Sep
30
2024

What Is Infrastructure Investment?

By | Growing Wealth, invest, Investing | Comments Off on What Is Infrastructure Investment?

Infrastructure investment is an alternative strategy that focuses on the physical structures and systems that keep societies operational. Examples of public infrastructure include: railways, highways, harbors, cell towers, school, and wastewater treatment facilities.

As a type of alternative investment, infrastructure is not correlated with traditional assets like stocks and bonds. As such it may provide portfolio diversification. Infrastructure investments come with specific risks, however.

Examining how infrastructure investments work and their pros and cons can help you determine if they might be right for you.

Key Points

•   Infrastructure investments are in the physical structures, facilities, and systems that enable society to run smoothly.

•   Examples of infrastructure sectors include transportation, energy, and telecommunications, and projects may include developing highways, wind farms, and fiber-optic cables.

•   Infrastructure is considered an alternative asset class. Because it’s typically uncorrelated with traditional markets, it can offer portfolio diversification.

•   Investors can access this asset class through municipal bonds, private investments, public-private partnerships, and infrastructure mutual funds or ETFs.

•   Because infrastructure is a physical asset, it can be durable and may offer steady yields. Risks include lack of liquidity, potential vulnerability to higher interest rates, regulatory changes, natural disasters, and political events.

Defining Infrastructure Investment

Infrastructure investing refers to investment in the tangible assets that societies rely on to function, from power plants and parking lots to hospitals and schools. It’s an example of an alternative investment, since infrastructure investments are typically not correlated with traditional assets, such as stocks, bonds, and cash, or cash equivalents.

As a strategy, alternative investments offer the potential to generate higher risk-adjusted returns compared with traditional assets, though this typically comes with higher risk. Infrastructure investments are illiquid, and can be subject to interest rate fluctuations, regulatory changes, and risks owing to climate change and extreme weather.

Infrastructure investment funds, infrastructure stocks, and municipal bonds are some of the ways to invest in this alternative asset.

Types of Infrastructure Assets

Infrastructure assets are long-term capital assets that are used to provide public services. They’re most often stationary and typically have a long life or period of usefulness. Examples of infrastructure assets include:

•   Roads, bridges, tunnels

•   Water, sewer, and drainage systems

•   Dams

•   Municipal lighting

•   Communications networks, cell towers

•   Schools

•   Healthcare facilities

•   Prisons

Infrastructure assets are viewed separately from equipment used to construct critical structures. For example, a new road is an example of an infrastructure asset but the asphalt paving machine used to build it is not.

Public vs. Private Infrastructure Projects

Public infrastructure is available for public use and is funded through public means, such as municipal bonds. When you buy a municipal bond you’re agreeing to let the bond issuer, typically a city or local government, use your money to support public works projects for a certain period. In return, the bond issuer pays you interest, and at the end of the term, you can collect your original investment plus the interest.

Private infrastructure projects use capital from private investors to further the construction or improvement of critical structures. An infrastructure investment fund, for example, may concentrate private equity in a specific sector or subsector.

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Importance of Infrastructure Investment

Infrastructure investment is important for many reasons, starting with its impact on the economy. Without roads, railways, airlines, and waterways, people and goods can’t get where they need to go. Transportation infrastructure facilitates economic growth and reduces disruptions to the supply chain. Investing in utilities, such as electricity and water is also crucial.

Quality of life and basic needs are also dependent on infrastructure. When infrastructure is not maintained, societies risk losing access to safe, clean drinking water, communications, housing, and health care.

Infrastructure investment also serves as a line of defense against cyberattacks, which can threaten the security of everything from banking systems to the electrical grid. In short, investment in infrastructure makes life as we know it possible.

Recommended: Alt Investment Guide

Infrastructure Investment Sectors and Projects

Infrastructure investments can target a specific sector or type of project. Here’s a quick look at different areas of infrastructure investing.

Transportation Infrastructure

Transportation infrastructure refers to structures and systems that allow goods and people to move from one place to another. Examples of transportation infrastructure projects include the building or maintenance of:

•   Canals that allow cargo ships to pass from one body of water to another

•   Ports which allow cargo ships, cruise ships, and other maritime vehicles to dock for the purpose of loading or unloading people and goods

•   Mass transit systems such as subways and buses that allow people to navigate around a large urban area without a car

•   Roads, streets, and highways designed for different speeds and levels of capacity

In the U.S., the interstate highway system is one of the largest public works infrastructure projects ever undertaken.

Energy Infrastructure

Energy infrastructure includes all of the systems and structures that are necessary for generating or transmitting energy to a population. Here are some examples of energy infrastructure projects.

•   Solar panel systems that provide power for street lamps along a highway

•   Large-scale wind turbine farms that generate electric energy for a local population

•   Battery energy storage systems that connect to the existing electrical grid

The Hoover Dam is an example of an energy infrastructure project. The dam was built through a combination of public and private funds, as the government focused on improving infrastructure to generate jobs amidst the Great Depression.

Telecommunications Infrastructure

Telecommunications infrastructure, or telecom, encompasses the various systems and structures people and businesses use to communicate. Telecom infrastructure includes:

•   Telephone lines

•   Fiber-optic cables

•   Wireless networks

•   Routers

•   Cellular phones

Satellites are also an integral part of telecom infrastructure. Global governments and organizations, including NATO, rely on satellites to keep the lines of communication open.

Financing Infrastructure Investments

There are several ways infrastructure investments are financed. Capital may come from public investments and government programs, private investment, or infrastructure funds.

Public Funding and Government Initiatives

Public funding for infrastructure projects most often takes the form of bonds. Investors get the benefit of regular interest payments while the bond issuer is able to get the capital they need to invest in infrastructure.

Bonds are a form of direct investment in infrastructure; taxes are an indirect method. When you pay taxes at the local, state, or federal level, some of that money goes toward funding infrastructure projects. Governments use tax dollars, along with revenue collected from other sources, to build or improve infrastructure.

Private Investment and Public-Private Partnerships

Private investment provides financing for infrastructure projects through individual and institutional investors. When you invest in this type of fund, you may gain exposure to multiple infrastructure classes or just one — it all depends on the fund’s goals and objectives.

