Understanding the Different Types of Retirement Plans

Types of Retirement Plans and Which to Consider

Retirement will likely be the most significant expense of your lifetime, which means saving for retirement is a big job. This is especially true if you envision a retirement that is rich with experiences such as traveling through Europe or spending time with your grown children and grandkids. A retirement savings plan can help you achieve these financial goals and stay on track.

There are all types of retirement plans you may consider to help you build your wealth, from 401(k) to Individual Retirement Accounts (IRAs) to annuities. Understanding the nuances of these different retirement plans, like their tax benefits and various drawbacks, may help you choose the right mix of plans to achieve your financial goals.

Key Points

•   There are various types of retirement plans, including traditional and non-traditional options, such as 401(k), IRA, Roth IRA, SEP IRA, and Cash-Balance Plan.

•   Employers offer defined contribution plans (e.g., 401(k)) where employees contribute and have access to the funds, and defined benefit plans (e.g., Pension Plans) where employers invest for employees’ retirement.

•   Different retirement plans have varying tax benefits, contribution limits, and employer matches, which should be considered when choosing a plan.

•   Individual retirement plans like Traditional IRA and Roth IRA provide tax advantages but have contribution restrictions and penalties for early withdrawals.

•   It’s possible to have multiple retirement plans, including different types and accounts of the same type, but there are limitations on tax benefits based on the IRS regulations.

Types of Retirement Accounts

There are several different types of retirement plans, including some traditional plan types you may be familiar with as well as non-traditional options.

Traditional retirement plans can be IRAs or 401(k)s. These tax-deferred retirement plans allow you to contribute pre-tax dollars to an account. With a traditional IRA or 401(k), you only pay taxes on your investments when you withdraw from the account.

Non-traditional retirement accounts can include Roth 401(k)s and IRAs, for which you pay taxes on funds before contributing them to the account.

Here’s information about some of the most common retirement plan types:

•   401(k)

•   403(b)

•   Solo 401(k)

•   SIMPLE IRA (Savings Incentive Match Plan for Employees)

•   SEP Plan (Simplified Employee Pension)

•   Profit-Sharing Plan (PSP)

•   Defined Benefit Plan (Pension Plan)

•   Employee Stock Ownership Plan (ESOP)

•   457(b) Plan

•   Federal Employees Retirement System (FERS)

•   Cash-Balance Plan

•   Nonqualified Deferred Compensation Plan (NQDC)

•   Multiple Employer Plans

•   Traditional Individual Retirement Accounts (IRAs)

•   Roth IRAs

•   Payroll Deduction IRAs

•   Guaranteed Income Annuities (GIAs)

•   Cash-Value Life Insurance Plan

💡 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.

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


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Retirement Plans Offered by Employers

There are typically two types of retirement plans offered by employers:

•   Defined contribution plans (more common): The employee invests a portion of their paycheck into a retirement account. Sometimes, the employer will match up to a certain amount (e.g. up to 5%). In retirement, the employee has access to the funds they’ve invested. 401(k)s and Roth 401(k)s are examples of defined contribution plans.

•   Defined benefit plans (less common): The employer invests money for retirement on behalf of the employee. Upon retirement, the employee receives a regular payment, which is typically calculated based on factors like the employee’s final or average salary, age, and length of service. As long as they meet the plan’s eligibility requirements, they will receive this fixed benefit (e.g. $100 per month). Pension plans and cash balance accounts are common examples of defined benefit plans.

Let’s get into the specific types of plans employers usually offer.

401(k) Plans

A 401(k) plan is a type of work retirement plan offered to the employees of a company. Traditional 401(k)s allow employees to contribute pre-tax dollars, where Roth 401(k)s allow after-tax contributions.

•   Income Taxes: If you choose to make a pre-tax contribution, your contributions may reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers allow you to make after-tax or Roth contributions to a 401(k). You should check with your employer to see if those are options.

•   Contribution Limit: $22,500 in 2023 for the employee; people over the age of 50 can contribute an additional $7,500.

•   Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. There is a significantly higher limit than with Traditional IRA and Roth IRA accounts.

•   Cons: With a 401(k) plan, you are largely at the mercy of your employer — there’s no guarantee they will pick plans that you feel are right for you or are cost effective for what they offer. Also the value of a 401(k) comes from two things: the pre-tax contributions and the employer match, if your employer doesn’t match, a 401(k) may not be as valuable to an investor. There are also penalties for early withdrawals before age 59 ½, although there are some exceptions, including for certain public employees.

•   Usually best for: Someone who works for a company that offers one, especially if the employer provides a matching contribution. A 401(k) retirement plan can also be especially useful for people who want to put retirement savings on autopilot.

•   To consider: Sometimes 401(k) plans have account maintenance or other fees. Because a 401(k) plan is set up by your employer, investors only get to choose from the investment options they provide.

💡 Recommended: Roth 401k vs Traditional 401k: Which Is Best for You?

403(b) Plans

A 403(b) retirement plan is like a 401(k) for certain individuals employed by public schools, churches, and other tax-exempt organizations. Like a 401(k), there are both traditional and Roth 403(b) plans. However, not all employees may be able to access a Roth 403(b).

•   Income Taxes: With a traditional 403(b) plan, you contribute pre-tax money into the account; the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers allow you to make after-tax or Roth contributions to a 403(b); the money will grow tax-deferred and you will not have to pay taxes on withdrawals in retirement. You should check with your employer to see if those are options.

•   Contribution Limit: $22,500 in 2023 for the employee; people over the age of 50 can contribute an additional $7,500. The maximum combined amount both the employer and the employee can contribute annually to the plan is generally the lesser of $66,000 or the employee’s most recent annual salary.

•   Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. Also, these plans often come with lower administrative costs because they aren’t subject to Employee Retirement Income Security Act (ERISA) oversight.

•   Cons: A 403(b) account generally lacks the same protection from creditors as plans with ERISA compliance.

•   To consider: 403(b) plans offer a narrow choice of investments compared to other retirement savings plans. The IRS states these plans can only offer annuities provided through an insurance company and a custodial account invested in mutual funds.

Solo 401(k) Plans

A Solo 401(k) plan is essentially a 1-person 401(k) plan for self-employed individuals or business owners with no employees, in which you are the employer and the employee. Solo 401(k) plans may also be called a Solo-k, Uni-k, or One-participant k.

•   Income Taxes: The contributions made to the plan are tax-deductible.

