Investopedia

Use These Smart Planning Tips to Set the Stage for Your Loved Ones’ Futures

Fact checked by Vikki Velasquez
Reviewed by David Kindness

Everybody needs an estate plan, regardless of their age, state of health, or even the size of their assets. An estate plan ensures that your money and property go to the people of your choice while minimizing the impact of taxation. Having a plan also will help your heirs access their inheritance faster and more easily.

You have numerous options, and one of them should be the best for you and your family.

Key Takeaways

• Federal law allows an individual to inherit up to $13.610 million tax-free as of the 2024 tax year. For 2025, the maximum rises to $13.99 million.
• There is no limit to the tax-free status for the spouse of the deceased.
• People who inherit assets valued under the maximum do not usually have to file an estate tax return.
• Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.

The Fundamentals of Wealth Transfer

Federal law provides an estate tax lifetime exemption that allows an individual to transfer up to $13.61 million tax-free to beneficiaries in 2024. The figure rises to $13.99 million in 2025.

This exemption could change significantly at the end of 2025 when the Tax Cuts and Jobs Act (TCJA) expires unless Congress agrees to extend the provision. The provision’s chances of an extension rose with the reelection of President Donald Trump, who signed it into law at the end of 2017.

Assets valued at more than the exemption amount can be taxed at a rate of as much as 40%. That rate has been in place since 2013.

The estate tax applies to everything you own at the time of your death, including partial interests in some assets, but not to the overall value of your assets, referred to as your gross estate. Your heirs are permitted to subtract mortgages, the costs of administering the estate, any gifts you give to charity, other debts you hold at the time of death, and anything you leave to your spouse.

Important

The Tax Cuts and Jobs Act (TCJA) nearly doubled the estate tax lifetime exemption when the law was passed in December 2017. The exemption could be cut to as low as $7 million when the TCJA expires at the end of 2025.

The Unlimited Marital Deduction

Federal tax law allows you to pass your wealth to your spouse with no limit. These transfers are completely tax-free whether they occur during your lifetime or when you die.

Of course, this exemption lasts only for the lifetime of the surviving spouse, whose heirs may face inheritance taxes on amounts exceeding the limit.

The Portability Rule

Another Internal Revenue Service (IRS) rule allows surviving spouses to reduce the impact of taxess on their heirs. The first spouse to die can transfer any unused portion of his or her own lifetime exemption to the survivor.

Let’s say the first spouse has died, passing on an estate that is valued at only half of the $13.61 million lifetime exemption. The surviving spouse can add the remaining $6.8 million to their own $13.61 million exemption for a total of $20.41 million under this portability rule.

The surviving spouse must file an estate tax return for the decedent to claim this right.

It’s worth noting that only Hawaii and Maryland offer portability for state-level estate taxes.

Ideally, both spouses are U.S. citizens because some restrictions apply otherwise. The IRS includes same-sex spouses provided that they’re legally married. It doesn’t recognize registered domestic partnerships or civil unions.

Tax-Efficient Ways to Transfer Wealth

Federal law provides a few other strategies to transfer your wealth without an undue tax burden if you are not married or want to leave a portion of your estate to others. 

Form an Irrevocable Trust

A trust is a legal entity set up by a grantor, usually the original owner of the assets it holds. The grantor funds the trust by transferring ownership of their property into its name or into the name of a trustee. The trustee is the individual or entity designated to oversee the trust upon the grantor’s death.

The assets that the trust holds don’t contribute to the grantor’s taxable estate.

One tax advantage to an irrevocable trust is that it can hold your life insurance policy. In that case, its value doesn’t contribute to the value of your taxable estate at the time of your death.

Moreover, any income earned by the assets held within the trust is taxed to the trust, not to the grantor, because the trust technically now owns the income-producing assets. This provides a benefit during your lifetime as well, easing your annual income tax burden.

The downside to an irrevocable trust is that, as the name implies, it can’t be amended, changed, or revoked by the grantor. It’s forever.

The grantor can’t reclaim the property they’ve placed into it. This is not the case with a grantor trust or revocable trust, which allows the grantor or creator to take back and reclaim assets placed into it or even dissolve the trust completely.

They can delete beneficiaries or add new ones without restriction.

Engage in Annual Gifting

You might prefer to simply give your wealth away during your lifetime, and the IRS has rules in place for this, too.

The gift tax is a separate level but it works in tandem with the estate tax. Gifting during your lifetime will decrease the value of your eventual estate because you’ve already given much of your wealth away, rendering your estate nontaxable. The IRS doesn’t want that to happen, so it imposes both taxes.

The tax code provides an annual gift tax exclusion of $18,000 per person per year for 2024, rising to $19,000 for 2025. You can give this much away, free of taxation.

Those numbers are more generous than they appear at first glance. The limit is for an individual, so multiple family members can get gifts.

“Take advantage of the gift-splitting provision,” advises Mike K. Earl, a certified financial planner and partner and director of The Wealth Group, Austin B. Colby & Associates in Minnesota. “For example, a married couple could give $36,000 to their son ($18,000 as a gift from each spouse). If this same couple’s son was married with two children, the couple could give up to $144,000 each year to their son’s family.” (Each spouse can give $72,000.)

You’re also granted a lifetime gift tax exemption, but unfortunately, it’s shared with the estate tax. Gifts that exceed the $18,000 yearly exclusion can be applied to your lifetime exemption so that the tax isn’t payable until your death, and they would then only be taxed if the total value of your estate and your lifetime gifts exceeds the annual estate tax exemption limit.

As with the estate tax, gifts made to your spouse or to charity don’t count against these limits. But lifetime gifts can subtract from the lifetime exemption if you do this, leaving less dollar-value protection for your estate.

The annual gift tax exclusion and the estate tax examption amount are adjusted annually for inflation.

Explore Other Gifting Options

Gifts made directly to a qualified educational institution or to a healthcare provider on behalf of someone other than yourself can be made tax-free.

Tuition and medical bills don’t apply against the annual gift tax exclusion, nor do gifts made to political organizations.

Form a Family Limited Partnership

A family limited partnership (FLP) provides joint ownership of family-owned assets to family members. Family members are either general partners or limited partners who assume varying (or no) responsibility for controlling the assets placed into the FLP’s ownership and managing its investments.

Parents and grandparents who donate their wealth and assets into an FLP then serve as partners who can transfer their partnership interests to other family members, including their children and grandchildren.

This can minimize or entirely dodge gift and estate taxes and protect assets from personal creditors, but the IRS does require that the partnership have a clear and definable business or investment purpose.

It must be created in such a way as to earn income of its own, and family partners must report that income on their own tax returns for income tax purposes.

“These structures can centralize family wealth management, provide some asset protection, and offer opportunities for tax-advantaged gifting through the use of valuation discounts,” says Celeste Robertson, a Texas-based estate planning and probate attorney with offices in Rockport and Corpus Christi.

Form a Generation-Skipping Transfer Trust

The generation-skipping transfer tax (GSTT) targets both lifetime gifts and estate bequests made to a person who is at least 37½ years younger than you, such as grandchildren or great-grandchildren you want to include in your estate plan.

The tax code provides for a generation-skipping transfer tax lifetime exemption as well. The maximum is $13.61 million for 2024 and $13.99 million for 2025.

The “skip person”—the individual who is two or more generations younger than the individual making the gift—must be the sole beneficiary of the trust and must have withdrawal rights to take advantage of the annual exclusion.

What Is the Most Tax-Efficient Way to Transfer Wealth?

The best strategy depends on the individual’s situation. Meeting with an estate tax lawyer or financial planner can help you determine the best way to pass on your wealth to your heirs.

What Are Some Strategies for Transferring Wealth?

One strategy is to give away some or all of your wealth over your lifetime rather than transfer it after your death. Or, you can create a generation-skipping transfer trust to provide for anyone who is at least 37½ years younger than you, such as grandchildren or great-grandchildren.

What Is the Greatest Wealth Transfer?

The greatest wealth transfer, as it has been called, is the process happening in the U.S. right now as the baby boom generation passes its wealth on to younger generations. Baby boomers are projected to leave their heirs, mostly millennials and Gen Xers, $84 trillion through 2045.

The Bottom Line

The federal gift and estate tax structure is currently generous enough to allow the vast majority of people to pass their wealth and assets to their loved ones tax-free.

You’ll still want to know and understand your options so you can properly plan for the future. Keep these taxes and options in mind as you plan your estate, and consider touching base with an attorney or tax professional who can guide you and keep you up to date with changes in the law.

It can give you an edge in a tight real estate market but there are downsides

Fact checked by Katharine Beer
Reviewed by Lea D. Uradu

“Cash is king,” goes the old adage. However, does that philosophy ring true when buying a home?

You may want to pay cash for your home if you’re shopping in a competitive housing market, or if you’d like to save money on mortgage interest. It could help you close a deal and beat out other buyers. However, there are downsides to not using a mortgage, such as the risk you take in tying up your funds in an illiquid asset. Learn when you should and shouldn’t pay for a home in all cash.

Key Takeaways

• Cash offers can give homebuyers an edge with motivated sellers eager to close the deal, or with sellers in tight markets where many bidders are competing for the same properties.
• Paying all cash for a home can make sense for some people and in some markets, but be sure that you also consider the potential downsides.
• The drawbacks include tying up too much investment capital in one asset class, losing the leverage provided by a mortgage, and sacrificing liquidity.

What Is the Process of Buying a Home with Cash?

The first step in buying a home with cash, not surprisingly, is coming up with the cash. Unless you happen to have that much money sitting in the bank, you’ll probably need to liquidate other investments and have the proceeds transferred into your bank account. Bear in mind that selling securities on which you’ve made a profit will trigger capital gains taxes.

A prospective seller may also ask for proof that you have the cash, such as your latest bank statement.

