A personal loan can be a helpful financial tool when someone needs to borrow money to pay for things like home repairs, a wedding, or medical expenses, for example. The principal amount of a loan refers to how much money is borrowed and has to be paid back, aside from interest.
Keep reading for more insight into what the principal of a loan is and how it affects repayment.
Loan Principal Meaning
What is the principal of a loan? When someone takes out a loan, they are borrowing an amount of money, which is called “principal.” The principal on a loan represents the amount of money they borrowed and agreed to pay back. The interest on the loan is what they’ll pay in exchange for borrowing that money.
Does a Personal Loan Have a Principal Amount?
Yes, a personal loan does come with a principal amount. Whenever a borrower makes a personal loan payment, the loan’s principal decreases incrementally until it is fully paid off.
The loan principal is different from interest. The principal represents the amount of money that was borrowed and must be paid back. The lender will charge interest in exchange for lending the borrower money. Payments made by the borrower are applied to both the principal and interest.
Along with the interest rate, a lender may also disclose the annual percentage rate (APR) charged on the loan, which includes any fees the lender might charge, such as an origination fee, and the interest. As the borrower makes more payments and makes progress paying off their loan principal amount, less of their payments will go towards interest and more will apply to the principal balance. This principal is referred to as amortization.
Loan Principal and Taxes
Personal loans aren’t considered to be a form of income so the amount borrowed is not subject to taxes like investment earnings or wages are. The borrower won’t be required to report a personal loan on their income tax return, no matter who lent the money to them (bank, credit card, peer-to-peer lender, etc.).
As tempting as it can be to pay off a loan as quickly as possible to save money on interest payments, some lenders charge borrowers a prepayment penalty if they pay their personal loan off early. Not all charge a prepayment penalty. When shopping for a personal loan, it’s important to inquire about extra fees like this to have a true idea of what borrowing that money may cost.
The borrower’s personal loan agreement will state if they will need to pay a prepayment penalty for paying off their loan early. If a borrower finds that they are subject to a prepayment penalty, it can help to calculate if paying that fee would cost less than continuing to pay interest for the personal loan’s originally planned term.
How Can You Pay Down the Loan Principal Faster?
It’s understandable why some borrowers may want to pay down their loan principal faster than originally planned as it can save the borrower money on interest and lighten their monthly budget. Here are a few ways borrowers can pay down their loan principal faster.
Interest Payments
When a borrower pays down the principal on a loan, they reduce how much interest they need to pay. That means that each month as they make a new payment, they reduce their principal and the interest they’ll owe in the future. As previously noted, paying down the principal faster can help the borrower pay less interest.
Personal loan lenders allow borrowers to make extra payments or to make a larger monthly payment than planned. When doing this, it’s important that borrowers confirm that their extra payments are going towards the principal balance and not the interest. That way, their extra payments work towards paying down the principal and lowering the amount of interest they owe.
Shorten Loan Term
Refinancing a loan and choosing a shorter loan time can also make it easier to pay down a personal loan faster. Not to mention, if the borrower has a better credit score than when they applied for the original personal loan, they may be able to qualify for a lower interest rate, which can make it easier to pay down their debt faster. Having a shorter loan term typically increases the monthly payment amount but can result in paying less interest over the life of the loan and paying off the debt faster.
Cheaper Payments
Refinancing to a new loan with a lower interest rate may reduce monthly loan payments, depending on the term of the new loan. With lower monthly scheduled payments, they may opt to pay extra toward the principal and possibly pay the loan in full before the end of the term.
Other Important Information on the Personal Loan Agreement
A personal loan agreement includes a lot of helpful information about the loan, such as the principal amount and how long the borrower has to pay their debt. The more information the borrower has about the loan, the more strategically they can plan to pay it off. Here’s a closer look at the information typically included in a personal loan agreement.
Loan Amount
An important thing to note on a personal loan agreement is the total amount the borrower is responsible for repaying.
