Financial Topics Archives | Page 644 of 791

Mar

2023

Guide to How Travel Credit Cards Work

There are many different credit cards out there, and each comes with different perks or benefits. Deciding which credit card makes sense will depend on what types of benefits and rewards matter the most for you. If you’re a frequent traveler with one airline or hotel chain, for instance, you might find it valuable to have the corresponding travel credit card.

It’s common for travel credit cards to earn airline miles, hotel points, or other travel rewards with every purchase. Some even offer perks with specific hotels or airlines just for having the card. Although certain travel credit cards charge annual fees, it’s possible the benefits you receive may make it worth it.

Recommended: What is a Charge Card?

What Is a Travel Credit Card?

A travel credit card is a generic term that applies to a type of credit card that offers travel rewards. There are many different kinds of travel credit cards, and each one may offer a different array of rewards, benefits, and perks. Some travel credit cards might earn airline miles, while others offer hotel points.

Finding the right travel credit card for you will depend on your own specific spending and travel patterns.

Different Types of Travel Credit Cards

There are three main types of travel credit cards: airline cards, hotel cards, and cards that earn generic travel points.

Airline Travel Credit Cards

Many airlines offer one or more airline travel credit cards that earn credit card miles that you can use to fly with that specific airline. With each purchase, you can get that much closer to your next flight. Additionally, many airline travel credit cards offer perks like free checked bags, a way to earn elite status, or discounts on inflight purchases.

Hotel Travel Credit Cards

Another type of travel credit cards are hotel credit cards issued by major hotel chains including Hilton, Hyatt, and Marriott. Similar to their airline counterparts, hotel travel credit cards let you earn hotel points with each purchase that you can then use to stay with their chain. Many hotel travel credit cards also offer hotel-specific perks, like elite status, increased earnings from stays, or an annual free night certificate.

Bank Travel Credit Cards

If you like traveling but don’t want to tie yourself to a specific airline or hotel chain, you can consider a more generic travel card. Some banks, including American Express, Chase, and Citi, offer travel credit cards that earn their own proprietary credit card points. You can then use these bank points for many different forms of travel.

4 Benefits of Travel Credit Cards

There are a number of advantages to having a travel credit card. Here’s a closer look at these upsides.

Qualify For Significant Welcome Bonuses

Many travel credit cards offer welcome bonuses when you’re approved for the card and meet certain minimum spending criteria. For example, you might earn 60,000 airline miles after spending $2,000 on your card in the first three months.

These welcome bonuses can be worth hundreds if not thousands of dollars, and they can be a great way to boost your travel budget. That’s why it’s important to understand how a credit card works when you sign up and what requirements there are to make the most out of your card.

Earn Airline Miles and Hotel Points

If you love to travel, you’re likely to be excited about the possibility of earning airline miles or hotel points with each purchase. The miles and points that you earn while using your travel credit card can help fund your next vacation trip.

Get Insurance Benefits

Some travel credit cards offer different types of insurance that you might find valuable if you’re a frequent traveler. Some credit card travel insurance protects you if you are delayed or an airline loses your baggage. Other credit card insurance might cover you while renting a car, allowing you to decline the rental car company’s high-priced insurance offerings.

Enjoy Other Perks and Card Benefits

Perks like elite status, free checked bags, or an annual free night certificate are other potential benefits of having a travel credit card. If you’re traveling outside the country, you might also consider an international credit card that you can use while abroad.

3 Disadvantages of Travel Credit Cards

While travel credit cards can come with many benefits, there are also some disadvantages you’ll want to keep in mind.

Limitations in Travel Choices

If you have an airline or hotel credit card, you will likely only earn airline miles or hotel points with that specific airline or hotel chain. This can limit where you can use your travel rewards. As one example, if you have a Delta Air Lines credit card, you won’t be able to use your miles if you want to fly United or Southwest.

Not as Flexible as Cash-Back Rewards

Earning airline miles and hotel points can seem fun and exciting, but it may not be the best way to maximize your earnings. You’ll want to carefully consider the benefits of credit card miles vs. cash back to decide which type of reward makes the most sense for you. You may find that you’re better off with a cashback credit card like the SoFi credit card.

Potential for Annual Fees

Some (but not all) travel credit cards come with annual fees. These annual fees may be waived for the first year as an incentive for you to sign up, but you’ll be on the hook to pay the fee each year you continue to have the card.

