Rollover IRA vs. Traditional IRA: What’s the Difference?

When it comes to retirement savings, one of the building blocks of many strategies is the individual retirement account, or IRA. An IRA is a retirement plan that allows individuals to save money in a tax-advantaged way. In some cases, an individual might open a traditional IRA, and in others, they might have investments from a previous retirement plan that they need to roll over into a rollover IRA.

When it comes to a traditional IRA vs. rollover IRA, there are many similarities— but also a few differences worth noting.

What Is a Traditional IRA?

To understand the difference between a rollover IRA vs. traditional IRA, it helps to understand some IRA basics.

From the moment you open a traditional IRA, your contributions to the account are typically tax deductible, so your savings will grow tax-free until you make withdrawals in retirement. This is advantageous to some retirees: Upon retiring, it’s likely one might be in a lower income tax bracket than when they were employed. Given that, the money they withdraw will be taxed at a lower rate than it would have when they contributed.

What is a Rollover IRA?

A rollover IRA is an IRA account created with money that’s being rolled over from a qualified retirement plan. Generally, rollover IRAs happen when someone leaves a job with an employer-sponsored plan, such as a 401(k) or 403(b), and they roll the assets from that plan into a rollover IRA.

In a rollover IRA, like a traditional IRA, your savings grow tax-free until you withdraw the money in retirement. There are several advantages to rolling your employer-sponsored retirement plan into an IRA, vs. into a 401(k) with a new employer:

•  IRAs may charge lower fees than 401(k) providers.
•  IRAs may offer more investment options than an employer-sponsored retirement account.
•  You may be able to consolidate several retirement accounts into one rollover IRA, simplifying management of your investments.
•  IRAs offer the ability to withdraw money early for certain eligible expenses, such as purchasing your first home or paying for higher education. In these cases, while you’ll pay income taxes on the money you withdraw, you won’t owe any early withdrawal penalty.

There are also some rollover IRA rules that may feel like disadvantages to putting your money into an IRA instead of leaving it in an employer-sponsored plan:

•  While you can borrow money from your 401(k) and pay it back over time, you cannot take a loan from an IRA account.
•  Certain investments that were offered in your 401(k) plan may not be available in the IRA account.
•  There may be negative tax implications to rolling over company stock.
•  An IRA requires that you start taking Required Minimum Distributions (RMDs) from the account at age 72 (or age 70 ½ if you turn 70 ½ in 2019 or earlier), even if you’re still working, whereas you may be able to delay your RMDs from an employer-sponsored account if you’re still working.
•  The money in an employer plan is protected from creditors and judgments, whereas the money in an IRA may not be, depending on your state.

A Side-by-Side Comparison of Rollover IRA vs. Traditional IRA

  Rollover IRA Traditional IRA
Source of contributions Created by “rolling over” money from another account, most typically an employer-sponsored retirement plan, such as 401(k) or 403(b). For rollover amount, annual contribution limits do not apply. Created by regular contributions to the account, not in excess of the annual contribution limit, although rolled-over money can also be contributed to a traditional IRA.
Contribution limits There is no limit on the funds you roll over from another account. If you’re contributing outside of a rollover, the limit is $6,000 per year, plus an additional $1,000 if you’re 50 or older. Up to $6,000 per year, plus an additional $1,000 if you’re 50 or older.
Withdrawal rules Withdrawals before age 59½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home). Withdrawals before age 59½ are subject to both income taxes and an early withdrawal penalty (with certain exceptions , like for higher education expenses or the purchase of a first home).
Required minimum distributions (RMDs) You’re required to withdraw a certain amount of money from this account each year once you reach age 72. You’re required to withdraw a certain amount of money from this account each year once you reach age 72.
Taxes Since contributions are from a pre-tax account, all withdrawals from this account in retirement will be taxed at ordinary income rates. If contributions are tax deductible, all withdrawals from this account in retirement will be taxed at ordinary income rates. (If contributions were non-deductible, you’ll pay taxes on only the earnings in retirement.)
Future rollover options As long as no other (non-rollover) funds have been added to the account, this money can be rolled into a future employer’s retirement plan, if the plan allows it. The money in a traditional IRA cannot be rolled into a future employer’s retirement plan.
Convertible to a Roth IRA Yes Yes

Is There a Difference Between a Traditional IRA and a Rollover IRA?

The money you roll over to a rollover IRA can later be rolled over into an employer-sponsored retirement plan, if the plan allows it. This is not true of money in a traditional IRA.