Loan Maturity Date
A personal loan’s maturity date is the day the final loan payment is due.
The monthly loan payment amount will be listed on the personal loan agreement. Knowing how much they need to pay each month can make it easier for the borrower to budget accordingly.
The Takeaway
Understanding how a personal loan works can make it easier to pay one-off. To recap: What is the principal amount of a loan? The principal on a loan is the amount the consumer borrowed and needs to pay back.
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FAQ
What is the principal balance of a loan?
The principal balance of a loan is the amount originally borrowed that the borrower agrees to pay back.
Does the principal of the loan change?
The original loan principal does not change. The principal amount included in each monthly payment will change as the amortization period progresses. On an amortized loan, less principal than interest is paid in each monthly payment at the beginning of the loan and incrementally increases over the life of the loan.
How does loan principal work?
The loan principal represents the amount borrowed. Usually, this is done in monthly payments until the loan principal is fully repaid.
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Market overhang is a market phenomenon whereby investors hold off trading a stock that’s seen a drop in price, because the expectation is the price will drop even further. A market or stock overhang can be precipitated by the awareness that a large block of shares — say, from an institutional investor — is about to hit the market, potentially driving a stock’s price down.
But it can result from other factors as well. Although the event has not happened, investors may hesitate to sell or buy shares in anticipation of price drop — and this can further depress the stock price. While there is also a business use of the term “overhang,” for investors, it may be useful to focus on how market overhang works in finance, specifically.
Market Overhang Definition
In its broadest use, an overhang describes a somewhat artificial market condition brought on by an anticipated shift in supply and demand (aka the price of a stock). Market overhang has a couple of uses in the business and finance worlds, and in an IPO market as well.
What Is an Overhang in Business?
An overhang in a business context can refer to the practice whereby a company, typically an industry leader, delays the release of a new product in order to stoke greater consumer demand for that product.
A familiar example might be the release of a new technology product or video game. The anticipation of the new release may cause consumers to avoid buying other products as they wait for the arrival of the new one. The overhang may result in lower purchases for existing products — and higher purchases of the newly released product. While this practice can be considered manipulative, it’s not uncommon.
What Is an Overhang in Finance?
More commonly: An overhang in finance is used to describe a dynamic that’s specific to how investors’ expectation about supply and demand can impact a company’s share price.
A market overhang is when a stock’s price declines because investors expect a further price drop on the horizon. Thus, some shareholders may hesitate to sell their shares, because that could further drive down the share price. Other investors may also hesitate to buy shares because of the anticipated price drop.
The business use of the term and the finance use describe different situations, but the common element is how investors’ anticipation of a future event can impact a company’s revenues or share price.
Needless to say, a market overhang can cast a shadow over a company’s performance, influencing share price, liquidity, and more, especially if the situation is prolonged. In many cases, though, market overhang is relatively short-lived and temporary. The difficulty for investors is knowing when the overhang, like bad weather, is finally going to pass. To that end, it helps to know some conditions that can cause a market overhang.
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How Market Overhang Is Created
There are a few conditions that can lead to a market overhang. Often these conditions can overlap.
A Stock Decline
The first is where a stock is already declining, perhaps owing to a change in key economic indicators or market conditions, and there is a buildup of selling pressure as investors hesitate to let go of their shares in a down market. This type of market overhang may be resolved once there are signs of price stability (even if it’s at a lower level).
The Role of Institutional Investors
Another type of stock overhang can be created by institutional investors — or companies that manage investments on behalf of clients or members of a firm. Institutional investors tend to have a larger stake in a particular stock compared with individual investors. This means that when the institutional investor plans to sell a large portion of their shares, a market overhang could kick in when investors become aware of this possible sale.
The anticipation of a large block of shares entering the market could drive prices down, and thus investors might hold off trading this particular stock — affecting its price, even before the institutional investor has made a move.
The stock overhang might be worse if it occurs during a price decline. In that case, investors may see the decline in share price, become aware that a large investor may sell a block of shares (which could further depress the price), become even more wary of buying or selling the company’s shares.
