Dec
26
2025
A smiling woman sits at her kitchen table typing on a computer with headphones around her neck.

Best IRA for Young Adults: 2026 Guide

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

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

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

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

Key Points

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

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

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

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

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

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

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

The Power of Compounding Returns

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

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

Building a Tax-Advantaged Nest Egg Early

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

Understanding the Types of IRAs

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

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

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

What Is a Roth IRA?

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

What Is a Traditional IRA?

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

What Are SEP and Simple IRAs?

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

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

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

IRA Comparison: Roth vs. Traditional for Young Adults

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

Taxes

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

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

Traditional IRA Deductions for 2025

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

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

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

Traditional IRA Deductions for 2026

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

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

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

Withdrawals

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

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

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

•   Death or disability of the individual who owns the account

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

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

•   Health insurance premiums paid while an individual is unemployed

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

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

Traditional IRA vs. Roth IRA: Key Differences

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

Who Should Choose a Roth IRA?

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

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

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

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

Who Should Choose a Traditional IRA?

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

2025 and 2026 IRA Contribution & Income Limits at a Glance

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

2025 IRA Annual Contribution Limits

Age

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

2026 IRA Annual Contribution Limits

Age

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

2025 Roth IRA Income Eligibility Limits

Tax Filing Status

 Can Make Full Contribution

 Can Make Partial Contribution

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

2026 Roth IRA Income Eligibility Limits

Tax Filing Status

 Can Make Full Contribution

 Can Make Partial Contribution

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

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

Tax Filing Status

 Can Take Full Deduction

 Can Take Partial Deduction

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

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

Tax Filing Status

 Can Take Full Deduction

 Can Take Partial Deduction

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

Could You Be Eligible for an IRA?

Building a Strong Investment Strategy

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

Contributing to a 401(k) and an IRA.

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

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

Automating your contributions.

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

Understanding your risk tolerance.

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

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

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

Diversifying your investments.

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

Reassessing your portfolio regularly.

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

How to Open an IRA in 3 Simple Steps

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

1. Choose Your IRA Type (Roth or Traditional)

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

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

2. Fund Your Account

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

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

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

3. Choose Your Investments

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

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

Considerations for Young Adults Looking to Start Investing

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

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

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

The Takeaway

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

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

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

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

Help build your nest egg with a SoFi IRA.

FAQ

What are the different types of IRAs?

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

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

Which IRA is suitable for young adults?

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

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

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

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

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

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

Photo credit: iStock/andresr

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

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

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

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

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

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

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

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Dec
26
2025
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Investing in Index Funds in a Roth IRA

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

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

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

Key Points

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

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

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

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

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

Understanding Your Investing Options in a Roth IRA

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

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

•   Index funds

•   Target-date funds

•   Exchange-traded funds (ETFs)

•   Real estate investment trust (REIT) funds

•   Bonds

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

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

What Are Index Funds?

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

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

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

Long-term Benefits

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

Why Invest in Index Funds Through a Roth IRA?

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

Tax-free Growth and Withdrawals

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

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

Supporting Retirement Goals

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

How to Invest in Index Funds in a Roth IRA

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

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

2.    Log into your Roth IRA account.

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

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

Tips on Choosing the Right Index Funds

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

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

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

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

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

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

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

Managing Your Index Funds

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

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

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

Managing Your Roth IRA

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

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

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

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

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

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

Filing Status

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

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

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

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

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

Recommended: Roth IRA Calculator

The Takeaway

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

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

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

Help build your nest egg with a SoFi IRA.

FAQ

Can I lose money investing in index funds?

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

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

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

Photo credit: iStock/Ridofranz

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

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

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

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

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

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

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

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

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

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Dec
26
2025
A man and woman, both wearing glasses, sit together in front of a computer as the man points to something onscreen.

Roth IRA vs. Mutual Fund

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

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

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

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

Key Points

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

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

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

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

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

What Is a Roth IRA?

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

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

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

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

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

What Is a Mutual Fund?

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

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

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

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

Recommended: What Is Portfolio Diversification?

How a Roth IRA Works

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

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

Tax Advantages of a Roth IRA

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

A Roth IRA also offers the following advantages:

•  Tax-free investment growth over time.

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

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

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

Contribution and Income Rules

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

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

 

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

Roth IRA Withdrawal Rules

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

•  Be 59 ½ or older

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

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

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

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

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

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

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

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

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

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

•  You’re a military reservist on active duty.

