What Is a Bump-Up Certificate of Deposit?

What Are Bump-Up Certificates of Deposit? All You Need to Know

A bump-up certificate of deposit (CD), also known as a step-up CD or raise-your-rate CD, is a type of savings account that allows the account owner to “bump up” or increase the interest rate they earn if rates rise during the CD term. Typically, one bump up is allowed, and the other terms of the CD remain the same after that.

The initial interest rate of a bump-up CD is lower than other types of CDs, but it comes with the potential opportunity to earn a higher rate.

What Is a Bump-Up CD?

A bump-up certificate of deposit is a type of savings account that is similar to an ordinary CD in many ways.

If an investor opens a bump-up CD account, it will start out with a certain interest rate. The investor will be required to deposit a certain amount of money to open the account and agree to keep it there for a specified period. The major difference between a bump-up CD and a traditional CD is that the account owner can potentially increase the interest rate they earn if rates go up during the term of the CD. This bump up is typically allowed only once during the CD term.

How a Bump-Up CD Works

If, during the term of a CD, the issuer’s interest rates increase, the CD account owner can ask the issuing bank to raise the interest rate they earn on their CD. This is quite different from a standard savings account, where the account owner has no control over the interest rate. So if the initial rate on a bump-up CD is 4.00%, and during the maturity term the rate increases to 5.00%, the account holder can request a bump up to 5.00%.

If the interest rate drops to 4.50% sometime after that, the investor is protected and keeps their bump up to 5.00%.

Usually, interest rates can only be increased one time during a CD term, but some banks do offer multiple bump-ups if the term of the CD is long. Also important to note is that some banks may put a cap on how high the interest rate can be bumped on a CD. So if interest rates go up a lot, CD owners may not be able to fully take advantage. Generally, bump-up CDs have a two- to four-year term. Like a regular CD, these accounts are FDIC-insured.

Recommended: How to Invest in CDs

Example of a Bump-Up CD

Say an investor opens a bump-up CD with a two-year term and a rate of 4.00%. One year into the CD term, the issuing bank’s interest rates rise, and they now offer 5.00% on the same type of CD. The investor can request that the rate on their CD be increased to the new rate of 5.00% for the second year of its term.

In this example, if the investor deposited $10,000 into the CD when they opened it and earned 4.00% on their money for the full two-year term, by the end of the term they would have $10,816.00 at the maturity date. However, if they earned 4.00% for the first year and 5.00% for the second year, at the maturity date they would have $10,900.00, or about $84 more. That might not seem like a lot, but when you’re saving and investing for the future, every little bit helps.

Advantages of Bump-Up CDs

There are some benefits to bump-up CDs, including:

•   Ability to raise the CD’s interest rate during its maturity term instead of having to wait or open a new CD

•   The potential to get new, higher rates without any early withdrawal penalties

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Disadvantages of Bump-Up CDs

Bump-up CDs come with some drawbacks as well. Here are some to consider.

•   Since bump-up CDs typically allow only one bump up, they are recommended for investors who have a deep understanding of the interest-rate system and what might happen during their investment term.

•   The initial interest rate on bump-up CDs tends to be lower than other types of CDs. So even though there is the ability to raise the rate later, a traditional certificate of deposit may still earn more interest since it likely starts at a higher rate.

•   Interest rates may not go up during the CD term, locking the investor into the initial lower rate.

•   If interest rates do start to increase, timing the bump-up on a CD can be challenging. By bumping up earlier you can take advantage of a higher interest rate for more time, but you could miss out on an even higher rate that might come later.

How to Open a Bump-Up CD

Banks and credit unions offer bump-up CDs just like they offer checking and savings accounts. To open a bump-up CD, an investor deposits a certain amount, and the CD has a particular starting interest rate and term. Once the bump-up CD is open, the account owner can contact the issuing bank or credit union to increase the rate if it rises during the CD term. As mentioned, bump-up CDs typically offer the account holder just one opportunity to request a rate increase.

Factors to consider when opening a CD include:

•   Maturity term of the CD: Bump-up CDs tend to have longer terms than traditional CDs, such as two years or more.

