Reviewed by Lea D. Uradu
Fact checked by Suzanne Kvilhaug

The Internal Revenue Service (IRS) considers bonuses to be supplemental wages, which means your employer is required to immediately withhold 22% of your windfall.

You could get some of that back at tax time. On the other hand, a bonus might bump you into a higher tax bracket.

Below are five strategies that may help you keep as much of that extra cash as the IRS allows.

Key Takeaways

• A bonus or windfall can be a great way to jumpstart your retirement savings.
• If you are paid in shares of stock, consider the best time to sell some to offset or limit your capital gains.
• If you itemize your deductions on Schedule A, you can shield some of your bonus by making a charitable donation.
• It may be possible to delay your compensation in order to cut back on your reportable income for the year.

1. Set It Aside for Later

A bonus or windfall can boost your retirement savings.

401(k)s

It might make very good sense to use the extra cash to maximize your 401(k) contribution. This move may even reap an additional reward if your employer kicks in a matching sum.

The maximum amount you can contribute to your 401(k) is $23,500 for the 2025 tax year, while the catch-up contribution is $7,500 for those age 50 or older. (For the 2024 tax year, the maximum was $23,000 while the catch-up contribution was also $7,500.)

Keep in mind that when changing your 401(k) allocation through your employer, there may be a delay before they are recorded in the payroll department. This can be critical when planning for a windfall received at the end of the year.

IRAs

Your total contributions to all of your traditional individual retirement accounts (IRAs) and Roth IRAs cannot be more than $7,000 for the 2025 tax year, plus $1,000 if you’re age 50 or older. (The maximum was also $7,000 in the 2024 tax year and the catch-up contribution was also $1,000.)

The deduction you can take on IRA contributions, however, is subject to limits based on your income, filing status, and whether your employer has a retirement plan in place.

Note: If you received the windfall on the last day of 2024, you can still make contributions up until the 2025 tax filing deadline of April 15, 2025.

Roth IRAs

Another strategy, says Rosalind Sutch, a certified public accountant (CPA) at the tax consulting firm Armanino LLP in Philadelphia, is to make a contribution to a traditional IRA, then convert the account to a Roth IRA before the end of the year. You will need to pay taxes upfront, but distributions you take in retirement (after age 59 ½) will be tax- and penalty-free, as long as you’ve had the account for at least five years.

The caveat is that you’ll need to walk through the paperwork carefully with your accountant to avoid tripping up and generating taxable income, especially if you already have an IRA. Also, you’ll need to fit the Roth income limitations.

2. Defer Compensation

When it comes to getting back some of that 22% withheld bonus, you have a number of options. For one, you might look into a deferred compensation plan at work, which will allow you to spread out both the money you pocket and the tax liability.

If you are paid in shares of stock, you’ll want to consider the best time to cash out of a security that has increased in value—in order to offset or limit capital gains. Long-term capital gains rates are 0%, 15%, and 20%, depending on your income level.

Any prepayment of property taxes that have yet to be assessed cannot be deducted. In any case, taxpayers are advised to check with their accountant before trying this tack.

3. Pay Your Taxes

One beneficial way to use your bonus is to catch up on estimated tax payments or your withholding-tax obligations and sidestep an IRS penalty for coming up short.

Under certain circumstances, you might be able to pay next year’s real estate taxes in advance. It depends on when your real estate taxes were assessed. Under IRS rules, you can deduct the prepayment of property taxes for the next tax year if the assessment was received and paid in the current tax year.

4. Give It Away

If you itemize your deductions on Schedule A, you can shield some of your bonus by making a charitable donation. For most cash contributions, up to 60% of adjusted gross income (AGI) can be deducted.

The IRS maintains an online resource to help taxpayers determine the deductibility of their contributions to tax-exempt organizations.

If you cannot decide on a charity, you might consider a donor-advised fund (DAF), which is a tool for high-net-worth individuals. When you contribute to a DAF, the money goes into an account with your name. You are permitted to take the full charitable deduction in the year it was made, even though the funds might not be dispersed to charity until later. As with any donations, you should make sure that the donations to the DAF are deductible.

5. Pay Your Expenses

Another way to shelter a bonus or windfall is to pay upcoming deductible business or personal expenses before December 31. You might consider upgrading your computer equipment or footing utility bills for your home office before year-end. Using a credit card may make sense, provided you can pay off the additional balance in January.

Another idea: If you have a health savings account at work, consider using part of your bonus or windfall to pay up to the contribution limit. Just be sure it’s money you can carry over to next year, or that you know you will spend in time.

Can I Avoid Having Taxes Taken out of My Bonus?

Companies are generally required to withhold appropriate taxes from your paychecks, including those included in a bonus. In any case, you will owe some taxes on that bonus no matter what strategies you deploy to reduce them.

Consider ways to reduce your total taxable income for the year, such as making a contribution to your tax-deferred retirement accounts or paying deductible expenses in advance.

Why Might My Bonus Be Taxed at a Higher Rate?

In some cases, the IRS may view your bonus as supplemental income. Supplemental income is taxed at a higher rate than regular earned income.

Are Bonuses Taxed Twice?

In many cases, bonuses are treated the same as regular earned income for taxes. In some cases, bonuses may be paid out of income to a corporation which is taxed at the corporate level, then distributed to employees and taxed at the individual level. However, if the corporation is able to deduct the bonus expense, the charge is not taxed twice. In either case, bonuses are only taxed to the individual once.

How Are Bonuses Reported on a W2?

When an employer pays its taxes, it will often report the bonus in Box 1 for your W2. This bonus will be combined with all earnings and salary earned for the year. In addition, any taxes withheld from the bonus will be added to the W2 and reported as part of the W2.

The Bottom Line

As soon as you know you’re about to get a bonus or windfall, consider booking a meeting with a tax advisor to explore ways to reduce the taxes you’ll owe on it.

“Like a lot of tax issues, things can get very complicated,” says Sutch. “You don’t want to get whipsawed on some of the more intricate rules, so it’s a good time to lean on a competent tax adviser’s advice.”

The commissions and fees are among the expenses you may face selling a home

Fact checked by Amanda Jackson
Reviewed by Doretha Clemon

Buying a home is expensive, but sellers are also responsible for paying different expenses. The costs of selling a home can include commissions and fees such as filing fees or notary fees, as well as potential taxes. You may also have to bear the costs associated with preparing your home to show to buyers or hiring a lawyer. Learn more about what to expect with the costs of selling a home and ways to minimize what you have to pay, including which costs are negotiable.

Key Takeaways

• Costs associated with selling a home include real estate agent commissions and potential tax on profits.
• A seller typically pays commissions to their agent as well as to the buyer’s agent.
• Preparing a home to show to buyers can entail several expenses, such as repainting or new landscaping.
• If the home sells for a significant profit, the seller may also be subject to capital gains tax.

Real Estate Agent Commissions

The largest cost involved in selling a home is often paying the real estate agent commissions. It may come as a surprise to some first-time sellers that the seller is typically responsible for paying commissions for both their agent and the buyer’s agent.

A 6% commission split between the seller’s and buyer’s agents was the standard, but commissions are negotiable. The national average commission for 2025 is estimated to be around 5.32%, which is split between the listing and buyer’s agent at 2.74% and 2.58%, respectively.