IPOs and Market Overhang
A third way that market overhang may occur is after an initial public offering (IPO). An IPO market can be a hot market, after all, and a company may get significant press coverage as its IPO approaches, which can drive up the stock price.
But if the IPO isn’t a big hit, and the share price isn’t what investors hoped (in IPO terms), there might be a bit of an overhang as investors wait for the lock-up period to end. The lock-up period is when company insiders can sell their shares, potentially flooding the market and further lowering the price.
Understanding the Effects of Market Overhang
Market overhang can last for a few weeks or even months — sometimes longer. The chief impact of a market overhang is that it can artificially depress the price of a stock, and if the market overhang is prolonged, that can have a negative impact on company performance.
As noted above, a market overhang typically ends when a stock price stabilizes. Unfortunately that often occurs at a lower price point than before the shares began to decline.
Example of Market Overhang
While some consider the market overhang phenomenon more anecdotal than technical, it’s something to watch out for. It could present an opportunity. And it doesn’t require a complicated, technical stock analysis to understand.
For example, let’s say a large tech company is trading at $300 a share. But there are reports that the company has been facing some headwinds, and it may undergo a rebranding and repositioning. In the face of this change and uncertainty, it’s natural that it might impact company performance and the share price might wobble a bit. But then, if enough investors are concerned about the company’s “new direction,” there could be a bigger shift in trading behavior that might further depress the share price in advance of the company pivot — creating an overhang.
While this isn’t ideal for current shareholders, a market overhang like this could be a “buy” opportunity for other investors. It depends on a number of factors, and it’s always important to understand market trends as well as company fundamentals. But it’s possible that some investors may view the company as a good prospect, despite a currently undervalued share price, and buy shares with the hope they might rise to their previous levels.
Why Market Overhang Matters
Market overhang is a valuable phenomenon for investors to be aware of, largely because it reflects many of the basic tenets of behavioral finance, which is the study of how emotions can impact financial choices. A market overhang could be viewed as the result of loss aversion and herd mentality — two well-documented behavioral patterns among investors.
Loss aversion is, as it sounds, the wish to avoid incurring losses. Herd mentality is, not surprisingly, the tendency for investors to behave as a group: buying or selling in waves. You can see how these two very human impulses — to protect oneself from losses, and to follow the herd — might create a market overhang.
The good news, though, is that investors are capricious and markets can be volatile, which means the market overhang will usually pass, and the stock will regain its normal momentum, whatever that may be. As an investor watching the market change, it’s up to you whether a stock overhang might present a buy opportunity or a sell opportunity — if you need to harvest some losses, for tax purposes.
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What Market Overhang Means for Shareholders
Market overhang affects different shareholders differently. Since institutional investors tend to be the ones who create market overhang, they also tend to have the upper hand on what it means for their investments.
Regular investors might worry that some of their shares are losing value. But with the ebbs and flows of the stock market, a price can rise and fall at various times throughout the year — even throughout a given day. Fluctuation is normal and this is part of the risk in investing in the stock market. Consider waiting out the storm to make an informed decision. There’s a chance the stock could rise to new highs and your investment will be worth even more.
The Takeaway
A market overhang is a type of trend that is considered more behavioral in nature, but it can be worthwhile for investors to keep it in mind when a stock isn’t performing as expected. In some cases, when investors anticipate an event that could drive down a stock’s price, they may hold off on trading that stock, further depressing the price and creating a market overhang. In that sense, a market overhang can become a self-fulfilling prophecy.
Institutional investors can create a market overhang, for example, when they contemplate selling a large portion of their holdings. This might spook other investors, who likewise decide not to trade their shares, creating a sort of temporary downward spiral in the share price. But because two common investor dynamics are at play here — the fear of losses, and the desire to comply with what other investors are doing — the emotions are usually temporary, and the market overhang passes.