•   Bump-up frequency: Does the CD offer the opportunity to bump up more than once? Many don’t but some may.

•   Initial interest rate: If interest rates don’t rise, the initial rate will be the ongoing rate throughout the CD term. And bump-up CDs tend to have lower interest rates to begin with.

•   Minimum deposit to open the account: Some bump-up CDs may require higher minimum deposits than traditional CDs, depending on the issuer.

•   Early withdrawal rules and penalties: Inquire with the financial institution what the consequences might be for cashing in the CD before the term ends.

•   Fees: Typically, there aren’t fees involved with CDs, but that isn’t always the case. Find out if there are any fees and how much they are.

Alternatives to Bump-Up CDs

There are several other types of interest-bearing deposit accounts and CD investment strategies that investors may want to consider, such as:

Traditional CD

A traditional CD has a fixed interest rate over the course of its maturity term. Traditional CDs often earn higher rates than bump-up CDs. They also usually have shorter terms.

CD Laddering

Since it can be hard to predict what will happen with interest rates in the future, another investing strategy is to create a CD ladder.

A CD ladder is a portfolio of CDs that each have a different interest rate and maturity term. This strategy provides an investor with a range of interest rates, allowing them to take advantage of changes in the market. Each time one of their CDs matures they have some funds to put into a new CD or cash out. Usually, a longer-term CD will have a higher rate, but by opening some shorter-term CDs as well, investors can put their money into new ones if interest rates increase, rather than opening a bump-up CD.

Here is an example of how an individual might set up a CD ladder with five rungs if they have $10,000 to invest:

•   $2,000 in a one-year CD

•   $2,000 in two-year CD

•   $2,000 in a three-year CD

•   $2,000 in a four-year CD

•   $2,000 in a five-year CD

As each CD matures, they can reinvest the funds into a new CD if interest rates are rising.

Step-Up CD

Similar to a bump-up CD, step-up CDs allow investors to take advantage of rising interest rates. The difference is, with a step-up CD, the issuer automatically raises the interest rates at certain intervals throughout the CD term. With a bump-up CD the rate is not automatically increased.

If you are looking for ways to bump up your savings, there are some other options in addition to CDs that you may want to consider. For instance, one way to potentially increase your savings is with a bank account with competitive rates, such as a high-yield savings account. You can shop around and explore the different savings options to see what might be right for you.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

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FAQ

What is an 18-month bump-up CD?

An 18-month bump-up CD is a certificate of deposit savings account that earns a certain amount of interest over the course of 18 months. If interest rates rise during that time, the account owner can request that the interest rate their CD earns be increased to the new rate.

When should I bump up my CD?

If you have a bump-up CD, you may want to consider a bump up when interest rates rise. However, remember that you are typically only allowed to bump up the rate once during the term of the CD. For this reason, bump-up CDs are generally best for investors who have a deep understanding of the interest-rate system and what might happen to rates during their CD term.

Who has bump-up CDs?

Bump-up CDs are typically offered by banks, online banks, and credit unions. You can explore bump-up CD options at different financial institutions to find one with the best rates and terms for you.


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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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Self-Directed IRA for Real Estate Investing Explained

A self-directed IRA (SIDRA) allows you to save money for retirement on a tax-advantaged basis while enjoying access to a broader range of investments. Opening a self-directed IRA for real estate investing is an opportunity to diversify your portfolio with an alternative asset class while potentially generating higher returns.

Using a self-directed IRA to invest in real estate offers the added benefit of either tax-deferred growth or tax-free withdrawals in retirement, depending on whether it’s a traditional or Roth IRA. Before making a move, however, it’s important to know how they work. The IRS imposes self-directed IRA real estate rules that investors must follow to reap tax benefits.

What Is a Self-Directed IRA?

Individual Retirement Accounts (IRAs) allow you to set aside money for retirement with built-in tax benefits. These retirement accounts come in two basic forms: traditional and Roth.

Traditional IRAs allow for tax-deductible contributions, while Roth IRAs let you make qualified distributions tax-free.

