The Roth IRA 5-year rule is one of the rules that governs what an investor can and can’t do with funds in a Roth IRA. The Roth IRA 5-year rule comes into play when a person withdraws funds from the account; rolls a traditional IRA account into a Roth; or inherits a Roth IRA account.
Here’s what you need to know.
Key Points
• The Roth IRA 5-year rule requires accounts to be open for five years before earnings can be withdrawn tax-free after age 59 ½.
• Contributions to a Roth IRA can be withdrawn at any time without penalties.
• Exceptions to the 5-year rule include reaching age 59 ½, disability, and using funds for a first home purchase.
• Each conversion from a traditional IRA to a Roth IRA starts a new 5-year period for tax purposes.
• Inherited Roth IRAs also adhere to the 5-year rule, affecting the taxation of earnings withdrawals.
What Is the Roth IRA 5-Year Rule?
The Roth IRA 5-year rule pertains to withdrawals of earnings from a Roth IRA. A quick reminder of how a Roth works: An individual can contribute funds to a Roth IRA, up to annual limits. For 2025, the maximum IRS contrbution limit for Roth IRAs is $7,000, while investors 50 and older can contribute an extra $1,000. For 2026, the maximum contribution limit is $7,500, and investors ages 50 and older can contribute an addiitional $1,100.
Roth IRA contributions can be withdrawn at any time without tax or penalty, for any reason at any age. However, investment earnings on those contributions can only typically be withdrawn tax- and penalty-free once the investor reaches the age of 59 ½ — and as long as the account has been open for at least a five-year period. The five-year period begins on January 1 of the year you made your first contribution to the Roth IRA. Even if you make your contribution at the very end of the year, you can still count that entire year as year one.
Example of the Roth IRA 5-Year Rule
To illustrate how the 5-year rule works, say an investor opened a Roth IRA in 2022 to save for retirement. The individual contributed $5,000 to a Roth IRA and earned $400 in interest and they now want to withdraw a portion of the money. Since this retirement account is less than five years old, only the $5,000 contribution could be withdrawn without tax or penalty. If part or all of the investment earnings is withdrawn sooner than five years after opening the account, this money may be subject to a 10% penalty.
In 2027, the investor can withdraw earnings tax-free from the Roth IRA because the five-year period will have passed.
💡 Quick Tip: How much does it cost to open a new IRA account? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.
Exceptions to the 5-Year Rule
There are some exceptions to the Roth IRA 5-year rule, however. According to the IRS, a Roth IRA account holder who takes a withdrawal before the account is five years old may not have to pay the 10% penalty in the following situations:
• They have reached age 59 ½.
• They are totally and permanently disabled.
• They are the beneficiary of a deceased IRA owner.
• They are using the distribution (up to $10,000) to buy, build, or rebuild a first home.
• The distributions are part of a series of substantially equal payments.
• They have unreimbursed medical expenses that are more than 7.5% of their adjusted gross income for the year.
• They are paying medical insurance premiums during a period of unemployment.
• They are using the distribution for qualified higher education expenses.
• The distribution is due to an IRS levy of the qualified plan.
• They are taking qualified reservist distributions.
5-Year Rule for Roth IRA Conversions
Some investors who have traditional IRAs may consider rolling them over into a Roth IRA. Typically, the money converted from the traditional IRA to a Roth is taxed as income, so it may make sense to talk to a financial or tax professional before making this move.
If this Roth IRA conversion is made, the 5-year rule still applies. The key date is the tax year in which the conversion happened. So, if an investor converted a traditional IRA to a Roth IRA on September 15, 2022, the five-year period would start on January 1, 2022. If the conversion took place on March 10, 2023, the five-year period would start on January 1, 2023. So, unless the conversion took place on January 1 of a certain year, typically, the 5-year rule doesn’t literally equate to five full calendar years.
If an investor makes multiple conversions from a traditional IRA to a Roth IRA, perhaps one in 2023 and one in 2024, then each conversion has its own unique five-year window for the rule.
When the owner of a Roth IRA dies, the balance of the account may be inherited by beneficiaries. These beneficiaries can withdraw money without penalty, whether the money they take is from the principal (contributions made by the original account holder) or from investment earnings, as long as the original account holder had the Roth IRA for at least five years. If the original account holder had the Roth IRA for fewer than five tax years, however, the earnings portion of the beneficiary withdrawals is subject to taxation until the five-year anniversary is reached.
People who inherit Roth IRAs, unlike the original account holders, must take required minimum distributions (RMDs). They can do so by withdrawing funds by December 31 of the 10th year after the original holder died if they died after 2019 (or the fifth year if the original account holder died before 2020), or have the withdrawals taken out based upon their own life expectancy.
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How to Shorten the 5-Year Waiting Period
To shorten the five-year waiting period, an investor could open a Roth IRA online and make a contribution on the day before income taxes are due and have it applied to the previous year. For example, if one were to make the contribution in April 2023, that contribution could be considered as being made in the 2022 tax year. As long as this doesn’t cause problems with annual contribution caps, the five-year window would effectively expire in 2027 rather than 2028.
