Investopedia

Fact checked by Betsy Petrick

You can list a minor as your Individual Retirement Account (IRA) beneficiary, but minors can’t inherit the account directly. To designate a minor, you’ll need to appoint a custodian to manage the IRA on their behalf until they reach the age of majority. We’ll walk you through some considerations before explaining the process of naming a custodian and designating a minor.

Key Takeaways

• You can designate a minor as your IRA beneficiary, but you also must name a custodian to manage the account until the minor comes of age.
• A minor who reaches the age of majority may begin making withdrawals from the IRA.
• An account holder’s child has until the age of majority for a 10-year window to start, in which all funds must be depleted from the inherited account.

Key Considerations When Designating a Minor as an IRA Beneficiary

Before you head off to find a custodian, be aware of significant changes to the rules regarding inherited IRAs. In 2019, the SECURE Act was passed, requiring the balance of an IRA to be distributed within 10 years of the original account owner’s death.

However, if the beneficiary is a minor, they’re considered to be an eligible designated beneficiary (EDB). This gives them more flexibility when it comes to withdrawing funds. Specifically, the SECURE Act stipulates that minors can use their life expectancy to calculate an annual required minimum distribution (RMD). Then, once the minor reaches the age of majority, the 10-year rule will apply.

You also should consider how the inherited IRA will be taxed, which depends on the type of IRA you have. With a traditional IRA, withdrawals (once the beneficiary reaches the age of majority) will be taxed at the beneficiary’s current income bracket. On the other hand, if you pass on a Roth IRA, you’ve already paid taxes on the funds, so your beneficiary won’t be required to pay taxes on the withdrawals.

Important

You can file an extension so the 10-year rule doesn’t begin until the beneficiary reaches age 26 if the parent was the account holder and the beneficiary is pursuing continuing education.

Requirements for Minor Child Beneficiaries

In order to successfully name a minor as your IRA beneficiary, you have to follow a few important rules.

Naming a Custodian

The IRS does not allow you to simply name a minor as your IRA beneficiary. Instead, you’re required to name a custodian who has control of the IRA and can manage it after your death and before the minor you designated comes of age.

If you do not designate a custodian for the account, the court will appoint one for the minor you listed.

What Is the 10-Year Rule?

If you have a traditional IRA, you’re required to make minimum withdrawals once you reach retirement. In the past, beneficiaries could stretch these required minimum withdrawals over their life expectancy, but the SECURE Act established the 10-year rule. Instead of stretching out IRA withdrawals, the beneficiary must have withdrawn all of the funds by the end of the 10th calendar year after the IRA owner’s death.

This means there are no required minimum withdrawals, but all of the funds must be out of the account after 10 years are up. However, this rule does not apply to children of the account owners who are still minors. They have the opportunity to calculate an annual required minimum distribution (RMD). Once they turn 21 years old, then the 10-year rule will apply.

Age of Majority

The age of majority is when the minor beneficiary comes of age and is legally allowed to begin managing and withdrawing from the IRA they inherited. Throughout most of the United States, the age of majority is 18 years old (the exception being Nebraska and Alabama with age 19 and Mississippi with age 21). However, the SECURE Act established age 21 as the age of majority for designated beneficiaries.

That said, if the minor is the owner’s child, they can begin withdrawing from an inherited IRA by calculating their life expectancy. Once they reach the age of majority, the 10-year rule about withdrawals applies.

What Accounts Can Be Used to Inherit an IRA?

You have options when it comes to choosing an account to leave to a beneficiary.

UGMA

If you’d like to establish a custodial account for the minor, you might look into the Uniform Gifts to Minors Act (UGMA). This legislation provides a way to establish an inheritance without going through the court process of setting up a trust.

A UGMA allows you to name a custodian and gift funds tax-free (up to a specific amount). Be aware that this move is permanent. You’ll no longer have access to the funds when you set up the custodial account. The minor gets full control of the account and funds when they come of age. Unlike some accounts, like a 529, there are no requirements about how the minor must use the funds.

UTMA

You can also set up a custodial account under the Uniform Transfers to Minors Act (UTMA). It works similarly to UGMA accounts in that you must name a custodian who manages the account until the minor comes of age, but a UTMA account can include other types of assets, including property and other assets such as art, patents, and royalties.

Qualified Tuition Program

A Qualified Tuition Program (QTP) is a program that allows people to save for qualified higher education expenses. You place funds in an account, usually a 529 plan, and the money grows tax-free until the account holder withdraws funds to use for school.

While you can’t directly roll money from your IRA into a 529 plan, you can designate the minor as your IRA beneficiary and choose a custodian. The custodian can move the funds to the 529 plan, where they’ll stay until the minor legally comes of age and plans to pursue higher education.

Trusts

Although you can’t establish a trust while you’re alive, you can name a minor as the beneficiary for the IRA and name a guardian as the trustee of the count. You can give specific instructions about how you’d like the IRA funds to be distributed to the minor after your death. A trust allows you to provide specific instructions on how you want the guardian to handle the IRA distributions for the minor.

The Bottom Line

You can’t directly give your IRA to a minor when you die. In most cases, you can designate the minor as a beneficiary, but you will need to name a custodian for the account. How you choose to distribute the funds to the minor depends on how much flexibility you’d like them to have with the money. To help you decide the best course of action, it can help to work with a financial advisor who can also assist you with estate planning.

These insurance contracts offer steady income but have some downsides

Fact checked by Betsy Petrick

What Is An Annuity?

An annuity is a contract purchased from an insurance company with a large lump sum in return for regular payments, commonly used as an income source in retirement. An annuity earns interest with either fixed or variable rates, and the buyer specifies the terms of the annuity when they purchase the contract. For instance, the buyer might specify the number of payments or guarantee payments to the surviving spouse. Some annuities can provide guaranteed payments for life, depending on the terms of the contract.

Key Takeaways

• Although annuities are often purchased from insurance providers, they are contracts of ensured payment, not insurance policies.
• An annuity pays out a steady income stream in exchange for a large lump-sum payment.
• Buyers can choose from fixed, variable, and indexed annuities based on their risk tolerance and financial goals.
• Borrowers pay regular tax rates on the annuity instead of capital gains rates, which usually are lower.

How An Annuity Works

Running out of money during retirement is a legitimate concern. To put your mind at ease, you might purchase an annuity in order to receive a lump sum or a steady stream of income during retirement.

Knowing that you’ll have regular income during retirement can help you create a budget for your non-working years. However, depending on the type of annuity you choose, the policy is not risk-free since you might lose out on earnings or the annuity provider could file for bankruptcy.

The Annuity Life Cycle (Phases)

An annuity has two phases: accumulation and payout. The accumulation phase begins when you purchase and fund the annuity. You can fund it with a lump sum or with regular payments over time.

The payout phase, also called the distribution phase, is when you begin to collect regular payments from the annuity. You must be at least 59½ to begin withdrawing payments or you’ll face fees and a higher tax bill. If your annuity has a defined accumulation period and you remove funds before the time is up, you may face a surrender charge.

Annuities are regulated differently than other savings products, with most of the rules and regulations at the state level. Each state’s insurance commissioner and department of insurance determines the policies and regulations that annuity providers must follow. If you get a variable annuity, it will fall under some federal regulations through the Securities and Exchange Commission since the annuity contains some securities like mutual funds.

Fees

The exact price you pay for an annuity depends on the provider and type of annuity you open. For example, variable annuities usually have significantly higher fees than fixed annuities or mutual funds.

Providers also might charge investment management fees, surrender charges (if you take out payments early), mortality fees, and administrative fees. These charges can add up quickly, so ask for an annuity prospectus and read the terms and conditions carefully before purchasing an annuity.