While it is possible to get more value from your travel credit card than the amount of the annual fee, you’ll want to make sure that’s the case for your situation. Otherwise, you’ll want to focus your search on no annual fee credit cards.

Are Travel Credit Cards Worth It?

Whether a travel credit card is worth it will depend quite a bit on your own specific financial and travel situation. There’s no denying that there are many people who have used travel credit cards to great effect, traveling around the world at a discounted rate thanks to miles and points. Others have signed up for travel cards and continue to pay annual fees, even though they aren’t traveling as often.

Alternatives to Travel Credit Cards

You do have other options you might think about if you’re not interested in a travel credit card.

If you’re intrigued by earning rewards with a specific brand but don’t travel often, you might consider a private label credit card. These types of cards can offer benefits at a specific store or retail establishment.

Another option could be a cash-back rewards credit card. This would allow you to earn cash as a reward, which you could use for travel or anything else that suits you.

The Takeaway

Travel credit cards are a type of credit card that offers rewards, perks, and benefits for frequent travelers. You might earn airline miles, hotel points, or more generic bank points that you can use for a variety of different types of travel. While it is possible to use travel credit cards to rack up airline miles or other travel rewards, you’ll also want to keep an eye on any annual fees that you’re being charged.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How do travel points and miles work?

Depending on the type of travel credit card that you have, you may earn airline miles, hotel points, or other types of travel rewards with each purchase that you make. These travel rewards will go into your account, and you can use them to book your next vacation.

Do travel rewards cards have annual fees?

There are some travel rewards cards that come with annual fees. You’ll want to be aware of these annual fees and make sure that the perks, rewards, and benefits that you receive are worth more than any annual fee you have to pay. There are also no annual fee credit cards that earn travel rewards, which may be a more attractive option.

How do I earn points with a travel credit card?

Most travel credit cards will earn airline miles, hotel points, or other travel rewards with each purchase. So earning points with a travel credit card may be as simple as just using your card to make any purchase at all. Additionally, some travel credit cards allow you to earn points as part of an initial signup bonus for being approved for the card and meeting minimum spending criteria.

Photo credit: iStock/nathaphat

Mar

2023

Guide to Store and Retail Credit Cards

A retail credit card is a type of credit card that is a partnership between a bank or major credit card issuer and a retailer. Also known as a store credit card, retail credit cards usually come with discounts, rewards, and other perks that are specific to that retailer.

You might have received an offer for a retail credit card when you’re at the checkout at a brick-and-mortar store. Or, you may have gotten an offer in the mail or while shopping online. When it comes to determining whether store credit cards are worth it, you’ll want to weigh their pros and cons.

What Is a Store Credit Card?

As mentioned, a store credit card is the same as a retail credit card. A store card is a credit card from a retailer, franchise, or group of stores. It might come with a sign-up offer, such as a one-time discount on your purchase. Other perks include a credit card points rewards program, special promotions, offers, and discounts on your purchases. Some might offer 0% financing on big-ticket purchases.

Store credit cards are not to be confused with retailer loyalty cards. Loyalty cards are a way to gain access to deals and promotions, and to earn points to swap for a discount on future purchases. However, they do not allow you to borrow money.

Recommended: Defining Credit Cards

How Do Store Credit Cards Differ From Other Credit Cards?

There are two main types of store credit cards: private label store cards and co-branded store cards. Private label credit cards differ more from other credit cards, as they are closed-loop cards, meaning you can only use the card at a specific retailer or group of retailers.

Closed-loop cards are more common than co-branded store cards. Co-branded credit cards are open-loop cards that partner with a major credit card network — think Visa, Mastercard, American Express, or Discover. As such, you can use this type of store card at the featured store or group of stores, as well as anywhere that particular credit card issuer is accepted.

Unlike private label cards, open-loop cards also may give you a chance to rack up points or scoop up rewards beyond spending in that specific store. Private label cards generally reserve rewards earnings for that particular store.

Benefits and Drawbacks of Store Credit Cards

There are both pros and cons to retail credit cards. Advantages include:

• Easy to obtain: Retail credit cards are usually easier to qualify for than other types of credit cards. They typically require just a fair credit score. And because they report to the major credit bureaus each month, they still can help you build your credit when you’re starting out.

• Often no annual fee: Many store credit cards don’t have an annual fee, which can save you money. This especially rings true if you don’t anticipate using the card that often.

• Instant discounts: When you first sign up for a retail credit card, you might get a one-time discount on your first purchase.

