Oct
01
2024

Is a SWIFT Code the Same as a Routing Number?

By | money, Terminology | Comments Off on Is a SWIFT Code the Same as a Routing Number?

A SWIFT code, a group of letters and numbers used globally to identify a bank account, is similar to a routing number, but they function differently.

Say you want to transfer money from your bank account to someone else’s: You’ll need to know some basic information about the recipient’s financial institution and their account. This ensures safe and accurate electronic transfers of funds. If you’re conducting a domestic transfer (that is, from one bank account in the United States to another), an ABA routing number will be required. If you are moving funds internationally (sending money to another country from the U.S. or vice-versa), a SWIFT code is typically required.

Key Points

•   SWIFT codes and routing numbers are both used to transfer money, but they are not the same: SWIFT codes are used for international transfers, while routing numbers are used for domestic ones.

•   SWIFT codes are alphanumeric and identify banks globally, while routing numbers are numeric and used within the U.S.

•   The Society for Worldwide Interbank Financial Telecommunications, founded in 1973, oversees SWIFT codes

•   The American Bankers Association, established in 1910, manages the use of routing numbers in the U.S.

•   Incorrect SWIFT codes or routing numbers can cause transaction failures and potential fees, but in some cases may lead to deposits in the wrong account.

Understanding SWIFT Codes

To send money internationally, you’ll usually need a SWIFT code. Learn more about how this string of letters and numbers usually works.

What Is a Swift Code?

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is a network that allows banks and other financial institutions to electronically communicate with each other securely, across borders. A key part of that involves a SWIFT code, also called a BIC (Business Identifier Code), which identifies a specific bank, with information about the country, location, and, if applicable, branch.

Purpose and Usage of SWIFT Codes

SWIFT codes identify specific details of a bank to ensure international payments are going to the right bank. These codes are comprised of eight to 11 alphanumeric characters:

•   The first four characters are letters and represent the name of the bank.

•   The next two characters, also letters, indicate the country the bank is located in.

•   The next (and sometimes final) two characters can be letters or numbers and indicate where the bank’s main office is located.

•   In instances where the bank is large enough to have branches in multiple countries, cities, or regions, there may be a three-digit branch code at the end of the SWIFT code.

If you’re sending an international wire transfer from the United States, you’ll usually need to know the recipient’s SWIFT code. There are a number of countries that do not participate in SWIFT, but generally speaking, SWIFT is the global standard for international payments.

Recommended: Guide to International Bank Account Numbers (IBANs)

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Understanding Routing Number

To send money domestically in the United States, you’ll usually need a routing number. Here’s important information about what these series of digits are and how they function.

What Is a Routing Number?

A routing number is a nine-digit code composed of numbers that are used to identify banks and credit unions within the United States during domestic transfers.

These codes have been around for more than a century. The American Bankers Association (ABA) started to link routing numbers to financial institutions in 1910 as a unique identifier.

Purpose and Usage of Routing Numbers

Like a SWIFT code, a routing number helps direct money transfers to the right financial institution. You’ll also need the recipient’s bank account number to successfully move the funds.

You might think of the routing number like a street name for your bank account (Main or Church Street, say), but your bank account number is the actual numeric portion of your address (to continue the analogy, this would specifically identify a house), to ensure money goes to the right “home” on that “street.”

(It’s worth noting that Canada also uses routing numbers, but not ABA routing numbers. Instead, Canada’s eight- or nine-digit routing numbers include a three-digit institution number and a five-digit transit number, and possibly a zero.)

ACH transfers and wire transfers require knowing the recipient’s bank account and routing number. And you’ll frequently need to know your own routing number for several common transactions, such as:

•   Online bill and tax payments

•   Payment app setup

•   Direct deposit setup

There are some ways to send money to another person in the United States without needing to know their routing number. For instance, you can write and mail a check, you can send a money order, and you can use a peer-to-peer (P2P) transfer app to send money to someone in the U.S. without needing to know their routing number.

Differences Between SWIFT Codes and Routing Numbers

While they serve a similar purpose in electronic funds transfers, there are some key differences when comparing SWIFT codes vs. routing numbers.

Domestic vs. International Transactions

In the U.S., you’ll use routing numbers for domestic transfers. For international transactions, you’ll need to know the recipient’s SWIFT code. U.S. banks typically have a SWIFT code for such situations that is specific to each branch. (Some smaller banks and credit unions may not, however, have SWIFT codes.)