•   Contribution Limit: $22,500 in 2023 , or 100% of your earned income, whichever is lower, plus “employer” contributions of up to 25% of your compensation from the business. The 2023 total cannot exceed $66,000. (On top of that, people over age 50 are allowed to contribute an additional $7,500 in 2023.)

•   Pros: A solo 401(k) retirement plan allows for large amounts of money to be invested with pre-tax dollars. It provides some of the benefits of a traditional 401(k) for those who don’t have access to a traditional employer-sponsored 401(k) retirement account.

•   Cons: You can’t open a solo 401(k) if you have any employees (though you can hire your spouse so they can also contribute to the plan as an employee — and you can match their contributions as the employer).

•   Usually best for: Self-employed people with enough income and a large enough business to fully use the plan.

SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)

A SIMPLE IRA plan is set up by an employer, who is required to contribute on employees’ behalf, although employees are not required to contribute.

•   Income Taxes: Employee contributions are made with pre-tax dollars. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement.

•   Contribution Limit: $15,500 in 2023 . Employees aged 50 and over can contribute $19,000 in 2023.

•   Pros: Employers contribute to eligible employees’ retirement accounts at 2% their salaries, whether or not the employees do themselves. For employees who do contribute, the company will match up to 3%.

•   Cons: The contribution limits for employees are lower than in a 401(k) and the penalties for early withdrawals — up to 25% — before age 59 ½ are higher.

•   To consider: Only employers with less than 100 employees are allowed to participate.

💡 Recommended: Comparing the SIMPLE IRA vs. Traditional IRA

SEP Plans (Simplified Employee Pension)

This is a retirement account established by a small business owner or self-employed person for themselves (and if applicable, any employees).

•   Income Taxes: Your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on withdrawals in retirement.

•   Contribution Limit: For 2023, whichever is lower: $66,000 or 25% of earned income.

•   Pros: Higher contribution limit than IRA and Roth IRAs, and contributions are tax deductible for the business owner.

•   Cons: These plans are employer contribution only and greatly rely on the financial wherewithal and available cash of the business itself.

•   Usually best for: Self-employed people and small business owners who wish to contribute to an IRA for themselves and/or their employees.

•   To consider: Because you’re setting up a retirement plan for a business, there’s more paperwork and unique rules. When opening an employer-sponsored retirement plan, it helps to consult a tax advisor.

Profit-Sharing Plans (PSPs)

A Profit-Sharing Plan is a retirement plan funded by discretionary employer contributions that gives employees a share in the profits of a company.

•   Income taxes: Deferred; assessed on distributions from the account in retirement.

•   Contribution Limit: The lesser of 25% of the employee’s compensation or $66,000 in 2023. (On top of that, people over age 50 are allowed to contribute an additional $7,500 in 2023.)

•   Pros: An employee receives a percentage of a company’s profits based on its earnings. Companies can set these up in addition to other qualified retirement plans, and make contributions on a completely voluntary basis.

•   Cons: These plans put employees at the mercy of their employers’ profits, unlike retirement plans that allow employees to invest in securities issued by other companies.

•   Usually best for: Companies who want the flexibility to contribute to a PSP on an ad hoc basis.

•   To consider: Early withdrawal from the plan is subject to penalty.

Defined Benefit Plans (Pension Plans)

These plans, more commonly known as pension plans, are retirement plans provided by the employer where an employee’s retirement benefits are calculated using a formula that factors in age, salary, and length of employment.

•   Income taxes: Deferred; assessed on distributions from the plan in retirement.

•   Contribution limit: Determined by an enrolled actuary and the employer.

•   Pros: Provides tax benefits to both the employer and employee and provides a fixed payout upon retirement that many retirees find desirable.

•   Cons: These plans are increasingly rare, but for those who do have them, issues can include difficulty realizing or accessing benefits if you don’t work at a company for long enough.

•   Usually best for: Companies that want to provide their employees with a “defined” or pre-determined benefit in their retirement years.

•   To consider: These plans are becoming less popular because they cost an employer significantly more in upkeep than a defined contribution plan such as a 401(k) program.

Employee Stock Ownership Plans (ESOPs)

An Employee Stock Ownership Plan is a qualified defined contribution plan that invests in the stock of the sponsoring employer.

•   Income taxes: Deferred. When an employee leaves a company or retires, they receive the fair market value for the stock they own. They can either take a taxable distribution or roll the money into an IRA.

•   Contribution limits: Allocations are made by the employer, usually on the basis of relative pay. There is typically a vesting schedule where employees gain access to shares in one to six years.

•   Pros: Could provide tax advantages to the employee. ESOP plans also align the interests of a company and its employees.

•   Cons: These plans concentrate risk for employees: An employee already risks losing their job if an employer is doing poorly financially, by making some of their compensation employee stock, that risk is magnified. In contrast, other retirement plans allow an employee to invest in stocks in other securities that are not tied to the financial performance of their employer.

457(b) Plans

A 457 retirement plan is an employer-sponsored deferred compensation plan for employees of state and local government agencies and some tax-exempt organizations.

•   Income taxes: If you choose to make a pre-tax contribution, your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers also allow you to make after-tax or Roth contributions to a 401(k).

•   Contribution limits: The lesser of 100% of employee’s compensation or $22,500 in 2023 ; some plans allow for “catch-up” contributions.

•   Pros: Plan participants can withdraw as soon as they are retired at any age, they do not have to wait until age 59 ½ as with 401(k) and 403(b) plans.

•   Cons: 457 plans do not have the same kind of employer match as a 401(k) plan. While employers can contribute to the plan, it’s only up to the combined limit for individual contributions.

•   Usually best for: Employees of governmental agencies.

Federal Employees Retirement System (FERS)

The Federal Employees Retirement System (FERS) consists of three government-sponsored retirement plans: Social Security, the Basic Benefit Plan, and the Thrift Savings Plan.

The Basic Benefit Plan is an employer-provided pension plan, while the Thrift Savings Plan is most analogous to what private-sector employees can receive.

•   Income Taxes: Contributions to the Thrift Savings Plan are made before taxes and grow tax-free until withdrawal in retirement.

•   Contribution Limit: The contribution limit for employees is $22,500 in 2023 , and the combined limit for all contributions, including from the employer agency, is $66,000. Also, those over 50 are eligible to make an additional $7,500 in “catch-up” contributions.

•   Pros: These government-sponsored plans are renowned for their low administrative fees and employer matches.

•   Cons: Only available for federal government employees.

•   Usually best for: Federal government employees who will work at their agencies for a long period; it is comparable to 401(k) plans in the private sector.