• Discounts, promos, and offers: As a store cardholder, you might be privy to exclusive, ongoing discounts, or special promotions and offers. The types of discounts and offers vary widely depending on the retailer and time of year. For instance, a retailer might offer a flat 5% discount on every purchase. Card holders also might have access to special coupons and offers.

• Rewards and cash back programs: Similar to other types of credit cards, you can earn points to use for store purchases or cash back.

• Other perks: If you’re a cardholder for a particular retailer, you might receive other benefits, such as free or expedited shipping, financing on certain types of products, or more time to return items.

Here are some potential downsides of a store credit card:

• High interest rates: Whereas the average credit card annual percentage rate (APR) is 20.40%, interest rates for store credit cards average around from 26.72% APR. If you carry a credit card balance, it could take you longer to pay off your debt. Plus, you’ll owe more in interest.

• Inflexibility in use: If you have a private label store card, or a closed-loop card, then you can only use the card to make purchases at that particular store or group of stores. Unless you shop frequently at that particular retailer, it might prove difficult to use often enough to make sense.

• Lower credit limits: Store credit cards usually have lower credit limits than other types of credit cards. In turn, it could be harder to keep your credit usage down. A high credit usage, or credit utilization ratio, could hurt your credit score.

• Deferred interest: A retail card might offer 0% financing for a period of time. Here’s the potential catch: If you don’t pay off your purchase before the promotional period ends, you might be on the hook for all of the interest owed from the purchase date onward.

To recap, here are the major pros and cons to keep in mind when considering if you should get a store credit card:

Store Credit Card Pros and Cons
Pros	Cons
Easy to qualify for	High interest rates
Often no annual fee	Low credit limits
Rewards and cash back programs	Deferred interest
Other perks	Inflexibility in use

Are Store and Retail Credit Cards Worth It?

A store credit card could be beneficial if you are building credit from scratch or are new to credit. As they typically are easier to qualify for and often don’t have an annual fee, you can use it at your leisure to build credit.

It can also be worth it if you are a loyal devotee and shop frequently at a particular retailer. That way, you’ll make the most of ongoing discounts, exclusive sales, promotions, offers, and additional perks.

When to Consider Getting a Store Credit Card

As mentioned, if you’re building credit from scratch and don’t want to worry about annual fees, a store credit card could be a good choice for you. It could also be a solid option if you shop at that retailer enough to make use of the card’s perks.

A store credit card can also be a good idea if you don’t need a card with a high credit limit. Ideally, you’ll be able to pay off the balance in full each month.

When Not to Consider a Store Credit Card

If you don’t anticipate using a card very often, or prefer a card that you can use more widely, then it might be best to forgo opening a store credit card.

A store credit card also is probably not the best choice for you if you tend to carry a balance. That’s because the higher-than-average interest rates can gobble up any savings you’ve earned on rewards and discounts.

Alternatives to a Store Credit Card

Not sure a store credit card is worth it for you? Here are some alternatives to look into:

• Cash-back credit card: A cash-back card is a type of rewards credit card that offers rewards in the form of cash back, which can offset your spending on the card. For instance, with a card that offers 1% cash back, you’d get $1 back for every $100 you spend. The SoFi credit card is an example of a cash-back card, offering unlimited cash-back rewards on all eligible purchases.

• Airline credit card: Airline credit cards are co-branded with major credit card networks. Similar to a store or retail credit card, you’ll receive perks with a specific airline company if you make purchases on the card. Airline credit cards typically are open-loop cards, which means you can use the card anywhere that type of card is accepted.

• Hotel credit card: Hotel credit cards are offered through partnerships between a hotel and a credit card network. With a hotel credit card, you get points toward that particular hotel’s rewards program. The card might also come with other benefits.

Recommended: Instant-Use Credit Cards

The Takeaway

A store credit card could be a good idea if you are building credit from scratch, or if there’s a card offered by a retailer you love and shop at often. Otherwise, it might make more sense to look at other options with greater flexibility in use and lower interest rates.

If you prefer a cash-back rewards credit card, consider the SoFi Credit Card. This credit card offers cash-back rewards on all eligible purchases that you can then use to invest, save, or pay down eligible SoFi debt.

FAQ

Are store credit cards good for credit?

Store credit cards can help you build credit from scratch. They tend to be easier to qualify for than other types of credit cards. And if you practice good credit card habits, such as keeping a low credit usage and paying on-time, they can help your score.

Will a store credit card improve my credit limit?