When it comes to a rollover IRA vs. traditional IRA, the only real difference is that the money in a rollover IRA was rolled over from an employer-sponsored retirement plan. Otherwise, the accounts share the same tax rules on withdrawals, required minimum distributions, and conversions to Roth IRAs.

Can You Contribute to a Rollover IRA?

You can make contributions to a rollover IRA, up to IRA contribution limits. In 2020 and 2021, individuals can contribute up to $6,000 (with an additional catch-up contribution of $1,000 if you’re 50 or older). If you do add money to your rollover IRA, however, you may not be able to roll the account into another employer’s retirement plan at a later date.

Can You Combine a Traditional IRA with a Rollover IRA?

A rollover IRA is essentially a traditional IRA that was created when money was rolled into it. Hence, you can combine two IRAs by having a direct transfer done from one account to another, or by rolling money from one IRA to the other IRA.

There’s one important aspect of the transfer or rollover process that will help prevent the money from counting as an early withdrawal or distribution to you—and that’s being timely with any transfers. With an indirect rollover, you typically have 60 days to deposit the money from the now-closed fund into the new one.

A few other key points to remember: As mentioned above, if you add non-rollover money to a rollover account, you may lose the ability to roll funds into a future employer’s retirement plan. Also keep in mind that there’s a limit of one rollover between IRAs in any 12-month period. This is strictly an IRA-to-IRA limit and does not apply to rollovers from a retirement plan to an IRA.

How to Open a Traditional or Rollover IRA Account

Opening a traditional IRA and a rollover IRA are identical processes—the only difference is the funding. Open a traditional or rollover IRA by doing the following:

•  Decide where to open your IRA. For instance, you can choose an online brokerage firm where you can choose your own investments, or you can select a robo-advisor that will offer automated recommendations based on your answers to a few basic investing questions. (There’s a small fee associated with most robo-advisors.)
•  Open an account. From the provider’s website, select the type of IRA you’d like to open—traditional or rollover, in this case—and provide a few pieces of personal information. You’ll likely need to supply your date of birth, Social Security number, and contact and employment information.
•  Fund the account. You can fund the account with a direct contribution via check or a transfer from your bank account, transferring money from another IRA, or rolling over the money from an employer-sponsored retirement plan. Contact your company plan administrator for information on how to do the latter.

The Takeaway

Both a rollover IRA or traditional IRA allow investors to put money away for retirement in a tax-advantaged way, with very little difference between the two accounts.

One of the primary questions anyone considering a rollover IRA should consider is, will you keep contributing to it? If so, that would prevent you from rolling the rollover IRA back into an employer-sponsored retirement account in the future.

Whether it’s a rollover IRA you’ve created by rolling over an employer-sponsored retirement account or a traditional IRA you’ve opened with regular contributions, either account can play a key role in your retirement game plan.

Interested in learning more about growing your savings with an IRA? Explore IRA accounts at SoFi and read about the broad range of investment options, member services and investment tools available.

Find out how to save for retirement with SoFi.


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.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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How Much Money Should You Have Saved For Retirement By 40?

At some point or another, you’ve probably asked yourself, “how much money should I have saved by 40?”

It’s a valid question that can be daunting to think about. The good news is you’re probably already saving money for retirement. The bad news is, you might not be saving enough money to retire when you want.

There are different ways to save money for retirement. The sooner, the better—so that it can start adding up. And that’s exactly what an increasing number of people in their 20s and 30s have been doing.

A Bank of America report found that almost one in four millennials (ages 24-41) have $100,000 or more saved as of winter 2020—a nearly 17% increase compared to that same report in 2015. The rising numbers are promising, but are these savings even enough? We’ll dig deeper into the numbers.

How Much Should I Have Saved by 40?

A general rule of thumb is to have the equivalent of your annual salary saved by the time you’re 30. By your 40s, many financial advisors recommend having two to three times your annual salary saved in retirement money.

In your 50s, conventional wisdom holds that you should have six times your annual salary in your retirement savings by the end of the decade.

How Can I Get My Retirement Money On Track?

If you feel you don’t have enough money saved yet, it’s never too late to get back on track. As you reach your 40s, it’s likely that your income increases, but so do the obligations tied to your money.

You might be saving money for your kids’ college; you probably have mortgage payments and existing debt; you may even be taking care of aging parents. It’s a lot of financial multi-tasking and you have to prioritize.

The key is to establish money goals and create a budget. Tracking your income and spending can help you figure out how much money you need to save for each goal and what kind of investments or savings make sense to achieve your goals.