Income Riders

It’s important to stress that with some annuities, you’re not guaranteed a specific payment. However, if you purchase an income rider, you get the reassurance that you’ll always get at least a minimum payment for as long as you live. Income riders are also called minimum benefit riders, and they’re only sold with deferred annuities.

Types of Annuities

Borrowers have options when it comes to purchasing an annuity. Specifically, you can choose from immediate or deferred annuities that offer fixed, variable, or indexed payments, each with benefits and drawbacks.

Immediate vs. Deferred

First, a buyer has to decide if they’d like to immediately begin pulling an income stream or if they’d like to defer it.

Someone might choose an immediate annuity if they’ve received a large sum of money but want to turn it into a predictable stream of income so it’s easier to manage. This might make the money last longer since it’s distributed in smaller, regular payments. An immediate annuity makes sense if the person is close to retirement.

A buyer who wants to save for retirement that’s years away might choose a deferred annuity. The money is tax-deferred and earns interest, so it can help you reach your retirement plan goals.

Fixed, Variable, and Indexed Annuities

Annuities earn interest but in different ways. Fixed annuities pay out a guaranteed amount and are the most secure option. However, they typically have lower annual returns than other annuities or some high-yield certificates of deposit (CDs).

If you’re comfortable with risk in exchange for potentially higher returns, you might select a variable annuity. You’ll have a choice of mutual funds that are placed in a personal subaccount. Then, you’ll receive payments based on how well the funds in your subaccount perform.

Indexed annuities are considered a medium-risk option since the buyer gets a guaranteed minimum payout, but some of the payout is determined by how well the market index performs.

Important

If you purchase a variable or indexed annuity, you may pay more in fees, and your returns aren’t guaranteed.

Tax Treatment of Annuities

If you withdraw funds early from an annuity, you’ll be hit with early withdrawal fees and a 10% tax penalty if you’re under 59½.

Whether you withdraw funds early or wait until retirement, you will have to pay federal taxes on the disbursements you receive. These funds are taxed at your standard income rate. Keep this in mind if you’re considering investing in mutual funds, which are taxed at the lower capital gains rate.

To help you reduce your tax burden for those disbursement years, here are a few strategies you could employ:

• Maximize your pre-tax retirement accounts each year
• Take advantage of retirement benefits offered by your employer
• Contribute to a health savings account (HSA)
• Take advantage of all available tax credits
• Donate to charity

The Bottom Line

If you love the idea of “pulling a paycheck” in retirement, an annuity might be what you’re looking for. Annuities give you a steady stream of income and they’re customizable, so you can purchase one that matches your risk tolerance and financial needs. As always, it’s a good idea to consult with a financial advisor when planning a retirement strategy.

Fact checked by Suzanne Kvilhaug

Buying a home is one of life’s most exciting (and expensive) milestones. Whether you’ve decided the time to buy is now to take advantage of tax benefits, build a sense of community, grow your wealth through appreciation and equity, or simply paint the walls whatever color you want, understanding each step can help you make smart and confident decisions about the house you’ll call home.

This guide walks you through the homebuying steps, offering tips and vital information to prepare you for this journey.

Key Takeaways

• Assess your financial readiness and credit score before buying a house.
• Determine your budget and calculate how much you can afford to spend.
• Research various financing options, such as conventional, FHA, and VA loans.
• Get pre-approved for a mortgage to strengthen your offer and streamline the buying process.
• Conduct a thorough home inspection and appraisal before finalizing the purchase.

1. Make Sure You Are Ready

Buying a home is a long-term commitment, so the first step in the homebuying process is ensuring you’re financially prepared. Review your income, expenses, debts, and savings to assess your current financial health. You should also consider your job stability in making these determinations. A solid job history and reliable income improve your chances of mortgage approval.

To further determine readiness, check your credit score. Your credit can impact mortgage approval and affect the interest rates you’re offered. 

Tip

Credit scores range from 300-850, with most lenders requiring a score of 620 for approval. Higher credit scores mean more favorable rates. To check your score and get a detailed report, visit AnnualCreditReport.com.

Before deciding you’re ready to put a ring cam on it, consider how homeownership aligns with your long-term financial goals. If buying a home interferes with saving for other priorities like retirement or education, you may not be ready.

2. Set a Budget

To determine what you can afford, start with the monthly mortgage payment you can handle. Various factors—beyond just the home’s price—affect this payment, known as “PITI”: principal, interest, taxes, and insurance.

Most lenders ask for a down payment between 3% and 20% of the home’s price. Remember, If you put down less than 20%, lenders will require you to pay private mortgage insurance (PMI), which increases your monthly mortgage payments and affects how much house you can afford.

Home prices vary widely across the United States. The median home price nationwide is $357,138, but that figure can translate to vastly different types of properties—from a spacious mansion in one area to a compact studio in another.

For example, in Mississippi, one of the most affordable states, the average home price is $179,182. Meanwhile, in Kansas City, Missouri—located in the heart of the American Midwest—the average cost is $236,159.

On the higher end of the spectrum, homebuyers in California face significantly steeper prices. The average home price statewide is $784,840. In major urban hubs like San Diego, that number climbs even higher, with average prices reaching $1,020,394.

Similarly, in New York City, the average home costs $763,358. However, in the upstate area of Albany, New York, homes average around $298,756.

After figuring out your monthly budget, you can estimate the home price you can afford in your area.

But wait! That’s not all. Your monthly payment may also fluctuate based on your home insurance premiums and HOA fees. In addition to your down payment, you should account for other upfront costs, such as closing fees, inspections, and moving expenses, in your budgetary calculations. 

3. Find the Right Property

Finding the right property is like assembling a puzzle. After determining your budget, consider key factors such as location, proximity to work, schools, and amenities, as well as property size. 

Location is crucial; a home near frequently visited places such as work or school can save time and money. Additionally, assess the safety and potential growth of the neighborhood, as it can affect property value. 

Creating a wish list of your wants versus needs can help narrow your search. Homebuyers typically filter by home type, number of bedrooms and bathrooms, square footage, lot size, and age.

Properties needing renovations often come at lower prices. When budgeting, also evaluate how much sweaty equity you’re willing to invest in improvements through renovations or DIY projects.

4. Shop for Financing Options

You have options for your mortgage, and finding the best mortgage is easier than you think. Your monthly mortgage payment will vary based on your loan type, repayment term, borrowed amount, interest rate, taxes, and insurance. 

Here are the most common mortgages to consider:

Conventional Loans: These loans are through private mortgage lenders such as banks, credit unions, or other financial institutions. Conventional mortgages require good or excellent credit and, typically, a 20% down payment. If you put down less, you may need to pay PMI, which increases your monthly mortgage costs. These loans have competitive interest rates and current 30-year mortgage rates for borrowers with good credit averages around 6.83%.

Federal Housing Administration (FHA) Loans: Backed by the Federal Housing Administration, FHA loans have lower minimum requirements and are available only for primary residences. Borrowers with a credit score above 580 can put down as little as 3.5%, while borrowers under 580 may still qualify with a down payment of 10%. These loans also may require PMI for borrowers without 20% down payments. Interest rates average 7.35%, which is slightly higher than conventional loans.

VA Loans: Available only to military service members, veterans, and their surviving spouses, these loans require a 0% down payment and do not require PMI. VA loans have competitive rates, with current rates averaging around 6.42% for a 30-year mortgage.

Jumbo Loans: For properties exceeding Federal Housing Finance Agency (FHFA) lending limits, these loans require excellent credit and a substantial down payment. These loans are most common in high-cost areas or for large or luxury homes. Current average rates are around 6.79% for a 30-year jumbo loan.

