Investing for Retirement: Tips and Options to Consider

Saving steadily for retirement is important, but how you invest that money also matters. Fortunately, today’s retirement saver has a number of options to consider — many of which can make the task of investing for the future less daunting.

These days, you can choose from DIY investing options like a portfolio of stocks and bonds or other securities you choose yourself. You can also invest in mutual funds or exchange-traded funds to help lower costs and add diversification. There are also certain types of pre-set retirement funds and automated platforms (i.e. robo advisors) that use technology to help manage your portfolio.

If you’re saving for retirement, it helps to understand the options that best suit your goals and your personality so that you’re more likely to stick with a plan for the long term.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.


money management guide for beginners

The Importance of Investing for Retirement

Retirement may be a long way off or a short way down the road, depending on your age and stage of life. Either way, developing an investment strategy that can help your savings to grow is essential. For many people, retirement might last 10, 20, 30 years — or even more. A solid long-term investment strategy can help you build up the amount you need for those years where you’re no longer in the workforce.

Remember that the longer your money is invested, the more time you have for potential gains to compound and help your money grow. Compounding simply means that if your money potentially sees a return, or a profit from various investments, that growth can compound over time, with both your savings and your earnings seeing gains.

Time can also help with losses. The longer your time horizon, the more volatility or risk it may be safe for you to assume. If you have a time horizon of 30 or 40 years before you retire, you can probably afford to weather some short-term losses, knowing that your investment returns will likely balance themselves out over time.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1


1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Understanding Retirement Accounts

While this article will focus on investment options, it’s worth a reminder that the type of retirement account you choose is also important. You may have a workplace retirement account like a 401(k) or 403(b). You may have opened an Individual Retirement Arrangement (IRA), like a traditional IRA, a Roth IRA, or a SEP IRA.

Different accounts have different contribution limits, and different tax implications. Since both the amount you can save and how it will be taxed can have a long-term impact on your nest egg, be sure to spend time strategizing about which types of accounts make the most sense for you.

With a suitable combination of accounts, you can then begin to choose the investments that will populate that account.

Remember: Just because you open an IRA or set up your 401(k) at work doesn’t mean it comes with any investments. Like moving into a new home, it’s up to you to furnish the account.

Recommended: 401(k) vs IRA: What’s the Difference?

Investment Options

While investing for retirement can seem overwhelming, it doesn’t have to be. Again, there are various retirement strategies that have stood the test of time, as well as a number of investment options that can make a retirement saver’s life easier.

Here are a few options for retirement investing that you can consider:

DIY Investing

For investors who feel confident in managing their own retirement portfolio, and the securities within it, taking a DIY approach is an option.

You can purchase stocks, bonds, commodities, mutual funds, or any other types of securities for your long-term portfolio. While the term active investing brings to mind day traders, active investing can also mean taking a hands-on approach to managing your own portfolio.

This approach isn’t for everyone. It’s time and energy intensive, and it requires a certain amount of expertise in order to be successful. In addition, if you go this route, bear in mind that the same rules apply to all long-term investors.

•   Be mindful of the contribution limits and tax implications of the retirement account you choose.

•   Consider the cost of your investments, as fees can reduce your earnings over time.

•   Consider using a strategy that includes some diversification, as this may help mitigate certain risks over time.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Index Funds

Index funds offer a basic way to invest for retirement. An index fund is a type of fund that tracks a broad market index. One of the most popular types of index funds tracks the S&P 500 index, for example, which mirrors the performance of the 500 largest U.S. companies.

There are hundreds of indexes, and many have corresponding funds that track different sectors of the market, e.g.: smaller companies, technology companies; sustainable or green companies; various types of bonds, and more.

Index funds don’t rely on a live team of portfolio managers, so they tend to be less expensive than actively managed funds. However, they have a downside which is that your money is pegged to the securities in that sector.

Automated Options

In the world of investing there really isn’t a truly automated “set it and forget it” strategy that will work on its own, without any input, for decades. But there are some options that are more hands-off than others.

•   Target Date Funds

One such option is a target date fund. A target date fund is designed to be an all-inclusive portfolio option for people that are looking to retire on or near a certain date. For example, a 2050 target date fund is intended for people that will be ready for retirement in 2050.

Target date funds use a set of calculations to adjust the portfolio’s asset allocation over time. When a target date fund is decades away from the specified date, it might invest 80% in equities and 20% in fixed income or cash/cash equivalents. As the date draws nearer, it will automatically move more of its investments away from equities towards bonds, cash, or other investments with lower risk. This automatic readjustment is referred to as the glide path.

•   Robo Advisors

Another option is an automated portfolio, commonly known as a robo advisor (although these services are not robots, and don’t typically offer advice).

A robo advisor platform offers a questionnaire for investors to gauge their time horizon (i.e. years to retirement or another goal), their risk level, and so forth.

The platform then uses sophisticated technology to recommend a portfolio of low-cost exchange-traded funds (ETFs).

While these are two of the more hands-off options, and they do offer the convenience of managing a portfolio on your behalf, these options have some downsides. The cost can be higher than other types of investment options. And there is very little flexibility. Investors typically cannot adjust the securities in these funds (although there may be some hybrid options in the market).

Recommended: How Do Robo Advisors Work

Hire an Advisor

If you still are not feeling comfortable investing for retirement on your own, you may want to consider using a financial advisor. Talk with your trusted friends or family members to get a recommendation.

Because an advisor introduces a new level of cost, be sure to ask how the person is compensated. Some advisors charge a flat fee, or an hourly rate, or some earn commissions — or combinations of the above.

Tips When Investing for Retirement

As you start investing for retirement, here are a few things that you’ll want to keep in mind:

Ask About Fees

Many investments come with fees that are charged by the advisor or company that manages the investment. These investment fees may be explicitly charged to your account, or they may be captured as part of the investment’s returns. Make sure to check any fees that are charged before you invest. There are many low-cost mutual funds that offer investment fees under 0.1% as compared to a financial advisor who may charge 1% or more. Even a small difference in the fees charged can make a huge difference on your returns when compounded over decades.

Plan for Taxes

You’ll also want to account for how your retirement investments will be taxed.

•   Tax-Deferred Accounts

If you contribute to a traditional 401(k) or IRA, you may be eligible for a tax deduction in the tax year that you make the contribution (i.e., a contribution for tax year 2025 can typically be deducted on your 2025 taxes).

These accounts are called tax-deferred because you will owe taxes on your withdrawals.

•   After-Tax Accounts

If you contribute to a Roth 401(k) or Roth IRA, you won’t get a tax deduction when you contribute — because you deposit after-tax dollars — instead, your withdrawals will be tax-free.

There are other differences between tax-deferred and after-tax accounts that can impact your nest egg. For example, once you reach the age of 73, you’re required to withdraw a minimum amount from a traditional IRA or 401(k) every year (also called RMDs or required minimum distributions). That doesn’t apply to Roth accounts.

•   Taxable Investment Accounts

On the other hand, if you invest for retirement in a non-retirement or taxable account, you will owe income taxes on your gains whenever you sell those securities, which will affect your portfolio’s overall performance.