Code Structure and Format

Routing numbers are nine characters, all digits. SWIFT codes are alphanumeric and are typically between eight and 11 characters long.

Issuing Authorities

The Society for Worldwide Interbank Financial Telecommunications oversees SWIFT codes and was founded in 1973. The American Bankers Association manages routing numbers in the U.S. and was established much earlier — in 1910.

Recommended: How to Send Money to Someone Without a Bank Account

When To Use SWIFT Codes and Routing Numbers

If you are wiring money internationally, you’ll need to know a recipient’s SWIFT code. (There are a number of countries that do not use SWIFT codes, in which case you’ll need to find an alternate way to identify their bank during an electronic transfer or move money using another method.) Similarly, if someone is wiring money from another country to you in the U.S., you’ll need to provide them with your bank’s SWIFT code.

If you’re transferring money to someone else domestically in the United States, you’ll instead need to know their bank’s routing number. You’ll also need your own routing number when transferring funds, as well as setting up direct deposit, online payments, and other forms of digital transfers and payments.

Locating SWIFT Codes and Routing Numbers

You can typically find your SWIFT code on a bank statement or on your bank’s website or app. Call customer service for your bank if you’re unable to locate it.

Your routing number is also easy to find online or via mobile app when you log into your account. The routing number is also printed on your paper checks. Typically, it is the first set of numbers at the lower left corner of a check.

The Takeaway

SWIFT codes and routing numbers serve the same basic purpose of helping to identify banks when transferring money electronically, but they are used for different kinds of transfers. Domestic transfers in the U.S. rely on routing numbers while international transfers typically need SWIFT codes.

Are you in need of a bank account to begin sending and receiving money? See what SoFi offers.

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FAQ

Can a SWIFT code be used for domestic transactions?

In the U.S., SWIFT codes are not used for domestic transactions. Instead, you’ll need to know your bank account number and routing number, as well as the bank account and routing number of the person to whom you are wiring money. Or, if someone is transferring funds to you, they will need your identifying information, including your bank account number and routing number.

Are SWIFT codes and routing numbers interchangeable?

When considering SWIFT codes vs. routing numbers, it’s important to recognize that they are not interchangeable. They’re issued by different authorities, have a different number of characters, and are used for different purposes. While similar, routing numbers are for domestic transfers, and SWIFT codes are for international transfers.

What happens if I use the wrong SWIFT code or routing number?

If you use the wrong SWIFT code or routing number for a wire transfer, the transaction will typically fail, and the payment will be returned to you. In some cases, you might have to pay a fee (including if you resubmit the transaction), and it’s possible money could be routed to the wrong account. For this reason, it’s important to verify that you have the correct SWIFT or routing number when transferring funds.

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

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Oct
01
2024

5 Common Recession Fears and How to Cope

By | Growing Wealth, invest, Investing, Life & Career | Comments Off on 5 Common Recession Fears and How to Cope

Millions of Americans are anxious about recessions and economic downturns, which often involve job-losses and tightening budgets. Not to mention, investment portfolios tend to take a hit, too. These worries are normal, and fortunately there are ways to cope in the short-term.

The first step to handling that anxiety is overcoming the fear itself. While it’s normal to be worried about a recession — how long it might last, how dire the consequences might be — the truth is that the economy is cyclical. It expands and contracts, and recessions are a natural part of the order.

5 Common Recession Fears

Some investors choose to stick to their strategies or mantras during a recession. Of course, you can always carry on with your online stock trading even during a recession, but whether you choose to do that is up to you. But it’s not always so simple for every investor.

That’s because when it comes to making financial decisions, emotions are rarely your friend – that includes fear, doubt, and anxiety. With that in mind, here are some of the most common recession-related fears people often grapple with during times of economic uncertainty.

1. What If This Recession Lasts for Many Years?

While it’s possible that a recession could last for a long time, it helps to have some historical context.

Since the end of World War II, there have been 12 recessionary periods — including the short, sharp decline in early 2020 sparked by the pandemic. While that one only lasted a couple of months, U.S. recessions have averaged about 11 months in duration.

There have been outliers: Notably, the Great Recession of 2008 lasted for 18 months; and the Great Depression of the 1930s lasted about four years, although the repercussions extended that financial crisis until 1938.

