May
23
2025
IRA Withdrawal Rules: All You Need to Know

Traditional and Roth IRA Withdrawal Rules & Penalties

By | invest, Investing, Preparing for Retirement | Comments Off on Traditional and Roth IRA Withdrawal Rules & Penalties

The purpose of an Individual Retirement Account (IRA) is to save for retirement. Ideally, you sock away money consistently in an IRA and your investment grows over time.

However, IRAs have strict withdrawal rules both before and after retirement. It’s very important to understand the IRA rules for withdrawals to avoid incurring penalties.

Here’s what you need to know about IRA withdrawal rules.

Key Points

•   Traditional and Roth IRAs have specific withdrawal rules and penalties.

•   Roth IRA withdrawal rules include the five-year rule for penalty-free withdrawals, and required minimum distributions (RMDs) for inherited IRAs.

•   Traditional IRA withdrawals before age 59 ½ incur regular income taxes and a 10% penalty.

•   There are exceptions to the penalty, such as using funds for medical expenses, health insurance, disability, education, and first-time home purchases.

•   Generally speaking, early IRA withdrawals might be thought of as a last resort due to the potential impact on retirement savings and tax implications.

Roth IRA Withdrawal Rules

So when can you withdraw from a Roth IRA? The IRA withdrawal rules are different for Roth IRAs vs traditional IRAs. For instance, qualified withdrawals from a Roth IRA are tax-free, since you make contributions to the account with after-tax funds.

There are some other Roth IRA withdrawal rules to keep in mind as well.

The Five-year Rule

The date you open a Roth IRA and how long the account has been open is a factor in taking your withdrawals.

According to the five-year rule, you can generally withdraw your earnings tax- and penalty-free if you’re at least 59 ½ years old and it’s been at least five years since you opened the Roth IRA. You can withdraw contributions to a Roth IRA anytime without taxes or penalties. (The annual IRA contribution limits for 2024 and 2025 are $7,000, or $8,000 for those age 50 and up.)

Even if you’re 59 ½ or older, you may face a Roth IRA early withdrawal penalty if the retirement account has been open for less than five years when you withdraw earnings from it.

These Roth IRA withdrawal rules also apply to the earnings in a Roth that was a rollover IRA. If you roll over money from a traditional IRA to a Roth and you then make a withdrawal of earnings from the Roth IRA before you’ve owned it for at least five years, you’ll owe a 10% penalty on the earnings.

For inherited Roth IRAs, the five-year rule applies to the age of the account. If your benefactor opened the account more than five years ago, you can withdraw earnings penalty-free. If you tap into the money before that, though, you’ll owe taxes on the earnings.

Required Minimum Distributions (RMDs) on Inherited Roth IRAs

In most cases, you do not have to pay required minimum distributions (RMDs) on money in a Roth IRA account.

However, according to the SECURE Act, if your loved one passed away in 2020 or later, you don’t have to take RMDs, but you do need to withdraw the entire amount in the Roth IRA within 10 years.

There are two ways to do that without penalty:

•   Withdraw funds by December 31 of the fifth year after the original holder died. You can do this in either partial distributions or a lump sum. If the account is not emptied by that date, you could owe a 50% penalty on whatever is left.

•   Take withdrawals each year, based on your life expectancy.

Tax Implications of Roth IRA Withdrawals

Contributions to a Roth IRA can be withdrawn any time without taxes or penalties. However, let’s say an individual did active investing through their account, which generated earnings. Any earnings withdrawn from a Roth before age 59 ½ are subject to a 10% penalty and income taxes.

Recommended: Retirement Planning Guide

Traditional IRA Withdrawal Rules

If you take funds out of a traditional IRA before you turn 59 ½, you’ll owe regular income taxes on the contributions and the earnings, per IRA tax deduction rules, plus a 10% penalty. Brian Walsh, CFP® at SoFi specifies, “When you make contributions to a traditional retirement account, that money is going to grow without paying any taxes. But when you take that money out — say 30 or 40 years from now — you’re going to pay taxes on all of the money you take out.”

RMDs on a Traditional IRA

The rules for withdrawing from an IRA mean that required minimum distributions kick in the year you turn 73 (as long as you turned 72 after December 31, 2022). After that, you have to take distributions each year, based on your life expectancy. If you don’t take the RMD, you’ll owe a 25% penalty on the amount that you did not withdraw. The penalty may be lowered to 10% if you correct the mistake and take the RMD within two years.

Early Withdrawal Penalties for Traditional IRAs

In general, an early withdrawal from a traditional IRA before the account holder is at least age 59 ½ is subject to a 10% penalty and ordinary income taxes. However, there are some exceptions to this rule.

Recommended: What Is a SEP IRA?

When Can You Withdraw from an IRA Without Penalties?

As noted, you can make withdrawals from an IRA once you reach age 59 ½ without penalties.

In addition, there are other situations in which you may be able to make withdrawals without having to pay a penalty. These include having medical expenses that aren’t covered by health insurance (as long as you meet certain qualifications), having a permanent disability that means you can no longer work, and paying for qualified education expenses for a child, spouse, or yourself.

