Dec
27
2025
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Required Minimum Distribution (RMD) Rules for 401(k)s

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Required Minimum Distribution (RMD) Rules for 401(k)s

When you turn 73, the IRS requires you to start withdrawing money from your 401(k) each year. These withdrawals are called required minimum distributions (or RMDs), and those who don’t take them face potential financial penalties.

The 401(k) RMD rules also apply to other tax-deferred accounts, including traditional IRAs, SIMPLE and SEP IRAs. Roth accounts don’t have RMDs for the account holder.

What’s important to know, as it relates to RMDs from 401(k)s, is that there can be tax consequences if you don’t take them when they’re required — and there are also tax implications from the withdrawals themselves.

Key Points

•   The IRS mandates that individuals must begin withdrawing funds from their 401(k) accounts as required minimum distributions (RMDs) starting at age 73.

•   RMD amounts are determined using IRS life expectancy tables, and failing to withdraw the required amount can result in a 50% penalty on the missed distribution.

•   Although RMDs generally apply to various tax-deferred accounts, Roth IRAs do not require distributions while the owner is alive.

•   Individuals can delay their first RMD until April 1 of the year following their 73rd birthday, but this may lead to higher taxes due to two distributions in one year.

•   Inheriting a 401(k) requires RMDs as well, with specific rules differing for spouses versus non-spouses, including timelines for withdrawals.

What Is an RMD?

While many 401(k) participants know about the early withdrawal penalties for 401(k) accounts, fewer people know about the requirement to make minimum withdrawals once you reach a certain age. Again, these are called required minimum distributions (or RMDs), and they apply to most tax-deferred accounts.

The “required distribution” amount is based on specific IRS calculations (more on that below). If you don’t take the required distribution amount (aka withdrawal) each year you could face another requirement: to pay a penalty of 50% of the withdrawal you didn’t take. However, if you withdraw more than the required minimum each year, no penalty applies.

All RMDs from tax-deferred accounts, like 401(k) plans, are taxed as ordinary income. This is one reason why understanding the amount — and the timing — of RMDs can make a big difference to your retirement income.

What Age Do You Have to Start RMDs?

Prior to 2019, the age at which 401(k) participants had to start taking RMDs was 70½. Under the SECURE Act that was raised to age 72. But the rules have changed again, and the required age to start RMDs from a 401(k) is now 73 — for those who turn 72 after December 31, 2022.

However for those who turned 72 in the year 2022, at that point age 72 was still technically the starting point for RMDs.

But if you turn 72 in 2023, you must wait until you turn 73 (in 2024) to take your first RMD.

In 2033, the age to start taking RMDs will be increased again, to age 75.

How Your First Required Distribution Is Different

There is a slight variation in the rule for your first RMD: You actually have until April 1 of the year after you turn 72 to take that first withdrawal. For example, say you turned 72 in 2022. you would have until April 1, 2023 to take your first RMD.

But you would also have to take the normal RMD for 2023 by December 31 of the same year, too — thus, potentially taking two withdrawals in one year.

Since you must pay ordinary income tax on the money you withdraw from your 401(k), just like other tax-deferred accounts, you may want to plan for the impact of two taxable withdrawals within one calendar year if you go that route.

Why Do Required Minimum Distributions Exist?

Remember: All the money people set aside in defined contribution plans like traditional IRAs, SEP IRAa, SIMPLE IRAs, 401(k) plans, 403(b) plans, 457(b) plans, profit-sharing plans, and so on, is deposited pre-tax. That’s why these accounts are typically called tax-deferred: the tax you owe is deferred until you retire.

So, requiring people to take a minimum withdrawal amount each year is a way to ensure that people eventually pay tax on the money they saved.

How Are RMDs Calculated?

It can get a bit tricky, but 401(k) RMDs are calculated by dividing the account balance in your 401(k) by what is called a “life expectancy factor,” which is basically a type of actuarial table created by the IRS. You can find these tables in Publication 590-B from the IRS.

If you’re married, there are two different tables to be aware of. If you are the original account owner, and if your spouse is up to 10 years younger than you, or is not your sole beneficiary, you’d consult the IRS Uniform Lifetime Table.

If your spouse is the primary beneficiary, and is more than 10 years younger, you’d consult the IRS Joint and Last Survivor table. Here, the RMD might be lower.

How does the life expectancy factor work?

As a simple example, let’s say a 75-year-old has a life expectancy factor of 24.6, according to the IRS. If that person has a portfolio valued at $500,000, they’d have to take an RMD of $20,325 ($500,000/24.6) from their account that year.

RMDs can be withdrawn in one sum or numerous smaller payments over the course of a year, as long as they add up to the total amount of your RMD requirement for that calendar year.

RMD Rules for 401(k) Plans

So just to recap, here are the basic RMD rules for 401(k) plans. Because these rules are complicated and exceptions may apply, it may be wise to consult with a professional.

Exceptions to Required Distributions

There aren’t many exceptions to 401(k) RMDs. In fact, there’s really only one.

If you’re working for the company sponsoring your 401(k) when you turn 73 years old (as of 2023), and you don’t own more than 5% of the firm, you may be able to skirt RMDs. That is, so long as you keep working for the company, and as long as your plan allows you to do so — not all will.

This only applies to 401(k)s. So if you’re weighing your options as it relates to a 401(a) vs 401(k), for instance, you’ll find they’re limited.

At What Age Do RMDs Start?

As mentioned, you must take your first RMD the same year you turn age 73, with the new rules being applied for 2023 under the SECURE ACT 2.0. Again: for your first RMD only, you are allowed to delay the withdrawal until April 1 of the year after you turn 73.

This has pros and cons, however, because the second RMD would be due on December 31 of that year as well. For tax purposes, you might want to take your first RMD the same year you turn 73, to avoid the potentially higher tax bill from taking two withdrawals in the same calendar year.

What Are RMD Deadlines?

Aside from the April 1 deadline available only for your first RMD, the regular deadline for your annual RMD is December 31 of each year. That means that by that date, you must withdraw the required amount, either in a lump sum or in smaller increments over the course of the year.

Calculating the Correct Amount of Your RMD

Also as discussed, the amount of your RMD is determined by tables created by the IRS based on your life expectancy, the age of your spouse, marital status, and your spouse’s age.

You’re not limited to the amount of your RMD, by the way. You can withdraw more than the RMD amount at any point. These rules are simply to insure minimum withdrawals are met. Also keep in mind that if you withdraw more than the RMD one year, it does not change the RMD requirement for the next year.

Penalties

The basic penalty, if you miss or forget to take your required minimum distribution from your 401(k), is 25% of the amount you were supposed to withdraw — or 10% if the amount is corrected within two years. (The penalty used to be 50%, but in 2023, under SECURE 2.0, it was reduced.)

For example, let’s say you were supposed to withdraw a total of $10,500 in a certain year, but you didn’t; in that case you could potentially get hit with a 25% penalty, or $2,625. But let’s say you’ve taken withdrawals all year, but you miscalculated and only withdrew $7,300 total.

Then you would owe a 25% penalty on the difference between the amount you withdrew and the actual RMD amount: $10,500 – $7,300 = $3,200 x .25 = $800. However, if you corrected the mistake within two years, you would only owe a 10% penalty, which is $325.

How Did COVID Change RMD Rules?

The pandemic ushered in some RMD rule changes for a time, and it may be easy to get mixed up given those changes. But you should know that things are more or less back to “normal” now (as of 2021) as it relates to RMD rules, so you’ll need to plan accordingly.

As for that rule change: There was a suspension of all RMDs in 2020 owing to COVID. Here’s what happened, and what it meant for RMDs at the time:

•   First, in 2019 the SECURE Act changed the required age for RMDs from 70½ to 72, to start in 2020.

•   But when the pandemic hit in early 2020, RMDs were suspended entirely for that year under the CARES Act. So, even if you turned 72 in the year 2020 — the then-new qualifying age for RMDs that year — RMDs were waived.

Again, as of early 2021, required minimum distributions were restored. So here’s how it works now, taking into account the 2020 suspension and the new age for RMDs.

•   If you were taking RMDs regularly before the 2020 suspension, you needed to resume taking your annual RMD by December 31, 2021.

•   If you were eligible for your first RMD in 2019 and you’d planned to take your first RMD by April 2020, but didn’t because of the waiver, you should have taken that RMD by December 31, 2021.

•   If you turned 72 in 2020, and were supposed to take an RMD for the first time, then you could have had until April 1, 2022 to take that first withdrawal. (But you could have taken that first withdrawal in 2021, to avoid the tax burden of taking two withdrawals in 2022.)

RMDs When You Have Multiple Accounts

If you have multiple accounts — e.g. a 401(k) and two IRAs — you would have to calculate the RMD for each of the accounts to arrive at the total amount you’re required to withdraw that year. But you would not have to take that amount out of each account. You can decide which account is more advantageous and take your entire RMD from that account, or divide it among your accounts by taking smaller withdrawals over the course of the year.