Preparing Your Home to Sell

Real estate agents often refer to a home’s curb appeal, which is the first impression the property makes on potential buyers. If you’re selling your home, you’ll want it to be in the best condition possible to attract more buyers and to help you get a higher price.

Potential costs with preparing your home to sell can include repainting, landscaping, or any home repairs. If a home inspector identifies problems with the property, you may have to pay to fix them or negotiate with the buyer.

Some sellers invest in staging their homes to increase their appeal. That entails decluttering or buying (or renting) new furniture. Experts say the median value of staging a home ranges between $400 when sellers stage their homes themselves and $600 when they use staging services.

You can also save on commissions by selling your home without an agent. You may still have to pay the buyer’s agent, and you will be taking on a great deal of work that your agent would handle for you.

Incentives for Buyers

In a strong housing market, a home might receive multiple bids, and you may not have to offer additional incentives to compete for potential buyers.

In a weaker market, however, incentives can make a difference in selling your home. Common incentives include paying points toward the buyer’s mortgage (known as seller-paid points), covering some of the buyer’s closing costs, or giving the buyer some furniture or appliances.

Note

As many as 20% of selling agents said staging increased sales prices by 1% to 5%.

Paying Off Your Mortgage

If you still owe money on your mortgage, you’ll have to use some of the sale’s proceeds to pay it off. For the deal to go through, you’ll need a payoff letter or statement from your lender. It will show how much you owe the lender, including any fees or prepayment penalties associated with the transaction.

If you have an escrow account with your lender, the lender should either apply that amount to your outstanding debt or refund it to you.

Hiring a Lawyer

Whether you’re required to use a lawyer in selling your home varies from state to state, but it’s often a good idea either way. The seller’s lawyer can draft the sales contract and represent the seller’s interests at the closing.

What you’ll pay for hiring a lawyer can vary widely, but it’s likely to be from several hundred to several thousand dollars. This depends on the type of transaction, property, location, and your needs.

Other Closing Costs

Paying the real estate agents’ commissions will account for the bulk of the closing costs the seller is responsible for, but there can be others. For example, the seller may be expected to pay any transfer taxes, which some states impose when a property changes hands. If the property is part of a homeowners association, the association might charge a transfer fee, as well.

These rules also vary from state to state, and who pays a particular closing cost can often be negotiated between the buyer and the seller as part of the contract.

Income Taxes

If you make a profit from selling your home, you may be subject to federal income taxes. However, you might be eligible to exclude a portion of your profit if you meet these two criteria: You owned the home for at least two years, and you lived in it for at least two years out of the past five.

Assuming you qualify, you can exclude up to $250,000 of the profit as an individual or $500,000 as a married couple filing a joint tax return.

Your profit isn’t based on what you paid for the home initially but on your adjusted cost basis. That consists of what you paid for the home plus the cost of any improvements you’ve made over the years. So, for example, if you add a new roof, central air conditioning, or wall-to-wall carpeting, those expenses will increase your basis and lower your profit. You can add some of your closing costs from when you purchased the home to the basis as well.

Also, the length of time you owned your home will have an impact on the capital gains tax you’ll have to pay. If you owned the home for at least a year, your profit (if any) will be taxed as a long-term capital gain. If you owned it for less than a year, it will be taxed at a potentially much higher rate for short-term capital gains.

What Closing Costs Does a Homebuyer Have to Pay?

Homebuyers are responsible for several fees. Typical closing costs include a mortgage origination fee, property appraisal fee, title search fee, title insurance premium, and first-year homeowners insurance premium. Note that some of these fees may be negotiable, and the seller may agree to chip in as part of your deal. In total, a buyer’s closing fees often range from about 3% to 6% of the home’s sale price.

Are Closing Costs Tax Deductible?

Most closing costs are not tax deductible. The exceptions are mortgage interest (including points) and real estate taxes, and that’s only if the buyer or seller itemizes deductions when they file their tax return for the year. However, sellers are allowed to add some of their original closing costs to the adjusted cost basis for their home, which can reduce their tax liability.

What Is a No-Closing-Cost Mortgage?

A no-closing-cost mortgage is one in which the lender will either add the borrower’s closing costs to the loan amount or charge a higher interest rate to make up for them. In other words, even if you don’t have to pay any closing costs initially, you’ll still pay them over time.

The Bottom Line

Selling a home can entail several expenses. The largest single expense is likely to be real estate agent commissions, but there are other costs and fees to keep in mind as well. If you sell your home for a significant profit, you may also owe income taxes on a portion of that amount.

Reviewed by JeFreda R. Brown
Fact checked by Vikki Velasquez

Investors who diversify their portfolios typically strengthen their investment goals by maximizing returns while reducing risk. Many choose stocks, bonds, commodity-centric mutual funds, futures, and currencies, but investors can add commodities. These are basic goods that can be transformed into other goods and services.

Key Takeaways

• Investing in commodities can provide investors with diversification.
• Supply, demand, and geopolitics all affect commodity prices.
• Investors can trade commodity-based futures, stocks, ETFs, or mutual funds or hold physical commodities such as gold bullion.

What Is Commodity Investing?

Commodity trading historically linked cultures and people. From spices and silks in the early days to the exchanges where these assets are now traded, commodities are still popular investment vehicles. Commodity-hungry investors can consider investing directly in the physical commodity or indirectly by purchasing shares in commodity companies. These companies are accessible through several mutual funds or exchange-traded funds (ETFs).

Investing in commodities tends to protect investors against the effects of inflation. Generally, demand is high during periods of inflation. Commodities are also a good bet against the U.S. dollar. When the greenback declines, commodity prices rise.

Investors can maximize returns with commodity investing due to strong global demand. However, commodities tend to be more volatile than other investments, especially funds that track a single commodity or a specific sector of the economy. Investors who trade futures should remember that it involves speculation. Futures contracts track an underlying commodity or index. Futures have unique risks that must be managed independently of the underlying commodity.

Pros

• Protect against inflation

• Diversify a portfolio

• Hedge against a decline in the base currency

• Help hedge price risk

Cons

• Increased volatility when compared to other investments

• Margin trading in commodities potentially resulting in significant losses

• Speculative nature of trading with uncertainty of the outcome

Important

Futures markets are regulated by the Commodity Futures Trading Commission (CFTC).

Crude Oil

After production, crude oil is refined into products like gasoline. However, petroleum products include plastics, medicines, floor wax, shingles, ink, cosmetics, synthetic fibers, solvents, fertilizer, and asphalt. Crude oil generally reacts to the laws of supply and demand. When demand exceeds supply, prices tend to rise. When demand wanes, prices tend to fall.

Similarly, demand from developing nations such as China and India—whose economies are still growing—pushes up prices. Geopolitics impacts the price of crude oil. Tensions in the Middle East, where much of the world’s oil is produced, can increase oil prices.

Oil futures are a favorite of day traders and are bought and sold through brokerages. However, futures can be highly volatile and require capital. Investors may consider purchasing stocks in oil companies, crude oil mutual funds, or ETFs. Other options include buying shares in energy sector mutual funds or ETFs, which invest directly in oil company stocks. The U.S. Oil Fund is one example. It tracks the movement of West Texas Intermediate light, sweet crude oil.

Important

Historically, oil prices were influenced by the producer cartel OPEC. In the early 21st century, the development of new technology, particularly hydro-fracturing (fracking), created a second U.S. energy boom, largely decreasing OPEC’s importance and influence.