If the same investor opens a second Roth IRA — say in 2024 — the five-year window still expires (in this example) in 2027. The initial Roth IRA opened by an investor determines the beginning of the five-year waiting period for all subsequently opened Roth IRAs.
The Takeaway
For Roth IRA account holders, the 5-year rule is key. After the account has been opened for five years, an account holder who is 59 ½ or older can withdraw investment earnings without incurring taxes or penalties. While there are exceptions to this so-called 5-year rule, for anyone who has a Roth IRA account, this is important information to know about.
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FAQ
Do I have to wait 5 years to withdraw from my Roth IRA?
Because of the Roth IRA 5-year rule, you generally have to wait at least five years before withdrawing earnings tax-free from your Roth IRA. You can, however, withdraw contributions you made to your Roth IRA at any time tax-free.
Does the 5-year rule apply to Roth contributions?
No, the Roth IRA rule does not apply to contributions made to your Roth IRA, only to earnings. You can withdraw contributions you made to your IRA tax-free at any time.
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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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Brokerage accounts offer a way into the financial markets: think stocks, bonds, and other securities. Your account enables you to buy, sell, and trade these products. Not all brokerages operate the same way; nor do they all offer the same types of investments. We’ll break down what brokerage accounts are, the different account types available, and how they differ from other financial accounts.
Key Points
Brokerage accounts allow individuals to buy and sell securities.
Cash brokerage accounts allow trading securities using only deposited cash.
Margin accounts offer the ability to borrow for trading, increasing both leverage and risk.
Joint accounts are typically used by partners or family members for shared investments.
Discretionary accounts enable brokers to make investment decisions on behalf of the holder.
What Is a Brokerage Account?
A brokerage account is a type of investing tool offered by investment firms. These accounts allow people to invest their money by buying and selling stocks, bonds, exchange-traded funds (ETFs), and other types of securities.
These accounts are typically flexible and come in various forms, catering to different needs and experience levels. For prospective investors, knowing what a brokerage account is and how they work is important. For seasoned investors, learning even more about them can help deepen their knowledge, too.
What Is a Brokerage Account Used For?
Brokerage accounts open up the world of online investing or investing through a broker in stocks and allows investors to conduct other transactions, such as options trading. They are offered by different types of financial firms as well. Here’s a breakdown of different brokerage accounts, and what each might be used for:
Full-service brokerage firms usually provide a variety of financial services, including allowing you to trade securities. Full-service firms will sometimes provide financial insights and automated investing to customers.
Discount brokerage firms don’t usually provide additional financial consulting or planning services. Thanks to their pared-down services, a discount brokerage firm often offers lower fees than a full-service firm.
Online brokerage firms provide brokerage accounts via the internet, although some also have brick and mortar locations. Online brokers often offer some of the lowest fees and give investors freedom to trade online with ease. They also tend to make information and research available to consumers.
You can start the application either online or in-person. You can then fund your account by transferring money from a checking or savings account.
Some brokerage firms require investors to use cash to open their accounts, and to ensure they have sufficient funding to cover the cost of their investments (as well as any commission fees). Some do not require an initial deposit, however.
Brokerage accounts generally do not have restrictions on deposit or withdrawals. This makes them different from retirement accounts, which typically have more transaction limits or restrictions. Investors do need to claim any profits that they withdraw from their account as taxable income.[1]
Here’s a closer look at how brokerage firm accounts differ from other types of money accounts.
💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
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How Are Brokerage Accounts Different From Bank Accounts?
Brokerage accounts are different from checking and savings accounts because of how your money is protected. Most checking accounts offered by a bank will come with Federal Deposit Insurance Corporation (FDIC) protection. FDIC insurance protects the first $250,000 per depositor, per bank, per account type.[2]
For example, if you have a checking and a savings account at the same insured bank, the combined balances are covered up to $250,000. If you hold accounts that fall under different ownership categories (e.g., a joint checking account), those accounts may be covered separately, and be insured up to its own $250,000 total.
Brokerage accounts, on the other hand, are often protected by Securities Investors Protection Corporation (SIPC) insurance. The SIPC safeguards customers against losses caused by brokers becoming insolvent. They ensure the return of cash and securities, up to $500,000 (including $250,000 for cash).[3] They do not cover losses due to market fluctuations or investment decisions, however.
Brokerage accounts and checking accounts have one key similarity: both can hold cash. Brokerage accounts will often “sweep” your cash holdings into a money market fund that’s managed by that same brokerage, so that it may potentially earn interest.
Benefits of Having a Brokerage Account
The biggest benefit of a brokerage account is the opportunity to invest. Although a money market account could accrue interest, its funds are designed to be invested rather than held. These accounts come with other advantages as well.
Flexibility and control: Brokerage accounts allow owners to trade financial securities and invest their money as they see fit.
Potential for returns: You may be able to realize gains that are greater than current interest rates. However, they also run the risk of unlimited loss depending on how their investments perform.