How Often Should I Adjust My Investments?

It’s generally considered a good idea to periodically adjust your investments by rebalancing your portfolio. Portfolio rebalancing is a way to adjust the mix of your investments. It means realigning the assets of a portfolio’s holdings to match your desired asset allocation.

If you have a robo advisor or investment advisor, they likely have you set up with a specific target of different types of investments. Over time, the advisor will rebalance your portfolio to keep it in line with your target percentages.

If you’re managing your investments yourself, you might rebalance your portfolio monthly, quarterly or annually, depending on the type of investments that you have.

The Takeaway

Investing for your retirement is one of the smartest things that you can do as part of an overall financial plan. While it may seem overwhelming, there are a few things that you can do to help streamline your investment plan.

Make sure that you understand the fees and taxes that come with different investment options. If you don’t feel comfortable managing your own portfolio, consider working with an advisor or investing in an automated portfolio.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

Can I invest for retirement if I have limited funds?

It is possible to invest for retirement if you have limited funds. In fact, if you have limited funds, that is one reason it’s even more important to invest for retirement. Especially if you are younger and have a long time before retirement, even a small amount can grow to be a sizable nest egg when its returns are compounded over many decades.

Should I adjust my investment strategy as I approach retirement?

How you choose to invest will depend on a number of factors, one of which is how close you are to retirement. One common strategy is to be more aggressive with your investment strategy when you are years or decades away from retirement. This can possibly lead to higher overall returns while you have a long time to smooth out the ups and downs of a high-risk, high-reward strategy. Then, as you get closer to retirement, you start to be more conservative with your investments in an attempt to better preserve capital.

What investment options are suitable for conservative investors?

Choosing your investment options will depend on your overall financial situation and tolerance for risk. Some examples of more conservative investments include bonds, cash, CDs, or Treasury bills. As you get closer to retirement, it can make sense to choose more conservative investments. You may give up some possible returns, but you may also be better insulated against large losses.


Photo credit: iStock/monkeybusinessimages

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

SOIN0623047

Read more
women walking on beach

Investment Strategies By Age

Your age is a major factor in the investment strategy you choose and the assets you invest in. The investments someone makes when they’re in their 20s should look very different from the investments they make in their 50s.

Generally speaking, the younger you are, the more risk you may be able to tolerate because you’ll have time to make up for investment losses you might incur. Conversely, the closer you are to retirement, the more conservative you’ll want to be since you have less time to recoup from any losses. In other words, your investments need to align with your risk tolerance, time horizon, and financial goals.

Most important of all, you need to start saving for retirement now so that you won’t be caught short when it’s time to retire. According to a 2024 SoFi survey of adults 18 and older, 59% of respondents had no retirement savings at all or less than $49,999.

Here is some information to consider at different ages.

Investing in Your 20s

In your 20s, you’ve just started in your career and likely aren’t yet earning a lot. You’re probably also paying off debt such as student loans. Despite those challenges, this is an important time to begin investing with any extra money you have. The sooner you start, the more time you’ll have to save for retirement. Plus, you can take advantage of the power of compounding returns over the decades. These strategies can help get you on your investing journey.

Strategy 1: Participate in a Retirement Savings Plan

One of the easiest ways to start saving for retirement is to enroll in an employer-sponsored plan like a 401(k). Your contributions are generally automatically deducted from your paycheck, making it easier to save.

If possible, contribute at least enough to qualify for your employer’s 401(k) match if they offer one. That way your company will match a percentage of your contributions up to a certain limit, and you’ll be earning what’s essentially free money.

Those who don’t have access to an employer-sponsored plan might want to consider setting up an individual retirement account (IRA). There are different types of IRAs, but two of the most common are traditional and Roth IRAs. Both let you contribute the same amount (up to $7,000 in 2024 and 2025 for those under age 50), but one key difference is the way the two accounts are taxed. With Roth IRAs, contributions are not tax deductible, but you can withdraw money tax-free in retirement. With traditional IRAs, you deduct your contributions upfront and pay taxes on distributions when you retire.

Strategy 2: Explore Diversification

As you’re building a portfolio, consider diversification. Diversification involves spreading your investments across different asset classes, such as stocks, bonds, and real estate investment trusts (REITs). One way twentysomethings might diversify their portfolios is by investing in mutual funds or exchange-traded funds (ETFs). Mutual funds are pooled investments typically in stocks or bonds, and they trade once per day at the end of the day. ETFs are baskets of securities that trade on a public exchange and trade throughout the day.

You may be able to invest in mutual funds or ETFs through your 401(k) or IRA. Or you could open a brokerage account to begin investing in them.

Strategy 3: Consider Your Approach and Comfort Level

As mentioned, the younger an individual is, the more time they may have to recover from any losses or market downturns. Deciding what kind of approach they want to take at this stage could be helpful.

For instance, one approach involves designating a larger portion of investments to growth funds, mutual funds or ETFs that reflect a more aggressive investing style, but it’s very important to understand that this also involves higher risk. You may feel that a more conservative approach that’s less risky suits you better. What you choose to do is fully up to you. Weigh the options and decide what makes sense for you.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1


1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Investing in Your 30s

Once you’re in your 30s, you may have advanced in your career and started earning more money. However, at this stage of life you may also be starting a family, and you likely have financial obligations such as a mortgage, a car loan, and paying for childcare. Plus, you’re probably still paying off your student loans. Still, despite these expenses, contributing to your retirement should be a top priority. Here are some ways to do that.

Strategy 1: Maximize Your Contributions

Now that you’re earning more, this is the time to max out your 401(k) or IRA if you can, which could help you save more for retirement. In 2024, you can contribute up to $23,000 in a 401(k) and up to $7,000 in an IRA. In 2025, you can contribute up to $23,500 in a 401(k) and up to $7,000 in an IRA. (If you have a Roth IRA, there are income limits you need to meet to be eligible to contribute the full amount, which is one thing to consider when choosing between a Roth IRA vs. a traditional IRA.)

Strategy 2: Consider Adding Fixed-Income Assets to the Mix

While you can likely still afford some risk since you have several decades to recover from downturns or losses, you may also want to add some fixed-income assets like bonds or bond funds to your portfolio to help counterbalance the risk of growth funds and give yourself a cushion against potential market volatility. For example, an investor in their 30s might want 20% to 30% of their portfolio to be bonds. But, of course, you’ll want to determine what specific allocation makes the most sense for your particular situation.

Strategy 3: Get Your Other Financial Goals On Track

While saving for retirement is crucial, you should also make sure that your overall financial situation is stable. That means paying off your debts, especially high-interest debt like credit cards, so that it doesn’t continue to accrue interest. In addition, build up your emergency fund with enough money to tide you over for at least three to six months in case of a financial setback, such as a major medical expense or getting laid off from your job. And finally, make sure you have enough funds to cover your regular expenses, such as your mortgage payment and insurance.