After that, the process is very similar to buying a home with a mortgage—except for having a mortgage lender looking over your shoulder. Once you’ve chosen a home that you want to buy:

1. Negotiate a price and sign a contract: Often referred to as a sales and purchase agreement, this contract will confirm the terms to which you and the seller have agreed. Sample forms are available online, from your real estate agent, or from your or the seller’s lawyer. You will want the contract to include a home inspection contingency so that you can get out of the deal or renegotiate the price if there’s anything seriously wrong with the property.
2. Hire a professional home inspector: This most likely would be mandatory if you were using a mortgage, but it’s also a very good idea if you’re paying cash.
3. Arrange for title insurance: Since no mortgage lender is involved, you won’t have to pay for lender’s title insurance. However, you will want owner’s title insurance. The title insurance company’s job is to search public records to verify that you’ll have clear title to the property that you’re purchasing—meaning that you own it free of any liens, claims, or disputes over whether the seller was the actual owner. Title insurance protects you against any problems that the title search might have missed. Whether you or the seller pays the one-time premium for this insurance is for you to negotiate.
4. Set up the closing: This is the meeting at which you and the seller will sign and exchange various documents to seal the deal. It may be held at the office of an escrow company hired by you or the seller to handle the necessary paperwork and register the sale with the proper authorities. Some title insurance companies also provide these services.
5. Fork over the cash: The closing is typically the point at which you pay the seller. This has traditionally required a cashier’s check from your bank but also may be done electronically these days.

Pros of Paying All Cash for a Home

Paying all cash provides advantages for homebuyers in competitive markets, and could provide some financial benefits, too.

You’re a More Attractive Buyer

A seller who knows that you don’t plan to apply for a mortgage is likely to take you more seriously. The mortgage process can be time-consuming, and there’s always the possibility that an applicant will be turned down, the deal will fall through, and the seller will have to start all over again, noted Mari Adam, a certified financial planner in Boca Raton, Fla.

Better Deal Possible

Just as cash makes you a more appealing buyer, it also puts you in a better position to bargain. Even sellers who have never heard the phrase “time value of money” will understand intuitively that the sooner they get their money, the sooner they can invest or make other use of it.

Avoid Mortgage Applications

After the housing bubble and the ensuing financial crisis of 2007–2008, mortgage underwriters tightened their standards for deciding who’s worthy of a loan. While they have loosened up somewhat since then, they are still likely to request substantial documentation even from buyers with solid incomes and impeccable credit records.

While that might be a prudent step on the part of the lending industry, it can mean more time and aggravation for mortgage applicants.

Other buyers have little choice but to pay cash. “We’ve had buyers who couldn’t get a new mortgage because they already have an existing mortgage on another house up for sale,” Adam said.

“Since they can’t get a new mortgage, they buy the new property with all cash. Once the old property sells, they may place a mortgage on the new property or perhaps decide to forgo the mortgage altogether to save on interest.” 

No Mortgage Payments

Mortgages are typically the largest bill that people have to pay each month, as well as the biggest burden if their income falls off due to a job loss or some other misfortune.

Years ago, homeowners would sometimes celebrate their final payments with mortgage-burning parties. Today, the average homeowner is unlikely to stay in the same place long enough to pay off a 30-year mortgage or even a 15-year one. In addition, homeowners often refinance their mortgages when interest rates fall, which can extend their loan obligations further into the future.

Mortgage-Free Retirement

If peace of mind is important to you, then paying off your mortgage early or paying cash for your home in the first place can be a smart move. That’s especially true as you approach retirement. Though considerably more Americans of retirement age carry housing debt than they did 20 years ago, according to Federal Reserve data, many financial planners and retirees see at least a psychological benefit in retiring free of debt.

“If someone is downsizing to a less expensive house in retirement, I generally advise them to use the equity in their current home and not get a mortgage on the new house,” said Michael J. Garry, a certified financial planner in Newtown, Pa.

Cons of Paying All Cash for a Home

Although there are pluses to buying a home in cash, don’t forget to consider the downsides.

Money Tied Up in One Asset Class

If the cash required to buy a home outright represents most of your savings, then you’ll be bucking one of the hallowed rules of personal finance: diversification.

What’s more, in terms of return on investment, residential real estate has historically lagged behind stocks, according to many studies. That’s why most financial planners will tell you to think of your home as a place to live rather than as an investment. 

Loss of Financial Leverage

When you buy an asset with borrowed money, your potential return is higher—assuming the asset increases in value.

For example, suppose you bought a $300,000 home that has since risen in value by $100,000 and is now worth $400,000. If you had paid cash for the home, then your return would be 33% (a $100,000 gain on your $300,000). However, if you had put down 20% and borrowed the remaining 80%, then your return would be 166% (a $100,000 gain on your $60,000 down payment). This oversimplified example ignores mortgage interest, tax deductions, and other factors, but that’s the general principle. 

Warning

Leverage works in the other direction, too. If your home declines in value, then you can lose more, on a percentage basis, if you have a mortgage than if you had paid cash. That may not matter if you intend to stay in the home, but if you need to move, then you could find yourself owing your lender more money than you can collect from the sale.

You Sacrifice Liquidity

Liquidity refers to how quickly you can take your cash out of an investment, if you ever need to. Most types of bank accounts are totally liquid, meaning that you can obtain cash almost instantly. Mutual funds and brokerage accounts can take a little longer, but not much. A home, however, can easily require months to sell.

You can, of course, borrow against the equity in your home, through a home equity loan, a home equity line of credit, or, if you’re at least age 62, a reverse mortgage. As Garry points out, however, all of these options have drawbacks, including fees and borrowing limits, so they should not be entered into casually.

How Common Are All-Cash Home Sales?

Just over 36% of single-family house and condominium sales were all cash in 2022, according to ATTOM Data Solutions. That’s the highest level since 2013.

How Much Can I Save if I Pay All Cash?

A study published in 2021 found that homebuyers with mortgages paid 11% more on average than those who paid all cash. But a lot will depend on the state of the housing market at any given time.

Can I Change My Mind Later and Get a Loan on a Home I Paid Cash for?

Yes, and you’ll have a variety of options to choose from. These include a mortgage with cash-out refinancing, a home equity loan or line of credit, or a reverse mortgage if you meet the age requirements.

Can I Get Cash from Securities Without Selling Them?

If you have investments in a brokerage account that allows margin loans for purposes such as buying real estate, then you may be able to borrow as much as 50% of their value without selling them. However, this is a risky move, especially if you don’t pay the money back quickly, such as by taking a mortgage on the home soon after you’ve completed the all-cash transaction.

The Bottom Line

Buying a home in all cash may save you money, both on the purchase price and in interest, and it could give you an edge in a competitive homebuying market. It also eliminates a big monthly bill when you don’t have a mortgage payment to make.

But before you draw down all of your savings to buy a house, consider whether you’d be better off keeping some of your funds liquid, investing the difference, and leveraging your mortgage to your advantage.

Fact checked by Vikki Velasquez
Reviewed by David Kindness

Unsteady first working years, higher than average student loan balances, and the disappearance of defined benefit plans (or pensions) mean many millennials have been fighting an uphill battle most of their working lives.

Still, many financial advisors are impressed with this generation and how they have prioritized their finances, and for good reason. This digitally native generation is also tech-savvy in figuring out the best ways to save for their futures.

But even the most dedicated saver can use expert advice on juggling competing financial priorities. We asked top financial advisors for insight for millennials who want to get the most out of their money.

Key Takeaways

• Sixty-four percent of millennials have investments, making them the most invested generation.
• Social media platforms like LinkedIn, X (formerly Twitter), YouTube, and TikTok are rising in popularity among millennials as sources of financial information.
• Financial advisors emphasize the importance of emergency savings while staying on track.
• The 50/30/20 budget rule is a simple way to allocate after-tax dollars to account for needs, wants, and savings.

First: What Millennials Are Getting Right

According to financial advisors like Douglas Boneparth, president of Bone Fide Wealth, millennials are using the past to fuel their financial futures. Boneparth “thinks the trauma of the Great Recession has made millennials very aware of savings and emergency funds,” which creates a stronger foundation that allows them to be in the accumulation phase during their higher earning years.

Melissa Joy, certified financial planner (CFP) and certified divorce financial analyst (CDFA), agrees. She says, “Millennials are responsible for their money and making great choices.” Joy is particularly encouraged by how comfortably they navigate retirement through company programs.

Joy also finds in her practice that once millennials feel they have a handle on balancing their debt, earnings, and current savings, they seek information about the next steps.

Even for millennials with no prior savings or plans for the future, all is not lost. Joy says, “If you feel like you are behind, now is such a good time to get to investing. Now, you are entering your high-earning years. There is no better time than the present to use your human capital to improve your picture.”

Emergency Savings Are Very Important

All the financial advisors interviewed in this article agreed that having emergency savings is the foundation of a sound financial plan. Life happens, and Joy emphasizes that the security of an emergency savings account can help you stick to your goals.

Sure, you could skip the emergency fund and instead invest that money. However, the average credit card interest rate for users with a balance is 22.80% (the latest available data, November 2024). Even the best investment will have a hard time outpacing 22.80% interest.

Tip

Individuals without emergency savings are more likely to use credit cards or debt to cover emergency costs.

Boneparth sums up the importance of emergency savings by saying, “Give yourself the opportunity to feel safe and secure before you even start investing. Starting early is important, but what good is compounding if you can’t stay invested? This way, you can navigate the ups and downs of life without having to worry. The ability to navigate that and stay on your path separates good and bad investors.”

Set Clear Priorities

Those who are most successful in planning their financial futures have clear priorities, say financial advisors.

“You cannot have everything you want, so what is the most important thing to you? You need to list it out and really prioritize it,” says Thomas Kopelman, co-founder and financial planner at AllStreet Wealth. “Also, do the opposite. Make a list of things that you can cut.”

