Jan
28
2025
Opening a Brokerage Account for Your Child

Opening a Brokerage Account for Your Child

By | Family Finances, invest, Investing | Comments Off on Opening a Brokerage Account for Your Child

Brokerage accounts for kids are generally custodial accounts, with the parent or guardian managing the assets until the child reaches adulthood. Only the parent or guardian can open the brokerage account, even when the account bears the child’s name.

When the child reaches maturity — the legal age varies by state — they would take possession of the account. Overall, the process for how to open a brokerage account for a child is fairly straightforward. But there are things to be aware of.

🛈 SoFi Invest offers brokerage accounts to eligible members aged 18-plus, but it does not currently provide brokerage accounts to minors.

Key Points

•   Opening a brokerage account for a child involves selecting a brokerage that offers investment accounts for kids.

•   A guardian account allows investing on behalf of the child, with assets and tax liability belonging to the guardian.

•   A custodial UGMA or UTMA account holds assets for the child, with tax liability assessed at the child’s rate.

•   Investments in a child’s brokerage account can include stocks, bonds, mutual funds, and ETFs.

•   Involving the child in investing provides educational benefits, such as learning about markets, compound interest, and financial management.

Why Open a Brokerage Account?

A brokerage account is an investment account that operates through a brokerage firm. When you open a brokerage account, you deposit money into it, then use that money to buy securities. You can also sell securities that you’ve purchased. Depending on where you open a brokerage account, you may be able to buy stocks or other assets, such as:

•   Stocks

•   Mutual funds

•   Exchange-traded funds (ETFs)

•   Real estate investment trusts (REITs)

•   Bonds

•   Foreign currencies

•   Options

•   Futures

•   Cryptocurrency

Some brokers may allow you to trade on margin, meaning you can borrow money to execute trades. (Trading on margin and investing in certain asset categories may not be available for custodial accounts, however.)

You may be charged commissions or other fees to execute trades, but there are no limits on how much you can invest. That, in a nutshell, is how a brokerage account works.

Note, too, that a brokerage account is not the same thing as a retirement account. When you sell assets at a profit in a brokerage account, you may have taxes due or other tax impacts. You can buy and sell investments at your own pace, withdrawing money as needed.

With an Individual Retirement Account (IRA), you can invest in many types of assets, but certain items (such as collectibles) are disallowed in most accounts. IRA holders must wait until age 59 ½ to withdraw funds without any tax penalty (some exceptions apply, such as disability). Early withdrawals from a traditional IRA are taxed at your ordinary income tax rate, plus you’ll generally incur a 10% additional penalty. When deciding on a taxable brokerage account vs. IRA, choose the one that furthers your financial goals.

Recommended: Popular Types of Retirement Plans

Can Children Have Brokerage Accounts?

Children can have brokerage accounts, but they are not allowed access to the account’s money or assets. In almost all cases, such brokerage accounts are custodial, meaning the parent is responsible for managing the money until their child reaches adulthood.

Numerous discount brokers offer investment accounts for kids online. Some brokers have also introduced hybrid products for teens that allow them to save money, spend, and invest all in one place with the supervision of their parents.

If you’re looking for a hands-on way to teach kids about how markets work, a brokerage account could be a great idea. But if you want to teach them about money more gradually, a kids’ savings account might suffice for now.

It’s worth noting that there are benefits to investing early, too. The longer money is invested, the more opportunities it has to generate gains or value over time. That’s something parents may want to keep in mind when considering whether to open a brokerage account for a child.


Can a Child Have a Brokerage Account in Their Name?

A custodial account is technically in the child’s name, even though it’s controlled by the parent. So yes, a child can have a brokerage account in their name. Of course, they themselves can’t open the account without the help of a parent.

How to Open a Brokerage Account for a Child

Once you know how to open a brokerage account for your child, doing so isn’t too difficult.

The first step is choosing a brokerage that offers investment accounts for kids. Factors to consider in making your decision could include the range of investment options, how easy it is to access the account, and the costs or fees.

The next step is deciding which type of account to open. There are three possibilities to choose from when opening a brokerage account for a child.