Read more about these and other penalty-free exceptions below.


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

9 Exceptions to the 10% Early-Withdrawal Penalty on IRAs

Whether you’re withdrawing from a Roth within the first five years or you want to take money out of an IRA before you turn 59 ½, there are some exceptions to the 10% penalty on IRA withdrawals.

1. Medical Expenses

You can avoid the early withdrawal penalty if you use the funds to pay for unreimbursed medical expenses that total more than 7.5% of your adjusted gross income (AGI).

2. Health Insurance

If you’re unemployed for at least 12 weeks, IRA withdrawal rules allow you to use funds from an IRA penalty-free to pay health insurance premiums for yourself, your spouse, or your dependents.

3. Disability

If you’re totally and permanently disabled, you can withdraw IRA funds without penalty. In this case, your plan administrator may require you to provide proof of the disability before signing off on a penalty-free withdrawal.

4. Higher Education

IRA withdrawal rules allow you to use IRA funds to pay for qualified education expenses, such as tuition and books for yourself, your spouse, or your child without penalty.

5. Inherited IRAs

IRA withdrawal rules for inherited IRAs state that you don’t have to pay the 10% penalty on withdrawals from an IRA, unless you’re the sole beneficiary of a spouse’s account and roll it into your own, non-inherited IRA. In that case, the IRS treats the IRA as if it were yours from the start, meaning that early withdrawal penalties apply.

6. IRS Levy

If you owe taxes to the IRS, and the IRS levies your account for the money, you will typically not be assessed the 10% penalty.

7. Active Duty

If you’re a qualified reservist, you can take distributions without owing the 10% penalty. This goes for a military reservist or National Guard member called to active duty for at least 180 days.

8. Buying a House

While you can’t take out IRA loans, you can use up to $10,000 from your traditional IRA toward the purchase of your first home — and if you’re purchasing with a spouse, that’s up to $10,000 for each of you. The IRS defines first-time homebuyers as someone who hasn’t owned a principal residence in the last two years. You can also withdraw money to help with a first home purchase for a child or your spouse’s child, grandchild, or parent.

In order to qualify for the penalty-free withdrawals, you’ll need to use the money within 120 days of the distribution.

9. Substantially Equal Periodic Payments

Another way to avoid penalties under IRA withdrawal rules is by starting a series of distributions from your IRA spread equally over your life expectancy. To make this work, you must take at least one distribution each year and you can’t alter the distribution schedule until five years have passed or you’ve reached age 59 ½, whichever is later.

The amount of the distributions must use an IRS-approved calculation that involves your life expectancy, your account balance, and interest rates.

Understanding How Exceptions Are Applied

If you believe that any of the exceptions to early IRA withdrawal penalties apply to your situation, you may need to file IRS form 5329 to claim them. However, it’s wise to consult a tax professional about your specific circumstances.


💡 Quick Tip: For investors who want a diversified portfolio without having to manage it themselves, automated investing could be a solution (although robo advisors typically have more limited options and higher costs). The algorithmic design helps minimize human errors, to keep your investments allocated correctly.

Is Early IRA Withdrawal Worth It?

While there may be cases where it makes sense to take an early withdrawal, many financial professionals agree that it should be a last resort. These are disadvantages and advantages to consider.

Pros of IRA Early Withdrawal

•   If you have a major expense and there are no other options, taking an early withdrawal from an IRA could help you cover the cost.

•   An early withdrawal may help you avoid taking out a loan you would then have to repay with interest.

Cons of IRA Early Withdrawal

•   By taking money out of an IRA account early, you’re robbing your own nest egg not only of the current value of the money but also the chance for future years of compound growth.

•   Money taken out of a retirement account now can have a big impact on your financial security in the future when you retire.

•   You may owe taxes and penalties, depending on the specific situation.

Alternatives to Early IRA Withdrawal

Rather than taking an early IRA withdrawal and incurring taxes and possible penalties, as well as impacting your long-term financial goals, you may want to explore other options first, such as:

•   Using emergency savings: Building an emergency fund that you can draw from is one way to cover unplanned expenses, whether it’s car repairs or a medical bill, or to tide you over if you lose your job. Financial professionals often recommend having at least three to six months’ worth of expenses in your emergency fund.

To create your fund, start contributing to it weekly or bi-weekly, or set up automatic transfers for a certain amount to go from your checking account into the fund every time your paycheck is direct-deposited.

•   Taking out a loan: You could consider asking a family member or friend for a loan, or even taking out a personal loan, if you can get a good interest rate and/or favorable loan terms. While you’ll need to repay a loan, you won’t be taking funds from your retirement savings. Instead, they can remain in your IRA where they can potentially continue to earn compound returns.

Opening an IRA With SoFi

IRAs are tax-advantaged accounts you can use to save for retirement. However, it is possible to take money out of an IRA if you need it before retirement age. Just remember, even if you’re able to do so without paying a penalty, the withdrawals could leave you with less money for retirement later.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help build your nest egg with a SoFi IRA.

FAQ

Can you withdraw money from a Roth IRA without penalty?