Many people think investing and planning for the future is just about dollars and cents, but financial advisors know that many money moves are psychological. By clearly establishing priorities and knowing “what it is that you are truly after,” Boneparth says, your goals will motivate you to keep going.

If you’re struggling to figure out what is most important, it’s best to talk to a financial advisor about prioritizing your goals.

Give Every Dollar a Job

With that in mind, Nathaniel Hoskin, CFP, accredited wealth management advisor (AWMA), and founder and lead advisor at Hoskin Capital, recommends “giving every dollar a job.” The best way to do that is to create a realistic budget.

Budgeting is a critical part of a financial plan, and while there are as many different ways to budget as there are stars in the sky, the most important part of budgeting is seeing where your money is going. Financial advisors know this is an uncomfortable truth for many people and that the further we get away from tangible money, the easier it is to ignore. In fact, 65% of people do not know how much money they spent last month.

Boneparth echoes that he has seen this in his practice and encourages people to be honest about their budgets by budgeting “not based on what you think you are spending but what you know you are spending.”

To face budgeting woes head-on, some financial advisors, like Hoskin, recommend looking at spending for three months before they lay out a budget for future expenditures. Hoskin recommends smartphone apps as a quick way to see income vs. expenses for the three prior months without having to backtrack every expense with pencil and paper.

Focus on Reverse Budgeting

Budgeting will reveal either a surplus or a deficit. Once you know where your money is going, “even if [your] money is not spreading as far as [you] want it to,” you can focus on reverse budgeting, says Hoskin. Reverse budgeting means putting money aside for your future self first.

Kopelman agrees wholeheartedly with Hoskin on reverse budgeting. Hoskin further recommends that you take advantage of automated investing and savings. He sees automation as tricking your brain and nervous system into sticking to the strategies. Setting money aside for your future self first by automatic withdrawals or transfers means you are working toward your goals before any of your income is spent.

Budgeting is not a set-it-and-forget-it endeavor. You should continue to track your budget and adjust goals as your priorities and income change. An easy place to continually track your budget is with a calculator.

“The best we can do is our best,” says Colin Overweg, CFP, founder of Advize Wealth Management. “We cannot predict the future, so we will put together a plan, stick to it, and adjust accordingly.”

Be a Goal-Getter with ‘Free Money’

Another way to slay your financial future is to make sure that you take advantage of all the “free money” offered by your employer.

An overwhelming percentage of millennials are participating in employer-sponsored retirement plans and should pat themselves on the back for that. Participating is the first step; taking advantage of employer matching is the next logical step. Hoskin says this should be the watermark for people with few extra means. Leaving matching contributions on the table is like walking away from free money.

Create a Financial Plan

Once you’ve established emergency savings and taken advantage of all matching employer contributions, financial advisors recommend working toward tackling those financial goals and priorities based on your budget.

There are some universally accepted future-focused budgeting tactics, like the 50/30/20 budget rule, where 50% of income is spent on needs, 30% on wants, and 20% on savings. While the 50/30/20 rule is simple, financial advisors tend to agree that saving 20% of income is a solid target, but 15% is a great starting point.

Those incapable of saving 20% of their income today should ideally save no less than 10% and incrementally increase it. Joy calls this “matching your lifestyle creep with your savings creep.” Managing the lifestyle creep is where a financial advisor can come in handy as well, because they can help you continually reassess the percentage of gross income you’re investing.

Financial advisors want their clients to invest based on their priorities, but they also emphasize the importance of Roth individual retirement accounts (Roth IRAs) for those who qualify. Roth IRAs are accounts in which you can invest after-tax dollars. That is beneficial because those who wait to withdraw this money until after they are 59½ years old can withdraw this money and its growth tax-free.

There are many more resources you can use to help you plan for and fund your retirement.

Additional Considerations

The most popular source for financial advice is social media. Many advisors today exist in the social media space and practice radical generosity with their knowledge and expertise.

However, as with anything, only some on the internet are experts. You should approach some free financial literacy with the same caution as approaching an unusual, spam-like social media direct message.

If you’re investing in company-sponsored plans, you should talk with your plan provider and financial advisor to ensure your money is being invested appropriately for your target retirement date and risk tolerance.

Joy also encourages people with stock options as part of their overall compensation to talk to an advisor. She has seen ill-prepared people make very reactive decisions regarding their stock options, and says planning can integrate these stock options into financial plans.

Where Do Millennials Get Their Financial Advice?

According to a survey from the National Association of Personal Financial Advisors, most millennials get financial advice from a family member (31%), a website (27%), a trusted friend (26%), a parent (26%), a financial advisor (21%), or social media (20%). Thirty-four percent of millennials and Gen Z respondents said that lack of financial guidance was hurting their ability to manage their retirement plans.

What Percentage of Millennials Have a Financial Advisor?

About 21% of millennials surveyed by the NAPFA got advice from a financial advisor.

Why Do Millenials Struggle Financially?

Millennials have trouble saving because the costs of living and inflation have increased, rents and home prices are up, and wages and salary increases have not kept pace.

The Bottom Line

Millennials are DIY-ing their financial future more than any previous generation, but financial advisors agree they’re doing well. Still, those who desire the best outcomes should prioritize goals and budgeting, take advantage of “free money” from their employer, make a savings plan, and stick to it.

Financial advisor Melissa Joy reminds us that perception is not always reality because “you always think everyone is doing better than you are, and that is not always the case.” However, millennials worried about how they stack up should not quit before they begin. It’s not too late to plan for your financial future.

Douglas Boneparth reiterates, “The first best time is yesterday. The second best time is today.”

How to use them to save for retirement

Fact checked by Vikki Velasquez
Reviewed by David Kindness

Millennials born in the early 1980s to mid-1990s are beginning to enter middle age and their peak earning years. This generation entered the workforce around the time of the Great Recession and has faced barriers that include a hefty student loan debt burden, the COVID-19 pandemic, and an increasing number of natural disasters. As a result, they may experience many obstacles in securing their retirement.

Target date funds may provide a helpful and convenient option for those who find saving for retirement difficult or daunting.

Key Takeaways

• Target date funds are convenient because they offer automatic asset allocation and diversification.
• When choosing target date funds, you should consider your risk tolerance and investment goals.
• Other factors to consider when selecting target date funds include expense ratios, fund performance, and investment philosophy.

Introduction to Target Date Funds

Target date funds, also known as life-cycle funds, aim to manage risk on behalf of investors to ensure that their retirement savings are protected as the date of retirement approaches. These funds are typically labeled by the intended year of retirement—such as a “2055 Fund”—and use what is known as a glide path to shift exposure from higher-risk, potentially higher-reward assets to lower-risk ones over time.

Target date funds are usually mutual funds that hold a combination of stocks, bonds, and other investments. Over time, the managers of these funds shift the allocation of these various asset types toward a more conservative approach. For instance, they shift from a more stock-heavy portfolio when retirement is still decades away to a fixed-income or cash-equivalent-heavy portfolio in the final years before retirement.

A goal of these funds is to bet on relatively riskier assets earlier in the investor’s career, in order to capitalize on the possibility of higher returns when there is still time to recover from potential market declines. Then, as retirement nears, a target date fund works to protect the investments accumulated over time from sudden market volatility or other factors that might erase returns at the last minute.

Note

Target date funds are typically offered through 401(k) plans and may, in fact, be the default investment plan within a 401(k).

Benefits of Target Date Funds for Millennials

Target date funds offer a variety of advantages for those interested in saving for retirement. These include:

• Automatic asset allocation: Target date funds remove all the work of managing risk. You simply contribute to the fund, and the fund managers automatically shift the asset allocation over time in line with the overall goals of the fund and the intended retirement date. If you don’t have the time or interest to participate actively in the investment process, this makes target date funds an excellent choice.
• Simplification: Because target date funds tend to be broadly diversified mutual funds, they can be considered a single investment vehicle in your retirement planning. Unlike individual stocks, bonds, exchange-traded funds (ETFs), or other assets, which investors may need to monitor, buy, and sell regularly, target date funds are very straightforward.
• Risk tolerance is factored in: Many target date funds allow investors to specify their relative level of risk tolerance and adjust the glide path accordingly. If you are comfortable with a greater level of risk, for example, a higher percentage of the portfolio may be allocated to stocks.
• Long time horizon: By definition, target date funds consider long time horizons when making allocations. The oldest in this generation still have decades until retirement age, making these funds a strong choice given this time frame.

Risks and Considerations of Target Date Funds for Millennials

It’s important to be aware of some risks and other considerations before you begin investing in a target date fund. These include:

• Misalignment of risk tolerance or investment goals: There is a risk of target date funds oversimplifying the retirement planning process for some investors. It’s important to consider the specifics of a fund—where does it invest funds, exactly how does it shift asset allocation over time, and so on—and compare those against your own level of risk tolerance and your financial goals.
• Fees: While it can be tempting to set up participation in a target date fund and put it out of mind, you should also be aware that different funds may have fees that must be paid periodically. These may be for the fund itself or, occasionally, for other mutual funds in which the target date fund invests.
• No guarantee of success: Just because a target date fund is designed to adopt a more conservative approach as you approach retirement, there is no guarantee that it will successfully protect retirement savings at that point.
• Limited agency: By choosing a target date fund, you remove the option of controlling aspects of an investing approach, which may be important. If you have a particular focus—for instance, you might wish to invest only in stocks meeting certain environmental, social, and governance (ESG) metrics—you may not be able to specify that preference when using a target date fund. You may also wish to have a fund that is actively managed by a professional, even if you wish to take a hands-off approach. Increasingly, a variety of target date funds do incorporate these kinds of investing preferences and strategies, though you may have to hunt for them.

Factors to Consider When Choosing Target Date Funds

If you’ve decided to use a target date fund, there are some key considerations to keep in mind before initiating an investment. The most important of these may be the target retirement date itself.