Adding another credit card, no matter the type of credit card, can help increase your credit limit. When you open a credit card, you receive a credit limit on top of those of your existing cards. For instance, let’s say you open a store credit card with a $2,000 limit, and your credit is capped at $10,000 among your other cards. By opening a store card, your credit limit will have increased to $12,000.

Should I cancel an unused store credit card?

You might consider closing an unused store credit card, but doing so could negatively impact your credit. That’s because it will lower your credit limit, which in turn increases your credit usage. Plus, it can impact your length of credit, which also plays into your score.

Will closing a store credit card hurt my credit?

Closing a store credit card could hurt your credit in two ways. First, it can lower your credit utilization ratio because your overall credit limit will decrease. Second, it could shorten your the length of your credit history, which also impacts your credit score.

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Mar

2023

Guide to Credit Reports

By Dan Miller | Credit, credit card | Comments Off

If you’ve ever had a credit card, student loans, or other type of debt, you likely have a credit report. Credit reports serve as a record of how you have handled the repayment of any loan or debt that you’ve taken out. The items that are contained in your credit report primarily come from information collected by the three major credit bureaus.

Many lenders might look at your credit report when they are considering whether or not to extend you additional credit. Your credit score is also calculated in part from information that’s included on your credit report. These are two good reasons to regularly look at your credit report and make sure the information in it is accurate.

What Is a Credit Report?

At its simplest, a credit report is a compilation of information regarding past debts, loans, or credit card accounts that you’ve managed. Your credit report will contain basic information about you, as well as information on the various accounts you’ve had in the past. This might include the name of the creditor, the dates the account was open, the monthly payment amount, if applicable, and any current or outstanding balance.

Recommended: When Are Credit Card Payments Due?

How Does a Credit Report Work?

The issuers of most credit cards, loans, or other forms of debt report information about that debt to the most popular credit bureaus — Experian, Equifax, and TransUnion. Each credit bureau compiles its own information, though there is usually a lot of overlap between the information that appears on credit reports from different credit bureaus. Lenders typically send updated information to the credit bureaus each month, or if any information about your debt changes.

Credit Report Information and Your Credit Score

It’s important to understand the relationship between the information on your credit report and your credit score. While these two things are related, they are not the same thing. As information on your credit report changes, your credit score updates as well. This means that it’s possible for your credit score to change every month (or even more often).

Further, while the information on your credit report influences your credit score, you won’t find your credit report listed on your credit report. Rather, you’ll have to go to lenders or credit monitoring websites for that information, both of which can allow you to check your credit score without paying.

Information Provided By a Credit Report

In addition to information about your accounts, your credit report may include other information about you. As one example, a credit report from Experian consists of four sections:

• Personal information: This includes details such as your name, address, employment information, and any past names you’ve used.

• Accounts: You’ll see both open and recently closed accounts listed.

• Inquiries: Both hard and soft credit checks will appear, though only hard pulls affect your credit score.

• Public records: This is information about you gathered from public records, including bankruptcies.

How Is a Credit Report Made?

Each of the major credit bureaus has its own process for how it generates a credit report. It’s typical that the credit bureau will have an informational section with details about you, sourced from loan applications and/or public records.

Another section of most credit reports is a listing of your open and recently closed accounts. Lenders will often report to the credit bureaus information about the amount, payment history, and status of accounts you have with them.

Why Is a Credit Report Important?

Your credit report is important because it is one of the sources of information that’s used to calculate your credit score. And your credit score can help determine whether you are approved for other financial products, like a credit card. If your credit score is too low, you may not be able to be approved for a new credit card or loan, and if you are approved, you may have to pay a higher interest rate.

Additionally, your credit report matters because many lenders will often refer to it when determining whether to approve you and under what terms. Sometimes, they may look at what’s known as a tri-merge credit report, which combines the three credit reports from each of the major credit bureaus.

Recommended: How to Avoid Interest On a Credit Card

How to Get a Credit Report

One good way to get your credit report is through AnnualCreditReport.com . This is a website authorized by federal law and brought to you by the three major credit bureaus.

You are able to get a copy of your credit report from each of the credit bureaus every year. Note that you can only get your own credit report to review — checking someone else’s credit report isn’t an option.

When to Get a Credit Report

It is a good financial habit to regularly review your credit report. As mentioned, you can get a free copy of your credit report each year from each of the major credit bureaus.

By reading a credit report regularly, you can make sure that there’s no inaccurate information on your credit report. If you have incorrect information, it could have a negative impact on your credit score.