Gold

Gold is found in jewelry and technology and used by central banks and investors. This precious metal has traditionally been a safe investment and a hedge against inflation. When the U.S. dollar goes down, gold prices go up. Prices are affected when central banks—which hold gold—decide to diversify their monetary reserves by buying more gold.

Unlike crude oil, investors can hold the physical commodity. Investors can purchase gold bullion bars or coins. But this means having to pay to store it in a deposit box, vault, or safe place. Gold futures contracts require investors to deposit an initial margin. If the price rises, investors will profit; however, if the price drops, the investor stands to lose their money.

With gold stocks, investors aren’t limited to producers but also exploration and mining companies. Gold ETFs track the price. For instance, the SPDR Gold Shares ETF exposes investors to bullion without having to take possession of it.

Silver often trades similarly to gold, but with a gold/silver price ratio that fluctuates over time.

Base Metals

Base metals are used in commercial and industrial applications, such as construction and manufacturing. Aluminum, zinc, and copper are examples. They are relatively inexpensive, and supplies are generally stable because they’re commonly found globally.

Prices tend to be much lower than for precious metals; however, the increase in base metal applications and rising global demand—particularly from China and other developing nations—positively impact prices.

Investors can hold stocks in base metals firms like aluminum or steel companies. Furthermore, holding ETFs like the SPDR S&P Metals & Mining ETF provides exposure to companies involved in metals and mining.

Are ETFs a Good Investment Vehicle for Commodities?

Commodity ETFs allow for easy trading because they are purchased like stocks, provide diversification, are not traded on margin like futures are, and typically have low expense ratios.

When Should Investors Buy Commodities?

Commodities are a hedge against inflation, so buying before periods of high inflation is a common investment strategy. Commodities should be viewed as any other investment concerning an investor’s time horizon and risk profile.

What Are Common Base Metals?

Base metals are nonferrous metals that are not considered precious or noble metals. The most common base metals are copper, lead, nickel, tin, aluminum, and zinc. 

The Bottom Line

Like any investment, commodities come with risks but can still be a way to diversify an investor’s portfolio. In addition to oil, gold, and base metals, other commodities to consider are platinum, palladium, silver—lithium, cotton, and food products such as coffee, corn, oats, wheat, soybeans, and sugar.

Heirs must adhere to deadlines and payoff rules

Fact checked by Amanda Jackson
Reviewed by Lea D. Uradu

A reverse mortgage uses home equity to provide cash for homeowners who are age 62 or older. This Home Equity Conversion Mortgage (HECM) allows homeowners to borrow money against the value of their home and receive funds as a lump sum, a fixed monthly payment, or a line of credit.

When the borrower dies, the loan balance becomes due. If the borrower’s heirs inherit a home with a reverse mortgage, they generally have 30 days to buy the home, sell it, or turn it over to the lender. However, the deadline can often be extended to six months to allow heirs time to buy the home or secure financing.

Key Takeaways

• Inheriting a property with a reverse mortgage depends on several factors, including when it originated. 
• A widow or widower could potentially lose the home upon their spouse’s death. 
• After the homeowner’s death, a reverse mortgage loan is due within 30 days but may qualify for an extension.
• For homeowners who plan to leave a home with a reverse mortgage to heirs, they can create an estate plan.

Spouse or Co-Borrower

Heirs can inherit a home with a reverse mortgage but will be responsible for settling the debt, either by paying it off, selling the home, or turning it over to the bank. The rules depend on several factors for those who inherit a home with a reverse mortgage from a spouse:

• Co-borrower: A co-borrower can remain in the home and receive reverse mortgage payments. Otherwise, the loan balance must be paid within 30 days, with a potential six-month extension.
• Timeline: Some individuals may still qualify as an eligible non-borrowing spouse under U.S. Department of Housing and Urban Development (HUD) rules. Qualifying can be difficult, but heirs can keep the home without paying off the debt. The process works best if the reverse mortgage was secured on or after Aug. 4, 2014.
• Married Spouse: If a spouse took out the reverse mortgage after Aug. 4, 2014, the remaining spouse will qualify as an eligible non-borrowing spouse and stay in the home without paying back the reverse mortgage loan.

If two spouses live together in a home and only one is the borrower, the other spouse risks losing the home if the borrower dies. Check with the reverse mortgage provider to include both names on the loan if that’s what was intended.

Inheritance Issues

A reverse mortgage can create problems for heirs. Though both spouses have to consent to reverse mortgage loans, both don’t have to be named as co-borrowers. If both spouses hold the title and are borrowers on the reverse mortgage, then the surviving spouse may continue the reverse mortgage and can continue living in the house.

However, if an heir is neither a co-borrower nor the spouse of the borrower, they must pay back the reverse mortgage to the lender by:

• Paying off the mortgage balance in full with estate or other funds.
• Paying off the balance of the reverse mortgage in full by obtaining a traditional mortgage on the property.
• Paying off the reverse mortgage with the proceeds from selling the property. 

Heirs who want to keep the home by paying off the debt must repay either the loan balance or 95% of the appraised value, whichever is less. Alternatively, they could sell the home to pay off the debt and generate cash, which is the most common option, according to the Consumer Financial Protection Bureau.

Important

Heirs who want to keep the home can face problems if it has a reverse mortgage they cannot repay. A traditional fixed-rate forward mortgage can offer these heirs a funding solution, but they may not always qualify. If they cannot repay the debt, the home must be sold to satisfy the reverse mortgage debt.

Deadlines

At 30 Days

Lenders issue a Due and Payable Notice to the estate within 30 days of receiving notice of the borrower’s death. At this time, heirs are given three options:

• Pay off the remaining loan balance of the Home Equity Conversion Mortgage
• Sell the property for at least 95% of the appraised value 
• Provide the lender with a deed-in-lieu of foreclosure 

Within 60 Days

Thirty days after the Due and Payable Notice is sent, heirs must secure an appraisal of the home. A surviving, non-borrowing spouse, may apply for a deferral if eligibility requirements are met.

At 6 Months

By the end of six months, if heirs have not sold the house or repaid the debt, a lender may start the foreclosure process to satisfy the loan.

12 Months After Death of Borrower

Heirs commonly have six months to satisfy the debt. HUD may approve heirs eligible to receive two three-month extensions to pay the HECM balance, giving them a year to pay off the loan after the borrower dies.

What Happens If the Home Sells for Less than the Reverse Mortgage Owed?

If the property sells for less than the amount of debt, the heir would receive no cash from the sale. A property may sell for less than the outstanding reverse mortgage if home values have declined, if it has physically deteriorated or been damaged, or if the borrower outlived the life expectancy. Heirs are not responsible for paying outstanding debt after the proceeds from the home sale are applied. Instead, Federal Housing Administration (FHA) insurance covers the lender’s shortfall.

Can a Family Member Take Over a Reverse Mortgage?

A family member cannot take over a reverse mortgage unless they are a co-borrower. Instead, they must pay off the mortgage with cash or a traditional mortgage. They can sell the property, and the resulting funds will be used to pay down the debt, with any remaining amount going to the heirs.

What Happens If a Homeowner With a Reverse Mortgage Goes Into a Nursing Home?

Reverse mortgages have residency requirements. If you go into a nursing home for an extended period, then the reverse mortgage loan will become due, the home may be sold, and any proceeds from the sale of the home may make you ineligible for government benefits.