Other considerations include expense ratios of the fund and any constituent funds, overall fund performance (particularly as it compares to other target date funds operating on the same time frame), and which funds are available through your particular investment manager.

Comparing Target Date Funds to Other Options

Retirement planners may weigh target date funds against other investment options, such as individual stock investments, robo-advisors, and traditional retirement accounts. The choice often comes down to how actively you wish to participate.

Note

Target date funds are one of the least-involved retirement planning options.

Index funds and related products are somewhat more involved, as you’ll need to determine which funds to focus on and how to allocate them over time.

Individual stock investments represent the opposite end of the spectrum and might be appealing if you’re looking to be more actively involved in determining how your money is allocated.

One popular alternative to target date funds if you have decades until retirement is to focus on a growth fund instead.

Chad Kennedy, a financial planner for Lighthouse Financial in Arkansas, points to a case in which a you might choose between a target date fund, large-cap growth fund, or S&P 500 index fund. Kennedy notes that most target date funds “range from 0.5% all the way up to 1% or more” in internal costs, while growth funds might cost “below 0.1%.” A typical expense ratio for an index fund may be 0.1%, although some are much lower.

So, someone with retirement decades away may “opt for a growth-oriented investment mix for the foreseeable future,” Kennedy says, making one of those growth funds a comparable option to target-date funds over the short term. He adds that someone considering between the two may “have a much better opportunity to outperform their respective target date fund opting for a simple growth fund” until it comes time to shift to a more conservative allocation many years down the line.

Common Misconceptions About Target Date Funds

A common misconception about target date funds is that funds with the same target date but offered by different providers are the same. On the contrary, target date funds with similar dates are likely to hold different allocations and types of assets.

For example, in most cases, a target date fund offered by a particular provider will include mutual funds only offered by the same provider. In contrast, others will hold various U.S. equity, foreign equity, and bond funds offered by the same provider.

If you’re eyeing your retirement, many more resources exist that can help you plan and support your financial future.

Another misconception about target date funds is that the allocations will be changed frequently. As Kennedy points out, most people can select a growth fund and make “updates to the investment mix…as retirement approaches in 20 to 30 years.” The impact of not changing asset allocations significantly in the short term may be minimal, particularly considering the relative cost difference between growth and target date funds.

Most investment management firms offer target date funds. Besides Vanguard, Fidelity, and T. Rowe Price, others include TIAA, BlackRock, State Street, JPMorgan Chase, and many more. The best target date fund for you may depend on whether you have a preference among these and other fund managers. Beyond that, this generation is likely targeting retirement dates of roughly 2045 through 2060, so choosing a fund with the appropriate time horizon is essential.

Next, it will be helpful to consider expense ratios across different comparable funds, as well as the assets that make up the portfolio and how you might expect them to shift over time.

What Should My Target Fund Date Be?

Your target date fund should be dated as close to the date you plan to retire as possible.

Where Do Millenials Invest Their Money?

Many are invested in traditional stocks and retirement accounts but are also interested in alternative investments.

What Is the Best 401(k) Mix for a 30 Year Old?

It depends on who you talk to and your investing strategy, preferences, risk tolerance, and goals.

The Bottom Line

Target date funds begin with a higher concentration of riskier assets like stocks and shift toward a more conservative approach as a target retirement date approaches. These funds may appeal to investors for their ease of access, as they allow them to make contributions and leave the rest of the fund management process up to professionals. However, they tend to have higher expense ratios than growth index funds, which may provide a similar performance and risk level for much of an investor’s career.

Compare interest rates, equity requirements, and other terms

Fact checked by Vikki Velasquez
Reviewed by Khadija Khartit

You can evaluate a fintech’s home equity offerings by comparing interest rates, terms, and any additional perks.

If you’re in the market for a home equity product such as a home equity loan or home equity line of credit (HELOC), you may turn to your bank or credit union. However, a growing number of fintech companies are also offering these products.

A fintech, or financial technology company, operates primarily online and uses advanced technology that enables a digitized lending process. As a result, fintechs can often offer a faster approval process and potentially better terms for the loans. Learn more about how home equity products work and how to evaluate a fintech’s home equity offerings.

Key Takeaways

• A fintech company, or financial technology company, operates primarily online and uses advanced technology for underwriting.
• Fintechs are increasingly offering home equity products like loans, lines of credit, or shared-appreciation arrangements.
• Home equity products use your home equity as collateral for a loan or revolving line of credit.
• Shared-appreciation arrangements allow homeowners to secure a lower rate in exchange for a portion of any increased home value to the lender.

Why Tap Into Home Equity

Home equity loans can often offer a more affordable way to access cash for major expenses like home repairs or college tuition. Their interest rates are typically much lower than the rates on personal loans and other loan products. Many people also use home equity loans or HELOCs to pay off higher-interest debt such as high credit card balances.

Homeowners with significant equity may also use a home equity product to help fund their living expenses in retirement. This practice is called a reverse mortgage, since the owners start the reverse process of receiving payments periodically against the value accumulated in their home over time and that they might not need for so long since they are aging.

Types of Home Equity Products

When you evaluate products from a fintech, you’ll want to understand the differences in how they work.

With a home equity loan, the lender provides a lump-sum amount that you can use for any purpose. The loan amount you can be approved for will depend on how much equity you have in your home, with many lenders capping loans at about 80% combined loan-to-value (CLTV) ratio, meaning you can usually only use a part of your equity. You repay a home equity loan in regular payments with a fixed interest rate.

Home equity lines of credit (HELOCs) work more like a credit card. Homeowners receive a line of credit that they can access as they need, and the interest rates are usually variable.

With both loans and lines of credit, the lender is repaid in full if the homeowner sells their property.

Note

Some lending companies, including fintechs, also offer shared-appreciation arrangements. Shared-appreciation financial products allow homeowners to get a lower interest rate in exchange for giving the lender a percentage of the increase in value, or appreciation, of the home if it’s sold.

How to Compare Home Equity Products

When you evaluate home equity products from a fintech company, you’ll want to take into account their terms and interest rates as well as how they compare to similar products from traditional lenders. For example, a fintech may offer a fixed interest rate on HELOCs, whereas traditional lenders typically offer variable rates. A fintech might charge minimal up-front fees because its process is digital and not costly, while traditional lenders might charge higher up-front fees since their process is manpower intensive.

Equity Requirements

Some fintech companies may accept more of your home equity as collateral than others. Many companies don’t accept a 100% CLTV, but you could potentially use up more of your home’s value with some products than others. More commonly, you will be be approved for a loan-to-value (LTV) ratio of 80% of less.

Important

A combined loan-to-value (CLTV) ratio is the ratio of the total amount of secured loans on a property compared to the property’s value. The lower the CLTV, the lower the risk to the lender.

You may also face minimum equity requirements, such as needing at least 20% equity in your home. Each fintech will set its specific minimum equity requirements.

Interest Rates

Interest rates on home equity products will vary from lender to lender. The lower your interest rate, the more you will save in total loan costs. So, compare interest rate offerings among several fintechs to determine which is most affordable. This means getting the lowest fixed rate over comparable lending periods. Some fintechs might have a more efficient underwriting process, different risk management through access of data, or cheaper cost of capital that they can pass on to you in the form of lower interest rates. And there might be other factors to consider with interest rates as well.

Some home equity products have fixed interest rates, which are more predictable. Others have variable interest rates, which could potentially be lower but could rise over time. Consider your current interest rate environment and your personal financial situation when you evaluate which type of interest rates may work best for you.

Length of Loan

Repayment terms for home equity loans and HELOCs will also vary.

With home equity loans, term lengths can range from five to 30 years. You’ll make regular payments to the lender during that time.

With a HELOC, the fintech will extend a line of credit to you for a set period of time called the draw period. Then your repayment period will begin, and you will begin making regular payments, typically with variable interest rates.

Other Terms

As technology companies, fintechs often offer innovative products, including with their home equity loans. For example, lenders like Synergy One Lending and Figure offer a HELOC that is powered by blockchain technology to provide a more efficient process for the application, underwriting, and funding. By using blockchain and other technology, fintechs can make loan origination significantly more affordable.

Finally, be sure to evaluate the different fees associated with various fintech home equity products. A home equity loan or HELOC may have a competitive interest rate, but higher closing costs. Many home equity loans or HELOCs come with closing costs of 2% to 6%.

How Does a Home Equity Loan Work?

A home equity loan is a loan for a set amount of money, repaid over a set period of time that uses the equity you have in your home as collateral for the loan. If you are unable to pay the loan back, you may lose your home to foreclosure.

What Is a Fintech Mortgage Company?

A fintech mortgage company is a lender that uses financial technology to process, approve, and fund a mortgage. Technology-based lenders process loans significantly faster than traditional lenders.

What Is a Blockchain HELOC?

A blockchain home equity line of credit (blockchain HELOC) uses your home as collateral and uses blockchain to store and transmit records in the application process. Using blockchain to verify data can make the approval and underwriting process much faster.

How Much Equity Can I Cash Out?

Lenders impose limits on the amount that you can borrow with a home equity loan or HELOC. Generally, your combined loan-to-value (CLTV) ratio needs to be 80% or less, meaning that the total loans using your home as collateral must be no more than 80% of your home’s value.

What Is the Difference Between a Home Equity Loan and a Shared-Appreciation Mortgage?

A home equity loan is debt financing. The borrower gets a sum of money and must repay it, plus interest. The lender may have a lien, or claim to the property, but receives only the principal plus interest as in any other loan. In a shared-appreciation arrangement, the lender receives part of the increased value of the home at some point in the future.

The Bottom Line

Fintech lenders can provide competitive home equity products like loans and lines of credit that may fit your financial needs. Review all your options in home equity loans, comparing the pros and cons and different terms. Consider consulting a professional financial advisor for guidance on the best home equity product for your particular situation.