What Other Accounts Have RMDs?

While we’re focusing on 401(k) RMDs, there are numerous other types of accounts that require them as well. As of 2023, RMD rules apply to all employer-sponsored retirement accounts, according to the IRS — a list that includes IRAs (SEP IRAs, SIMPLE IRAs, and others), but not Roth IRAs while the owner is alive (more on that in a minute).

So, if you have an employer-sponsored retirement account, know that the IRA withdrawal rules are more or less the same as the rules for a 401(k) RMD.

Allocating Your RMDs

Individuals can also decide how they want their RMD allocated. For example, some people take a proportional approach to RMD distribution. This means a person with 30% of assets in short-term bonds might choose to have 30% of their RMD come from those investments.

Deciding how to allocate an RMD gives an investor some flexibility over their finances. For example, it might be possible to manage the potential tax you’d owe by mapping out your RMDs — or other considerations.

Do Roth 401(k)s Have RMDs?

No, Roth 401(k) plans no longer have required minimum distributions, similar to Roth IRAs. But if you bequeath a Roth IRA it’s another story. Since the rules surrounding inherited IRAs can be quite complicated, it’s wise to get advice from a professional.

Can You Delay Taking an RMD From Your 401(k)?

As noted above, there is some flexibility with your first RMD, in that you can delay your first RMD until April 1 of the following year. Just remember that your second RMD would be due by December 31 of that year as well, so you’d be taking two taxable withdrawals in the same year.

Also, if you are still employed by the sponsor of your 401(k) (or other employer plan) when you turn 73, you can delay taking RMDs until you leave that job or retire.

RMD Requirements for Inherited 401(k) Accounts

Don’t assume that RMDs are only for people in or near retirement. RMDs are usually required for those who inherit 401(k)s as well. The rules here can get quite complicated, depending on whether you are the surviving spouse inheriting a 401(k), or a non-spouse. In most cases, the surviving spouse is the legal beneficiary of a 401(k) unless a waiver was signed.

Inheriting a 401(k) From Your Spouse

If you’re the spouse inheriting a 401(k), you can rollover the funds into your own existing 401(k), or you can rollover the funds into what’s known as an “inherited IRA” — the IRA account is not inherited, but it holds the inherited funds from the 401(k). You can also continue contributing to the account.

Then you would take RMDs from these accounts when you turned 73, based on the IRS tables that apply to you.

Recommended: What Is a Rollover IRA vs. a Traditional IRA?

Inheriting a 401(k) From a Non-Spouse

If you inherit a 401(k) from someone who was not your spouse, you cannot rollover the funds into your own IRA.

You would have to take RMDs starting Dec. 31 of the year after the account holder died. And you would be required to withdraw all the money from the account within five or 10 years, depending on when the account holder passed away.

The five-year rule comes into play if the person died in 2019 or before; the 10-year rule applies if they died in 2020 or later.

Other Restrictions on Inherited 401(k) Accounts

Bear in mind that the company which sponsored the 401(k) may have restrictions on how inherited funds must be handled. In some cases, you may be able to keep 401(k) funds in the account, or you might be required to withdraw all funds within a certain time period.

In addition, state laws governing the inheritance of 401(k) assets can come into play.

As such, if you’ve inherited a 401(k), it’s probably best to consult a professional who can help you sort out your individual situation.

How to Avoid RMDs on 401(k)s

While a 401(k) grows tax-free during the course of an investor’s working years, the RMDs withdrawal is taxed at their current income tax rate. One way to offset that tax liability is for an investor to consider converting a 401(k) into a Roth IRA in the years preceding mandatory RMDs. Roth IRAs are not subject to RMD rules.

What Is a Roth Conversion?

A Roth conversion can be done at any point during an investor’s life, and can be done with all of the 401(k) funds or a portion of it.

Because a 401(k) invests pre-tax dollars and a Roth IRA invests after-tax dollars, you would need to pay taxes right away on any 401(k) funds you converted to a Roth. But the good news is, upon withdrawing the money after retirement, you don’t have to pay any additional taxes on those withdrawals. And any withdrawals are at your discretion because there are no required distributions.

Paying your tax bill now rather than in the future can make sense for investors who anticipate being in a higher tax bracket during their retirement years than they are currently.

The Backdoor Roth Option

Converting a 401(k) can also be a way for high earners to take advantage of a Roth. Traditional Roth accounts have an income cap. To contribute the maximum to a Roth IRA in 2025, your modified adjusted gross income (MAGI) must be less than $150,000 if you’re single, and less than $236,000 if you’re married filing jointly, with phaseouts if your income is higher.

To contribute the maximum to a Roth IRA in 2026, your modified adjusted gross income (MAGI) must be less than $153,000 if you’re single, and less than $242,000 if you’re married filing jointly, with phaseouts if your income is higher. But those income rules don’t apply to Roth conversions (thus they’re sometimes called the “backdoor Roth” option).

Once the conversion occurs and a Roth IRA account is opened, an investor needs to follow Roth rules: In general, withdrawals can be taken after an account owner has had the account for five years and the owner is older than 59 ½, barring outside circumstances such as death, disability, or first home purchase.

What Should an Investor Do With Their RMDs?

How you use your RMD funds depends on your financial goals. Fortunately, there are no requirements around how you spend or invest these funds (with the possible exception that you cannot take an RMD and redeposit it in the same account).

•   Some people may use their RMDs for living expenses in their retirement years. If you plan to use your RMD for income, it’s also smart to consider the tax consequences of that choice in light of other income sources like Social Security.

•   Other people may use their 401(k) RMDs to fund a brokerage account and continue investing. While you can’t take an RMD and redeposit it, it’s possible to directly transfer your RMD into a taxable account. You will still owe taxes on the RMD, but you could stay invested in the securities in the previous portfolio.

Reinvesting RMDs might provide a growth vehicle for retirement income. For example, some investors may look to securities that provide a dividend, so they can create cash flow as well as maintain investments.

•   Investors also may use part of their RMD to donate to charity. If the funds are directly transferred from the IRA to the charity (instead of writing out a check yourself), the donation will be excluded from taxable income.

While there is no right way to manage RMDs, coming up with a plan can help insure that your money continues to work for you, long after it’s out of your original 401(k) account.

The Takeaway

Investors facing required minimum distributions from their 401(k) accounts may want to fully understand what the law requires, figure out a game plan, and act accordingly. While there are a lot of things to consider and rules to reference, ignoring 401(k) RMDs can result in sizable penalties.

Even if you’re not quite at the age to take RMDs, you may want to think ahead so that you have a plan for withdrawing your assets that makes sense for you and your loved ones. It can help to walk through the many different requirements and options you have as an account holder, or if you think you might inherit a 401(k).

As always, coming up with a financial plan depends on knowing one’s options and exploring next steps to find the best fit for your money. If you’re opening a retirement account such as an IRA or Roth IRA, you can do so at a brokerage, bank, mutual fund house, or other financial services company, like SoFi Invest®.

Help grow your nest egg with a SoFi IRA.

FAQ

Is my 401(k) subject to RMDs?

Yes, with very few exceptions, 401(k)s are subject to RMDs after its owner reaches age 73, as of 2023. What those RMDs are, exactly, varies depending on several factors.

How to calculate your RMD for your 401(k)?

It’s not an easy calculation, but RMDs are basically calculated by dividing the owner’s account balance by their life expectancy factor, which is determined by the IRS. That will give you the amount you must withdraw each year, or face a penalty.

Can you avoid an RMD on your 401(k)?

You can, if you’re willing to convert your traditional 401(k) account to a Roth IRA. Roth IRAs do not require RMDs, but you will owe taxes on the funds you convert.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Dec
26
2025
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How Often Are Dividends Paid?

By | Growing Wealth, invest, Investing | Comments Off on How Often Are Dividends Paid?

Dividends are a portion of earnings that a company pays to certain shareholders who own dividend-paying stock. Dividends are generally paid quarterly, although the timing of dividend payments can vary depending on the company: some dividends might be monthly, or twice a year.

Most companies pay dividends in cash, or as additional shares of stock. Investors can take dividend payouts to supplement income or savings (or other goals). They can also reinvest their dividends as part of a dividend reinvestment plan, or DRIP.

Not all companies pay dividends, however. And just because a company pays dividends now doesn’t mean it will continue to do so. A company can stop paying dividends at any time.

Investors may be qualified to receive dividends depending on when they purchase shares of stock. It’s important to understand the key dates regarding dividend payouts.

Key Points

•  Dividends are a portion of a company’s earnings paid to qualified shareholders typically each quarter.

•  Some stocks may pay dividends monthly, semi-annually, annually, or on an irregular schedule.

•  Dividends can be paid in cash, company stock (often through dividend reinvestment plans), or, rarely, as property.

•  Key dates involved in dividend payments include the declaration date, date of record, ex-dividend date, and payment date.