Public-private partnerships (PPPs) are arrangements in which private investors and governments work together to support infrastructure projects. PPPs can be used to address a variety of infrastructure needs, from building parks and recreation centers to constructing new roadways.5

Infrastructure Funds and Asset Management

Infrastructure funds allow investors to gain exposure to companies or industries that engage in infrastructure activities. For example, you might invest in a fund that holds companies in the shipping and ports sector or a fund that’s dedicated to investing in utilities.

Investing in infrastructure through mutual funds or exchange-traded funds (ETFs) allows for diversification. You can hold a collection of investments in a single basket, rather than purchasing shares of individual infrastructure stocks.

Infrastructure asset management refers to strategies for managing infrastructure assets. It encompasses key decision-making processes related to the maintenance of infrastructure systems, including risk management and cost management.

Advantages of Investing in Infrastructure

As discussed earlier, because infrastructure is an alternative asset class it’s not correlated with conventional assets like stocks and bonds. Thus, it can provide some portfolio diversification and may help mitigate volatility in other asset classes.

And because infrastructure is generally comprised of long-term physical assets that typically require a high initial investment, these structures tend to be durable. This contributes to lower ongoing investment expenses, and steady yields from population use (i.e., tolls, utility payments, transportation fees).

In that way, infrastructure can also be a resilient investment in the face of other sources of volatility. For example: what happens in the stock market generally won’t impact bridges and tunnels, or the long-term impacts could potentially trickle down in more predictable ways (material costs, interest rate changes) over time.

Risks and Challenges in Infrastructure Investing

Infrastructure investments are exposed to a variety of risks. As an investor, it’s important to understand what those risks can mean for your portfolio.

The most common risks and challenges include:

•   Interest rate risk: This is the risk of interest rates rising or falling in a way that could impact bond rates, as well as the cost of loans for construction and development of certain projects.

•   Regulatory risk: Because municipal structures depend on local regulations, changes in laws and policies can impact how quickly a project may ramp up, and whether new standards or guidelines will increase costs.

•   Construction risk: Construction risk can be a problem if the builder of a project experiences delays, if there are structural impediments that cause significant delays, or if the builder walks away from the contract before the project is complete.

•   Event risk: Infrastructure projects can face a wide range of potential threats from outside forces or actors, including the possibility of cyberattacks, supply chain attacks, and data breaches. Natural disasters, a changing climate, and geopolitical upheaval can also prove challenging for maintaining infrastructure.

The Takeaway

Infrastructure investing might be of interest to you if you’re looking for a way to expand your investments beyond stocks and bonds and diversify your portfolio. The most important thing to remember about alternative investments like infrastructure is that they may carry a higher degree of risk. It’s wise to weigh those risks against the potential returns or other benefits before wading in.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.


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FAQ

What are some examples of infrastructure investments?

Examples of infrastructure investments include municipal bonds that are used to build or improve local roads, public-private partnerships that aim to build more green spaces, and energy sector ETFs.

How can individual investors participate in infrastructure investing?

Infrastructure stocks, mutual funds, ETFs, and municipal bonds may offer the easiest points of entry for investors. You could buy individual shares of stock in an infrastructure company, hold a collection of infrastructure investments in a single fund, or earn interest from muni bonds while helping to fund infrastructure projects.

What are the typical returns on infrastructure investments?

Infrastructure investments can generate returns that may be higher or lower than typical market returns, but it’s important to remember that infrastructure typically does not react to market volatility the same way as conventional assets might. Also some infrastructure investments can offer predictable yields versus other assets.

Photo credit: iStock/RyanJLane

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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 https://sofi.app.link/investchat. 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.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
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.

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

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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Sep
30
2024

Putting an IRA in a Trust: What You Need to Know

By | Growing Wealth, invest, Investing | Comments Off on Putting an IRA in a Trust: What You Need to Know

While it’s not possible to put an individual retirement account (IRA) in a trust while you’re alive, you can name a trust to be the beneficiary of your IRA assets after you die. This can be done with traditional IRAs as well as Roth IRAs, SEP, and SIMPLE IRAs.

Trusts are an estate-planning tool that can be useful for passing on assets to others after your death. Assets you can transfer to a trust include investments like stocks and bonds, real estate, bank accounts, and antiques — but not IRA accounts, per se.

Rather, the trust would become a beneficiary of the IRA, and assets within the IRA would transfer to the trust after your death, with instructions about how and when those assets should be distributed.

Key Points

•   You can effectively put an IRA in a trust after you die by naming the trust as the beneficiary of the IRA.

•   Naming a trust as the beneficiary of an IRA allows you, the IRA owner, to manage how and when assets will be distributed after your death.

•   This arrangement can be used for any type of IRA: traditional, Roth, SEP, or SIMPLE.

•   Setting up a trust as an IRA beneficiary requires that you establish a trust, identify a trustee, and name the trust beneficiaries, who will then inherit the IRA assets.

•   Benefits include greater control over how IRA assets are distributed; drawbacks include the cost and time involved in setting up a trust.

What Is an IRA?

To recap what an IRA is, it’s an individual retirement account that allows you to save and invest on a tax-advantaged basis.

You can open an IRA at brokerages, banks, and other financial institutions that offer them. There are different types of IRAs you can fund; each with its own set of restrictions:

•   Traditional IRA: A traditional IRA typically allows you to make tax-deductible contributions. Withdrawals are taxed at your ordinary income tax rate.

•   Roth IRA: Roth IRAs do not allow for deductible contributions. However, qualified withdrawals are tax free.

•   SEP and SIMPLE IRAs: SEP and SIMPLE IRAs are designed for small business owners and self-employed individuals. Similar to traditional IRAs, these plans are tax-deferred, but generally have higher contribution limits.

How much can you put in an IRA? The IRS determines how much you can contribute to an IRA each year. The maximum contribution for tax year 2024 is $7,000; an additional $1,000 catch-up contribution is allowed for people aged 50 or older.

Anyone with earned income can contribute to a traditional or a Roth IRA. There are some rules to know, however:

•   The amount of traditional IRA contributions you can deduct, if any, is based on your income and filing status and whether you (or your spouse, if married) are covered by an employer’s retirement plan.