No contribution limits: You are only limited by the amount of money you want (or have) to invest. Beginners should seriously consider how much they are willing to lose before funding their account and trading securities.
Liquidity: Brokerage accounts offer full liquidity, enabling you to withdraw and deposit as you please.
Top 3 Types of Brokerage Accounts Explained
There are several types of brokerage accounts: cash brokerage accounts, margin accounts, and discretionary accounts.
1. Cash Brokerage Accounts
Cash brokerage accounts are a straightforward option for investors who want to trade securities without using borrowed funds, or leverage, as you would with a margin account. These accounts only let you invest with the cash you deposit, which can be a simpler approach to investing.
Features:
Simple account structure: Cash brokerage accounts are fairly simple in that investors can trade with whatever they deposit.
Trading ability: Investors have the ability to trade a wide variety of assets, including stocks, bonds, ETFs, and mutual funds.
Pros and Cons:
Brokerage accounts are simple, offer flexibility, and often do not have maintenance fees. They do not offer leverage, which can affect your trading strategies. They may be best for investors seeking simplicity.
2. Margin Brokerage Accounts
Margin brokerage accounts let you use margin when trading. You can effectively borrow money to trade with directly from the brokerage. Thus, you may require approval from a brokerage to open an account. There’s a higher degree of risk with these accounts than cash brokerage accounts, given that you are borrowing money to invest with. There is a significant risk of loss as well as gain.[4]
Features:
Leverage: The ability to borrow funds to increase buying power, allowing you to trade more than your initial balance. Margin comes with interest, however, which can erode potential profits.
Risk management tools: Some margin accounts offer features like stop-loss orders or margin alerts to help manage risks.
Flexibility: Allows for short selling, providing opportunities to profit from declining markets.
Pros and Cons:
Margin accounts increase purchasing power, allowing investors to make larger trades, potentially leading to higher returns and the opportunity to profit from short selling. However, these benefits come with increased risk, as losses can be amplified, interest costs add up, and margin alerts may require investors to deposit additional funds or sell assets, making careful management essential.
3. Prime Brokerage Accounts
Prime brokerage accounts are designed mostly for institutional investors and high-net-worth individuals. These accounts offer advanced services (e.g., margin trading, securities lending) and proprietary research. These are sophisticated tools designed for experienced traders.
Features:
Access to leverage: Prime brokers allow clients to borrow funds for margin trading, enabling higher potential returns (but also increased risk).
Customized services: Tailored to meet the needs of sophisticated clients, including advanced trading strategies and risk management.
Securities lending: Clients can borrow securities to execute short sales, enhancing their trading flexibility.
Clearing and settlement services: Prime brokers handle the logistics of trades, including clearing and settlement, often allowing clients to access a broader range of financial instruments.
Research and reporting: Advanced market research, real-time data feeds, and detailed reporting on positions and trades.
Pros and Cons:
Prime brokers offer access to leverage, allowing clients to borrow funds for margin trading and enhance potential returns, while also providing tailored services for institutional investors or high-net-worth individuals. However, these advantages come with increased risk, as borrowing funds for margin trading amplifies potential losses.
Other Types of Brokerage Accounts
In addition to cash, margin, and joint brokerage accounts, there are other account types that serve specific needs and investment strategies. These accounts cater to different financial goals, investor preferences, and tax implications. Some common alternatives include:
Custodial Accounts: These accounts are set up by an adult for the benefit of a minor, with the custodian managing the assets until the minor reaches the age of majority.
Managed Accounts: In these accounts, a professional portfolio manager makes investment decisions on behalf of the account holder, often for a higher fee.
Each of these account types has unique benefits, tax treatments, and management structures designed to meet specific financial objectives. Depending on your investment goals, it may be advantageous to explore these alternatives to maximize returns and minimize tax liabilities.
How to Choose the Right Brokerage Account for You
Choosing the right brokerage account depends on your investment goals and risk tolerance. For those looking to amplify their investments, a margin account offers leverage, though with added risk. Joint accounts are ideal for shared investments, while more experienced investors may opt for managed or discretionary accounts for professional guidance. Your decision should align with your financial objectives, time horizon, and comfort with risk.
The Takeaway
Brokerage accounts allow owners to buy and sell investments and financial securities. They are offered by a number of financial institutions, and come in a few different types. By and large, though, they’re a very popular choice for investors looking to get their money in the markets.
They do have their pros and cons and associated risks, however. It may be beneficial to speak with a financial professional to learn more about how you can use a brokerage account to your advantage in pursuit of your financial goals.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
What is the minimum needed to open a brokerage account?
Different brokerage firms will have different rules regarding minimum deposits, but there are many that don’t require a minimum deposit. Again, it’ll depend on the specific firm.
Can I withdraw money from a brokerage account?
You can withdraw money from a brokerage account by transferring funds to a linked bank account, or by requesting a check or wire transfer. Keep in mind that any profits may be subject to capital gains tax, which may vary depending on how long you’ve held the assets among other factors.
Do you pay taxes on brokerage accounts?