When you open a traditional or Roth IRA at a brokerage you might be able to invest in mutual funds, exchange-traded funds, or bonds. A self-directed IRA allows you to fund your retirement goals with alternative investments — including real estate.

You can do the same thing with a self-directed 401(k).

Self-directed IRAs have the same contribution limits as other IRAs. For 2024, you can contribute up to:

•   $7,000 if you’re under 50 years of age

•   $8,000 if you’re 50 or older

Contributions and withdrawals are subject to the same tax treatment as other traditional or Roth IRAs. The biggest difference between a self-directed IRA and other IRAs is that while a custodian holds your account, you manage your investments directly.

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SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.


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💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with an IRA account. With a traditional IRA, the money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

How Self-Directed IRAs for Real Estate Investing Work

Using a self-directed IRA to invest in real estate allows investors to invest in various funds or securities that, themselves, invest in property or real estate. Those securities may be real estate investment trusts (REITs), mutual funds, or ETFs focused. Investors with self-directed IRAs can, then, direct retirement account funds toward those securities.

Other types of real estate investments can include single-family homes, multi-family homes, apartment buildings, or commercial properties — actual, physical property. For investors who do want to buy actual property using an IRA, the process generally involves buying the property with cash (which may require them to liquidate other investments first), and then taking ownership, which would all transact through the IRA itself. It’s not necessarily easy and can be complicated, but that’s the gist of it.

With that in mind, the types of investments you can make within an IRA will depend on your goals.

For instance, if you’re interested in generating cash flow you might choose to purchase one or more rental properties using a self-directed IRA for real estate. If earning interest or dividends is the goal, then you might lean toward mortgage notes and REIT investing instead.

The most important thing to know is that if you use a retirement account to invest in real estate, there are some specific rules you need to know. For instance, the IRS says that you cannot:

•   Use your retirement account to purchase property you already own.

•   Use your retirement account to purchase property owned by anyone who is your spouse, family member, beneficiary, or fiduciary.

•   Purchase vacation homes or office space for yourself using retirement account funds.

•   Do work, including repairs or improvements, on properties you buy with your retirement account yourself.

•   Pay property expenses, such as maintenance or property management fees, from personal funds; you must use your self-directed IRA to do so.

•   Pocket any rental income, dividends, or interest generated by your property investments; all income must go to the IRA.

Violating any of these rules could cause you to lose your tax-advantaged status. Talking to a financial advisor can help you make sense of the rules.

Pros and Cons of Real Estate Investing Through an IRA

Using a self-directed IRA for real estate investing can be appealing if you’re ready to do more with your portfolio. Real estate offers diversification benefits as well as possible inflationary protection, as well as the potential for consistent passive income.

However, it’s important to weigh the potential downsides that go along with using a self-directed IRA to buy real estate.

Pros

Cons

•   Self-directed IRAs for real estate allow you to diversify outside the confines of traditional stocks, bonds, and mutual funds.

•   You can establish a self-directed IRA as a traditional or Roth account, depending on the type of tax benefits you prefer.

•   Real estate returns can surpass those of stocks or bonds and earnings can grow tax-deferred or be withdrawn tax-free in retirement, in some cases.

•   A self-directed IRA allows you to choose which investments to make, based on your risk tolerance, goals, and timeline.

•   The responsibility for due diligence falls on your shoulders, which could put you at risk of making an ill-informed investment.

•   Failing to observe self-directed IRA rules could cost you any tax benefits you would otherwise enjoy with an IRA.

•   The real estate market can be unpredictable and investment returns are not guaranteed — they’re higher-risk investments, typically. Early withdrawals may be subject to taxes and penalties, and there may be higher associated fees.

•   Self-directed IRAs used for real estate investing are often a target of fraudulent activity, which could cause you to lose money on investments.

Using a self-directed IRA for real estate or any type of alternative investment may involve more risk because you’re in control of choosing and managing investments. For that reason, this type of account is better suited for experienced investors who are knowledgeable about investment properties, rather than beginners.

Real Estate IRAs vs Self-directed IRAs For Real Estate Investing

A real estate IRA is another way of referring to a self-directed IRA that’s used for real estate investment. The terms may be used interchangeably and they both serve the same purpose when describing what the IRA is used for.