•   The amount of Roth IRA contributions you can make each year is determined by your income and tax filing status. If your income is too high, you may be ineligible to contribute to a Roth IRA.

The assets in any of these types of IRAs could be transferred to a trust upon your death, as long as you name the trust the beneficiary of the IRA account.

Recommended: Calculate Your 2024 IRA Contribution Limits

Inherited IRAs

Before deciding whether to transfer your IRA assets to a trust upon your death, you may want to consider the rules for inherited IRAs. Leaving the funds in the IRA to be inherited by a beneficiary such as your spouse, child, or grandchild is also an option, rather than going to the trouble of setting up a trust.

Inherited IRA rules can be complicated, however. When it comes to IRAs, there are two types of beneficiaries: designated and non-designated. Designated includes people, such as a spouse, child, or friend. Non-designated beneficiaries are entities like estates, charities, and trusts.

Depending on the beneficiary’s relationship to you at the time of your death, as well as your age, different rules will apply to how IRA funds can be accessed and distributed. For example, all inherited IRAs obey a set of IRS rules pertaining to the distribution of funds. But when you set up a trust as the beneficiary for an IRA, the funds can be distributed according to parameters that you have established.

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How Does a Trust Work?

A trust is a legal entity you can establish for the protection and distribution of assets after you die. State law determines the process for creating one, but generally here’s how a trust works:

•   You create the trust document on paper, either by yourself or with the help of an estate planning attorney.

•   You name a trustee who will manage trust assets on behalf of the individuals or entities you name as beneficiaries.

•   Once the trust is created, you typically can transfer assets to the trust and control of the trustee. With an IRA, you would name the trust as the beneficiary of the IRA assets.

•   The assets are transferred to the trust upon your death, and the trustee oversees the distribution of the funds to the beneficiaries of the trust.

•   In many cases, the assets in a trust are not subject to probate after you pass. This can streamline the transfer of assets, and also ensure some privacy.

More Facts About Trusts

•   A trustee is a fiduciary, meaning they’re obligated to act in the best interests of you and the trust’s beneficiaries. The trustee has an ethical duty to manage the trust assets according to the terms you spelled out in the trust document.

•   There are different types of trusts you can consider, but generally they can be classified as revocable or irrevocable: A revocable trust can be altered or canceled, while an irrevocable trust is permanent.

•   In estate planning, a trust is separate from a person’s will. A will is a legal document you can use to specify how you’d like assets to be distributed after your death or name a guardian for minor children.

Can an IRA Be Put in a Trust?

An IRA can be put in a trust, but it cannot be transferred to a trust during your lifetime. You can, however, establish a trust and name it as the beneficiary of your IRA.

Naming a trust as the beneficiary of your IRA assets can give you more control over how and when the funds are distributed.

Making a trust the beneficiary to your IRA may be as simple as updating your beneficiary elections with the company that holds your account, assuming the trust has already been created. Your brokerage account may allow you to make a change to your beneficiary designation online or require you to mail in a new beneficiary election form.

What Happens When You Put an IRA in a Trust?

When you name a trust as the beneficiary of an IRA, funds in the IRA account are directed into the trust once you pass away. IRA funds can then be distributed among the trust’s beneficiaries, according to the conditions you set.

Moving an IRA to a trust would not affect the beneficiary designations for any other retirement accounts you might have, such as a 401(k).

Reasons Someone Might Put Their IRA in a Trust

There are different scenarios in which it might make sense to name a trust as your IRA beneficiary, versus passing it on to your heirs directly. You might choose to do so if you:

•   Want to set specific conditions or restrictions on when beneficiaries can access IRA assets.

•   Are interested in creating a legacy of giving through your estate plan and have named one or more charities as trust beneficiaries.

•   Want to protect IRA assets from creditors.

•   Need to set up a trust for a special needs beneficiary.

Control is often the biggest reason for naming a trust as an IRA beneficiary. For example, say one of your children is a spendthrift. If you were to name them as beneficiary to your IRA, then they’d have free access to that money once you pass away.

Instead, you could name the trust as beneficiary, with a stipulation that your child is only able to withdraw a certain amount of money from the IRA each year, or only for a certain purpose (e.g., their education). Or you could specify that the IRA assets should only be released to them when they reach a certain age.

Things to Consider Before Putting an IRA in a Trust

Before setting up a trust for an IRA, it’s important to consider whether it actually makes sense for your situation.

Here are some questions to weigh:

•   What are the goals of the trust, and specifically for the IRA assets?

•   Will you transfer other assets to the trust as well?

•   Which type of trust should you open?

•   Who will benefit from the trust itself?

•   What are the tax implications for beneficiaries?

•   Who is the best choice to act as executor?

It’s also important to factor in the cost of setting up and maintaining a trust. Doing it yourself could save you the expense of hiring an attorney, but that might not be an option if you have a complex estate.

Once the trust is created, there may be additional costs including any fees the executor is entitled to collect.

How Can You Put an IRA in a Trust?

As mentioned, you cannot transfer an IRA into a trust during your lifetime. To plan for a trust to be the beneficiary of an IRA, you’ll need to take the following steps.

1. Open an IRA

If you don’t already have a retirement account, opening an IRA is a good place to start. That’s easy to do, as many brokerages allow you to set up a traditional, Roth, SEP or SIMPLE IRA online. When deciding where to open an IRA, pay attention to:

•   The range of investment options offered

•   What you might pay in fees

•   How easily you’ll be able to access and manage your account (i.e., website, mobile app, etc.)

You can open an IRA with money from a savings account or rollover funds from another retirement account.

Recommended: A Beginner’s Guide to Opening an IRA

2. Establish a Trust

Once you have an IRA, you’ll need a trust to name as its beneficiary. You could create a simple living trust yourself using an online software program. Remember that the rules governing trusts vary depending on the state.

If you have a more complicated estate, you might want to work with an attorney.

Here are some of the key steps to establishing a trust:

•   Select the trust type. As mentioned, there are different types of trusts to choose from. If you’re unsure which one might be right for you, it may be helpful to talk to a professional.

•   Choose a trustee. Your trustee should be someone you can rely on to manage trust assets ethically. It’s possible to name yourself as the trustee in your lifetime, with one or more successor trustees to follow you.