Opening a Guardian Account

A guardian account allows you to invest money on behalf of your child. All of the money in the account technically belongs to you, as does any tax liability associated with the sale of assets in the account. You (but not the child) can withdraw money from the account for any reason. Once the child turns 18, you can decide whether to hand the money in the account over to them.

Opening a Custodial Account

With a custodial account, the parent opens the account but the assets in it belong to the child. You can direct investment decisions while the child is a minor, and any tax liability is assessed at their rate. Withdrawals are allowed only for expenses benefitting the child. Once the child reaches adulthood, they automatically become the owner of the account.

Opening an IRA Account

If your child has earned income from a part-time or summer job (even babysitting or lawn mowing) for at least a year, you might consider opening a custodial IRA for them. With a custodial IRA, you direct the investments until the child turns 18 (or 21 in some states). At that point, the account becomes their property.

One key distinction: The IRA has annual contribution limits, but other types of custodial accounts do not. Each year the maximum contribution is the amount equal to the child’s total earnings; in 2025 the amount is capped at $7,000. (If a child earns no money in a given year, the maximum contribution is $0.)

The Roth IRA, which holds post-tax dollars, may be a better choice for a kid than a traditional one funded by pre-tax dollars. The benefits of the traditional IRA — such as lowering your taxable income during your earning years — won’t help a young person very much.

Recommended: Roth vs Traditional IRA: Main Differences

Types of Brokerage Accounts a Parent Can Open for a Child

When opening a custodial account for a child at a brokerage, you have two options: a Uniform Transfers to Minors Act (UTMA) account and a Uniform Gifts to Minors Act (UGMA) account. Most states recognize both account types. With either one, you control the account until the child reaches the age of termination, which in some places may be later than the age of majority.

UTMA Account

UTMA accounts allow minors to hold securities without the creation of a separate trust. This type of account permits you to hold many types of assets, including:

•   Stocks

•   Bonds

•   Mutual funds

•   Real estate

•   Fine art

•   Precious metals

•   Patents

•   Royalties

•   Shares in a family limited partnership

The IRS taxes earnings in a UTMA at the child’s tax rate, up to a limit of $2,600 for 2025. Any gifts made to a UTMA on behalf of your child are irrevocable, meaning once you put the money in it becomes theirs; you can’t take it back out again. Any withdrawals must be used to pay expenses for the child, such as school tuition.

UGMA Account

A UGMA account is similar to a UTMA account in terms of tax treatment and who actually owns the assets in the account. The main difference between a UGMA and a UTMA account lies in what you can invest in. For a UGMA account, those are typically limited to stocks, bonds, and mutual funds. So if you’re choosing between a UTMA and a UGMA, it’s important to consider which types of assets you’d like to keep in the account.

Investing for Kids

A brokerage account can be a useful teaching tool for helping kids to grasp such concepts as:

•   How investing works

•   Compound returns and why compounding matters

•   The importance and value of saving money

Tips for Choosing the Right Broker

If you’re navigating how to open a brokerage account for your child for the first time, you may not be sure what an investment broker does or how to decide where to keep the account. When you’re seeking out the right broker, here are a few key questions you could ask as you narrow down the options:

•   Does this brokerage firm offer investment accounts for kids?

•   What types of brokerage accounts for kids are available?

•   Is there a minimum initial deposit to open the account?

•   What are the fees?

•   Which investments will I be able to trade in the account?

If you have an existing brokerage account for your child, consider whether moving it to a different broker makes sense. For example, you may want to move if you believe your current brokerage is charging too much in fees. If you do decide to switch, it’s easy to request a brokerage account transfer online.

The Takeaway

A brokerage account for your child would probably take the form of a guardian account or a custodial UGMA or UTMA account. Knowing what types of assets you intend to deposit may help you determine what kind of account works best for you.

Hybrid save-and-spend accounts designed for teens can help them learn about investing while under adult supervision. In all of these cases, the parent oversees the accounts until the child reaches adulthood.

FAQ

Can I open a brokerage account in my child’s name?