Cash-Balance Plans

This is another type of pension plan that combines features of defined benefit and defined contribution plans. They are sometimes offered by employers that previously had defined benefit plans. The plans provide an employee an “employer contribution equal to a percent of each year’s earnings and a rate of return on that contribution.”

•   Income Taxes: Contributions come out of pre-tax income, similar to 401(k).

•   Contribution Limit: The plans combine a “pay credit” based on an employee’s salary and an “interest credit” that’s a certain percentage rate; the employee then gets an account balance worth of benefits upon retirement that can be paid out as an annuity (payments for life) or a lump sum. Limits depend on age, but for those over 60, they can be more than $250,000.

•   Pros: Can reduce taxable income.

•   Cons: Cash-balance plans have high administrative costs.

•   Usually best for: High earners, business owners with consistent income.

Nonqualified Deferred Compensation Plans (NQDC)

These are plans typically designed for executives at companies who have maxed out other retirement plans. These plans defer payments — and the taxes — you would otherwise receive as salary to a later date.

•   Income Taxes: Income taxes are deferred until you receive the payments at the agreed-upon date.

•   Contribution Limit: None

•   Pros: The plans don’t have to be entirely geared around retirement. While you can set dates with some flexibility, they are fixed.

•   Cons: Employees are not usually able to take early withdrawals.

•   Usually best for: Highly-paid employees for whom typical retirement plans would not provide enough savings compared to their income.

Multiple Employer Plans

A multiple employer plan (MEP) is a retirement savings plan offered to employees by two or more unrelated employers. It is designed to encourage smaller businesses to share the administrative burden of offering a tax-advantaged retirement savings plan to their employees. These employers pool their resources together to offer a defined benefit or defined contribution plan for their employees.

Administrative and fiduciary responsibilities of the MEP are performed by a third party (known as the MEP Sponsor), which may be a trade group or an organization that specializes in human resources management.

Compare Types of Retirement Accounts Offered by Employers

To recap retirement plans offered by employers:

Retirement Plans Offered by Employers

Type of Retirement Plan

May be Funded By

Pro

Con

401(k)Employee and EmployerContributions are deducted from paycheckLimited investment options
Solo 401(k)Employee and EmployerGood for self-employed peopleNot available for business owners that have employees
403(b)Employee and EmployerContributions are deducted from paycheckUsually offer a narrow choice of investment options
SIMPLE IRAEmployer and EmployeeEmployer contributes to accountHigh penalties for early withdrawals
SEP PlanEmployerHigh contribution limitsContributions are at the mercy of financial wherewithal of the employer
Profit-Sharing PlanEmployerCan be paired with other qualified retirement plansPlan is at the mercy of an employer’s profits
Defined Benefit PlanEmployerFixed payout upon retirementCan be difficult to access benefits
Employee Stock Ownership PlanEmployerAligns interest of a company and its employeesRisky for employees
457EmployeeYou don’t have to wait until age 59 ½ to withdrawDoes not have same employer match possibility like a 401(k)
Federal Employees Retirement SystemEmployee and EmployerLow administrative feesOnly available for federal government employees
Cash-Balance PlanEmployerCan reduce taxable incomeHigh administrative costs
Nonqualified Deferred Compensation PlanEmployerDon’t have to be retirement focusedEmployees are not usually able to take early withdrawals

Is your retirement piggy bank feeling light?

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Retirement Plans Not Offered by Employers

Traditional Individual Retirement Accounts (IRAs)

Individual retirement accounts (IRAs) are managed by the individual policyholder.

With an IRA, you open and fund the IRA yourself. As the name suggestions, it is a retirement plan for individuals. This is not a plan you join through an employer.

•   Income Taxes: You may receive an income tax deduction on contributions (depending on your income and access to another retirement plan through work). The balance in the IRA will always grow tax-deferred, and withdrawals will be taxed (the amount will vary depending on whether contributions were deductible or non-deductible).

•   Contribution Limit: $6,500 in 2023 , or $7,500 for people age 50 or over.

•   Pros: You might be able to lower your tax bill if you’re eligible to make deductible contributions. Additionally, the money will grow tax-deferred, which can make a difference over a long period of time. Finally, there are no income limits for contributing to a traditional IRA.

•   Cons: Traditional IRAs come with a number of restrictions, including how much can be contributed and when you can start withdrawals without penalty. Traditional IRAs are also essentially a bet on the tax rate you will be paying when you begin withdrawals after age 59 ½, as the accounts grow tax-deferred but are taxed upon withdrawal. Also, traditional IRAs generally mandate withdrawals starting at age 72.

•   Usually best for: People who can make deductible contributions and want to lower their tax bill, or individuals who earn too much money to contribute directly to a Roth IRA. Higher-income earners might not get to deduct contributions from their taxes now, but they can take advantage of tax-deferred growth between now and retirement. An IRA can also be used for consolidating and rolling over 401(k) accounts from previous jobs.

•   To consider: There is a 10% penalty for withdrawing funds before age 59 ½. You cannot deduct IRA contributions if you’re already covered by a retirement account through your work and earn more (according to your modified gross adjusted income) than $88,000 in 2023 (with a phase-out beginning at $73,000 in 2023).

Roth IRAs

A Roth IRA is another retirement plan for individuals that is managed by the account holder, not an employer.

•   Income Taxes: Roth IRA contributions are made with after-tax money, which means you won’t receive an income tax deduction for contributions. But your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.

•   Contribution Limit: $6,500 in 2023 , or $7,500 for people age 50 or over.

•   Pros: While contributing to a Roth IRA won’t lower your tax bill now, having the money grow tax-free and being able to withdraw the money tax-free down the road provides value in the future.

•   Cons: Like a traditional IRA, a Roth IRA has tight contribution restrictions. Unlike a traditional IRA, it does not offer tax deductions for contributions. As with a traditional IRA, there’s a penalty for taking some kinds of distributions before age 59 ½.

•   Usually best for: Someone who wants to take advantage of the flexibility to withdraw from an account during retirement without paying taxes. Additionally, it can be especially beneficial for people who are currently in a low income-tax bracket and expect to be in a higher income tax bracket in the future.

•   To consider: To contribute to a Roth IRA, you must have an earned income. Your ability to contribute begins to phase out when your income (specifically, your modified adjusted gross income) reaches $138,000 in 2023. As a joint filer, your ability to contribute to a Roth IRA phases out at $218,000 in 2023.

Payroll Deduction IRAs

This is either a traditional or Roth IRA that is funded through payroll deductions.