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

•  You become totally and permanently disabled.

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

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

How a Mutual Fund Works

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

Active vs. Passive Mutual Funds

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

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

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

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

Types of Mutual Funds

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

•  Stock mutual funds, which concentrate holdings in corporate stocks

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

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

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

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

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

Fees and Expenses Associated With Mutual Funds

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

•  Sales loads

•  Redemption fees

•  Exchange fees

•  Purchase fees

•  Account fees

•  Management fees

•  Distribution fees

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

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

Roth IRAs and Mutual Funds: Key Points to Know

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

 

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

Investing in Mutual Funds Within a Roth IRA

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

Types of Funds to Consider

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

•  Index funds

•  Bond funds

•  Growth funds

•  Dividend funds

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

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

When comparing fund options, some consider:

•  Historical performance

•  Risk profiles

•  Expense ratios

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

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

Asset Location and Tax Efficiency

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

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

Rebalancing and Portfolio Management

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

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

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

The Takeaway

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

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

Help build your nest egg with a SoFi IRA.

FAQ

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

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

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

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

Photo credit: iStock/zamrznutitonovi

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

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

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

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

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

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

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

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

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

SOIN-Q425-089

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Dec
26
2025
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Changing Student Loan Repayment Plans: Understanding Your Options

By | Fresh Out of School, Student Loans, student_loan | Comments Off on Changing Student Loan Repayment Plans: Understanding Your Options

If you’re working to pay off student loan debt and having second thoughts about your current repayment plan, it’s possible to make a switch. There are a number of other plans to choose from, and one of them may be a better fit.

For example, there are income-driven repayment (IDR) plans that might help reduce your monthly payments, and an Extended Repayment Plan that could give you more time to repay what you owe.

It’s also important to be aware that federal student loan repayment plans will be undergoing changes in mid-2026, as part of President Trump’s “One Big Beautiful Bill” that was signed into law in 2025. So this is a good time to explore what your options are and what it takes to switch student loan repayment plans.

Key Points

•   Borrowers can change their federal student loan repayment plan at any time.

•   There is no limit to the number of times a borrower can switch to a new repayment plan.

•   Certain repayment plans may better suit a borrower whose financial circumstances have changed.

•   If a borrower is struggling to make student loan payments, switching to an income-driven plan may lower monthly payment amounts.

•   Other student loan debt management strategies include loan forgiveness, deferment, consolidation, and refinancing.

Student Loan Repayment Plan Options

The average student loan debt for federal loans is $39,075 per borrower, according to the Education Data Initiative. The Education Department (ED) currently has several repayment plans for these loans. Some of them are income-driven plans that are based on discretionary income and family size. If your financial situation has changed since you started paying your loan, you might benefit from switching student loan repayment plans if you qualify.

The types of federal student loan repayment plans for federal student loans that are currently available to borrowers include:

Standard Repayment Plan

The Standard Repayment Plan is the default plan for federal student loan borrowers. This plan sets payments at a specific amount that allows borrowers to pay their loans within 10 years.

On the Standard Plan, monthly payments are fixed. Because the repayment time frame is relatively short, borrowers will likely save more money on interest than they would on a plan with a longer repayment timeline. However, their monthly payments will typically be higher because of the short loan term.

It’s important to be aware that the Standard Repayment Plan will change for loans taken out on or after July 1, 2026. The repayment term will then range from 10 to 25 years, and it will be based on the loan amount. If you owe $25,000 or less, your term will be 10 years; if you owe more than $100,000, your repayment term will be 25 years.

Income-Based (IBR) Repayment Plan

One of the three IDR plans currently available, the Income-Based Repayment Plan bases a borrower’s monthly payments on their discretionary income and family size. Most of the other IDR plans are scheduled to close down in 2027, but IBR will remain open to current borrowers.

If you qualify for the IBR plan, your monthly payment will be 10% of your discretionary income if you’re a new borrower on or after July 1, 2014, and you’ll repay the loan over 20 years. Any remaining balance at the end of the loan term will be forgiven.

Income-Contingent (ICR) Repayment Plan

The Income-Contingent Repayment Plan sets a borrower’s payments at the lesser of 20% of their discretionary income or what they would pay on a repayment plan with a fixed payment over 12 years, adjusted to their income. ICR has a repayment term of 25 years.