You can withdraw your contributions to a Roth IRA without penalty no matter what your age. However, you generally cannot withdraw the earnings on your contributions before age 59 ½, or before the account has been open for at least five years, without incurring a penalty.

What are the rules for withdrawing from a Roth IRA?

You can withdraw your own contributions to a Roth IRA at any time penalty-free. But to avoid taxes and penalties on your earnings, withdrawals from a Roth IRA must be taken after age 59 ½ and once the account has been open for at least five years.

However, there are a number of exceptions in which you typically don’t have to pay a penalty for an early withdrawal, including some medical expenses that aren’t covered by health insurance, being permanently disabled and unable to work, or if you’re on qualified active military duty.

What are the 5 year rules for Roth IRA withdrawal?

Under the 5-year rule, if you make a withdrawal from a Roth IRA that’s been open for less than five years, you’ll owe a 10% penalty on the account’s earnings. If your Roth IRA was inherited, the 5-year rule applies to the age of the account. So if you inherited the Roth IRA from a parent, for instance, and they opened the account more than five years ago, you can withdraw the funds penalty-free. If the account has been opened for less than five years, however, you’ll owe taxes on the gains.

How do inherited IRA withdrawal rules differ?

According to inherited IRA withdrawal rules, you don’t have to pay the 10% penalty on withdrawals from an IRA unless you’re the sole beneficiary of a spouse’s account and roll it into your own, non-inherited IRA. In that case, the IRS treats the IRA as if it were yours from the start, meaning that early withdrawal penalties apply.

In addition, for inherited IRAs, the five-year rule applies to the age of the account. If the person you inherited the IRA from opened the account more than five years ago, you can withdraw earnings penalty-free.

Are there penalties for missing RMDs?

Yes, there are penalties for missing RMDs. You are required to start taking RMDs when you turn 73, and then each year after that. If you miss or don’t take RMDs, you’ll typically owe a 25% penalty on the amount that you failed to withdraw. The penalty could be lowered to 10% if you correct the mistake and take the RMD within two years.

Photo credit: iStock/Fly View Productions

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA(www.finra.org)/SIPC(www.sipc.org). For all full listing of the fees associated with Sofi Invest, please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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 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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May
23
2025

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

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Rollover IRA vs Traditional IRA: What’s the Difference?

If you’re leaving a job, you may hear the term “rollover IRA.” But exactly what is a rollover IRA? Employees have the option of moving their retirement savings from their employer-sponsored 401(k) plan to an individual retirement account, or IRA, at another financial institution when they leave a job. This IRA, where they transfer their 401(k) savings to, is called a rollover IRA. If the 401(k) plan was not a Roth 401(k), you’ll likely want to open what’s called a traditional IRA.

In this scenario, a rollover IRA is also a traditional IRA. But they aren’t always the same. You can have a traditional IRA that is not a rollover IRA. Read on for the differences worth noting between a rollover IRA and a traditional IRA.

Key Points

•   A rollover IRA is an individual retirement account created with funds rolled over from a qualified retirement plan, like a 401(k), usually when someone leaves a job.

•   A traditional IRA is funded by direct contributions by the account holder, and contributions are tax-deductible up to a cap and subject to eligibility limitations.

•   Directing rollover funds from an employer-sponsored plan to a traditional IRA that holds your direct contributions is called commingling funds, which you may not want to do, especially if you want to transfer the rollover funds to a new employer’s plan.

•   Withdrawals from either type of IRA before age 59.5 are subject to both income taxes and an early withdrawal penalty, except for certain eligible expenses.

•   The IRS requires owners of both types of IRAs to start making withdrawals at age 73 (for people born in 1951 or later); these withdrawals are also called required minimum distributions (RMDs).

Is There a Difference Between a Rollover IRA and 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.

💡 Recommended: Here’s a complete list of retirement plans to compare.

What Is a Rollover IRA?

A rollover IRA is an individual retirement 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 73, 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.

Recommended: This guide can help you financially prepare for retirement.

What Is a Traditional IRA?

Now that you know the answer to the question of what is a rollover IRA?, you’ll want to familiarize yourself with a traditional IRA. To understand the difference between a rollover IRA vs. traditional IRA, it helps to know 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 retirement, 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.

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 the 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 $7,000 for tax year 2024 plus an additional $1,000 if you’re 50 or older. Up to $7,000 for tax year 2024, plus an additional $1,000 if you’re 50 or older.
Withdrawal rules Withdrawals before age 59 ½ 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 59 ½ 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 73 (thanks to the SECURE 2.0 Act of 2022). You’re required to withdraw a certain amount of money from this account each year once you reach age 73 (again, thanks to the SECURE 2.0 Act).
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.)
Convertible to a Roth IRA Yes Yes

Can You Contribute to a Rollover IRA?

By now you’re probably wondering, can I contribute to a rollover IRA?, and the answer is yes. You can make contributions to a rollover IRA, up to IRA contribution limits. For tax year 2023, individuals can contribute up to $6,500 (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 suggestions 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.