Investing in Your 40s

You may be in — or approaching — your peak earning years now. At the same time, you likely have more expenses, as well, such as putting away money for your children’s college education, and saving up for a bigger house. Fortunately, you probably have at least 20 years before retirement, so there is still time to help build your nest egg. Consider these steps:

Strategy 1: Review Your Progress

According to one rule of thumb, by your 40s, you should have 3x the amount of your salary saved for retirement. This is just a guideline, but it gives you an idea of what you may need. Another popular guideline is the 80% rule of aiming to save at least 80% of your pre-retirement income. And finally, there is the 4% rule that says you can take your projected annual retirement expenses and divide them by 4% (0.04) to get an estimate of how much money you’ll need for retirement.

These are all rough targets, but they give you a benchmark to compare your current retirement savings to. Then, you can make adjustments as needed.

Strategy 2: Get Financial Advice

If you haven’t done much in terms of investing up until this point, it’s not too late to start. Seeking help from financial advisors and other professionals may help you establish a financial plan and set short-term and long-term financial goals.

Even for those who have started saving, meeting with a financial specialist could be useful if you have questions or need help mapping out your next steps or sticking to your overall strategy.

Strategy 3: Focus on the Your Goals

Since they might have another 20-plus years in the market before retirement, some individuals may choose to keep a portion of their portfolio allocated to stocks now. But of course, it’s also important to be careful and not take too much risk. For instance, while nothing is guaranteed and there is always risk involved, you might feel more comfortable in your 40s choosing investments that have a proven track record of returns.

Investing in Your 50s

You’re getting close to retirement age, so this is the time to buckle down and get serious about saving safely. If you’ve been a more aggressive investor in earlier decades, you’ll generally want to become more conservative about investing now. You’ll need your retirement funds in 10 years or so, and it’s vital not to do anything that might jeopardize your future. These investment strategies by age may be helpful to you in your 50s:

Strategy 1: Add Stability to Your Portfolio

One way to take a more conservative approach is to start shifting more of your portfolio to fixed-income assets like bonds or bond funds. Although these investments may result in lower returns in the short term compared to assets like stocks, they can help generate income when you begin withdrawing funds in retirement since bonds provide you with periodic interest payments.

You may also want to consider lower-risk investments like money market funds at this stage of your investment life.

Strategy 2: Take Advantage of Catch-up Contributions

Starting at age 50, you become eligible to make catch-up contributions to your 401(k) or IRA. In 2024 and 2025, you can contribute an additional $7,500 to your 401(k) for a total contribution of $30,500 for 2024, and $31,000 for 2025 if you max out your plan.

In 2024 and 2025, the catch-up contribution for an IRA is an additional $1,000 annually for a total maximum contribution of $8,000 for each year. This allows you to stash away even more money for retirement.

Strategy 3: Consider Downsizing

Your kids may be out of the house now, which can make it the ideal time to cut back on some major expenses in order to save more. You might want to move into a smaller home, for instance, or get rid of an extra car you no longer need.

Think about what you want your retirement lifestyle to look like — lots of travel, more time for hobbies, starting a small business, or whatever it might be — and plan accordingly. By cutting back on some expenses now, you may be able to save more for your future pastimes.

Investing in Your 60s

Retirement is fast approaching, but that doesn’t mean it’s time to pull back on your investing. Every little bit you can continue to save and invest now can help build your nest egg. Remember, your retirement savings may need to last you for 30 years or even longer. Here are some strategies that may help you accumulate the money you need.

Strategy 1: Get the Most Out of Social Security

The average retirement age in the U.S. is 65 for men and 63 for women. But you may decide you want to work for longer than that. Waiting to retire can pay off in terms of Social Security benefits. The longer you wait, the bigger your monthly benefit will be.

The earliest you can start receiving Social Security Benefits is age 62, but your benefits will be reduced by as much as 30% if you take them that early. If you wait until your full retirement age, which is 67 for those born in 1960 or later, you can begin receiving full benefits.

However, if you wait until age 70 by working longer or working part time, say, the size of your benefits will increase substantially. Typically, for each additional year you wait to claim your benefits up to age 70, your benefits will grow by 8%.

Strategy 2: Review Your Asset Allocation

Just before and during retirement, it’s important to make sure your portfolio has enough assets such as bonds and dividend-paying stocks so that you’ll have income coming in. You’ll also want to stash away some cash for unexpected expenses that might pop up in the short term; you could put that money in your emergency fund.

Some individuals in their 60s may choose to keep some stocks with growth potential in their asset allocation as a way to potentially avoid outliving their savings and preserve their spending power. Overall, people at this stage of life may want to continue the more conservative approach to investing they started in their 50s, and not choose anything too aggressive or risky.

Strategy 3: Keep investing in your 401(k) as long as you’re still working.

If you can, max out your 401(k), including catch-up contributions, in your 60s to sock away as much as possible for retirement. In 2025, those aged 60 to 63 can take advantage of an extra catch-up provision, thanks to SECURE 2.0: They can contribute $11,250, instead of $7,500, for a total of $34,750. This can be especially helpful if you didn’t invest as much as you ideally should have at earlier ages. Contributing to your 401(k) could also help lower your taxable income now, when you may be in a higher income tax bracket than you were in previous decades.

Also, you can continue to contribute to any IRAs you may have — up to the limit allowed by the IRS, which is $8,000 in 2024 and 2025, including catch-up contributions. If you have a Roth IRA, you will need to meet the income limits in order to contribute.

The Takeaway

Investing for retirement should be a priority throughout your adult life, starting in your 20s. The sooner you begin, the more time you’ll have to save. And while it’s never too late to start investing for retirement, focusing on investment strategies by age, and changing your approach accordingly, can generally help you reach your financial goals.

For instance, in your 20s and 30s you can typically be more aggressive since you have time to make up for any downturns or losses. But as you get closer to retirement in your 40s, 50s, and 60s, your investment strategy should shift and take on a more conservative approach. Like your age, your investment strategy should adjust across the decades to help you live comfortably and enjoyably in your golden years.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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


SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


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

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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.

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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN-Q224-1905241-V1

Read more
Overhead shot of the desk in the office.

A Guide to Tax-Efficient Investing

As the saying goes: It’s not how much you earn, it’s how much you keep. And when you make money from your investments you need to consider the impact taxes might have on your earnings.

Fortunately, there are a range of tax-efficient investment strategies that can help minimize the bite that taxes take out of your returns.

What is tax-efficient investing, and how does it work? By understanding the tax implications of different types of accounts, as well as the types of investments you choose (e.g. stocks, bonds, mutual funds), you can determine the most tax-efficient strategies for your portfolio.

The Importance of Tax-Efficient Investing

Investing comes with an assortment of costs, and the taxes you pay on investing profits can be one of the biggest. By learning how to be a more tax-efficient investor, you may be able to keep more of what you earn.

The Impact of Taxes on Returns

Investment tax rules are complicated. Profits from many stock and bond investments are taxed at the capital gains rate; but some bonds aren’t taxed at all. Qualified dividends are taxed in one way; non-qualified dividends another. Investments in a taxable account are treated differently than those in a tax-advantaged account.