Yes, you can open a custodial brokerage account for your child in their name. Transfers to a custodial account are irrevocable, but you’ll have control of the account and make the investment decisions until the child reaches adulthood. In the meantime, the assets in the account will belong to the child.

Can I open a brokerage account for a family member?

Generally, you can open a brokerage account for a family member only if that person is your minor child. You are allowed to establish a 529 college savings plan on behalf of other family members, including siblings, nieces, nephews, or cousins.

Can I buy stocks for my child?

Yes, you can purchase stocks for your child. You can make the purchases through a custodial account. There are also financial apps that allow you to purchase full or fractional shares of stock for your child.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


Photo credit: iStock/Morsa Images

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q125-002

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Jan
28
2025
Guide to Speculative Investments

Guide to Speculative Investments

By | Growing Wealth, invest, Investing | Comments Off on Guide to Speculative Investments

A speculative investment is when an investor hopes to profit from a rapid change in the value of an asset, often one that’s considered non-productive. Many speculative investments are short-term, and they can be made in markets such as foreign currencies, collectives, fine art, and margin trading of stocks.

Typically, speculative investments are high-risk positions in assets with frequent price fluctuations, providing both the opportunity to profit and the risk of loss.

Key Points

•   Speculative investments aim for rapid value growth, often short-term, with high risk.

•   Examples include penny stocks or cryptocurrencies, which are popular among active traders.

•   Speculation differs from gambling by involving analysis and taking an asset’s potential value into account.

•   Margin trading, which involves borrowed funds and interest payments, amplifies investors’ potential returns.

•   Options trading provides the right to trade assets, useful for hedging or speculating, with careful risk assessment.

What Are Speculative Investments?

In general, if an investor is investing in an asset with the belief that its value will increase within a short amount of time, and they will be able to sell it for more than they bought it for, it likely qualifies as a speculative investment.

The types of investments that fall into the speculative investing category are often referred to as non-productive assets, because they don’t produce any income while they are held by an investor, such as dividends or rental income.

The way investors make money on them is by speculating that someone else will buy the asset for more than they did at some point in the future. There is some underlying agreement in the markets that an asset has value despite its lack of production. For instance, gold and precious metals are considered valuable, and investors buy them predicting that their value will increase.

Conversely, non-speculative investments tend to be part of long-term investment strategies. These are assets that may increase in value over a longer period of time, and may also provide income while the investor owns them.

Examples of non-speculative investments may include real estate and owning part of a business, but even real estate and stock investments can be considered speculative in certain cases.

How Does Speculation Work?

As noted above, speculation is when investors anticipate that their purchase will go up in value and they will be able to sell it for a profit. Investors would be unlikely to take part in speculative investments unless there was a significant chance that they might see a significant gain, despite the risk exposure.

Investors typically consider many factors, such as a news event, election cycle, interest rate changes, or a new regulation. Any of these could spark a price change in a speculative asset.

If an investor has several speculative assets in a portfolio, they might hope that just one or two of them earn a huge profit, making up for any losses in other areas. Speculative investing poses a high risk for novice investors.

Speculation looks different depending on the market. For instance, speculation in the real estate market might look like an investor buying multiple properties with small down payments with a plan to quickly resell them for a profit.

Speculation can also look like betting against the market trend through short selling, a strategy where investors bet that a particular stock’s future price will be lower than its current price. It’s the opposite of going long a stock, where an investor buys shares with the expectation that the stock price will increase.

4 Examples of Speculative Investments

Below are four examples of common speculative investments.

1. Foreign Currencies

One type of speculative investment is foreign currencies (forex). The forex market is the largest in the world. Trillions of dollars are transacted each day in the global foreign currency markets.

Forex trading involves buying and selling currency pairs such as EUR/USD. As the value of one currency goes down, the other goes up. Traders speculate on which way the relationship will go and hope to profit off the change in value.

Forex markets are open 24 hours a day, and investors can execute trades as quickly as seconds or minutes, making it a popular forum for speculation.

2. Precious Metals

Precious metals such as gold, silver, copper, and others are traded as hard commodities (versus soft commodities, like agricultural products). These are speculative investments that fluctuate in price constantly based on a variety of factors, including inflation, supply and demand for products that require these metals, and other trends.