That said, bull markets tend to last longer than bear markets. Equally important to remember is that every financial crisis has also informed new monetary policy and new fiscal tools that help protect consumers and investors.

2. What If Unemployment Soars?

It’s true that the potential for job loss is higher during a recession, when companies may be forced to lay off some of their workforce. While this is a common occurrence — as demand for goods lessens and output drops, companies typically need to cut expenses — there is a potential upside.

Unemployment numbers tend to lag a bit; joblessness typically rises to its highest level at certain points during the recession, and recovers to prior levels after the recession has ended. This means that some workers may have a window of opportunity to either look for new jobs now, or shore up their savings (in case of a layoff).

Be open and flexible to changes in responsibility. Lower your expectations around raises and bonuses. Try to bring value to the company, by going above and beyond, or by learning a new skill.

Make connections with your coworkers and network with people in your industry. It might be helpful to spruce up your resume too. That way, should you be laid off you can hit the ground running.

Take advantage of the shift to the gig economy, e.g. becoming your own boss, and relying on various income streams rather than a single full-time job. Not only are part-time positions becoming more common, it’s possible that your employer may be open to a gig arrangement, rather than completely letting go of a qualified employee.

A common rule of thumb is to keep three to six months’ worth of income in an emergency fund.

Recommended: Discover your ideal emergency fund amount with our emergency fund calculator.

3. What If You Lose Your Savings?

Emergency savings are important in any circumstances, as life is full of curveballs and unpredictable expenses. To that end, it’s smart to keep at least one month’s worth of expenses in a rainy day fund — three to six months is better, of course, but always have a cushion for life’s inevitable emergencies.

A recession can hit your savings hard. But it’s better to spend down your emergency fund than to panic and make financial moves you’ll later regret. At all costs, try to avoid the following:

•   Covering expenses with your credit card, and incurring debt that you have to pay off at high interest rates.

•   Taking out a home equity loan. While the interest rates may be lower on these loans, it’s still an additional monthly expense. And if your home value dips, you could put yourself in a precarious position when you need to sell.

•   Taking a loan from your 401(k). While borrowing from a 401(k) has its pros and cons, and a loan is usually better than taking an early withdrawal, there are still a number of risks. The biggest being: If you do get laid off, the entire loan could be due within a 12-month period.

In short: Build up your savings while you can, especially if you’re concerned about losing your job. And don’t be afraid to spend some or even all of that emergency money if things go south. That’s what the money is there for.

4. What If You Can’t Cover All Your Bills?

A recession can mean that money is tight, and that your bills may go up. If a job loss is looming, you may have real fears of being able to cover your expenses. Fortunately, one area where you have some control is how much money you spend.

The first step in lowering your expenses is to get to know them, especially the bills and subscriptions you pay automatically (or are on an auto-renewal system).

Take a look at your current spending habits by examining your bank statements (you can usually get a transaction history right on your phone). You don’t have to read through months of expenditures. What you spend in one month is probably similar to what you spend any other month (despite some seasonal differences).

As you examine what, where, and why you spend, note that some expenses are easier to control than others. Here are some common areas where it’s often possible to make cutbacks:

•   Food (eating out, snacks) and groceries are generally the biggest household expenses, after mortgage or rent — but they’re also easy to rein in.

•   Utilities (e.g. use less gas, oil, electricity).

•   Clothing and other “nice-to-haves” (limit spending to necessities).

•   Subscriptions (you’re likely paying for several streaming or music services you rarely use; it’s easy to forget what you signed up for a year ago).

•   Examine your insurances. Sometimes you can lower premiums by switching providers or calling and asking for a discount.

Once you trim your expenses, you may realize there are other ways you can cut back that aren’t on the above list — but not everyone has these options. You could change your commute to save money. You could take on a roommate who can split expenses.

5. What If Your Investments Lose Value?

It’s likely that your retirement account(s) and investment portfolio could lose value when the markets are down, or fluctuating. As discussed above, you don’t want to react strongly and pull your money out of the market impulsively. That’s when you lock in losses that can be hard to recover from.

If you have a financial advisor, or you’re thinking of working with one, you may want to discuss sooner rather than later how well-diversified your portfolio is. Diversification can help protect against volatility in some cases. But portfolio diversification is ideally something you do before a recession sets in.