This can be made much easier by using SoFi Relay to know where you stand with your money, what you spend, and how to hit your financial goals. With SoFi Relay you can track all of your money in one place, plus get credit score monitoring, spending breakdowns, financial insights, and more.

A key priority to think over is paying off any high-interest debt, including credit card debt. Be sure to make the payments on any existing loans to avoid any late fees or penalties for missed payments. It may be worth reviewing any loans you currently hold to see if you could potentially refinance to a lower interest rate.

If you don’t have an emergency money fund yet, consider putting that at the top of your priority list. You could plan to have three to six months’ worth of expenses saved.

Once you have high-interest debt paid off and an emergency money saved, you can allot a larger portion of your funds to save for retirement and other money goals. If you’re playing catch-up with your retirement money, try contributing any financial windfalls toward your retirement savings.

Saving and Investing Money by 40

If you already have a 401(k), there are a number of strategies to max out your 401(k) that are worth looking into. For example, it might make sense to contribute at least enough to qualify for any employer matching your company offers. Why lose out on the “free” money that your employer is willing to contribute to your retirement savings?

Try setting monthly or weekly savings targets to help you stay on track for retirement. You can even set up automatic transfers or deposits, so you don’t have to think about it.

As you’re rethinking how much money you need to save for retirement, it also makes sense to look at your lifestyle goals. That includes figuring out when you might want to retire, what kind of lifestyle you want in retirement, and how much money you might have coming in during retirement.

Where to Save Money for Retirement

Next, you’ll also need to figure out which retirement plan is right for you. There are many ways to save for retirement, even beyond the popular employer-sponsored 401(k). Other options include a traditional IRA or a Roth IRA (to see how much you can contribute to a Roth IRA, check out our Roth Contribution Calculator).

Some people choose to put their retirement savings in more than one type of account. This is useful if you want to set aside more than the yearly contribution limits on 401(k) plans—whether because you’re a high-income earner, or you started saving later in life, or you’re trying to achieve financial independence at a younger age. In that case, it might make sense to leverage a Traditional IRA, Roth IRA, or after-tax account to save beyond the 401(k) limits.

Investing in a Roth IRA now, with post-tax dollars, can also be useful if you want to withdraw money in retirement without paying taxes on the money. In contrast, 401(k) contributions are tax-deferred, meaning you will be taxed on funds you withdraw in retirement. That said, there are income limits on Roth IRAs, so this might not be an option depending on your salary.

After-tax accounts can be appealing to individuals who plan to achieve financial independence at a younger age and retire early. Unlike qualified plans, which place penalties on withdrawing funds before a certain age, an after-tax account is a pool of money that you can withdraw from without having to worry about penalties if you access the account before age 59 ½.

The Takeaway

While there are conventional rules of thumb as to how much money you should have saved by 40, the truth is everyone’s path to a comfortable retirement looks different. One piece of advice is universal, however: The sooner you start saving for retirement, the better your chances of being in a financially desirable position later in life.

Interested in boosting your retirement savings? You can open a Traditional IRA, Roth IRA, or after-tax account with SoFi Invest® online retirement account to supplement your 401(k).

Find out how SoFi Invest can help you start saving for your future.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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

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What Is a Pension Plan & How Does It Work?

A pension plan is a savings plan offered by employees that guarantees income to workers after retirement. Pension plans are also known as defined-benefit plans because the monthly benefits the worker will receive during retirement is defined.

When defining those benefits, a pension may offer an exact dollar amount to be paid in retirement, like $100 per month at retirement. But more often, the benefit involves calculating a number of factors, including how much the worker earned while working, how long they served the company, and how senior they were when they retired.

That kind of guarantee isn’t the only reason why workers with pension plans tend to stick around for the long haul. In most pension plans, many of the benefits are protected by federal insurance that is offered by the Pension Benefit Guaranty Corporation (PBGC ).

How to Get a Pension Plan

Unlike other different types of retirement plans, such as IRAs and Roth IRAs, an investor who wants to save for retirement can’t just go out and invest in a pension. Like 401(k)s, pensions have to be offered by an employer.

While pension plans were once a mainstay of how companies took care of their workers, they’ve become increasingly rare in recent decades. Only 12% of private sector employers offered some form of pension to their employees as of 2019, according to the Bureau of Labor Statistics’ National Compensation Survey .