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A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, and then withdraw the money tax free in retirement. A Roth IRA is different from a traditional IRA, which is a tax-deferred account: meaning, you contribute pre-tax dollars — but you owe tax on the money you withdraw later.
Many people wonder what a Roth IRA is because, although it’s similar to a traditional IRA, the two accounts have many features and restrictions that are distinct from each other. Roth accounts can be more complicated, but for many investors the promise of having tax-free income in retirement is a strong incentive for understanding how Roth IRAs work.
Key Points
• A Roth IRA is a retirement savings account that offers tax-free growth and tax-free withdrawals in retirement.
• Contributions to a Roth IRA are made with after-tax dollars, but qualified withdrawals are not subject to income tax.
• Roth IRAs have income limits for eligibility, and contribution limits that vary based on age and income.
• Unlike traditional IRAs, Roth IRAs do not require minimum distributions during the account holder’s lifetime.
• Roth IRAs can be a valuable tool for long-term retirement savings, especially for individuals who expect to be in a higher tax bracket in the future.
What Is a Roth IRA?
A Roth IRA is a retirement account for people who want to make after-tax contributions. The trade-off for paying taxes upfront is that when you retire, all of your withdrawals will be tax free, including the earnings and other gains in your account.
That said, because you’re making after-tax contributions, you can’t deduct Roth deposits from your income tax the way you can with a traditional IRA.
Understanding Contributions vs Earnings
An interesting wrinkle with a Roth IRA is that you can withdraw your contributions tax and penalty-free at any time. That’s because you’ve already paid tax on that money before initially depositing or investing it.
Withdrawing investment earnings on your money, however, is a different story. Those gains need to stay in the Roth for a minimum of five years before you can withdraw them tax free — or you could owe tax on the earnings as well as a 10% penalty.
It’s important to know how the IRS treats Roth funds so you can strategize about the timing around contributions, Roth conversions, as well as withdrawals.
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Roth IRA Eligibility
Technically, anyone can open an IRA account, as long as they have earned income (i.e. taxable income). The IRS has specific criteria about what qualifies as earned income. Income from a rental property isn’t considered earned income, nor is child support, so be sure to check.
There are no age restrictions for contributing to a Roth IRA. There are age restrictions when contributing to a traditional IRA, however.
How to Open a Roth IRA
Roth IRA Annual Contribution Limits
For 2024, the annual limit is $7,000, and $8,000 for those 50 and up. The extra $1,000 is called a catch-up provision, for those closer to retirement.
Remember that you can only contribute earned income. If you earn less than the contribution limit, you can only deposit up to the amount of money you made that year.
One exception is in the case of a spousal Roth IRA, where the working spouse can contribute to an IRA on behalf of a spouse who doesn’t have earned income.
Other Roth IRA Details
Since Roth IRAs are funded with after-tax income, contributions are not tax-deductible. One exception for low- and moderate-income individuals is something called the Saver’s Credit, which may give someone a partial tax credit for Roth contributions, assuming they meet certain income and other criteria.
Note that the deadline for IRA contributions is Tax Day of the following year. So for tax year 2023, the deadline for IRA contributions is April 15, 2024. But, if you file an extension, you cannot further postpone your IRA contribution until the extension date and have it apply to the prior year.
In addition, with a Roth there are important income restrictions to take into account. Higher-income individuals may not be able to contribute the full amount to a Roth IRA; some may not be eligible to contribute at all.
It’s important to know the rules and to make sure you don’t make an ineligible Roth contribution if your income is too high. Those funds would be subject to a 6% IRS penalty.
For 2023:
• You could contribute the full amount to a Roth as long as your modified adjusted gross income (MAGI) was less than $138,000 (for single filers) or less than $218,000 for those married, filing jointly.
• Single people who earned more than $138,000 but less than $153,000 could contribute a reduced amount.
• Married couples who earned between $218,000 and $228,000 could also contribute a reduced amount.
• For single and joint filers: in order to contribute the full amount to a Roth you must earn less than $146,000 or $230,000, respectively.