What to Look For in a Credit Report

As you regularly review your credit report, there are a few common credit report errors you’ll want to look out for. These include:

• Typos or incorrect information

• Information belonging to someone with a similar name

• Closed accounts that are still marked as open

• False late payment

• Duplicate debts or accounts

Monitoring Your Credit Report

If there is any incorrect or erroneous information on your credit report, you’ll want to dispute that with the credit bureau. Disputing a credit report is a relatively straightforward process, and it’s an important one.

Generally, most credit report disputes must be submitted in writing, and it’s a good idea to send the letter via certified mail. That way, you have proof that the credit bureau received your letter.

The Takeaway

If you’ve been using credit cards, loans, or other financial products, it’s likely that you have a credit report with each of the three major credit bureaus. Your credit report contains identifying information about you as well as information about your open and recently closed credit accounts. Regularly monitoring your credit report and correcting any incorrect information is a good financial habit to have.

That’s because information from your credit report is used in the calculation of your credit score. Your credit score is used by potential lenders to decide whether they will approve you for new loans or credit cards. Having a good credit score makes it more likely that you’ll be approved for a new credit card, for example.

If you’re in the market for a new credit card, you might look at a rewards credit card like the SoFi Credit Card. With the SoFi Credit Card, you can earn cash-back rewards, which you can then use to invest, save, or pay down eligible SoFi debt.

FAQ

Can negative information remain on my credit report for long?

Yes, negative information can remain on your credit report, even after you have closed your account. Most negative information will stay on your credit report for seven years, though some information (like bankruptcies) can stay on your credit report even longer.

How do I get my credit report?

You can get your credit report through AnnualCreditReport.com. You’re able to get a free copy of your credit report from each of the credit bureaus every year.

Who is eligible to view my credit report?

You can view your own credit report, but in most cases, you will not be able to check someone else’s credit report. The only time someone else can view your credit report is if they have a legitimate reason. This might include a potential lender that’s viewing your credit report to determine whether they want to extend you additional credit.

What errors might be present in my credit report?

While the major credit bureaus make every attempt to ensure that all credit reports are completely accurate, errors have been known to happen. Possible errors might include typos, accounts from someone with a similar name, duplicate accounts, or false late payments, among other errors. This is why it’s a good idea to regularly review your credit report and dispute any incorrect information.

What is the most important thing on a credit report?

Arguably all of the information contained in your credit report is important and worth taking the time to review. Perhaps most important is information on your accounts, as the details reported there have the potential to impact your credit score, and thus your borrowing opportunities.

Photo credit: iStock/Deepak Sethi

Mar

2023

Guide to Writing Call Options: What You Should Know

By Dan Miller | Growing Wealth, invest, Investing | Comments Off

Selling a call option is referred to as writing a call option. When writing a call option you will be initiating the option contract for sale, and will collect a premium from the buyer when the contract is initially sold.

There are two ways to write a call option — sell covered calls or sell naked calls.

• When you write a covered call, you are selling an option on an underlying stock that you own.

• Writing a naked call means you are selling an option on a stock you do not currently own.

The biggest difference between these two paths is the risk profile. Your risk with covered calls is that you may miss out on some of the upside gains if the stock’s price goes above the strike price of your call option.

When you sell a naked call, you have no risk protection and theoretically unlimited risk.

What Are Calls?

Remember the basics of put vs. call options: When you buy a call option at a specific strike price, you have the right (but not the obligation) to purchase the underlying stock at the strike price of the option over a given time period.

Buying put gives you the right, but not the obligation, to sell the underlying stock or asset before the expiration date.

If you are wanting to know how to trade options, it’s important to understand the differences between calls and puts, when you would buy or sell options, and how to arrange options trading strategies to minimize your risk. When you buy an option, your maximum risk is capped at the amount of premium that you initially paid for the option. But when you write a call option or put option, your risk is theoretically infinite.

Writing Call Options

Writing call options is similar to writing put options in that you are selling the option initially. When you write a call option, you are creating a new option contract that allows the buyer the right to buy the stock at the specified strike price at any time before the expiration date.

When you write a call option, you can be forced to buy the stock at the strike price at any time. In practice, this is unlikely to happen unless the stock is deep in-the-money before expiration or if it’s at or in-the-money at the date of expiration.

Finally, user-friendly options trading is here.^*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

*Check out the OCC Options Disclosure Document.