And, of course, there is the process of applying investment losses to gains in order to reduce your taxable gains — a strategy known as tax-loss harvesting.

In addition, the location of your investments — whether you hold them in a taxable account or a tax-advantaged account (where taxes can be deferred, or in some cases avoided) — also has an impact on your returns. In a similar way, you can refocus your charitable giving strategy to be tax efficient as well.

Knowing the ins and outs of investment taxes can help you establish a tax-efficient strategy that makes sense for you.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Types of Tax-Efficient Accounts

Investment accounts can generally be divided into two categories based on how they’re taxed: taxable and tax-advantaged.

Taxable Accounts

In order to understand tax-deferred and tax-exempt accounts, it helps to first understand taxable accounts, e.g. brokerage accounts. A taxable brokerage account has no special tax benefits, and profits from the securities in these accounts may be taxed according to capital gains rules (unless other rules apply).

Taxable accounts can be opened in the name of an individual or trust, or as a joint account. Money that is deposited into the investment account is post-tax, i.e. income taxes have already been paid or will be paid on those funds (similar to the money you’d put into a checking or savings accounts).

Taxes come into play when you sell investments in the account and make a profit. You may owe taxes on the gains you realize from those investments, as well as earned interest and dividends.

With some securities, like individual stocks, the length of time you’ve held an investment can impact your tax bill. Other investments may generate income or gains that require a different tax treatment.

For example:

•   Capital gains. The tax on an investment gain is called capital gains tax. If an investor buys a stock for $40 and sells it for $50, the $10 is a “realized” gain and will be subject to either short- or long-term capital gains tax, depending on how long the investor held the investment.

   The short-term capital gains rate applies when you’ve held an investment for a year or less, and it’s based on the investor’s personal income tax bracket and filing status — up to 37%.

   The long-term capital gains rate, which is generally 0%, 15%, or 20% (depending on your income), applies when you’ve held an investment for more than a year.

•   Interest. Interest that’s generated by an investment, such as a bond, is typically taxed as ordinary income. In some cases, bonds may be free from state or local taxes (e.g. Treasuries, some municipal bonds).

   But if you sell a bond or bond fund at a profit, short- or long-term capital gains tax could apply.

•   Dividends. Dividends are distributions that may be paid to investors who hold certain dividend stocks. Dividends are generally paid in cash, out of profits and earnings from a corporation — and can be taxed as short- or long-term capital gains within a taxable account.

Recommended: How Do Dividends Work?

But the terms are different when it comes to tax-advantaged accounts.

Tax-Advantaged Accounts

Tax-advantaged accounts fall into two categories, and are generally used for long-term retirement savings.

Tax-Deferred Retirement Accounts

A 401(k), 403(b), traditional IRA, SEP IRA, and Simple IRA fall under the tax-deferred umbrella, a tax structure typical of retirement accounts. They’re considered tax efficient for a couple of reasons.

•   Pre-tax contributions. First, the money you contribute to a tax-deferred account is not subject to income tax; you owe taxes when you withdraw the funds later, e.g. in retirement. Thus the tax is deferred.

This means the amount you contribute to a tax-deferred account for a given year can be deducted from your taxable income, potentially reducing your tax bill for that year.

Speaking hypothetically: If your taxable income for a given year is $100,000, and you’ve contributed $5,000 to a traditional IRA or SEP IRA, you would deduct that contribution and your taxable income would be $95,000. You wouldn’t pay taxes on the money until you withdrew that funds later, likely in retirement.

•   Tax-free growth. The money in a tax-deferred retirement account (e.g. a traditional IRA) grows tax free. Thus you don’t incur any taxes until the money is withdrawn.

•   Potentially lower taxes. By deducting the contribution from your taxable income now, you may avoid paying taxes at your highest marginal tax rate. The idea is that investors’ effective (average) tax rate might be lower in retirement than their highest marginal tax rate while they’re working.

Tax-Exempt Accounts

Typically known as Roth accounts — e.g. a Roth IRA or a Roth 401(k) — allow savers to deposit money that’s already been taxed. These funds, plus any gains, then grow tax free, and qualified withdrawals are also tax free in retirement.

Because contributions to Roth accounts are made post-tax, there is also more flexibility on when the money can be withdrawn. You can withdraw the amount of your contributions tax and penalty free at any time. However earnings on those investments may incur a penalty for early withdrawal, with some exceptions.

Recommended: What Is the Roth IRA 5-Year Rule?

Tax Benefits of College Savings Plans

529 College Savings Plans are a special type of tax-exempt account. The contributions and earnings in these accounts can be withdrawn tax free for qualified education expenses. In some cases you may be able to deduct your contributions from your state taxes, but the rules vary from state to state.

While you can invest the money in these accounts, they are limited in scope so aren’t generally considered one of the broader investment account categories.

Tax-Efficient Accounts Summary

As a quick summary, here are the main account types, their tax structure, and what that means for the types of investments you might hold in each.

•   Generally you want to hold more tax-efficient investments in a taxable account.

•   Conversely, you may want to hold investments that can have a greater tax impact in tax-deferred and tax-exempt accounts, where investments can grow tax free.

Types of Accounts When Taxes Apply Investment Implications
Taxable
(e.g. brokerage or investment account)
Investors deposit post-tax funds and owe taxes on profits from securities they sell, and from interest and dividends. Investments with a lower tax impact make sense in a taxable account (e.g. long-term stocks, municipal and Treasury bonds).
Tax-deferred (e.g. 401(k), 403(b), traditional, SEP, and Simple IRAs) Investors contribute pre-tax money, but owe taxes on withdrawals. Investments grow tax free until funds are withdrawn, giving investors more tax flexibility when choosing securities.
Tax-exempt
(e.g. Roth 401(k), Roth IRA)
Investors deposit post-tax funds, and don’t owe taxes on withdrawals. These accounts offer the most tax flexibility as investments grow tax free and investors withdraw the money tax free.

The Tradeoffs of Tax-Free Growth

Because of the advantages tax-deferred accounts offer investors, there are restrictions around contribution limits and the timing (and sometimes the purpose) of withdrawals. Taxable accounts are generally free of such restrictions.

•   Contribution limits. The IRS has contribution limits for how much you can save each year in most tax-advantaged accounts. Be sure to know the rules for these accounts, as penalties can apply when you exceed the contribution limits.

•   Income limits. In order to contribute to a Roth IRA, your income must fall below certain limits. (These caps don’t apply to Roth 401(k) accounts, however.)

•   Penalties for early withdrawals. For 401(k) plans and traditional as well as Roth IRAs, there is a 10% penalty if you withdraw money before age 59 ½, with some exceptions.

•   Required withdrawals. Some accounts, such as traditional, SEP, and Simple IRAs require that you withdraw a minimum amount each year after age 73 (as long as you turned 72 after Dec. 31, 2022). These are known as required minimum distributions (RMDs).

   The rules governing RMDs are complicated, and these required withdrawals can have a significant impact on your taxable income, so you may want to consult a professional in order to plan this part of your retirement tax plan.