This repayment plan closes to new enrollees on July 1, 2027. Those already on the plan have until July 1, 2028 to switch to the IBR plan or the new Repayment Assistance Plan (RAP) that will be launched by the Education Department in July 2026.

Pay As You Earn (PAYE)

On PAYE, monthly payments are 10% of a borrower’s discretionary income, and the loan term is 20 years. To be eligible, an individual must be a new borrower as of October 1, 2007, and have received a Direct Loan disbursement on or after October 1, 2011. On PAYE, a borrower’s monthly payment must also be less than what it would be on the Standard Plan.

Like ICR, PAYE is also closing down on July 1, 2027. Those already on the plan will need to switch to the IBR or RAP plan by July 1, 2028.

The Latest on SAVE

One income-driven plan that is no longer available is the Saving on a Valuable Education (SAVE) plan. SAVE was closed to new borrowers in February 2025, when a court order blocked it. Those enrolled in the plan were placed in forbearance.

So what should you do if you are enrolled in SAVE? In December 2025, the ED announced a proposed settlement with the court that would end the SAVE plan, and said that it would “move all SAVE borrowers into available repayment plans.” ED said it would “reach out to SAVE borrowers in the coming months with more information.”

Graduated and Extended Repayment Plans

The Extended Repayment Plan allows borrowers to repay their loans over a period of up to 25 years. Because of the long loan term, monthly payments will generally be lower, but borrowers will pay more in interest over the life of the loan compared to plans with shorter terms. To qualify for this plan, you must have more than $30,000 in outstanding Direct Loans or more than $30,000 in outstanding Federal Family Education Loans (FFEL) loans.

Under the Graduated Repayment Plan, a borrower starts with lower monthly payments that are gradually increased, typically every two years, over the course of 10 years.

Can You Change Your Student Loan Repayment Plan?

You can change your federal student loan repayment plan at any time. There is no cost to changing your federal student loan repayment plan.

Depending on the type of repayment plan you’d like to switch to, however, you may need to meet certain eligibility requirements.

Eligibility Requirements and Restrictions

Some plans, such as the Extended Repayment Plan and the IDR plans, have certain eligibility requirements. For example, to be eligible for the Extended Repayment Plan, a borrower must have more than $30,000 in outstanding Direct Loans or more than $30,000 in outstanding Federal Family Education Loans (FFEL) loans.

The requirements a borrower will need to meet to qualify for an IDR plan include:

•   Having an eligible loan type. Qualifying loans for IDR plans are Direct Loans (including Direct PLUS Loans for graduate or professional students, and Direct Consolidation Loans that did not repay any PLUS loans), Federal Stafford Loans, FFEL PLUS Loans made to graduate or professional students, FFEL Consolidation Loans that did not repay any PLUS loans made to parents, and Federal Perkins Loans, if these loans are consolidated.

•   Meeting an income cap for PAYE and ICR. Your income must be less than what you’d pay on the 10-year Standard Plan to be eligible for these plans.

•   Being a new borrower for PAYE. To qualify for PAYE, an individual must be a new borrower as of October 1, 2007, and have received a Direct Loan disbursement on or after October 1, 2011.

•   Recertifying every year. Borrowers must recertify their income and family size annually to remain on an IDR plan.

How Often Can You Change Your Student Loan Repayment Plan?

There’s no limit to how many times you can change your student loan repayment plan. You can change repayment plans multiple times during the life of the loan.

There are a few things to keep in mind, though, if you’re thinking about making a switch.

Factors to Consider Before Making a Change

Be aware that every time you change your student loan repayment plan, the interest rate and amount you pay may change. This could work to your advantage if interest rates are low, but if they aren’t, you could end up paying more for your student loan if you change your repayment plan.

Also, reducing your monthly payment may extend the number of years you pay back your loan, which means you’ll pay more in interest the longer you take to repay it. With a 10-year repayment plan, for example, you’d pay less in interest overall than you would with a 25-year plan.

Finally, if you are pursuing student loan forgiveness, changing your repayment plan could affect the qualifying payments you need to make. Not all repayment plans qualify for all types of federal forgiveness.

How to Change Your Student Loan Repayment Plan

If you’re wondering how to change your student loan repayment plan, the process is relatively simple. The easiest way to do it is online.

Steps to Switch Repayment Plans Online

To get started, log into your account at StudentAid.gov. You’ll need your FSA ID. From there, follow these steps:

1.    Click on “Loan Repayment.” From the drop-down menu choose the Loan Simulator and go to “I Want to Find the Best Student Loan Repayment Strategy.” The simulator will use your personal information, such as your income and dependents, to identify which plans you are eligible for.