Fact checked by Ryan Eichler

During homeownership, as you pay down your mortgage and the value of your home rises, you begin building equity in the property. Home equity is the difference between the market value of your property and what you owe on the mortgage. This can be used to borrow money against it in the form of a one-time home equity loan or an ongoing home equity line of credit (HELOC). Both options have pros and cons so it’s important to understand the key differences between the two so you can make the right choice for your financial goals.

Before pursuing either, it’s worth considering other financing options. Depending on your financial situation, personal loans, mortgage refinancing, or other lines of credit might offer better terms.

Key Takeaways

• Home equity loans and HELOCs use home equity as collateral to lend you money.
• Equity loans offer lump sum cash while HELOCs offer a line of credit for recurring borrowing.
• Home equity loans and HELOCs may not always be the best options for you, so consider alternatives like mortgage refinancing. 
• Both options come with the serious risk of losing your home if you miss payments. 

HELOCs and Home Equity Loans: The Basics

Home equity loans and HELOCs use the equity you own in your property as collateral to let you borrow money. However, there are some differences in how the two options work.

Home equity loans offer money as a lump sum, often at a fixed interest rate, so you get all the cash upfront. On the other hand, HELOCs operate similarly to credit cards, offering a line of credit with a variable interest rate depending on market conditions, allowing you to borrow and repay money as needed.

While both options can be useful for raising funds, they can pose serious risks as you use your home as collateral. This means if you fail to repay the money, the lenders can place a lien on your home, which is a legal claim against a property that lets them seize and sell the asset to recover the amount loaned to you.

Note

Home equity loans and HELOCs typically have lower financing fees compared to other unsecured options like credit cards. 

How Much Can You Borrow?

How much money you can borrow against home equity loans and HELOCs typically depends on factors like how much equity you own in the property and your personal credit history. It’s possible you won’t qualify for either option. 

Lending institutions use a combined loan-to-value (CLTV) ratio to make the decision. This ratio looks at the total value of all loans secured by your home so far, including both your primary mortgage and any additional mortgages, compared to the current market value of the property.

For example, say your home is worth $300,000 and the bank has a maximum CLTV ratio of 80%. This means the total loans secured by your home can’t exceed 80% of its appraised value. In this case, the bank would consider approving you if you have less than $240,000 in total debt.

If you still owe $150,000 on your primary mortgage, you could potentially qualify for a second mortgage (home equity loan or HELOC) for the difference, which would be $90,000 in this scenario. However, keep in mind that each lender can have different guidelines and your creditworthiness also plays a role in the decision. 

How Home Equity Loans Work

Home equity loans offer a lump sum of cash at once, which can be helpful for major one-time expenses like home renovations, buying a vehicle, weddings, emergency medical bills, etc. One of the key benefits they offer is that they typically have fixed interest rates so you know exactly what your monthly payments will be, which makes budgeting easier. 

Important

Different lenders each have their own procedures if you can’t pay back your loan. Generally, you may have to pay late fees or other penalties, your credit score will dip, and your home may be foreclosed to recover what’s owed. 

If you need a larger amount and want the predictability of a fixed-rate loan, a home equity loan may be a good choice. However, if you’re looking to borrow a smaller amount for nominal expenses like paying off a little credit card balance or buying a new phone, you might want to consider other financing options like Buy Now, Pay Later, personal loans, or even HELOCs that we’ll explore below. 

Some lenders may offer up to $100,000 in home equity loans, but they’re typically meant for expenses larger than $35,000. A major drawback is that you’ll pay closing costs similar to a primary mortgage, including appraisal fees, loan origination fees, and processing fees. These costs can range anywhere from a few hundred to a few thousand dollars, depending on the size of your loan.

If you are using “points” or prepaid interest, you’ll have to pay them at closing. Each point equals 1% of the loan amount, so for a $100,000 loan, one point would cost you an extra $1,000. Points are used to buy down your interest rate, lowering your monthly payments over time. This can be beneficial for long-term loans, but you may not get the full benefits if you plan to pay it off quickly. Negotiating for fewer or no points may be possible, depending on the lender. 

If you have a higher credit score, you may qualify to pay a lower interest rate.

How HELOCs Work

HELOCs offer an ongoing line of credit, letting you borrow and repay money as needed. Think of it like a credit card with a much larger limit, but the equity in your home secures it. This means HELOCs are often more flexible than home equity loans, making them suitable for larger and smaller expenses arising from different life situations. 

HELOCs are generally a good option for homeowners who want flexible access to funds over time without committing to a large, one-time loan with recurring payments lasting for years. Depending on the lender, HELOCs offer different ways to access the funds up to your assigned credit limit. You can transfer money online, write checks, or even use a credit card linked to the account.

One of the most appealing aspects of a HELOC is that it typically has low, or even no, closing costs. This makes it more affordable to set up compared to a home equity loan, which usually comes with various fees, sometimes making it more expensive than what you initially budgeted for. 

Moreover, you only pay interest on the amount you borrow while a much larger sum may be available in case you need extra help. Once you pay it off, the sum is added back to the available credit without requiring any extra interest until you borrow again. This can be ideal for people who prefer having money on standby rather than committing to a fixed loan amount up front.

While the benefits make it sound like one of the most flexible and convenient forms of borrowing money against your property, there are key downsides to consider. HELOCs often come with variable interest rates, meaning your rate and monthly payments could increase or decrease over time. 

Some lenders do offer fixed rates for the first few years of the loan, but after that, the rate will often fluctuate with market conditions. This can make it difficult to predict what your payments will look like, so HELOCs can be a bit tricky to budget for in the long term.

Home Equity Loan vs. Mortgage Refinance

If you want to use home equity to borrow money, equity loans aren’t the only options. You may also want to consider mortgage refinancing, which replaces your current loan with a new one, usually with better terms. The newer loan can offer a reduced interest rate or the option to switch from a variable interest rate to a fixed one or vice versa. 

Both have their benefits and drawbacks, so take some time to consider each option thoroughly and if needed, discuss with a financial advisor to find the best option for your needs. Here’s a comparison table to make the decision easier. 

Factors	Home Equity Loan	Mortgage Refinance
Interest rates	Typically carries higher interest rates.	Interest rates are usually lower than equity loans.
Payments	Fixed payments over a set term.	Fixed or variable payments, depending on your refinance terms.
Private Mortgage Insurance (PMI)	No PMI required.	PMI may be required if you have less than 20% equity in your home.
Fees	Generally lower fees than refinancing, but may include appraisals, origination fees, and other costs.	Higher closing costs due to a new mortgage, including appraisals, origination fees, title insurance, recording fees, etc.

Getting a Home Equity Loan or HELOC

If you’ve considered all possible options and feel ready to get a home equity loan or a HELOC, here are the steps to follow. 

1. Explore different options: Compare borrowing options from different institutions like traditional banks, mortgage companies, credit unions, etc.
2. Get multiple quotes: Set up consultations and receive multiple quotes from different providers to compare the terms. Don’t settle for the first offer you receive. If you have active accounts, enquire about special rates for existing customers. 
3. Consider working with mortgage brokers: Mortgage brokers can connect you with multiple lenders and receive their commission directly from the lender you choose so you don’t have to bear heavy consultation expenses. 
4. Look beyond interest rates: Choosing the offer with the lowest interest rate may not always be the best decision. Consider other fees like appraisals and closing costs that can add up quickly. 

Warning

Criminals are increasingly targeting HELOCs, either by applying in someone else’s name or hacking into existing accounts to steal funds. Regularly check your credit report for unfamiliar transactions and keep an eye on your HELOC statements for any unusual activity.

The Bottom Line

Both home equity loans and HELOCs can help you borrow money by using the equity you own in your house as collateral. However, they come with serious risks, especially when you can’t keep up with payments. Make sure you have a solid repayment plan in place to avoid losing your home. 

Reviewed by Lea D. Uradu
Fact checked by Kirsten Rohrs Schmitt

Applying to multiple mortgage lenders allows you to compare rates and fees to find the best deal. Having multiple offers in hand provides leverage when negotiating with individual lenders. However, applying with too many lenders over too broad a time period may result in score-lowering credit inquiries, and it can trigger a deluge of unwanted calls and solicitations.

Key Takeaways

• Applying to multiple lenders allows borrowers to pit one lender against another to get a better rate or deal. 
• Applying to multiple lenders lets you compare rates and fees, but it can impact your credit report and score due to multiple credit inquiries.
• If you’re going to keep a mortgage for many years, it’s best to opt for a lower rate and higher closing costs. If you plan to refinance or pay off the loan after a few years, it’s best to keep closing costs low.
• There is no optimal number of applications, though too few applications can result in missing out on the best deal, while too many might lower your credit score and besiege you with unwanted calls.

Reasons to Apply to Multiple Lenders

It’s difficult to know you are getting the best deal if you have not compared it with other offers. What looks like small interest rate savings now could translate to a large dollar amount over 15- or 30-year mortgages. Use a mortgage calculator to compare how different rates would impact your monthly payment.

Moreover, different lenders structure loans in different ways with regard to rates and closing costs, which carry an inverse relationship. Some lenders ramp up closing costs to buy down your interest rate, while others that advertise low or no closing costs offer higher interest rates in exchange.

Looking at multiple good faith estimates (GFEs) side by side lets you compare rate and closing-cost scenarios to pick the best one for your situation. It generally makes sense to pay higher closing costs for a lower interest rate when you plan to keep the mortgage for many years because your interest rate savings eventually surpass the higher closing costs.

If you plan to sell or refinance after a few years, it is better to keep closing costs as low as possible because you are not paying off the mortgage long enough for interest rate savings to add up.