•  Dividend income is taxable, with the tax rate depending on whether it’s a qualified or nonqualified dividend and the investor’s tax situation.

What Are Dividends?

Companies will sometimes share a portion of their profits with shareholders, and this is called a dividend. Dividends are typically distributed as cash, although it’s also possible to receive a dividend in the form of stock (or some other asset).

Typically, dividends work on a per-share basis. Investors who buy stocks online or through a traditional brokerage can look for dividend-paying stocks. For example, if Company A pays a quarterly cash dividend of 50 cents per share, and an investor owns 50 shares, they would receive $25 in cash every quarter.

If a company pays a stock dividend, it’s usually a percentage increase in the number of shares an investor owns. So if Company A awards a 5% stock dividend and an investor owns 100 shares of Company A, they would have 105 shares after the dividend payout.

Remember that dividend income is taxable (see below), and dividends are not guaranteed. A company may start or stop paying dividends at any time.

Recommended: Stock Market Basics

How Often Are Dividends Paid Out?

In most cases in the U.S., dividends are paid quarterly, on the same schedule as the company must report earnings.

If you’re wondering why companies generally pay quarterly vs. monthly dividends, it makes sense that dividends would come only after a company has finalized its income statement and its board of directors has reviewed (and approved) the numbers.

Some investments pay dividends on other schedules, such as twice a year, once a year, or monthly, for monthly dividend stocks, or on no schedule at all (called “irregular” dividends, though this isn’t typical in the United States). Ultimately, the dividend payout schedule is up to a company’s board of directors.

It’s also possible for a company to pay a special one-time dividend. Usually a special dividend is paid out when a company has had a stronger-than-usual earnings period or has excess cash on hand — from the sale of a business, perhaps, or the liquidation of an investment, or a major litigation win. These special one-time dividends may be paid as cash, stock, or property dividends.

When it comes to mutual funds that invest in dividend-paying companies, they may pay dividends on a more frequent basis, such as monthly or even weekly. It may be possible to invest in dividend funds, or even dividend stocks, when you open an IRA.

Important Dividend Dates

There are four essential dates involved in the payment of dividends. It’s important for investors to pay attention to these dates, to ensure they’re getting the dividend payout they hope for.

1.    Declaration date. Also called the announcement date, this is the day that a company’s board of directors states their intention to pay a dividend. It’s typically announced every quarter.

2.    Date of record and ex-dividend date. The record date and the ex-dividend date used to be separate dates. Now owing to the T+1 settlement rule, whereby trades must settle within one business day, they are typically the same in the U.S.

Nonetheless, they signify two different actions by the company which can impact investors. The first is the date of record: shareholders must be on the company books before this date in order to get the dividend. Shareholders who buy stock on or after this date, which is also the ex-dividend date (i.e., the date that quarter’s dividend expires), will not qualify for the dividend and it will go to the seller for that quarter.

Note that if the date of record falls on a weekend or holiday, the ex-dividend date in that case is the business day before.

3.    Payment date: This is when dividends are paid to company shareholders.

IMPORTANT DIVIDEND DATES

for 5 Companies in the S&P 500 Dividend Aristocrats Index, paying qualified dividends, as of 9/03/25
Company

 Dividend Payout

 Declaration Date

 Record Date / Ex-Dividend Date

 Payment Date
Kimberly-Clark Corp (KMB) $1.26 Aug. 1, 2025 Sept. 5, 2025 Oct. 2, 2025
Leggett & Platt (LEG) $0.05 Aug. 7, 2025 Sept. 15, 2025 Oct. 15, 2025
Farmers & Merchants Bancorp (FMCB) $0.27 Aug. 30, 2025 Oct. 10, 2025 Oct. 20, 2025
3M Company (MMM) $0.73 Nov. 4, 2025 Nov. 14, 2025 Dec. 12, 2025
Gorman-Rupp Company (GRC) $0.19 Oct. 24, 2025 Nov. 14, 2025 Dec. 10, 2025


Sources: Kimberly-Clark Corp, Leggett & Platt, Farmers & Merchants Bancorp, 3M Company, Gorman-Rupp Company

Typically, investors can get information about a company’s dividend dates by visiting its investor relations page. To find this, search for the company’s name and “investor relations” online. Or check a company’s dividend history online. Many investment websites, including Nasdaq.com, track this information.

When Are Dividends Paid?

Once a company’s board of directors approves a plan to pay out dividends, the company announces the dividend payment information, including: the dividend amount to be paid, the date it will be paid, and the date of record and the ex-dividend date (which typically occur together, unless the record date falls on a weekend or holiday).

On the payment date, the dividend is paid to investors who owned the stock before the ex-dividend date. Consider the following hypothetical example:

•   Company A announces its dividend payout on September 1, 2025. This is the declaration date for a dividend payout on Sept. 17.

•   Sunday, Sept. 14 is the record date. Shareholders must be on record as owning the company stock before September 14, in order to get the dividend.

•   The ex-dividend date cannot fall on a weekend or holiday, so it’s set to the business day before the record date: Friday, September 12, 2025. In order to get the dividend, an investor must buy shares before the ex-dividend date.

•   The dividend itself will be paid on Wednesday, Sept. 17, 2025.

Different Dividend Payout Methods

These are some of the ways dividends may be paid to investors.

Cash Dividends

Dividends are often paid in cash. Companies typically send cash dividends directly to an investor’s brokerage, where the money is deposited into their account. The company might also mail a check to stockholders.

Company Stock Dividends

In other cases, investors will be paid in company stocks. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically buy additional shares for an investor with their dividends. This provides the advantages of both simplifying the process (since investors won’t have to receive the cash and buy more shares themselves) and potentially being more cost effective, since many DRIP programs don’t charge commissions.

Additionally, some DRIP programs discount the purchase of additional shares. For this and other reasons, some investors may specifically look to find dividend reinvestment stocks.

Property Dividends

More rarely, a company might award a property dividend instead of cash or stock payouts. This could include company products, shares of a subsidiary company, or physical assets the company owns.

Are Dividends Taxable?

Dividend income is always taxable, but tax treatment depends on the type of dividend the shareholder gets (qualified or nonqualified dividends), as well as the type of account in which the dividend stock is held.

The Type of Account Impacts How Dividends Are Taxed

For instance, if an investor is holding the investment in a retirement account such as a 401(k) or IRA, the dividend isn’t taxable the year it’s paid because it’s deposited in a tax-deferred account.

In this case, though, any dividend income would be taxed along with any other funds upon withdrawal in retirement.

If an investor holds dividend funds or dividend-paying stocks in a Roth IRA, the tax treatment is different. Here, contributions are after tax, and withdrawals are tax free.

If the investment is held in a taxable account, like a brokerage account, then a dividend is considered income, and the tax rate will depend on whether it’s a qualified dividend or nonqualified (ordinary) dividend.

Tax Rate for Qualified Dividends

These are dividends paid by a U.S. corporation or a qualified foreign corporation on stock that an investor has held for a certain period of time — generally more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.

For some preferred stock, the investor must have held it for 91 days out of the 181-day period starting 90 days before the ex-dividend date. Taxes on qualified dividends (vs. ordinary dividends) are paid at long-term capital gains rates, which range from 0% to 20% based on an individual’s modified adjusted gross income.

In other words, the taxes investors pay on qualified dividends are based on their overall income tax bracket, and they could pay 0%, depending on their income. Because the long-term capital gains tax rate is lower than ordinary income tax rate, qualified dividends are preferable to nonqualified dividends.

2025 Tax Rates for Long-Term Capital Gains

Following are long-term capital-gains tax rates for the 2025 tax year, according to the IRS.

Capital Gains Tax Rate Income — Single Married, Filing Jointly Married, Filing Separately Head of Household
0% Up to $48,350 Up to $96,700 Up to $48,350 Up to $64,750
15% $48,351 to $533,400 $96,701 to $600,050 $48,351 to $300,000 $64,751 – $566,700
20% Over $533,400 Over $600,050 Over $300,000 Over $566,700

Additionally, note that those who have net investment income and modified adjusted gross incomes (MAGIs) over $200,000 — or couples filing jointly with MAGIs over $250,000 — may have to pay the Net Investment Income Tax (NIIT). This is 3.8% on either net investment income or the excess over the MAGI limits, whichever is less.

2026 Tax Rates for Long-Term Capital Gains

Following are long-term capital-gains tax rates for the 2026 tax year.

Capital Gains Tax Rate Income — Single Married, Filing Jointly Married, Filing Separately Head of Household
0% Up to $49,450 Up to $98,900 Up to $49,450 Up to $66,200
15% $49,451 to $545,500 $98,901 to $613,700 $49,451 to $306,850 $66,201 – $579,600
20% Over $545,500 Over $613,700 Over $306,850 Over $579,600

Again, note that those who have net investment income and MAGIs over $200,000 — or couples filing jointly with MAGIs over $250,000 — may have to pay the Net Investment Income Tax (NIIT). This is 3.8% on either net investment income or the excess over the MAGI limits, whichever is less.