The capital gains, dividends, and interest income earned in the account are all taxable, with long-term capital gains benefiting from lower tax rates compared to short-term gains. The specific tax rate depends on factors, such as how long you hold an asset and your overall income, so it’s best to consult with a tax professional for guidance.
About the author
Samuel Becker
Sam Becker is a freelance writer and journalist based near New York City. He is a native of the Pacific Northwest, and a graduate of Washington State University, and his work has appeared in and on Fortune, CNBC, Time, and more. Read full bio.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.
The Black-Scholes option pricing model is a mathematical formula used to calculate the theoretical price of an option. It’s a commonly-used formula for determining the price of contracts, and as such, can be useful for investors in the options market to know.
But there are some important things to know about it, such as the fact that the model only applies to European-style options.
Key Points
• The Black-Scholes model is a mathematical formula used to calculate the theoretical price of an option.
• It is commonly used for pricing options contracts and helps investors determine the value of options they’re considering trading.
• The model takes into account factors like the option’s strike price, time until expiration, underlying stock price, interest rates, and volatility.
• The Black-Scholes model was created by Myron Scholes and Fischer Black in 1973 and is also known as the Black-Scholes-Merton model.
• While the model has some assumptions and limitations, it is considered an important tool for European options traders.
What Is the Black-Scholes Model?
As mentioned, the Black-Scholes model is one of the most commonly used formulas for pricing options contracts. The model, also known as the Black-Scholes formula, allows investors to estimate the value of options they’re considering trading.
The formula takes into account several important factors affecting options in an attempt to arrive at a theoretical price for the derivative. The Black-Scholes options pricing model only applies to European options.
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The History of the Black-Scholes Model
The Black-Scholes model gets its name from Myron Scholes and Fischer Black, who created the model in 1973. The model is sometimes called the Black-Scholes-Merton model, as Robert Merton also contributed to the model’s development. These three researchers were affiliated with the Massachusetts Institute of Technology (MIT) and University of Chicago.
The model functions as a differential equation that requires five inputs:
Modern computing power has made it easier to use this formula and made it more popular among those interested in stock options trading.
The model is designed for European options, since American options allow contract holders to exercise at any time between the time of purchase and the expiration date. By contrast, European options may be priced differently and only allow the owner to exercise the option on the expiration date. So, while European options only offer a single opportunity to exercise, American option traders may choose any of the days up until and on expiration to exercise the option.
The main goal of the Black-Scholes model is to estimate the theoretical price of a European-style contract, giving options traders a benchmark to compare against market prices. To this end, the model goes deeper than simply looking at the fact that the price of a call option may increase when its underlying stock price rises and incorporates the impact of stock volatility.
The model looks at several variables, each of which may impact the value of that option. Greater volatility, for example, could increase the option’s theoretical value since it may have a higher chance of seeing larger price moves. Similarly, more time to expiration may increase the model’s estimate of the option ending in the money, and may lower the present value of the exercise price. Interest rates also influence the price of the option, as higher rates can make the option more expensive by decreasing the present value of the exercise price.
The Black-Scholes Formula
The Black-Scholes formula estimates the theoretical value of a call option or put option using inputs such as current stock price, time to expiration, volatility, and interest rates. It expresses the value of a call option by taking the current stock prices multiplied by a probability factor (d1) and subtracting the discounted exercise payment times a second probability factor (d2).
Explaining in exact detail what d1 and d2 represent can be complex. They are part of the mathematical process used to estimate option prices in the market, and are often debated.
💡 Quick Tip: If you’re an experienced investor and bullish about a stock, buying call options (rather than the stock itself) can allow you to take the same position, with less cash outlay. It is possible to lose money trading options, if the price moves against you.
Why Is the Black-Scholes Model Important?
The Black-Scholes option pricing model is so impactful that it once won the Nobel Prize in economics. Some consider it a foundational idea in financial history.
Some traders use the Black-Scholes model to estimate theoretical values of European options. Since its creation, many scholars have elaborated on and improved this formula. The model is widely recognized as a landmark in mathematical finance.
Some analysts argue that the model has contributed to greater pricing efficiency of options and stock markets. While designed for European options, the Black-Scholes model can still offer insights into how theoretical option values respond to changes in core pricing factors, which may help inform investors’ overall options trading strategies.
Some traders use the model hedge against portfolio risk, which they believe may improve overall market efficiency. However, others assert that the model has increased volatility in the markets, as more investors constantly try to fine tune their trades according to the formula.
How Accurate Is the Black-Scholes Model?
Some studies have shown the Black-Scholes model to be effective at estimating theoretical options prices. This doesn’t mean the formula has no flaws, however.
The model tends to underestimate the value of deep in-the-money calls and overestimate calls that are deeply out of the money.
That means the model might assign an artificially low value to options that are significantly in the money, while it may overvalue options that are significantly out of the money. Options tied to stocks yielding a high dividend may also get mispriced by the model.
