invest Archives | Page 15 of 180

Nov

2024

Roth TSP vs. Roth IRA: How They Compare

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

Both Thrift Savings Plans (TSPs) and Individual Retirement Accounts (IRAs) come in traditional and Roth versions. One of the main differences between a Roth TSP vs. Roth IRA is who can contribute. Federal employees and members of the military can save in a Roth TSP. Anyone with earned income that’s within IRS income thresholds can contribute to a Roth IRA.

In either case, your contributions are not tax-deductible, but you can make tax-free qualified withdrawals when you retire.

Key Points

• Roth TSPs are available to federal employees and military members, while Roth IRAs are accessible to anyone with earned income within IRS income thresholds.

• Contributions to both Roth TSPs and Roth IRAs are made with after-tax dollars, allowing for tax-free qualified withdrawals in retirement.

• Roth TSPs have higher annual contribution limits and allow for employer matching contributions, unlike Roth IRAs.

• Roth IRAs typically offer a broader choice of investment options than Roth TSPs.

• Choosing between a Roth TSP and Roth IRA depends on employment status, contribution capacity, and retirement goals.

What Are Roth Thrift Savings Plans (TSP)?

The Thrift Savings Plan is a retirement plan that’s designed specifically for federal employees. You’re generally eligible to contribute to a TSP if you’re covered by the Federal Employees’ Retirement System (FERS) or the Civil Service Retirement System (CSRS). Members of the military can also save for retirement in a TSP.

A Roth TSP allows you to contribute after-tax dollars. When you make qualified withdrawals in retirement, those withdrawals are not taxed. Earnings are considered qualified if:

• At least 5 years have passed since January 1 of the first year in which you began making contributions, and

• You’re 59 ½ or older, permanently disabled, or deceased.

Contributions are made through elective salary deferrals, similar to a 401(k) plan. Catch-up contributions are allowed for workers aged 50 or older. Under the SECURE 2.0 Act, a higher catch-up contribution limit applies in 2025 for those ages 60 to 63. The IRS determines how much you can save in a Roth TSP each year. Here are the contribution limits for 2024 and 2025.

	2024	2025
Elective Deferrals	$23,000	$23,500
Catch-Up Contributions	$7,500	$7,500 $11,250 for those ages 60-63
Annual Additions Limit	$69,000	$70,000

The annual additions limit is the total amount you can contribute in a calendar year. It includes employee contributions, as well as automatic and matching contributions made by your employing agency. Catch-up contributions do not count in this total.

🛈 While SoFi does not offer a Roth TSP, we do offer a Roth IRA to help members save for retirement.

What Are Roth IRAs?

A Roth IRA retirement account is an individual retirement account that allows you to contribute after-tax dollars, then make qualified withdrawals tax-free. Roth IRAs are available to individuals through brokerages, banks, and other financial institutions, rather than through employers.

You’ll need to have earned income to contribute to a Roth IRA. The IRS sets the maximum annual contribution limit. Catch-up contributions are allowed if you’re 50 or older. Here’s how the limits compare for 2024 and 2025.

	2024	2025
Annual Contributions	$7,000	$7,000
Catch-Up Contributions	$1,000	$1,000

The annual limit does not apply to rollover or reservist contributions. How much you can contribute to a Roth IRA is based on your income and tax filing status.

You can make the full contribution in 2024 if:

• You file single or head of household and your modified adjusted gross income (MAGI) is less than $146,000

• You’re married, file separately, did not live with your spouse during the year and your MAGI is less than $146,000

• You’re married and file jointly or are a qualifying widow(er) and your MAGI is less than $230,000

You can make a full contribution in 2025 if:

• You file single or head of household and your MAGI is less than $150,000

• You’re married, file separately, did not live with your spouse during the year, and your MAGI is less than $150,000

• You’re married and file jointly or are a qualifying widow(er) and you’re MAGI is less than $236,000

There are no required minimum distributions for Roth IRAs, so you can leave money in your account until you need it. You can also withdraw original contributions at any time, without a tax penalty.

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.

Similarities Between Roth TSP vs. Roth IRA

It’s important to open a retirement account that fits your needs. In terms of what’s similar between a Roth IRA vs. Roth TSP, they both allow you to contribute money on an after-tax basis. In other words, you pay taxes on the money that goes into the plan upfront so you can withdraw it tax-free later.

Once you reach age 59 ½, you can begin taking distributions without triggering any tax consequences. In terms of early withdrawals from a TSP vs. Roth IRA, there’s no difference. The IRS can assess a 10% early withdrawal penalty when taking money out of either account prematurely.

Both Roth IRAs and Roth TSPs are subject to the five-year rule mentioned earlier. Again, that rule dictates that at least five years must have passed since making your first contribution in order to avoid a tax penalty when making withdrawals.

TSP Roth vs. Roth IRA Similarities
Funded with…	After-tax dollars
Contributions are…	Not tax-deductible
Qualified withdrawals are…	Tax-free

Differences Between Roth TSP vs. Roth IRA

While they do have some things in common, there are some notable differences between a Roth IRA vs. TSP.

First, the TSP is an employer-sponsored plan, while an IRA is not. If you don’t work for the federal government you wouldn’t have access to a Roth TSP, but you could still open a Roth IRA and contribute to it.

Next, Roth TSPs have much higher annual contribution limits and catch-up contribution limits. They also allow for employer matching contributions, something you won’t get with a Roth IRA. Your ability to contribute to a TSP is not limited by your income either.

While Roth IRAs allow you to withdraw original contributions at anytime without a tax penalty, that’s not the case for Roth TSPs.