Thus, investing in precious metals can be risky because they’re susceptible to volatility based on factors that can be hard to anticipate. Even a relatively stable commodity such as gold can be affected by rising or falling interest rates, or changes in the value of the U.S. dollar.

In the case of any commodity, it’s important to remember that you’re often dealing with tangible, raw materials that typically don’t behave the way other investments or markets tend to.

3. Cryptocurrencies

Cryptocurrencies are considered speculative since they fluctuate widely in price and come with high risk and potential high returns. Because the crypto markets are relatively young, there isn’t a lot of history to the market to use for predictions, and no way of knowing whether a crypto like Bitcoin (or Ethereum, Litecoin, Dogecoin).

4. Bond Market

Asset prices in the bond market fluctuate widely depending on interest rate changes and political and economic conditions. The prices in the U.S. Treasuries market are often strongly influenced by speculation.

Bonds are rated by agencies such as Moody’s and Standard and Poor’s. Highly rated bonds are not considered speculative and are referred to as “investment grade,” while lower-rated bonds are considered speculative and referred to as “junk bonds.” Since junk bonds are riskier, they pay out higher interest rates to investors.

Pros and Cons of Speculative Investment

Speculative investments come with both upsides and downsides. The choice of whether to make speculative investments depends on an investor’s risk tolerance, knowledge about markets, and short- and long-term investment goals.

Pros

Some of the pros of speculative investments include:

•   Potential for high returns

Cons

Downsides of speculative investments include:

•   Don’t provide income while they are held. (With some exceptions, such as cryptocurrencies that earn interest through staking)

•   Risk of losing one’s entire investment

•   Requires active trading and time commitment

Speculative Investments vs Traditional Investments

Below are some of the key differences between speculative investing and traditional investing:

Speculative Investments

 Traditional Investments
Usually short-term Long-term
High risk and active Low- to medium-risk and generally more passive
Includes alternative and niche assets such as art, forex, and crypto Generally includes traditional assets like stocks, bonds, and index funds

Recommended: What Are Alternative Investments?

Speculative Investments vs Gambling

The difference between speculation and gambling is that speculation involves taking a calculated risk on investing in an asset with an uncertain outcome but an expected return from the asset increasing in value. Gambling involves betting money with an uncertain outcome and the hope of winning more money.

Gamblers could be said to possess a more risk neutral outlook, in that they might disregard even high levels of risk for a potential reward. Speculative investors calculate the risk vs. the reward.

Other Higher-Risk Investments

In addition to the speculative investments highlighted above, the following are higher-risk types of investments that can be considered speculative.

Margin Trading

Margin trading involves an investor borrowing money from a broker in order to make a trade rather than using a cash account to buy securities. Usually investors can only borrow up to 50% of the purchase amount of securities they want to buy. For example, if an investor with $3,000 in their account, can borrow $3,000, allowing them to purchase $6,000 worth of securities.

Typically, less experienced, risk-averse investors choose cash accounts vs. margin accounts because of the risks involved with leveraged positions. By using margin, the investor can place bigger bets. But if the trade doesn’t go in their favor they could lose both their own capital and the money they borrowed.

Margin accounts also charge interest, so any securities purchased need to increase above the interest amount for the investor to see a profit. Different brokers charge different interest rates, so it’s a good idea for investors to compare before choosing an account.

Options Trading

With options trading, investors purchase an option that gives them the ability to buy a stock in the future at a particular price if they choose to. In other words, options give holders the right, but not the obligation, to buy or sell an asset like shares of a company stock.

Options holders can buy or sell by a certain date at a set price, while sellers have to deliver the underlying asset. Investors can use options if they think an asset’s price will go up or down, or to offset risk elsewhere in their portfolio.

Options are considered financial derivatives because they’re tied to an underlying asset.

Penny Stocks

Penny stocks are higher-risk stocks that have a low dollar value. Investors can buy several shares of them since they are so inexpensive, with the hope that they increase a lot in value over a short period of time. However, an event such as a big news story could trigger a change in stock value and provide the chance for a trader to cash out.