There are also a few assumptions made by the model that can limit its real-world accuracy. Some of these include:
• The assumption that volatility and the risk-free rate remain constant over the option’s life
• The assumption that stock prices move continuously and without sudden jumps
• The assumption that a stock doesn’t pay dividends during the option’s life
Such assumptions are necessary to simplify the model, even though they may negatively impact results. Relying on assumptions makes the model mathematically tractable, as only so many variables can reasonably be calculated.
Over the years, quantitative researchers have expanded on the original models to address limitations introduced by its assumptions.
This leads to another flaw of the Black-Scholes model: unlike other inputs in the model, volatility must be an estimate rather than an objective fact. Interest rates and the amount of time left until the option expires are concrete numbers, while volatility has no fixed numerical value.
The best a financial analyst can do is estimate volatility using something like the formula for variance. Variance is a measurement of the variability of an asset, or how much its price changes from time to time. One common measurement of volatility is the standard deviation, which is calculated as the square root of variance.
Test your understanding of what you just read.
The Takeaway
The Black-Scholes option-pricing model is among the most influential mathematical formulas in modern financial history, and it may be one of the most accurate ways to determine the theoretical value of a European call option. It’s a complicated formula that has some drawbacks that traders should be aware of, but it’s a useful tool for European options traders.
Given the Black-Scholes model’s complexity, it’s likely that many investors may never apply it directly in their trading decisions. That doesn’t mean it isn’t important to know or understand, of course, but many investors may not get much practical use out of it unless they delve deeper into options trading.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
An example would be using the Black-Scholes formula to estimate the theoretical value of a European call option on a stock trading at $100, with a $105 strike price, 30 days to expiration, 20% volatility, and a 5% risk-free rate. The model would help determine the option’s theoretical worth under these conditions.
What is the 5 step method of Black-Scholes?
The five steps typically include: identifying the input values (stock price, strike price, time to expiration, volatility, and risk-free rate), calculating d1 and d2 (which are probability factors), finding the cumulative normal distribution values of d1 and d2, plugging the values into the Black-Scholes formula, and interpreting the result as the option’s theoretical price.
Is Black-Scholes still used?
Yes, the Black-Scholes model remains widely used as a foundational pricing tool for European options. Many traders and financial institutions still use it, though modifications or alternative models may be applied in complex or non-standard scenarios.
Why are Black-Scholes so important?
The Black-Scholes model helped transform how options are priced by offering a standardized, mathematically grounded method. Some argue that it has helped to improve market efficiency and risk management and pave the way for the modern derivatives market.
Photo credit: iStock/akinbostanci
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.
A married put is an options trading strategy wherein an investor holding an asset purchases a put option to help protect against a potential drop in the asset’s price. For this reason, it’s also called a protective put.
This options strategy may help reduce exposure to sharp declines in the underlying asset price. You can calculate your maximum profit, maximum loss, and breakeven with a married put strategy.
What Is a Married Put?
A married put is an options strategy in which you hold or buy shares of an asset and purchase a put option (typically one that’s at-the-money) to help limit losses from a potential decline in the asset price.
You might execute a married put strategy when you are concerned about a potentially significant downward move in the asset price over the short run, but you want to own the asset for a longer timeframe.
A married put may help reduce exposure to a decrease in the price of an asset. With a married put, you are still exposed to a loss, but losses are limited based on the strike price and the premium paid.
At the same time, a married put allows you to participate in upside in the underlying asset since the most you can lose with the put option is the premium paid on the option, while your long asset position has unlimited upside.
At-the-money put options can be expensive insurance. The premium you pay for the downside protection can make the strategy cost-prohibitive. Put option pricing depends on many variables, such as underlying price, time to expiration, interest rates, dividends, and implied volatility. The sensitivities to these factors are known as the options Greeks. A married put options strategy may work well during periods of lower implied volatility.
One of the main advantages of a married put options strategy is that you retain unlimited upside potential since you are long the asset and the most you can lose on the put option is the premium paid on that option.
Maximum profit = unlimited
Breakeven
Broadly, a married put’s breakeven point is the adjusted cost basis per share plus the premium paid to acquire the put option. The asset must rise by more than the amount of the premium for the strategy to exhibit gains.
Breakeven = Cost basis of the asset + premium paid per share
This is a key feature of the married put strategy. The maximum loss is the cost of the asset minus the put option’s strike price, plus the premium paid. The most you can lose with a married put is limited.
Maximum loss = cost basis of the underlying asset – strike + premium paid per share
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It is helpful to run through a married put example to show the benefits and downsides of this options strategy. This can help when comparing it against other options strategies.
Let’s say you want to own shares of a stock currently priced at $100. You buy 100 shares for a total of $10,000 and an at-the-money put option contract (with a strike of $100) for $5. Each option contract covers 100 shares, so the total premium is $500.
Your breakeven is $105. That is the per-share cost of the stock plus the premium paid. If the stock is unchanged at the expiration of the options contract, you would have a loss of $5 on the strategy. (Note that this doesn’t take transaction costs into account.)
Your maximum profit is unlimited since the stock has no upside cap. If the stock rallies to $120 by expiration, you would have a $15 gain. While the maximum profit is unlimited, it will be lower than if you’d purchased only the shares due to the cost of the put.