•   Decide which assets to transfer. An IRA isn’t the only thing you might transfer to a trust. You’ll want to take some time to decide what other assets you’d like to include.

•   Set the rules. Again, you have control over what happens to trust assets. So as you create the trust you’ll need to decide what conditions, if any, to place on when beneficiaries can gain access to those assets.

3. Name Trust Beneficiaries

You’ll need to decide who to name as beneficiaries for the trust. Individuals you might name include:

•   Your spouse

•   Children

•   Siblings

•   Other relatives or family members

•   Charities or nonprofit organizations

Remember, these are the people who benefit from the trust directly. When naming beneficiaries, you can further specify which trust assets they will or won’t have access to, including IRA funds.

4. Fund the Trust

After creating the trust, you’ll need to fund it. Funding a trust simply means transferring assets into it.

Depending on the type of trust, you might choose to place real estate, land, antiques, collectibles, bank accounts, or investments under the control of the executor. Remember that once assets are transferred to an irrevocable trust you can’t change your mind later.

5. Name the Trust as Your IRA Beneficiary

Once you’ve established the trust and arranged to fund it, the final step is naming it as a beneficiary on your IRA account. Again, that might be as simple as logging in to your brokerage account to update your beneficiary choices. If you’re not sure how to change your IRA beneficiary to a trust, you can reach out to your brokerage for help.

Tax and Withdrawal Rules for Trust IRAs

When IRA money is held inside a trust, withdrawals may be taxable according to the type of trust it is. If money from IRA assets is distributed to beneficiaries of the trust, they’re responsible for paying any taxes due.

That said, in some cases the trust can assume responsibility for paying taxes on distributions, including elective and required minimum distributions, when required.

For example, say you set up a trust to hold your IRA assets, and specify that a beneficiary cannot receive distributions until age 30. In that scenario, the trust could take distributions from the IRA to pay expenses for the beneficiary and pay any tax owed on those distributions.

Qualified distributions from Roth IRAs are always tax free. IRA withdrawal rules dictate that early or non-qualified withdrawals from a traditional or Roth IRA can trigger a 10% tax penalty. Income tax may also be due on early distributions, unless an exception or exclusion applies. Unlike 401(k)s, IRAs do not allow for loans.

Pros and Cons of Putting an IRA in a Trust

If you have a trust already, then naming it as beneficiary of your IRA may not be that difficult. However, it’s important to consider what kind of advantages you may gain by setting up a trust if you don’t have one yet.
On the pro side, putting an IRA in a trust gives you more control over how your heirs use that money. It can also make it easier to create financial security for a special needs beneficiary. It can protect the assets from creditors.

However, it’s important to consider the cost and the level of effort required to set up a trust for an IRA. A trust may not be necessary if you don’t have a lot of other assets or wealth to pass on.

Pros

 Cons

•   Allows for greater control of trust assets, including IRA funds.

•   Can protect assets from creditors.

•   May make financial planning easier when you have a special needs beneficiary.

•   Setting up a trust for an IRA can be time-consuming and potentially costly.

•   IRA funds only transfer to the trust once you pass away.

•   May not be necessary if you have a simple estate.

The Takeaway

If you have assets in any type of IRA account (traditional, Roth, SEP, or SIMPLE), you can set up a trust so that the assets in the IRA can be transferred to the trust upon your death — and then distributed to beneficiaries according to your wishes.

Just as funding an IRA can help you save for retirement, bequeathing your IRA to a trust can protect your assets and perhaps add to the financial security of the person(s) who later inherits those funds.

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).

Easily manage your retirement savings with a SoFi IRA.

FAQ

What happens to an IRA in a trust?

When an IRA is placed in a trust, what really happens is that the trust becomes the beneficiary of the IRA. After your death, the assets are then managed by a trustee according to the direction of the trust creator. The beneficiaries of the trust can access IRA assets, but only according to the instructions specified by the trust document. Beneficiaries of the trust can include spouses, children, or other family members, as well as charities and nonprofits.

Why put an IRA in a trust?

Naming a trust as the beneficiary of an IRA could be the right move if you’d like to have more control over how your beneficiaries access those assets. You may also set up a trust for an IRA if you have a special needs beneficiary, you want to protect those assets from creditors, or you want all of your estate assets to be held in the same place.

How is an IRA taxed in a trust?

IRA tax rules still apply when assets are held in a trust. The difference is that the trust, not the trust beneficiaries, are responsible for any resulting tax liability associated with earnings from IRA assets. Once the trust distributes income from an IRA to beneficiaries, they become responsible for paying any taxes owed on earnings.

Photo credit: iStock/Milan Markovic

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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
30
2024

15 Ways to Invest $10,000 Right Now in 2024

By | Growing Wealth, invest, Investing | Comments Off on 15 Ways to Invest $10,000 Right Now in 2024

If you have $10,000 that you can earmark for investing purposes, count yourself lucky. There are many ways to invest $10,000 right now, whether you’re thinking about long-term goals like retirement, or you’re interested in learning more about how to invest in the stock market.

A $10,000 investment can compound over the years into a substantial sum — although there is always the risk of loss when investing any amount of money. Whether you are a beginner or an experienced investor, investing $10,000 takes research and discipline to follow through on the choices that make sense for you.

Key Points

•   Identify your financial goals and risk tolerance before choosing a strategy for investing $10,000.

•   Retirement plans such as IRAs and 401(k)s offer tax advantages that may help you boost your savings.

•   Putting your money in low-risk, high-yield savings accounts, which typically offer rates that are 8x or more those of average savings accounts, can help your money grow.

•   Investing in ETFs, index funds and other mutual funds, alternatives, or individual stocks is higher risk, but may offer higher returns in time.

•   One of the most effective ways to spend $10,000 is to pay off high-interest debt, which can cost thousands in interest payments over time.

What to Know Before You Invest $10,000

Before you review some of the different ways you can invest your money, it helps to identify what your goals are. After all, you don’t have to put the entire amount into a single option; you can split your money into various pots, so to say.

It may help to ask yourself some questions about what is important to you:

•   Do you want to invest for a specific purchase or life event, such as buying a home or welcoming a child?

•   Do you want to invest toward a more secure retirement and old age, perhaps by funding a retirement account?