TSP Roth vs. Roth IRA Differences
Contribution limits…	Are higher for Roth TSPs
Matching contributions…	Only apply for Roth TSPs
Contribution withdrawals…	Only Roth IRAs allow you to withdraw original contributions at anytime without a tax penalty

Roth TSP vs. Roth IRA: The Pros

There are several types of retirement plans that can offer tax advantages, including both Roth TSP and Roth IRA accounts. In terms of the pros, the main benefits of choosing either of these accounts lies in the ability to withdraw money when you retire tax-free.

If you expect to be in a higher tax bracket when you retire, Roth TSP or Roth IRA withdrawals won’t increase your tax liabilities. That’s a good thing if the value of your investments within either account has risen significantly since you first begin making contributions.

Roth TSPs may help you save a decent amount of money for retirement if you’re able to max out your plan each year. The addition of employer matching contributions is another benefit, since that’s essentially “free” money. You don’t get that with Roth IRAs, but these accounts can still be a good way to save if you don’t have access to a retirement plan at work.

Roth TSP Pros	Roth IRA Pros
• Contribute money on an after-tax basis • Contributions grow tax-free • Qualified withdrawals are tax-free • High annual contribution and catch-up contribution limits • Employer matching contributions may help your savings grow faster • Eligibility to contribute is not tied to your income	• Contribute money on an after-tax basis • Contributions grow tax-free • Qualified withdrawals and withdrawals of original contributions are tax-free • Save for retirement even if you don’t have a workplace retirement plan

Roth TSP Pros

Roth IRA Pros

• Contribute money on an after-tax basis

• Contributions grow tax-free

• Qualified withdrawals are tax-free

• High annual contribution and catch-up contribution limits

• Employer matching contributions may help your savings grow faster

• Eligibility to contribute is not tied to your income

• Contribute money on an after-tax basis

• Contributions grow tax-free

• Qualified withdrawals and withdrawals of original contributions are tax-free

• Save for retirement even if you don’t have a workplace retirement plan

Roth TSP vs. Roth IRA: The Cons

While there are some advantages to saving in a Roth TSP or Roth IRA, there are also some potential downsides. For one thing, you’ll need to have a federal job (that is, work for the federal government is some capacity) in order to contribute to a Roth TSP. With a Roth IRA, your ability to make a contribution hinges on your income and filing status.

Roth TSPs are also known for offering a narrower range of investment options. If you make an in-service withdrawal from your account and you’re not age 59 ½ yet, you should be prepared to pay a tax penalty.

A Roth IRA doesn’t offer matching contributions, nor can you borrow from it. Any early withdrawals that are not qualified or don’t otherwise meet the five-year rule could be subject to tax penalties. While you might have more investment options to choose from, it’s important to be mindful of the fees you may pay.

Roth TSP Cons	Roth IRA Cons
• Must be an eligible federal employee to contribute • Investment selection may be limited • In-service withdrawals only allowed for financial hardship • Early withdrawal penalty may apply	• Must be within the IRS threshold guidelines to contribute • How much you can contribute is tied to income and filing status • No option to take loans • No employer matching contributions • Early withdrawal penalty may apply

Roth TSP Cons

Roth IRA Cons

• Must be an eligible federal employee to contribute

• Investment selection may be limited

• In-service withdrawals only allowed for financial hardship

• Early withdrawal penalty may apply

• Must be within the IRS threshold guidelines to contribute

• How much you can contribute is tied to income and filing status

• No option to take loans

• No employer matching contributions

• Early withdrawal penalty may apply

Roth TSP vs. Roth IRA: Which Is Better for Your Retirement Goals?

Selecting a retirement plan is an important decision as you want to choose an option that aligns with your needs, goals, risk tolerance, and objectives. Contributing to a Roth TSP could be wise if you’re a federal employee, since you can take advantage of higher contribution limits and employer matching contributions.

A Roth IRA, meanwhile, could make sense if you don’t have access to a retirement plan at work or you want to supplement your employer’s plan. Contributing to a retirement plan at work doesn’t bar you from also contributing to a Roth IRA, as long as you’re within the income limits set by the IRS.

The one that’s better for you may depend on where you work, how much money you’re able to contribute to retirement savings each year, and when you plan to retire. When comparing investment options for a Roth TSP vs. Roth IRA, consider the overall track record of those investments as well as the fees you might pay.

The Takeaway

Whether you choose a Roth IRA vs. Roth TSP or something else, it’s important to save for retirement early and often. Even if you can only afford to contribute small amounts to a retirement account, they can add up over time as long as you remain consistent.

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

Should I max out my TSP or Roth IRA?

If you can afford to max out your TSP, it might make sense to do so before maxing out a Roth IRA. The simple reason for that is TSPs have higher annual contribution limits and you can also get a matching contribution from your employer. If you only have a Roth IRA, then maxing it out each year can help you save the most money possible toward your retirement goals.

Is a Roth IRA better for retirement or a Roth TSP?

A Roth IRA is a good retirement savings option if you want to be able to make tax-free withdrawals later. However, a Roth TSP allows you to contribute a larger amount of money each year and your employer can also make matching contributions on your behalf.

Does a Roth TSP reduce taxable income?

Roth TSP contributions are made using after-tax dollars, so they do not reduce your taxable income for the year. You can, however, manage your tax liability by taking advantage of any deductions and credits you might be eligible for.

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Nov

2024

Are You Asking Yourself: Are 401(k)s Worth It Anymore?

By Dan Miller | invest, Investing, Preparing for Retirement | Comments Off

401(k) plans have been around for decades, and millions of Americans have successfully used them to help with saving for retirement. Named for the section of the tax code that enables them, a 401(k) is an employer-sponsored plan that allows you to withdraw funds directly from your paycheck to save for retirement. Having the money come out directly from your paycheck makes it quite easy to save for retirement.