Again, the main difference is how investments are selected and managed. When you open a traditional or Roth IRA at a brokerage, the custodian decides which range of investments to offer. With a self-directed IRA, you decide what to invest in, whether that means investing in real estate or a different type of alternative investment.

💡 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.

Opening an IRA With SoFi

Opening a self-directed IRA is an option for many people, and the sooner you start saving for retirement, the more time your money has to grow. And, as discussed, a self-directed IRA allows you to save money for retirement on a tax-advantaged basis while enjoying access to a broader range of investments, including real estate.

Once again, using a self-directed IRA to invest in real estate offers the added benefit of tax-deferred growth and tax-free withdrawals in retirement. There are pros and cons, and rules to abide by, but these types of accounts are another option for investors.

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).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Can you use a self-directed IRA for real estate?

You can use a self-directed IRA to invest in real estate-related or -focused securities and other types of alternative investments. Before opening a self-directed IRA to invest in real estate, it’s important to shop around to find the right custodian. It’s also wise to familiarize yourself with the IRS self-directed IRA real estate rules.

What are the disadvantages of holding real estate in an IRA?

The primary disadvantage of holding real estate in an IRA is that there are numerous rules you’ll need to be aware of to avoid losing your tax-advantaged status. Aside from that, real estate is less liquid than other assets which could make it difficult to exit an investment if you’d like to remove it from your IRA portfolio.

What are you not allowed to put into a self-directed IRA?

The IRS doesn’t allow you to hold collectibles in a self-directed IRA. Things you would not be able to hold in a self-directed IRA include fine art, antiques, certain precious metals, fine wines, or other types of alcohol, gems, and coins.


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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.

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.

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

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.

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Choosing the Best IRA for Young Adults

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

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

Understanding IRAs

First things first, what is an IRA exactly? An IRA is a retirement savings account that allows you to save for the future over the long term. It typically also has tax advantages that may help you build your savings more efficiently.

There are several types of IRAs, but the two most common are traditional IRAs and Roth IRAs. The key difference between the two accounts is how they’re taxed. With a traditional IRA, you contribute pre-tax dollars. That means you take deductions on your contributions upfront, which may lower your taxable income for the year, and then pay taxes on the distributions when you take them in retirement.

With Roth IRAs, you contribute after-tax dollars. Your contributions are not tax deductible when you make them. However, you withdraw your money tax-free in retirement.

How much you can contribute to an IRA each year is determined by the IRS, and the amount generally changes annually. In 2024, those under age 50 can contribute a maximum of $7,000 to a traditional or Roth IRA. (Those 50 and up can contribute an extra $1,000 in 2024 in what’s called a catch-up contribution.) However, the contribution cannot exceed the individual’s earned income for the year. So if a child made $2,000 babysitting for the year, the most they could contribute is $2,000 to a Roth IRA that year.

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SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.


Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.

Factors to Consider & Eligibility

When choosing the best IRA for young adults, it’s important to consider your specific situation, the eligibility requirements, and what type of tax treatment would benefit you most.

Eligibility

The eligibility rules are different for traditional and Roth IRAs. One thing that’s not a requirement for either type is age — an individual of virtually any age can open an IRA as long as they have earned income for the year. How much money you make is another matter. Roth IRAs have income limits, while traditional IRAs do not.

How a Roth IRA works is that your modified adjusted gross income (MAGI) must be below a certain level to qualify for a Roth. In 2024, the limit on MAGI is $146,000 for those who are single. Single individuals who earn more than $146,000 but less than $161,000 can contribute a partial amount to a Roth, while those who earn more than $161,000 are not eligible to open or contribute to a Roth. For married couples who file taxes jointly, the limit in 2024 is $230,000 for a full contribution to a Roth, and between $230,000 to $240,000 for a partial contribution.

Young adults starting out in their career might be earning less than they will in the future — in fact, the average college grad salary for 2024 is projected to range from $61,000 to slightly more than $76,000, depending on the type of degree earned. So it could make sense for a young adult to open a Roth now when they may not have to worry about earning too much to qualify. In this case, a Roth might be the best IRA for young people.