The Takeaway

Speculative investments are risky, but can provide significant returns and can be a good way to diversify one’s portfolio. They are generally best for active traders looking for short-term investment opportunities, who can tolerate higher levels of volatility and risk.

Speculative investments are often considered non-productive assets, such as foreign and cryptocurrencies or commodities like gold or silver. But some stocks and bonds can be speculative too. Speculation is mainly the opportunity to profit from short-term price movements.

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

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

FAQ

What are some examples of some speculative investments?

Examples of speculative investments include penny stocks, crypto, precious metals, and forex. Many speculative investments fall into the category of non-productive assets, and they’re usually susceptible to volatility, giving investors the opportunity to profit from short-term price movements.

Is speculative investing the same as gambling?

No, gambling involves betting money with the hope that you will win more money, while speculative investing involves buying an asset with the expectation that you will be able to sell it for a profit.

Is Bitcoin considered a speculative investment?

Bitcoin and cryptocurrencies are considered speculative investments because their prices fluctuate widely and are difficult to predict. They are risky and come with the potential for significant gains or losses.

Photo credit: iStock/Delmaine Donson

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q125-005

Read more
Jan
27
2025

Self-Directed IRA for Real Estate Investing Explained

By | Growing Wealth, invest, Investing | Comments Off on Self-Directed IRA for Real Estate Investing Explained

A self-directed IRA (SIDRA) allows you to save money for retirement on a tax-advantaged basis while enjoying access to a broader range of investments. Opening a self-directed IRA for real estate investing is an opportunity to diversify your portfolio with an alternative asset class while potentially generating higher returns.

Using a self-directed IRA to invest in real estate offers the added benefit of either tax-deferred growth or tax-free withdrawals in retirement, depending on whether it’s a traditional or Roth IRA. Before making a move, however, it’s important to know how they work. The IRS imposes self-directed IRA real estate rules that investors must follow to reap tax benefits.

What Is a Self-Directed IRA?

Individual Retirement Accounts (IRAs) allow you to set aside money for retirement with built-in tax benefits. These retirement accounts come in two basic forms: traditional and Roth.

Traditional IRAs allow for tax-deductible contributions, while Roth IRAs let you make qualified distributions tax-free.

When you open a traditional or Roth IRA at a brokerage you might be able to invest in mutual funds, exchange-traded funds, or bonds. A self-directed IRA allows you to fund your retirement goals with alternative investments — including real estate.

You can do the same thing with a self-directed 401(k).

Self-directed IRAs have the same annual contribution limits as other IRAs. For both 2024 and 2025, you can contribute up to:

•   $7,000 if you’re under 50 years of age

•   $8,000 if you’re 50 or older

Contributions and withdrawals are subject to the same tax treatment as other traditional or Roth IRAs. The biggest difference between a self-directed IRA and other IRAs is that while a custodian holds your account, you manage your investments directly.

Get a 1% IRA match on rollovers and contributions.

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

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

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with an IRA account. With a traditional IRA, the money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

How Self-Directed IRAs for Real Estate Investing Work

Using a self-directed IRA to invest in real estate allows investors to invest in various funds or securities that, themselves, invest in property or real estate. Those securities may be real estate investment trusts (REITs), mutual funds, or ETFs focused. Investors with self-directed IRAs can, then, direct retirement account funds toward those securities.

Other types of real estate investments can include single-family homes, multi-family homes, apartment buildings, or commercial properties — actual, physical property. For investors who do want to buy actual property using an IRA, the process generally involves buying the property with cash (which may require them to liquidate other investments first), and then taking ownership, which would all transact through the IRA itself. It’s not necessarily easy and can be complicated, but that’s the gist of it.

With that in mind, the types of investments you can make within an IRA will depend on your goals.

For instance, if you’re interested in generating cash flow you might choose to purchase one or more rental properties using a self-directed IRA for real estate. If earning interest or dividends is the goal, then you might lean toward mortgage notes and REIT investing instead.

The most important thing to know is that if you use a retirement account to invest in real estate, there are some specific rules you need to know. For instance, the IRS says that you cannot:

•   Use your retirement account to purchase property you already own.