There are several benefits that come from contributing to a 401(k) plan. You’ll get a tax break for contributing to your account, since contributions made to a traditional 401(k) are made with pre-tax dollars, reducing the gross income you’ll need to report to the IRS that year. Many employers also make matching contributions to their employees’ 401(k) accounts. Still, with so many other ways to save for retirement available now, you might be wondering if 401(k)s are worth it.

Key Points

• A 401(k) is an employer-sponsored retirement plan allowing tax-advantaged contributions that can be invested and withdrawn in later years.

• Traditional 401(k)s allow employees to make pre-tax contributions, meaning they reduce taxable income for that year, while Roth 401(k)s allow employees to make after-tax contributions.

• Employer-matching in 401(k)s can provide additional funds, enhancing retirement savings.

• 401(k)s have higher contribution limits than IRAs but are limited by employer investment options.

• In comparison with savings accounts, 401(k)s offer higher potential returns but come with penalties for early withdrawal.

How 401(k) Plans Work

A 401(k) is an employer-sponsored plan, which means that you have to be employed by a company that offers one. If your employer does not offer a 401(k) program, in most cases, you can not start one on your own. In that case, you may need to look for other options, and may want to think about opening an IRA.

If you do have a 401(k), you can specify a percentage of your total pay or an amount to be withheld from your paycheck each pay period. Contributions to a traditional 401(k) account are made with pre-tax dollars and are therefore not counted in the gross income you’ll need to report to the IRS (likely lowering your overall tax bill). Instead, you will pay income tax based on the amount of money you withdraw from your account when you reach retirement age. You can also choose how to invest your contributions, based on a list of investment options provided by your employer.

401(k) Matching Explained

Many employers offer 401(k) matching as an additional employee benefit, and employers can set up matching programs in a variety of different ways.

One example might be that a company might offer to match 50% of your contributions, up to a maximum of 6% of your pay. So if you contribute the full 6% of each paycheck to your 401(k) account, your employer will contribute an additional 3%.

Effectively, employer matching allows employees to benefit from “free money” coming from their employer directly into their retirement plans.

Pros and Cons of 401(k)s

401(k)s, like any other investment and savings vehicle, have advantages and disadvantages. Here are some pros and cons of 401(k) accounts.

thumb_up

Pros:

• 401(k) plans are tax-advantaged, allowing for pre-tax (traditional) or post-tax (Roth) contributions

• The contribution limits are higher than that of other retirement options (like IRAs)

• Your employer may offer matching funds

thumb_down

Cons:

• Investment options are limited to what is offered by your employer

• There is a limit to how much you can contribute each year

• Some investment options may come with fees

401(k) vs Savings Account

If you’re considering where to put your money and deciding between 401(k) retirement savings versus stashing it in a regular savings account, there are a few things to keep in mind.

Money you put into a traditional 401(k) account is intended for retirement, so you may face penalties and an additional tax bill if you take it out before you reach retirement age. However, the investment options available in many 401(k) accounts may allow you to earn higher returns than those available in savings accounts. The money in a savings account would only accrue interest.

Here’s a hypothetical look at how returns may generate at various rates. All figures are for $50,000 invested in a diversified (401)k, assuming a 401(k) was invested entirely in an S&P 500 index fund, and at varying rates of return (compounding continuously, meaning that an investor earns returns on their initial investment, plus their returns, repeatedly) with no additional contributions.

Additionally, in the chart below, the percentage of corresponding rates of return is based on an inflation-adjusted return, and this percentage can be even lower based on time in the market. We’ve also included the rate of return for a hypothetical savings account, which might pay out 0.4% annual interest, for comparison:

Starting amount	Rate of Return	Ending amount after 20 years
$50,000	0.4%	$54,156
$50,000	3%	$90,306
$50,000	5%	$132,665
$50,000	7%	$193,484
$50,000	10%	$336,375

As you can see, even a small increase in your overall rate of return may pay dividends in the long term. There can also be a place in your overall financial plan for both retirement savings and regular savings accounts, but generally, it’s probably a good idea to make sure that any money you are investing for the long term has the highest possible rate of return, given your risk tolerance. Typically, the higher the potential rate of return is for an investment, the higher the potential risk involved.

Compound Interest vs Simple Interest

Depending on how you are investing or saving your money, you may earn interest. And that interest may be calculated as simple interest, or compounded on a particular schedule.

Many investments in the stock market that you might use in a 401(k) account may compound continuously. Other investments like bonds, CDs, or savings accounts may use simple interest or compound interest on other schedules.

Here’s a look at how a $50,000 investment would grow at a 7% interest rate, using either simple interest or interest compounded at various other timeframes:

Starting amount	APY	Ending amount after 20 years
$50,000	7%, simple interest	$120,000
$50,000	7%, compounded annually	$193,484
$50,000	7%, compounded quarterly	$200,320
$50,000	7%, compounded monthly	$201,936.94
$50,000	7%, compounded continuously	$202,760.00

401(k)s vs IRAs

401(k)s and Individual Retirement Accounts (IRAs) are both types of accounts that may give you tax advantages for saving for retirement. Again, a 401(k) is a retirement account sponsored by your employer, while an IRA is something you set up individually.

There are pros and cons with an IRA vs 401(k), so make sure you understand how they both work. That way you can make the best decision for your unique situation.

Perhaps the most stark difference between the two is the amount you can contribute in a year. For 2024, contribution limits are $23,000 in a 401(k) versus $7,000 in an IRA.

Is a 401(k) Right for You?

There are many different types of retirement accounts, and a 401(k) account can be an important part of your retirement plan. Check with your employer to see if they offer a 401(k) account, what investment options are available, and whether they offer any matching funds. Then consider how that fits in with your other retirement options to decide if a 401(k) is right for you.