Renovation Loans: Ideal for buyers of fixer-uppers, these loans finance both the home purchase and renovation costs in one. Conventional renovation loans are available for well-qualified borrowers, but the government also has FHA 203(k) loans for borrowers needing extra help updating their dream home. Rates are typically 0.75-1.00% higher than FHA loan rates due to renovation risks.

5. Get Pre-Approved

Getting pre-approved for a mortgage offers several advantages. It confirms how much you can afford, narrowing your home search to properties within your budget. A pre-approval letter strengthens your offers, which is crucial in a competitive seller’s market.

During the pre-approval process, lenders require proof of income (like pay stubs and tax returns), check your credit report and score, and may verify your employment for stable income. Note that pre-approval counts as a “hard inquiry” on your credit report, lasting for two years, but will not affect your score after one year. A pre-approval letter is typically valid for 60-90 days, so it’s wise to obtain one when you’re ready to seriously start house hunting.

Note

Pre-approval streamlines the buying process and gives you a competitive edge when making offers.

6. Find a Real Estate Agent

Finding the right real estate agent is one of the most important steps in the homebuying process. Your real estate agent is your advocate in all things homebuying, from finding the perfect house to negotiating the best deal to walking you through all the necessary steps to secure your mortgage. 

When choosing an agent, consider their market knowledge, local expertise, experience, and communication style. Trust and reliability are also key traits; your agent should keep you informed throughout the process. To find the right fit, read online reviews, and ask for referrals from trusted friends, family, or colleagues. You may also want to interview a few agents to feel confident in your decisions before committing to an agent. 

Be clear about the agent’s commission, which typically ranges from 5%-6% of the sale price and is often covered by the seller. Still, clarifying their commission structure upfront helps you understand how their pay may impact your finances.

7. Go House Hunting and Make an Offer

Finding your dream home can take anywhere from a few weeks to a few months, depending on market conditions. Once you’ve identified a property you love, you’ll need to make a competitive offer based on a comparative market analysis (CMA), which determines a fair price based on similar homes in the area. 

After deciding on an offer price, your agent will explain the contingencies in your offer, such as an inspection contingency to ensure the home has no significant structural issues, an appraisal contingency to confirm the home is worth the amount you settle on, and a financing contingency to protect you in case your mortgage falls through before closing. 

Your agent also negotiates with the seller’s agent to finalize the terms and price, which may require more volleys than a tennis match before all parties agree. Keep in mind that you might lose out to a more competitive offer during negotiations. Trust your instincts and rely on your agent’s expertise in market conditions and seller expectations to craft a standout offer without overextending your budget.

8. Get Your Mortgage

Once the seller accepts your offer, you’ll need to finalize your mortgage to continue the homebuying process. Pre-approvals aren’t binding, so you can choose to proceed with your lender or shop for better rates and terms. 

After selecting a lender, you’ll need to provide various documents to verify your financial status, including W-2s, tax returns, proof of identity, proof of assets, proof of employment, and recent bank statements. Once your lender has all the necessary documents, your loan file enters underwriting, where the loan officer reviews your information and may request additional documentation. 

Final approval comes after they review your documents and verify your ability to repay the loan.   

9. Get Homeowners Insurance, a Home Inspection, and a Home Appraisal

As you near the homebuying finish line, you must clear three final hurdles to safeguard your investment: homeowners insurance, a home inspection, and a home appraisal.

Homeowners Insurance

Before closing, most lenders require proof of homeowners insurance. This insurance protects against unexpected events like fire, storms, or floods and covers liability for injuries on your property. While you can choose your insurance provider, ensure your policy meets your lender’s minimum requirements. Shop around for the best rates to fit your needs.

Home Inspection

Though not legally required and typically costing between $300 and $500, a home inspection provides a clear picture of your home’s condition before you buy it. A licensed inspector checks for safety hazards, necessary repairs, and maintenance issues, including electrical, plumbing, HVAC, and structural integrity.

If your inspection reveals significant problems, you and your agent may want to request repairs, credits, or negotiations to the purchase price before closing.

Home Appraisal

A home appraisal assesses your home based on location, condition, and market conditions to determine its fair market value, ensuring that your offer price aligns with the current value.  

As the buyer, you pay for the appraisal, but your lender will hire the appraiser from an independent pool of licensed appraisers.

If your appraisal comes in below your offer, you may need to renegotiate the price with the seller or make up the difference between the assessed and the offered value in cash.

These three items in this step of the home-buying process protect you and your investment from any problems that may arise with your property. 

10. Negotiate With the Seller

After your home inspection and appraisal, you can renegotiate your offer price or request repairs.

In a buyer’s market, where supply exceeds demand, you’ll likely have more leverage and success in getting sellers to accommodate your requests. However, in a seller’s market, where demand outpaces supply, your negotiating power may be limited, especially if the seller’s home is priced competitively.

It’s in your best interest to focus on the big picture when renegotiating by:

• Prioritizing safety or structural issues.
• Getting repair estimates to strengthen your case for pre-closing repairs or credits.
• Compromising on minor or cosmetic fixes, as needed.
• Keeping communication open and respectful.

11. Close the Deal

Your lender will send the final closing statement a few days before your closing date. This statement offers a detailed breakdown of all property details, loan terms, interest rates, and closing costs which may include:

• Appraisal fees
• Title insurance
• Home inspection fees
• Attorney fees (if applicable)
• Recording fees
• Property taxes
• Mortgage origination fees

On closing day, you’ll review and sign various documents, including the mortgage agreement and transfer forms. After paying your closing costs—either upfront or by rolling them into your mortgage—and signing the necessary documents, ownership of the property is officially transferred to you.

Moving in and Beyond

You have the keys—now it’s time to move! Early planning makes moving into your dream home a breeze.

Start by organizing your move early and getting quotes for movers or packers if needed. If you’re taking a DIY approach, pack in stages and label boxes with room and contents to make unpacking easier.

Tip

Transfer utilities like electricity, water, trash, and gas into your name weeks before closing, and schedule installations for services like internet and cable before you move in.

Once you sign for your home, establish good habits for regular home maintenance and basic tasks like lawn care, gutter cleaning, HVAC filter replacements, testing smoke alarms, and cleaning out dryer vents.

Ongoing Expenses of Homeownership

Homeownership involves more than just unpacking and picking wall colors. Beyond your monthly mortgage payments, you’ll face occasional costs to keep your home in tip-top shape, making an emergency fund and essential preparation for expenses not covered by insurance.

Your mortgage payment often includes homeowner’s insurance and property taxes, which can fluctuate. Insurance rates vary by location and coverage. As coverages and rates change, so do payments.

Property taxes typically range from 1%-2% of your home’s value and may increase with reassessments, which happen every few years in many states.

Your home may also require Homeowners Association (HOA) fees. Depending on your community and the amenities provided, these fees can range from $30 to $500 a month.

By budgeting for these ongoing costs, you can keep your dream home from becoming a financial nightmare. 

The Bottom Line

Homebuying is an exciting journey with multiple steps, each requiring careful financial planning and clear expectations. From assessing your financial readiness to receiving the keys to your new home, each step plays a key role in ensuring you purchase with confidence. With the proper preparation and mindset, homeownership is a gift you continue to give yourself for years. 

Reviewed by David Kindness
Fact checked by Ryan Eichler

Outsourcing is the process of hiring an outside organization that is not affiliated with the company to complete specific tasks. Insourcing, on the other hand, is a business practice performed within the operational infrastructure of the organization. The main difference between outsourcing and insourcing is the methods in which work, projects, or tasks are divided between various companies and departments for strategic purposes.

Outsourcing

Outsourcing uses the developed workforce of an outside organization to perform tasks and also the resources of an outside organization for services and manufacturing products. Saving money on costs is typically the motivation for outsourcing work to another company. Industries such as healthcare, travel, transport, energy/utility companies, retail, and even government often rely on outsourcing to complete important projects or tasks.