2.    You can explore the different options you’re able to choose from to compare how much you might pay on each plan. Click on “View and Compare All Plans” at the bottom. This will allow you to see your monthly payment and total payments over the life of the loan.

3.    Decide which repayment plan makes the most sense for you. If you opt for an income-driven plan, you’ll need to apply for it (you’ll see an option to do that — just click on it).

4.    If you choose a fixed repayment plan, like the Graduated Repayment Plan or the Extended Repayment Plan, you can contact your loan servicer to request the new plan. You can find out who your loan servicer is by going to your student loan account dashboard and scrolling to the “My Loan Servicers” section.

Documentation You May Need to Provide

To switch to an IDR plan, you may be required to provide proof of income, such as pay stubs or a recent tax return. You’ll also need to provide your family size and marital status, and your spouse’s financial information, if applicable. Once approved for an IDR plan, you’ll need to recertify each year to continue with the plan.

Your application to change your repayment plan may take some time, so be sure to continue making your current student loan payments in the meantime.

Other Options for Lowering Your Student Loan Payment

Changing repayment plans isn’t the only way to potentially lower your student loan payments. These are some of the other methods you can explore.

Loan Forgiveness

If you work full-time in public service or you’re in education, there are federal loan forgiveness programs you may qualify for, such as Public Service Loan Forgiveness (PSLF), which forgives the remaining balance on your eligible loans after 120 qualifying payments made under an eligible repayment plan while working for a qualified employer. If you’re a teacher, and you’ve taught full-time for at least five consecutive years in a low-income school or educational service agency, you might be eligible for Teacher Loan Forgiveness.

Deferment or Forbearance

Borrowers looking for a way to temporarily pause or reduce their federal student loan payments may want to consider student loan deferment or forbearance. While these two programs are similar, there are some key differences. During deferment, borrowers are not required to pay the interest that accrues on their qualifying federal loans. In forbearance, however, borrowers must always pay the interest that accrues on their loans.

Deferment is designed for borrowers with financial difficulties. Forbearance comes in two types — mandatory, which must be granted to those who qualify, such as National Guard members; and general, which your loan servicer must approve you for.

Loan Consolidation

Borrowers who have more than one student loan and are struggling to juggle multiple payments, due dates, and interest rates, may want to consider consolidating student loans to streamline things.

A Direct Consolidation Loan allows borrowers to combine multiple federal loans into one. The interest rate of the new loan is a weighted average of rates of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. Consolidation can simplify loan payment, but just be aware that it may not save a borrower money because of the weighted interest rate.

Refinancing to a Private Loan

Another option is to refinance student loans with a private lender. With refinancing, you exchange your current loans for one new private loan — ideally one with more favorable rates and terms.

Refinancing could reduce your monthly payments, especially if you qualify for a lower interest rate. Choosing a longer loan term may also lower your monthly payments. However, you might pay more interest over the life of the loan if you refinance with an extended term.

Keep in mind that refinancing federal student loans makes them ineligible for federal benefits, including income-driven repayment plans and student loan forgiveness. Make sure you won’t need those benefits before you move ahead with refinancing.

If your current federal student loan repayment plan isn’t working for you, you have the option of changing to a new plan. There are income-driven plans that might lower your monthly payments, and extended and graduated plans that could help you lower or stretch out your payments over a longer term. You can explore different repayment options on the Federal Student Aid website to see what might be a good fit for your situation.

And keep in mind that changing repayment plans isn’t the only option for making it easier to manage your loans. You could also consider student loan forgiveness, deferment, loan consolidation, and refinancing. The point is, you have choices when it comes to repaying your student loan debt.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Can I change my repayment plan for student loans?

Yes, you can change your repayment plan for federal student loans whenever you like. You can choose a new plan, such as an income-driven repayment plan or the Graduated or Extended Repayment plans. You could also consider consolidating your loans, refinancing them, or pursuing student loan forgiveness, if you qualify.

Can you change your loan repayment plan at any time?

Yes, you can change your federal loan repayment plan at any time. And there’s no limit to how many times you can change your student loan repayment plan.

Can I switch IDR plans?