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The Takeaway

Both a rollover IRA and a 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.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can you take money out of a rollover IRA?

You can, but if you take money from a rollover IRA (or a traditional IRA for that matter) before age 59½, those withdrawals are subject to income tax and an early withdrawal penalty of 10%. There are certain exceptions, however. If you withdraw the money for certain higher education expenses or to buy your first home, for example, the penalty may not apply.

Why would you rollover an IRA?

A rollover is when you move money between two different types of retirement plans. Typically, you might roll over an IRA if you leave a job with an employer-sponsored plan, such as a 401(k) or 403(b). You would roll the assets from that plan into a rollover IRA where your savings grow tax-free until you withdraw the money in retirement. You could instead choose to leave the money in your former employer’s plan, if that’s allowed, or roll it over into your new employer’s 401(k) or 403(b) plan, if they have one. However, a rollover IRA may offer you more investment choices and lower fees and costs than an employer-sponsored plan.

Can I roll over assets into my traditional IRA?

Yes, rolled over money can be contributed to a traditional IRA. It’s also worth noting that you can also combine a traditional IRA and a rollover IRA. You can do this with a direct transfer from one account to another, or by rolling money from one IRA to another, for instance. Just keep in mind that there is a limit of one rollover between IRAs in any 12-month period.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.


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


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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May
23
2025

What Is the Average Retirement Savings by Age?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on What Is the Average Retirement Savings by Age?

The average retirement savings by age depends on people’s income, expenses, and even where they live (with some states having higher retirement savings rates than others). The older you are, the more likely you are to prioritize retirement savings.

How much have Americans saved for retirement? While nearly half (46%) of households have no retirement savings, those that do have an average of about $334,000 saved, according to the Federal Reserve Board’s 2022 Survey of Consumer Finance, which is the most recent data available.

If you look at the median amount Americans have saved in retirement accounts such as IRAs, 401(k) and 403(b) plans, pensions, and so forth, that number is lower: about $87,000 per household.

Key Points

•   Average retirement savings by age varies widely, with savings increasing as people get older.

•   Though 46% of U.S. households show no retirement savings, those with retirement assets have an average of about $334,000.

•   By age 30, it’s generally recommended to save an amount equal to your annual salary, and by age 40, three to four times annual salary.

•   By age 50, it’s advised to have six times annual salary saved, and by age 60, eight times.

•   Given that many Americans are not saving for retirement, it’s important to consider these broader benchmarks as a way to keep your own savings on track.

Average Retirement Savings By Age

Below is a breakdown of retirement savings by age group, ranging from people in their 20s to people in their 70s, according to the 2022 Survey of Consumer Finance.

Age Group

 Mean Retirement Savings
Under age 35 $49,130
35 to 44 $141,520
45 to 54 $313,220
55 to 64 $537,560
65 to 74 $609,230

Source: 2022 Survey of Consumer Finance, Federal Reserve Board, latest data available.

Average Retirement Savings Before Age 35: $49,130

Most Americans in their 20s and early 30s haven’t reached their peak earning years, and many might be paying off student loans, and saving up to buy a house or have kids. Retirement isn’t always top of mind.

But the earlier people can figure out which retirement plan is right for them and commit to actually starting a retirement savings plan, the more they will benefit from compound growth over time.

Average Retirement Savings, Age 35 to 44: $141,520

With their careers and lives generally more established, many people are making more money at this age than they ever have. It can be tempting to spend more on lifestyle choices (e.g., vacations, cars, furniture). Many people also have mortgages, families, and other big-ticket expenses during this time in their lives.

But those who put that money towards retirement may be able to reach their retirement goal with greater confidence. Granted, it can be difficult to juggle competing priorities, but taking advantage of employer-provided retirement accounts, matching funds, and automatic transfers to savings can all help busy people make progress.

Recommended: How to Save for Retirement at 30

Average Retirement Savings, Age 45 to 54: $313,220

At this age, some Americans are on track to reach their retirement goals, while others are far off. There are still ways to catch up, such as cutting unnecessary expenses, moving to a smaller home, or putting any additional pay, income, or bonuses into retirement accounts.

In addition, many retirement accounts offer what’s known as a catch-up provision, which is a way to add more money to certain accounts, once you’re over age 50. Starting in 2025, there is also a new policy that allows people between 60 and 64 to save an extra amount in an employer-sponsored plan.

Average Retirement Savings, Age 55 to 64: $537,560

Although the goal for many is to retire at about age 65, many Americans have to keep working since they don’t have enough savings. In some cases, people plan on working at this stage of life anyway, although it’s not always easy to find work. Ideally, working in later years of life would be a choice and not a necessity.

Retirement contributions tend to increase as people age partly because they are earning more and partly because they are thinking about retirement more — and in some cases because other expenses are lower. For example: Your kids may be done with college, or you may have paid off your mortgage.

Average Retirement Savings, Age 65 to 74: $609,320

Many people in this age group have embarked on retirement, thanks to years of self-directed investing (although many retirees may have consulted a professional as well). This is a time when people need to evaluate the amount they have saved in light of how long they are likely to live — which is the most significant factor impacting retirees, in addition to the cost of living.

