collateralization, so it’s worth confirming whether or not this is happening before taking on a second loan through the same lender.

Can you get out of cross-collateralization?

A major downside of cross-collateralized loans is that once a borrower has multiple sources of debt through the same lender that are cross-collateral loans, it can be difficult to move them to another lender. Paying off the loan is usually the best option for getting out of this type of loan.

Photo credit: iStock/mapodile

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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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