When choosing the location of different investments, be sure to understand the rules and restrictions governing tax-advantaged accounts.

Choosing Tax-Efficient Investments

Next, it is helpful to know that some securities are more tax efficient in their construction, so you can choose the best investments for the type of account that you have.

For example, ETFs are considered to be more tax efficient than mutual funds because they don’t trigger as many taxable events. Investors can trade ETFs shares directly, while mutual fund trades require the fund sponsor to act as a middle man, activating a tax liability.

Here’s a list of some tax-efficient investments:

•   ETFs: These are similar to mutual funds but more tax efficient due to their construction. Also, most ETFs are passive and track an index, and thus tend to be more tax efficient than their actively managed counterparts (this is also true of index mutual funds versus actively managed funds).

•   Treasury bonds: Investors will not pay state or local taxes on interest earned via U.S. Treasury securities, including Treasury bonds. Investors do owe federal tax on Treasury bond interest.

•   Municipal bonds: These are bonds issued by local governments, often to fund municipal buildings or projects. Interest is generally exempt from federal taxes, and state or local taxes if the investor lives within that municipality.

•   Stocks that do not pay dividends: When you sell a non-dividend-paying stock at a profit, you’ll likely be taxed at the long-term capital gains rate, assuming you’ve held it longer than a year. That’s likely lower than the tax you’d pay on ordinary dividends, which are generally taxed as income at your ordinary tax rate.

•   Index funds vs. actively managed funds: Generally speaking, index funds (which are passively managed) have less churn, and lower capital gains. Actively managed funds are the opposite, and may incur higher taxes as a result.

Note that actively trading stocks can have additional tax implications because more frequent trades, specifically those that fall into the short-term capital gain category, incur a higher tax rate on gains.

Typically, tax consequences will vary from person to person. A tax professional can help navigate your specific tax questions.

Estate Planning and Charitable Giving

Another important aspect of tax-efficient investing is adjusting your estate plan and establishing a strategy for charitable bequests. Because both these areas — inheritances and philanthropy — can be extremely complex taxwise, it may be wise to consult with a professional.

Taxes and Estate Planning

There are a number of ways to structure inheritances in a tax-efficient manner, including the use of gifts, trusts, and other vehicles. With a sophisticated estate-planning strategy, taxes can be minimized for the donor as well as the receiver.

For example, while there is a federal estate tax, there is no federal inheritance tax. And only five states tax your inheritance as of 2025 (Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania). As of January 1, 2025, Iowa no longer has an inheritance tax.

Yet your heirs may owe capital gains if you bequeath assets that then appreciate. But if you leave stock to your heirs, they can enjoy a step-up in cost basis based on when they inherited the stock, so they’d be taxed on gains from that time, not from the original price at purchase.

Tax Benefits of Charitable Contributions

Tax-efficient charitable giving is possible using a variety of strategies and accounts. For example a charitable remainder trust can reduce the donor’s taxable income, provide a charity with a substantial gift, while also creating tax-free income for the donor.

This is only one example of how charitable gifts can be structured as a win-win on the tax front. Understanding all the options may benefit from professional guidance.


💡 Quick Tip: Newbie investors may be tempted to buy into the market based on recent news headlines or other types of hype. That’s rarely a good idea. Making good choices shouldn’t stem from strong emotions, but a solid investment strategy.

Advanced Tax-Efficient Strategies

It may also be possible to minimize taxes by incorporating a few more strategies as you manage your investments.

Asset Location Considerations

As noted above, one method for minimizing the tax impact on your investments is through the careful practice of asset location. A well-considered combination of taxable, tax-deferred, and tax-exempt accounts can help mitigate the impact of taxes on your investment earnings.

For example, with some investment accounts — such as IRAs and 401(k)s — your tax bracket can have a substantial impact on the tax you’ll pay on withdrawals. Having alternate investments to pull from until your tax bracket is more favorable is a smart move to avoid that excess tax.

Also, with multiple investment accounts, you could potentially pull tax-free retirement income from a Roth IRA, assuming you’re at least 59 ½ and have held the account for at least five years (also known as the 5-year rule). and leave your company-sponsored 401(k) to grow until RMDs kick in.

Having a variety of investments spread across account types gives you an abundance of options for many aspects of your financial plan.

•   Need to cover a sudden large expense? Long-term capital gains are taxed at a significantly lower rate than short-term capital gains, so consider using those funds first.

•   Want to help with tuition costs for a loved one? A 529 can cover qualified education costs at any time, without incurring taxes or a penalty.

•   Planning to leave your heirs an inheritance? Roth IRAs are tax free and transferrable. And because your Roth IRA does not have required distributions (as a traditional IRA would), you can allow the account to grow until you pass it on to your heir(s).

Tax-Loss Harvesting

Within taxable accounts, there may be an additional way to minimize some of the tax bill created by selling profitable investments: tax-loss harvesting. This advanced move involves reducing the taxes from an investment gain with an investment loss.

For example, an investor wants to sell a few investments and the sale would result in $2,000 in capital gains. Tax-loss harvesting rules allow them to sell investments with $2,000 in total capital losses, effectively canceling out the gains. In this scenario, no capital gains taxes would be due for the year.

Note that even though the investor sold the investment at a loss, the “wash sale” rule prevents them from buying back the same investment within 30 days after those losses are realized. This rule prevents people from abusing the ability to deduct capital gain losses, and applies to trades made by the investor, the investor’s spouse, or a company that the investor controls.

Because this strategy involves the forced sale of an investment, many investors choose to replace it with a similar — but not too similar — investment. For example, an investor that sells an S&P 500 index fund to lock in losses could replace it with a similar U.S. stock market fund.

Recommended: What Are the Benefits of Tax Loss Harvesting?

Tax-Loss Carryover

Tax-loss harvesting rules also allow an investor to claim some of that capital loss on their income taxes, further reducing their annual income and potentially minimizing their overall income tax rate. This can be done with up to $3,000 in realized investment losses, or $1,500 if you’re married but filing separately.

Should your capital losses exceed the federal $3,000 max claim limit ($1,500 if you’re married and filing separately), you have the option to carry that loss forward and claim any amounts excess of that $3,000 on your taxes for the following year.

For example, if you have a total of $5,000 in capital losses for this year, by law you can only claim $3,000 of those losses on your taxes. However, due to tax-loss carryover, you are able to claim the remaining $2,000 as a loss on your taxes the following year, in addition to any capital gains losses you happen to experience during that year. This in turn lowers your capital gains income and the amount you may owe in taxes.

Roth IRA Conversions

It’s also possible in some cases to convert a traditional IRA to a Roth IRA. This is a complicated strategy, with pluses and minuses on the tax front.

•   By converting funds from a traditional IRA to a Roth, you will immediately owe taxes on the amount you convert. The conversion amount could also push you into a higher tax bracket; meaning, you’d potentially owe more in taxes.

•   Unlike funding a standard Roth IRA, there is no income limit for doing a Roth conversion, nor is there a cap on how much can be converted.