Taxes

Another important factor to consider when looking at which IRA is best for young adults is taxes. For those who are currently in a lower tax bracket, the upfront tax deductions with a traditional IRA may not be as beneficial. On the other hand, a Roth, with its tax-free distributions in retirement, might be worth exploring, especially if the individual expects to be in a higher tax bracket in retirement.

With a traditional IRA, your income is important in determining how much of your contributions you can deduct. Deduction limits depend on your MAGI, whether you are single or married, your tax filing status, and if you’re covered by a retirement plan at work.

For instance, if you’re single and not covered by a retirement plan from your employer, you can deduct the entire amount you contribute to a traditional IRA in 2024. But if you’re covered by a workplace retirement plan, you can only deduct the full contribution limit if your MAGI is $77,000 or less. Those who earn $87,000 or more can’t take any deductions at all.

Individuals who are married filing jointly and aren’t covered by a retirement plan at work can deduct the full amount of their traditional IRA contributions. However, if their spouse is covered by a workplace retirement plan, they can only deduct the full amount of their contribution if their combined MAGI in 2024 is $230,000 or less. If their combined MAGI is $240,000 or more, they can’t take a deduction. And if they themselves are covered by a retirement plan at work, they can deduct the full amount of their contributions only if their combined MAGI is $123,000 or less. If their combined MAGI is $143,000 or more, they can’t take a deduction.

Withdrawals

Whether you choose a Roth or traditional IRA, the idea is to keep your money in the account without touching it until retirement, when you begin making withdrawals. In fact, both types of IRA accounts have early withdrawal penalties.

With a traditional IRA, individuals who take withdrawals before age 59 ½ will generally be subject to a 10% penalty, plus taxes. A Roth IRA typically offers more flexibility: Individuals may withdraw their contributions penalty-free at any time before age 59 ½. However, any earnings can typically only be withdrawn tax- and penalty-free once the individual reaches age 59 ½ and the account has been open for at least five years. This is known as the Roth IRA 5-year rule.

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

•   Death or disability of the individual who owns the account

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

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

•   Health insurance premiums paid while an individual is unemployed

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

Building a Strong Investment Strategy

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

Contribute to a 401(k) and an IRA.

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

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

Automate your contributions.

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

Understand your risk tolerance.

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

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

Diversify your investments.

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

Reassess your portfolio regularly.

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

Maximizing Your IRA Investments

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

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

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

Finally, when you change jobs, consider rolling over your 401(k) into an IRA (learn more about an IRA transfer vs. rollover). Once you’ve rolled the money over, you can choose how to invest it.

Considerations for Young Adults Looking to Start Investing

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

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

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

The Takeaway

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

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

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

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

What are the different types of IRAs?

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

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

Which IRA is suitable for young adults?

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

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

What factors should young adults consider when choosing an IRA?

Young adults should consider their current tax bracket and the tax bracket they expect to be in during retirement when choosing an IRA. If they’re in a low tax bracket now and anticipate that they’ll be in a higher tax bracket when they retire, a Roth IRA may make more sense since distributions are withdrawn tax-free in retirement. Conversely, if they’re in a higher tax bracket now than they expect to be in retirement, a traditional IRA may be a better option.

How can young adults maximize their IRA investments?

To maximize IRA investments, young adults should start contributing money to their IRA as early as possible. The longer their money has to compound, the bigger their IRA balance may grow over time. In addition, they should contribute as much as they can to their IRA each year, up to the annual limit ($7,000 for those under 50 in 2024).


Photo credit: iStock/andresr

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.

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

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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.

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What Is the Difference Between Money Market Accounts vs CDs?

Money Market Account vs Certificate of Deposit

Both certificates of deposit (CDs) and money market accounts (MMAs) are types of savings accounts that tend to earn higher interest rates than traditional savings accounts. But there are some key differences between them.

An MMA allows you to withdraw money as needed (and even comes with checks or a debit card), though you may be limited to a certain number of transactions per month. With a CD, on the other hand, your money is locked up for a set period of time. In exchange for leaving your money untouched, however, CDs generally pay higher rates than MMAs.