Writing Call Option Strategies

There are several strategies when trading options, depending on whether you have a bullish or bearish outlook for a given stock. Here are two of the most common call writing option strategies:

Writing Covered Calls

One common options strategy is writing covered calls. A call is considered a “covered” call when you also own at least 100 shares of the underlying stock. Writing covered calls is a popular income strategy if you think that the stock you hold will move within a specific range. You then might write a covered call with a strike price a little above the expected price range.

When you write covered calls, since you are the seller of the option contract, you will collect an initial premium. Your best case scenario is that the underlying stock will close below the strike price of the call option at expiration. That means that the call will expire worthless, and you will keep the entire premium. If the stock closes above the strike price at expiration, you will be forced to sell your shares of stock at the strike price. This means that you may miss out on any additional gains for the stock.

Writing Naked Calls

If you are wondering what naked calls are, it is when you write a call when you don’t have a long position in the underlying stock. Unlike covered calls, writing naked calls comes with significant risk. Since a stock has no maximum price, you have unlimited exposure. The more a stock’s price rises above the strike price of the call option, the more money you will lose on the trade.

Because of this, writing naked calls is something that is recommended only for people with significant options experience and/or those who have a high tolerance for risk. You will want to make sure you understand your risk before writing naked calls, and have a plan for what you will do if the stock moves against you.

Writing Call Options Example

To understand the difference between writing covered calls and naked calls, here are two examples.

Covered Call Example

Say that you own 100 shares of stock XYZ with a cost basis of $65. You feel that the stock is trading in a range of $60-$70, so you write a covered call with a June expiration and a strike price of $70, collecting $1.25 in premium, or $125 ($1.25 x 100).

If the stock closes below $70 at June’s expiration, you keep your shares and the entire $125 premium. Because you still own shares in XYZ, you can write another covered call in July (and beyond) generating income as you collect the premiums.

If instead the stock rises to $75 by June, then you will be obligated to sell 100 shares of XYZ at the strike price of $70. Because you already own 100 shares of XYZ, your shares will be called away. Your broker will automatically sell your 100 shares at the price of $70/share. You will miss out on any additional gains above the $70 price.

Naked Call Example

Say that you are bearish about stock ABC, which currently is trading at $100/share. You sell the October $110 calls for a premium of $4.25. You collect $425 upfront ($4.25 * 100 shares per option contract). As long as stock ABC closes below $110/share, you will keep the entire $425.

However if stock ABC closes above $110 at October options expiration you will be forced to buy 100 shares of ABC at whatever the prevailing market price is for stock ABC.

When you wrote (sold) the call option, you gave your buyer the right to buy 100 shares of stock ABC at $110/share. If ABC has risen to $250/share, for example, you will have to pay $25,000 to buy 100 shares, and then sell those 100 shares for $11,000 ($110/share), taking a $14,000 loss on your trade offset slightly by the $425 premium you collected.

The Takeaway

Writing call options can be a viable and valuable options strategy with several different uses. Writing covered calls on a stock whose shares you also hold can be a way to earn additional income if the stock is not very volatile. You can also write naked calls, or calls on stocks that you don’t own. Writing or selling naked calls leaves you in a position where you have unlimited risk, so make sure that you have a risk mitigation plan in place.

If you’re ready to try your hand at options trading, SoFi can help. When you set up an Active Invest account and start investing online, you can trade options from the SoFi mobile app or through the web platform. SoFi doesn’t charge any commission, and also enables you to trade stocks, ETFs, and more. And if you have any questions, SoFi offers educational resources about options to learn more.

Trade options with low fees through SoFi.

FAQ

Is writing a call option the same thing as buying a put?

It is important to understand put vs. call options and how they are different. While writing a call option and buying a put option are both bearish options strategies, they are very different in terms of their risk/reward profile. When you write a call option, you collect the option premium upfront but have unlimited risk. Buying a put option has a defined risk of the initial premium that you paid to purchase the put option, which gives you the right but not the obligation to sell the underlying shares.

Does a writer of a call option make an unlimited profit?

No, the writer of a call option does not and cannot make an unlimited profit. When you write a call option, your maximum profit is defined by the initial premium that you collect when you first write the option. As a call option writer, you are hoping that the stock closes below the strike price of your option at expiration. In that scenario, it will expire worthless and you will receive your maximum profit.

How are call options written?

Writing a call option is another way to say that you are selling a call option. When you write a call option, you are giving the buyer the right (but not the obligation) to buy 100 shares of the underlying stock at a given strike price at any time before the options expiration. When you write a call option, you collect an initial premium from the buyer of the option.