•   Once the conversion is complete, you would reap the benefits of tax-free withdrawals from the Roth IRA in retirement.

•   According to the 5-year rule, if you’re under age 59 ½ the funds that you convert to a Roth IRA must remain in your account for at least five years or you could be subject to a 10% early withdrawal penalty.

Final Thoughts on Tax-Efficient Investing

Given the impact of investment taxes on your returns, it makes sense to consider all the various means of tax-efficient investing. After all, not only are investment taxes an immediate cost to you, that money can’t be invested for further growth.

Key Strategies Recap

Once you understand the tax rules that govern different types of investment accounts, as well as the tax implications of your investment choices, you’ll be able to create a strategy that minimizes taxes on your investment income for the long term. Ideally, investors should consider having a combination of tax-deferred, tax-exempt, and taxable accounts to increase their tax diversification. To recap:

•   A taxable account (e.g. a standard brokerage account) is flexible. It allows you to invest regardless of your income, age, or other parameters. You can buy and sell securities, and deposit and withdraw money at any time. That said, there are no special tax benefits to these accounts.

•   A tax-deferred account (e.g. 401(k), traditional IRA, SEP IRA, Simple IRA) is more restrictive, but offers tax benefits. You can deduct your contributions from your taxable income, potentially lowering your tax bill, and your investments grow tax free in the account. Your contributions are capped according to IRS rules, however, and you will owe taxes when you withdraw the money.

•   A tax-exempt account (e.g. a Roth IRA or Roth 401(k)) is the most restrictive, with income limits as well as contributions limits. But because you deposit money post-tax, and the money grows tax free in the account, you don’t owe taxes when you withdraw the money in retirement.

Further Learning in Tax-Smart Investing

Being smart about tax planning applies to the present, to educational expenses, to the future (in terms of taxes you could owe in retirement), and to your estate plan and your heirs as well. Maximizing your tax-efficient strategies across the board can make a significant difference over time.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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


SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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 email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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.

SOIN1023137

Read more
401(k) Vesting: What Does Vested Balance Mean?

401(k) Vesting: What Does Vested Balance Mean?

Your vested 401(k) balance is the portion you fully own and can take with you when you leave your employer. This amount includes your employee contributions, which are always 100% vested, any investment earnings, and your employer’s contributions that have passed the required vesting period.

Here’s a deeper look at what being vested means and the effect it can have on your retirement savings.

Key Points

•   401(k) vesting refers to when ownership of an employer’s contributions to a 401(k) account shifts to the employee.

•   401(k) contributions made by employees are always 100% vested; they own them outright.

•   Vesting schedules vary, but employees become 100% vested after a specified number of years.

•   401(k) vesting incentivizes employees to stay with their current employer and to contribute to their 401(k).

•   Companies may use immediate, cliff, or graded vesting schedules for their 401(k) plans.

What Does Vested Balance Mean?

The vested balance is the amount of money that belongs to you and cannot be taken back by an employer when you leave your job — even if you are fired.

The contributions you personally make to your 401(k) are automatically 100% vested. Vesting of employer contributions typically occurs according to a set timeframe known as a vesting schedule. When employer contributions to a 401(k) become vested, it means that the money is now entirely yours.

Having a fully vested 401(k) means that employer contributions will remain in your account when you leave the company. It also means that you can decide to roll over your balance to a new account, start making withdrawals, or take out a loan against the account, if your plan allows it. However, keeping a vested 401(k) invested and letting it grow over time may be one of the best ways to save for retirement.

💡 Recommended: How Much Should I Contribute to My 401(k)?

How 401(k) Vesting Works

401(k) vesting refers to the process by which employees become entitled to keep the money that an employer may have contributed to their 401(k) account. Vesting schedules can vary, but most 401(k) plans have a vesting schedule that requires employees to stay with the company for a certain number of years before they are fully vested.

For example, an employer may have a vesting schedule requiring employees to stay with the company for five years before they are fully vested in their 401(k) account. If an employee were to leave the company before reaching that milestone, they could forfeit some or all of the employer-contributed money in the 401(k) account. The amount an employee gets to keep is the vested balance. Other qualified defined contribution plans, such as 401(a) or 403(b) plans, may also be subject to vesting schedules.

💡 Recommended: What Happens to Your 401(k) When You Leave a Job?

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1


1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Importance of 401(k) Vesting

401(k) vesting is important because it determines when an employee can keep the employer’s matching contributions to their retirement account. Vesting schedules can vary, but typically after an employee has been with a company for a certain number of years, they will be 100% vested in the employer’s contributions.

401(k) Vesting Eligibility

401(k) vesting eligibility is the time an employee must work for their employer before they are eligible to receive the employer’s contribution to their 401(k) retirement account. The vesting period varies depending on the employer’s plan.

401(k) Contributions Basics

Before understanding vesting, it’s important to know how 401(k) contributions work. A 401(k) is a tax-advantaged, employer-sponsored retirement plan that allows employees to contribute a portion of their salary each pay period, usually on a pre-tax basis.

For tax year 2024, employees can contribute up to $23,000 annually in their 401(k) accounts, with an extra $7,500 in catch-up contributions allowed for those age 50 or older. For tax year 2025, employees can contribute up to $23,500, with an extra $7,500 in catch-up contributions allowed for those age 50 or older. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

The Internal Revenue Service (IRS) also allows employers to contribute to their employees’ plans. Often these contributions come in the form of an employer 401(k) match. For example, an employer might offer matching contributions of 3% or 6% if an employee chooses to contribute 6% of their salary to the 401(k).

In 2024, the total contributions that an employee and employer can make to a 401(k) is $69,000 ($76,500 including catch-up contributions). In 2025, the total contributions that an employee and employer can make to a 401(k) is $70,000 ($77,500 including standard catch-up contributions, and $81,250 with SECURE 2.0 catch-up for those aged 60 to 63).

Employer contributions are a way for businesses to encourage employees to save for retirement. They’re also an important benefit that job seekers look for when searching for new jobs.

💡 Recommended: How To Make Changes to Your 401(k) Contributions

Benefits of 401(k) Vesting

There are several benefits of 401(k) vesting, including ensuring that employees are more likely to stay with a company for the long term because they know they will eventually vest and be able to keep the money they have contributed to their 401(k). Additionally, it incentivizes employees to contribute to a 401(k) because they know they will eventually be fully vested and be entitled to all the money in their account.

401(k) vesting also gives employees a sense of security, knowing they will not lose the money they have put into their retirement savings if they leave their job.

Drawbacks of 401(k) Vesting

While 401(k) vesting benefits employees, there are also some drawbacks. For one, vesting can incentivize employees to stay with their current employer, even if they want to leave their job. Employees may be staying in a job they’re unhappy with just to wait for their 401(k) to be fully vested.

Also, using a 401(k) for investing can create unwanted tax liability and fees. When you withdraw money from a 401(k) before age 59 ½, you’ll typically have to pay a 10% early withdrawal penalty and taxes. This can eat into the money you were hoping to use for retirement.