You can even play one lender against another when you have multiple offers. Suppose lender A offers you a 4% interest rate with $2,000 in closing costs. Then lender B comes along and offers 3.875% with the same closing costs. You can present lender B’s offer to lender A and try to negotiate a better deal. Then, you can take lender A’s new offer back to lender B and do the same thing, and so on.

If you are comparing lenders with each other, try to get an official loan estimate from each one that details all the terms, rates, fees, and points for each loan. When possible, try to compare loans with the same points. Lenders have been known to mislead borrowers with where they place their fees and points to make their deal seem better than a competitor’s.

Important

There is no magic number of applications. Some borrowers opt for two to three, while others use five or six offers to make a decision.

Drawbacks of Applying to Multiple Lenders

For a lender to approve your mortgage application and make an offer, it has to review your credit report. To do so, the lender makes credit inquiries with the three major credit bureaus.

Credit analysts note that too many inquiries can lower your numerical credit score. Hard inquiries in particular stay on your report for two years. Most scoring models, such as FICO and VantageScore, make inquiries into your credit account. These models are closely guarded, so few people know the exact extent to which inquiries matter. Fair Isaac Corporation (FICO), the creator of the FICO model, states that multiple mortgage inquiries that occur within 30 days of one another do not affect your FICO score.

In a hot housing market, borrowers could have to go through multiple rounds of credit checks as buyers get pre-approved, submit offers, and close on homes over several months instead of 30 days. Though multiple checks from mortgage companies over several months may be excluded by your lender for your housing purchase, it may lower your credit score for the following two years.

Another thing many borrowers may not know is that credit bureaus make additional revenue by selling your information to mortgage lenders to which you have not applied. This is known in industry parlance as a trigger lead. Submitting a mortgage application triggers a credit pull, and mortgage companies pay the credit bureaus for lists of people whose credit was recently pulled by mortgage companies.

Credit Pulls

There is no real limit to how many times you can pull credit for a mortgage, but too many pulls over too much time can lower your credit score. Most borrowers have their credit pulled for pre-approval and again at closing to make sure it hasn’t dropped. On occasion, lenders may pull credit again during the underwriting process if a long period of time has elapsed since your pre-approval or if they are verifying that you completed something such as paying off a debt, or if a dispute was removed.

Having credit checked at the beginning of the process is important to obtain a pre-approval letter, which shows you are a serious buyer. You only need one mortgage pre-approval letter. If you’ve had a recent change in financial circumstances such as a raise or inheritance that changes your income, credit score, or down payment amount for the better, it may be worth getting a newer, stronger pre-approval letter.

Do Multiple Credit Inquiries From the Same Lender Count as One?

Generally, multiple inquiries made within 30 days are counted as one inquiry. If your lender pulls your credit multiple times outside of a 30-day period, it may count on your credit report as a hard inquiry.

Can I Lock Mortgage Rates With Multiple Lenders?

Technically, yes, but it is not a very courteous thing to do and you may be on the hook for costs such as credit-check and appraisal fees from each lender, depending on their policies. Originating and underwriting a loan takes a lot of time and care from several dedicated professionals. Locking rates with a lender implies that you are going through with the loan, which is how they get paid. If you cancel at the last minute, they have wasted their time and that company or lender may not be willing to work with you in the future.

Can I Shop for Rates Without a Hard Inquiry?

Yes. Many online lenders, local banks, and mortgage brokers list their rate charts transparently on their websites. If you prefer to call around, clarify in your phone call that you are only consenting to a soft credit check. Not everyone you speak with will be willing to give you rates over the phone, but there are many who will.

The Bottom Line

Too few applications can result in missing out on the best deal, while too many might lower your credit score and besiege you with unwanted calls. Unfortunately, there is no Goldilocks number that represents the right number of mortgage lenders to which you should apply. Some borrowers apply with only two, feeling certain that one or the other can provide the ideal loan, while others want to hear from five or six banks before making a decision.

Perhaps the best approach to getting a mortgage is to start by conducting market research to get an idea of what constitutes a great deal from the best providers in the current lending climate. Next, contact two or three lenders and challenge them to match or beat the terms you have established. If you review their offers and still believe a better deal exists, apply to additional lenders as necessary but understand the established drawbacks of doing so.

One is less expensive, while the other provides more legal protections. Here’s how to decide.

Fact checked by Vikki Velasquez
Reviewed by JeFreda R. Brown

Sole Proprietorship vs. LLC: An Overview

One of the first decisions that anyone going into business needs to make is how to structure their company.

The structure they choose can have a variety of important implications, including how they pay their taxes and the extent to which their personal assets can be shielded from legal liability if they’re sued.

For many small business owners, the choice will be between a sole proprietorship and a limited liability company (LLC).

Here is what you need to know about each one to decide which might be right for you.

Key Takeaways

• Sole proprietorships and LLCs can both work for single owners of a business.
• LLCs are more expensive to set up and maintain but provide liability protections that sole proprietorships do not.
• Sole proprietorships can only have a single owner, while LLCs can have one owner or multiple owners, known as members.
• LLCs can be established as single-member LLCs, partnerships, S corporations, or C corporations.
• Different types of LLCs are subject to different tax treatment by the IRS.

Sole Proprietorship

A sole proprietorship is the simplest type of business structure. Anyone can establish a sole proprietorship as long as they are the only owner.

If two or more people wish to start a business together, they must choose another structure, such as a limited liability company (LLC) or a partnership.

Advantages

Cost-effectiveness and simplicity of setup: Sole proprietorships are easy and inexpensive to establish.

In most states, you don’t need to register the business or take any other official steps if you plan to operate it under your own name. If you choose another name, you may have to file a doing-business-as (DBA) registration.

When it comes time to file your taxes, you don’t have to fill out a separate business tax return; you simply report the gains and losses of your business on a Schedule C and attach it to your Form 1040 individual tax return.

Full control and ownership of the business: As the sole owner of the business, you have complete autonomy. You are your own boss and don’t have to answer to partners, a board of directors, or anyone else.

Easy dissolution process: Just as starting a sole proprietorship requires no legal formalities, you can end one whenever you please.

The Internal Revenue Service (IRS) does require that you file a Schedule C for your final year in business, and you may also need to attach a Form 4797 if you sell any property or other assets associated with the business.

The process is a little more complicated if you have used an employer identification number (EIN) rather than your Social Security number (SSN) in filing your taxes, as is required if you have employees.

In that case, the IRS requires that you send a letter notifying it that you are canceling your EIN.

The U.S. Small Business Administration (SBA) also advises canceling any registrations, permits, licenses, and DBA names that you no longer need so as to “protect your finances and reputation.”

Disadvantages

Personal liability for business debts and obligations: As a sole proprietor of your business, you are solely responsible for its debts and other obligations.

Most other business structures provide protections that can insulate an owner’s personal wealth from that of the business to at least some extent.

However, if you’re a sole proprietor, you can mitigate some of the financial risk if you purchase liability insurance.

Difficulty in raising capital: Unless your sole proprietorship has been successfully up and running for some time, you may find it difficult to borrow money if you need to do so.

Many sole proprietorships are funded in the early years out of their owner’s personal bank accounts and with help from generous friends and relatives. Unlike C corporations, sole proprietorships can’t issue stock to raise capital.

Limited growth potential: Because of their lack of access to capital and generally limited resources, sole proprietorships tend to stay small.

That may be just fine for some owners, who prefer it that way. For owners with grander ambitions, there may come a time to switch to a different and more flexible structure, allowing for additional or faster growth.

Limited Liability Company (LLC)

A limited liability company (LLC) is a step up from a sole proprietorship in terms of complexity.

An LLC can have a single owner or multiple owners, and it affords them legal protections that a sole proprietorship does not (hence “limited liability”).

LLCs with just one owner are sometimes referred to as single-member LLCs.

An LLC filing service can handle all the formation details for you, for a fee. Here’s our rundown of the best LLC services.

Advantages

Limited personal liability for business debts: An LLC shields its owners’ personal property, such as a home, car, or personal savings, in the event of a lawsuit or bankruptcy.

Flexibility in management and ownership: Like a sole proprietorship, an LLC’s owners have relative autonomy in deciding how the business is run.

There is no limit to how many owners an LLC can have, and in addition to individuals, owners can be trusts, corporations, or partnerships.

Potential tax benefits: For tax purposes, LLCs can be set up as pass-through (or flow-through) entities.

This means that any profits or losses are simply passed on to the owners, who then report them on their individual tax returns.

This is also true for sole proprietorships, partnerships, and S corporations, but not for C corporations, which are subject to an additional layer of corporate taxes, sometimes referred to as double taxation.

Disadvantages

Formation and ongoing fees: LLCs typically must be registered in their home state and in any other state where they do business.

States vary in their filing requirements, but LLCs will generally need to submit a set of documents including an operating agreement that spells out how the business will be run.

States charge filing fees for establishing an LLC and require that the registration be renewed periodically at an additional cost.

In addition, an LLC may be subject to other fees, often including annual or biennial report fees, which are required to preserve its legal status.

If the owners wish to close the LLC, they will be required to pay a (generally small) dissolution fee.

Additional administrative requirements: As mentioned, LLCs are generally required to file a report, sometimes called a statement of information, annually or every two years with the states in which they’re registered.

These reports include such details as the LLC’s current owners and their addresses. If the LLC fails to file its report by the state’s deadline, the state can impose late fees or even dissolve the LLC.

Importantly, as the accounting firm Wolters Kluwer points out, an LLC without an up-to-date report on file “will not be in good standing with the state. This can jeopardize your business’ ability to secure a loan, close contracts, or expand operations.”

LLCs may also be required to obtain a state EIN and state or local sales tax identification number, depending on the type of business.

If an LLC has payroll, they will need a state EIN or withholding account number. Some states also require employers to have an employer account number with the state Department of Labor for unemployment tax collection.

Additional tax requirements: LLCs can be subject to additional tax filing requirements as well.