Tax Rate for Nonqualified Dividends

The more common type of dividend is a nonqualified — or ordinary — dividend. When companies pay ordinary dividends, they’re considered ordinary income, so an investor will be taxed at ordinary income tax rates.

In general, investors should assume that any dividend they receive is an ordinary dividend unless told otherwise. (The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.)

Can You Live on Dividends?

In general, retirees may want to live off a combination of Social Security, interest income from bonds, and selling a small portion of their investments each year. The 4% retirement rule maintains that if one withdraws no more than 4% of their portfolio each year, they’ll be able to make their nest egg last — although some financial professionals believe this formula is too conservative.

Investments that pay regular dividends may shift an individual’s retirement equation by providing steady income over time that may allow them to sell fewer investments — or no investments at all.

The amount of dividends a stock pays may grow over time as companies get larger and continue to increase their profits. But the reverse is also possible; a company could stop paying dividends, choosing to reinvest its cash in business operations.

Investing with an eye toward dividend income may allow an investor to create an income stream that could supplement their Social Security and other income in retirement.

The Takeaway

Dividends — cash or stock payments from a company to qualified shareholders — are typically paid quarterly. These financial rewards can be attractive to investors, who may seek out dividend-paying companies in hopes of boosting their income or savings.

Dividends may provide a source of consistent and predictable income, which may be a helpful addition to an individual’s portfolio, depending on their investing goals. Investors may choose to use dividend income to supplement other income or to reinvest in their portfolio.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How long do you have to hold a stock to get a dividend?

Investors must buy, or already own, shares of the stock before the ex-dividend date, which is now the same as the date of record. The date of record is when the company reviews its records to determine who its shareholders are, and who qualifies for a dividend payout. If the date of record falls on a weekend or holiday, the ex-dividend date is the business day prior, and shareholders who buy stock on or after that date will not receive a dividend until the following quarter (or relevant time period).

Are dividends taxed if they are reinvested?

Yes. Dividends that are reinvested are considered income, just like cash dividends, and must be reported on your tax return. The way you are taxed on dividends depends on whether your dividends are qualified or nonqualified. The more common type of dividend is nonqualified, and these dividends are taxed at ordinary income tax rates. Qualified dividends are taxed at long-term capital gains rates.

What happens if you see more dividends than profit?

Typically, a portion of a company’s earnings may go to paying dividends. This is known as the dividend payout ratio. Investors typically look for payout ratios that are 80% or less — meaning that the company is not paying all of its earnings in dividends.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Best IRA for Young Adults: 2026 Guide

By | invest, Investing, Preparing for Retirement | Comments Off on Best IRA for Young Adults: 2026 Guide

Saving for retirement may be lower on the priority list for young adults as they deal with the right-now reality of paying rent, bills, and student loans. But the truth is, it’s never too soon to start saving for the future. The more time your money has to grow, the better. And saving even small amounts now could make a big difference later.

An individual retirement account (IRA) allows you to save for the future over the long term. It’s one option that could help young adults start investing in their future.

There are different types of IRAs, and each has different requirements and benefits. Read on to learn about different types of IRAs, how much you can contribute, the possible tax advantages, and everything else you need to know about choosing the best IRA for young adults.

Key Points

•   By saving and investing for retirement, a young adult could benefit from compounding returns, which can potentially help the growth of a nest egg over the long term.

•   Traditional IRA contributions may help reduce current taxable income because they are made with pre-tax dollars, and withdrawals are taxed in retirement.

•   Roth IRA contributions are made with after-tax dollars, and withdrawals in retirement are tax-free.

•   A Roth IRA may be an option for young adults in a low tax bracket now who expect to be in a higher tax bracket in retirement.

•   Automating contributions may potentially enhance the growth of retirement savings by making savings a recurring process.

Why Start an IRA in Your 20s and 30s?

When you begin saving and investing in your 20s and 30s, you have more time to build a nest egg. Starting an individual retirement account (IRA) early in adulthood may potentially help you benefit from compounding returns and also give you a tax-advantaged way to help your money grow.

The Power of Compounding Returns

The younger you are when you start investing, the more time you have to take advantage of the power of compounding, which can help your investment grow over time.

With compounding returns, if the money you invest earns a profit, and that profit is then reinvested, you earn money both on your original investment and on the returns. That means your gains could potentially multiply over time. The more time you have to invest, the more time your returns potentially have to compound.

Building a Tax-Advantaged Nest Egg Early

An IRA typically also has tax advantages that may help you build your savings more efficiently. For example, with a traditional IRA, you contribute pre-tax dollars and pay taxes on the distributions in retirement. With a Roth IRA, you contribute after-tax dollars, and your withdrawals in retirement are tax-free. One type of IRA or the other might make the most sense for an investor, or perhaps even a combination of both types.

Understanding the Types of IRAs

There are several types of IRAs, but two of the most common are traditional IRAs and Roth IRAs.

How much you can contribute to either type of IRA each year is determined by the IRS, and the amount generally changes yearly. In 2025, those under age 50 can contribute a maximum of $7,000 annually to a traditional or Roth IRA. (Those 50 and up can contribute an extra $1,000 per year in 2025 in what’s called a catch-up contribution.) In 2026, those under age 50 can contribute up to $7,500 annually to a traditional or Roth IRA, while those 50 and up can contribute an extra $1,100 per year.

An IRA calculator can help you figure out how much you can contribute, depending on the type of IRA you’re interested in, among other factors.

What Is a Roth IRA?

A key difference between Roth and traditional IRAs is how they’re taxed. With a Roth IRA, you contribute after-tax dollars. Your contributions are not tax deductible when you make them. However, your earnings grow tax-free in the account, and you withdraw your money tax-free in retirement.

What Is a Traditional IRA?

With a traditional IRA, you contribute pre-tax dollars. Generally speaking, you take deductions on your contributions upfront, which may lower your taxable income for the year, and then you pay taxes on the distributions when you take them in retirement. Your earnings in the account grow tax-deferred.

What Are SEP and Simple IRAs?

Individuals who are self-employed or own a small business might want to explore a SEP IRA or a SIMPLE IRA.

A SEP IRA is available for freelancers, independent contractors, and small business owners. Contributions are capped at a limit set by the IRS. In 2025, individuals can contribute up to the amount that’s the lesser of $70,000 or 25% of an individual’s compensation. In 2026, they can contribute up to the amount that’s the lesser of $72,000 or 25% of their compensation. Contributions to a SEP are made with pre-tax dollars and are tax deductible, and withdrawals are taxed in retirement.

A SIMPLE IRA is also an option for those who are self-employed as well as small businesses that have no other retirement savings plan. The tax and withdrawal rules for a SIMPLE IRA are the same as for a SEP IRA. One big difference between them: A SIMPLE IRA allows employees under age 50 to contribute up to $16,500 in 2025 and $17,000 in 2026 (employers are required to contribute), while a SEP does not allow employee contributions, only employer contributions.

IRA Comparison: Roth vs. Traditional for Young Adults

For those exploring a Roth vs. traditional IRA for a young person, there are a number of different factors to weigh, including taxes, withdrawal rules, and income.

Taxes

An important consideration when looking at which IRA is best for young adults is taxes. For individuals who currently earn a lower income and are in a lower tax bracket, the upfront tax deductions with a traditional IRA may not be as beneficial. A Roth, with its tax-free distributions in retirement, might be worth exploring instead — especially if the individual expects to be in a higher tax bracket in retirement.

Your income also determines how much of your contributions you can deduct with a traditional IRA. Deduction limits depend on your modified adjusted gross income (MAGI), whether you are single or married, your tax filing status, and if you’re covered by a retirement plan at work.

Traditional IRA Deductions for 2025

For instance, in 2025, those who are single and not covered by a retirement plan at work can deduct the entire amount they contribute to a traditional IRA. However, if they are covered by a retirement plan from their employer, they can only deduct the full amount if their MAGI is $79,000 or less. If they earn more than $79,000 and less than $89,000, they can take a partial deduction. And if their MAGI is $89,000 or more, they can’t take any deductions.

Individuals who are married filing jointly and aren’t covered by a retirement plan at work can deduct the full amount of their traditional IRA contributions. But in 2025, if their spouse is covered by a workplace retirement plan, they can deduct the full amount only if their combined MAGI is $236,000 or less. If their combined MAGI is $246,000 or more, they can’t take a deduction.

And if they themselves are covered by a retirement plan at work, they can deduct the full amount of their traditional IRA contributions only if their combined MAGI is $126,000 or less. If their combined MAGI is $146,000 or more, they can’t take a deduction.

Traditional IRA Deductions for 2026

In 2026, individuals who are single and not covered by a retirement plan at work can deduct the entire amount they contribute to a traditional IRA. However, if they are covered by a retirement plan from their employer, they are able to deduct the full amount only if their MAGI is $81,000 or less. If they earn more than $81,000 and less than $91,000, they can take a partial deduction. And if their MAGI is $91,000 or more, they can’t take any deductions.