The biggest reason why companies no longer offer pensions is that it’s cheaper for them to offer defined contribution plans, such as 401(k) or 403(b) plans. But if an American works for the federal, state or local government, there’s a good chance that he or she may qualify for a pension. Among state and local government workers who participate in a retirement savings plan, a whopping 92% are in a pension plan.

How Pension Plans Differ from Other Retirement Plans

The key difference between pension plans and other retirement plans comes down to the difference between a “defined benefit” plan like a pension, and a “defined contribution” plan.

In a defined benefit plan, such as a pension, it’s clear how much workers will receive. In a defined contribution plan, it’s clear to employees how much they put into it. Unlike a pension, a defined contribution plan doesn’t promise a given amount of benefits once the employee retires.

There are some plans, such as 401(k) or 403(b) plans in which an employer has the option to contribute. However, they’re not required to. In these plans, the employee and possibly the employer will invest in the employee’s tax-advantaged retirement account. At the time of the employee’s eventual retirement, the amount in the fund can depend heavily on how well the investments in the account performed.

There are still other retirement plans, like IRAs and Roth IRAs, which a worker also funds. Like 401(k) plans, the ultimate payout often depends largely on the performance of the investments in the plan. But unlike 401(k)s, an employer isn’t involved.

One big advantage that pensions have over defined contribution plans is that pensions are guaranteed by the federal government, through the Pension Benefit Guaranty Corporation. It effectively guarantees the benefits of pension-plan participants. But the PBGC does not cover people with defined contribution plans.

What to Do If You Have a Pension Plan

Workers with pension plans should talk to a representative in their human resources department and find out what the plan entitles them to. Every pension plan is unique. An employee can benefit from looking into the specifics, especially how much the plan might pay, whether it includes health and medical benefits, and what kind of benefits it will offer a spouse if the worker dies first.

For someone just starting in their career, they may also want to ask when their pension benefits vest. In many plans, the benefits vest immediately, while others vest in stages, over the course of as many as seven years, which could affect their plans to move on to a new job or company.

One way to get a better handle on what a pension may pay over time is to inquire about the unit benefit formula. It’s how an employer tallies up its eventual contribution to a pension plan based on years of service.

Most often, the formula will use a percentage of the worker’s average annual earnings, and multiply it by their years of service to determine how much the employee will receive. But an employee can use it themselves to see how much they might expect to receive after 20 or 30 years of service.

Pros of a Pension Plan

Perhaps the biggest pro of a defined-benefit plan is the guarantee of predictable income from the day a worker retires until the day they die. That’s the core promise that the PBGC protects.

Many pension plans also include related medical and other benefits for the employee, as well as related benefits for surviving spouses. Those benefits vary widely from plan to plan and are worth investigating for workers with a pension. Employees who are considering a new role in an organization that offers a pension should also research such features.

A defined contribution plan can also motivate the worker to regularly calculate the amount they’ll have to live on after they retire. That can open up questions about what they’ll do if they get sick or need at-home care. And by asking those questions, they can look into things like supplemental medical insurance or long-term care insurance, in order to better protect themselves down the road.

Cons of a Pension Plan

But the greatest strength of a pension plan – its reliability and its guarantee – can also be its biggest weakness from a planning standpoint. That’s because a pension can give would-be retirees a false sense of security.

A pension, with its well-insured promise of income, can lead people to ignore important questions and avoid strict budgeting for basic living expenses. That flat monthly income can also lead people to believe that their expenses will be the same each month.

And that can lead retirees to avoid planning for increased overall living expenses due to the effects of inflation or sudden, unexpected expenses that inevitably crop up. There’s also the likelihood that their expenses later in life could be significantly higher, as they’re able to accomplish fewer daily necessities themselves.

That’s why, regardless of how thorough a pension plan is, it can pay to save for retirement in other ways, including through a 401(k), IRA or Roth IRA. Just because a worker has a pension, that doesn’t mean that it’s the only retirement plan that’s right for them. And employees will benefit from preparing for retirement early.

The Takeaway

Workers could get started investing today by opening an account with SoFi Invest®. SoFi Invest offers an active investing platform that allows users to choose their stocks and ETFs without paying SoFi management fees and commissions.

SoFi Invest also offers an automated investing solution that invests users’ money based on their goals and risk tolerance without charging a management fee.

Check out SoFi Invest today.



SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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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3 Easy Steps to Starting a Retirement Fund

It can sometimes feel like there’s no good time to start a retirement savings plan. If you’re in your 20s or 30s, you might have financial pressures from weddings and cars, to first homes and kids. Perhaps you’re launching a business. And of course, there’s student loan debt.