Key Takeaways

• Outsourcing enlists the help of outside organizations not affiliated with the company to complete specific tasks.
• Insourcing, on the other hand, is a business practice performed within an organization’s operational infrastructure.
• The organization’s control over operations and decisions will differ depending on whether the company is using outsourcing or insourcing.
• Insourcing generally places new operations and processes on-site within the organization, while outsourcing involves an outside organization that is separate from the primary organization’s operations.

Companies can use outsourcing to better focus on the core aspects of the business. That is, outsourcing non-core activities can improve efficiency and productivity. At the same time, outsourcing can affect jobs ranging from customer support to manufacturing, as well as technology and the back office. 

The organization’s control over operations and decisions will differ when using outsourcing and insourcing. Organizations that use outsourcing for a particular service or manufacturing process have minimal managerial control over the methods of the outside organization that was hired for the project. For instance, an organization that is known for friendly customer service does not have the ability to enforce or manage how an outside support center interacts with customers.

Insourcing

Insourcing assigns a project to a person or department within the company instead of hiring an outside person or company. It utilizes developed resources within the organization to perform tasks or to achieve a goal. For example, an organization might insource technical support for a new product because the company already has existing technical support for another product within the organization.

Further, insourcing generally places new operations and processes on-site within the organization. For that reason, insourcing can be more expensive for a company because it often involves the implementation of new processes to start a different division within the organization.

Law Firms Example

While outsourcing jobs and work are often a major discussion regarding the U.S. economy, insourcing is relatively common and is seeing greater usage by companies seeking better control of important projects and tasks.

Law firms are an example of companies that use insourcing. In 2023, results of a survey in a Law Department Management Benchmarking Report indicated that the majority of law firms are still completing their work in-house.

Reviewed by Charlene Rhinehart
Fact checked by Yarilet Perez

Private equity fund accounting is unlike that of other investment vehicles because private equity funds are not like other types of investments.

They are one part hedge fund, one part venture capital firm, and one part something all their own, and it is evident in their accounting. The same accounting rules you see in other companies still apply, but they often have to be modified to accommodate privately held companies.

Key Takeaways

• Private equity (PE) funds are pooled investment vehicles that invest their investors’ capital to generate returns.
• PE funds invest in long-term projects; they mainly purchase other companies, improve them, and sell them for a profit or take them public through an IPO.
• Accounting in private equity can be complex because it has to account for ownership stakes, investment structures, and various international standards.
• Fund structures, tax strategies, and valuation methods influence financial statement preparation and reporting.

Understanding Private Equity Funds

Private equity funds typically invest in companies directly. Private equity funds often purchase private companies and can sometimes buy the stock shares of publicly-traded companies as well.

Private equity funds seek to acquire a controlling interest in a private company. Once a company has been acquired, experts are signed to the company to improve and guide management and implement improvements. 

Private equity funds employ various strategies to improve a company, including a change of management, improved operational efficiency, and expanding the company or its product lines. The goal of a private equity fund is to make the company as profitable as possible with the intent of selling its controlling interest for a profit once the company becomes more valuable.

The result could also end in an initial public offering (IPO), which is when a private company issues equity shares to the public to raise capital or funds. Private equity firms also have a hand in helping companies merge with one another. In either case, there is a period of years during which a precise value of the private equity fund’s investments is not objectively defined.

Private Equity Funds vs. Hedge Funds

Private equity funds are akin to hedge funds in that they have similar payment structures. Hedge funds are an investment containing pooled funds that invest in various securities and assets to achieve returns for investors.

Typically, a hedge fund’s goal is to earn as much return in the shortest time frame. The portfolio allocation can include commodities, options, stocks, bonds, derivatives, and futures contracts. Leverage—or borrowed funds—is often employed to magnify returns.

Private equity funds are different from hedge funds because private equity is focused more on a long-term strategy to maximize profits and investor returns by partly owning the companies directly. Investors can liquidate their hedge fund holdings when needed, while an investment in a private equity fund usually needs to be held for a longer period of time, sometimes 10 years or longer.

However, there are similarities between the two funds. Investors pay management fees and a percentage of the profits earned. Both types of funds maintain portfolios of different investments, but they have very different focuses.

Private equity has a long-term outlook, and this affects its accounting. While hedge funds invest in anything and everything, most of these positions are highly liquid, meaning the positions can be readily sold to generate cash. Conversely, private equity funds tend to be very illiquid.

Private equity funds are akin to venture capital firms, which are funds that invest in private companies with high-growth potential. Venture capital funds often involve investing in start-ups. Private equity funds also invest directly in private companies and, depending on the investment, may not be able to touch their investments for years.

Important

Both private equity funds and hedge funds are generally only available to accredited investors, meaning that the average retail investor won’t have access to either.

Fund Structure

Private equity funds tend to be structured as limited partnership agreements (LPAs) with several classes of partners. There is often a founder partner (FP) class, as well as a general partner (GP) class and a limited partner (LP) class.

Fund expenses and distributions have to be allocated across these partner classes. The rules for this are to be stipulated in the limited partnership agreement (LPA), and there can be wide variance between firms.

The type of private equity fund structure can impact how the accounting information for each investment and that of the company as a whole are recorded. The level of analysis the private equity fund uses may also be affected by the structure. 

The country of jurisdiction can also impact both the private equity fund structure and accounting. Most U.S. private equity funds are in Delaware, but private equity funds may also go offshore, as in a Cayman Limited Partnership, or they may be based in another country.

For instance, in Europe, an English Limited Partnership is very common, even for funds not based in the United Kingdom.

Private Equity Investments

Also, keep in mind that many private equity funds create complex investment structures to limit the tax burdens of their investments, which vary depending on the state or country of jurisdiction, and that complicates the accounting.

Controls may be put in place, or need to be put in place, to reduce tax risk, and some structures may need to be adjusted as time goes on depending on changing legislation or the accepted interpretation of tax legislation.

Further, the agreements that private equity funds have with the companies in which they invest also make a difference. For example, some private equity funds invest in a business through both equity and debt, which acts as a loan for the business.

If so, interest payments have to be reconciled. In other cases, the company may have an agreement to pay dividends to the private equity fund, and the distribution of those profits has to be handled.

Accounting Standards

Private equity firms must adhere to the standards issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

For the most part, accounting standards were not written with private equity in mind, so the format for private equity fund accounting has to be modified to clearly illustrate the operations and financial situation of the private equity fund.

There is also variance in the terms the private equity fund has with each company in which it invests, the purpose of the private equity fund’s activities, and the needs of its investors as far as financial statements are concerned.

Private equity fund accounting may also be affected by the amount of control the fund has over an entity.

Note

One of the most traditional ways to enter a career in private equity is to first start in traditional investment banking roles.

For instance, under the U.K. version of generally accepted accounting principles (GAAP), equity accounting is necessary if the investment gives the fund an influential minority (20% or more) stake in the company and is not held as part of a larger portfolio, while U.S. GAAP does not require equity accounting for influential minority positions.

In contrast, the International Financial Reporting Standards (IFRS) requires equity accounting for influential minority positions when they are not valued fairly through a profit and loss.

The accounting standard that a private equity fund adopts also affects how partner capital is treated. Under U.S. GAAP, partner capital is treated as equity unless the partners have an agreement that allows them to redeem their investment at a particular time. In contrast, the U.K. GAAP and IFRS treat partner capital as debt that has a finite life.

Valuation Methodologies

When looking at private equity accounting, valuation is a critical element. The choice of accounting standards impacts how investments are valued.