The Bottom Line

Heirs may encounter several problems when inheriting a reverse mortgage. The process for inheriting a property with a reverse mortgage depends on whether the heir is a spouse or a co-borrower of the mortgage and when it originated.

You can have only one reverse mortgage, but there are other ways to access equity

Fact checked by Timothy Li
Reviewed by Doretha Clemon

Reverse mortgages are limited to primary residences, and since you can have only one primary residence, it is not possible to have two reverse mortgages at the same time.

Reverse mortgages can be suitable for snowbirds who also are seniors. Many snowbirds have second homes in the Sun Belt, Hawaii, or Florida, so they have built up equity in two distinct properties. Since a reverse mortgage is an option for only one of those properties, there are alternatives such as home equity loans or cash-out refinance plan.

Key Takeaways

• Many snowbirds have equity in two homes: their primary residence and their vacation home. 
• A reverse mortgage can be a good way to access this equity, but you can only have one at a time. 
• Reverse mortgages can be taken out only on your primary residence, meaning the place where you spend the majority of the year.
• There are other ways of accessing the equity in your properties. These include a cash-out refinance or a home equity loan.

What Is a Reverse Mortgage?

A reverse mortgage is a special type of loan that is available to people who are 62 and older who own their own homes and have a considerable amount of equity in their properties. It allows retirees a way to borrow money against the value of their homes. The loan is advanced in a lump sum, as a fixed monthly payment, or as a line of credit.

There are three types of reverse mortgages. The most common is the home equity conversion mortgage (HECM). Under this program, the mortgage amount that you may borrow will be the lesser of:

1. The appraised value
2. The Federal Housing Administration (FHA) HECM limit of $970,800, or
3. The sales price (only applicable to HECM for Purchase). If you need to borrow more, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.

Reverse mortgages come due when the homeowner dies, moves away permanently, or sells their home.

Reverse Mortgages for Snowbirds

Many snowbirds choose to buy a second home in their vacation spot of choice, whether in Florida, Hawaii, or somewhere else warm and sunny. They also may have significant equity built up in their primary residence. It’s possible to use a reverse mortgage to access some of this money, giving them regular monthly payments, a lump sum, or a line of credit, in exchange for giving away the equity in their home.

However, residency rules for reverse mortgages state that the property on which you have the reverse mortgage must be your principal residence. This means you can’t be away from a property for more than six months and have a reverse mortgage on it.

This effectively bars snowbirds from taking out a reverse mortgage on their second home if they already have a reverse mortgage on their primary residence. However, if you have a significant amount of equity invested in your second home and want to access it, there are alternative ways of doing that. 

Important

If you have a second home and spend a lot of time there, be careful with the residency rules of reverse mortgages. If you are away from your primary residence for more than six months at a time, then your reverse mortgage lender can assume that you are in breach of the lending terms and may even start foreclosure proceedings. Make sure that you keep records, and respond quickly to requests (generally annual) to confirm where you are living.

Accessing Equity for Snowbirds

A reverse mortgage is not the only way to access the equity that you have built up in a property. In fact, reverse mortgages only make sense for a small proportion of senior homeowners. That’s because the high costs associated with reverse mortgages make other forms of borrowing more cost-efficient in the long term.

And unlike reverse mortgages, it’s possible to use these alternative sources of borrowing on two properties at once or to use them just in association with your vacation home. The alternatives include a:

• Cash-out Refinance: This option can help you access considerable equity in your home at one time. Keep in mind that you must make monthly payments to the lender if you take this route.
• Home Equity Loan or Home Equity Line of Credit (HELOC): You can access a great deal of equity in your home by taking out a HELOC. This option also requires regular monthly payments. But, there may be fewer associated fees, making this a much less expensive alternative to a reverse mortgage or cash-out refinance. Another benefit is that you can secure a HELOC with your primary or second (vacation) home—or both if you choose to do so.

Whichever option you take, make sure that you stick within the residency rules for your first reverse mortgage and plan for the long term. While taking equity out of your properties might be attractive in the short term, you should plan carefully to make sure that it doesn’t leave you short of money in the long term.

Can You Have Two Reverse Mortgages?

No, borrowers can only have one existing reverse mortgage at a time. However, borrowers who have paid off a reverse mortgage can get another reverse mortgage. And borrowers with an existing reverse mortgage can refinance the reverse mortgage to another one.

Does a Reverse Mortgage Have to Be on Your Primary Residence?

Yes, the residency rules for reverse mortgages state that you must spend the majority of the year in the property on which you have the reverse mortgage. If you are away for more than six months, your lender might say that you’ve broken the lending terms and may even start foreclosure proceedings.

Can I Use a Reverse Mortgage to Buy a Second Home?

Yes, but be careful. The fees and interest associated with a reverse mortgage mean that you may end up with a lot less money than you invested in your first home. Other ways of accessing your equity, including a cash-out refinance or a home equity loan, might make more sense in the long term.

The Bottom Line

Many snowbirds have equity in two homes: their primary residence and their vacation home. A reverse mortgage can be a good way to access this equity, but you can only have one at a time. Reverse mortgages can be taken out only on your primary residence, meaning the place where you spend the majority of the year.

There are other ways of accessing the equity in your properties, though. These include a cash-out refinance or a home equity loan.

Reviewed by Amy Soricelli

Those entering the workforce armed with a degree in finance face a tough choice. Do they head to Wall Street and the lucrative, although risky, world of high finance? Or, do they head away from the path of the investment banker and develop the tools to become a future giant of corporate finance?

Of course, there are even more choices than that. Below we take a look at the options available to those entering the workforce and provide some tips on how to land a finance job.

Key Takeaways

• Finance majors usually study a robust curriculum of critical subjects from risk management to financial forecasting.
• Coursework may vary from school to school, but overall, finance courses cover multiple areas of the industry.
• Internships often play an essential role in getting hired after graduation.
• Accounting, Operations, Compliance, and FinTech are four popular areas of finance.

Working in Financial Services

Coursework for finance majors varies from school to school. Typically, the curriculum teaches students several key subjects, including business fund management, financial markets, security analysis and valuation, financial institutions, investments and securities, risk management, trading, financial forecasting, capital structure, venture capital, and security issuance.

Overall, finance courses are more quantitative than qualitative, meaning that students really need to develop some real-world experience through internships to build up the interpersonal skills that the workplace requires. This is one of the primary reasons so many schools have students work on projects in teams. So what does a job in finance actually look like? The answer is a broad one, but we’ve rounded up five popular careers in finance.

Accounting

The success of financial firms may ebb and flow and the fates of investment bankers may change at any moment, but there is one employee that firms can rarely get enough of—accountants. Accounting work on Wall Street involves reviewing and handling financial system data, maintaining financial schedules and journal entries, and keeping track of where a firm’s obligations are.

Taking this career path requires an eye for order and a stomach for complexity. Tracking the value of a security position may not seem difficult in a textbook, but keeping track of a dizzying array of derivatives requires a certain finesse that requires more than just standard knowledge of accounting principles.

Important

When you graduate with a degree in finance, there are many career paths open to you from accounting to investment banking.

Investment Banking

Essentially, investment banks are consulting firms that provide advice on initial public offerings (IPOs), mergers, stock repurchases, and corporate refinancing. These firms rely on smart personnel with inquisitive and detailed minds to help them examine the inner workings of their clients, which makes it easier to bring in sizable billings.