It may be possible to enjoy some years of travel, starting a business, helping raise grandchildren — or other adventures. Or it may be a time to adjust living expenses in order to make one’s savings last.

Target Retirement Savings by Age

Because the cost and standard of living varies so greatly, there aren’t clear dollar figure amounts that each age group should aim to have saved for retirement. But there are suggested guidelines, and numerous ways to save for retirement as well.

Retirement Savings Benchmarks

•   By age 30: It’s generally recommended that people save an amount equal to their annual salary by the time they reach age 30. That may not be a realistic goal for many people, but it can be a general guideline or goal to aspire to.

One way to achieve this is to save 10-15% of one’s gross income starting in one’s 20s. Some employers will match 401(k) contributions if employees save a certain amount each month, so it’s a good idea to contribute at least that much to take advantage of what is essentially free money.

•   By age 40: It’s recommended that investors have three to four times their annual salary saved by age 40.

•   By age 50: Investors are typically advised to have six times their salary saved by age 50.

•   By age 60: It’s recommended that investors have eight times their salary saved by age 60.

•   By age 67: Investors are typically advised to have ten times their salary saved by age 67, which is considered full retirement age for Social Security for many Americans.

For example, if a 67-year-old makes $75,000 per year, ideally they would aim to have $750,000 saved, more or less, at the point at which they actually retire and start to claim Social Security.

Is Anyone Saving Enough for Retirement?

Despite the above recommendations, most Americans don’t have nearly these amounts in their retirement accounts. As noted, a significant percentage of Americans don’t have any retirement savings at all — and that includes Americans who are near retirement age.

In a recent SoFi survey of adults aged 18 and over, 59% had either no retirement savings or less than $49,000.

So, while some people are saving enough for retirement, many people aren’t. And relying on Social Security benefits isn’t likely to cover all of a retiree’s living expenses.

Social Security and Your Retirement

Social Security was designed to help people pay some of their expenses during retirement, but it was always assumed these benefits would be part of an individual’s larger income plan, which might include a pension and personal savings.

As a result, Social Security benefits are generally modest. As of January 2025, the estimated average Social Security payment for a retired worker was around $1,976 per month. But benefit amounts can be higher or lower, depending on your earning history, how old you are when you file, and other factors.

Perspectives on Social Security Vary Widely

In addition, people have different perspectives about Social Security. According to SoFi’s recent retirement survey, some adults think it will be their main source of income in retirement, while others see it as a supplement to other income sources. And some people aren’t counting on Social Security at all.

Perceptions of Social Security Perceptions in Retirement

•   41% Perceive SS as a supplementary source of income

•   31% Perceive SS as a their primary source of income

•   16% Aren’t relying on SS as a source of income

•   12% Aren’t sure how to perceive SS in their retirement plans

Source: SoFi Retirement Survey, April 2024

The fact that nearly a third of respondents believe Social Security could be their primary source of income reveals a lack of awareness of these benefits and how they work. And it points to a need for greater education around the need for personal savings and careful financial planning.

Strategies to Maximize Retirement Savings

It can be stressful to feel behind on saving for retirement, but it’s never too late to start.

There are several ways to save for retirement — but a good place to start, if you haven’t already, is by creating a budget to track expenses. This allows you to see where your money is going and identify categories of spending that could be reduced. It’s then possible to direct some of those savings to a retirement account, such as a traditional IRA, or a work-sponsored plan such as a 401(k) or 403(b).

Some retirement plans also have catch up options for those who start late — typically, individuals older than 50 can contribute extra funds to their retirement accounts.

No matter how much you put aside for retirement, or whether you contribute to a traditional IRA or a Roth IRA, a 401(k) or an after-tax investment account, a good strategy is to automate savings. With automated savings, the money is deducted from your paycheck or your bank account automatically — making it easy to forget that the money was ever in the account in the first place.

Recommended: Comparing the SIMPLE IRA vs. Traditional IRA

Retirement Account Options

Whether you’re employed full-time, working part-time, or you’re self-employed, there are many types of retirement account options available. Following is a selection of common retirement accounts, but there are others as well.

Bear in mind: Most retirement accounts offer different tax advantages, as well as strict rules about annual contribution limits, withdrawals and early withdrawals, loans, and required minimum distributions (RMDs). Be sure to understand the terms, to ensure a the plan you choose can help you reach your goals before funding a retirement account.

Individual Retirement Accounts, or IRAs

With an IRA, you open and fund a tax-advantaged IRA account yourself or for a custodian (e.g., a minor child). IRAs are for individuals, and are not offered by employers. That said, small businesses may offer a special type of IRA.

IRAs come in two flavors: traditional and Roth IRAs. When considering a Roth IRA vs traditional it’s important to understand the tax implications of each type of account. Traditional IRAs take tax-deferred contributions. This means your contributions are pre-tax, and can reduce your taxable income. You owe ordinary income tax on withdrawals.

Roth IRAs are considered after tax, because you deposit funds that have been taxed already. Qualified withdrawals are tax free.