While all accounting standards require investments to be listed at fair value, the definition of fair value differs considerably between standards. In certain cases, a private equity fund might be able to discount the value of an investment by claiming there is a contractual or regulatory restriction that affects the market price.

In other cases, investments are listed at what the fund paid for them minus any provisions or are valued at the sale price of the investment if it were put on the market.

Financial Statements

The financial statements prepared for investors also vary depending on the accounting standard. Private equity funds under U.S. generally accepted accounting principles (GAAP) follow the framework outlined in the American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide.

This includes a cash flow statement, a statement of assets and liabilities, a schedule of investments, a statement of operations, notes to the financial statements, and a separate listing of financial highlights.

In contrast, the IFRS requires an income statement, balance sheet, and cash flow statement, as well as applicable notes and an account of any changes in the net assets attributable to the fund partners. U.K. GAAP asks for a profit and loss statement, a balance sheet, a cash flow statement, a statement of the gains and losses the fund recognizes, as well as any notes.

What Is Private Equity?

Private equity is the process of buying an underperforming company, improving it to increase its value, and then selling it for a profit or taking it public via an initial public offering (IPO). PE firms raise money from investors and use the raised capital to make acquisitions. The targeted companies are usually struggling or underperforming. Once purchased, the PE firms make various changes over time to improve the purchased company’s profitability. During this time, the acquired company is private. Once profitability has improved, PE firms seek to sell the company for a profit or take it public.

What Is a Hedge Fund?

A hedge fund is an investment vehicle that uses a variety of strategies, including many risky ones, to generate returns that outperform the market. Due to their nature, hedge funds are only available to accredited investors, which includes high-net-worth individuals and financial institutions; in essence, you need to have a lot of money to invest in a hedge fund.

This is because these types of investors have the financial ability to absorb potential losses that may arise from the unique strategies that hedge funds employ; however, not all hedge funds are risky. Unlike mutual funds, hedge funds have high fees and often require investors’ money to be locked up for a long period.

What Is the Difference Between U.S. GAAP and IFRS?

U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS) are two different types of accounting standards. GAAP is primarily used in the U.S., while IFRS is used in many countries around the world. The primary difference between the two is how they are structured: GAAP is a rules-based accounting framework, whereas IFRS is a principles-based accounting framework.

What this means is that GAAP requires strict accounting rules to be followed, whereas IFRS allows for more flexibility in the interpretation of how its principles should be applied.

The Bottom Line

Private equity accounting is specialized because PE funds take a long-term investment approach, acquiring and improving companies before selling them for a profit. Their structure, investment methods, and illiquid nature require adjustments to standard accounting rules.

Different regulations and valuation methods across jurisdictions add to the complexity, making private equity fund accounting more intricate than that of other investment vehicles.

Reviewed by Erika Rasure
Fact checked by Vikki Velasquez

The defining factor between a nonprofit and for-profit organization boils down to Internal Revenue Code 501(c), which excuses nonprofits from federal tax liability. These qualified charitable organizations face a tradeoff since they must distribute surplus earnings to a social cause.

The individuals in a nonprofit possess limited liability about the incorporated legal entity, which provides both an upside and downside.

Key Takeaways

• Organizations and companies must evaluate the tradeoffs of becoming a tax-exempt nonprofit or a for-profit business.
• Nonprofits represent a wide range of entities, including houses of worship, campus societies, public school foundation boards, chambers of commerce, and nongovernmental organizations.
• A hybrid business model used successfully by large companies like Tesla has both nonprofit and for-profit arms.
• An alternative route, rather than incorporate an entire leg of a business as a nonprofit, is when nonprofits and for-profits choose to work with one another.
• The affiliation of a brand and a nonprofit cause can be a mutually beneficial relationship.

What Is a Nonprofit?

Nonprofits refer to organizations like public charities, foundations, churches, fraternal groups, and chambers of commerce, which are built to address a social purpose. They encompass a broad range of structures such as nongovernmental organizations (NGOs).

Nongovernmental organizations tend to tackle larger causes, often on an international scale. In the United States, an estimated 1.9 million nonprofits exist, according to the latest tax-filing records.

Whether or not a cause will find success in raising funds and serving the public good will rely primarily on the decision to become a nonprofit or for-profit entity. 

The Benefits of Nonprofit Status

Nonprofits can qualify under the 501(c) federal corporate income tax exemption. After establishing this exemption, most nonprofits are exempt under state and local tax law.

This status also increases the chance of investments to a nonprofit, as individuals are more willing to donate to organizations that will help reduce their tax liability. One can claim a deduction on their taxes regarding a gift or donation to a 501(c)-qualified organization. Nonprofits may also solicit money from both private and public grants.

When incorporating a nonprofit, the individual founders are completely separated from the nonprofit. This takes the burden off any individual founders in the case of debts, lawsuits, fines, and other legal matters.

Important

Employees and board members of a nonprofit entity possess limited liability.

Legal Status

The private assets of the founders of a nonprofit are shielded from creditors and courts. However, if a person acts illegally or unethically behind the shield of the nonprofit, they will be held accountable if the nonprofit is harmed.

The nonprofit organization holds a legal status and identity that transcends the founders. This aspect is attractive to those looking to start a mission-driven organization that will endure for generations.

Donors are more willing to give to organizations with legacies that they foresee surviving in the long term.

Starting a Nonprofit

The elimination of tax and legal liabilities sounds like an excellent way to mitigate risk when starting a new organization. However, when businesses try to take off the ground, they need to raise capital from investors and attract talent with competitive wages.

The public’s reluctance to give nonprofits the same leeway as for-profits severely thwarts their ability to succeed. Therefore, many nonprofits need large sums of money upfront from well-established families and foundations.

Related Tasks

Starting a nonprofit requires considerable funds to pay lawyers, accountants, and consultants. Costly administrative tasks face nonprofits, including applying for federal tax exemptions and public reporting requirements. They are required to maintain specialized accounts for reporting.

Applying for the federal tax exemption alone will cost $275–$600, in addition to varying state fees for incorporation. To grow a nonprofit takes time and money, similar to starting up a company.

Important Deadlines

There’s a lot of paperwork weighing down the nonprofit operation. Strict deadlines for annual reporting are put in place by the government for a nonprofit to continue to qualify for tax exemption status. Documents include financial statements and reports that must meet particular requirements.

Since the nonprofit is in the public domain, these statements are subject to the public’s criticism and the scrutiny of a possible independent or governmental audit. The public is often hypercritical of nonprofit decisions regarding employee pay and the use of funding.

Controlling a Nonprofit

The diminished role of founders and individuals of nonprofits also affects management’s decision to start a nonprofit.

For leaders who desire a large degree of control over the direction of the nonprofit, they may not enjoy the shared control structure, which delegates decisions to several directors and follows relatively stringent procedures.

Hybrid Business Models

Nonprofits receive better treatment by the federal government and a charitable view from the general public. Holding for-profit status gives business leaders autonomy and empowers companies with an entrepreneurial spirit. Therefore, some organizations have taken a hybrid approach by maintaining a for-profit leg and incorporating a nonprofit into the business, or vice versa.

Many traditional for-profit companies and entire industries have taken on corporate social responsibility standards and initiatives. These companies work to optimize social good works and profits side by side.

Examples of Successful For-Profit and Nonprofit Hybrids

Organizations such as Life Is Good, Chipotle, The Body Shop, and Tesla have found that the two goals actually work to enhance one another. Instead of viewing the decision as a zero-sum game, innovators experiment with balancing the proper dose of nonprofit and for-profit roles.

Embrace and Embrace Innovations are examples of a nonprofit that spun off a for-profit leg. Jane Chen founded Embrace to save babies through innovative, cheap technology in impoverished communities around the world. In a Harvard Business Review article, Chen stated that after setting up as a nonprofit, she felt it was essential to raise money from venture capitalists to scale social impact.