You can switch IDR plans as long as you qualify for the new plan. In addition to meeting an income cap, you must have eligible types of federal loans. Plus, in the case of the PAYE plan, you must also be a new borrower as of October 1, 2007, and have received a Direct Loan disbursement on or after October 1, 2011.

How do I know which student loan repayment plan is right for me?

To help determine which student loan repayment plan is right for you, you can use the Office of Federal Student Aid’s Loan Simulator tool. The simulator will use your personal information, such as your income, marital status, and dependents, to identify which plans you are eligible for. Then you can use the tool to compare the different plans and see your monthly payment amount on each one, plus your total payments over the life of the loan.

Will changing my repayment plan affect loan forgiveness eligibility?

It might, depending on the repayment plan you are changing to. Not all repayment plans qualify for all types of forgiveness. For example, with Public Service Loan Forgiveness, only payments made on an income-driven repayment plan or the Standard Repayment Plan count toward forgiveness. Before changing your plan, check the Federal Student Aid website to make sure that you will still be eligible for the type of forgiveness you’re working toward.

Photo credit: iStock/AlexSecret

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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Dec
26
2025
Can a Cleared Check Be Reversed?

Can a Cleared Check Be Reversed?

By | Financial Independence, relay | Comments Off on Can a Cleared Check Be Reversed?

Technically, once a check clears, it can’t be reversed, meaning the payer cannot get the funds back. The only exception to this is if the check payer can prove that identity theft or fraud has occurred, in which case they may indeed get their money back.

When discussing the ins and outs of check clearing and potential reversals, it can be helpful to understand how checking accounts work, typical clearance times, and exceptions to the rule. Read on to learn more.

Key Points

•   A check deposit reversal occurs when a bank reclaims previously deposited funds, often due to stop payments, insufficient funds, or fraud.

•   Reversals can lead to negative account balances, potentially triggering overdraft or non-sufficient funds (NSF) fees for the account holder.

•   Account holders must resolve reversals to secure expected funds and restore positive balances, often dealing with the check’s issuer.

•   Understanding the check clearing process is crucial, as funds availability varies, impacting financial control.

•   Many checks clear quickly, but some may take a week or more, requiring attention to actual fund availability.

What Is a Check Deposit Reversal?

A check deposit reversal can refer to several ways that a bank takes back money that was previously deposited into a checking and savings account. This can happen when a check is returned due to a stop payment notification, insufficient funds, or bank fraud.

When a check reversal takes place, it can result in a negative bank account balance, which can trigger overdraft or NSF fees. The account holder needs to take steps to resolve a check deposit reversal and see if they can secure the funds they were expecting and, if necessary, bring their account back from a negative balance.

reverses the original deposit, often resulting in a negative balance or a returned check fee, and leaves the account holder to resolve the issue with the check’s maker or the bank.

How Long Does It Take for a Check to Clear?

It typically takes between two and five business days for a check to clear once it’s deposited in a checking and savings account, but some banks will process it more quickly. In general, the first $275 is made available in one’s account the next business day after a check is deposited, and then the rest of the check will be made available in the next four days.

If one or more checks total more than $6,725 for deposit in a single day, it could take up to seven to nine business days (or sometimes longer) for the full amount to clear because the bank will want to ensure the check will clear before processing it.

The time it takes for a check to clear can depend on several factors, including the relationship the account holder has with the bank, the amount of money already in their account, and the amount that the check is for. Also, if you, say, mobile deposit a check after the cutoff time on a Friday night, it may not begin processing until the next Monday morning, slowing the process down a bit.

Note that check clearance rules apply to paper checks only. If you receive money or pay bills electronically by an ACH payment, a different set of guidelines will apply.

How to Know If Your Check Cleared

In order to know for certain that a check has cleared, look at your bank account information on your financial institution’s website or app to see if the funds are pending or available. You might also contact the bank and ask them to see if the check bounced.

You might also inquire about whether your financial institution offers tools that can help you track checks and alert you when they clear. You may also benefit from other options, including a budget planner app, debt payoff planner, and credit monitoring.

Track your credit score with SoFi

Check your credit score for free. Sign up and get $10.*

Recommended: What Is an Outstanding Check?

Understanding the Check Clearing Process

When a check gets deposited, there are a few steps involved in processing and clearing it. First, the bank makes a request to take the funds out of the check payer’s account. Typically, the bank actually deposits funds into the payee’s account first as pending, as long as the check is not flagged as risky or there’s another reason that it might not clear.