No matter how old you are, it might be tempting to think, “I’ll do it with my next job, or after my next raise.” But for everyone, the sooner you get a head start on planning for the future, the more opportunity you have to grow your retirement savings. Learn how to set up a retirement fund and why it matters.

Why You Should Start a Retirement Fund

There are many reasons for starting a retirement account now. Thanks to rising life expectancy, most of us will likely spend more time in retirement than our parents and grandparents. The average life expectancy in 2020 was 78.81, up from 76.47 in 2000, and 74.89 in 1990.

At the same time, fewer workers have access to pensions and employer-sponsored plans, and the future value of Social Security benefits is uncertain. Opening a retirement fund matters for making sure you’re financially prepared.

The earlier you start building your nest egg, the more your savings will grow. Thanks to the power of compound interest, the length of time your money is invested can play a huge role in the amount you end up with. That’s because with compound interest, you earn interest on top of the interest you’ve already earned—not just on top of your initial contributions.

For example, say you invest $10,000 and earn a 5% annual return on that investment each year. You invest an additional $500 a month for 10 years, earning the same rate of return. Compounding interest would make your account worth $91,756, representing a gain of $21,000 and change on a $70,000 investment. After 20 years, that would grow to nearly $225,000, with $130,000 representing your contributions and the rest chalked up to compounding interest.

3 Steps to Starting a Retirement Fund

Starting a retirement fund takes some planning, particularly if you aren’t used to setting money aside consistently.

Having a blueprint to follow for starting a retirement account can make it easier to begin working toward long-term financial goals. It can also help you avoid some of the most common mistakes people make when putting together a retirement planning strategy.

If you’re starting from square one with retirement saving, here are the most important steps to know when opening a retirement fund.

1. Calculate How Much You Need to Save

Starting a retirement fund begins with considering your needs, goals, and ability to save. A good way to assess how much money you need to save for retirement is by asking yourself a few questions:

•  What is your target retirement date?
•  Do you plan to stop working at age 65, or will you continue working full-time or part-time?
•  Based on current life expectancy, how many years do you expect to spend in retirement?
•  What kind of lifestyle would you like in retirement?
•  Do you anticipate your living expenses will be higher or lower than today?

Once you’ve considered these questions, it can help to consult a retirement calculator. This tool will help you figure out much you need to sock away, given your age, how much you’ve already saved, and other factors.

A common rule of thumb is that you should have the equivalent of your yearly salary saved by age 30 and twice your annual salary saved by age 35. But those are ballpark benchmarks—the amount you have saved at those ages may depend on when you get started saving for retirement, how much you save each year and how much your money grows as you invest it.

2. Choose a Retirement Plan Option

Once you know how much you should be saving, the next step is opening a retirement fund. Generally speaking, a savings account isn’t the most lucrative place to save money for retirement—the national average interest rate is currently .05%, according to the FDIC . People typically get larger returns by investing their retirement savings in other financial vehicles.

Not only do savings account rates tend to lag behind what you could earn in the market, but inflation, or the overall increase in the price of goods and services, can diminish the value of the interest you’re able to earn with a savings account over time. If you’re leaning toward keeping your emergency fund or other liquid cash in a savings account, look for a high-interest savings option which can yield the best rates.

There are several types of retirement accounts to choose from, all of which allow you to invest your funds in a variety of assets. The one you should pick depends on your personal situation.

401(k)

A 401(k) is an employer-sponsored retirement plan (some non-profit employers offer a 403(b) instead) in which an employee contributes regularly to their retirement savings with pre-tax dollars. In some cases, employers offer to match employee contributions up to a certain amount. This is essentially free money account holders can use to grow wealth for retirement.

Employees can contribute up to $19,500 to their 401(k) plans in 2020 and 2021, with deductions taken straight from their paycheck, which makes it easier to stay on track (sort of a “set it and forget it” mentality). What’s more, a 401(k) is tax-advantaged, meaning the more you contribute, the lower your taxable income for IRS purposes. While there are tax savings on the front end, you can expect to pay income tax on withdrawals in retirement.

Some employers offer a Roth 401(k) option as well as a traditional 401(k). With a Roth 401(k), contributions are made using after-tax dollars. This allows investors to make qualified withdrawals in retirement tax-free. But you would still be subject to required minimum distributions beginning at age 72, the same as you would with a traditional 401(k).