The Takeaway

401(k) accounts are employer-sponsored retirement accounts that may be available as an employee benefit. When you contribute to a traditional 401(k) plan, the amount you contribute is not counted in the total gross income you’ll need to report that year. This may allow you to lower your overall tax liability. Additionally, many employers offer a 401(k) matching program, where they provide additional funds into your account as an employee benefit.

It can be a smart financial decision to use one of these accounts to make sure you have enough money put aside for your retirement.

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).

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.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of Individual Retirement Accounts (IRAs).

FAQ

Is a 401(k) worth it anymore?

There are many different kinds of retirement plans, and each come with their own pros and cons. A 401(k) is a valuable tool that may be a good choice for many Americans. Compare the benefits of a 401(k) with the benefits that come with other types of retirement plans to make the best choice for your specific situation.

Is it better to have a 401(k), or just save money?

It can make sense to keep some of your money in safe investments like cash or money market accounts. Having a few months’ worth of expenses in cash or cash equivalents can serve as a useful emergency fund. However, you likely won’t want to keep too much of your money in these types of investments, since they generally offer lower returns than investments that might be available in a 401(k) account.

What are the main disadvantages of a 401(k)?

While a 401(k) account has a lot of benefits and advantages, there are a few disadvantages. First is that you can only open a 401(k) account if your employer offers one, and your employer controls what investments are available. You also are limited in how much money you can contribute to a 401(k) account each year.

Photo credit: iStock/Pekic

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Nov

2024

How To Invest in Publicly Traded Sports Teams

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

Owning a professional football or baseball team is well out of reach for the average investor, but owning a piece of one isn’t. Publicly traded sports teams offer investors exposure to the world of alternative investments without requiring you to bring billions to the table.

If you have a brokerage account you may be able to invest through the wide world of sports. Here’s a look at how it works to invest in publicly traded sports teams.

Key Points

• Investing in publicly traded sports teams allows individuals to engage with their passions and diversify their portfolios through publicly traded teams.

• U.S. sports leagues like the NBA, NHL, and MLB have publicly traded teams, while international options include Manchester United and Borussia Dortmund.

• Key factors to consider before investing in sports teams include team management, ownership structure, financials, and performance record.

• Risks include stock price fluctuations, potential privatization, and significant debt loads affecting financial stability.

• Investment strategies may include buying shares through brokerages or investing in sports-focused ETFs for diversified exposure.

Understanding Sports Team Ownership Structures

Sports team ownership structures vary by organization and franchise. Major and minor league teams can be owned by:

• A single individual

• A family or family trust

• Corporations

• Limited liability companies (LLCs)

• Partnerships

• Private equity firms

Some teams have mixed ownership, meaning there are multiple owners, which can include a mix of individuals or entities. The controlling owner may be an individual or family who owns a majority share, with the rest distributed among other owners that were interested in investing.

There may be limits on what percentage of ownership an individual or entity can have in such a structure. For example, the National Football League (NFL) approved a vote in 2024 to allow private equity funds to buy stakes in teams. Private equity is capped at 10% of total ownership and controlling owners must have at least 30% ownership.

What Is a Publicly Traded Sports Team?

Most sports teams are privately owned following one of the ownership structures listed previously. Publicly traded sports teams are teams that are owned by corporations that may or may not make their shares available to trade on stock exchanges.

Current Publicly Traded Teams

A handful of professional sports teams are publicly traded. If you’re interested in how to invest in sports teams here are the companies you might choose from.

• Atlanta Braves. The Braves baseball team is owned by Atlanta Braves Holdings, Inc. (BATRA), which also operates mixed-use development projects. BATRA is traded on the Nasdaq Select Global Market.

• Toronto Blue Jays. Rogers Communications (RCI) owns the Blue Jays and is a leading provider of wireless service in Canada. RCI is traded on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE).

• New York Knicks. Madison Square Garden Sports Corp. (MSGS) owns and operates the New York Knicks. Shares are traded on the NYSE.

• New York Rangers. MSGS also owns and operates the New York Rangers hockey team.

• Manchester United. The Manchester United Football Club is owned by Manchester United plc. The stock trades on the NYSE using the ticker symbol MANU.

• Borussia Dortmund. Borussia Dortmund is a publicly traded sports team that trades on the German stock exchange. Its ticker symbol is BVB.

The Green Bay Packers, a professional football team playing in the NFL, are often included in the discussion about publicly traded sports teams, too. But while the team is publicly owned, it is not publicly traded. The team has, in the past, offered stock sales, and is a nonprofit organization.

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Strategies for Investing in Sports Franchises

There are several ways to invest in sports teams. The simplest path may be investing in sports by purchasing shares through a brokerage.

You’ll need to open a brokerage account if you don’t have one already, and deposit funds to trade. Once your account is set up you can buy and sell shares of publicly traded sports teams the way you would any other stock. Some brokerages also offer access to alternative investment funds, such as commodities or currencies.

If you don’t want to tie up all of your investment dollars in a single team, sports-focused ETFs are another option. These are thematic ETFs that allow investors to own a basket of investments in a single fund. Funds may be focused on:

• Sports betting

• Digital sports entertainment, including esports and gaming

• Sports broadcasting

• Sports and athletic technology, such as wearables

• Energy drinks or foods that are marketed to athletes

Real estate investment trusts (REITs) are another opportunity to invest in sports, albeit not necessarily sports teams per se. REITs own and operate real estate properties, which can include sports stadiums, arenas, and training facilities. Investing in sports REITs can diversify your portfolio while generating passive income through dividends.

Private equity may also be an option, depending on your situation. Private equity involves investment in sports companies that are not publicly traded. Investing in private companies can be lucrative but the barrier to entry is often high, as you may need to be an accredited investor to qualify.