Whether you should choose a CD or MMA will depend on your financial needs and goals. To help you make the right choice, here’s a closer look at how these two savings options compare.

Main Differences Between Money Market Accounts and CDs

Here’s a quick snapshot of the differences between money market accounts and CDs.

Money Market Accounts CDs
Interest rates Variable; typically lower Fixed; typically higher
Liquidity Highly liquid Lacks liquidity (early withdrawal incurs a penalty, in most instances)
Minimum balance requirements Higher than regular savings accounts Varies by CD
Debit card/checks Yes No

Money Market Accounts

A money market account (MMA) is a type of savings account offered by banks and credit unions that provides some of the conveniences of a checking account. Like a typical savings account, you earn interest on your deposits, often at a higher rate than what you could earn in a traditional savings account. In addition, these accounts typically come with checks and/or a debit card, making it easier to access your funds.

Money market accounts may come with withdrawal limits (such as six or nine per month), however, so they aren’t designed to be used as a replacement for a checking account. MMAs also often require you to keep a certain minimum balance in order to avoid fees or earn the advertised annual percentage yield (APY).

The money you deposit in an MMA is insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), if held at an FDIC-insured bank, or by the National Credit Union Administration (NCUA), if held at an insured credit union. That means you can’t lose your money (up to certain limits) even if the bank were to go bankrupt or shut its doors.

Pros of Money Market Accounts

Here’s a look at some advantages of opening a money market account.

•   Higher interest rate: Typically, money market accounts have higher interest rates than traditional savings accounts.

•   Security: Because of the FDIC and NCUA insurance, the funds in a money market account are typically insured against loss.

•   Funds are liquid: You can withdraw your money when you need to (though you may be limited to a certain number of transactions per month).

•   Ease of access: It’s possible to access the funds in a money market account by withdrawing cash at an ATM, doing an electronic transfer, using a debit card, and/or writing checks.

Cons of Money Market Accounts

MMAs also have some disadvantages. Here are some to keep in mind.

•   Better rates may be available elsewhere: You may be able to find a high-yield savings account at an online bank that offers a higher APY than an MMA at a traditional bank (with potentially fewer restrictions and/or fees).

•   Minimum balance requirements: Banks often require a minimum deposit to open an MMA, as well as a minimum amount you must keep in the account in order to earn the top APY and/or or avoid a monthly maintenance fee.

•   Variable interest rate: APYs on MMAs are based on market interest rates at a given time. It’s difficult to predict how the market will perform and if this interest rate will rise or fall.

•   Limited growth potential: If you’re looking for long-term growth, you can potentially make more by investing your money in the market.

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!


Certificates of Deposits (CDs)

A certificate of deposit (CD) is a type of savings account that offers fixed interest rate that is generally higher than a traditional savings account. A CD also comes with a fixed-term length and a fixed maturity date. This means you need to leave the funds in a CD untouched for a set term, which can range anywhere from a few months to several years. Generally, the longer the CD’s term, the higher the APY, but this is not always the case.

CDs don’t charge monthly fees, but will typically have an early withdrawal penalty, and you usually can’t add any additional funds after the initial deposit.

CDs are offered by banks and credit unions: at credit unions, they are often referred to as share certificates. Like regular savings accounts, CDs are typically insured by the FDIC or NCUA, so you get your money back (up to $250,000) in the unlikely event that the bank or credit union were to go out of business.

Pros of CDs

Here’s a look at some of the advantages that come with depositing money into a CD.

•   Potentially higher rates: CDs tend to offer higher APYs than regular savings accounts and money market accounts.

•   Guaranteed rate of return: Because CDs typically have fixed rates for fixed terms, you know up front how much interest you will earn.

•   Security: Like other types of savings accounts, CDs are insured by either the FDIC or NCUA.

•   Convenience: It’s fairly easy to open a CD, since most banks and credit unions offer them.

Cons of CDs

There are also some disadvantages of CDs that you’ll want to bear in mind.

•   Relatively low returns: While CDs tend to earn more than a regular savings account, investing in stocks and bonds can be a better option if you’re looking to maximize your returns over the long term (though, unlike CDs, returns are not guaranteed).