•   Income Taxes: For a Traditional IRA, you may receive an income tax deduction on contributions (depending on income and access to a retirement plan through work); the balance in the IRA will always grow tax-deferred, and withdrawals will be taxed (how much is taxed depends on if you made deductible or non-deductible contributions). For a Roth IRA, contributions are made with after-tax money, your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.

•   Contribution Limit: $6,500 in 2023 , or $7,500 for people age 50 or over.

•   Pros: Automatically deposits money from your paycheck into a retirement account.

•   Cons: The employee must do the work of setting up a plan, and employers can not contribute to it as with a 401(k). Participants can not borrow against the retirement plan or use it as collateral for loans.

•   Usually best for: People who do not have access to another retirement plan through their employer.

•   To consider: These have the same rules as a Traditional IRA, such as a 10% penalty for withdrawing funds before age 59 ½. Only employees can contribute to a Payroll Deduction IRA.

Guaranteed Income Annuities (GIAs)

Guaranteed Income Annuities are products sold by insurance companies. They are similar to the increasingly rare defined benefit pensions in that they have a fixed payout that will last until the end of life. These products are generally available to people who are already eligible to receive payouts from their retirement plans.

•   Income Taxes: If the annuity is funded by 401(k) benefits, then it is taxed like income. Annuities purchased with Roth IRAs, however, have a different tax structure. For “non-qualified annuities,” i.e. annuities purchased with after-tax income, a formula is used to determine the taxes so that the earnings and principal can be separated out.

•   Contribution Limit: Annuities do not have contribution limits.

•   Pros: These allow for payouts until the end of life and are fixed, meaning they’re not dependent on market performance.

•   Cons: Annuities are expensive; to buy an annuity, you’ll likely pay a high commission to a financial advisor or insurance salesperson.

•   Usually best for: People who have high levels of savings and can afford to make expensive initial payments on annuities.

Cash-Value Life Insurance Plan

Cash-value life insurance covers the policyholder’s entire life and has tax-deferred savings, making it comparable to other retirement plans. Some of the premium paid every month goes to this investment product, which grows over time.

•   Income Taxes: Taxes are deferred until the policy is withdrawn from, at which point withdrawals are taxed at the policyholder’s current income tax rate.

•   Contribution Limit: The plan is drawn up with an insurance company with set premiums.

•   Pros: These plans have a tax-deferring feature and can be borrowed from.

•   Cons: While you may be able to withdraw money from the plan, this will reduce your death benefit.

•   Usually best for: High earners who have maxed out other retirement plans.

Compare Types of Retirement Accounts Not Offered by Employers

To recap retirement plans not offered by employers:

Retirement Plans Not Offered by Employers

Type of Retirement Plan

Pro

Con

IRAContributions may be tax deductiblePenalty for withdrawing funds before age 59 ½
Roth IRADistributions are not taxedNot available for individuals with high incomes
Payroll Deduction IRAAutomatically deposits money from your paycheck into the accountParticipants can’t borrow against the plan
Guaranteed Income AnnuityNot dependent on market performanceExpensive fees and commissions
Cash-Value Life Insurance PlanTax-deferred savingsMay be able to withdraw money from the plan, but this will reduce death benefit

Specific Benefits to Consider

As you’re considering the different types of retirement plans, it’s important to look at some key benefits of each plan. These include:

•   the tax advantage

•   contribution limits

•   whether an employer will add funds to the account

•   any fees associated with the account

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Determining Which Type of Retirement Plan Is Best for You

Depending on your employment circumstances, there are many possible retirement plans in which you can invest money for retirement. Some are offered by employers, while other retirement plans can be set up by an individual.

Likewise, the benefits for each of the available retirement plans differ. Here are some specific benefits and disadvantages of a few different plans to consider.

With employer-offered plans like a 401(k) and 403(b), you have the ability to:

Take them with you. OIf you leave your job, you can roll these plans over into a plan with a new employer or an IRA.

Possibly earn a higher return. With these plans, you typically have more investment choices, including stock funds.

With retirement plans not offered by employers, like a SEP IRA, you may get:

A wider variety of investment options. You could have even more options to choose from with these plans, including those that may offer higher returns.

You may be able to contribute more. The contribution limits for some of these plans tend to be higher.

Despite their differences, the many different types of retirement accounts all share one positive attribute: utilizing and investing in them is an important step in saving for retirement.

Because there are so many retirement plans to choose from, it may be wise to talk to an expert to help you decide your financial plan.

Can You Have Multiple Types of Retirement Plans?

You can have multiple retirement savings plans, whether employer-provided plans like a 401(k), IRAs, or annuities. Having various plans can let you take advantage of the specific benefits that different retirement savings plans offer, thus potentially increasing your total retirement savings.

Additionally, you can have multiple retirement accounts of the same type; you may have a 401(k) at your current job while also maintaining a 401(k) from your previous employer.

Nonetheless, there are limitations on the tax benefits you may be allowed to receive from these multiple retirement plans. For example, the IRS does not allow individuals to take a tax deduction for traditional IRA contributions if they also have an employer-sponsored 401(k).

Opening a Retirement Investment Account With SoFi

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).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Why is it important to understand the different types of retirement plans?

Understanding the different types of retirement plans is important because of the nuances of taxation in these accounts. The various rules imposed by the Internal Revenue Service (IRS) can affect your contributions, earnings, and withdrawals. And not only does the IRS have rules around taxation, but also about contribution limits and when you can withdraw money without penalties.

Additionally, the various types of retirement plans differ regarding who establishes and uses each account and the other plan rules. Ultimately, understanding these differences will help you determine which combination of retirement plans is best for you.

How can you determine which type of retirement plan is best for you?

The best type of retirement plan for you is the one that best meets your needs. Many types of retirement plans are available, and each has its own benefits and drawbacks. When choosing a retirement plan, some factors to consider include your age, investing time horizon, financial goals, risk tolerance, and the fees associated with a retirement plan.


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Futures options can be a low-risk method to getting exposure to the futures market. Trading options on futures works like trading options on individual equities but rather than the underlying asset being a stock, it’s a futures contract.

In addition, there are other key differences for investors to bear in mind, including how futures are traded.

It is important to be aware of these differences, and familiarize yourself with key terms and understand how futures options work for buyers and sellers.

What Are Options on Futures?

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Key Terms to Know About Futures Options

Experienced options traders might be familiar with many of the primary terms of options on futures. New traders should understand these basics. Let’s investigate some key terms.