Those who are married filing jointly and aren’t covered by a retirement plan at work can deduct the full amount of their traditional IRA contributions. But in 2026, if their spouse is covered by a workplace retirement plan, they can deduct the full amount only if their combined MAGI is $242,000 or less. If their combined MAGI is $252,000 or more, they can’t take a deduction.

And if they themselves are covered by a retirement plan at work, they can deduct the full amount of their traditional IRA contributions only if their combined MAGI is $129,000 or less. If their combined MAGI is $149,000 or more, they can’t take a deduction.

Withdrawals

Another important consideration when choosing an IRA is withdrawals. Both traditional and Roth IRAs have early withdrawal penalties.

There are some differences, however. With a traditional IRA, individuals who take withdrawals before age 59 ½ will generally be subject to a 10% penalty, plus taxes. A Roth IRA typically offers more flexibility: Individuals may withdraw their contributions penalty-free at any time before age 59 ½. However, any earnings can typically only be withdrawn tax- and penalty-free once the individual reaches age 59 ½ and the account has been open for at least five years.

That said, there are exceptions to the IRA withdrawal rules, including:

•   Death or disability of the individual who owns the account

•   Qualified higher education expenses for the account owner, spouse, or a child or grandchild

•   Up to $10,000 for first-time qualified homebuyers to help purchase a home

•   Health insurance premiums paid while an individual is unemployed

•   Unreimbursed medical expenses that are more than 7.5% of an individual’s adjusted gross income

The chart below gives a side-by-side comparison between a traditional and Roth IRA to help you quickly see what the key differences are.

Traditional IRA vs. Roth IRA: Key Differences

Traditional IRA Roth IRA
Contributions Made with pre-tax dollars Made with after-tax dollars
Pay taxes on withdrawals in retirement Yes No
Potential earnings Grow tax-deferred Grow tax-free
Contributions tax deductible Yes, if you meet income requirements No
Early withdrawal penalty May have to pay tax on earnings plus a 10% penalty before age 59 ½ No taxes or penalties on contributions, but earnings are subject to taxes and a 10% penalty before age 59 ½

Who Should Choose a Roth IRA?

How a Roth IRA works is that your MAGI must be below a certain level to qualify. In 2025, single individuals who earn up to $150,000 can contribute the full amount to a Roth. Single filers with a MAGI of $150,000 or more but less than $165,000 can contribute a partial amount, and those who earn $165,000 or more are not eligible to open or contribute to a Roth. For married couples who file jointly, the limit in 2025 is up to $236,000 for a full contribution to a Roth, and between $236,000 to $246,000 for a partial contribution.

In 2026, single filers with a MAGI of up to $153,000 can contribute the full amount to a Roth IRA. If their MAGI is $153,000 or more but less than $168,000, they can contribute a reduced amount, and those who earn $168,000 or more cannot contribute to a Roth. Individuals who are married filing jointly can make the full contribution to a Roth IRA if their MAGI is up to $242,000, and they can make a partial contribution if their MAGI is between $242,000 and $252,000.

Since young adults starting out in their career might be earning less than they will in the future, it could make sense for a young adult to open a Roth now when they are more likely to qualify. Plus for individuals earning less now and who expect to have a higher income in retirement, taking tax-free withdrawals after age 59 ½ could make financial sense as well. However, it’s essential to check the annual MAGI limits every year to help prevent exceeding contribution thresholds.

A Roth IRA calculator can help you determine how much you can contribute annually.

Who Should Choose a Traditional IRA?

With a traditional IRA, you contribute pre-tax dollars. That means you take deductions on your contributions upfront, which may lower your taxable income for the year, and then pay taxes on the distributions when you take them in retirement. If you’re earning more now than you expect your income to be in retirement, a traditional IRA may make sense for your situation.

2025 and 2026 IRA Contribution & Income Limits at a Glance

The charts below offer a handy comparison on the contribution limits of traditional and Roth IRAs, the income eligibility limits for Roth IRAs, and the traditional IRA tax deduction limits for 2025 and 2026.

2025 IRA Annual Contribution Limits

Age

 Maximum Annual Contribution (2025)
Under age 50 $7,000
Age 50 and over $8,000 (includes $1,000 “catch-up” contribution)

2026 IRA Annual Contribution Limits

Age

 Maximum Annual Contribution (2026)
Under age 50 $7,500
Age 50 and over $8,600 (includes $1,100 “catch-up” contribution)

2025 Roth IRA Income Eligibility Limits

Tax Filing Status

 Can Make Full Contribution

 Can Make Partial Contribution

 Cannot Contribute
Single / Head of Household MAGI up to $150,000 MAGI between $150,000 – $165,000 MAGI of $165,000 or more
Married & Filing Jointly MAGI up to $236,000 MAGI between $236,000 – $246,000 MAGI of $246,000 or more

2026 Roth IRA Income Eligibility Limits

Tax Filing Status

 Can Make Full Contribution

 Can Make Partial Contribution

 Cannot Contribute
Single / Head of Household MAGI up to $153,000 MAGI between $153,000 – $168,000 MAGI of $168,000 or more
Married & Filing Jointly MAGI up to $242,000 MAGI between $242,000 – $252,000 MAGI of $252,000 or more

2025 Traditional IRA Deduction Limits (if Covered by a Workplace Plan)

Tax Filing Status

 Can Take Full Deduction

 Can Take Partial Deduction

 Cannot Take a Deduction
Single / Head of Household MAGI of $79,000 or more MAGI between $79,000 – $89,000 MAGI of $89,000 or more
Married Filing Jointly MAGI of $126,000 or more MAGI between $126,000 – $146,000 MAGI of $146,000 or more

2026 Traditional IRA Deduction Limits (if Covered by a Workplace Plan)

Tax Filing Status

 Can Take Full Deduction

 Can Take Partial Deduction

 Cannot Take a Deduction
Single / Head of Household MAGI of $81,000 or less MAGI between $81,000 – $91,000 MAGI of $91,000 or more
Married Filing Jointly MAGI of $129,000 or less MAGI between $129,000 – $149,000 MAGI of $149,000 or more

Could You Be Eligible for an IRA?

Building a Strong Investment Strategy

As you explore a suitable IRA for young adults, you’ll want to make sure that you’re getting the most out of your investing strategy to help you achieve your financial goals. Here are some ways to do that.

Contributing to a 401(k) and an IRA.

If your employer offers a 401(k), enrolling in it and contributing as much as you can may help you get started. If possible, aim to contribute enough to get the matching contribution, which is, essentially, “free” or extra money that can help you build your savings.

If you don’t have a workplace 401(k) — and even if you do — you might consider opening an IRA as another account to help save for retirement. Contribute as much as you are able to. With an IRA, you typically have more investment options than you do with a 401(k), and you can also choose the type of IRA that could give you potential tax advantages.

Automating your contributions.

With a 401(k), your contributions usually happen automatically. Opening an investment account for an IRA could help you do something similar. Many brokerages allow you to set up automatic repeating deposits in an IRA. This way you don’t have to even think about contributing to your account — it just happens.

Understanding your risk tolerance.

When you’re deciding what assets to invest in, consider your risk tolerance. All investments come with some risk, but some types are riskier than others. In general, assets that potentially offer higher returns (like stocks) come with higher risk.

If a drop in the market is going to send your anxiety level skyrocketing, you may want to make your portfolio a little more conservative. If you’re willing to take risks, you might want to be a bit more aggressive. Either way, try to find an asset allocation that balances your tolerance for risk with the amount of risk you may need to take to help meet your investment goals.

You might even choose to do automated investing to help match your financial aims and risk tolerance.

Diversifying your investments.

Building a diversified portfolio across a range of asset classes — such as stocks, bonds, and cash, for instance — rather than concentrating all of it in one area — may help you offset some investment risk. Just be aware that diversification doesn’t eliminate risk.

Reassessing your portfolio regularly.

Once or twice a year, review the performance of your portfolio to make sure it’s on track to help you get where you want to be in terms of your financial future.

How to Open an IRA in 3 Simple Steps

Opening an IRA is typically a straightforward process. This is what it entails:

1. Choose Your IRA Type (Roth or Traditional)

Explore a traditional IRA vs. A Roth IRA to decide which one is right for you. Be sure to take into consideration your income now and in retirement, the tax situation that makes the most sense for your situation, the contribution level, and early withdrawal rules.

You can open an IRA at any one of a number of financial institutions, including a bank or an online brokerage, among others.

2. Fund Your Account

After you open an IRA, contribute up to the annual limit if you can to help maximize your investments. If you’re not sure how to fund an IRA, you can start with a few basic techniques.

For instance, you could use your tax refund to contribute to an IRA. That way, you won’t be pulling money out of your savings or from the funds you have earmarked to pay your bills. The same is true if you get a raise or bonus at work, or if a relative gives you money for a birthday. Put those dollars into your IRA.