• Single filers earning more than $146,000 but less than $161,000 can contribute a reduced amount. (If your MAGI is over $161,000 you can’t contribute to a Roth.)
• Married couples who earn between $230,000 and $240,000 can contribute a reduced amount. (But if your MAGI is over $240,000 you’re not eligible.)
If your filing status is…
If your 2023 MAGI is…
If your 2024 MAGI is…
You may contribute:
Married filing jointly or qualifying widow(er)
Up to $218,000
Up to $230,000
For 2023 $6,500 or $7,500 for those 50 and up. For 2024 $7,000 or $8,000 for those 50 and up.
$218,000 to $228,000
$230,000 to $240,000
A reduced amount*
Over $228,000
Over $240,000
Cannot contribute
Single, head of household, or married filing separately (and you didn’t live with your spouse in the past year)
Up to $138,000
Up to $146,000
For 2023 $6,500 or $7,500 for those 50 and up. For 2024 $7,000 or $8,000 for those 50 and up.
From $138,000 to $153,000
From $146,000 to $161,000
Reduced amount
Over $153,000
Over $161,000
Cannot contribute
Married filing separately**
Less than $10,000
Less than $10,000
Reduced amount
Over $10,000
Over $10,000
Cannot contribute
*Consult IRS rules regarding reduced amounts. **You did live with your spouse at some point during the year.
Advantages of a Roth IRA
Depending on an individual’s income and circumstances, a Roth IRA has a number of advantages.
• No age restriction on contributions. With a traditional IRA, individuals must stop making contributions at age 72. A Roth IRA works differently: Account holders can make contributions at any age as long as they have earned income for the year.
*You can fund a Roth and a 401(k). Funding a 401(k) and a traditional IRA can be tricky, because they’re both tax-deferred accounts. But a Roth is after-tax, so you can contribute to a Roth and a 401(k) at the same time (and stick to the contribution limits for each account).
• Early withdrawal option. With a Roth IRA, an individual can generally withdraw money they’ve contributed at any time, without penalty (but not earnings on those deposits). In contrast, withdrawals from a traditional IRA before age 59 ½ may be subject to a 10% penalty.
• Qualified Roth withdrawals are tax-free. Investors who have had the Roth for at least five years, and are at least 59 ½, are eligible to take tax- and penalty-free withdrawals of contributions + earnings.
• No required minimum distributions (RMDs). Unlike IRAs, which require account holders to start withdrawing money after age 73, Roth IRAs do not have RMDs. That means an individual can withdraw the money as needed, without fear of triggering a penalty.
Disadvantages of a Roth IRA
Despite the appeal of being able to take tax-free withdrawals in retirement, or when you qualify, Roth IRAs have some disadvantages.
• No tax deduction for contributions. The primary disadvantage of a Roth IRA is that your contributions are not tax deductible, as they are with a traditional IRA and other tax-deferred accounts (e.g. a SEP IRA, 401(k), 403(b)).
• Higher earners often can’t contribute to a Roth. Affluent investors are generally excluded from Roth IRA accounts, unless they do what’s known as a backdoor Roth or a Roth conversion. (There are no income limits for converting a traditional IRA to a Roth, but you’ll have to pay taxes on the money that goes into the Roth — though you won’t face a penalty.)
• The 5-year rule applies. The 5-year rule can make withdrawals more complicated for investors who open a Roth later in life. If you open a Roth or do a Roth conversion at age 60, for example, you must wait five years to take qualified withdrawals of contributions and earnings, or face a penalty (some exceptions to this rule apply; see below).
Last, the downside with both a traditional or a Roth IRA is that the contribution limit is low. Other retirement accounts, including a SEP-IRA or 401(k), allow you to contribute far more in retirement savings. But, as noted above, you can combine saving in a 401(k) with saving in a Roth IRA as well.
Since you have already paid tax on the money you deposit, you’re able to withdraw contributions at any time, without paying taxes or a 10% early withdrawal penalty.