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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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
SOIN0422031

Mar

2023

Setting Up a Retirement Account for Your Child

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

Opening a tax-advantaged individual retirement account (IRA) for minors becomes possible once they start earning income. Even babysitting or lawn-mowing money counts.

A custodial IRA offers certain advantages: It can jump start a child’s interest in investing, and possibly help build their future nest egg. But there are annual contribution limits and other potential drawbacks to consider, such as the child’s eligibility for college financial aid.

How to Open a Retirement Account for Your Child

Opening a retirement fund for a child means opening a custodial IRA. Generally speaking, a custodial account is one that’s owned by an adult — a parent, grandparent, or legal guardian — on behalf of a minor.

The adult does the investment planning for their child, and manages the money in the account until the child reaches the age of majority (it varies by state). At that point, all the money in the account belongs to the child.

Steps to Opening a Retirement Account for a Child

Here’s how opening a retirement account for minors typically works.

Step 1: Choose a Brokerage

Custodial IRAs are offered by many brokerages, so you’ll need to choose where to open yours. This could be the brokerage where you currently have your investment accounts or a different one.

When deciding on a custodial IRA, consider the range of investments offered, the fees you’re likely to pay, and how easy it is overall to open and manage new accounts. For example, some brokerages let you set up an IRA for a child online, while others require you to fill out and mail in the necessary paperwork.

Step 2: Complete the Application

On the application for a custodial IRA, the brokerage will typically ask for specific information, including:

• Contact information (e.g., your phone number, email address, and mailing address)

• Personal information about yourself, including your name, date of birth, and Social Security number

• Personal information about your minor child, including their name, date of birth, and Social Security number

• Employment information, if applicable

You’ll also need to share routing information and the account number for the bank account you plan to use to make contributions. If you’re moving money from another brokerage firm, you’ll be asked to provide the account number and type.

Step 3: Choose an IRA Type

Should you choose a traditional or a Roth IRA for your child? Both offer tax benefits and both have the same annual contribution limits for kids. For minors, a Roth IRA typically works better. One reason is that the child’s tax rate is typically quite low, and likely much lower than their tax rate will be upon retirement.

Step 4: Fund the Account and Choose Investments

Once you’ve opened a retirement account for a child, you can fund the account using your linked bank account and then make your investment selections. As the custodian, you choose how the money in the IRA is invested, though you might want to talk to your kids first to get their feedback. Generally, custodial IRAs can offer the same investment selections as IRAs for adults, which can mean stocks, mutual funds, exchange-traded funds (ETFs), bonds and other securities.

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.

Different Types of IRAs for Children

As mentioned earlier, there are two main types of IRAs you can open for a minor child: traditional and Roth. The main difference lies in their tax treatment. The IRS regulates contributions to and withdrawals from each type of IRA.

Traditional IRA

A traditional IRA is funded with pre-tax dollars. The IRS allows eligible taxpayers to claim a deduction for contributions. When you take money out in retirement, you pay taxes on the earnings.

Traditional IRAs can make sense for people who can benefit from tax-deductible contributions. That might be less valuable to your child than the tax benefits that a Roth IRA could yield.

Roth IRA

You start a Roth IRA using after-tax dollars, so you get no tax deductions on your contributions. But they can offer something else: tax-free qualified distributions. This means no matter what tax bracket your child is in when they retire, they can withdraw their money from a Roth IRA tax-free.

Roth IRA withdrawal rules also allow contributions to be withdrawn at any time, tax- and penalty-free.

Funding a Child’s Retirement Account

Both traditional and Roth IRAs have annual contribution limits, and you have to contribute earned income. For 2023, the IRA contribution limit is $6,500. If you’re 50 or older, you can add another $1,000 to help you catch up for retirement.

The same rules apply to custodial IRAs. In 2023, kids can contribute an amount equal to their earnings for the year or the $6,500 limit, whichever is lower. So if your child makes $5,000 by babysitting and mowing lawns, the most they’d be able to add to their IRA is $5,000.

Again, it’s important to remember that kids need to have income (specifically, taxable compensation) to open and contribute to a traditional or Roth IRA. According to the IRS, that includes:

• Wages

• Salaries

• Commissions

• Tips

• Bonuses

• Net income from self-employment

Investment income, including interest and dividend income, doesn’t count as income that can be contributed to the child’s IRA, under IRS guidelines.