IRA

While a 401(k) is offered through an employer, individuals can open an IRA, or an individual retirement account, on your own. This can be a good option for people who don’t have access to a retirement plan at work. Compared to a 401(k), an IRA usually offers a wider variety of investment options and allows an individual to select institutions and funds with lower fees.

Most people have heard of IRAs and Roth IRAs, though they may not know the differences between them. Here’s a summary—along with info on another type of IRA, SEP IRA.

•  A traditional IRA lets you set aside up to $6,000 a year in pre-tax dollars (or $7,000 if you’re 50 or older). As with a 401(k), you’ll pay taxes on the money you withdraw in retirement.
If you withdraw funds before age 59½, you will pay a 10% penalty (excluding certain exceptions including first-time home purchases, qualified educational expenses, unreimbursed medical expenses). At age 72, you are required to withdraw a minimum amount every year (known as an RMD, or required minimum distribution). Generally, a traditional IRA might be appealing for people who expect to be in a lower tax bracket when they retire, or for those who tend to owe a lot on their taxes.

•  A Roth IRA also allows you to contribute up to $6,000 a year in post-tax dollars (or $7,000 if you’re 50 or older). This means that while there are no tax advantages for contributions, you won’t pay taxes on the money you withdraw in retirement.

There are eligibility requirements with a Roth IRA: You must fall below the income limit ($125,000 for a single person, or $198,000 for a married couple filing jointly, in 2021) to contribute the maximum amount to a Roth IRA. If you do qualify, one advantage over an IRA is that you can withdraw the contributions (but not earnings) without penalties or taxes at any time. A second is that there are no RMDs. It might make sense to consider a Roth IRA if you’re likely to be in a higher tax bracket when you retire, or if you usually get a refund at tax time.

•  A SEP IRA is designed for people who are self-employed or own small businesses. It’s similar to a traditional IRA in that contributions are tax-deductible. But you can often contribute much more than to a traditional IRA: For 2021, that’s up to 25% of your income, or $58,000, whichever is lesser.

Brokerage Accounts

You can also save for retirement using a general investment account. While they won’t have the same tax advantages as a retirement account, general brokerage accounts don’t have limits on how much you can contribute or when you can take money out.

A brokerage account can be a good option for starting retirement savings if you want to contribute more than annual limits allow or take advantage of other benefits. Unlike retirement accounts, SoFi Invest®, for example, allows you to invest in exchange traded funds (ETFs), which offer a diversified mix of stocks and bonds at low fees.

3. Start Investing

The assets you choose to invest in will likely depend on a variety of factors. When choosing exchange-traded funds (ETFs), mutual funds, or stocks, here are some important considerations:

•  Your age
•  Time horizon for investing
•  Risk tolerance
•  Amount you’re comfortable investing
•  How hands-on (or hands-off) you’d like to be

ETFs and mutual funds can offer a simplified investing package, since one of the benefits of an ETF, and a mutual fund, is that the selection of stocks and bonds will provide diversification. Trading individual stocks, on the other hand, has the potential to yield higher returns.

When weighing stocks, mutual funds, or ETFs side by side, consider each one’s past performance and risk profile. With mutual funds and ETFs, pay attention to the expense ratio so you understand how much it will cost you to own a particular fund each year. A lower expense ratio will mean you get to keep more of the returns earned.

Estimate how much of your income you can afford to invest each month, based on your regular expenses, debt payments, and other money you’re allocating to savings. Aiming to save and invest 10% to 15% of what you earn is a good ballpark goal but you may want to tweak the number if it’s not a realistic target for you.

Finally, keep in mind that you also have a choice between passively and actively managed funds. Keep reading to learn the major pros and cons of each investing strategy.

Passive Investing vs. Active Investing

Passively managed funds, usually index funds or ETFs, track the performance of a certain index, such as the S&P 500. These funds usually offer lower fees than actively managed portfolios.

With active investing, your portfolio’s performance doesn’t necessarily depend on how an underlying benchmark performs but on the decisions made by you (or your fund manager) regarding how and where you invest. For example, you might build a portfolio that includes stocks from your favorite companies or actively managed ETFs.

Pros and Cons of Passive Investing

Passive investing may appeal to you if you prefer more of a hands-off approach to building a portfolio.

Pros Cons

•  Potentially lower investment costs
•  Track the performance of an underlying benchmark through the use of index funds
•  Simplified diversification
•  Doesn’t require advanced investment knowledge
•  Returns can meet the market but typically don’t beat it
•  Passive investing is not risk-free so you could still lose money with this strategy

Pros and Cons of Active Investing

This type of investment approach might appeal to you if you’d rather be hands-on in shaping your portfolio over time. You can tailor which stocks or funds you purchase or sell to your goals and risk tolerance, giving you flexibility.