The IRS doesn’t consider LLCs to be a distinct type of entity for tax purposes. Instead, it subjects them to the rules for sole proprietorships (single-member LLCs), partnerships, or corporations, depending on which of those they have chosen.

LLCs with more than one member can be treated as either partnerships or corporations. In the case of a partnership, the LLC must file an informational tax return with the IRS each year, known as Form 1065, as well as prepare Schedule K-1 forms for each of its owners.

The partnership is not taxed on its income, but each owner must report the information that’s on their K-1 and pay any required taxes when they file their individual returns.

LLCs that are classified as corporations must file different forms, depending on whether they are set up as C corporations or S corporations.

Potential for involuntary dissolution: LLCs can dissolve of their own accord based on a decision by their owners, or they can be involuntarily dissolved by the state (administrative dissolution) or a court (judicial dissolution).

When an LLC is dissolved, it loses the liability protections previously afforded to its members. Reasons for involuntary dissolution can include failure to pay taxes or meet other state requirements.

LLCs can also be dissolved in the absence of members, such as if the owner or owners have died.

Sole Proprietorship vs. LLC: Similarities and Key Differences

Sole proprietorships and LLCs have much in common, but there are also some differences worth reinforcing.

Similarities

Tax reporting requirements: Both sole proprietors and LLC owners are required to file certain tax forms and pay taxes on any profits they make.

Sole proprietors report their business income and losses on their individual tax returns by attaching federal Schedule C.

LLCs are subject to different filing requirements, depending on whether they are classified as a single-member LLC, a partnership, or a corporation.

Business licenses and permits: Both sole proprietorships and LLCs can be required to obtain federal, state, or local business licenses and permits, depending on the nature of the business they are in.

For example, a restaurant or construction company may be required to obtain a business license regardless of its ownership structure.

Use of assumed business names/(DBA): Both sole proprietorships and LLCs can choose a name for the business (assuming it hasn’t already been taken by another business).

Sole proprietorships have the option of running the business under the owner’s name, while LLCs must choose and register a DBA name.

Differences

Liability protection: Sole proprietors bear the entire financial responsibility for any lawsuits or legal judgments against their business. LLCs can protect their owners’ personal assets in that situation.

Ability to raise capital: Obtaining a loan or attracting investors can be difficult for sole proprietorships, especially those without a long track record of profitability.

LLCs can raise capital in a number of ways. For example, they can take on additional members (as LLC owners are known). If the LLC is structured as a C corporation, it can also sell shares of stock or issue bonds to raise capital.

Regulatory requirements and costs: LLCs are more strictly regulated than sole proprietorships. This is not just in the state where they are based, but in any location where they do business.

That means that LLCs face additional and ongoing costs, making them more expensive to operate.

Note

Online marketplace eBay, with a market capitalization of $31.01 billion in March 2025, started as a sole proprietorship of Pierre Omidyar. He launched his business in 1995 to bring together buyers and sellers in an open marketplace.

Factors to Consider in Choosing the Right Business Structure

Business owners have a choice in how they wish to structure their companies. A single-owner operation, for example, can set up as either a sole proprietorship or a single-member LLC.

Multiple owners can form a partnership or corporation. Before deciding how you’ll set up your business, here are some things to consider.

The nature of the business and its risks: Because LLCs provide additional protections for their owners’ personal possessions and other assets, they can be more appropriate than sole proprietorships for businesses that run the risk of lawsuits.

As the U.S. Small Business Administration (SBA) puts it, “Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business,” while “LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want protected, and owners who want to pay a lower tax rate than they would with a corporation.”

Growth potential and funding needs: Sole proprietorships are limited in their growth potential because they can have no more than one owner and are likely to have a harder time obtaining capital for expansion.

However, as the SBA notes, a sole proprietorship can be a practical way to start a business. If it catches on, the owner can later restructure it as any of the several types of LLCs.

Personal liability concerns: Sole proprietorships provide no protection for their owner’s personal assets, although that can be mitigated to some extent through liability insurance and, if worse comes to worst, filing for bankruptcy.

So anyone with substantial assets to protect should weigh the benefits of forming an LLC. That is especially true if their business faces a serious likelihood of being sued at some point.

Tax implications: Sole proprietorships and certain types of LLCs all enjoy the tax benefits of being pass-through entities, where any profits are taxed only once.

The exception is if the LLC is established as a C corporation, in which case its income is taxed on both the corporate and individual levels.

Administrative requirements and costs: LLCs require considerably more paperwork to set up and maintain than sole proprietorships do.

They are also subject to additional costs. For prospective business owners, the question comes down to whether the extra work and expense is justified by the LLC’s greater liability protections.

Can You Convert a Sole Proprietorship to an LLC?

Yes, you can convert a sole proprietorship to an LLC by filing the same paperwork with the state as if you were starting an LLC from scratch. A business owner might want to do this if it has become more important for them to protect their personal assets.

Can You Convert an LLC to a Sole Proprietorship?

Yes, you can convert an LLC to a sole proprietorship. You will have to dissolve the LLC with the state and transfer its assets to yourself. A business owner might consider doing this if, for example, they are now the sole owner of a business that once had partners and they want to save on administrative costs. They will, however, lose the liability protections of their old LLC.

How Much Does It Cost to Form an LLC?

The costs of forming an LLC vary from state to state. According to Wolters Kluwer, the fee to establish an LLC varies from $50 in Colorado and Iowa to about $300 in Texas and Tennessee. Most states are in under $200. Bear in mind that if you plan to do business in more than one state, you will have to register in each of them. In addition, there may be other costs, such as business licenses.

How Much Does It Cost to Form a Sole Proprietorship?

It might not cost anything to form a sole proprietorship, since you normally aren’t required to register with your state. As with LLCs, however, you may incur costs if you need to obtain business licenses.

The Bottom Line

Sole proprietorships and LLCs both have advantages and disadvantages. Sole proprietorships are simpler and cheaper to set up and run, while LLCs provide liability protections that sole proprietorships do not.

For anyone about to launch a business, these tradeoffs are important to think through. However, whichever structure you choose, it is relatively easy to switch to the other one if you later decide that it would be a better fit.

Maintain a balanced portfolio to manage risk and reach your investing goals

Reviewed by Khadija Khartit
Fact checked by Yarilet Perez

What Is Rebalancing?

Rebalancing involves periodically buying and selling investments in an established portfolio to ensure that its asset allocation continues to fit an investor’s risk tolerance and investment objectives.

It’s recommended that investors rebalance their portfolios annually because the assets in them can shift in value during the year.

The goal in rebalancing your portfolio is not perfection, since as soon as your allocations regain their predetermined percentages, prices will shift, causing the allocations to deviate again.

The goal is simply to make sure that the balance of assets is working for you as effectively as possible.

This article provides the basics that every investor should know about rebalancing.

Key Takeaways

• Rebalancing your portfolio can fine-tune its diversification to minimize volatility and risk.
• To keep your portfolio balanced, start by measuring your actual allocations and compare them to your original or preferred allocations.
• You can choose from several rebalancing strategies based on triggers such as time spans and percentage changes.
• Rebalancing can conflict with tax loss harvesting strategies.
• Consider using a robo-advisor if you find that handling rebalancing yourself is too difficult.

How to Rebalance Your Portfolio 

When you rebalance your portfolio, consider these questions:

• How much has my portfolio deviated from my original asset allocation?
• Am I still comfortable with my original asset allocation, or has my situation shifted, suggesting that I amend the asset mix?
• Have my goals and/or risk tolerance changed, and if so, does my allocation reflect this?
• Does my current asset allocation still work for me, so that my portfolio’s balance needs no tweaking?

Ways to Rebalance Your Portfolio

There are several rebalancing strategies:

• Select a percent range for rebalancing, such as when each asset class deviates 5% from its asset weight. The window of drift tolerance can be as low as 1 or 2% or higher than 5%. It all depends on your tolerance and the time you’re willing to dedicate to keeping the portfolio compliant with the set allocation.
• Set a time to rebalance. Once a year is sufficient, although some investors prefer to rebalance quarterly or twice per year. There’s no wrong or right strategy, although less frequent rebalancing will potentially lead to greater stock allocations and higher overall returns, along with greater volatility.
• Add new money to the underweighted asset class to return the portfolio to its original allocation.
• Use withdrawals to decrease the weight of the overweight asset. If stocks have increased 1%, sell a portion of the overweight stocks and withdraw the proceeds. 

Important

It’s recommended that younger investors devote a greater percentage of their portfolios to stocks and a smaller percentage to fixed income securities. Although stocks are a higher risk investment, they offer a greater return over time due to capital appreciation and, potentially, dividend income. Those with years to build their savings can afford to invest aggressively because they have the time to recover from stock market losses that they may incur.

Steps to Rebalance Your Portfolio

Generally, you should track the asset allocation of your portfolio over time so that you can determine when it changes. You can maintain your records on a spreadsheet or use a free or paid investment monitor like Quicken or Mint.

Once you’ve listed your assets and the percentage devoted to each asset class is recorded, you can rebalance when needed.

Step 1: Compare 

Compare the current asset values and weight percentages of each asset class with your predetermined (or newly desired) asset allocation.

Step 2: Assess

Notice the difference between your actual and preferred asset allocation. If your 80% stock, 20% bond portfolio has drifted to 85% stocks and 15% bonds, then it’s time to rebalance, either by adding new money or selling stocks and buying bonds. 

Step 3: Sell

Assume your portfolio is worth $100,000. Given the drift above and a desired 80%/20% balance, to reduce your percentage of stocks by 5%, you’ll sell $5,000 worth of stock investments.

Step 4: Then Buy

With the $5,000 proceeds from the stock sale, you’ll buy $5,000 of bonds. This will return your portfolio to its preferred 80%/20% mix. 