Nonprofit Side

The nonprofit arm of Chen’s company maintains the responsibility for owning intellectual property, receiving donations, distributing the technology in poor communities, and serving as the face of education and promotion of the cause.

For-Profit Arm

The for-profit spinoff at Embrace takes on the role of managing capital-intensive work and building up business infrastructure to enable the sale of the technology to those who could afford it.

Choose Your Business Model

The hybrid business model works very well for large corporations, like Embrace, with a great ability to influence the social good. For different stages of growth and variable long-term growth potentials, considering whether to be a for-profit or nonprofit will change.

Changing from a nonprofit to a for-profit is doable but requires much administrative work. Among the necessary steps required to do so include:

• The board must first approve the plan.
• A statement of nonprofit conversion, liquidation plan, valuation, and other information must be provided to authorities.
• Founders will need to reorganize and plan from scratch.

In short, when you switch from a nonprofit to a for-profit (or vice versa), you will have to restart your company.

How Is a Nonprofit Organization Defined?

A nonprofit organization is an entity created and operated for charitable or socially beneficial purposes rather than to make a profit. It might serve religious, scientific, charitable, educational, literary, health, or animal welfare purposes. Nonprofits may receive donations from individuals, corporations, and government entities.

How Do Nonprofits Qualify as Tax Exempt and File with the IRS?

To qualify as tax exempt, a nonprofit must serve the public good, meet filing requirements, be established as a 501(c)(3) or similar type of organization, and avoid engaging in certain types of activities.

Nonprofits report their revenues, expenses, and activities to the Internal Revenue Service (IRS) by filing Form 990.

What Is a 501(c)(3) Organization?

A 501(c)(3) organization is a nonprofit that must meet requirements of Section 501(c)(3) of the U.S. Internal Revenue Code (IRC). It must remain true to its founding purpose and must not serve any private interests to stay tax exempt. It also may not attempt to influence legislation or campaign for or against any political candidate.

The Bottom Line

The choice of whether to become a for-profit or nonprofit entity may not be as clear-cut. The obvious tax benefits of becoming a nonprofit weigh against the flexibility granted to for-profit organizations that have the leverage to raise money and attract the best talent. Moreover, nonprofits face public scrutiny and strict legislation.

Perhaps if there is a change in how society views charity, nonprofits would have a better chance up against bigger and more powerful corporate rivals.

On the other hand, the nonprofit world seems to have taken innovation upon itself, as social entrepreneurs take up hybrid organizations that demand the public’s respect while strategizing like a for-profit business.

Reviewed by Andy Smith
Fact checked by Suzanne Kvilhaug

What Is the Difference Between the Different Cost Types?

Fixed costs, variable costs, and total costs all sound similar, but there are significant differences among the three. The main difference is that fixed costs do not account for the number of goods or services a company produces, while variable costs and total costs depend primarily on that number.

Key Takeaways:

• Fixed costs do not account for the number of goods or services a company produces.
• Variable costs and total costs depend on the number of goods or services a company produces.
• Companies must consider both types of costs to ensure they are fiscally solvent and thriving over the long term.

Understanding the Different Cost Types

As the name suggests, fixed costs do not change as a company produces more or fewer products or provides more or fewer services. For example, rent that a widget company pays for a building will be the same regardless of the number of widgets produced within that building.

In contrast, variable costs do change depending on production volume. For example, the cost of materials that go into producing the widgets will rise as the number of widgets produced increases.

Fixed Costs

A fixed cost is an expense that a company is obligated to pay, and it is usually time-related. A prime example of a fixed cost would be the rent a company pays monthly for office space and/or manufacturing facilities. This is typically a contractually agreed-upon term that does not fluctuate unless both landlords and tenants agree to renegotiate a lease agreement.

In the case of some rental properties, there may be predetermined incremental annual rent increases where the lease stipulates rent hikes of certain percentages from one year to the next. However, these increases are transparent and baked into the cost equation. Consequently, accountants can calculate their companies’ overall budgets with the lead time necessary to ensure a business’s bottom line is protected. This is typically how rent-controlled properties operate.

Variable Costs

Variable costs are functions of a company’s production volume. For example, widget company ZYX may have to spend $10 to manufacture one unit of product. Therefore, if the company receives an inordinately large purchase order during a given month, then its monthly expenditures rise accordingly.

Another example is a retailer that doubles its typical order to prepare for a holiday rush. This increases company ZYX’s expenses to fulfill the order. Larger purchase orders may also result in increased overtime pay for employees.

Conversely, purchase orders may decline during offseasons and slower economic times, ultimately pushing down labor and manufacturing costs accordingly. In addition, the costs of commodities and other raw materials for manufacturing may rise and fall, which can also affect a company’s variable expenses.

Total Costs

Total costs are composed of both total fixed costs and total variable costs. Total fixed costs are the sum of all consistent, non-variable expenses a company must pay. For example, suppose a company leases office space for $10,000 per month, rents machinery for $5,000 per month, and has a $1,000 monthly utility bill. In this case, the company’s total fixed costs would be $16,000.

In terms of variable costs, if a company produces 2,000 widgets at $10 per unit, and it must pay employees $5,000 in overtime to keep up with the demand, the total variable costs would be $25,000 ($20,000 in products plus $5,000 in labor costs).

Consequently, the total costs, combining $16,000 in fixed costs with $25,000 in variable costs, would come to $41,000. Total costs are an essential value a company must track to ensure the business remains fiscally solvent and thrives over the long term.

Does a Company’s Production or Sales Affect Fixed Costs?

No. Fixed costs are a business expense that doesn’t change with an increase or decrease in a company’s operational activities.

Are Variable Costs Short-Term or Long-Term?

Variable costs are usually viewed as short-term because they can be adjusted quickly. That’s because variable costs are an expense that changes in proportion to how much a company produces or sells. They rise as production or sales increase and fall as production or sales decrease.

Does a Company Report Total Costs in Its Financial Statements?

No, a company doesn’t have a line specifically for total costs in its key financial statements. Instead:

• A balance sheet reports a company’s assets, liabilities, and shareholder equity at a specific point in time.
• A cash flow statement provides aggregate data on how cash is moving through a company (including operations, investments, and financing activities) and highlights liquidity (whether the company can generate enough cash to sustain itself, invest in growth, and meet its financial obligations).
• An income statement, also known as a profit and loss (P&L) statement or a statement of revenue and expense, tracks a company’s revenue, expenses, gains, and losses during a set period.

The Bottom Line

A company looking to reduce fixed costs will likely need time, as these costs are usually set in a contract. New or renegotiated contracts could cut fixed costs. Other strategies include analyzing usage and cutting waste; outsourcing areas like marketing or customer service; and implementing workflow technology.

A company looking to cut variable costs could reduce inventory by finding new suppliers that offer more competitive prices, or negotiating better rates or discounts from existing suppliers. Other strategies include improving efficiency; analyzing products and services for cost savings; managing salary and wage costs; and investing in technology.

Implementing fixed and variable cost controls should reduce total costs.

Reviewed by Marguerita Cheng
Fact checked by Timothy Li

The basic steps involved in revoking a revocable trust are fairly simple and include the transfer of assets and an official document of dissolution.

A revocable trust is a flexible legal entity/financial structure that allows the individual who creates it, known as the grantor, to change, remove or alter the trust assets—or, in fact, amend the trust itself or its beneficiaries—at any point during their lifetime.

Also often referred to as a living trust, a revocable trust is often used to transfer assets to heirs while avoiding the time and expenses associated with probate—which they often would incur if assets were simply bequeathed to them in a will. During the life of the trust, income earned is distributed to the grantor, and only after death does its property transfer to the beneficiaries.