In the event that the funds aren’t available in the payer’s account, the check “bounces.” In that case, the funds are then withdrawn from the payee’s account, and, if the account winds up with a negative balance, fees can be applied.

How Long Can a Bank Hold a Check?

The length of time that a bank will hold a check depends on a few factors, including the amount of the check, the bank the check is coming from, the relationship of the payee to the bank, and more. If both the payer and the payee use the same bank, the clearing time will be shorter. Usually it takes two business days for a check to clear, but it may take up to seven days or possibly longer.

The time that it takes for a check to bounce varies depending on the bank’s size and technology. Larger banks with more technological capabilities will know more quickly if a check has bounced. It will take longer for a smaller bank to process bounced checks.

Incidentally, the amount of time a check is good for is typically six months, or 180 days, after it’s written.

Factors That Affect Hold Times

In certain cases, a “risky” check may take up to seven business days (or sometimes longer) to clear. The following reasons can cause this to happen:

•   Insufficient funds in the account

•   Checks larger than $6,725 or multiple checks totaling more than $6,725 deposited in a single day

•   Accounts younger than 30 days

•   Repeated overdrafts associated with the account

•   Checks from international banks

Personal Checks vs Government-Issued Checks

While it takes between two and five business days for personal checks to clear, banks are required by law to make funds available from government checks and U.S. Treasury checks within one business day (meaning by the next business day).

Certified checks and cashier’s checks are both types of checks that are typically made available within one day of deposit. A certified check is a check where the money is taken out of a checking account, ensuring that the funds are available in the payer’s account. Generally a certified check is required for making larger transfers. With a cashier’s check, the money is taken out of the bank’s account, also ensuring that the funds are available.

Note: If depositing a certified or cashier’s check, determine whether you need to use a special deposit slip for next-day availability. Some banks follow this procedure.

Cases of Fraud

Scams and fraud involving checks can occur. With scams, like overpayment scams, the account holder is responsible for repaying any funds owed and fees if they have deposited a check that didn’t clear. And if an account holder writes a check to a scammer and it has cleared, that money likely cannot be recouped.

Worth noting: If a person knowingly deposits a bad check, there can be legal consequences.

But with fraudulent checks, there’s hope: If, say, your checks were stolen from you and/or identity theft is involved in their use, alert your bank immediately, request a stop payment, dispute any transactions that have taken place, and request a credit. You may have to file additional paperwork relating to the incident, but you may be able to get your money back. The same holds true if you believe you received a fake or counterfeit check: Contact your bank and appropriate authorities.

Recommended: Finding Your Bank Routing Number

What to Do If a Deposited Check Is Reversed?

If a deposited check is reversed, contact your bank to find out what happened, and reach out to the check issuer to request a new form of payment.

Also stay alert to your account balance. If you have written checks against the amount you thought was available and/or have autopay set up, you could wind up with unpaid bills and penalties. Overdraft protection may help you avoid this scenario.

The Takeaway

Check deposits can be reversed in some situations (such as a check that bounces or one that is suspected of being fraudulent). That’s why it’s important to understand the process for depositing checks and having them clear. Many checks clear in a day or two, but some can take up to seven days or longer, so it can be wise to pay attention to when funds actually become available to stay in control of your finances.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

How can a check clear and then bounce?

If a bank doesn’t see any red flags that a check might bounce, they may go ahead and transfer funds into the payee’s account. However, it may turn out during their processing that funds weren’t available from the payer, so then the check bounces.

Can a bank reverse a check deposit?

Technically, a cleared check cannot be reversed. But if a check bounces, the bank can remove funds they had deposited into the payee’s account.

Can you dispute a cleared check?

If identity theft has occurred or if a check is fraudulent, then a cleared check can be disputed. If the bank finds the evidence to be believable, the funds may be returned to the account.

Can I redeposit a check that was returned?

You can redeposit a check that was returned for non-sufficient funds if you feel reassured that the check will now clear.

How can I protect myself from fraudulent checks?

A fake check can be poorly printed, use thin or shiny paper, have smooth instead of perforated edges, and have mismatched or incorrect bank name and address information. Also be wary of checks that overpay you or ones you were not expecting.

Photo credit: iStock/sturti

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. 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.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible 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 (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, 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 Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details 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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
^Early access to direct deposit funds is based on the timing in which we receive notice of impending payment from the Federal Reserve, which is typically up to two days before the scheduled payment date, but may vary.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

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.

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.

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