SEC guidelines consider you to be an accredited investor if you:

• Have a net worth greater than $1 million, excluding the value of your primary residence

• Earned $200,000 or more ($300,000 with a spouse or partner) for the previous two years and expect the same level of income for the current year.

If you don’t meet those requirements there’s another option. You could invest in private equity ETFs that have a sports focus. This alt investment guide offers a closer look at how nontraditional assets like private equity work.

Risks and Challenges in Sports Team Investing

Investing in sports has risks like any other investment. Weighing them carefully can help you decide if it makes sense to invest with sports.

Here are some of the biggest challenges and associated risks associated with investing in sports teams:

• Stock prices of publicly traded sports teams (or their parent organizations) can fluctuate widely, based on how well the team performs.

• A team that’s publicly traded today may not be tomorrow if the team is sold to a new owner who decides to make it private.

• Sports teams can generate huge profits but they can also carry significant debt loads, which can affect their financial health and stability.

• Investing in sports REITs can generate passive income but those investments often lack liquidity.

• Private equity often has higher barriers to entry and may carry more risk than other sports investments.

Before investing in sports it’s helpful to review your current asset allocation and risk tolerance. That can help you decide how much of your portfolio to allocate to sports investments.

Recommended: Alternative Investment Definition

The Takeaway

Investing in sports is an opportunity to put your money where your passions are and diversify your portfolio. Comparing different investment paths can help you decide which one makes the most sense for you. And remember that if you’re interested in trading sports stocks, it’s easy to open a brokerage account and start investing online.

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.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Which sports leagues have publicly traded teams?

In the U.S., the NBA, NHL, and MLB all have at least one publicly traded sports team on the stock market. While the Green Bay Packers are publicly owned and offer periodic sales of shares, they are not publicly traded.

Can I invest in international sports teams?

There are at least two international sports teams that are publicly traded. They are the Manchester United Football Club and Borussia Dortmund, a German football club and sports club.

What factors should I consider before investing in a sports team?

Some of the most important factors to consider before you invest in sports teams are the team’s management, its ownership structure, and its financials. It’s also wise to look at the team’s performance record, as that can influence how it’s valued at any given point in time.

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Nov

2024

What Are Real Assets? Understanding Tangible Investments

By MP Dunleavey | Growing Wealth, invest, Investing, Terminology | Comments Off

Real assets are tangible, physical assets that can be exchanged for cash, owing to their use in manufacturing and consumer goods, and other purposes. Real assets, as a category, may include precious metals, commodities, real estate, infrastructure, and more.

Typically, real assets are considered a type of alternative investment, owing to their low correlation with traditional asset classes such as stocks and bonds. As such, real assets may provide some portfolio diversification. But real assets are also susceptible to specific risks pertaining to each sector.

Key Points

• Real assets take their name from the fact that they are tangible, physical assets, as opposed to financial assets (like stocks and bonds) or intangible assets (like a brand).

• Real assets have a cash value, and can generally be traded for cash. They typically include real estate, land, commodities, infrastructure, precious metals, and more.

• It’s possible to invest in real assets directly (by owning the physical goods, resources, or structures) or indirectly (via mutual or exchange-traded funds).

• They are considered a type of alternative asset, because most real assets are not correlated with conventional asset classes, and thus may provide some portfolio diversification, and potential returns.

• Real assets come with specific risk factors that pertain to each type of tangible asset, in addition to the risks that come with most alts: e.g., illiquidity, lack of transparency, less regulation.

Defining Real Assets

What is an asset? On the whole, assets can be considered tangible (e.g., land), intangible (e.g. a brand or trademark), or financial (e.g. shares of stock). While real assets have a cash value and can be exchanged for cash, they are not considered a type of financial asset because they are not securities.

Also, real assets are considered a type of alternative investment. Alts tend not to move in sync with, i.e., they’re not typically correlated with conventional assets like stocks and bonds. But like all types of alternative investments, real assets come with specific risks, including lack of liquidity, transparency, and less regulation in some cases.

Characteristics of Real Assets

The primary characteristic of real assets is that they are physical. They can be objects, goods, resources, or structures that have a specific cash value and can be traded for cash in certain markets.

However, real assets are considered non-securities, because they do not derive their value from a contractual ownership arrangement like stocks, bonds, exchange-traded funds (ETFs), options, and more.

Real Assets vs. Financial Assets

Financial assets fall into the category of securities; generally speaking there are debt securities (like bonds) and equity securities (stocks), as well as derivatives (options and futures). Real assets are non-securities.

• Securities are financial instruments that can be traded on an exchange, with an expectation of making a profit. More important, securities are fungible, meaning the value of one unit is interchangeable with another of the same type of unit: e.g., a share of stock in Company A is the same as another share of that stock.

• Real assets are physical goods, and in many cases they are not fungible: one type of property or infrastructure is not interchangeable with another. That said, commodities are a type of real asset, and are generally fungible: one barrel of crude oil is the same as the next.

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

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Types of Real Assets

As noted, real assets consist of physical, tangible goods and resources. But while one stock generally behaves the same as another stock, each type of real asset has to be considered individually to understand its benefits and risks.

Real Estate

Real estate includes a wide range of property types and investment choices: e.g., commercial real estate, industrial real estate, healthcare facilities, rental properties, and more. While it’s possible to invest directly in real estate, it’s also possible to buy into a type of pooled investment like real estate investment trusts, or REITs.

Real estate may offer passive income (i.e., from rent), or gains from the sale of properties, but real estate investments come with potential risks: local laws and regulations can change; property can be damaged by extreme weather; interest rate risk can impact property values.

Commodities

Commodities include numerous raw materials, including agricultural products like corn and coffee; precious metals such as copper or nickel; energy sources (including renewables), and more. Commodity trading typically involves futures contracts, but it’s possible to invest in commodities via index funds and mutual funds, or ETFs.