How Do I Know if I Am Fully Vested in my 401(k)?

If you’re unsure whether or when you will be fully vested, you can check their plan’s vesting schedule, usually on your online benefits portal.

Immediate Vesting

Immediate vesting is the simplest form of vesting schedule. Employees own 100% of contributions right away.

Cliff Vesting

Under a cliff vesting schedule, employer contributions are typically fully vested after a certain period of time following a job’s start date, usually three years.

Graded Vesting

Graded vesting is a bit more complicated. A percentage of contributions vest throughout a set period, and employees gain gradual ownership of their funds. Eventually, they will own 100% of the money in their account.

For example, a hypothetical six-year graded vesting schedule might look like this:

Years of Service

Percent Vested

1 0%
2 20%
3 40%
4 60%
5 80%
6 100%

Why Do Employers Use Vesting?What Happens If I Leave My Job Before I’m Fully Vested?

If you leave your job before being fully vested, you forfeit any unvested portion of their 401(k). The amount of money you’d lose depends on your vesting schedule, the amount of the contributions, and their performance. For example, if your employer uses cliff vesting after three years and you leave the company before then, you won’t receive any of the money your employer has contributed to their plan.

If, on the other hand, your employer uses a graded vesting schedule, you will receive any portion of the employer’s contributions that have vested by the time they leave. For example, if you are 20% vested each year over six years and leave the company shortly after year three, you’ll keep 40% of the employer’s contributions.

Other Common Types of Vesting

Aside from 401(k)s, employers may offer other forms of compensation that also follow vesting schedules, such as pensions and stock options. These tend to work slightly differently than vested contributions, but pensions and stock options may vest immediately or by following a cliff or graded vesting schedule.

Stock Option Vesting

Employee stock options give employees the right to buy company stock at a set price at a later date, regardless of the stock’s current value. The idea is that between the time an employee is hired and their stock options vest, the stock price will have risen. The employee can then buy and sell the stock to make a profit.

Pension Vesting

With a pension plan, vesting schedules determine when employees are eligible to receive their full benefits.

How Do I Find Out More About Vesting?

There are a few ways to learn more about vesting and your 401(k) vested balance. This information typically appears in the 401(k) summary plan description or the annual benefits statement.

Generally, a company’s plan administrator or human resources department can also explain the vesting schedule in detail and pinpoint where you are in your vesting schedule. Understanding this information can help you know the actual value of your 401(k) account.

The Takeaway

While any employee contributions to 401(k) plans are immediately fully vested, the same is not always true of employer contributions. The employee may gain access to employer contributions slowly over time or all at once after the company has employed them for several years.

Understanding vesting and your 401(k)’s vesting schedule is one more piece of information that can help you plan for your financial future. A 401(k) and other retirement accounts can be essential components of a retirement savings plan. Knowing when you are fully vested in a 401(k) can help you understand how much money might be available when you retire.

There are many ways to save for retirement, including opening a traditional or Roth IRA. To get started with those, you can open an online retirement account on the SoFi Invest® platform.

Find out more about investing with SoFi today.

FAQ

What does 401(k) vesting mean?

401(k) vesting is when an employee becomes fully entitled to the employer’s matching contributions to the employee’s 401(k) account. Vesting typically occurs over a period of time, such as five years, and is often dependent on the employee remaining employed with the company.

What is the vesting period for a 401(k)?

The vesting period is the amount of time an employee must work for an employer before they are fully vested in the employer’s 401(k) plan. This period is different for each company, but generally, the vesting period is between three and five years.

How does 401(k) vesting work?

Vesting in a 401(k) plan means an employee has the right to keep the employer matching contributions made to their 401(k) account, even if they leave the company. Vesting schedules can vary, but most 401(k) plans have a vesting schedule of three to five years.


SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

SOIN0622047

Read more

Health Care Costs in Retirement: How to Plan Ahead

When planning for retirement, people often assume Medicare will cover their medical bills, but in fact many retirees will face out-of-pocket costs that, over time, could reach into the six figures.

While it’s difficult to predict for sure what your actual health care costs in retirement will be — especially in light of today’s longevity — it’s wise to work with a ballpark figure in order to create a safety net of savings that will cover you, no matter what your needs will be in the years to come.

Key Points

•   Planning for retirement should take health care costs into account, such as potential out-of-pocket costs and long-term care.

•   According to research, the average 65-year-old individual may need $165,000 in savings to cover medical expenses in retirement (and double that amount for couples).

•   Medicare covers medical costs such as preventive care, doctor visits, prescription drugs, inpatient hospital stays, short-term rehab, and hospice.

•   Medicare Advantage Plans are Medicare-approved, private insurance plans that may cover medical basics as well as other expenses, such as vision, hearing, and dental.

•   Health savings accounts (HSAs) and long-term care insurance can help pay for medical expenses not covered by Medicare.

Health Care in Retirement

The cost of health care in retirement can be overwhelming. According to the annual Fidelity Retiree Health Care Cost Estimate in 2024, a typical retired couple aged 65 could spend as much as $330,000 in after-tax savings on medical expenses during the course of their retirement.

That figure doesn’t include related health costs such as dental services, over-the-counter medications, or long-term care — which are not currently covered by original Medicare.

Long-term care expenses can be especially onerous, with the median cost of a private room in a nursing home running about $116,800 per year, according to the 2023 Genworth Cost of Care Survey. This, too, is an expense that many people may need to factor into their retirement plans, given the growing number of people living into their 80s and 90s — or longer.

This “new longevity,” as it’s sometimes called, may also lead to additional health-related costs down the line that are difficult to anticipate now, but require educated estimates nonetheless — especially for women, who live on average about five years longer than men.

Recommended: Different Types of Retirement Accounts

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1


1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

How Much to Budget for Health Care Costs in Retirement

To create a realistic plan for retirement, and make optimal financial decisions about investing for retirement, insurance coverage, and the timing of important government benefits — the starting point is to look at how much money will be coming in, and how much will be going out to pay for likely health issues.

Social Security Benefits

While Social Security benefits depend on an individual’s work history, as well as the age when they first file for Social Security, the key thing to know about this source of income is that it’s limited. The average monthly payout, starting in January 2024, was $1,907. And the maximum possible benefit amount is $3,822 per month, for those who retire at full retirement age in 2024, and the maximum possible benefit is $4,018 per month for those who retire at full retirement age in 2025.

Individuals can file for Social Security starting at age 62, generally speaking, but “full retirement age” is 67 for those born in 1960 and later. To get a more accurate estimate of your own benefit amount, go to SSA.gov.

Private Sources of Income

Fortunately, most retirees also have savings or a pension, which can add to their income. Nearly 80% of retirees reported having one or more sources of private income, in addition to Social Security, according to the Economic Well-Being of U.S. Households in 2022, by the Federal Reserve Board.

For example, you may have opened a retirement account like an IRA or an employer-sponsored plan, such as a 401(k), that may offer an additional source of income.

If you’re freelance or a small business owner, you may have a SEP IRA or a SIMPLE IRA — common retirement plan options for the self-employed.