Your maximum loss is $5 per share, the put option premium, when the strike price equals the purchase price. In this example, your maximum loss occurs at or below the strike price of $100. You can close the trade by selling the stock and selling-to-close the option. Alternatively, you can sell-to-close the put or let it expire (if out-of-the-money) and continue to hold the stock.
💡 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, trading options online can be risky, and best done by those who are not entirely new to investing.
Pros and Cons of Married Puts
Pros
Cons
May reduce downside risk
The put option’s premium might be prohibitively expensive
May offer upside participation
Transaction costs could be high for the put option, including bid-ask spreads and fees
May work well during periods of lower implied volatility when you believe there is a near-term risk of a share price decline
Liquidity on the put option could be weak
Married Puts vs Covered Call
Married Puts
Covered Call
Purchase a (typically) at-the-money put on an underlying asset you own
Sell a call on an asset you own
Long the asset and long a put option
Collect a premium to enhance a portfolio’s yield
Exit the trade selling-to-close the put option
Roll out by buying-to-close and then potentially selling-to-open another call.
Strategies Similar to Married Puts
There are several options trading strategies similar to married puts. Let’s investigate those.
Protective Puts
A married put options strategy is also referred to as a protective put strategy. The difference is that you already own the asset with a protective put trade. With a married put, you simultaneously buy the asset and a put.
Long Calls
A married put behaves similarly to a long call. You own the asset with a married put strategy, but a long call position does not entail owning the underlying shares. Long calls differ from naked calls since you buy-to-open a call option contract in a long call strategy, while you sell-to-open calls without owning the underlying shares in a naked call play.
Call Backspreads
A call backspread is a bullish options strategy wherein you sell lower-strike calls and buy a greater number of higher-strike calls at the same expiration on the same asset. A call backspread offers unlimited upside. You would execute this complex options strategy when you are extremely bullish on a volatile asset. Call backspreads are also known as call ratio backspreads.
The Takeaway
A married put options strategy is when you purchase an at-the-money put option on an underlying asset you already own or are simultaneously purchasing. It is a way to help limit risk when you own shares in a company.
Adding a married put raises the position’s cost basis and breakeven, and the put could expire worthless if the stock price finishes above the strike. This approach may suit buyers who want exposure to a stock with defined downside during a set period, understanding that these outcomes depend on volatility, time to expiration, and transaction costs.
SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.
With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.
A covered put is the opposite of a married put in that you are short the underlying asset and also short a put option. With a married put, however, you are long the underlying asset and also long a put option.
A married put may be a good strategy if you are seeking a measure of protection on an underlying asset you own. It is a bullish strategy used if you are worried about potential near-term risks in the asset. By owning a protective put, you may help reduce downside risk while still being able to participate in asset price appreciation. You have the right to receive dividends and participate in shareholder votes by owning the stock, too. The downside is that you must pay a premium to own the put option.
What is the difference between puts and calls in options trading?
Puts and calls are two option types. Puts give the holder the right but not the obligation to sell shares of an asset at a specific price and at a specified time. Calls give the holder the right but not the obligation to buy shares of an asset at a specified price and time.
Photo credit: iStock/Renata Angerami
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Editor's Note: Options are not suitable for all investors. 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. Please see the Characteristics and Risks of Standardized Options.
Investors usually need to pay taxes on their stocks when and if they sell them, assuming they’ve accrued a capital gain (or profit) from the sale, and the shares are held in a taxable account.
But there are other circumstances when stock holdings may generate a tax liability for an investor: for example, when an investor earns dividends.
This is important for investors to understand so that they can plan for the tax implications of their investment strategy.
An important note: The following should not be considered tax advice. Below, you’ll learn about some tax guidelines, but to fully understand the implications, it’s wise to consult a tax professional.
Key Points
• When an investor sells a stock for more than they paid for it, and realizes a profit, that gain is generally subject to capital gains tax.
• If the stock was held for a year or less, the gain is considered short term and is subject to federal income tax rates, which range from 10% to 37%.
• If the stock was held for over a year, it’s a long-term gain, which is subject to long-term capital gains tax rates, which range from 0% to 20%, depending on the investor’s income and filing status.
• Dividends earned from dividend-paying stocks are also subject to tax, even if the investor doesn’t sell the stock and realize a gain.
• Stocks sold within a tax-deferred account, such as a qualified retirement account, are not subject to capital gains tax. (Withdrawals from tax-deferred accounts are taxed, however.)
Do You Have to Pay Taxes on Stocks?
Broadly speaking, yes, investors need to pay taxes on their stock holdings when they sell them for a profit, and when they’re selling shares within a taxable account. Selling stocks in a tax-deferred account, such as an online IRA or 401(k), does not trigger tax on profits from the sale (though withdrawals will be taxed).
The type of tax you need to pay on profit from the sale of a stock depends on how long you’ve held the stock, your income, and filing status. This applies when you’re investing online and through a traditional brokerage firm.