These assets, owing to steady demand, may offer the potential for profits. They may help hedge against inflation. That said, the value of commodities can be impacted by weather, supply chain breakdowns, market fluctuations, and other factors, which makes them risky. Commodities can lose value for a number of reasons, and direct investments in commodities lack certain investor protections offered to other securities.

Infrastructure

Infrastructure assets are durable structures that provide public services, utilities, and the like to enable the smooth functioning of society. Infrastructure includes durable structures like bridges, roads, tunnels, and schools, as well as energy infrastructure like power plants. Infrastructure is typically stationary, has a long period of use, and generates predictable cash flow (via utility payments, tolls, and so on).

While it can be difficult for individual investors to invest directly in infrastructure, it’s possible to invest in municipal bonds, or funds that offer exposure to companies involved in infrastructure.

Investing in infrastructure comes with specific risks investors should consider, including interest-rate risk (which can affect access to loans, and interest on bonds), regulatory issues, climate and weather challenges, and more.

Precious Metals

Generally speaking, precious metals consist of a group of natural assets, including gold, silver, platinum, iridium, and others. Investing in precious metals may be appealing as many metals tend to retain value owing to their scarcity, their critical role in manufacturing and technology, and because some (like gold and silver) are themselves used as a store of value.

For many individual investors, it may not be obvious how to invest in gold, silver, or other metals. Though it’s possible to buy bullion or bars directly, it’s also possible to invest in ETFs that are invested in gold or precious metals, or in stocks of mining companies, and the like.

The risks of investing in precious metals include potential changes in demand, technological innovations that may require more or less of a given metal, supply chain issues, worker safety, and more.

Recommended: Why Invest in Alternative Investments?

Benefits and Risks of Investing in Real Assets

In addition to the advantages and disadvantages of different types of real assets noted above, there are a few other factors investors should consider.

Inflation Hedge

Inflation essentially decreases a dollar’s purchasing power, and a hedge against inflation can offer a potential upside.

In some cases real assets can provide a hedge against inflation. For example, assets that benefit from steady demand, like commodities, may help offset inflation’s bite. Also, land or real estate may rise in value even when the purchasing power of the dollar is declining, which may offer a potential inflation hedge.

That said, it’s impossible to predict for certain which asset classes will help to mitigate inflation, and there are no guarantees.

Portfolio Diversification

Another factor investors should consider is the potential benefit from diversification, which is the practice of investing in different asset classes to help mitigate risk. Diversifying your assets may help offset some investment risk.

Diversification is complex, however, and involves more than just including alternative investments along with equities and fixed income. Investors need to consider how certain investments, like tangible assets, might provide some sense of equilibrium in their portfolio if conventional strategies are down.

Potential for Steady Income

As discussed, some types of real assets, like infrastructure investments, can become a source of steady income. For example, roads and bridges and public transportation require a high initial investment, but then they may provide a predictable revenue stream from tolls and fares and so forth.

The same is true for some types of municipal power plants and other energy sources that supply utilities, and derive steady payments over time.

Liquidity Concerns

Taken as a whole, however, real assets are quite similar to other types of alternative investments in that they lack the liquidity and easy access to cash that most conventional investments provide.

Liquidity risk is something all investors must take into account when choosing investments, as the inability to enter and exit positions with ease, and as needed, can impact one’s goals.

Market Volatility

All markets fluctuate to some degree, but some markets are more volatile than others. When it comes to deciding whether to invest in real assets, investors must do their due diligence because the market for each type of tangible asset is vastly different from another.

Just as understanding volatility in the stock market is key to making smart choices about equities, it’s essential for investors to consider the real estate market for a property they might invest in, or the futures market for investing in commodities, and so forth.

Incorporating Real Assets into Your Investment Strategy

Would investing in real assets make sense in your portfolio? There are a few factors to consider.

Asset Allocation

Asset allocation is basically the mix of stocks, bonds, and other investments in your portfolio. While a standard allocation usually includes these conventional asset classes, some investors also include other choices such as commodities, real estate, private equity, and more.

Deciding on the right allocation for your portfolio means thinking about your goals, time horizon, and how much risk you’re willing to take on. Given that real assets are often higher-risk investments, but aren’t correlated with traditional assets, investors may want to consider the advantages and disadvantages before deciding on an asset allocation that makes sense.

Direct vs. Indirect Investment Methods

Owing to the physical nature of real assets, it’s possible to invest in many real assets directly (e.g., owning rental property or gold bullion) as well as investing indirectly in real assets.

For example, commodities are typically traded via futures contracts. A commodity futures contract is an agreement to either buy or sell a specified quantity of that commodity for a specific price at some point in the future. While it’s possible to end up with actual physical commodities this way (e.g., bushels of corn or barrels of oil), for the most part futures are an indirect way to gain access to the commodities markets.

REITs and ETFs

Real estate investment trusts (REITs) and ETFs are two other common instruments for investing indirectly in real assets.

• A REIT is a trust that owns income-generating properties, so that investors are spared the hassle of direct ownership. A REIT may own warehouses, retail stores, storage units, hotels, and more. REITs can focus on a geographic area or specific market (like healthcare). A REIT is required to distribute 90% of its income to shareholders, so owning shares of a REIT may provide passive income, as well.

• ETFs are another way to invest indirectly in certain types of real assets, because these funds invest in companies that either produce, process, or in some way support a given type of real assets.

For example, there are ETFs that invest in mining, equipment, or technology companies in the precious metals and commodities sectors. Likewise, there are ETFs that invest in companies that support infrastructure projects.

Investors who are interested in exploring real assets are not limited to direct investment strategies; there are other options to consider.