Pros Cons

•  You’re in control of choosing your investments
•  An active portfolio may outperform a passive portfolio, depending on how you choose to invest
•  Online investment platforms like SoFi Invest make it easy to get started with active investing with low costs
•  Active investing can be risky and returns aren’t guaranteed
•  If you’re investing in actively managed funds, those can carry higher investment costs than passively managed funds

The Takeaway

Starting a retirement savings plan is one of the most important financial steps you can take in adulthood. The sooner you start, the sooner you can begin saving money for retirement—and rest easy with the knowledge that you are taking care of your future self.

There are many ways to save for retirement—whether by contributing to an employer-sponsored plan, an individual retirement plan, or by investing your money in a brokerage account.

Diversification across thousands of assets can reduce (but does not eliminate) your risk, and your portfolio is rebalanced once a month to keep it in line with your investment goal and risk tolerance.

Starting a retirement fund is an important financial priority—and thanks to online investment platforms like SoFi Invest, it’s easier to do than ever before. SoFi invest not only offers Roth or traditional IRAs, but also lets you invest with automated portfolios or engage in active investing by building your own portfolio with $0 commission for stocks and ETFs.

Find out how SoFi Invest can help you start saving for retirement.


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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns.. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.

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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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How to Choose a 401(k) Beneficiary: Rules & Options

Choosing a 401(k) beneficiary ensures that any unused funds in your account are dispersed according to your wishes after you pass away. Whether you’re married, single, or in a domestic partnership, naming a beneficiary simplifies the estate process and makes it easier for your heirs to receive the money.

There’s room on 401(k) beneficiary forms for both a primary and contingent beneficiary. Before making any decisions on a beneficiary and a backup, it can help to familiarize yourself with 401(k) beneficiary rules and options.

Why It’s Important to Name 401(k) Beneficiaries

If you die without a beneficiary listed on your 401(k) account, the distribution of the account may have to go through the probate process. While some plans with unnamed beneficiaries automatically default to a surviving spouse, others do not. If that’s the case—or if there is no surviving spouse—the 401(k) account becomes part of the estate that goes through probate as part of the will review.

The amount of time it will take for your heirs to go through the probate process varies depending on the state and the complexity of your assets. At a minimum, it can last months. Another downside of having your 401(k) go to probate instead of being directly inherited by a beneficiary is that the account funds could be used to pay off creditors. By naming a 401(k) beneficiary, you ensure your heirs receive the funds in full.

Having named 401(k) beneficiaries is a decision that overrides anything written in your will, as well as court orders, so it’s important to stay on top of this administrative task.

What to Consider When Choosing a Beneficiary

Your 401(k) may house a substantial amount of your retirement savings. How you approach choosing a 401(k) beneficiary depends on your personal situation. For married individuals, it’s common to choose a spouse. Some people choose to name a domestic partner or your children as beneficiaries.

Another option is to choose multiple beneficiaries, like multiple children or siblings. In this scenario, you can either elect for all beneficiaries to receive equal portions of your remaining 401(k) account, or assign each individual different percentages.

For example, you could allocate 25% to each of four children, or you could choose to leave 50% to one child, 25% to another, and 12.5% to the other two.

In addition to choosing a primary beneficiary, you must also choose a contingent beneficiary. This individual only receives your 401(k) funds if the primary beneficiary passes away. If the primary beneficiary is still alive, the contingent beneficiary doesn’t receive any funds.

401(k) Beneficiary Rules and Restrictions

Really, an individual can choose anyone they want to be a 401(k) beneficiary, with a few limitations. There are only a few restrictions and requirements on who may be named a beneficiary.

•  Minor children cannot be direct beneficiaries. They must have a named guardian oversee the inherited funds on their behalf, which will be chosen by a court if not specifically named. Choosing a reliable guardian helps to ensure the children’s inheritance is managed well until they reach adulthood.

•  A waiver may be required if someone other than a spouse is designated. Accounts that are ruled by the Employee Retirement Income Security Act (ERISA) have 401(k) spouse beneficiary rules. A spousal waiver is required if you designate less than 50% of your account to your spouse. Your plan administrator can tell you whether or not this rule applies to your specific 401(k).

How to Name Multiple 401(k) Beneficiaries

You are allowed to have multiple 401(k) beneficiaries, both for a single account and across multiple accounts. You must name them for each account, which gives you flexibility in how you want to pass on those funds.