Premium

Premium is the amount you pay for calls and puts when you buy these instruments. Options sellers collect the premium at the initiation of a trade. The amount of premium paid or collected is determined by a variety of factors including the size of the underlying futures contract.

The lower the premium, the less the market believes a futures contract will be in-the-money by expiration.

Contract Months

Unlike stocks, options contracts have expiration dates. When trading options on futures there are two expiration dates to keep in mind: the expiration date of the futures option and the expiration date of the futures contract.

Options on futures pricing usually expire near the end of the month before physical delivery of the futures contract takes place.

In general, the longer the time until expiration, the more expensive the options will be.

Strike Price

The strike price on futures options is the price at which you can buy or sell the underlying futures contract.

For example, when you buy a call option on a futures contract with a strike price of $10, you have the right, but not the obligation, to buy the underlying futures contract at $10 on or before expiration for an American-style option.

Many futures options contracts are European-style, however, which means they can only be exercised on the expiration date and not before.

Most options are not exercised, rather they are closed in the market before expiration.

How Do Futures Options Work?

Futures options work very much like options on equity securities, but there are differences.

Let’s outline some of the specifics so you understand the mechanics of trading options on futures contracts.

Calls and Puts: Rights for Buyers

The buyer of a call option on a futures contract has the right to buy the underlying futures contract at a predetermined price and time. The buyer of a put option on a futures contract has the right to sell the underlying futures contract at a predetermined price and time.

Recommended: 10 Options Trading Strategies

Calls and Puts: Obligations for Sellers

The seller, or writer, of a call option on a futures contract is obligated to sell the underlying futures contract at a predetermined price and time. The seller of a put option on a futures contract has the obligation to buy the underlying futures contract at a predetermined price and time.

Be aware that most options on futures are cash-settled. That means the price difference is paid or received — there is no physical delivery of the futures contracts or assets with cash-settled options.

💡 Quick Tip: Options can be a cost-efficient way to place certain trades, because you typically purchase options contracts, not the underlying security. That said, options trading can be risky, and best done by those who are not entirely new to investing.

Pros and Cons of Options on Futures

Options and futures have benefits and drawbacks. Let’s clarify some of those.

Pros

A primary advantage of options on futures is that you can trade with high leverage. This means you put down a small amount of capital to access a large notional value of an asset. Small swings in price can lead to large moves in your account’s equity.

Another upshot is the options market on futures is open more hours than the stock market. You can trade overnight in many markets.

When you purchase options, the most you can lose is the premium you pay. When you sell options, you know what your max gain is: the premium received. For this reason, options on futures can be used to tailor an investment strategy based on your risk and reward objectives.

Cons

There are downsides to consider. For example, when you trade with high leverage, you expose yourself to a large loss potential.

You must also be aware of differences in options specifics in futures trading. For example, a $1 move on a futures index option could have a much greater impact on your account’s equity versus a $1 move on an equity option.

Finally, futures contracts are more complex than equity options. Each futures contract has unique specifications. It can be tough to understand all the futures contracts available to trade.

American-Style vs European-Style

American-Style

European-Style

The holder can exercise before expirationThe holder cannot exercise before expiration
Most options on equities are American-styleFutures contracts often have European-style options
Quarterly options on S&P 500 futures contracts, Eurodollar options, and Treasury optionsMost CME Group options on futures are European style

There is a third less common option, the Bermudan option. Bermudan options lie somewhere between American and European options — hence the name. The biggest difference is Bermudan options can be exercised on specified dates prior to expiration. These dates are laid out in the options contract.

Option Value vs Underlying Futures Value

The price impact on a futures option works just as options on stocks. Calls benefit from higher prices on the underlying asset while puts rise when the underlying price drops, all else equal.

Futures Price Change

Call Price Change

Put Price Change

IncreaseIncreaseDecrease
Decrease Decrease Increase

In-the-Money vs At-the-Money vs Out-of-the-Money

It is important to understand the moneyness of options when trading. Moneyness is simply the difference between an option’s strike price and the underlying asset’s price. Knowing the moneyness of an option can help you decide whether to exercise.

In-the-money options have intrinsic value and are priced more expensively than out-of-the-money options. Out-of-the-money options are often cheaper and can be accessed with a smaller amount of capital.

In-the-Money

At-the-Money

Out-of-the-Money

For calls, when the underlying asset’s price is above the strike For calls, when the underlying asset’s price at the strike For calls, when the underlying asset’s price is below the strike
For puts, when the underlying asset’s price is below the strike For puts, when the underlying asset’s price is at the strike For puts, when the underlying asset’s price is above the strike

Examples of Futures Options

You can find examples of futures options on many types of futures contracts. Stock market indexes and commodities are two markets that have options available to trade. Interest rate and foreign exchange markets also have futures markets with options. You can construct options strategies in these markets including defined-risk plays such as a collar in options.

The Takeaway

Options on futures allow investors to make bets on futures contracts with lower capital requirements than the futures themselves, which is also lower than the capital they’d need to trade the underlying asset. Instead, puts and calls are used.

So in that case, an option on a futures contract gives the holder the right, but not the obligation, to buy or sell a futures contract at a predetermined price usually on a pre-specified expiration date. Trading options and futures is a low risk way to access the futures market.

Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.

Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.

With SoFi, user-friendly options trading is finally here.

FAQ

Can you trade options on futures?

Yes, you will need to open an account with a broker that offers this type of trading. There might be high capital requirements to meet in order to open an option on a futures trading account.

How do you buy futures?

Futures contracts can be bought through a futures trading brokerage company or directly at an exchange. Most retail traders go through a brokerage company. Not all brokerage firms offer these products, however.

What is the difference between futures and options?

Futures obligate the buyer to purchase an asset and a seller to deliver that asset unless the option buyer’s position is closed by the expiration date.

Options give the buyer the right, but not the obligation, to buy or sell an asset at a specified price during the life of a contract, while potentially creating an obligation for the seller (of the option) to buy or sell the underlying asset if the buyer exercises that option.


Photo credit: iStock/Drs Producoes

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
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Do IPOs Offer Dividends?

Do IPOs Offer Dividends?

Some companies may have the financial means to make regular dividend payments before being listed on a public exchange, i.e. prior to their initial public offering, or IPO. A company may choose to offer this type of pre-IPO dividend in order to garner interest in the IPO if it anticipates a high valuation.

Dividends represent a percentage of a company’s profits that it pays out to shareholders. Dividends most commonly come from established companies, but it’s possible to collect an IPO dividend from up-and-coming companies as well.