The Takeaway

Real assets are tangible assets like real estate, infrastructure, or commodities, and are considered a type of alternative investment. Alts are not typically correlated with traditional assets like stocks and bonds, and thus may provide portfolio diversification that can help mitigate some risk factors. But like all types of alts, real assets come with specific risks, including lack of liquidity and lack of transparency.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

How do real assets perform during economic downturns?

Although some alternative investments may not be affected by a downturn, the markets for specific assets can react differently, depending on the economic conditions. For example, if stocks are down, real estate may not be impacted at all. When interest rates fluctuate, the cost of loans can impact real estate values and infrastructure projects, but not necessarily commodities. It’s incumbent on each investor to consider the pros and cons of any investment before putting money into it.

What percentage of a portfolio should be in real assets?

Deciding on the percentage any asset class should have in your portfolio is a personal calculation, taking into account your goals, time horizon, and stomach for risk. It’s especially important to consider that real assets are illiquid, a risk consideration that can impact whether you want to invest in real assets at all.

Are real assets suitable for all types of investors?

No. Real assets are better suited to experienced investors, who may have the skills to navigate the complexities of real asset markets, pricing, risks, and so forth.

Photo credit: iStock/Edwin Tan

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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.
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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.

An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
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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.
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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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

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.

SOIN-Q324-057

Nov

2024

What Is Extrinsic Value?

By Mike Zaccardi, CMT, CFA | Growing Wealth, invest, Investing | Comments Off

Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.

What Is Extrinsic Value?

Extrinsic value is the difference between an option’s market price, known as the premium, and its intrinsic value.

Extrinsic value reflects factors beyond the underlying asset’s price that can influence the overall worth of an option. This value fluctuates based on the time to expiration and the volatility of the underlying asset.

Key Points

• Extrinsic value is the difference between an option’s market price and intrinsic value, influenced by time and volatility.

• Longer contracts and higher implied volatility increase extrinsic value.

• Interest rates and dividends affect extrinsic value differently for call and put options.

• Extrinsic value cannot be negative; it represents the portion of an option’s price that exceeds its intrinsic value.

• At-the-money options have the most extrinsic value due to sensitivity to time and volatility changes.

Understanding Intrinsic and Extrinsic Value

The intrinsic value of an option is the difference between an option’s strike price and the current price of the underlying asset, which can be calculated only when the underlying asset is in the money. An out-of-the-money option has no intrinsic value.

Remember, an option that is “in the money” would be profitable for the owner if exercised today, while an option that is “out of the money” would not.

An out-of-the-money option may present an investment opportunity for some, however, because of its potential to become in-the-money at expiration.

Extrinsic value equals the price of the option minus the intrinsic value. As an option’s expiration approaches, extrinsic value usually diminishes since there is less time for the price of the underlying asset to potentially move in a way that benefits the option holder (also known as time decay).

For example, an option that has two weeks before expiry typically has a higher extrinsic value than one that’s one week away. This does not imply it has more intrinsic value, however. It just means there is more time for it to move up or down in price.

Out-of-the-money option premiums consist entirely of extrinsic value, while in-the-money options have both intrinsic value and extrinsic value. Options that trade at-the-money might have a substantial proportion of extrinsic value if there is a long time until expiration and if volatility is high.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

How Extrinsic Value Works

Simply put, the more time until expiration and the more a share price can fluctuate, the greater an option’s extrinsic value. Extrinsic value demonstrates the time that remains for potential price movement, and the uncertainty in that movement. There are a few different factors that could influence extrinsic value, and understanding them is crucial for evaluating an option’s pricing.

Factors that Affect Extrinsic Value

Two key factors affect an option’s extrinsic value: contract length and implied volatility. In general, the longer the contract, the greater the extrinsic value of an option. That’s because the more time allowed until expiration, the more a stock price might move in favor of the option’s holder. It’s possible, however, that the price moves in the opposite direction; if the holder keeps the option in the hope that the price will rebound, they may lose some or all of their investment.

The second factor that determines extrinsic value is implied volatility. Implied volatility measures the expected magnitude of how much a stock might move over a specific period. Volatility impacts an option’s extrinsic value, and its sensitivity is represented by the Greek letter vega.

1. Length of Contract

An option contract generally has less value the closer it is to expiration. The logic is that there is less time for the underlying security to move in the direction of the option holder’s benefit. As the time to expiration shortens, the extrinsic value decreases, all else equal.

To manage this risk, many investors use the options trading strategy of buying options with varying contract lengths. As opposed to standard option contracts, a trader might choose to buy or sell weekly options, which usually feature shorter contract lengths.

On the opposite side of the spectrum, Long-Term Equity Anticipation Securities (LEAPS) sometimes have contract lengths that measure in years. Extrinsic value could be a large piece of the premium of a LEAPS option.

Some traders will also use a bull call spread, in order to reduce the impact of time decay (and the loss of extrinsic value) on their options.

Recommended: A Beginner’s Guide to Options Trading

2. Implied Volatility

Implied volatility measures how much analysts expect an asset’s price to move during a set period. In general, higher implied volatility means more expensive options, due to higher extrinsic value. That’s because there is a greater chance a stock price could significantly move in the favor of the owner by expiration (or out of favor if the markets shift in the opposite direction). High volatility gives an out-of-the-money option holder more hope that their position will go in-the-money.

So, if implied volatility rises from 20% to 50%, for example, an option holder may benefit from higher extrinsic value (all other variables held constant). On the flip side, an out-of-the-money option on a stock with extremely low implied volatility may have a lower chance of ever turning in-the-money.

3. Others Factors

There is more than just the length of the contract and implied volatility that affect the premium of an option, however.

• Time decay: The time decay, or the rate at which time decreases an option’s value, can greatly impact the premium of near-the-money options, this is known as theta. Time decay works to the benefit of the option seller, also known as the writer.