Typically, investors need to pay capital gains tax when they sell a stock — the sale of which usually triggers a taxable event in the form of either a gain or a loss. The main question is: when do you need to pay taxes on stocks, and what else, besides a sale, could trigger a taxable event?
When Do You Pay Taxes on Stocks?
There are several scenarios in which you may owe taxes related to the stocks you hold in an investment account. The most well known is the tax liability incurred when you sell a stock that has appreciated in value since you purchased it. The difference in value is referred to as a capital gain. When you have capital gains, you must pay tax on those earnings.
Capital gains have their own special tax levels and rules. To get a sense of what you might owe after selling a stock, you’d need to check the capital gains tax rate for 2025 or 2026 – more on that below.
You will only owe capital gains tax if your investments are sold for more than you paid for them (you turn a profit from the sale). That’s important to consider – especially if you’re trying to get a sense of taxes, fees, and ROI on your investments.
There are two types of capital gains: Short-term gains and long-term gains, and they’re taxed at different rates.
Short-Term Capital Gains
Short-term capital gains occur when you sell an asset that you’ve owned for one year or less, and which gained in value within that time frame. These gains would be taxed at the same rate as your federal income tax bracket, so they’re important for day traders to consider.
Short-Term Capital Gains Tax Rates for Tax Year 2025
This table shows the federal marginal income tax rates, by filing status and income bracket, for tax year 2025, which apply to short-term capital gains (for tax returns that are usually filed in 2026)
Marginal Rate
Single filers
Married, filing jointly
Head of household
Married, filing separately
10%
$0 to $11,925
$0 to $23,850
Up to $17,000
$0 to $11,925
12%
$11,926 to $48,475
$23,851 to $96,950
$17,001 to $64,850
$11,926 to $48,475
22%
$48,476 to $103,350
$96,951 to $206,700
$64,851 to $103,350
$48,476 to $103,350
24%
$103,351 to $197,300
$206,701 to $394,600
$103,351 to $197,300
$103,351 to $197,300
32%
$197,301 to $250,525
$394,601 to $501,050
$197,301 to $250,500
$197,301 to $250,525
35%
$250,526 to $626,350
$501,051 to $751,600
$250,501 to $626,350
$250,526 to $375,800
37%
Over $626,350
Over $751,600
Over $626,350
Over $375,800
Short-Term Capital Gains Tax Rates for Tax Year 2026
This table shows the federal marginal income tax rates, by filing status and income bracket, for tax year 2026, which apply to short-term capital gains (for tax returns that are usually filed in 2027).
Marginal Rate
Single filers
Married, filing jointly
Head of household
Married, filing separately
10%
$0 to $12,400
$0 to $24,800
$0 to $17,700
$0 to $12,400
12%
$12,401 to $50,400
$24,801 to $100,800
$17,701 to $67,450
$12,401 to $50,400
22%
$50,401 to $105,700
$100,801 to $211,400
$67,451 to $105,700
$50,401 to $105,700
24%
$105,701 to $201,775
$211,401 to $403,550
$105,701 to $201,750
$105,701 to $201,775
32%
$201,776 to $256,225
$403,551 to $512,450
$201,751 to $256,200
$201,776 to $256,225
35%
$256,226 to $640,600
$512,451 to $768,700
$256,201 to $640,600
$256,226 to $384,350
37%
Over $640,600
Over $768,700
Over $640,600
Over $384,350
Long-Term Capital Gains
Long-term capital gains tax applies when you sell an asset that gained in value after holding it for more than a year. Depending on your taxable income and tax filing status, you’d be taxed at one of these three rates: 0%, 15%, or 20%.
Overall, long-term capital gains tax rates, according to the IRS, are typically lower than those on short-term capital gains.
Long-Term Capital Gains Tax Rates for 2025
The following chart shows the long-term capital gains tax rates, by income bracket and filing status, for the 2025 tax year, according to the IRS.
Capital Gains Tax Rate
Single
Married, filing jointly
Married, filing separately
Head of household
0%
Up to $48,350
Up to $96,700
Up to $48,350
Up to $64,750
15%
$48,351 to $533,400
$96,701 to $600,050
$48,351 to $300,000
$64,751 – $566,700
20%
Over $533,400
Over $600,050
Over $300,000
Over $566,700
Long-Term Capital Gains Tax Rates for 2026
The following table shows the long-term capital gains tax rates for the 2026 tax year by income and status, according to the IRS.
Capital Gains Tax Rate
Single
Married, filing jointly
Married, filing separately
Head of household
0%
Up to $49,450
Up to $98,900
Up to $49,450
Up to $66,200
15%
$49,451 to $545,500
$98,901 to $613,700
$49,451 to $306,850
$66,201 to $579,600
20%
Over $545,500
Over $613,700
Over $306,850
Over $579,600
Capital Losses
If you sell a stock for less than you purchased it, the difference is called a capital loss. You can deduct your capital losses from your capital gains each year, and offset the amount in taxes you owe on your capital gains. Note that short term losses must be applied to short term gains first, and long term losses to long term gains first.
If your losses exceed your gains for the year, you can also apply up to $3,000 in investment losses to offset regular income taxes.