Business analysts work with clients to identify their needs and develop strategic plans that will move them toward meeting those needs. This all happens while setting requirements and tasks to improve the likelihood of sustained success among clients.

Going down this career track requires skill in identifying the big picture and the patience to work with clients who may not know what they want. This position often involves interfacing with many different clients, as well as working with members of the firm who are specialists in specific fields. Projects may be short and defined or long and vague.

Operations

The heart of a Wall Street firm is its operations. Work in this area involves project management, gathering requirements, and business process planning—tasks generally not considered when college graduates think of an investment bank.

Employees may track complex trades to ensure that all parties are settled and that the ownership of securities passes to the correct group. They may examine how deals are executed in order to improve the process, and they focus on accomplishing the firm’s goals efficiently and with the fewest resources required.

Operations staff, much like accountants, need an eye for the relationships between different parties and factors and should be comfortable with business process mapping and modeling.

FinTech

The world of finance changes rapidly—so much so that it barely resembles the days when computers were first used to evaluate transactions. Today, financial engineers create new financial instruments that would have been impossible to implement in the past. Complex derivatives, exotic options, and multi-party trades require employees who understand financial economics, mathematics, and software engineering. They also require imagination and diligence.

A financial engineer may be charged with developing software that can reduce the time it takes to execute a trade, allowing firms to profit from the smallest of fluctuations in a security’s price. Tasks might require modeling financial formulas and developing simple interfaces so that other employees can interpret data.

Compliance

When Wall Street draws the ire of Main Street, politicians and regulators often step in to fix an industry that may be considered broken. Since before the Great Depression, regulatory bodies such as the Securities and Exchange Commission (SEC) have provided rules and guidelines that firms must follow in order to protect consumers and other businesses. Breaking these regulations often comes with a hefty fine.

To avoid conflict with regulations, firms employ compliance officers to make sure that the strategies and processes they employ are legal. Compliance officers review and evaluate business processes and compare them to regulations, audit company activities in order to mitigate risk, and develop policies and procedures designed to make breaking the rules evident and preventable.

This position is often the “bad cop” of the company, as its function is to limit behavior that increases a firm’s risk, even if that behavior is highly profitable. Knowledge of process planning, financial forensics, and business law are all desirable assets for achieving success.

Do You Need A College Degree to Work in Finance?

Yes, most entry-level jobs in finance require applicants to have an associate’s degree or – preferably – a bachelor’s degree. Meanwhile, more advanced positions may require applicants to hold a master’s degree or specialized industry certification. While you can get a entry-level job without a degree, you’ll likely find it much harder to advance your career without one.

What Are Some Entry-Level Jobs in Finance?

Numerous entry-level positions exist in financial firms, from banks to insurance companies. Common positions include junior accountants, personal bankers, financial advisors, financial analysts, underwriters, and registered representatives.

What College Degrees Are Most Common for Finance Jobs?

A degree in finance is usually a good option if you want to land a job in finance. However, there are plenty of viable alternatives, especially if you want to work in a specialized career. Popular options include economics, actuarial science, statistics, and mathematics.

The Bottom Line

Working on Wall Street means long hours and backbreaking work, all thrown in with something commonly referred to as “paying your dues.” Entry-level work can often be thankless, and the rewards of the job may vary greatly from firm to firm and position to position.

Tough economic times and political influences also change what Wall Street jobs have to offer. Many factors can focus the public’s eye on a number of facets of Wall Street that might have typically gone unnoticed.

Ever-changing bonuses, salaries, regulations, and technology will adjust the benefits and restrictions of a career in finance. The days of the “fat cat” may not be over, but they certainly have changed.

Don’t leave until these signposts show you’ve covered all the bases

Reviewed by Ebony Howard
Fact checked by David Rubin

Are You Ready to Retire?

If you’re considering retiring early, you’ll forego not only the headaches of working but also the additional earnings that could have made your retirement even more comfortable. Make sure you’re truly ready before you leave.

Key Takeaways

• Start debt free, with a solid retirement account that will support your extra years not working.
• Make sure you can withdraw some money from your retirement accounts without penalty.
• Plan to pay for your own healthcare coverage until Medicare kicks in.

Here are six signs you may be able to retire early instead of continuing to work.

1. Your Debts Are Paid Off

If your mortgage is paid off and you don’t have any loans, credit lines, large credit card balances, or other debt, you won’t have to worry about making large payments during retirement. This leaves your savings and retirement income available to enjoy life and free to use in the event of an emergency.

2. You Have Ample Savings

You planned and set a goal for retirement savings. Now your investments meet or exceed the amount you were hoping to save. This is another good sign you could take early retirement.

If you didn’t plan for early retirement, you will need to recalculate how long your savings will last. Also, depending on your age, you may not yet be eligible for Social Security or Medicare. Your savings will need to cover your expenses until you reach the eligible age.

Important

Keep in mind that if you do leave work several years before you planned to, your savings must be enough to cover these additional retirement years.

“Think ‘Rule 25.’ Prepare to have 25 times the value of your annual expenses,” says Max Osbon, partner at Osbon Capital Management in Boston, Massachusetts.

The Rule of 25 is used by many participants in the Financial Independence, Retire Early (FIRE) movement, and it depends on a 4% maximum portfolio withdrawal rate (adjusted for inflation). Many experts, though, question the validity of the 4% guideline, especially for folks who plan to retire early. Since the 4% rule for retirement budgeting only allows for safe withdrawals for about 30 years, this means it may not provide sustainable income for individuals who retire early.

3. You Can Get at Your Savings

No one likes to pay unnecessary penalties.

If your 59th birthday was at least six months ago, you’re eligible to take penalty-free withdrawals from any of your 401(k) plans. These policies generally apply to other qualified retirement plans, but there are exceptions.

For instance, the 457 plan doesn’t have an early withdrawal penalty. But remember that you’ll still pay income tax on your withdrawals.

There’s also good news for wannabe early retirees with 401(k)s. If you continue working for your employer until the year that you turn 55 (or after), the Internal Revenue Service (IRS) allows you to withdraw from only that employer’s 401(k) without penalty when you retire or leave, as long as you leave it at that company and don’t roll it into an individual retirement account (IRA).

“There is a caution, however: If an employee retires before age 55 [except as noted above], the early retirement provision is lost and the 10% penalty will be incurred for withdrawals before age 59½,” says James B. Twining, CFP, founder and CEO of Financial Plan Inc. in Bellingham, Washington.

The third option for penalty-free retirement plan withdrawals is to set up a series of substantially equal withdrawals over at least five years, or until you turn 59½, whichever is longer. Like withdrawals from a 457 plan, you’ll still have to pay income taxes on your withdrawals.

If your retirement plans include any of the above penalty-free withdrawal options, it’s another point in favor of leaving work early.

4. Your Healthcare Is Covered

Healthcare can be incredibly costly, and early retirees should have a plan in place to cover the costs before becoming eligible for Medicare at age 65. If you have coverage through your spouse’s plan or if you can continue to get coverage through your former employer, this is another sign that early retirement could be a possibility for you.

Keep in mind that COBRA may extend your healthcare coverage for a period of time after leaving your job, although your costs with COBRA may be higher than other options.

Another option for early retirees is to purchase private health insurance. If you have a Health Savings Account (HSA), you can use tax-free distributions to pay for your out-of-pocket qualified medical expenses no matter what age you are.