For example, if you’ve contributed $25,000 to a Roth over the last five years, and your investments have seen a 10% gain (or $2,500), you would have $27,500 in the account. But you could only withdraw up to $25,000 of your actual deposits.
Withdrawing any of the $2,500 in earnings would depend on your age and the 5-year rule.
The 5-Year Rule
What is the 5-year rule? You can withdraw Roth account earnings without owing tax or a penalty, as long as it has been at least five years since you first funded the account, and you are at least 59 ½. So if you start funding a Roth when you’re 60, you still have to wait five years to take qualified withdrawals.
The 5-year rule applies to everyone, no matter how old they are when they want to withdraw earnings from a Roth.
There are some exceptions that might enable you to avoid owing tax or a penalty.
Non-Qualified Withdrawals
Non-qualified withdrawals of earnings from a Roth IRA depends on your age and how long you’ve been funding the account.
• If you meet the 5-year rule, but you’re under 59 ½, you’ll owe taxes and a 10% penalty on any earnings you withdraw, except in certain cases.
• If you don’t meet the 5-year criteria, meaning you haven’t had the account for five years, and if you’re less than 59 ½ years old, in most cases you will also owe taxes and a 10% penalty.
There are some exceptions that might help you avoid paying a penalty, but you’d still owe tax on the early withdrawal of earnings.
Exceptions
Again, these restrictions apply to the earnings on your Roth contributions. (You can withdraw direct contributions themselves at any time, for any reason, tax and penalty free.)
You can take an early or non-qualified withdrawal prior to 59 ½ without paying a penalty or taxes, as long you’ve been actively making contributions for at least five years, in certain circumstances, including:
• For a first home. You can take out up to $10,000 to pay for buying, building, or rebuilding your first home.
• Disability. You can withdraw money if you qualify as disabled.
• Death. Your heirs or estate can withdraw money if you die.
Additionally you can avoid the penalty, although you still have to pay income tax on the earnings, if you withdraw earnings for:
• Medical expenses. Specifically, those that exceed 7.5% of your adjusted gross income.
• Medical insurance premiums. During a time in which you’re unemployed.
• Qualified higher education expenses.
Not only are the early withdrawal restrictions looser than with a traditional IRA, the post-retirement withdrawal restrictions are lesser, as well. Whereas account holders are required to start taking distribution of funds from their IRA after age 73, there is no pressure to take distribution from a Roth IRA at any age.
Roth IRA vs Traditional IRA
There are certain things a Roth IRA and a traditional IRA have in common, and several ways that they differ:
• It’s an effective retirement savings plan: Though the plans differ in the tax benefits they offer, both are a smart way to save money for retirement.
• Not an employer-sponsored plan: Individuals can open either type of IRA through a financial institution, and select their own investments or choose an automated portfolio.
• Maximum yearly contribution: For 2023, the annual limit is $6,500, with an additional $1,000 allowed in catch-up contributions for individuals over age 50. For 2024 it’s $7,000, and $8,000 if you’re 50 and older.
There are also a number of differences between a Roth and a traditional IRA:
• Roth IRA has income limits, but a traditional IRA does not.
• Roth IRA contributions are not tax deductible, but contributions you make to a traditional, tax-deferred IRA are tax deductible.
• Roth IRA has no RMDs. Individuals can withdraw money when they want, without the age limit imposed by a traditional IRA.
• Roth IRA allows for penalty-free withdrawals before age 59 ½. While there are some restrictions, an account holder can typically withdraw contributions (if not earnings) before retirement.
Is a Roth IRA Right for You?
How do you know whether you should contribute to a Roth IRA or a traditional IRA? The quiz below or this checklist might help you decide.
• You might want to open a Roth IRA if you don’t have access to an employer-sponsored 401(k) plan, or if you do have a 401(k) plan but you’ve already maxed out your contribution there. You can fund a Roth IRA and an employer-sponsored plan.