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Tax-Loss Harvesting
The process mentioned above – which involves deducting capital losses from your capital gains to secure tax savings – is called tax-loss harvesting. It’s a common technique often used near the end of the calendar year to try and minimize an investor’s tax liability.
Tax-loss harvesting is also commonly used as a part of a tax-efficient investing strategy. It may be worth speaking with a financial professional to get a better idea of whether it’s a good strategy for your specific situation.
You may face taxes related to your stock investments even when you don’t sell them. This holds true in the event that the investments generate income.
Dividends
You may receive periodic dividends from some of your stocks when the company you’ve invested in earns a profit. If the dividends you earn add up to a large amount, you may be required to pay taxes on those earnings.
Each year, you will receive a 1099-DIV tax form for each stock or investment from which you received dividends. These forms will help you determine how much in taxes you owe.
There are two broad categories of dividends: qualified or ordinary (nonqualified) dividends. The IRS taxes ordinary dividends at your regular income tax rate.
The tax rate for qualified dividends is the same as long-term capital gains: 0%, 15%, or 20%, depending on your filing status and taxable income. This rate is usually lower than the one for nonqualified dividends, though those with a higher income typically pay a higher tax rate on dividends.
Interest Income
This money can come from brokerage account interest or from bond/mutual fund interest, as two examples, and it is taxed at your ordinary income rate. Municipal bonds are an exception because they’re exempt from federal taxes and, if issued from your state, may be exempt from state taxes, as well.
Net Investment Income Tax (NIIT)
Also called the Medicare tax, this is a flat rate investment income tax of 3.8% for taxpayers whose adjusted gross income exceeds $200,000 for single filers or $250,000 for married filers filing jointly.
Taxpayers who qualify may owe interest on the following types of investment income, among others: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.
Again, this is a discussion to have with your tax professional. But there are a few situations where you may not pay taxes when selling a stock.
For example, if you are investing through a tax-deferred retirement investment account like an IRA or a 401(k), you won’t have to pay taxes on any gains when trading stocks inside the account.
However, with all tax-deferred accounts, withdrawals after age 59 ½ are subject to ordinary income tax. Withdrawals prior to that age could incur a penalty, in addition to being taxed.
4 Strategies to Pay Lower Taxes on Stocks
Do you have to pay taxes on stocks? While you’ll typically be subject to tax on any gains you realize from selling shares, there are some strategies that may help lower your tax bill.
Buy and Hold
Holding on to stocks long enough for dividends to become qualified and for any capital gains tax to be in the long-term category because they are typically taxed at a lower rate.
Tax-Loss Harvesting
As discussed, utilizing a tax-loss harvesting strategy can help you with offsetting your capital gains with capital losses.
Use Tax-Advantaged Accounts
Putting your investments into retirement accounts or other tax-advantaged accounts may help lower your tax liabilities.
Here’s a short rundown of the types of taxes to be aware of in regards to investments outside of stocks.
Mutual Funds
Mutual funds come in all sorts of different types, and owning mutual fund shares may involve tax liabilities for dividend income, as well as capital gains. Ultimately, an investor’s tax liability will depend on the type and amount of distribution they receive from the mutual fund, and if or when they sell their shares.
In addition, if an investor holds mutual funds in a tax-deferred account, capital gains won’t be taxed.
Property
“Property” is a broad category, and can include assets like real estate as well as land. The IRS looks at property the same way, from a taxation standpoint. In short, profit from selling a property is subject to capital gains taxes (not to be confused with property taxes, which are paid separately). In effect, if you buy a house and later sell it for a profit, that gain could be subject to capital gains taxes (although there are exclusions on gains, up to certain amounts).
Options
Taxes on options trading can be confusing, and tax liabilities will depend on the type of options an investor has traded. But generally speaking, capital gains taxes apply to gains from options trading activity — it may be wise to consult with a financial professional for more details.
Test your understanding of what you just read.
The Takeaway
For most investors, paying taxes on stocks involves paying capital gains taxes after they sell their holdings, or paying income tax on dividends. But it’s important to keep in mind that the tax implications of your investments will vary depending on the types of investments in your portfolio and the accounts you use, among other factors.
That’s why it may be worthwhile to work with an experienced accountant and a financial advisor who can help you understand and manage the complexities of different tax scenarios.
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FAQ
How much tax do you pay on stocks?
How much an investor pays in taxes on profits from selling stocks depends on several factors, including any applicable capital gain, how long they held the stock, and whether they received any income from the stock, such as dividend distributions.
Do you get taxed when you sell stocks?
Yes, investors who sell stocks at a profit may generate a tax liability in the form of capital gains taxes. If the investor has generated a capital loss as the result of a sale, they can use the loss to offset tax liabilities generated by other capital gains.
How do you avoid taxes on stocks?
There are several strategies that investors can use to try and avoid or minimize taxes on stocks, including utilizing a buy-and-hold strategy and tax-advantaged accounts.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Mutual Funds (MFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
This article is not intended to be legal advice. Please consult an attorney for advice.