5. You Can Live on Your Budget

Retirees living on fixed incomes, including pensions or retirement plan withdrawals, usually have lower monthly incomes than they did when they were working.

Try practicing sticking to your reduced retirement budget for at least a few months before you actually retire. You’ll get a sense of just how easy or difficult it would be to make that lower budget permanent.

“Humans do not like change, and it is hard to break old habits once we have become accustomed to them. By ‘road-testing’ your retirement budget, you are essentially teaching yourself to develop daily habits around what you can afford in retirement,” says Mark Hebner, founder and CEO of Index Fund Advisors Inc. in Irvine, California, and author of “Index Funds: The 12-Step Recovery Program for Active Investors.”

6. You Have a New Plan

Leaving work early to spend long days with nothing to do will lead to an unhappy early retirement. Having a defined plan—or even the outline of a daily routine—can help you prepare.

Perhaps you’ll replace sales meetings with a weekly golf outing or a volunteer gig, in addition to adding daily walks or trips to the gym. Plan a long-overdue trip or take classes to learn something new.

If you can easily think of realistic, non-work-related ways to enjoyably pass your days, early retirement could be for you. In the same way you test-drive your retirement budget, try taking a week or more off work to spend your days as you would in retirement. If you become bored with long walks, daytime TV, and hobbies within a week, you’ll certainly get antsy in retirement.

What Is Retirement?

Retirement, fundamentally, is when you leave the workforce behind. The traditional retirement age is 65 in the United States. The full retirement age (when you can collect full Social Security benefits) is 66 or 67, depending on your birth year. The early retirement age is 62 (the earliest age you can collect Social Security benefits).

What Is Retirement Planning?

Retirement planning is a strategy for long-term saving, investing, and finally withdrawing money you accumulate to achieve a financially comfortable retirement. Creating a retirement plan begins with determining your long-term financial goals and tolerance for risk, then starting to take action to reach those goals. The process of creating a retirement plan includes identifying your income sources, adding up your expenses, putting a savings plan into effect, and managing your assets.

How Much Do I Need to Save to Retire?

The answer varies by individual, and it depends largely on your current income and the lifestyle you want and can afford in retirement. Many retirement experts recommend strategies such as saving 10 times your pre-retirement salary and planning on living on 80% of your pre-retirement annual income.

The Bottom Line

These are questions nearly all young and middle-aged workers have asked themselves: Should I leave my job and retire early? What would I need? How do I know I’m ready?

When it comes to deciding if you should retire early, there are several signs to watch for. The signposts also point to a number of plans you can make now to increase the chances that you could fulfill this dream if you end up wanting (or needing) to do so.

Reviewed by David Kindness
Fact checked by David Rubin

While many Americans struggle to save for retirement, elected representatives and senators in the U.S. Congress receive substantial pension benefits for life. Though congressional retirement pay is not typically a big election-year issue, it might serve as evidence of a disconnect between lawmakers and the mainstream United States.

Key Takeaways

• Congressional representatives have access to a variety of retirement plans.
• A typical member of Congress has a net worth that far surpasses a typical American citizen’s net worth.
• The average American saves far less for retirement than a member of Congress does.

Overview

The median net worth for a member of Congress is over $1 million. The median wealth for an American household, in contrast, was $176,500 in 2022, the most recent data available. That means half of American households’ wealth is lower than that number, and half is higher. (This includes households that are in debt, with negative wealth.)

Congressional members are eligible for their own unique pension plans under the Federal Employees Retirement System (FERS), though there are other retirement options available, ranging from Social Security to the Civil Service Retirement System (CSRS). Members of Congress are eligible for a pension dependent on the member’s age at retirement, length of service, and salary. The pension value can be up to 80% of the member’s final salary, which is $174,000 per year. At an 80% rate, that’s a pension benefit of $139,200. (The Speaker of the House has a salary of $223,500. The Senate President makes $193,400, as do the majority and minority leaders in the House and Senate.) All benefits are taxpayer-funded.

Additionally, members of Congress enjoy the same Thrift Savings Plan (TSP) as all other federal employees, which is similar to a 401(k). Congressional contributions are matched up to 5% of salary per year, in addition to an extra 1% giveaway regardless of how much the congressperson contributes, if anything.

Few private employees have the option to contribute to an employer-sponsored defined benefit pension plan. Most have the option to contribute to a 401(k) or 403(b), while others may contribute to an employee stock ownership plan (ESOP) or some other retirement option. The median benefit for private pensions and annuities for those 65 and older was $11,040 per year in 2022, the most recent data available. For state and local government pensions, it was $24,980 per year. Of course, some people receive both Social Security and a private pension. The median Social Security benefit for those 65 and older was $18,520, so with a private pension, that’s an income of nearly $30,000 per year. As far as other retirement assets, the Federal Reserve found that the median retirement account balance in 2022 (the most recent data available) was $86,900 and the average balance was $334,000.

Social Security Fairness Act

The Social Security Fairness Act, concerning the Windfall Elimination Provision and Government Pension Offset, was signed into law on Jan. 5, 2025. It eliminates the reduction of Social Security benefits while entitled to public pensions from work not covered by Social Security. The Social Security Administration is finalizing its plan to implement the act.

How Benefits Have Changed Over Time

Participation in defined-benefit pension plans peaked in the private sector in the early 1980s. More than 80% of American employees who worked for large companies in the private sector contributed to a pension plan. By 2011, that rate for all private industry workers dropped to 18%. In 2001, 5% of the Fortune 1000 closed down or froze their defined-benefit retirement plans. By 2004, it was over double that (11%).

Defined contribution plans, like 401(k)s, have become more prominent. In 2023, 67% of private-sector workers had access to defined contribution plans. Only 15% could access defined-benefit plans. Of these, 49% and 11% of workers participated, respectively.

Increasingly, American workers are forced to rely on 401(k) plans, individual retirement accounts (IRAs), and Social Security for their retirement. Among these, only Social Security provides a guaranteed minimum payment in retirement, and even those benefits seem uncertain, considering the massive unfunded future liabilities faced by the U.S. government.

Previous Pensions

Congress did not always receive a gold-plated pension. Before 1942, members of Congress did not receive a taxpayer-funded retirement plan. This early system was quickly scrapped after public outcry, however. A pension was put into place after World War II and eventually replaced by FERS in the 1980s. The congressional pension system has not changed much since September 2003, after which all incoming representatives were no longer able to decline FERS.

During and After the Financial Crisis

Unfortunately, the once-promising 401(k) era failed to live up to its promise after unrealized gains were wiped out by the 2007–2009 recession, though some of the lost retirement wealth from 2009 recovered quickly. By 2011, the average retirement account balance increased by 7%.

Those gains were conspicuously concentrated among the wealthiest Americans. Approximately 45% of workers saw declines in the value of their retirement assets to the tune of thousands of dollars from 2009 to 2011, despite the fact that the S&P 500 grew approximately 54% over that period.

Note

Nine in 10 high-income families had retirement savings account balances in 2019. For low-income families, that ratio dropped to one in 10.

What Does a Member of Congress Make in Retirement?