•   Rates won’t go up: Because CDs come with fixed interest rates, the APY won’t go up even if market rates rise during the term of your CD (unless you open a bump-up CD).

•   No liquidity: Unlike other types of savings accounts, you can’t withdraw funds as needed. To benefit from a CD, you must wait until the CD term ends before you access your cash.

•   Withdrawal penalties: If you end up needing the money before the CD matures, you will likely incur an early withdrawal penalty.

When Should I Consider a Money Market Account or CD Over the Other?

MMAs and CDs have different requirements and benefits, and which one will serve you best will depend on your needs and preferences.

Choosing a Money Market Account Over a CD

A money market account may be a better choice than a CD if:

•   You want the option to add and withdraw money regularly. You can save money over time with a money market account. You can also withdraw the money at any time, though you may be subject to some restrictions.

•   You’re building an emergency fund. A money market account can be a good place to stash your emergency fund. You can likely maintain the minimum balance requirement and can benefit from the extra interest. Should you need the money, however, you can get it right away.

•   You’re saving for a large purchase. If you’re saving for a big ticket item like a car, a money market account will allow you to write a check from the account when you’ve reached your goal and it comes time to use those funds.

Choosing a CD Over a Money Market Account

A CD may be a better fit than a money market account if:

•   You have a longer-term savings goal. If you don’t need to use the money for a year or two, you may benefit from the higher returns offered by CD.

•   You want to make sure you don’t touch the money. If you’re setting aside money for a specific future expense, like a wedding or vacation, a CD helps insure you won’t impulsively spend it on something else.

•   You want some growth without risk. Unlike money invested in the market, the money you put into a CD is insured (up to certain limits) and the rate of return is guaranteed.

Recommended: How to Save Money: 33 Easy Ways

The Takeaway

Both money market accounts and CDs offer safe ways to earn more interest on your savings than you could in a traditional savings account. While money market accounts offer more flexibility and liquidity than CDs, CDs tend to offer higher APYs.

If you won’t need the money for a set period of time (say, six months to three years), and can find a good rate on a CD, you might be better off going with a CD over an MMA. If you may need to tap the funds at some point (but you’re not sure when), an MMA allows you to earn a higher-than-average interest rate while keeping the money liquid, with the added benefit of offering checks or a debit card.

Before choosing any type of savings account, however, it generally pays to shop around and compare current APYs. You may find another savings vehicle, such as a high-yield savings account, that offers the returns you want with minimal requirement, restrictions, or fees.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.60% APY on SoFi Checking and Savings.

FAQ

Are CDs or money markets better?

If you don’t need to access your funds for a while, a CD could be a better fit. CDs tend to offer higher interest rates than money market accounts, and the interest rate is fixed which makes the return predictable. Conversely, if you might need to draw on the funds in the near-term, an MMA may be a better route.

What are the tax implications of money market accounts vs. CDs?

With both certificates of deposit (CDs) and money market accounts (MMAs), the interest you earn is considered taxable income. You will receive a Form 1099-INT from your bank at the end of the year, which you must report on your tax return.

The Interest from CDs is typically taxed in the year it is earned, even if you don’t withdraw it until the CD matures. This means you might owe taxes on interest even if you haven’t received it yet. Interest on MMAs, however, is usually credited monthly and taxed in the year it is credited.

What are other options besides money market accounts and CDs?

Money market accounts and certificates of deposit (CDs) offer a low-risk way to earn a solid interest rate on your money. But they aren’t your only option. Here are some alternatives:

•   High-yield savings accounts. These accounts offer higher interest rates than traditional savings accounts and provide easy access to your funds with no fixed terms.

•   Treasury Securities. U.S. Treasury bills, notes, and bonds are government-backed securities that can offer competitive returns. They vary in term length and interest rate and are considered very safe investments.

•   Bond Funds. These mutual funds invest in a diversified portfolio of bonds, offering potentially higher returns than money market accounts and CDs, though they come with higher risk.


Photo credit: iStock/Vanessa Nunes

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.


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.

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