Another way to fund an IRA is to make small monthly contributions to it. You could start with $50 or $100 monthly. You could even set up a vault bank account specifically for money designated to your IRA so that you don’t end up spending it on something else.

3. Choose Your Investments

Once you fund your IRA, you can start investing your money.That means you need to decide what assets to invest in. Consider your time horizon (or how long you have to invest), your goals, and how much risk you are comfortable with.

As mentioned earlier, assets that can potentially provide higher returns like investing in stocks come with higher risk than fixed-income assets like bonds. Figure out an allocation of the different types of assets that will help you reach your goal without keeping you up at night.

Considerations for Young Adults Looking to Start Investing

Young adults who are ready to begin investing should typically aim to get started as soon as possible. Thanks to the power of compounding returns, the longer your money has to compound, the bigger your account balance may be when you reach retirement.

When choosing an IRA, consider the tax advantages of traditional and Roth IRAs to decide which type of account may be most beneficial for your situation. Once you’ve opened an IRA, try to contribute as much as you can afford to each year, up to the annual limit.

Young adults should also think about their financial goals, at what age they plan to retire, and what their tolerance is for risk. Each of these factors can affect how they invest and what kinds of assets they invest in.

The Takeaway

An IRA can be a way for young adults to start saving for retirement. The earlier they begin, the longer their money may have to grow, which can make a big difference over time.

In order to choose the best IRA for young people, weigh the different tax benefits of Roth and traditional IRAs. If you’re leaning toward a Roth IRA, make sure you meet the income limit requirements, and if you’re considering a traditional IRA, check to see if you can deduct your contributions.

Once you’ve chosen the right IRA for you, start contributing to it regularly if you can. And no matter how much you’re able to contribute, remember this: Getting started with retirement savings is one of the most important steps you can take to build a nest egg and help secure your financial future.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

FAQ

What are the different types of IRAs?

There are several types of IRAs. Two of the most popular are traditional and Roth IRAs, which individuals with earned income can open and contribute to. Contributions to traditional IRAs are made with pre-tax dollars and the contributions are generally tax deductible; the money is taxed on withdrawal in retirement. Contributions to Roth IRAs are made with after tax dollars, and the money is withdrawn tax-free in retirement.

Other types of IRAs include SEP IRAs for self-employed individuals and small business owners, and SIMPLE IRAs for small businesses with 100 employees or fewer.

Which IRA is suitable for young adults?

It depends on an individual’s specific situation, but for young adults choosing between a traditional or Roth IRA, a Roth may be a suitable choice for those in a low tax bracket now and who expect to be in a higher tax bracket in retirement. That’s because with a Roth, contributions are made with after tax dollars and distributions are withdrawn tax-free in retirement. With traditional IRAs, contributions are deducted upfront and you pay taxes on distributions when you retire.

Still, it’s important to weigh the different options and benefits to choose the IRA that’s best for you.

Can I have a 401(k) and an IRA at the same time?

Yes, you can have a 401(k) and an IRA at the same time. In fact, this could potentially be a way to increase retirement savings. You may be able to save more for retirement by having both a 401(k) — and contributing enough to get the employer match — and an IRA. Plus, with an IRA, you typically have a wider range of investment options than with a 401(k), and there may be tax advantages. For example, having a traditional 401(k) and a Roth IRA might provide flexibility when it comes to managing taxes now and in retirement.

What is the maximum I can contribute to my IRA in 2025 and 2026?

The maximum you can contribute to a traditional or Roth IRA in 2025 is $7,000 if you are under age 50. Those ages 50 and up can contribute up to $8,000, including $1,000 in catch-up contributions. In 2026, the maximum contribution you can make to a traditional or Roth IRA is $7,500 if you’re under age 50, or up to $8,600, including $1,100 in catch-up contributions, if you are age 50 or older.

Photo credit: iStock/andresr

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

CalculatorThis retirement calculator is provided for educational purposes only and is based on mathematical principles that do not reflect actual performance of any particular investment, portfolio, or index. It does not guarantee results and should not be considered investment, tax, or legal advice. Investing involves risks, including the loss of principal, and results vary based on a number of factors including market conditions and individual circumstances. Past performance is not indicative of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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Investing in Index Funds in a Roth IRA

By | Growing Wealth, invest, Investing | Comments Off on Investing in Index Funds in a Roth IRA

An index fund is a type of mutual fund or exchange-traded fund that aims to track the performance of a specific stock index. A Roth IRA is a type of tax-advantaged investment account. Index funds are one type of investment you could hold inside a retirement plan like a Roth IRA.

Here’s a closer look at investing in index funds through a Roth IRA.

Key Points

•   A Roth IRA is a tax-advantaged retirement account, while index funds are investments that can be held within such accounts.

•   Investing in index funds within a Roth IRA allows for tax-free growth and withdrawals.

•   Index funds provide diversification and offer the potential for long-term growth, which could make them an efficient choice for retirement savings.

•   When selecting an index fund, consider factors like risk tolerance, investment goals, expense ratios, and historical performance.

•   It’s important to regularly review your Roth IRA and the investments in it and make any necessary adjustments to meet your financial objectives and comply with contribution limits.

Understanding Your Investing Options in a Roth IRA

A Roth IRA is an individual retirement account that allows you to set aside after-tax dollars for retirement. Because you’ve already paid taxes on the money you contribute to the Roth IRA, you can withdraw it tax-free in retirement, which is an attractive feature to some investors.

Roth IRAs can offer a number of different investment options, including:

•   Index funds

•   Target-date funds

•   Exchange-traded funds (ETFs)

•   Real estate investment trust (REIT) funds

•   Bonds

Index funds, target-date funds, and REITs can feature a mix of different investments. So, you might invest in a target-date fund that has a 70% allocation to stocks, and a 30% allocation to bonds, for instance. When comparing different funds it’s important to consider the expense ratio you might pay to own it and its past performance.

Some brokerage companies that offer IRAs may also offer other investments, such as individual stocks or commodities. Evaluating your personal risk tolerance, investment timeline, and goals can help you decide how to invest your money if you’re opening a retirement account online like a Roth IRA.

What Are Index Funds?

An index fund is a type of mutual fund or ETF that aims to track the performance of a specific stock index. A stock index measures a specific segment of the market. For example, the S&P 500 index tracks the 500 largest companies listed on public stock exchanges in the U.S.

Index funds typically work by investing in the same securities that are included in the index they’re trying to match. So, for example, if an index fund is using the S&P 500 as its benchmark, then its holdings would reflect the companies that are included in that index.

Index funds are a type of passively managed fund, since assets turn over less frequently. In terms of performance, index funds are not necessarily designed to beat the market but they can be more cost-friendly for investors as they often have lower expense ratios.

Long-term Benefits

Index funds offer the opportunity for long-term appreciation. Because they track the stock market, which historically has an annual return of about 7% (as measured by the S&P and adjusted for inflation), index funds may be able to get a similar rate of return over time, minus any fund fees.

Why Invest in Index Funds Through a Roth IRA?

As noted above, you can hold a range of investments in a Roth IRA, including index funds. Investing in index funds may help diversify your portfolio. Here are some of the other possible factors to consider.

Tax-free Growth and Withdrawals

Because you’ve already paid taxes on the money you contribute to a Roth IRA, you can withdraw it tax-free in retirement, as long as you are age 59 ½ and meet the five-year rule, which dictates that your account has to be open for at least five years before you start withdrawing funds. Tax free withdrawals in retirement might appeal to you if you expect to be in a higher tax bracket at that time.

Any earnings you have from index funds or other investments grow tax-free in a Roth IRA and they can be withdrawn tax-free in retirement.

Supporting Retirement Goals

Because they offer the potential for long-term growth, index funds can be part of a retirement savings strategy. An investor can choose the funds that best fit their risk tolerance and investment goals. The fees are also lower for index funds than some other types of investments, which means you can keep more of your earnings over the long term.

How to Invest in Index Funds in a Roth IRA

If you’ve decided to invest in index funds through your Roth IRA, the process for getting started is relatively simple:

1.    Decide which index fund or funds you’d like to invest in (see more on that below).

2.    Log into your Roth IRA account.

3.    Find the fund you’d like to purchase and select “Buy.” You may be able to specify a specific dollar amount you want to spend or choose the number of shares you want to buy.

4.    Review your order to make sure it is correct, then finalize it.

Tips on Choosing the Right Index Funds

While index funds operate with a similar goal of matching the performance of an underlying benchmark like the S&P 500, they don’t all work the same. There can be significant differences when it comes to things like the expense ratio, the fund’s underlying assets, its risk profile, and its overall performance.

When choosing an index fund to invest in, consider the following factors:

•   Risk tolerance. How much risk are you willing to take with your investments? Knowing if you’re a conservative, moderate, or aggressive investor is important to choosing index funds that make the most sense for you. Our risk tolerance quiz can help you figure out which category you fall into.