•   Are you interested in using the money you have to help you learn more about investing basics?

•   Would it be prudent to pay off credit card debt, since eliminating debt is an investment by effectively increasing your net worth?

Understanding Growth vs. Risk

In addition to thinking about your goals, it’s important to consider what your risk tolerance is. While there are many ways to invest, some may involve more risk (or reward) than others. Some investors may want to swing for the fences with a high-risk venture, while others prefer to keep their cash as safe as possible.

As you weigh your investing choices, from stocks and bonds to alternative investments, keep in mind that higher-risk investments tend to offer more growth — with the downside that there’s a higher risk of losing money. Lower-risk investments, like buying bonds, generally offer lower returns (but also less risk of losing money).

15 Ways to Invest $10,000

Whether you want to be a hands-off type of investor or more of an active investor, there are countless choices to consider. We summarize 15 possibilities here.

While some of these may count as conventional options (e.g., investing via a retirement or college savings account), some are less so (e.g., investing in a business).

1. Start With an IRA

Opening an IRA provides you with the opportunity to save for your retirement, supplement existing retirement plans, and potentially benefit from tax advantages. A traditional or Roth IRA can be a great vehicle for tax-advantaged, long-term investments.

The annual IRA contribution limit for 2024 is $7,000; $8,000 for those 50 and older.
Traditional IRAs allow for pre-tax contributions and tax-deferred growth, while Roth IRAs involve after-tax contributions and qualified tax-free withdrawals in retirement.

Other types of IRAs include SEP and SIMPLE IRAs. SEP IRAs are for small business owners and self-employed individuals, while SIMPLE IRAs are for employees and employers of small businesses. These have different contribution limits and rules than ordinary traditional or Roth IRAs.

In all cases, though, an IRA is just a tax-advantaged type of account. You must select investments to fill the IRA you choose.

Recommended: IRA Contribution Calculator: Check Your Eligibility

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

2. Increase Your 401(k) Contributions

Another way to invest $10,000 is to increase your 401(k) contributions at work. Like IRAs, these are tax-advantaged accounts. Generally, you establish your 401(k) contributions through your workplace plan, and the money is deducted from your paycheck.

You could, however, increase your withholdings so that you’re adding $10,000 more to your accounts (or a percentage of that), as long as you don’t exceed the annual contribution limit.

Unlike IRAs, which have a fairly low annual contribution limit, you can save as much as $23,000 in your 401(k) for tax year 2024. If you’re 50 and up, you can save an additional $7,500, for a total of $30,500.

3. Open a High-Yield Savings Account

If you open a high-yield savings account with a competitive interest rate, this is a lower-risk way to save. As of August 2024, top high-yield savings accounts were offering as much as 5.50% annual percentage yield (APY). Just remember that terms vary considerably from bank to bank, and there are no guarantees the rate will remain constant.

Still, that means a $10,000 deposit in a high-yield savings account with a 5.0% APY could yield roughly $511 in interest in one year, assuming interest is compounded monthly, and there are no further deposits that year, and that the APY doesn’t change.

Another benefit of putting your money in a bank account is that your funds are typically FDIC-insured, up to $250,000, per depositor, per insured bank, for each account ownership category.

4. Be Debt Free

Knowing how to invest $10,000 today does not have to mean finding a high-performing stock. Simply paying off high-interest-rate debt can be like earning a guaranteed rate of return.

Think about it: If you’re carrying a $5,000 balance on a credit card that charges a 15.99% annual percentage rate (APR), paying off your balance means you are “saving” all that interest, rather than paying it to your card.

Given that most credit card issuers compound interest daily, those charges can add up to hundreds or even thousands of dollars per year (depending on your actual balance, and APR).

5. Beef Up Your Emergency Fund

Putting some or all of your $10,000 into an emergency fund could also pay off down the road. Having cash on hand to cover life’s inevitable curveballs means that you wouldn’t have to put more expenses on a credit card in a crisis, or take out a home loan or line of credit, and end up paying interest on borrowed funds.

Keeping your emergency fund in a high-yield savings account, as noted above, could offer another potential upside in the form of interest gained.

6. Get Healthy with an HSA

Another way to invest is to max out your Health Savings Account (HSA) contributions. Individual contributions are limited to $4,150 for 2024; $8,300 for a family. The money in the HSA account is yours, even if you switch jobs or health plans.

An HSA can be triple-tax advantaged. That means your contributions, which are typically made via withholdings from your paycheck, are tax-deductible, investment growth within the HSA builds tax-free, and you can withdraw funds for qualifying health-related expenses tax-free, too.

If you use HSA funds for non-qualified expenses before age 65, you could face a 20% penalty on the withdrawals.
However, if you don’t use the account much over the years, then you can use the account like a traditional IRA once you reach age 65. That means: You’d owe tax on the withdrawals, but you wouldn’t face a penalty — and you could use the funds for any purpose (not only health-related expenses).

7. Try U.S. Treasuries

Investing $10,000 in government bills, notes, and bonds is another way to help your money grow over time. U.S. Treasury bonds are often considered one of the safest investments, as they have the full faith and credit of the U.S. government backing them. Treasuries are available in short-, medium-, and long-term maturities.

Treasury bills are short-term debt securities that mature within one year or less.Treasury notes are longer-term and mature within 10 years.Treasury bonds mature in 30 years and pay bondholders interest every six months. Treasury Inflation-Protected Securities, or TIPS, are notes or bonds that adjust payments to match inflation. Investors can buy tips with maturities of five, 10 and 30 years; they pay interest every six months.

Recommended: How to Buy Treasury Bills, Bonds, and Notes

8. Explore Alternative Assets

Experienced investors who have a sizable portfolio and a sophisticated understanding of various markets might want to explore the world of alternative assets.

Alternative investments — commonly known as alts — differ from conventional stock, bond, and cash categories. Alts include a variety of securities such as commodities, foreign currencies, real estate, art and collectibles, derivative contracts, and more.

Alts are considered high-risk, but they may offer the potential for portfolio diversification. It’s also important to know they typically aren’t as regulated or transparent as traditional assets.