A better approach during a recession is to stay the course. Continue to invest; continue to save for retirement. Rather than impulsively change your financial behavior, intentionally keep doing what you’ve always done. One way to do this is by using a robo advisor, which incorporates highly sophisticated technology that uses automation to help you stick to your own plan. You’ll likely find yourself in better shape when the recession ebbs and the markets rise once more.

The Takeaway

It’s natural to feel worried about the onset of a recession. Most people have fears about how long a recession could last and what the possible consequences could be in terms of their jobs, their bills, their long-term savings and even retirement.

That said, there are a number of ways to cope. While headlines may sound dire, the reality of a recession is that it may not last as long as you fear. Also, it can take some time for ordinary people to feel the impact. That can give you time to be proactive, including giving your job options (and spending habits) a careful review, beefing up your emergency savings, and reminding yourself to stay calm above all.

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


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

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Oct
01
2024
Investing for Retirement: Guide to Emerging Markets

Guide to Investing in Emerging Markets

By | invest, Investing, Preparing for Retirement | Comments Off on Guide to Investing in Emerging Markets

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

Investing in emerging markets can help diversify your portfolio, which is one of the reasons that some investors do it. There are, however, risks associated with investing in emerging markets that investors should be aware of.

Understanding Emerging Markets

Investing in emerging markets, or even if you plan to open an IRA and use it to add foreign stocks to your portfolio, may prove to be a part of a successful investment strategy. If, that is, you understand what you’re investing in.

Emerging markets are economies that are in the middle between the developing and developed stages. Emerging markets risk can be high since these areas often see rapid growth and high volatility with booms and busts. Some of the most well-known and biggest countries that investors may look to invest in include China, India, Brazil, and South Korea.

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

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

Why Invest in Emerging Markets?

Emerging market investments have been popular for decades. It became easy to own a broad emerging market index fund within an investment portfolio in the early, when exchange-traded funds (ETFs) gained popularity.

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

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

Moreover, owning high-growth areas within a tax-advantaged account can be a savvy retirement savings strategy. This can be helpful when choosing a retirement plan.

Can You Build a Retirement Portfolio With Emerging Markets?

It’s possible to build a segment of a retirement portfolio by investing in emerging markets. Also consider that emerging market bonds are a growing piece of the global fixed-income market.

In addition, owning emerging market investments in retirement accounts is possible via ETFs and both active and passive mutual funds. Moreover, many 401(k) plans offer an emerging markets fund, too.

When thinking about investing in emerging markets, keep in mind that emerging market stocks comprise a fraction of the overall market. Emerging markets stocks represent 27% of the global stock market.

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Pros of Investing in Emerging Markets

There are many pros and cons of investing in emerging markets. When you start saving for retirement, it may be a good time to think about investing in emerging market stocks, since you’d likely have a relatively long time horizon to weather volatility.

Here are some of the pros of investing in emerging markets.

Opportunity to Generate Returns

Investing in emerging markets may present the opportunity to generate returns in your portfolio, although it does assume risks, too.

Also consider that more than 80% of the world’s population lives in emerging market countries, while just 27% of the global stock market is weighted to them. Investing for retirement could have at least some exposure to this area for risk-tolerant individuals.

Diversification Benefits

International investments can help offset the ebbs and flows of U.S. stocks through diversification. Consider that the domestic equity market is more than 60% of the global market. So if the U.S. goes into a bear market, foreign shares might outperform. Retirement investing should have a diversified approach.

Cons of Investing in Emerging Markets

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

Due to the many risks, it’s common for retirement investors to tone down their stock allocation as they approach retirement. Here are some potential downsides to investing in emerging markets.

Potential Underperformance

Emerging market stocks have underperformed in recent years for a host of factors – such as the global pandemic, and military conflicts in Europe and the Middle East. So, it’s important to consider that these stocks could underperform domestic stocks in the future as well.

Correlations Might Be Changing

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

High Volatility

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

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

Uncertainty in China

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

Start Investing for Retirement With SoFi

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

It’s possible to invest in emerging markets through a variety of means, including through a retirement account, such as an IRA. But keep the risks in mind, along with your overall investment goals and time horizon.

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).

FAQ

Is it worth investing in emerging markets?

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

What is the best emerging market to invest in?

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

Should my entire retirement portfolio be in emerging markets?

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

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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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

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

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

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

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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.
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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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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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