Can a Parent Contribute to a Child’s IRA?

A parent can contribute to a child’s IRA only if that child has earned income of their own for the year.

Again, contributions to a child’s IRA must not exceed their allowed limit for the year. Going back to the previous example, in which your child earned $5,000, they could technically put all of that money into their IRA. Or you could offer to split the difference and let them put in $2,500 while contributing the remaining $2,500 yourself.

Keeping careful records of your child’s earnings for the year can help you avoid contributing too much to their IRA. Also, offering to put in an equivalent amount (without breaching the limit) can be a good motivator for kids to invest in their IRA.

Benefits of a Child Opening a Retirement Account

Opening up a Roth IRA for a child can benefit them in several ways.

• Kids can get an early taste of what it means to invest money rather than saving it. The IRA can be a teaching tool to help a child learn how the market works and the importance of setting long-term financial goals.

• Kids who start saving for retirement at an early age have the ability to take full advantage of the power of compounding interest. A child who contributes $5,000 each year starting at age 14 and earns a 7% annual return, for example, could have $2.3 million saved for retirement by age 65. Running the numbers using a Roth IRA calculator can give you an idea of how much of a head start on growing wealth you might be able to give your child by opening a minor IRA.

• The money in a Roth IRA for a child is tax-free when they take qualified distributions. This can result in substantial tax savings if they’re in a higher tax bracket when they retire.

Cons of a Child Opening a Retirement Account

Before you open a traditional or Roth IRA for a child, there are some drawbacks to consider.

• While contributing to a Roth IRA may offer some long-term benefits, there are no guarantees, and the money is then locked up until your child turns 59 ½ (although early withdrawals are possible, and might incur a penalty).

• A Roth IRA might affect your college-bound child’s financial aid eligibility. Just having money in a Roth IRA won’t cause any snags if your child is applying for federal student aid. But if they withdraw contributions from their Roth IRA for any reason — including paying for college expenses — that money is counted as income, which may affect eligibility for need-based aid.

• Investments within a custodial IRA entail some level of risk, as with all investments.

Pros	Cons
An IRA can be a good way to teach kids about investing and the stock market.	Funds in an IRA are typically restricted (although Roth contributions can be withdrawn at any time, penalty-free).
Starting an IRA for a child at a young age means they have more time to benefit from compounding interest.	Withdrawal of contributions from a Roth IRA could affect a child’s financial aid eligibility.
Qualified distributions are tax-free in retirement.	Investments within a custodial IRA entail some level of risk.

Open a Retirement Account Today With SoFi

IRAs can be a valuable addition to a retirement savings strategy if you’re interested in investment planning for children or for yourself. If you haven’t started saving for the future yet or your child is starting to earn income of their own, there’s no time like the present to consider opening an IRA.

When investing for retirement with SoFi, you can set up a traditional IRA, Roth IRA, or SEP IRA. The SEP IRA is designed for people who are self-employed. All three can offer tax benefits while helping you get closer to your retirement goals.

Easily manage your retirement savings with a SoFi IRA.

FAQ

How do I set up a retirement account for a minor?

To get started, find out which brokerages allow you to open custodial IRAs for minor children. Then you need to choose a brokerage and IRA type, fill out the appropriate paperwork, and make a deposit or transfer to fund the IRA.

How do I give my kids an IRA?

You can open an IRA for your child once they have earned income of their own. This would be a custodial account: You own it until the child reaches adulthood, at which point it belongs to them. The other way to give an IRA to your kids is to name them as your IRA beneficiary when you pass away. If the child is a minor when they inherit the IRA, they would need a custodian to manage it for them.

When can I start a 401(k) for my child?

You can’t start a 401(k) for a child, unless you run a business that offers a 401(k) to its employees and your child works for you. You can, however, open an IRA for a minor child who has earned income, and make contributions to it on their behalf, as long as the total contributions don’t surpass the amount earned by the child that year.

Photo credit: iStock/VioletaStoimenova

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.
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.

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.

SOIN0322012

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Finally, user-friendly options trading is here.*

Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.

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Setting Up a Retirement Account for Your Child

How to Open a Retirement Account for Your Child

Steps to Opening a Retirement Account for a Child

Step 1: Choose a Brokerage

Step 2: Complete the Application

Step 3: Choose an IRA Type

Step 4: Fund the Account and Choose Investments

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

Different Types of IRAs for Children

Finally, user-friendly options trading is here.^*

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

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