• Interest rates: Even changes in interest rates, or rho, impact an option’s value. A higher risk-free interest rate pushes up call options’ extrinsic value higher, while put options have a negative correlation to interest rates.

• Dividends: A stock’s dividend will decrease the extrinsic value of its call options while increasing the extrinsic value of its put options.

• Delta: An option’s delta is the sensitivity between an option price and its underlying security. In general, the lower an option’s delta, the less likely it is to be in-the-money, meaning it likely has higher extrinsic value. Options with higher delta are in-the-money and may have more intrinsic value.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Extrinsic Value Example

Let’s say a trader bought a call option through their brokerage account on shares of XYZ stock. The premium paid is $10 and the underlying stock price is $100. The strike price is $110 with an expiration date in three months. Also assume there is a company earnings report due out in the next month.

Since the share price is below the call’s strike, the option is out-of-the-money. The option has no intrinsic value because it is out-of-the-money. Thus, the entire $10 option premium represents extrinsic value, or time value.

As expiration draws nearer, the time value declines, also known as time decay. A trader who takes the long position with a call option hopes the underlying asset appreciates by expiration.

An increase in volatility, perhaps due to the earnings report or another catalyst, might push the option’s price higher. Let’s assume the stock has risen to $120 per share following strong quarterly earnings results, and the call option trades at $11 immediately before expiration.

The call option’s intrinsic value is now $10, but the extrinsic value has declined to just $1, in this scenario, since there is little time to expiration and the earnings date volatility-driver has come and gone. In this case, the trader can sell the call for a small profit or they might choose to exercise the option.

Note that if the stock price had instead fallen below the strike price of $110, the call option would have expired worthless and the trader would have lost the premium they paid for the option.

Extrinsic vs Intrinsic Value

Extrinsic value reflects the length of the contract plus implied volatility, while intrinsic value is the difference between the price of the stock and the option’s strike when the option is in the money.

Extrinsic Value Factors (Call Option)	Intrinsic Value Factor (Call Option)
Length of Contract	Stock Price Minus Strike Price
Implied Volatility

Extrinsic Value and Options: Calls vs Puts

Both call options and put options can have extrinsic value.

Calls

Extrinsic value for call options can be high. Consider that a stock price has no upper limit, so call options have infinite potential extrinsic value. The more time until expiration and the greater the implied volatility, the more extrinsic value a call option will have.

Puts

Put options have a lower potential value since a stock price can only drop to zero. Thus, there is a limit to how much a put option can be worth, which is the difference between the strike price and zero. Out-of-the-money puts, when the stock price is above the strike, feature a premium entirely of extrinsic value.

The Takeaway

Understanding the fundamentals of intrinsic and extrinsic value is important for options traders. Although intrinsic value is a somewhat simple calculation, extrinsic value takes a few more factors into consideration — specifically time and volatility of the underlying asset. The more time until the contract expires, and the more a share price can fluctuate, the greater an option’s extrinsic value.

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FAQ

Which options have the most extrinsic value?

At-the-money options typically have the most extrinsic value since their price is closest to the strike price, thus being most sensitive to changes in time and volatility.

Can an option’s extrinsic value be negative?

No. Extrinsic value represents the portion of an option’s price beyond its intrinsic value, so it can never be less than zero. If an option’s market price is lower than its intrinsic value, it can only be as low as zero.

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SOIN-Q324-066

Roth TSP vs. Roth IRA: How They Compare

What Are Roth Thrift Savings Plans (TSP)?

What Are Roth IRAs?

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Similarities Between Roth TSP vs. Roth IRA

Differences Between Roth TSP vs. Roth IRA

Roth TSP vs. Roth IRA: The Pros

Roth TSP vs. Roth IRA: The Cons

Roth TSP vs. Roth IRA: Which Is Better for Your Retirement Goals?

The Takeaway

FAQ

Should I max out my TSP or Roth IRA?

Is a Roth IRA better for retirement or a Roth TSP?

Does a Roth TSP reduce taxable income?

Are You Asking Yourself: Are 401(k)s Worth It Anymore?

How 401(k) Plans Work

401(k) Matching Explained

Pros and Cons of 401(k)s

Pros:

Cons:

401(k) vs Savings Account

Compound Interest vs Simple Interest

401(k)s vs IRAs

Is a 401(k) Right for You?

The Takeaway

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How To Invest in Publicly Traded Sports Teams

Understanding Sports Team Ownership Structures

What Is a Publicly Traded Sports Team?

Current Publicly Traded Teams

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Strategies for Investing in Sports Franchises

Risks and Challenges in Sports Team Investing

The Takeaway

FAQ

Which sports leagues have publicly traded teams?

Can I invest in international sports teams?

What factors should I consider before investing in a sports team?

What Are Real Assets? Understanding Tangible Investments

Defining Real Assets

Characteristics of Real Assets

Real Assets vs. Financial Assets

Alternative investments, now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

Types of Real Assets

Real Estate

Commodities

Infrastructure

Precious Metals

Benefits and Risks of Investing in Real Assets

Inflation Hedge

Portfolio Diversification

Potential for Steady Income

Liquidity Concerns

Market Volatility

Incorporating Real Assets into Your Investment Strategy

Asset Allocation

Direct vs. Indirect Investment Methods

REITs and ETFs

The Takeaway

FAQ

How do real assets perform during economic downturns?

What percentage of a portfolio should be in real assets?

Are real assets suitable for all types of investors?

What Is Extrinsic Value?

What Is Extrinsic Value?

Understanding Intrinsic and Extrinsic Value

How Extrinsic Value Works

Factors that Affect Extrinsic Value

1. Length of Contract

2. Implied Volatility

3. Others Factors

Extrinsic Value Example

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