Step 5: Add Funds

Let’s say that you decide to add $10,000 to your portfolio. Its value would then be $110,000 and the desired 80%/20% asset mix would now require $88,000 in stocks and $22,000 in bonds.

(Multiply $110,000 by 80% for the stock allocation and $110,000 by 20% for the bond allocation to arrive at these dollar goal amounts).

Step 6: Then Invest Those Funds

Recall that you currently have $85,000 in stocks and $15,000 in bonds. To achieve the 80%/20% balance desired (which requires $88,000 in stocks and $22,000 in bonds), invest $3,000 of your added cash in stocks and $7,000 in bonds.

Follow these steps every time you rebalance your portfolio. Don’t worry if the asset allocation drifts between your rebalancing periods. If your situation changes, and you become more conservative on the one hand or more comfortable with greater volatility or risk on the other, you can always adjust to a newly desired asset allocation.

How to Use a Robo-Advisor to Rebalance Your Portfolio

A robo-advisor might can be a great solution for those who prefer to outsource portfolio selection and rebalancing.

Robo-advisors such as Wealthfront and Schwab Intelligent Portfolios are designed to offer investors access to well-diversified investment portfolios, rebalancing, and other features, such as tax loss harvesting, with low or no management fees.

The most popular robo-advisors administer a quick survey to determine your investment goals, timeline, and risk. This survey drives the makeup of your investment portfolio.

After investing, robo-advisors will rebalance your holdings on an as-needed basis, to keep your it in line with the initial survey parameters.

Pros and Cons of Portfolio Rebalancing

Investment management, which involves rebalancing, requires a commitment. You’ll need to analyze your investments to make certain that they continue to meet your objectives.

You might choose to increase the stock allocation if you’re comfortable with greater risk. Or, you may want to increase the fixed income allocation to preserve capital if you’re nearing retirement or are uncomfortable with occasional double-digit declines in your portfolio’s value.

Pros

• Updates and improves a portfolio’s diversification

• Reduces a portfolio’s volatility and risk

• With planned rebalancing, you’re less likely to become spooked at a market drop and sell at the bottom

Cons

• Can reduce exposure to outperforming sectors and increase exposure to underperforming sectors

• May conflict with tax loss harvesting strategies

• Requires time and effort to understand, select, or alter your own investments

Additional Tips to Rebalance Your Portfolio 

Here are additional tips to aid in successful rebalancing:

• Avoid checking your investment values too frequently (such as daily or weekly). You might feel the need to act, which typically leads to overtrading and inferior investment returns. 
• If you didn’t when you originally built your portfolio, create a personal investment policy statement or investment plan, which includes your investment mix, asset allocation, and rebalancing parameters. Stick to it.
• Minimize tax events generated by taxable accounts. This involves tax loss harvesting (selling losing positions to offset capital gains). 
• Maintain a long-term focus to reach your long-term goals. Don’t be distracted by changes in the value of your investments.

Remember that investing is how you can turn today’s earnings into future financial security.

Investing and rebalancing are designed to increase your returns over time, such as five or more years. For shorter-term goals, consider a certificate of deposit or high-yield money market account. 

Why Should I Rebalance My Portfolio?

You should rebalance your portfolio periodically so that your holdings (e.g., equities and fixed income securities) continue to meet your financial goals and match your risk profile. Investment values change, which means that the percentages that investments represent of your overall portfolio can change. If you don’t rebalance and restore your assets to the appropriate balance of, say, a 80% vs. 20% stock/bond mix, then you might open yourself up to greater risk of financial loss than you’re comfortable with. Rebalancing helps your investments stay on track to meet your financial goals. 

How Much Does It Cost to Rebalance a Portfolio?

Most investment brokers don’t charge commissions or trading fees for stocks and ETFs. So buying and selling stocks and funds is typically fee-free. If you own individual bonds, you’re apt to pay a commission to buy or sell. Mutual funds might also levy a fee to trade.

As long as you’re buying and selling stocks or ETFs, the only cost you might incur is a tax on a capital gain, if it’s realized in a taxable brokerage account.

Can I Rebalance My Portfolio Without Selling?

Yes, you can rebalance your portfolio without selling. Add new money into the portfolio and buy the asset class that is underrepresented. If you need to withdraw funds from your account, sell a portion of the overrepresented asset. You can also reinvest cash dividend payments into an under-allocated asset class. 

Does Portfolio Rebalancing Reduce Returns?

Rebalancing reduces returns in most cases. Historically, stocks have provided a greater return than bonds, so they’ll become a greater percentage of the total portfolio over time without rebalancing. When you rebalance and sell some stocks, you’ll reduce your portfolio’s return. But bear in mind that stocks are riskier than bonds, so as the percentage of stocks in your portfolio grows, so does your risk. Rebalancing is usually a tradeoff between greater return and lower risk. 

How Often Should I Rebalance My Portfolio?

Rebalancing too frequently can sacrifice returns while rebalancing infrequently can increase portfolio risk. Vanguard recommends checking your portfolio annually. The key is to set up and stick with a rebalancing schedule that works for you. 

The Bottom Line

Rebalancing will maintain your preferred asset allocation and help to smooth out the volatility of your portfolio.

When stock prices soar, rebalancing will force you to take some profits. When prices are lower, and an asset class declines in value, you’ll buy at lower levels.

Less frequent rebalancing saves you time and might allow your winning assets to grow for a bit longer. 

Reviewed by Michael J Boyle

Tesla remains one of the hottest companies on the market, with a P/E ratio of 143.62. However, it is also one of the most volatile stocks, meaning investors who want a cost-effective way to gain exposure to Tesla should consider investing in one of these three exchange-traded funds (ETFs) that include the California-based electric car company as a major holding.

Key Takeaways

• Tesla (TSLA) is one of the Magnificent Seven, a group of the 7 most valuable stocks in the U.S.
• While Tesla stock is highly sought-after, it also has a history of high price volatility, making investing in ETFs with significant TSLA holdings more attractive for some investors.
• Popular ETFs that TSLA drives include VanEck Vectors Low Carbon Energy ETF (SMOG), ARK Industrial Innovation ETF (ARKQ), and First Trust NASDAQ Clean Edge Green Energy ETF (QCLN).

VanEck Vectors Low Carbon Energy ETF (SMOG)

Launched in 2007, the VanEck Vectors Low Carbon Energy ETF (SMOG) seeks to provide similar returns to the Ardour Global Index Extra Liquid (AGIXLT). The fund achieves this by investing a minimum of 80% of its assets in small- and mid-capitalization low carbon energy companies that operate primarily in the alternative energy space which includes power derived principally from biofuels (such as ethanol), wind, solar, hydro, and geothermal sources. Tesla accounts for 5.41% of its portfolio, giving investors ample exposure to the electric car maker. Other top holdings in the fund include BYD Co. Ltd. (BYDDY) at 8.9% and Nextera Energy Inc. (NEE) at 7.58%.

The VanEck Vectors Low Carbon Energy ETF has a net expense ratio of 0.61% and has $120.6 million in net assets. As of Jan. 31, 2025, it has a five-year annualized return of 6.19% and a one-year annualized return of 6.47%. The fund also has a 30-day SEC yield of 1.21%.

ARK Industrial Innovation ETF (ARKQ)

The ARK Industrial Innovation ETF (ARKQ), formed in September 2009, invests in companies that are likely to benefit from automation or other forms of technological innovation and advancements. Although the fund invests in both domestic and foreign securities, the bulk of its exposure (86.12%) targets U.S. companies. Tesla is the fund’s top allocation at 11.26%. Teradyne Inc. (TER) and Kratos Defense & Security Solutions Inc. (KTOS) round out the ETF’s top three holdings.

The ARK Industrial Innovation ETF has net assets of $1.01 billion. Its expense ratio of 0.75% is higher than the 0.55% category average, but the fund’s outstanding performance warrants its higher management fees. As of Feb. 28. 2025, ARKQ has five- and one-year annualized returns of 16.85% and 56.18%, respectively. 

First Trust NASDAQ Clean Edge Green Energy ETF (QCLN)

The First Trust NASDAQ Clean Edge Green Energy ETF‘s primary objective is to track the NASDAQ Clean Edge Green Energy Index. The fund, created in 2007, achieves this by investing the majority of its assets in securities that make up the underlying index. This includes U.S.-listed companies that manufacture, develop, and install clean-energy technologies. QCLN has 9.9% of its portfolio in Tesla. The ETF’s other significant holdings include Rivian Automotive Inc. (RIVN) with a 7.19% weighting, First Solar Inc. (FSLR) with a 7.17% weighting, and ON Semiconductor Corporation (ON) with a 6.39% weighting.

The First Trust NASDAQ Clean Edge Green Energy ETF has an expense ratio of 0.59% and $510.39 million in net assets. While the fund has a 5.46% return over the past five years, it has experienced negative returns (-2.47%) over the past year.

Does Tesla Have an ETF?

The Simplify Volt TSLA Revolution ETF (TESL) seeks to provide capital appreciation by investing primarily in TSLA stock. TSLA makes up approximately 78% of the fund’s weight, with the remaining 22% made up of options to manage downside risk.

Is There an Inverse ETF for Tesla?

The T-Rex 2x Inverse Tesla Daily Target ETF (TSLZ) seeks daily investment returns of 200% of the opposite of the performance of Tesla, before fees and expenses.

Why Should You Pick a Tesla ETF over Tesla Stock?

For some investors, the volatility risk of TSLA stock outweighs its potential upside. These investors may prefer investing in an ETF that offers exposure to TSLA as well as similar companies.

The Bottom Line

While Tesla stock is extremely valuable, it’s not suitable for every investor. Some investors may prefer to invest in an ETF that is heavily weighted toward TSLA, such as SMOG, ARKQ, or QCLN. These ETFs provide you exposure to TSLA without having to invest directly in the stock itself.