Recommended: Roth IRA vs Traditional IRA: Key Differences

Employer-Sponsored Plans

A 401(k) plan is a tax-advantaged plan typically offered to the employees of a company. A 403(b) and 457(b) are similar, but offered by governments, schools, churches, or non-profit organizations that are tax exempt.

Traditional accounts allow employees to contribute pre-tax dollars, but withdrawals are taxed as income in retirement. Roth versions of these accounts (you may be able to set up a Roth 401(k) or Roth 403(b) account) allow after-tax contributions, and qualified tax-free withdrawals.

Self-Employed and Small Business Accounts

•   A Saving Incentive Match Plan for Employees, or SIMPLE IRA plan, is also a tax-deferred account, similar to a traditional IRA. But these accounts are designed for small businesses with 100 employees or less (including sole proprietors, and people who are self-employed).

As a result, the contribution limits for SIMPLE IRAs are higher, and the tax treatment of these plans is slightly different.

•   A SEP IRA is a Simplified Employee Pension Plan that small businesses and self-employed individuals can fund. Here, the employer makes the contributions. Employees do not. Like a SIMPLE IRA, the annual contribution limits are generally higher than for standard IRAs.

The Takeaway

The average American household has about $334,000 in retirement accounts, e.g., IRAs, 401(k) and 403(b) plans, pensions, and so forth. The number varies depending on age groups and other factors. Knowing how much others in your age group are saving for retirement can help provide a benchmark for evaluating whether you’re making the progress you envision.

There are a number of different formulas, calculations, and rules of thumb to help individuals figure out how much money they’ll need in retirement. While these figures can be helpful, it’s also important to take personal goals, financial responsibilities, and lifestyle into consideration.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

How much money do I need to retire comfortably?

Calculating the amount you need to retire comfortably is highly personal. It depends on how long you’re likely to live, how healthy you are, as well as the lifestyle you envision. It may be worth consulting with a professional to lay out different options, and what the financial implications may be, as this can influence how much you save as well as your investment strategy.

What percentage of my income should I save for retirement?

The general rule of thumb is to save between 10% and 20% of your income for retirement. The exact amount will depend on many factors, including whether you’re saving for yourself or also for a spouse; what your likely longevity will be; whether you might have other financial sources of income (e.g., from a trust or an inheritance); and the retirement lifestyle you hope to have.

When should I start saving for retirement?

Given that you could live as many years in retirement as you did while you were working, the odds are that you might need more savings than you anticipated. In that light, it’s wise to start as soon as you can, and maximize the savings opportunities available to you.

What happens if I start saving for retirement late?

If you get a late start on retirement, it’s even more important to maximize your savings and your investing strategy. As an older saver, it can be hard to recover from market volatility, so you want to be cautious. It may make sense to work with a professional.

How do I catch up on retirement savings?

Catching up on retirement savings can mean boosting the percentage you save, pairing another retirement account, such as an IRA, with your employer plan, making sure you get your employer match, and — for those 50 and up — being sure to take advantage of catch-up provisions that allow you to save more in most retirement accounts. For those between the ages of 60 and 64, a “super catch-up” amount is now allowed in most employer plans.

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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Pros & Cons of Using Retirement Funds to Pay for College

By | Going to College, Preparing for Retirement, Student Loans, student_loan | Comments Off on Pros & Cons of Using Retirement Funds to Pay for College

Using retirement funds to pay for college may seem like a convenient solution when faced with the high cost of higher education, especially for parents looking to support their children. However, tapping into these savings can have significant financial consequences.

While certain retirement accounts, like IRAs, allow penalty-free withdrawals for qualified education expenses, the funds are often still subject to income tax and may reduce long-term retirement security.

Understanding the pros and cons can help families make informed decisions about whether to use retirement savings for college costs.

Key Points

•   Using retirement funds to pay for college can help avoid student loans, but it may incur tax liabilities and penalties depending on the account type.

•   Early withdrawals from an IRA for educational purposes can bypass the 10% penalty, but the amount withdrawn will still be taxable as income.

•   Loans from a 401(k) allow borrowing without immediate tax consequences, but leaving a job may trigger immediate repayment obligations, turning the loan into a taxable withdrawal.

•   Alternatives to using retirement funds include scholarships, federal student loans, Parent PLUS Loans, and private student loans, which may be less risky for retirement savings.

•   Balancing financial security with supporting a child’s education is essential; exploring various funding options can help maintain future financial stability.

Pros of Using Retirement Funds to Pay for College

If you already have the money saved up, there can be some upsides to taking money out of your retirement funds so that your child won’t need to take out student loans.

May Avoid an Early Withdrawal Penalty

If you have an individual retirement account (IRA), taking an early withdrawal typically results in income taxes on the withdrawal amount plus a 10% penalty. However, if you withdraw funds for qualified higher education expenses, the 10% penalty is waived.

That said, the withdrawn funds will still be considered taxable as income. Also, this tax break does not apply to 401(k) accounts. But if you roll over your 401(k) into an IRA, then you would be able to withdraw the funds from the IRA and avoid the penalty.