• Because contributions are taxed immediately, rather than in retirement, using a Roth IRA can make sense if you are in a lower tax bracket or if you typically get a refund from the IRS. It may also make sense to open a Roth IRA if you expect your tax bracket to be higher in retirement than it is today.
• Individuals who are in the beginning of their careers and earning less might consider contributing to a Roth IRA now, since they might not qualify under the income limits later in life.
• A Roth IRA can be helpful if you think you’ll work past the traditional retirement age.
The Takeaway
A Roth IRA has many of the same benefits of a traditional IRA, with some unique aspects that can be attractive to some people saving for retirement. With a Roth IRA you don’t have to contend with required minimum distributions (RMDs); you can contribute to a Roth IRA at any age; and qualified withdrawals are tax free. With all that, a Roth IRA has a lot going for it.
That said, not everyone is eligible to fund a Roth IRA. You need to have earned income, and your annual household income cannot exceed certain limits. Also, even though you can withdraw your Roth IRA contributions at any time without owing a penalty, the same isn’t true of earnings.
You must have been funding your Roth for at least 5 years, and you must be at least 59 ½, in order to make qualified withdrawals of earnings. Otherwise, you would likely owe taxes on any earnings you withdraw — and possibly a penalty. Still, the primary advantage of a Roth IRA — being able to have an income stream in retirement that’s completely tax free — can outweigh some of the restrictions for certain investors.
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
Are Roth IRAs insured?
If your Roth IRA is held at an FDIC-insured bank and is invested in bank products like certificates of deposit (CDs) or money market account, those deposits are insured up to $250,000 per depositor, per institution. On the other hand, if your Roth IRA is with a brokerage that’s a member of the Securities Investor Protection Corporation (SIPC), and the brokerage fails, the SIPC provides protection up to $500,000, which includes a $250,000 limit for cash. It’s important to note that neither FDIC or SIPC insurance protects against market losses; they only cover losses due to institutional failures or insolvency.
How much can I put in my Roth IRA monthly?
For tax year 2023, the maximum you can deposit in a Roth or traditional IRA is $6,500, or $7,500 if you’re over 50. How you divide that per month is up to you. You just can’t contribute more than the annual limit.
Who can open a Roth IRA?
Anyone with earned income (i.e. taxable income) can open a Roth IRA, but your income must be within certain limits in order to fund a Roth.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
The term “growth savings account” or “grow savings account” generally refers to a savings account that earns more than the average interest rate for a savings account. This allows your money to grow faster, just for sitting in the bank.
But are these accounts always a good bet? Important points to consider are:
• What is a growth savings account?
• How do growth savings accounts work?
• The pros and cons of a growth savings account
• How to open a growth savings account.
What Is a Growth Savings Account?
Growth savings accounts are similar to regular savings accounts, except that they tend to pay a higher annual percentage yield (APY), which represents how much an account holder will earn in interest over the course of a year.
More commonly referred to as a high-yield savings account, these accounts can pay 10 to 20 times more than the average APY for a savings account, while keeping those funds safe and accessible.
You may get the best interest rate on a growth savings account at an online bank or credit union versus a traditional, brick-and-mortar, bank. However, even at their best, the APYs on these savings accounts generally lag behind what you could earn by investing in the market over time. That makes growth savings accounts best suited for your emergency fund and money you’re saving for a short-term goal, like a vacation or large purchase.
How Do Growth Savings Accounts Work?
Growth savings accounts work in the same way as regular savings accounts. You open the account at a bank or credit union, deposit money into the account, and begin to earn interest on your balance. You can continue adding money to the account, either by making a deposit at a branch or ATM, transferring money from a linked account, or via mobile check deposit or direct deposit.
Savings accounts are typically insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC) at banks and the National Credit Union Administration (NCUA) at credit unions. So you can’t lose your money (up to certain limits) even if the bank were to go out of business.