The point is to have a grasp of your income sources in retirement, as well as your anticipated cash flow, so that you can cover medical costs in retirement.

Understanding Health Care Costs

As costs vary considerably depending on one’s region, age, and overall health, it can be difficult to estimate the precise amount to set aside for health care in retirement.

Start by assessing your overall health today, and speaking to your doctor(s) about any chronic conditions, genetic predispositions, and any other risk factors that could impact the care you need as you get older.

Unfortunately, there’s almost no way to predict with any accuracy the types of conditions or care you might need, or what they will cost, when preparing for retirement. But in some cases this thought exercise may help you anticipate some upcoming costs, so you can factor that into your overall estimate.

Of course, not all of your medical costs in retirement will be out of pocket; Medicare (and Medicaid, if you qualify) cover many medical expenses. But this insurance is another expense to factor in.

What Does Medicare Cost, What Does It Cover?

Medicare is a medical insurance program offered by the federal government for those 65 years and older, and those who are disabled. Medicare will pay certain health care expenses in retirement, but with restrictions. Dental, vision, and hearing care, including hearing aids, are not covered by Original Medicare, generally known as Parts A and B.

Also, as noted above: Medicare does not cover long-term care, like an assisted living or nursing home facility.

Note that you must apply for Medicare benefits within a certain window, or risk being penalized with higher premiums. Generally, the Initial Enrollment period begins three months before you turn 65, and it ends three months after the month in which you turned 65. Some exceptions apply (for example, if you have health insurance through your employer, or were affected by a natural disaster).

Be sure to check the terms that might apply to your situation to avoid a penalty.

Understanding Medicare Coverage

The following terms generally apply to those with a modified adjusted gross income (MAGI) over $103,000, or $206,000 for a married couple. If your premium is subject to an income adjustment, it could be as high as $594 per month (though according to the Centers for Medicare and Medicaid Services (CMS), the highest rate generally applies to people with incomes over $500,000, or $750,000 for a married couple).

•   Medicare Part A covers inpatient hospital stays and treatment, as well as skilled nursing care (i.e. short-term rehab), limited in-home care and hospice. As long as you or your spouse had sufficient Medicare taxes withheld through your job (generally at least 10 years), you won’t pay a monthly premium for Part A. The deductible for Part A is $1,632 in 2024 and $1,676 in 2025.

•   Medicare Part B covers outpatient care, preventive care, and visits to doctors. The monthly premium for Part B is about $174 per month, with a roughly $240 annual deductible in 2024. In 2025, the monthly premium for Part B is $185 per month, with an annual deductible of $257.

•   Medicare Part D covers prescription drugs. The monthly premium is about $55.50 in 2024 and about $57 in 2025.

Medicare Part C, or Medicare Advantage Plans, is a bit of a separate case. Medicare Advantage plans are private insurance plans that are Medicare-approved, and may cover vision, hearing, or dental needs, as well as the medical basics and prescriptions covered by Parts A, B, and D. Medicare Advantage plans are optional.

While the Advantage Plans are designed to fill in certain gaps in coverage, you want to make sure the costs are manageable, and that you’re not paying for overlapping policies.

Medicare Costs

In other words, assuming at least one hospital stay that requires you to pay the deductible, the basic cost of Medicare alone is about $4,600 per year. Again, that doesn’t include:

•   Vision care

•   Dental care

•   Hearing care or hearing aids

•   Long-term care

Most people will need some or all of those types of health care as they get older, which could add to your potential out-of-pocket expenses over time, and speaks to the need for some emergency savings.

Other Ways to Pay for Health Care

In addition to Medicare, there are other ways to pay for medical expenses during retirement, including HSA accounts and long-term care insurance.

Health Savings Account (HSA)

When choosing a health insurance plan before you retire, consider one that comes with a health savings account (HSA) that may help you save money for retirement medical expenses. These accounts generally come with high-deductible health plans (HDHPs), and provide three substantial tax benefits:

•   Contribution deductions

•   Tax-deferred growth

•   Withdrawals without taxation for qualified medical costs

The accounts take pre-tax deposits to cover health care costs that are not covered by insurance. The unspent money in an HSA rolls over from year to year. Most important, the money in an HSA account belongs to you, even when you are no longer participating in the original high-deductible plan.

What Your HSA Savings May Cover

HSA funds can be used to pay for a variety of medical expenses in retirement. For instance, prescription drugs, eyeglasses, hearing aids, and other medical supplies can generally be purchased with HSA funds.

Additionally, you can use HSA savings to cover deductibles and co-payments for medical care. Medicare premiums and long-term care insurance premiums can also be covered using HSA funds.

By utilizing catch-up payments and employer contributions, those who are already over 50 can still get the most out of these programs. A catch-up payment of $1,000 per year, in addition to the maximum contribution limit, is allowed for people 55 and older. One can use an HSA to pay for yearly physicals or other preventative exams covered by an HDHP.

A benefit of utilizing an HSA to cover medical expenses in retirement is that the money in the account can be invested, allowing it to increase in value over time. This might be helpful for people who wish to have a dedicated source of savings to cover medical bills.

It’s worth noting that funds in an HSA must be used for qualified medical expenses in order to be withdrawn tax-free. It’s a good idea to consult a tax professional or review IRS guidelines to ensure that HSA funds are being used appropriately.

Long-Term Care Insurance

Another approach to bridge the Medicare gap is to get long-term care insurance. This kind of insurance can provide a monthly benefit for long-term care, either for a few years or for the rest of one’s life.

The expenses of long-term care such as in-home care, assisted living, and nursing facility care, can be covered in part by long-term care insurance. These services are often required by people who are unable to do activities of daily living on their own, such as eating, dressing, or bathing, due to a chronic disease or disability.

That said, these policies can be complex, as well as expensive, and it may be wise to consult with a professional before purchasing coverage.

The Takeaway

Medical expenses can be a large portion of one’s retirement budget. As daunting as it may seem, calculating these expenditures ahead of time and developing an insurance and spending plan will help you save more of your retirement funds for other needs.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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

FAQ

How much does the average person spend on health care in retirement?

Health care costs depend on a variety of factors, but on average a healthy person over age 65 could spend as much as $165,000 during their retirement ($330,000 per couple).

How do I prepare for health care expenses in retirement?

A few ways to prepare include making a retirement budget, saving in a retirement account, funding a health savings account while still employed, making sure to get adequate medical insurance through Medicare and/or private Advantage plans once you turn 65. You may want to consider long-term care insurance as well.

How do I save for out-of-pocket medical expenses?

Ways to save on out-of-pocket medical expenses include shopping around for the best prices on health care services, making use of preventive care services to help reduce the need for more expensive treatments in the future, and purchasing insurance to help cover unexpected medical costs. In addition, funding a health savings account (HSA) when it’s offered is a tax-advantaged way to set aside money for health care costs.


Photo credit: iStock/jacoblund

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

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.
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.

SOIN0522016

Read more
TLS 1.2 Encrypted
Equal Housing Lender