Do IPOs Offer Dividends?

Most companies that are going public are doing so to raise capital and don’t necessarily have money to spare that they can pay out as special dividends or stock dividends.

However, some companies involved in the IPO process can pay dividends on a regular basis before and/or after going public, or they may pay a special one-time dividend. In either case, the dividends could serve as a useful incentive to attract and retain investors.

In general dividend-paying stocks and IPOs pay different roles in an investors’ portfolio. The former represents a steady source of income, while the latter holds the potential for capital appreciation through strategies such as the Dogs of the Dow, a strategy in which investors purchase the Dow Jones Industrial Average stocks with the highest dividend yield.

A simple way to know whether a pre-IPO company plans to offer a dividend is to review their registration documents. Companies must amend their S-1 registration form with the SEC if they plan to offer any type of dividend payment to investors. You can find S-1 forms through the SEC’s EDGAR database online.


💡 Quick Tip: Keen to invest in an initial public offering, or IPO? Be sure to check with your brokerage about what’s required. Typically IPO stock is available only to eligible investors.

REIT IPOs and Dividends

Typically, companies do not offer dividends as part of the IPO process. If you do find an IPO company that’s offering a dividend payment, it’s more likely to be a real estate investment trust (REIT) versus a more traditional company structure.

REITs are companies that own income-producing real estate investments and must pay out 90% of their taxable income to shareholders as dividends. Just like other companies, REITs can choose to go public in order to raise capital from investors.

REIT IPOs work a little differently than other IPOs in that there are additional filing requirements they have to meet under SEC rules, but otherwise the overall process is largely the same.

IPOs Explained

IPO stands for Initial Public Offering, and the event represents the first time a company makes its shares available for trade on a public exchange. This is often referred to as “going public”.

Companies launch IPOs, a process regulated to raise capital from investors. The Securities and Exchange Commission regulates the IPO process to ensure that the company has performed its due diligence, completed all of the appropriate paperwork, and established an accurate valuation of the IPO.

Investing in IPOs can offer an opportunity to diversify a portfolio while potentially getting in on the ground floor of a company poised for significant growth. It can, however, be risky as there are no guarantees whether an IPO stock will be a success — and even a successful IPO doesn’t necessarily predict how well a company will do over time.

For this reason, it can be difficult for individual investors to buy IPO stock when it’s first issued. In most cases, individuals can trade IPO shares on the secondary market through their brokerage.

IPO stocks are considered high-risk investments, and while some companies may present an opportunity for growth, there are no guarantees. Like investing in any other type of stock, it’s essential for investors to do their due diligence.


💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Dividends Explained

A dividend is a share of a company’s profits that’s paid out to shareholders, usually in cash. The company determines how frequently to make these payments to investors. For example companies may pay dividends on a monthly, quarterly, biannual or annual basis, or it can pay them on a one-time basis.

The amount an investor receives in dividends correlates to the amount of stock they own. Preferred stock shareholders receive first priority for dividend payouts, ahead of common stock shareholders. However, preferred stock shareholders do not have voting rights while common stock shareholders do.

Companies that offer dividends can decide whether to increase or decrease dividend payouts over time, depending on profitability. Companies that consistently increase dividend payouts over a period of 25 consecutive years or more are called Dividend Aristocrats. Companies that do so over a period of 50 consecutive years or more are called Dividend Kings.

Types of Dividends

Dividends can take different forms, depending on when and why a company pays them out to investors. When discussing IPOs and dividends, you’re typically talking about special dividends and stock dividends. Companies may use both to encourage investors to buy that their IPO is an investment opportunity, though they aren’t exactly the same in terms of what the investor is getting.

Special Dividends

Special dividends, also referred to as one-time dividends or extra dividends, are dividend payments made to investors outside the scope of regular dividend payments. A company that plans to go public may make a pre-IPO special dividend payment to its existing shareholders. The total value of the dividends paid may be equal to or less than the amount the company expects to be raised through the Initial Public Offering.

Dividends

Dividends are regular payments made in stock or via cash to shareholders out of a company’s profits. Cash dividends can increase the value of an investor’s holdings over time if the investor reinvests them in the stock. Again, the amount an investor receives in dividends depends on the company.

Dividends may go up when profits are up and drop when profits fall. But a high dividend payout alone is not a reason to consider investing in a company. It’s important to look at the company’s financials to determine whether that higher payout is sustainable over time.

Why Do Companies Give Dividends?

Companies offer dividends as a reward or incentive to attract new investors and retain existing ones. A company that offers a dividend regularly can attract income-focused investors. As long as the dividend payout sticks around, then the investors are likely to stick around as well. Of course, this assumes that a company is profitable and has the means to pay out dividends in the first place.

Dividends are less common among newer companies because they’re typically reinvesting any profits they realize into further growth. That doesn’t mean they won’t offer a dividend to investors later but for the near term, they may need every bit of profit to continue expanding.

The Takeaway

The purpose of most IPOs is to raise capital and generate buzz; paying shareholder dividends is more common with an initial public offering for a REIT than a traditional company IPO. In either case, the dividends could serve as an incentive to attract new investors.

The easiest way to know whether a pre-IPO company plans to offer a dividend is to review their registration documents by reading the S-1 registration form that’s been submitted to the SEC.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.


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

FAQ

What is an IPO dividend?

An IPO dividend is a dividend payout associated with a company’s Initial Public Offering. IPO companies can make special dividend payouts on a one-time basis or offer regular stock dividend payments to investors.

How do shareholders make money in an IPO?

Shareholders can make money in an IPO if they’re able to sell shares at a higher price than their initial offering price. Shareholders can also collect IPO dividend payments to supplement their profits.

Are dividends taxed?

Yes. The IRS considers dividends a form of taxable income. The tax rate that applies can depend on whether you have qualified or nonqualified dividends. The IRS taxes nonqualified dividends at ordinary income tax rates while qualified dividends follow the long-term capital gains tax rate structure.


Photo credit: iStock/LaylaBird

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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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Why You Should Start Retirement Planning in Your 20s

Why You Should Start Retirement Planning in Your 20s

When you’re in your 20s, the last thing on your mind may be the end of your career and the retirement that comes after. But thinking about retirement now can ensure your financial security in the future.

The longer you have to save for retirement, the better. Here’s why you should start thinking about retirement planning and investing in your 20s.