May Avoid Taxes Altogether

If you have a Roth IRA, you can withdraw up to the amount you’ve contributed to the account over the years without any tax consequences at all.

Paying Interest to Yourself With a 401(k) Loan

In addition to allowing you to take early withdrawals, some 401(k) plans also let you borrow from the amount you’ve already saved and earned over the years.

If you borrow from a 401(k) account, that money won’t be subject to taxes the way an early withdrawal would. Also, when you’re paying that loan back, the money you pay in interest goes back into your 401(k) account rather than to a lender.

Drawbacks of Using Retirement Funds to Pay for College

Before you raid your retirement to pay for your child’s college tuition, here are some potentially negative aspects to consider.

May Be Negative Tax Consequences

Even if you manage to avoid being charged a 10% early withdrawal penalty on your retirement account, some or all of the money you withdraw from a retirement account may be considered taxable income. Depending on how much it is, you could face a larger-than-usual tax bill when you file your tax return for the year.

401(k) Loan Repayment Can Be Affected by Your Job Status

If you take out a large loan from your 401(k), then leave your job, you may be required to pay the loan in full right then, regardless of your original repayment term. If you can’t repay it, it’ll likely be considered an early withdrawal and be subject to income tax and the 10% penalty.

You May Have to Work Longer

Taking money out of a retirement account not only lowers your balance, but it also means that the money you’ve withdrawn is no longer working for you.

Due to compounding interest, the longer you have money invested, the more time it has to grow. But even if you replace the money you’ve taken out over time, the total growth may not be as much as if you’d left the money where it was all along.

Alternatives to Using Retirement Funds to Pay for College

While you can use retirement funds to pay for college, there are other options to consider, too.

Scholarships and Grants

One of the best ways to pay for a college education is with scholarships and grants, since you typically don’t have to pay them back.

Check first with the school that your child is planning to attend (or is already attending) to see what types of scholarships and grants are available.

Then, make sure your child fills out the Free Application for Federal Student Aid (FAFSA®). The information provided in the FAFSA will help determine his or her federal aid package, which typically includes grants, federal student loans, and/or work-study.

Finally, you and your child can search millions of scholarships from online scholarship databases. While your child may not qualify for all of them, there may be enough relevant options to help reduce that tuition bill.

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Federal Student Loans

As mentioned above, filling out the FAFSA will give your child an opportunity to qualify for federal student loans from the U.S. Department of Education.

These loans have low fixed interest rates, plus access to federal benefits, including loan forgiveness programs and income-driven repayment plans.

With most federal student loans, there’s no credit check requirement, so you don’t have to worry about needing to cosign a loan with your child.

Parent PLUS Loans

If you’re concerned about the effect of student loan debt on your child, you can opt to apply for a federal Parent PLUS Loan to help cover the costs of college.

Keep in mind that the terms aren’t usually as favorable for Parent PLUS Loans as they are for federal loans for undergraduate students. The interest rates are currently higher, and you may be denied if you have certain negative items on your credit history.

Private Student Loans

If your child can’t get federal student loans, is maxed out on loans, or has pursued all other options to no avail, private student loans may be worth considering to make up the difference.

To qualify for private student loans, however, you and/or your child may need to undergo a credit check. If your child is new to credit, you may need to cosign to help them get approved by being a cosigner — or you can apply on your own.

Private student loans don’t typically offer income-driven repayment plans or loan forgiveness programs, but if your credit and finances are strong, it may be possible to get a competitive interest rate.

Recommended: A Complete Guide to Private Student Loans

The Takeaway

Using retirement funds to pay for college is one way to help your child, but you may not want to risk your future financial security. Take the time to help your child consider all of the options to get the money to pay for school.

Options to pay for college include cash savings, working a part-time job, scholarships, grants, federal student loans, and private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.


Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.

FAQ

Can I use retirement funds to pay for my child’s college education?

Yes, it’s possible to use retirement funds, such as those from an IRA or 401(k), to pay for college expenses. However, this decision carries potential tax implications and penalties, depending on the type of account and how the funds are withdrawn.

What are the tax implications of withdrawing from an IRA for college expenses?

Withdrawals from an IRA for qualified higher education expenses can avoid the 10% early withdrawal penalty. However, the amount withdrawn is still considered taxable income, which could impact your tax bracket and financial aid eligibility.

What are the alternatives to using retirement funds for paying college tuition?

Alternatives include applying for scholarships, federal student loans, Parent PLUS Loans, and private student loans. These options can help cover college costs without compromising your retirement savings.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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


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.


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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Purchasing Power 101: Examining the Value of the US Dollar

Purchasing Power 101: Examining the Value of the US Dollar

By | invest, Investing, Preparing for Retirement | Comments Off on Purchasing Power 101: Examining the Value of the US Dollar

Purchasing power is a concept used to express the amount of goods and services a consumer or business can buy with a given unit of currency. In the United States, purchasing power is directly linked to the value of the dollar.

Due to inflation, a dollar today typically won’t go as far as it did last year. And a dollar next year won’t buy the same things that it did this year. This fluctuation in U.S. dollar purchasing power is constant, and typically goes unnoticed, except in times of extreme inflation.