When naming multiple beneficiaries, it’s common practice to divide the account by percentage, since the dollar amounts may vary based on what you use during your lifetime and investment performance.

However, also consider how the funds will be taxed for each individual . Spouse and non-spouse beneficiaries have different rules for an inherited 401(k). Spouses usually have more options available, but they differ depending on the spouse’s age and your age at the time of passing. In many cases, the spouse may roll over the funds into a specific spousal or inherited IRA.

Non-spouse beneficiaries may face higher tax consequences, but may be able to extend or stretch any required distributions over their life span to reduce their taxable income. They can also take out the money as a lump sum, which will be subject to income tax, but not the 10% early withdrawal penalty.

What to Do After Naming Beneficiaries

Once you’ve selected one or more beneficiaries, take the following steps to notify your heirs and to continually review and update your decisions as you move through various life stages.

Inform Your Beneficiaries

Naming your beneficiaries on your 401(k) plan makes sure your wishes are legally upheld, but you’ll make the inheritance process easier by telling your beneficiaries about your accounts. They’ll need to know where and how to access the account funds, especially since 401(k) accounts can be distributed outside of probate, making the process much faster than other elements of your estate plan.

For all of your accounts, including a 401(k), it’s a good idea to keep a list of financial institutions and account numbers. This makes it easier for your beneficiaries to access the funds quickly after your death. Plus, there may be rules on the pace at which the funds must be dispersed after your death—in some cases, your beneficiary may need to spread out withdrawals of the entire account over the 10 years following your death.

Revise After Major Life Changes

Managing your 401(k) beneficiaries isn’t necessarily a one-time task. It’s important to regularly review and update your decisions, especially as major life events occur. The most common events include marriage, divorce, birth, and death.

Common Life Stages

Before you get married, you may decide to list a parent or sibling as your beneficiary. But you’ll likely want to update that to your spouse or domestic partner, should you have one. At a certain point, you may also wish to add your children, especially once they reach adulthood and can be named as direct beneficiaries.

Divorce

It’s particularly important to update your named beneficiaries if you go through a divorce. If you don’t revise your 401(k) account, your ex-spouse could end up receiving those benefits—even if your will has been changed.

Death of a Beneficiary

Should your primary beneficiary die before you do, your contingent beneficiary will receive your 401(k) funds if you pass away. Any time a major death happens in your family, take the time to see how that impacts your own estate planning wishes. If your spouse passes away, for instance, you may wish to name your children as beneficiaries.

Second Marriages and Blended Families

Also note that the spouse rules apply for second marriages as well, whether following divorce or death of your first spouse. Your 401(k) automatically goes to your spouse if no other beneficiary is named. And if you assign them less than 50%, you’ll need that spousal waiver. Financial planning for blended families takes thought and communication, especially if you remarry later in life and want some or all of your assets to go to your children.

Manage Your Account Well

Keep your 401(k) beneficiaries in mind as you manage your account over the years. While it is possible to borrow from your 401(k), this can cause issues if you pass away with an outstanding balance. The loan principal will likely be deducted from your estate, which can limit how much your heirs actually receive.

Also try to streamline multiple 401(k) accounts as you change jobs and open new employer-sponsored plans. There are several ways to rollover your 401(k), which makes it easier for you to track and update your beneficiaries. It also simplifies things for your heirs after you pass away, because they don’t have to track down multiple accounts.

How to Update 401(k) Beneficiaries

Check with your 401(k) plan administrator to find out how to update your beneficiary information. Usually you’ll need to just fill out a form or log into your online retirement account.

Typically, you need the following information for each beneficiary:

•  Type of beneficiary
•  Full name
•  Birth date
•  Potentially their Social Security number

Although your named beneficiaries on the account supersede anything written in your will, it’s still smart to update that document as well. This can help circumvent legal challenges for your heirs after you pass away.

The Takeaway

A financial plan at any age should include how to distribute your assets should you pass away. The best way to manage your 401(k) is to formally name one or more beneficiaries on the account. This helps speed up the process by avoiding probate.

A named beneficiary trumps anything stated in your will. That’s why it’s so important to regularly review these designations to make sure the right people are identified to inherit your 401(k) assets.

Preparing for retirement? SoFi Invest® offers both traditional and Roth IRAs to help you reach your goals.

Find out how SoFi can help you with a financial plan for retirement.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Digital Assets—The Digital Assets platform is owned by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, http://www.sofi.com/legal.

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.
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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