9. Build a Business

Starting your own venture is an intriguing idea in today’s tech-driven world. Taking $10,000 to fulfill an entrepreneurial dream could lead to future profits. But as with any business, success isn’t guaranteed and there is always the possibility of loss.

That said, it doesn’t have to take much capital to start a small business online or just offer your services to the market. Maybe you’re a professional with expertise in a certain area or perhaps you’ve honed a particular craft. You could consult with the Small Business Administration or other resources that might help you develop a solid business plan and put your $10,000 investment to good use.

10. College Savings

You could also invest $10,000 to help your kids or other family members via a college savings plan. The most common of these is a 529 college savings account.

These accounts, also known as qualified tuition plans, give individuals the option to save for college (or even elementary and secondary school and some training programs) on behalf of a beneficiary, while providing tax advantages. All states offer 529 plans; some offer a tax deduction for your contributions. Withdrawals for qualified educational expenses are tax free.

Be sure to understand the rules pertaining to the 529 plan you choose, because contribution limits vary from state to state, as do the investment options within the account.

11. Consider Low-Cost ETFs and Index Funds

If you’re looking for a low-cost investment option, you might want to consider
looking into index funds. Index funds are a type of mutual fund that utilize a passive investing strategy, i.e. they track an index like the S&P 500. They are not actively managed like some mutual funds, which have a live portfolio manager at the helm.

Most exchange-traded funds (ETFs) also rely on passive strategies, and as such typically have very low expense ratios. Lower investment fees can help investors keep more of their returns over time.

One of the advantages of investing in low-cost index funds and ETFs is that there are so many flavors of different funds these days. Stocks, bonds, REITs, small caps, large caps, sector funds, and dividend companies — these are just some of the fund types available.

12. Explore Municipal Bonds

If taxes are a concern, you may want to explore municipal bonds or bond funds, as these bonds are issued by state and local governments to pay for infrastructure and other amenities. Munis, as they’re called, feature interest income that is exempt from federal income tax, and sometimes state and local tax in the state where the bond was issued.

Investors might be helping to build a city park, better roads, or a new football stadium, for example. Those who like the idea of investing in a way that aligns with their personal values might find munis appealing.

13. Use a Robo Advisor

One way to go about building an investment portfolio is through a robo advisor service, also known as an automated portfolio. These computer-based platforms use sophisticated algorithms to select investments (typically low-cost ETFs), based on the risk tolerance and other objectives you indicate through a questionnaire.

The robo advisor then builds a portfolio, and provides services such as rebalancing and, in some cases, tax-loss harvesting for you.

You can invest in a robo advisor portfolio within an IRA or other type of account, as long as it’s offered by your broker or plan sponsor.

14. Get Real Estate Exposure with REITs

A real estate investment trust, or REIT, offers a way to invest in income-producing real estate without owning the properties directly. REITs can be advantageous because they must distribute at least 90% of taxable income to shareholders as dividends.

You can invest in REITs through buying REIT shares, mutual funds, or ETFs. While the benefits of REITs include passive income and portfolio diversification, REITs can be illiquid and sensitive to interest rate changes.

15. Pick Individual Stocks

Learning how to pick stocks is a lifelong endeavor. A committed stock investor typically does research on company fundamentals and other factors — such as its leadership team, reputation, and comparison to industry averages — before buying actual company shares.

For many investors, investing in individual stocks can be more rewarding than buying shares of a mutual fund, which may contain hundreds of stocks. Investing in individual shares allows you to put your money directly into organizations or products you believe in. Depending on the company, you may be able to choose between common or preferred stock (preferred shares qualify for dividend payouts).

And while equity markets can be volatile, over the last 20 years, the average return of the stock market as represented by the S&P 500 Index has been about 7.03%, adjusted for inflation.

The Takeaway

Deciding how to invest $10,000 is an exciting proposition. You can begin by recognizing your ideal level of risk, and identifying what your short- and long-term goals are. Once you set those key parameters, it’s easier to choose among the many investment options to find one that suits your aims and your comfort level.

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).


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

Photo credit: iStock/Ridofranz

SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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 https://sofi.app.link/investchat. 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.

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

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.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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2024
Budgeting for Residents

Budgeting as a New Resident

By | Budgeting & Goals, Life & Career, student_loan | Comments Off on Budgeting as a New Resident

Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.


The member’s experience below is not a typical member representation. While their story is extraordinary and inspirational, not all members should expect the same results.

As a resident, Dr. Saira Z. worked in one of the most expensive places in the country—the New York City area. Besides managing the high cost of living on a residency budget, Saira was also paying back loans from medical school.

Figuring out how to stretch her $65,000 a year medical resident’s salary wasn’t easy, even after she got married. She and her husband tried to be as frugal as possible. When they took stock of their spending, however, they found places to cut back.

The couple drew up a budget to help them stay the course through Saira’s three-year residency and when her medical fellowship salary dipped. It also allowed them to set good habits that still serve them well. Saira and her husband now have twins, and she’s in a private practice.

As Saira learned, residency can test your finances. While you’re finally drawing an income—the average annual salary of a first-year resident is less than $63,000, according to 2023 data from the Association of American Medical Colleges—a residency budget needs to cover a lot. Your medical school finances likely include considerable student loan debt. The median medical school debt for the class of 2023 is $200,000, according to the Association of American Medical Colleges, which doesn’t include undergraduate student loans, credit card balances or other debt.

Having a financial plan is a way to make the most of your income and set up for the future. These tips for budgeting for residents may help you get started.

Identify Your Biggest Budget Busters

A budget can serve a variety of purposes. It can help you make progress toward your savings goals, adopt healthier spending habits, and pay down debt. It can even allow you to spot the biggest drains on your money so you can look for ways to curb spending.

For Saira and her husband, meals out with friends were a top budget buster. But they had no idea that was the case until they reviewed their finances. “You don’t realize eating out is such a huge expense until after the fact,” Saira says. As a result, the couple decided to temporarily stop going to restaurants, which allowed them to put that money into their savings.

Build Your Financial Foundation

Budgeting for medical residents should include working on your financial foundation, says Brian Walsh, CFP, senior manager, financial planning for SoFi. “These foundational pieces are so critical to establish,” Walsh says. “Then, once you get that big paycheck, it will be much easier to sock away 25% or more of your income toward retirement.”