Key Points

•   Purchasing power is the quantity of goods and services that can be bought with a unit of currency.

•   Inflation decreases the purchasing power of the U.S. dollar, influencing consumer and business decisions.

•   The Consumer Price Index (CPI) measures inflation, which impacts various economic indicators.

•   Inflation can pose challenges but also indicates economic growth, affecting stock market returns.

•   Investors can diversify their portfolios to help protect against inflation, and consider assets such as value stocks, REITs, and commodities.

How Does Purchasing Power Impact Investors?

Once you understand the purchasing power definition, you can start to understand its context for investing. The purchasing power of a dollar affects investors because it makes an impact on virtually every aspect of the broader economy.

When the dollar buys less, it changes the shopping decisions of consumers, the hiring practices of employers, the strategic decisions of corporations, and the monetary policy of the Federal Reserve.

One way to track inflation and the purchasing power of a dollar is the Consumer Price Index (CPI), a statistic compiled by the US Bureau of Labor Statistics (BLS), which reports the figure every month. The statistic measures the average prices of a set of goods and services in sectors such as transportation, food, and healthcare. Economists consider it a valuable gauge of the ever-changing cost of living, though it does exclude some important spending categories, including real estate and education.

Investors, executives, and policymakers use CPI as a lens through which to scrutinize other economic indicators, including sales numbers, revenues, earnings, and so on. It also determines the payments made to the millions of people on Social Security, which gets adjusted for the cost of living every year, and retirees drawing a pension from the military or the Federal Civil Services.


💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Why Does the Value of the Dollar Change?

A number of factors drive the value of the U.S. dollar, including large-scale factors having to do with economic cycles, government politics, and international relations.

But the dollar has also experienced inflation for most of the last century. Inflation rose after World War I amid increased demand for food and other raw materials, which raised prices of most consumer goods up until the Great Depression, in which the country experienced prolonged deflation.

That’s when President Franklin Roosevelt stepped in with a surprising policy decision: He banned private ownership of gold, and required people to sell their holdings to the government. That allowed the Federal Reserve to increase the money supply and stop deflation in its tracks.

Since 1933, through World War II, the Cold War, and a host of changing monetary and economic policies, the U.S. dollar has seen various rates of inflation. It reached its peak during the late 1970s and early 1980s oil and gas shortages exacerbated existing inflation and led to a gas shortage, and an increase in the price of manufacturing and shipping of nearly every single consumer good.

Inflation rose at a more steady pace through the 1990s, falling to historically low levels in the past decade. One reason for the ongoing inflation is that the Federal Reserve continually increased the money supply via economic stimulus. The logic is simple supply and demand: If there are more dollars, then each one is worth less in terms of purchasing power.

Following the pandemic in 2020, economies around the world also experienced inflation, which peaked in 2022, but has since fallen near more typical levels.

What Purchasing Power Means for Investors

Generally, investors consider inflation a headwind for the markets, as it drives up the costs of materials and labor, boosts the cost of borrowing and tends to reduce consumer spending. That all tends to translate to lower earnings growth, which can depress stock prices.

But after decades of steady inflation, the markets have priced in a certain amount of shrinkage when it comes to the purchasing power of the dollar. Inflation has a great impact when it occurs suddenly and unexpectedly.

But inflation can have benefits for investors as well. During an economic upswing, inflation is a reliable side effect of prosperity, since economic booms produce higher profits, which drives up the markets.

Investors saving for long-term goals, such as retirement, must take declining purchasing power into account when determining how much they’ll need to reach those goals.


💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.

How Does Inflation Influence Stocks?

Inflation impacts different types of stocks differently, and there are several strategies that investors can use to hedge against inflation. During periods of high inflation, growth stocks tend to underperform, simply because so much of their value is tied up in the expectation of future earnings, and inflation diminishes those expectations.

Value stocks, on the other hand, typically boast steadier earnings, and are valued in line with those earnings. As a result, value stocks, as a category, tend to hold up better during periods of high inflation.

Other investments to consider during periods of high inflation include dividend-paying utility stocks and REITs, gold and other commodities. And because periods of high inflation usually bring higher interest rates, it can be a good time to buy bonds, especially government bonds

The Takeaway

The value of the dollar, in terms of what it can buy, changes over time, but inflation isn’t always bad news for investors. Some stocks may perform better than others in an inflationary environment, and higher interest rates may be good news for bond investors and savers.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What is purchasing power?

The phrase “purchasing power” refers to the quantity of goods or services that a consumer can purchase with a unit of currency.

How does purchasing power affect investors?

Changes in purchasing power, often related to inflation or rising prices, can affect companies’ revenues, earnings, and more, cascading into economic indicators, and eventually, altering the markets. That, in effect, can impact investors.

Is inflation beneficial for investors?

It’s possible that inflation can have benefits for investors. During an economic upswing, inflation is a reliable side effect of prosperity, since economic booms produce higher profits, which drives up the markets, for example.

Photo credit: iStock/pcess609

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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