Since 2009, congressional pay has been $174,000 per year, which, at an 80% rate, equates to a lifelong pension benefit of $139,200. (There are a few exceptions. The Speaker of the House has a salary of $223,500. The Senate President has the same salary as the majority and minority leaders in the House and Senate: $193,400.) Under the Federal Employees Retirement System (FERS), members of Congress are eligible to receive this full pension once they are at least 62 years old, as long as they’ve served for at least five years. Alternatively, if they’ve worked in the job for at least 20 years, their pension can kick in at age 50. If they’ve served for at least 25 years, there’s no minimum age to receive their pension. The Civil Service Retirement System (CSRS), which is only an option for representatives elected before 1984, is similar: A member of Congress may retire at age 60 with 10 years served, or at age 62 with five years of civilian federal service, which includes working in Congress.

Can Members of Congress Be Paid After They Retire?

While members of Congress don’t get paid their full salary after they retire, they do receive a pension that can be up to 80% of their $174,000 salary, depending on the amount of time served.

Do Members of Congress Receive Full-Pay Retirement Benefits After Serving One Term?

No, members of Congress do not receive their full pay as a retirement benefit after serving only one term. Their pension is based on the amount of time served. To be eligible for the Federal Employees Retirement System (FERS) pension, they must have served in Congress for a minimum of five years (and be at least 62 years old).

The Bottom Line

There are more retirement plan options for a member of the U.S. Congress than for the average citizen.

Every member of Congress has access to several retirement plans, and their defined benefits are not negatively impacted by stock market recessions.

Congress also has the unique position of determining its own benefits without having to worry about turning a profit—a private company may have to freeze its pension plan or perform a buyout if it experiences balance sheet problems, but the U.S. Congress must only appropriate tax dollars. Even state and local government pensions are often limited by balanced budget amendments or the tolerance of local taxpayers.

Correction—Feb. 11, 2025: This article has been corrected to state that the median wealth for an American household means half of American households’ wealth is lower than that number and half is higher.

Here’s how to protect your sensitive financial data before and after a breach

Reviewed by Pamela Rodriguez
Fact checked by Jiwon Ma

From Capital One to Target, the Home Depot to TJ Maxx, criminals have stolen customers’ credit card information—and there’s no indication that the thefts will stop. Fortunately, there are a number of ways to minimize the damage.

Even if you haven’t yet been hacked, many of the seven moves described below can make your information less easy to find and less usable if you are caught up in a breach. They range from monitoring your accounts regularly to freezing your credit.

Key Takeaways

• Data breaches that compromise your credit card information are becoming commonplace. 
• Well-known breaches that exposed customer data include the 2019 hacking of Capital One. 
• If you’re the victim of a breach, protect your credit record by immediately ordering a replacement card and freezing your credit report.
• There’s no need to sign up for high-priced fraud protection.
• Be on the lookout for phishing schemes.
• Use tough-to-crack passwords. 

1. Get a Replacement Card

If you’ve been told that you’re part of a data breach, tell the company that you need a new card immediately. You’re not likely to get any pushback from the already-embarrassed company. But if you do, don’t back down.

Important

Credit card fraud pays. On the black market, your card number and information can be worth anywhere from $5 to more than $100, according to credit reporting agency Experian. So if a hacker steals information on a million cards, that can be lucrative.

2. Check Your Account Online

After a breach, don’t wait for your statement to arrive before you check it—monitor your account regularly online. Keep checking daily for at least 30 days, even after you get a new card. If you find a suspicious charge, dispute it immediately.

3. Freeze Your Credit

If you are caught up in a data breach, call each of the three main credit bureaus (Equifax, Experian, and TransUnion) and request that your credit report be frozen. Freezing means that no one will be able to access your credit report without your approval. Creditors likely won’t approve an application without having access to your credit report.

Important

If you’re deeply worried about potential breaches, then you can also put a credit freeze on your accounts proactively—you don’t have to be a fraud victim. Just remember to unfreeze it any time you’re applying for a loan.

4. Place a Fraud Alert

An alternative—and less drastic—step to freezing your credit is to place a fraud alert on your credit profile with the credit bureaus. A fraud alert can protect your credit history from unauthorized access for one year, after which it can be renewed. A fraud alert won’t completely lock down your credit reports the way that a credit freeze does, but it does require creditors and lenders to take the extra step of verifying your identity before authorizing new lines of credit in your name.

Important

There’s no need to sign up for high-priced fraud protection. In the panic of the moment, you might be tempted to shell out hundreds of dollars per year for credit monitoring services. But that’s not necessary. You can monitor your own accounts by closely reviewing the information that you get free of charge.

5. Order Your Credit Reports

By law, you get one free credit report per year from each credit reporting company. Even if you haven’t yet been targeted, be proactive and take a look at your free reports. Ideally, you can order one every four months by staggering the requests across the three main credit reporting agencies, so you can be better covered across the entire year.

6. Watch for Phishing Scams

Just because thieves have your credit card number doesn’t mean they also have its expiration date and the three- or four-digit card verification value (CVV) number. Beware of phishing, a scam where the thief might send an email or call in an attempt to obtain the rest of the information.

Don’t give your information to anybody unless you call the company directly. If somebody leaves a message, go to the company’s website and find a contact number to make sure it matches what the person in the message provided. For even more security, call the company directly and make sure that the person who called you is legitimate.

7. Be Smart About Passwords

Simply employing all the password rules won’t prevent a breach, but since you don’t know exactly what information thieves are looking for, it can’t hurt. Use strong passwords, and change them frequently.

You may also want to take advantage of additional digital security measures such as two-factor authentication. Newer types of authentication, such as Face ID and Touch ID, are slowly replacing passwords as a legitimate means to grant a person access to sensitive financial information.

What Is Two-Factor Authentication?

Two-factor authentication delivers a one-time code to a trusted device, such as a mobile phone. This provides a secondary layer of protection that requires physical possession of your device before allowing an unknown sign-in to your accounts.

How Many Capital One Customers Were Affected in the 2019 Data Breach?

One of the largest data breaches involved Capital One, which reported that the personal information of 106 million of its customers had been compromised in July 2019.

How Many Target Customers Were Affected in the 2013 Data Breach?

Over 70 million customers’ personally identifiable information and credit card information were stolen from Target’s databases in 2013.

The Bottom Line

Even if you haven’t been a victim of a credit card breach, it’s important to act proactively to make yourself less vulnerable. If you have, don’t panic. It’s going to take time to clear up everything, but you won’t pay for any charges that weren’t yours. Call your credit card company, tell them about any incorrect charges, and be patient as they work to clear them from your account. In the meantime, continue monitoring your credit report and credit card bills for further signs of unauthorized activity.

Navigating the World of Cryptocurrency ETFs

As cryptocurrencies capture more and more attention from retail and institutional investors, cryptocurrency exchange-traded funds (ETFs) have emerged as an accessible way to gain exposure to these volatile assets.

“Crypto ETFs mark a monumental shift in the regulatory landscape,” said Christina Lynn, a behavioral finance researcher and certified financial planner at Mariner Wealth Advisors. “Their approval lends legitimacy to the asset class and provides [investors] with a more straightforward, regulated investment vehicle.” However, she suggested anyone interested “abandon get-rich-quick schemes and aim for an above-average return on investment.”

Whether you’re considering adding a crypto ETF to your portfolio or want to understand how these instruments compare to direct cryptocurrency investments, this guide gives you what you need to know.

Key Takeaways

• Crypto ETFs allow investors to gain exposure to digital assets through traditional brokerage accounts without the need to manage wallets or custody issues.
• Spot ETFs hold actual cryptocurrencies, while futures ETFs track price movements via derivatives.
• The major U.S.-listed crypto ETFs by issuers like iShares, Fidelity, and Grayscale have had significant growth despite major price changes among crypto assets.
• If you are interested in crypto ETFs, you’ll need to assess the effect of expense ratios, tracking errors, and evolving regulations on risks and returns.