Here are a few steps he recommends:

•  Pay off “bad debt.” Walsh defines “bad debt” as anything that accelerates consumption and comes with a high interest rate (such as credit cards).

•  Build up an emergency fund. This stash of cash should cover three to six months’ worth of your total living expenses and be placed in an easy-to-access place, like money market funds, short-term bonds, CDs or a high-yield savings account.

•  Protect your income. There are two types of protection you may want to consider. Disability insurance covers a portion of your income in the event you’re unable to work due to an injury or illness. Monthly premium amounts vary, but generally, the younger and healthier you are, the less expensive the policy. You may also want to consider purchasing a life insurance policy if other people depend on your income.

Recommended: Short Term vs. Long Term Disability Insurance

Start Saving for the Future

Next, Walsh suggests putting any leftover funds into retirement. Over time, as your emergency fund grows and “bad debt” diminishes, you’ll be able to put more money into retirement.

One simple way to build up savings now is to contribute to your employer’s 401(k) or 403(b) retirement plan, if one is available, and tap into any matching funds program. There’s a limit to how much you can contribute annually to either plan. In 2024, the amount is $23,000; if you’re 50 or older, you can contribute up to an additional $7,000, for a total of $30,500.

There are other investment vehicles Walsh suggests exploring if you have additional money to save, don’t have access to a 401(k) or 403(b), or simply prefer to have more control over your money. These include an individual retirement account (IRA), such as a traditional IRA or Roth IRA, both of which can offer tax advantages.

Contributions made to a traditional IRA are tax deductible, and no taxes are due until you withdraw the money. Contributions to a Roth IRA are made with after-tax dollars; your money grows tax-free and you don’t pay taxes when you withdraw the funds. However, there are limits on how much you can contribute each year and on your income.

Another option is a health savings account (HSA), which may be available if you have a high deductible health plan. HSAs provide a triple tax benefit: Contributions reduce taxable income, earnings are tax-free, and money used for qualified medical expenses is also tax-free.

Recommended: Budgeting as a New Doctor

Come Up With a Plan to Pay Student Loan Debt

As a resident, you have several priorities competing for a piece of your paycheck: lifestyle expenses, long-term savings goals, and medical student loan debt. Loan repayment typically starts six months after graduation, and options vary based on the type of loan you have.

If you have federal student loans and need extra help making payments, for example, you can explore a loan forgiveness program or an income-driven repayment (IDR) plan, which can lower monthly payments for eligible borrowers based on their income and household size. You also have the option to postpone payments during residency, but the interest will continue to accrue and add to your total balance.

Your medical student loan debt may feel overwhelming, but there are a couple of ways to consider tackling it. With the avalanche approach, you prioritize debt repayment based on interest rate, from highest to lowest. With the snowball approach, you pay off the smallest balance first and then work your way up to the highest balance.

While the right approach is the one you’ll stick with, Walsh often sees greater success with the snowball approach. “Most people should start with paying off the smallest balance first because then they’ll see progress, and progress leads to persistence,” he says.

Find Out If Refinancing Is Right for You

You may want to consider refinancing your student loans as part of your repayment strategy. When you refinance, your existing loans are paid off and you get one new loan. You may be able to get a lower interest rate, which could potentially reduce your monthly payments. Some lenders, including SoFi, also provide benefits for residents and other medical professionals.

Though the refinancing process is fairly straightforward, “People overestimate the amount of work it takes to refinance and underestimate the benefits,” Wash says. A quarter of a percentage point difference in an interest rate might seem small, but if you have a big loan balance, it could save you quite a bit.

However, refinancing may not be right for everyone. By refinancing federal student loans, you could lose access to benefits and protections, such as income-driven repayment and student loan deferment. Your best bet is to weigh all of your options and decide what makes the most sense for your situation.

The Takeaway

After years of medical school, you’re finally starting to make some money. But you also likely have a lot of student loan debt that you need to start paying back during your residency. Having a solid plan for repaying your loans, and using a few key strategies to start saving money for your future, can help position you for long-term financial success.

If part of that plan includes refinancing your student loans, SoFi can help. With our medical professional refinancing, you may qualify for a special competitive rate if you have a loan balance of more than $150,000. You can also reduce your monthly payments to as low as $100 during residency, for up to seven years.

SoFi reserves our lowest interest rates for medical professionals like you.

Photo credit: iStock/Andrei Orlov

SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


SoFi Loan Products
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.

The member’s experience below is not a typical member representation. While their story is extraordinary and inspirational, not all members should expect the same results.
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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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
30
2024
Budgeting as a New Dentist

Budgeting as a New Dentist

By | Budgeting & Goals, Life & Career, student_loan | Comments Off on Budgeting as a New Dentist
Editor's Note: For the latest developments regarding federal student loan debt repayment, check out our student debt guide.

If you’re a new dentist, you have plenty of reasons to smile about your profession. You can start practicing soon after completing dental school, and you stand to earn a healthy salary right off the bat. The average entry-level dentist in the U.S. earns $189,979 a year, according to ZipRecruiter.

At the same time, you also need to figure out how to pay off your student loans. According to the American Dental Association (ADA), the average dental school graduate leaves school with nearly $300,000 in education debt. By comparison, medical school graduates owe an average of $243,483 in total educational debt, according to the Education Data Initiative. That’s where budgeting for dentists comes into the equation.

Key Points

•   Consider disability insurance to protect income.

•   Establish saving and investing strategies early, leveraging a pay-yourself-first mentality.

•   A good budgeting rule of thumb: Set aside 30% of income for savings, with 25% for retirement and 5% for other savings.

•   Think about diversifying your investments and including HSAs, IRAs, and after-tax brokerage accounts.

•   When tackling student loans, consider aggressive repayment strategies, as well as refinancing.

How Budgeting Helps

Starting a career with a six-figure loan debt may feel overwhelming, but budgeting for dentists can help. In fact, now is an ideal time to establish your saving and investing strategies, says Brian Walsh, CFP®, Head of Advice and Planning for SoFi. “When you’re right out of school and your lifestyle is already lean, you can more easily build a pay-yourself-first mentality without making any drastic adjustments,” he explains. “It’s significantly easier to do it at this point instead of when you have a house, a car, and a family and then need to start making cuts.”