Main Reason to Start Saving for Retirement Early

When you start investing in your 20s, even if you begin with just a small amount, you have more time to build your nest egg. Typically, having a long time horizon means you have time to weather the ups and downs of the markets.

What’s more — and this is critical — the earlier you start saving, by opening a savings vehicle such as a high-yield savings account or a money market account, for instance, the more time you’ll have to take advantage of compound interest, which can help boost your ability to save. Compound interest is the reason small amounts of money saved now can go further than much larger amounts of money saved later. The more time you have, the more returns compound interest can deliver.

Compound Interest Example

Imagine you are 25 with plans to retire at 65. That gives you 40 years to save. If you save $100 a month in a money market account with an average annual return of 6% compounded monthly, at age 60, you would have saved about $200,244.

Now, let’s imagine that you waited for 30 years, until age 55 to start saving. You put $1,000 a month into a money market account. With an average annual return of 6% compounding monthly, you’d only have about $165,698 by the time you’re ready to retire, far less than if you’d started saving smaller amounts earlier.

The lesson? The longer you wait to start saving for retirement, the more money you’ll have to save later to make up the difference. Depending on your financial situation, it could be difficult to find these extra funds when you’re older.

Though it may not sound fun in your 20s to start putting money toward retirement, it may actually be easier in the long run.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How to Start Saving for Retirement in Your 20s

If you’re new to saving, starting a retirement fund requires a little bit of planning.

Step 1: Calculate how much you need to save

Set a goal. Consider your target retirement date and how long you’ll expect to be retired based on current life expectancy. What kind of lifestyle do you want to lead? And what do you expect your retirement expenses to be?

Step 2: Choose a savings vehicle

When it comes to where to put your savings, you have a number of options. For example, as of early August 2023, you could get around 4.5% APY on a high-yield savings account.

Many retirement savers also opt to use an investing account, such as a taxable brokerage account or tax-advantaged retirement savings account instead.

Keep in mind that investments in equities or other securities are riskier than savings accounts, but that allows for the possibility of better returns. Young investors may be better positioned than older investors to take on additional risk, since they have time to recover after a market decline. However, the amount of risk you’re willing to take on is an important consideration and a personal choice.

Step 3: Start investing

Once you’ve opened an account, your investment strategy depends on age, goals, time horizon and risk tolerance. For example, the longer you have before you retire, the more money you might consider investing in riskier assets such as stock, since you’ll have longer to ride out any rocky period in the market. As retirement approaches, you may want to re-allocate more of your portfolio to less risky assets, such as bonds.

Types of Retirement Plans

If you’re interested in opening a tax-advantaged retirement plan, there are three main account types to consider: 401(k)s and traditional IRAs, and Roth IRAs.

401(k)

A 401(k) is an employer sponsored retirement account that you invest in through your workplace, if your employer offers it. You make contributions to 401(k)s with pre-tax funds (meaning contributions lower your taxable income), usually deducted from your paycheck. Your 401(k) will typically offer a relatively small menu of investments from which you can choose.

Employers may also contribute to your 401(k) and often offer matching contributions. Consider saving enough money to at least meet your employer’s match, which is essentially free money and an important part of your total compensation.

Some companies also offer a Roth 401(k), which uses after-tax paycheck deferrals.

Individuals can contribute up to $22,500 in their 401(k) in 2023. And those aged 50 and up can make an additional catch-up contribution of $7,500.

Money invested inside a 401(k) grows tax-deferred, and you’ll pay regular income tax on withdrawals that you make after age 59 ½. If you take out money before then, you could owe both income taxes and a 10% early withdrawal penalty.

You must begin making required minimum distributions (RMDs) from your account by age 73.

Learn more: What Is a 401(k)?

Traditional IRA

Traditional IRAs are not offered through employers. Anyone can open one as long as they have earned income. Depending on your income and access to other retirement savings accounts, you may be able to deduct contributions to a traditional IRA on your taxes.

As with 401(k) contributions, you’d owe taxes on traditional IRA withdrawals after age 59 ½ and may have to pay taxes and a penalty on early withdrawals.

In 2023, traditional IRA contribution limits are $6,500 a year or $7,500 for those aged 50 and up. Compared to 401(k)s, IRAs offer individuals the ability to invest in a much broader range of investments. These investments can then grow tax-deferred inside the account. Traditional IRAs are also subject to RMDs at age 73.

Roth IRA

Unlike 401(k)s and traditional IRAs, savings go into Roth IRAs with after-tax dollars and provide no immediate tax benefit. However, money inside the account grows tax-free and it isn’t subject to income tax when withdrawals are made after age 59 ½.

You can also withdraw your principal (but not the earnings) from a Roth at any time without a tax penalty as long as the Roth has been open for five tax years. The first tax year begins on January 1 of the year the first contribution was made and ends on the tax filing deadline of the next year, such as April 15. Any contribution made during that time counts as being made in the prior year. So, for instance if you made your first contribution on April 10, 2023, it counts as though it were made at the beginning of 2022. Therefore, your Roth would be considered open for five tax years in January 2027.

Roths are not subject to RMD rules. Contribution limits are the same as traditional IRAs.


💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

Investing in Multiple Accounts

Individuals can have both a traditional and Roth IRA. But note the contribution limits apply to total contributions across both. So if you’re 25 and put $3,250 in a traditional IRA, you could only put up to $3,250 in your Roth as well.

You can also contribute to both a 401(k) and an IRA, however if you have access to a 401(k) at work you may not be able to deduct your IRA contributions.

Retirement Plan Strategies

The investment strategy you choose will depend largely on three things: your goals, time horizon and risk tolerance. These factors will help you determine your asset allocation, what types of assets you hold and in what proportion. Your retirement portfolio as a 20-something investor will likely look very different from a retirement portfolio of a 50-something investor.

For example, those with a high risk tolerance and long time horizon might hold a greater portion of stocks. This asset class is typically more volatile than bonds, but it also provides greater potential for growth.

The shorter a person’s time horizon and the less risk tolerance they have, the greater proportion of bonds they may want to include in their portfolio. Here’s a look at some portfolio strategies and the asset allocation that might accompany them:

Sample Portfolio Style

Asset allocation

Aggressive100% stocks
Moderately Aggressive 80% stocks, 20% bonds
Moderate60% stocks, 40% bonds
Moderately Conservative 30% stocks, 70% bonds
Conservative100% bonds

The Takeaway

Even if you don’t have a lot of room in your budget to start investing, putting away what you can as early as you can, can go a long way toward saving for retirement. As you start to earn more money, you can increase the amount of money that you’re saving over time.