Key Takeaways

• Revocable trusts, as their name implies, can be altered or completely revoked at any time by their grantor—the person who established them.
• The first step in dissolving a revocable trust is to remove all the assets that have been transferred into it.
• The second step is to fill out a formal revocation form, stating the grantor’s desire to dissolve the trust.
• The official revocation declaration must be signed by the grantor, notarized, and, in some cases, filed with a local probate or estates court.

Reasons for Revoking a Trust

People might revoke a trust for any number of motives. Usually, it involves a life change. One of the most common reasons for revoking a trust is a divorce if the trust was created as a joint document with one’s soon-to-be ex-spouse.

A trust might also be revoked simply in the event that the grantor wishes to make changes that are so extensive that it would be easier to dissolve the trust and create a new one than to try to alter it. A revocable trust may also be revoked if the grantor wants to change the provisions of the trust completely.

Important

Although they avoid probate, revocable trusts are not exempt from estate taxes. Since the grantor retains control of the assets during their lifetime, those assets are considered part of the taxable estate.

How to Revoke a Trust

There are generally three steps involved in dissolving a revocable trust:

• Step one: Remove all the assets that have been transferred into the trust. This procedure involves changing titles, deeds, or other legal documents to transfer ownership.
• Step two: Create a legal document that states the trust’s creator, having the right to revoke the trust, wishes to revoke all terms and conditions of the trust and dissolve it completely. Such documents, often called a “trust revocation declaration” or “revocation of living trust,” can be downloaded from legal websites; local probate courts may also provide copies of them. It can be advisable to have a trust and estates lawyer draw one up for you or at least review it to make sure it is correctly worded and meets all the qualifications of your state’s laws. Also, if the trust has a variety of assets, it is often easier to let a qualified attorney make sure everything has been properly transferred out of it.
• Step three: The dissolution document should, at minimum, be signed and dated by the trust’s creator, with a notary public acting as a witness. If the trust being dissolved was registered with a particular court, the dissolution document should be filed with the same court. Otherwise, you can simply attach it to your trust papers and store it with your will or new trust documents.

Who Can Dissolve a Revocable Trust?

The person who established the trust, or the grantor, can dissolve a revocable trust at any time. The grantor might dissolve the trust in order to completely rewrite its terms or because of a life change, such as a divorce.

Can a Dissolution Be Legally Challenged?

Dissolving a revocable trust can raise red flags for family members, especially if the grantor is elderly. The dissolution can be contested by those of legal standing under certain circumstances, including when there appears to be undue influence on the grantor, the grantor is mentally incompetent at the time they make changes, or there is misappropriation of funds by the trustee.

Can an Irrevocable Trust Ever Be Dissolved?

It is possible to dissolve an irrevocable trust, but it is much more complicated than dissolving a revocable trust. Typically, it requires the consent of all of the beneficiaries, paperwork has to be filed, and court approval may be required. What’s more, if the trust held assets that have appreciated substantially in value, there can be significant tax consequences when the assets are distributed.

The Bottom Line

A revocable trust can be dissolved by the person who set it up, or the grantor, at any time. There are several steps involved, but the process is not a complicated one. Common reasons for dissolution include a divorce or the desire to completely rewrite the original trust.

Fact checked by Yarilet Perez
Reviewed by Michael J Boyle

Bank of America Corp. (BAC) is a leading bank in the U.S. and one of the world’s largest financial institutions. It offers a range of financial products and services, including savings accounts, mortgage loans, cash and wealth management, investment funds, and insurance.

The company operates through four key business segments: Consumer Banking, Global Wealth & Investment Management, Global Banking, and Global Markets. As of March 2025, Bank of America’s 12-month trailing net income and revenue were $25.5 billion and $101.9 billion, respectively. The company’s market cap was approximately $323.6 billion.

Key Takeaways

• Bank of America is one of the largest consumer banks in the United States.
• The largest institutional shareholder is Warren Buffett’s Berkshire Hathaway.
• Individual shareholders include company insiders, like executives and board members.

Inside Shareholders

Brian T. Moynihan

In 2024, Brian Moynihan owned 2.7 million Bank of America shares. Mr. Moynihan is the chair of the board of directors. He has served as chief executive officer (CEO) since 2010.

Moynihan joined Fleet Boston Financial as the company’s deputy general counsel in 1993 before leading the firm’s brokerage and wealth management business operations. Following a 2004 merger of Fleet Boston with Bank of America, Moynihan assumed the position of president of wealth and investment management at the bank, then was promoted to a series of executive positions before rising to CEO.

Matthew Koder

In 2024, Matthew Koder owned approximately 548,000 Bank of America shares. He serves as president of Global Corporate & Investment Banking. Koder joined Bank of America in 2011 as head of Asia Pacific Global Corporate & Investment Banking. He previously held positions at UBS and Goldman Sachs.

Dean Athanasia

Dean Athanasia is president of Regional Banking for Bank of America and held approximately 443,000 Bank of America shares in 2024. He oversees Retail Banking, Preferred Banking, Business Banking, and Global Commercial Banking. Athanasia joined Bank of America in 1996 after previously holding positions at Global Wealth and Investment Management Banking and Merrill Edge.

71%

The percentage of Bank of America’s total shares held by institutional investors.

Institutional Shareholders

Berkshire Hathaway Inc.

Berkshire Hathaway held 1.03 billion shares of Bank of America in 2024. The company has subsidiaries in insurance, rail transportation, energy, and retailing. Berkshire Hathaway also owns a sizable investment portfolio that includes shares of major U.S. corporations. The value of Bank of America shares in Berkshire’s portfolio was $29 billion in 2024.

Vanguard Group Inc.

As of 2024, Vanguard Group owned 608.2 million shares of Bank of America. The company is primarily a mutual fund and ETF management company with about $7.6 trillion in global AUM.

BlackRock Inc.

BlackRock owned 494.5 million shares of Bank of America in 2024. The company is primarily a mutual fund and ETF management company with approximately $10 trillion in AUM.

As of March 2025, the iShares Core S&P 500 ETF (IVV) is one of BlackRock’s largest ETFs, with approximately $589 billion in net assets. Bank of America comprises about 0.58% of IVV’s holdings.

How Much Does Bank of America Manage?

In 2024, Bank of America held approximately $3.6 trillion in client balances.

How Much Money Does Bank of America Lend?

Bank of America provided over $10 billion in loans to individuals and small businesses in 2024.

How Does Bank of America’s Stock Perform Compared to the Overall Market?

In 2024, Bank of America’s stock outperformed the S&P 500, earning 30.5% over the market’s 23.3%.

The Bottom Line

Bank of America is one of the largest consumer banks in the United States. The largest institutional shareholder is Berkshire Hathaway. The company’s CEO is the largest inside shareholder.

Find out what goes on behind the scenes of your mortgage

Fact checked by Vikki Velasquez
Reviewed by Lea D. Uradu

Your mortgage loan may have helped you buy your home, but investors see a mortgage as a stream of future cash flows. These cash flows get bought, sold, stripped, tranched, and securitized in the secondary mortgage market. Because most mortgages end up for sale, the secondary mortgage market is huge and very liquid.

From the point of origination to the point at which a borrower’s monthly payment ends up with an investor as part of a mortgage-backed security (MBS), asset-backed security (ABS), collateralized mortgage obligation (CMO), or collateralized debt obligation (CDO) payment, there are several different institutions that all carve out some percentage of the initial fees and monthly cash flows.

In this article, we’ll show you how the secondary mortgage market works—and why lenders and investors participate in it—and introduce you to its major participants.