•   Your goals. What specifically, are you hoping to get out of your investment? Are you saving for the long term and aiming for it to grow over time? Are you putting away money for retirement? Determining exactly what you want to do with your investment will help you decide what type of index funds to invest in.

•   Broad vs. specialized fund. Broad funds attempt to mimic the performance of a stock market as a whole, while a specialized fund like a small cap index fund, for example, targets companies with a smaller market capitalization. A specialized fund can be riskier because you’re invested in one type of asset, while a broad fund can provide some diversification, although like any investment, there are still risks involved.

•   Performance history. A fund’s performance history can help you see how the fund has handled different market conditions. Look to see how it has consistently performed relative to the benchmark it tracks. You can also compare its performance to other index funds in the same category.

•   Expense ratios. These ratios represent the annual cost of managing an index fund. They’re expressed as a percentage of your total investment. Keep in mind that a small difference in expense ratios can add up over time. With a smaller expense ratio, less of your investment goes to management costs.

Managing Your Index Funds

Even though index funds are passively managed, it’s a good idea to review them from time to time.

First, check their performance to see if they are mirroring the index they follow, minus the expense ratio. If their performance is not keeping up, you may want to consider another fund.

Also, keep an eye on fees. If you see that the fees for your index funds are growing over time, you may want to change your investment.

Managing Your Roth IRA

Similarly, with a Roth IRA, it’s wise to review your account and the investments inside it at least once a year. Monitor how well your assets are performing and see if they are on track to help you reach your goals.

You may find that you need to do some portfolio rebalancing. Based on how your assets have performed, you might have a different asset allocation than you originally started out with, as some things may have performed better than others. For instance, maybe stocks outperformed bonds. Review your asset allocation carefully and make any adjustments needed to help stay true to your risk tolerance and investment goals.

Finally, contribute to your Roth IRA each year if you can, but be sure not to over-contribute. The IRS sets the maximum limit for annual Roth IRA contributions. For 2025, the maximum limit is $7,000, or $8,000 if you’re age 50 or older. You have until the tax filing deadline to make contributions for that tax year. For 2026, the maximum limits are higher: $7,500 or $8,600 if you’re 50 or older.

It’s important to note that the limits are cumulative. If you have more than one Roth IRA, or a Roth IRA and a traditional IRA, your total contributions to all accounts cannot be greater than the limit allowed by the IRS. Unlike traditional IRA contributions, Roth IRA contributions are not tax-deductible.

Also, be aware that you’ll need to have earned income for the year to contribute to a Roth IRA, but there are limits. The IRS sets a cap on who can make a full contribution, based on their filing status and modified adjusted gross income (MAGI).

Here are the income thresholds for the 2025 and 2026 tax years:

Filing Status

 You Can Make a Full Contribution for 2025 If Your MAGI is…

 You Can Make a Full Contribution for 2026 If Your MAGI is…
Single or Head of Household Less than $150,000 Less than $153,000
Married Filing Jointly Less than $236,000 Less than $242,000
Married Filing Separately and Did Not Live With Your Spouse During the Year Less than $150,000 Less than $153,000
Qualifying Widow(er) Less than $236,000 Less than $242,000

Contribution amounts are reduced as your income increases, eventually phasing out completely. The 2025 phaseout limits are $150,000 for single filers, heads of households, and qualifying widows or widowers. The limit for couples is $236,000.

If you’re married and file separate returns but lived with your spouse during the year, you’d only be able to make a reduced contribution for 2025 if your MAGI is less than $10,000.

The 2026 phaseout limits are $153,000 for single filers, heads of households, and qualifying widows or widowers. The limit for couples is $242,000. And if you’re married and filed separate returns and lived with your spouse during the year, you can make a reduced contribution only if your MAGI is less than $10,000.

Recommended: Roth IRA Calculator

The Takeaway

A Roth IRA is a tax-advantaged account that can help you save for retirement. There are a number of different investment options to choose from when you have a Roth IRA, including target-date funds and index funds.

If you decide to invest in index funds, research different funds to find the best ones for you, and be sure to look at their performance and expense ratio, among other factors. Also, consider your risk tolerance and goals when choosing index funds to make sure that they are aligned to help you reach your financial goals.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

FAQ

Can I lose money investing in index funds?

It is possible to lose money investing in index funds. All investments involve risk and can lose money. However, broad index funds, such as those that use the S&P 500 as a benchmark, are diversified and hold many different types of stocks. Even if some of those stocks lose value, they may not all lose value at the same time.

Is it better to invest in index funds or individual stocks for a Roth IRA?

Which investment is best depends on an investor’s financial situation, goals, and risk tolerance. There is no one-size-fits-all answer. But in general, individual stocks can be more volatile with more potential for risk (they may also have more potential for higher returns). Broad index funds that provide significant diversification may help minimize risk and maximize returns over the long term.

Photo credit: iStock/Ridofranz

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
CalculatorThis retirement calculator is provided for educational purposes only and is based on mathematical principles that do not reflect actual performance of any particular investment, portfolio, or index. It does not guarantee results and should not be considered investment, tax, or legal advice. Investing involves risks, including the loss of principal, and results vary based on a number of factors including market conditions and individual circumstances. Past performance is not indicative of future results.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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26
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Roth IRA vs. Mutual Fund

By | Investing, Money & Life, Preparing for Retirement | Comments Off on Roth IRA vs. Mutual Fund

A Roth IRA is a tax-advantaged investment account designed for retirement savings, and a mutual fund is a type of pooled investment that might be found within an IRA.

It may help to think of a Roth IRA as the container that can hold a variety of investments, including shares of mutual funds, which are baskets of securities (like stocks, bonds, or other assets). Like other IRAs, a Roth IRA offers certain tax advantages when saving for retirement.

A mutual fund, on the other hand, is a type of security investors may purchase for their IRA or other type of portfolio. Mutual funds hold a range of securities, and may be actively managed or passively managed. Passive funds are also known as index funds.

Key Points

•  A Roth IRA is a tax-advantaged retirement account funded with after-tax money.

•  A mutual fund is an investment that can be held within a Roth IRA, as well as other types of investment and retirement accounts.

•  A Roth IRA has annual contribution limits. Roth IRAs are also subject to income limits; if you exceed the IRS income limits, you can’t fund a Roth.

•  Mutual funds are pooled investment funds that can hold a range of securities (e.g., stocks, bonds, cash, and more).

•  There are no annual limits or income restrictions on purchasing mutual fund shares.

What Is a Roth IRA?

A Roth IRA is an individual retirement account that you can open independently of a workplace retirement plan. Because a Roth is funded with after-tax contributions — versus a traditional IRA, which is considered pre-tax, or tax deferred — qualified withdrawals from a Roth IRA are tax free in retirement.

If you open a Roth IRA or a traditional IRA, there are specific rules and restrictions that come with these accounts. There are also certain advantages, especially when saving and investing for retirement.

Roth IRAs have annual contribution limits, just like traditional IRAs and SIMPLE or SEP IRAs (which are designed for self-employed individuals and small business owners).

The maximum annual contribution limit for a Roth IRA in 2025 is $7,000, or $8,000 with the $1,000 catch-up contribution amount for those age 50 or older. For tax year 2026, the maximum annual contribution limit is $7,500, or $8,600 for those 50 or older.

As noted above, a Roth IRA can act as a container for a portfolio of assets, including mutual funds.

What Is a Mutual Fund?

A mutual fund is a type of pooled investment that is often compared to a basket of securities. It’s not an investment account, but a type of investment itself. Mutual funds may include stocks, bonds, cash or cash equivalents, commodities, and other securities.

Investors typically buy shares of a mutual fund, which provides a level of exposure to a variety of companies or assets, thus offering some basic diversification.

Unlike stocks, which trade throughout the day, mutual fund shares only trade once per day, at the end of the day.

This quick guide to mutual funds explains the basics, and there are more details below about how a mutual fund works.

Recommended: What Is Portfolio Diversification?

How a Roth IRA Works

Roth IRAs are more complicated than traditional IRAs, because they not only come with the standard annual contribution limits, there are also income restrictions that pertain only to Roth IRAs.

In addition, Roth IRAs are subject to a different kind of tax treatment than other types of IRAs.

Tax Advantages of a Roth IRA

Roth IRAs are funded with after-tax dollars. This means you don’t get an upfront tax deduction for Roth IRA contributions the way you would with a traditional IRA. However, you do get the benefit of tax-free withdrawals beginning at age 59 ½.

A Roth IRA also offers the following advantages:

•  Tax-free investment growth over time.

•  Penalty-free and tax-free withdrawals of original contributions at any time.

•  You’re not required to take money from your account starting at age 73, as you are with a traditional IRA.

•  Money can remain in your Roth account indefinitely and be passed on to one or more beneficiaries.

Contribution and Income Rules

Anyone with earned income can contribute to a Roth IRA, as long as their modified adjusted gross income (MAGI) is within certain limits.