Savings accounts allow easy access to your money when you need it, though some institutions may limit the number of withdrawals or transfers you can make to six or nine per month.
Here’s a look at some of the advantages that come with opening a growth or high-yield savings account.
Higher Interest Rates
Because these savings accounts can offer higher interest rates, the money held in the account tends to grow faster than money held in traditional savings accounts. When determining what is a good interest rate, it’s a good idea to also look into minimum balance requirements. You may see that you need to keep your balance above a certain threshold to earn the highest available rate.
Get up to $300 when you bank with SoFi.
No account or overdraft fees. No minimum balance.
Up to 4.00% APY on savings balances.
Up to 2-day-early paycheck.
Up to $2M of additional FDIC insurance.
Accessible Form of Growth
Putting money in a savings account can be a great way to earn interest while keeping that money liquid, meaning you can access it as soon as you need it. You don’t need to sell off investments or wait until a particular maturity date to withdraw the money.
Because these funds are fairly accessible, a growth savings account can be a great place to build an emergency fund. That way, the emergency fund can continue to grow until it might be needed.
Cons of a Growth Savings Account
There are also some downsides to growth savings accounts worth keeping in mind before opening one.
Limited Growth Opportunity
Yes, growth savings accounts typically earn more interest than traditional savings accounts. However, when considering your long-term savings options, there may be more strategic investments that can enhance growth over time. If, for instance, you’re saving for retirement, which is a few decades away, you might take a look at the stock market for growth.
Withdrawal Limits
Growth savings accounts generally provide easier access to funds than keeping money in investments. That said, you may only be able to make a certain number of withdrawals or transfers per month (such as six or nine) or risk running into fees. While the Federal Reserve withdrew this rule during the pandemic, banks are allowed to continue imposing those limits, so it’s a good idea to check.
Earnings Are Taxable Income
The interest earned in a growth savings account can count as taxable income. By contrast, the money you put into a Roth Individual Retirement Account (IRA) grows tax-free.
When you’re looking for ways to earn more interest on your money, a growth or high-yield savings account might be a good option. It’s a good idea to shop around to find the best fit for your needs. Here are a few factors to keep in mind when looking for a new savings account:
• APYs
• Minimum balance requirements
• Fees
• Account features
• Mobile app
• Other product and service offerings
How to Open a Growth Savings Account
While each banking institution will have its own process, opening a growth savings account typically includes the following steps:
• Fill out the application. When filling out a savings account application, you’ll usually provide details like your name, Social Security number, proof of address (say, from a utility bill), and government-issued photo ID.
• Choose the account type. There may be different savings account types, such as an individual account or a joint account (to share with a spouse or family member). Select the kind that’s right for your needs.
• Designate beneficiaries. It’s important to choose a beneficiary for your growth savings account, just as you might select a beneficiary for a 401(k) plan. This is the person who would receive the account’s funds if you were to become incapacitated or pass away.
• Deposit funds. Some banks require a minimum initial deposit, so you may need to make that deposit to open the account.
• Create login information. To set up your online account, you’ll need to create login information such as a username and password. Be sure to create a unique and complex password with at least one capital letter, number, and symbol.
Growth savings accounts generally offer higher interest rates than traditional savings accounts, which can help your money grow faster. In some cases, however, these accounts may come with monthly fees and/or require you to maintain a certain minimum balance to earn the higher rate, so it pays to shop around.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.
FAQ
How do growth savings accounts work?
Growth savings accounts function similarly to traditional savings accounts. The only difference between these account types is that growth savings accounts tend to have higher interest rates.
What does “growth account” mean?
A growth account — also known as a high-yield account — typically offers a higher interest rate than a traditional savings account. This higher interest rate leads to more growth on deposited funds.
How much interest does a growth savings account earn?
These days, a growth or high-yield savings account can earn as much as 5% APY.
Photo credit: iStock/Eoneren
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
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.
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.
Social security is a right and even a rite of passage ahead for many Americans, and one it’s never too early to start better understanding and planning for.