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.

Photo credit: iStock/izusek


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.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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International IPOs for International Investors

International IPOs for International Investors

Private companies often choose to go public in the country that offers the brightest prospects for a successful IPO. Sometimes, that means getting listed on a stock exchange in the company’s home country — but sometimes it makes more sense to list in a foreign market.

So, while many U.S. investors focus primarily on domestic companies, it’s also possible to invest in an international IPO.

Likewise, foreign companies can choose to launch their IPO on U.S. stock exchanges, such as the New York Stock Exchange (NYSE) or Nasdaq. And in some cases, a company could choose to do both through a global IPO.

Investing in IPOs, international or domestic, may appeal to certain investors who want more geographic diversity within their portfolio, and understand the risks of doing so. Knowing how these IPOs work and where to find them is the first step.

What Are International IPOs?

An international IPO is an initial public offering from a private company that takes place outside of that company’s home country. For example, a company based in South Korea decides to go public but instead of listing on the Korea Exchange (KRX), it wants to list on an American exchange.

If the company successfully meets the regulatory requirements established by the Securities and Exchange Commission (SEC), it could move forward with an international IPO. International investors could then purchase shares of the company once it begins trading on the NYSE or Nasdaq.

In most cases, an investor must apply or qualify to buy IPO shares through their brokerage, as these stocks can be restricted in certain ways, limited in quantity, and come with a much higher risk level than other types of stocks.

There are a number of reasons and companies may choose an international IPO. Those include:

•   More lenient regulatory requirements for securities on a foreign exchange than those of the home country.

•   Better prospects for raising capital through an IPO on a foreign exchange.

•   More credibility versus listing on its home country’s exchange.

The most important thing to keep in mind with foreign companies that list on U.S. stock exchanges is that they must complete the IPO process just like a domestic company would.


💡 Quick Tip: IPO stocks can get a lot of media hype. But savvy investors know that where there’s buzz there can also be higher-than-warranted valuations. IPO shares might spike or plunge (or both), so investing in IPOs may not be suitable for investors with short time horizons.

Understanding IPOs

When discussing IPOs, “international” refers to public launches involving companies that are foreign to the market they plan to list in. But what is an IPO in general?

In simple terms, an IPO represents the first time that a private company allows investors to purchase shares on a public stock exchange.

Why do companies choose to go public? The answer can depend on the company and its overall business plan. In most cases, the answer is to raise capital so the company can continue to grow and expand. Companies don’t enter into the IPO process lightly, however, as it can be time-consuming and costly.

In the United States, the SEC regulates the IPO process. An IPO can take upwards of a year to complete, as the company moves through the various phases, including:

•   Due diligence

•   SEC review

•   Road show

•   Valuation

•   Launch

International IPO Funds

With domestic companies, it’s possible to purchase IPO stock on the day the company goes public, using an online brokerage account. In the case of companies that offer pre-IPO placements, it may also be possible to purchase shares before they’re made available to the market at large. Effectively, you’re investing in a private placement.

When investing in international IPOs, you may choose to invest through IPO mutual funds or international exchange-traded funds (ETFs) instead. You might go this route if you want more diversification, or if you don’t have access to IPO shares.

When comparing international IPO ETFs or international mutual funds, it’s important to consider a few things, including:

•   Underlying holdings (i.e. which sectors does the fund include, what countries does it offer exposure to)

•   Expense ratios

•   Management style (i.e. active versus passive)

With either type of fund, you’d also want to consider the track record and performance, particularly in the case of actively managed funds with a higher expense ratio. This can help you determine if a higher returns justify a higher expense ratio.


💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

International IPO ETFs

What is an exchange-traded fund (ETF)? An ETF is a type of pooled investment that combines features of both mutual funds and stocks. Essentially, it’s a mutual fund that trades on an exchange like a stock.

This feature makes ETFs different from mutual funds. However, like mutual funds, ETFs have an expense ratio that reflects the annual cost of owning the fund over the course of a year. ETFs can follow an active or passive management strategy, with some funds using an index-based approach.

For some investors, international ETFs that concentrate holdings on companies that go public in foreign markets could make sense since they provide diversified exposure to newly listed non-U.S. companies in a single investment vehicle.

International IPO Mutual Funds

Mutual funds are also pooled investments, meaning multiple investors contribute funds used to buy underlying securities. Each investor in the fund assumes a share of the fund’s earnings (or losses), based on the number of shares they own.

The key difference between mutual funds and exchange-traded funds is how they’re bought and sold. Rather than trading on an exchange like stocks, traders settle mutual fund transactions once a day.

Mutual funds that invest solely in international IPOs may be harder to come than international IPO ETFs. But there are mutual funds that focus on international holdings.

How to Find International IPOs to Invest In

You may be able to purchase international IPOs or international IPO funds through your brokerage account.

To find potential investments, you might use an online resource like the Nasdaq IPO calendar, which lists all upcoming IPO dates. This can help you identify potential investment opportunities for upcoming international IPOs or global IPOs. Investing websites that report on the latest market trends and news offer another way to gain information about foreign companies that are pursuing international IPOs.

Recommended: How to Find Upcoming IPO Stocks Before Listing Day

Key Things to Consider When Investing in International IPOs

If you’re looking to international IPO funds for investment, consider the following:

•   What the fund holds (both the companies and the geographies)

•   The expense ratio, or costs associated with the fund

•   The fund manager’s strategy (or the index it follows)

•   If you’re investing in multiple international IPO funds, consider whether there’s any overlap in the holdings that might reduce your diversification

Evaluating international IPOs is similar to evaluating domestic IPOs. The company’s prospectus provides important information about the offering. Though keep in mind that a red herring prospectus may not disclose full details about the company’s financials or organizational structure.

It’s also important to consider risk factors unique to a foreign company that could affect its IPO outcome. A company located in a country that’s experiencing geopolitical turmoil or economic impact related to climate change, for instance, may have a higher risk profile than a company that isn’t facing those types of threats. So getting familiar with a company’s economics, politics and geography may be helpful before investing in an international IPO.

The Takeaway

IPOs allow investors to get in on the ground floor of an up-and-coming company. Whether you choose to invest in domestic IPOs or international IPOs, it’s important to understand, however, that they can also represent a riskier investment than an established public company.

International IPOs come with their own special set of concerns. While qualified U.S. investors may have access to IPO shares, it’s important to read the prospectus of international companies carefully, understand the product and the market you’re investing in, and vet the terms of any IPO international stock before you choose to buy it.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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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