•   Use your retirement account to purchase property owned by anyone who is your spouse, family member, beneficiary, or fiduciary.

•   Purchase vacation homes or office space for yourself using retirement account funds.

•   Do work, including repairs or improvements, on properties you buy with your retirement account yourself.

•   Pay property expenses, such as maintenance or property management fees, from personal funds; you must use your self-directed IRA to do so.

•   Pocket any rental income, dividends, or interest generated by your property investments; all income must go to the IRA.

Violating any of these rules could cause you to lose your tax-advantaged status. Talking to a financial advisor can help you make sense of the rules.

Pros and Cons of Real Estate Investing Through an IRA

Using a self-directed IRA for real estate investing can be appealing if you’re ready to do more with your portfolio. Real estate offers diversification benefits as well as possible inflationary protection, as well as the potential for consistent passive income.

However, it’s important to weigh the potential downsides that go along with using a self-directed IRA to buy real estate.

Pros

 Cons

•   Self-directed IRAs for real estate allow you to diversify outside the confines of traditional stocks, bonds, and mutual funds.

•   You can establish a self-directed IRA as a traditional or Roth account, depending on the type of tax benefits you prefer.

•   Real estate returns can surpass those of stocks or bonds and earnings can grow tax-deferred or be withdrawn tax-free in retirement, in some cases.

•   A self-directed IRA allows you to choose which investments to make, based on your risk tolerance, goals, and timeline.

•   The responsibility for due diligence falls on your shoulders, which could put you at risk of making an ill-informed investment.

•   Failing to observe self-directed IRA rules could cost you any tax benefits you would otherwise enjoy with an IRA.

•   The real estate market can be unpredictable and investment returns are not guaranteed — they’re higher-risk investments, typically. Early withdrawals may be subject to taxes and penalties, and there may be higher associated fees.

•   Self-directed IRAs used for real estate investing are often a target of fraudulent activity, which could cause you to lose money on investments.

Using a self-directed IRA for real estate or any type of alternative investment may involve more risk because you’re in control of choosing and managing investments. For that reason, this type of account is better suited for experienced investors who are knowledgeable about investment properties, rather than beginners.

Real Estate IRAs vs Self-directed IRAs For Real Estate Investing

A real estate IRA is another way of referring to a self-directed IRA that’s used for real estate investment. The terms may be used interchangeably and they both serve the same purpose when describing what the IRA is used for.

Again, the main difference is how investments are selected and managed. When you open a traditional or Roth IRA at a brokerage, the custodian decides which range of investments to offer. With a self-directed IRA, you decide what to invest in, whether that means investing in real estate or a different type of alternative investment.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Opening an IRA With SoFi

Opening a self-directed IRA is an option for many people, and the sooner you start saving for retirement, the more time your money has to grow. And, as discussed, a self-directed IRA allows you to save money for retirement on a tax-advantaged basis while enjoying access to a broader range of investments, including real estate.

Once again, using a self-directed IRA to invest in real estate offers the added benefit of tax-deferred growth and tax-free withdrawals in retirement. There are pros and cons, and rules to abide by, but these types of accounts are another option for investors.

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).

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

FAQ

Can you use a self-directed IRA for real estate?

You can use a self-directed IRA to invest in real estate-related or -focused securities and other types of alternative investments. Before opening a self-directed IRA to invest in real estate, it’s important to shop around to find the right custodian. It’s also wise to familiarize yourself with the IRS self-directed IRA real estate rules.

What are the disadvantages of holding real estate in an IRA?

The primary disadvantage of holding real estate in an IRA is that there are numerous rules you’ll need to be aware of to avoid losing your tax-advantaged status. Aside from that, real estate is less liquid than other assets which could make it difficult to exit an investment if you’d like to remove it from your IRA portfolio.

What are you not allowed to put into a self-directed IRA?

The IRS doesn’t allow you to hold collectibles in a self-directed IRA. Things you would not be able to hold in a self-directed IRA include fine art, antiques, certain precious metals, fine wines, or other types of alcohol, gems, and coins.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


Photo credit: iStock/SrdjanPav

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.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.


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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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

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

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