Here are some strategies to help you create your budget and plan for the future.

Protect Your Income

With its repetitive motions and constrained work area, dentistry can be physically taxing work, especially on the back and joints. According to the ADA, dentists have a one in four chance of becoming disabled. To mitigate your risk, you may want to consider disability insurance, which covers a percentage of your income if you become unable to work due to an illness or injury.

If you purchased a policy during dental school, you have the option to increase your coverage now that you’re making more. If you don’t have a policy, you can buy one as part of a group plan or as an individual. Find out if your employer offers it as part of your benefits package; some do. Monthly premium amounts vary, but in general, the younger and healthier you are, the cheaper the policy.

Recommended: Budgeting as a New Doctor

Don’t Overspend

Dropping a bundle on meals out? Clicking “add to cart” more frequently? Enjoy your hard-earned income, but don’t go overboard on splurges.

To help you focus on where you put your money, consider prioritizing your financial goals — saving for a home, for example, or paying off your debt. This is an important strategy in budgeting for dentists. Walsh also recommends that early-career professionals use cash or debit cards for purchases to build up good spending habits, and automate their finances whenever possible. For example, pre-schedule your bill payments and set up automatic contributions to your retirement account.

Kick-Start a Savings Plan

Tackling student loans is likely a top priority for you right now, but just as important is creating a savings plan.

Walsh recommends early-career dentists set aside 30% of their income for savings. Of that, 25% should be for retirement and 5% for other savings, like building an emergency fund that can tide you over for three to six months. The remaining 70% of your income should go toward expenses, including monthly dental school loan payments.

The sooner you start saving and investing, the sooner you can enjoy compound growth, which is when your money grows faster over time. That’s because the interest you earn on what you save or invest increases your principal, which earns you even more interest.

You may even want to consider buying a dental practice at some point, so that’s another reason budgeting for dentists makes sense.

Explore Different Ways to Invest

As a high earner, you may need to do more with your money than max out your 401(k) or 403(b), though you should do that, too. Walsh suggests new dentists leverage a combination of different investments. This strategy, called diversification, can help shield you from risk. Here are some types of investments to consider:

•  A health savings account (HSA), which provides a triple tax benefit. Contributions reduce taxable income, earnings are tax-free, and money used for qualified medical expenses is also tax-free.

•  An individual retirement account (IRA), like a traditional IRA or Roth IRA, can offer tax advantages. Contributions made to a traditional IRA are tax deductible, and no taxes are due until you withdraw the money. Contributions to a Roth IRA are made with after-tax dollars; your money grows tax-free and you don’t pay taxes when you withdraw the funds, provided certain requirements are met. However, there are limits on how much you can contribute to an IRA each year.

•  A Simplified Employee Pension IRA (SEP IRA) can be a good option if you’re a solo practitioner. “Total contributions can be just like those with an employer-sponsored plan, but you control how much to contribute, up to a limit,” Walsh says. Contributions are tax-deductible, and you don’t pay taxes on growth until you withdraw the money when you retire.

•  After-tax brokerage accounts offer no tax benefits but give you the flexibility to withdraw money at any time without being taxed or penalized.

Two investments to consider bypassing are variable annuities and whole life insurance. Neither is a suitable way to build wealth, Walsh says.

Whatever your strategy, keep in mind that there may be fees associated with investing in certain funds. Those can add up over time, Walsh points out.

Determine a Student Loan Repayment Strategy

Since new dentists tend to start earning money more quickly than other health care professionals, they are often better positioned to tackle loan repayments more aggressively.

But your repayment strategy will depend on a number of factors. To start, consider the types of student loans you have. Federal loans have safety nets you can explore, like loan forgiveness and income-driven repayment (IDR) plans, which can lower monthly payments for eligible borrowers based on their income and household size.

Once you’ve assessed the programs and plans you’re eligible for, figure out your goals for your loans. Do you need to keep monthly payments low, even if that means paying more in interest over time? Or are you able to make higher monthly payments now so that you pay less in the long run?

If you have multiple loans and/or other debts, there are two approaches you might consider for paying them down. With the avalanche approach, you prioritize debt repayment based on interest rate, from highest to lowest. With the snowball method approach, you pay off the smallest balance first and work your way up to the highest balance.

While both have their benefits, Walsh often sees greater success with the snowball approach. “Most people should start with paying off the smallest balance first because then they’ll see progress, and progress leads to persistence,” he says. But as he points out, the right approach is the one you’ll stick with.

Consider Your Refinancing Options

Paying down debt has long-term benefits, like lowering your debt-to-income ratio and building your credit. In order to help do this, you may want to include refinancing your student loans in your student loan repayment strategy.

When you refinance, a private lender pays off your existing loans and issues you a new loan. This can give you a chance to lock in a lower interest rate than you’re currently paying and combine all of your loans into a single monthly bill, which can be easier to manage. Some lenders, including SoFi, also provide benefits for new dentists.

The refinancing process is straightforward, yet some common misconceptions persist, Walsh says. “People overestimate the amount of work it takes to refinance and underestimate the benefits,” he says. A quarter of a percentage point difference in an interest rate may seem inconsequential, for instance, but if you have a big loan balance, it could save you thousands of dollars.

That said, refinancing may not be right for everyone. If you refinance federal student loans with a private lender, for instance, you lose access to federal benefits and protections, such as forgiveness programs and forbearance. Consider all your options and decide what makes sense for you and your financial goals.

The Takeaway

Dentistry can be a rewarding career with the potential to earn a healthy salary right from the start. However, you’re likely to have a significant loan debt when you graduate from dental school. Fortunately, balancing your goals with some smart saving, investing, and loan repayment strategies can help you get your finances on firm footing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

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SoFi Student Loan Refinance
SoFi Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891. (www.nmlsconsumeraccess.org). SoFi Student Loan Refinance Loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Public Service Loan Forgiveness, Income-Based Repayment, Income-Contingent Repayment, PAYE or SAVE. Additional terms and conditions apply. Lowest rates reserved for the most creditworthy borrowers. For additional product-specific legal and licensing information, see SoFi.com/legal.


SoFi Loan Products
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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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.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOSLR-Q324-025

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Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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