The four types of mortgage market players include:

1. The mortgage originator
2. The aggregator
3. The securities dealer
4. The investor

Key Takeaways

• A mortgage loan might get sold after origination and packaged into an investment, such as a mortgage-backed security (MBS).
• A mortgage-backed security (MBS) contains a pool of mortgage loans and pays fixed-interest payments to investors.
• The secondary mortgage market includes the mortgage lender or originator who lends money to a borrower to buy a home.
• Within the secondary mortgage market, mortgages get sold to aggregators like Fannie Mae or Freddie Mac.
• From there, a pool of loans gets packaged into an MBS, whereby a securities dealer sells it to investors like a financial institution or hedge fund.

1. The Mortgage Originator

The mortgage originator is the first company involved in the secondary mortgage market. Mortgage originators consist of retail banks, mortgage bankers, and mortgage brokers. While banks use their traditional sources of funding to close loans, mortgage bankers or nonbanks typically use what is known as a warehouse line of credit to fund loans. Most banks—and nearly all mortgage bankers—quickly sell newly originated mortgages into the secondary market.

One distinction to note is that banks and mortgage bankers use their own funds to close mortgages, and mortgage brokers do not. Rather, mortgage brokers act as independent agents for banks or mortgage bankers, putting them together with clients (borrowers).

However, depending on its size and sophistication, a mortgage originator might aggregate mortgages for a certain period of time before selling the whole package; it might also sell individual loans as they are originated. There is risk involved for an originator when it holds onto a mortgage after an interest rate has been quoted and locked in by a borrower. If the mortgage is not simultaneously sold into the secondary market at the time the borrower locks the interest rate, interest rates could change, which changes the value of the mortgage in the secondary market and ultimately, the profit the originator makes on the mortgage.

Originators that aggregate mortgages before selling them often hedge their mortgage pipelines against interest rate shifts. There is a special type of transaction called a best efforts trade designed for the sale of a single mortgage, which eliminates the need for the originator to hedge a mortgage. Smaller originators tend to use best efforts trades.

In general, mortgage originators make money through the fees that are charged to originate a mortgage and the difference between the interest rate given to a borrower and the premium a secondary market will pay for that interest rate.

2. The Aggregator

Aggregators are the next company in the line of secondary mortgage market participants. Aggregators are large mortgage originators with ties to Wall Street firms and government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac. Aggregators purchase newly originated mortgages from smaller originators and, along with their own originations, form pools of mortgages that they either securitize into private-label mortgage-backed securities (by working with Wall Street firms) or form agency mortgage-backed securities (by working through GSEs).

Similar to originators, aggregators must hedge the mortgages in their pipelines from the time they commit to purchasing a mortgage through the securitization process until the MBS is sold to a securities dealer. Hedging a mortgage pipeline is a complex task due to fallout and spread risk. Aggregators make profits by the difference in the price that they pay for mortgages and the price for which they can sell the MBS backed by those mortgages, contingent upon their hedge effectiveness.

3. The Securities Dealers

After an MBS has been formed (and sometimes before it is formed, depending upon the type of the MBS), it is sold to a securities dealer. Most Wall Street brokerage firms have MBS trading desks. Dealers at these desks do all kinds of creative things with MBS and mortgage whole loans; the end goal is to sell them as securities to investors. Dealers frequently use MBSs to structure CMOs, ABSs, and CDOs.

These deals can be structured to have different and somewhat definite prepayment characteristics and enhanced credit ratings compared to the underlying MBS or whole loans. Dealers make a spread in the price at which they buy and sell MBSs and look to make arbitrage profits in the way they structure the particular CMO, ABS, and CDO packages.

4. The Investors

Investors are the end users of mortgages. Foreign governments, pension funds, insurance companies, banks, GSEs, and hedge funds are all big investors in mortgages. MBS, CMOs, ABSs, and CDOs offer investors a wide range of potential yields based on varying credit quality and interest rate risks.

Foreign governments, pension funds, insurance companies, and banks typically invest in highly rated mortgage products. These investors seek certain tranches of the various structured mortgage deals for their prepayment and interest rate risk profiles. Hedge funds are typically big investors in mortgage products with low credit ratings and structured mortgage products with greater interest rate risk.

Of all the mortgage investors, the GSEs have the largest portfolios. The type of mortgage product they can invest in is largely regulated by the Office of Federal Housing Enterprise Oversight.

Why Do Banks Sell Mortgages?

Banks sell mortgages for two reasons: liquidity and profitability.

Banks must keep pools of money on hand—to meet their federally mandated cash reserve requirements and have funds available for account holders and customers. Selling mortgages frees up their capital, ensuring they can handle withdrawals and enabling them to make loans—including other mortgages—to applicants. It also gets debt and default risk off their books.

Selling mortgages converts longer-term, less liquid assets on the balance sheet to cash, the most liquid asset on the balance sheet. In addition, banks collect immediate commissions on the loans they sell. By contrast, the mortgage interest the bank earns over the life of your loan takes decades to collect.

In a nutshell, selling loans is more profitable than holding onto them. Banks can make money by writing a mortgage and then collecting the interest on it for years. However, they can make even more by issuing a mortgage, selling it (and earning a commission), writing new mortgages, and then selling them.

Important

Sometimes, banks just sell the mortgage debt—the loan principal—and keep the mortgage servicing rights, which means they continue receiving the borrower’s repayments. Often, though, they sell the entire mortgage—both the debt itself and the servicing rights.

Why Do Investors Buy Mortgages?

Investors buy mortgages (or mortgage-backed securities) for the same reason they invest in most debt instruments: income. Specifically, the interest generated by the loan represents steady monthly income, depending on the frequency of the mortgage owner’s payments. The regularity of income appeals to institutional investors, such as pension plans, insurance annuity companies, and mutual funds that make recurring payments to account holders and clients.

Most mortgage-backed securities are considered to be of high credit quality, often higher than that of corporate bonds, especially if they are agency mortgage-backed securities (that is, guaranteed by the government or government-sponsored agencies such as Ginnie Mae, Fannie Mae, or Freddie Mac). Yet mortgage-backed securities have provided higher yields than other low-risk bonds, like Treasuries with similar maturities.

Other investors might purchase mortgages to diversify their portfolios and asset mix. Investing in mortgages provides something of a real estate play.

What Is a Mortgage-backed Security (MBS)?

A mortgage-backed security (MBS) is an investment that provides fixed-income interest payments to investors. An MBS contains a pool of mortgage loans packaged and sold to investors from lenders or banks.

How Does the Secondary Mortgage Market Work?

The mortgage lender or originator lends money to a borrower to buy a home. The mortgage loan gets sold to an aggregator like Fannie Mae or Freddie Mac. A number of loans get pooled and packaged into a mortgage-backed security (MBS). A securities dealer sells the MBS to investors, who may include financial institutions, pensions, and hedge funds.

What Is a Collateralized Debt Obligation (CDO)?

A collateralized debt obligation (CDO) pays a fixed interest rate since it’s a fixed-income security. CDOs contain a wider variety of loans or debt versus mortgage-backed securities, which contain home loans. A CDO investment might include credit card receivables, home equity loans, mortgages, corporate loans, and auto loans.

The Bottom Line

Borrowers may not realize their mortgage can be sold shortly following its origination and become packaged into an investment, including a mortgage-backed security (MBS) or collateralized debt obligation (CDO).

The investor or end user of a mortgage might be a hedge fund, making directional interest rate bets or a central bank of a foreign country that likes the credit rating of the MBS. The secondary mortgage market is vast, liquid, and complex, with several institutions all eager to consume a slice of the mortgage pie.

Correction—June 4, 2023: A previous version of this article incorrectly stated that selling a mortgage reduces a bank’s liabilities. This article has been updated to clarify how the sale converts one asset to another.