Understanding Crypto ETFs

An ETF is a pooled investment vehicle that trades on stock exchanges like a regular stock, but holds a basket of securities such as stocks, bonds, or other assets, allowing investors to buy and sell shares throughout the trading day at market-determined prices. Crypto ETFs do the same thing, but track the performance of one or more of the major cryptocurrencies.

The most attractive aspect of crypto ETFs is their convenience. Instead of dealing with the technical challenges of setting up digital wallets, managing private keys, or storing cryptocurrencies securely, investors can simply buy ETF shares from their broker just like they would with any other stock or traditional ETF. This accessibility makes crypto exposure possible for both retail and institutional investors without requiring deep technical knowledge of the crypto ecosystem.

Lynn suggests that when choosing a crypto ETF, “opt for the product with the lowest fees, as this helps maximize returns by minimizing costs—a principle that applies equally to both traditional and crypto ETFs. Additionally, consider ETFs that offer high liquidity and providers with a strong and reliable track record in managing crypto assets.”

Types of Crypto ETFs & How they Work

There are four major types of crypto ETFs available, each designed to meet different investor needs and risk appetites:

• Spot ETFs: When investors buy shares of a spot crypto ETF, the fund manager uses those funds to buy an equivalent amount of the cryptocurrency (such as bitcoin or ether) and holds it in secure storage—often a cold wallet or through a trusted custodian. Each share of the ETF represents fractional ownership of the underlying crypto assets.
• Futures ETFs: Instead of holding crypto, futures-based crypto ETFs invest in cryptocurrency derivatives contracts. A futures contract is an agreement to buy or sell an asset at a preset price on a specific future date. By holding these contracts, the ETF track the expected future price movements of the cryptocurrency.

Important

Because futures contracts have expiration dates, futures-based ETFs must periodically “roll over” —selling contracts nearing expiration and purchasing new ones. This can sometimes lead to tracking errors, meaning the ETF’s performance might not perfectly mirror the spot market price of the cryptocurrency.

• Inverse and leveraged ETFs are designed to deliver multiples of the daily performance of a given cryptocurrency index or inverse exposure. Inverse ETFs profit from declines in the underlying asset’s price (and vice versa), while leveraged ETFs amplify gains (and losses). Both types carry considerably higher risks and are generally more suitable for short-term trading rather than long-term investing.
• Blockchain company ETFs: While not directly investing in cryptocurrencies, blockchain ETFs focus on companies involved in the blockchain space and related technology. This broader exposure lets investors benefit from the growth of the blockchain sector without the direct volatility of crypto prices.

Pros & Cons of Crypto ETFs

Pros of Crypto ETFs

• Diversification: Crypto ETFs offer a way to gain exposure to a basket of crypto assets or related companies, unlike investing in a single cryptocurrency. Investors can benefit from broader market trends without the concentration risk that comes with direct ownership.
• Simplicity and accessibility: Like traditional ETFs, crypto ETFs can be traded through standard brokerage accounts.
• More security: By investing in a regulated fund, investors cut the risk of direct crypto ownership, such as hacking or losing access to digital wallets.
• Professional management: Crypto ETFs are managed by professionals with the expertise and resources to navigate the volatile cryptocurrency market.

Cons of Crypto ETFs

• Potentially higher fees: ETFs have management fees and other expenses that can erode returns over time.
• Lack of direct ownership: When you invest in a crypto ETF, you do not own the underlying cryptocurrency.
• Limited trading hours: ETFs are traded during regular stock market hours, unlike the 24/7 nature of cryptocurrency exchanges. This can restrict your ability to react to market movements outside these hours.
• Regulatory and market risks: Shifts in regulations can lead to increased uncertainty and impact the performance or even the availability of these funds.
• Volatility: The significant swings in the cryptocurrency market are the biggest risks with these assets.

Pros

• Diversification potential

• Accessibility

• Security

• Professional Management

Cons

• Potentially higher costs

• Lack of direct ownership

• Not traded 24/7

• Potential for regulatory shifts

Regulatory Environment

The regulatory landscape for crypto ETFs has shifted dramatically in the mid-2020s. Under new U.S. Securities and Exchange Commission (SEC) leadership and a more crypto-friendly administration, the approval process for crypto ETFs has accelerated considerably.

Nevertheless, “there is still no comprehensive federal regulation of any type of digital assets or cryptocurrency,” said V. Gerard Comizio, associate director of business law programs at American University’s Washington College of Law and author of Virtual Currency Law: The Emerging Legal and Regulatory Framework.

The SEC approved the first spot Bitcoin ETFs in January 2024 and spot Ethereum ETFs in mid-2024, a major change from the previous years when only futures-based crypto ETFs were permitted in the U.S. markets. A key factor in shifts since their approval is the changing political attitudes toward digital assets, with President Donald Trump himself a purveyor of meme coins and members of his administration previously involved in various cryptocurrency offerings.

However, regulatory scrutiny remains selective. While bitcoin and ether ETFs have gained approval, other cryptocurrencies face varying levels of regulatory uncertainty. For example, analysts suggest that ETFs holding Litecoin may have an advantage in gaining approval since the SEC has never classified it as a security. In contrast, XRP faces a more challenging path because of ongoing legal questions about its status.

For investors, understanding these regulatory nuances is crucial. The approval status of different crypto ETFs can significantly impact their liquidity and trading volumes, that is, your ability to buy and sell your shares with relative ease.

Important

The first spot bitcoin ETFs were approved by the SEC in January 2024.

Crypto ETFs vs. Direct Crypto Investments

Direct Crypto Investments

Investing directly in cryptocurrencies involves purchasing tokens through online exchanges or from a private party. This offers complete ownership, enabling participation in activities like staking, lending, or voting in decentralized governance. However, direct investments also require secure storage, navigating complex exchange interfaces, and the potential for hacking or fraud.

Direct crypto ownership means maintaining a digital wallet to store assets and transact. You are also responsible for remembering and keeping your private keys secure, which lets you access your wallet. Without your private keys, your tokens are as good as lost.

Crypto ETFs

Crypto ETFs, on the other hand, provide exposure to cryptocurrency markets without requiring you to handle digital wallets or worry about cybersecurity at the individual level. Instead, ETF shares stay in your brokerage account alongside the rest of your portfolio holdings.

The tradeoff, however, is that investors pay fees and lose the benefits of direct token ownership.

Strategic Considerations

• Risk management: Investors with a lower risk tolerance may appreciate the structure and professional management of crypto ETFs to gain exposure to cryptocurrencies.
• Investment goals: Those looking for potential additional benefits like staking rewards might prefer owning cryptocurrencies directly, despite the added responsibilities and risks.
• Market timing: The 24/7 trading environment of cryptocurrency exchanges allows for rapid reactions to market shifts, while ETFs are constrained to market hours.

The Bottom Line

Crypto ETFs are for investors who want exposure to the burgeoning cryptocurrency market while avoiding some of the complexities and risks associated with direct ownership. For investors considering crypto ETFs, aligning your investment strategy with your risk profile and financial goals is key. Conducting thorough research and, if necessary, consulting a financial advisor can help determine whether these funds are the right fit for your portfolio.