Here’s a table showing what you can contribute for tax years 2025 and 2026, based on your MAGI and filing status. You can also use an IRA eligibility calculator to determine your contribution amount.

 

If you are… And your MAGI for tax year 2025 is… And your MAGI for tax year 2026 is… You can contribute…
Married and file jointly or are a qualifying surviving spouse Less than $236,000 Less than $242,000 2025
Up to $7,000 per year, $8,000 if you’re 50 or older
2026
Up to $7,500 per year, $8,600 if you’re 50 or older
$236,000 to $246,000 $242,000 to $252,000 A partial amount
$246,000 or more $252,000 or more No contribution
Married, file separately, and you lived with your spouse at any time during the year Less than $10,000 Unchanged A partial amount
More than $10,000 Unchanged No contribution
Single, the head of household, or married and filing separately but you did not live with your spouse at any time during the year Less than $150,000 Less than $153,000 A full contribution
$150,000 to $165,000 $153,000 to $168,000 A partial amount
$165,000 or more $168,000 or more No contribution

Roth IRA Withdrawal Rules

When you’re ready to withdraw money from your Roth IRA, there are some rules to know. To make a tax- and penalty-free Roth IRA withdrawal, you must:

•  Be 59 ½ or older

•  Have had your Roth IRA for five years or more, also known as the five-year rule

The IRS allows you to withdraw original contributions from your Roth IRA at any time, with no taxes or penalties. But if you need to take an early distribution of earnings, you’d owe ordinary income tax on the amount of earnings withdrawn.

You’d also pay a 10% early withdrawal penalty on the earnings withdrawn unless you qualify for one of the following exceptions:

•  You’re withdrawing the money to pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.

•  You need the money to cover medical insurance while you’re unemployed.

•  You’re withdrawing funds to pay for qualified higher education expenses.

•  The distribution is part of a series of substantially equal periodic payments.

•  You’re a domestic abuse survivor and withdraw less than $10,000.

•  The IRS levies your Roth IRA to satisfy a tax debt.

•  You’re taking a distribution to fund the birth or adoption of a child.

•  You’re a military reservist on active duty.

•  You’re using the money for expenses related to qualified disaster recovery.

•  You become totally and permanently disabled.

•  You withdraw up to $10,000 towards the purchase of a home.

The 10% penalty is also waived if your Roth IRA beneficiary withdraws money early because you’ve passed away. Because IRA rules are subject to change, it’s wise to consult with a professional, or check IRS.gov, for updates.

How a Mutual Fund Works

If you choose to invest in a mutual fund in your Roth IRA, or in any type of retirement account or taxable account, it’s important to understand the wide variety of mutual funds available.

Active vs. Passive Mutual Funds

The first point of distinction in the world of mutual funds is the difference between active management and passive management.

•  Active investing refers to a strategy where human portfolio managers oversee the fund’s portfolio, and pick investments they believe will outperform the market.

•  By contrast, passive investing doesn’t involve live portfolio managers. This strategy relies on an algorithm to mirror the performance of certain market sectors or indexes.

Passive investing is also known as index investing, as the fund’s portfolio tracks an index. For example, the S&P 500 index tracks the performance of the top 500 biggest companies in the U.S. The Dow Jones Industrial Average (often called the Dow) tracks 30 top industrial companies. The Nasdaq composite index tracks over 3,000 companies mainly in the tech sector.

Types of Mutual Funds

Mutual funds are then categorized by what they hold. Some of the most common types of mutual funds include:

•  Stock mutual funds, which concentrate holdings in corporate stocks

•  Bond funds, which are focused on different types of bonds

•  Money market funds, which hold short-term investments issued by corporations and government entities

•  Target-date funds, which adjust their asset allocation based on the investor’s target retirement date

Within those categories, you’ll find plenty of variety. For example, some stock funds invest exclusively in growth stocks or large-cap companies, while others primarily hold stocks that pay dividends to investors.

Bond funds may center on corporate bonds, municipal bonds, green bonds, or a mix of different bond types.

Fees and Expenses Associated With Mutual Funds

Mutual funds have fees, which reduce the returns you earn. Before you buy a mutual fund, it’s important to review the prospectus so you know what you’ll pay. Some of the most common mutual fund fees include:

•  Sales loads

•  Redemption fees

•  Exchange fees

•  Purchase fees

•  Account fees

•  Management fees

•  Distribution fees

If you’re confused by the various fees, it may be easier to focus on the expense ratio. The expense ratio, which is expressed as a percentage, represents the fund’s total operating expenses. The lower this number is, the less you’ll pay to own the fund. For example, there’s a noticeable difference in the amount you’ll pay annually when your fund’s expense ratio is 0.02% vs. 0.20%.

A $10,000 investment in a mutual fund with an expense ratio of 0.02% would cost $200 per year; an expense ratio of 0.20% would cost $2,000 per year, hypothetically.

Roth IRAs and Mutual Funds: Key Points to Know

When considering investing in mutual funds through a Roth IRA account, it’s important to understand how each of them works, since you’re talking about two separate things. Here’s a table that highlights the main points to know about each.

 

Roth IRA Mutual funds
What it is A tax-advantaged investment account that’s designed for retirement. A pooled investment vehicle that holds a collection of securities.
How it’s taxed Roth IRAs offer tax-free qualified withdrawals beginning at age 59 ½, with no required minimum distributions at any age. Mutual funds are subject to capital gains tax when held in a taxable account; funds held in a Roth IRA are subject to Roth IRA tax rules.
Who it’s for Individuals who want to save for retirement on a tax-advantaged basis, and who meet the IRS income guidelines. Individuals who want to gain exposure to a broad range of investments in a single vehicle.

Investing in Mutual Funds Within a Roth IRA

One misconception is that you have to choose between a Roth IRA or mutual fund to invest in; in reality, you can do both. You can hold one or more mutual funds inside a Roth IRA (or any type of IRA). You can also invest in mutual funds within a taxable brokerage account outside of your Roth.

Types of Funds to Consider

When you open a Roth IRA, you’ll have to decide what you want to invest in. Your brokerage will likely offer you a selection of mutual funds to choose from, including:

•  Index funds

•  Bond funds

•  Growth funds

•  Dividend funds

Your choice of funds can depend on your risk tolerance and overall objectives. If you’re in your 30s and have years to invest, for instance, you might be comfortable with more aggressive growth funds.

Once investors reach their 60s, they may shift more of their assets into bond funds to help minimize risk.

When comparing fund options, some consider:

•  Historical performance

•  Risk profiles

•  Expense ratios

It’s also important to look at the underlying holdings of each fund so you understand what it owns and how often investments turn over.

Can you lose money in a Roth IRA? Yes, if your investments don’t perform as well as you expected when the market is down. When selecting mutual funds for your Roth IRA account, remember that past performance isn’t a guaranteed indicator of what a fund will do in the future.

Asset Location and Tax Efficiency

Should you keep mutual funds in a Roth IRA? It can make sense from a tax perspective. Funds held within your Roth IRA are subject to Roth taxation rules. That means qualified withdrawals are tax free, starting at age 59 ½.

If you were to hold mutual funds in a taxable brokerage account, on the other hand, you’d likely owe capital gains tax if you sold your shares at a profit.

Rebalancing and Portfolio Management

Rebalancing means reevaluating your portfolio’s asset allocation and buying or selling assets as needed to maintain your ideal mix of assets. It’s generally a good idea to review and potentially rebalance at least once a year to make sure that you’re maintaining the right mix to meet your goals.

For example, say that you prefer a 70% to 30% split between stocks and bonds in your Roth IRA. Over the past year, that split may have crept closer to 60/40, and you feel you’re missing out on returns. You might sell some of the bond funds in your account and replace them with growth or dividend funds instead.

Rebalancing doesn’t trigger tax consequences since a Roth IRA is tax-advantaged. If you’re not sure what you should be doing to keep your asset allocation aligned, you may want to get help from a financial advisor.

The Takeaway

With the clarification that a Roth IRA is a type of tax-advantaged retirement account, and a mutual fund is a type of investment that can be held within an IRA, it may be easier to take the next step with your own investment plans.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Help build your nest egg with a SoFi IRA.

FAQ

Can you invest in both a Roth IRA and mutual funds?

Yes, in that you can open a Roth IRA account, and purchase mutual fund shares within the IRA account. But an IRA is not a type of investment, whereas a mutual fund is. You would invest your money in a mutual fund or other type of asset, and you could then hold those investments in the Roth or traditional IRA account.

What are the contribution limits for a Roth IRA and for a mutual fund?

Roth IRAs are subject to annual contribution limits, as determined by the IRS; mutual funds are not. For 2025, the maximum contribution to a traditional or Roth IRA is $7,000; $8,000 if you’re age 50 or older. For 2026, the maximum contribution is $7,500; $8,600 if you’re 50 or older. Mutual funds have no maximum contribution limit, though there may be a minimum contribution required to invest in a fund.

Photo credit: iStock/zamrznutitonovi

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.

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