Sep
11
2026
Explaining the 3-Legged Stool of Retirement
The three-legged stool analogy refers to the three sources of income investors can tap in retirement. Here’s a summary of each, and who has access.
Read more
Sep
09
2026
Roth IRA Conversion: Rules and Examples
A Roth IRA is a retirement savings account that offers tax-free withdrawals during retirement. You can convert a traditional IRA or a qualified distribution from a previous employer-sponsored plan, such as a 401(k), into a Roth IRA. This is known as a Roth IRA conversion.
A Roth IRA conversion may be worth considering for the potential tax benefits. Along with tax-free qualified withdrawals in retirement, the money in a Roth IRA has the potential to grow tax-free. Read on to learn how a conversion works, the Roth IRA conversion rules, and whether a Roth IRA conversion may make sense for you.
What Is a Roth IRA Conversion?
With a Roth IRA conversion, an individual moves the funds from another retirement plan into a Roth IRA. You pay taxes on the money in your existing account in order to move it to a Roth IRA.
Many retirement plans, such as 401(k)s and traditional IRAs are tax-deferred. The money is contributed to your account with pre-tax dollars. In retirement, you would pay taxes on your withdrawals. But by doing a Roth conversion, you pay taxes on the money you convert to a Roth IRA, and the money can then potentially grow tax-free. In retirement, you can make qualified withdrawals from the Roth IRA tax-free.
You can convert all or part of your money to a Roth IRA.
💡 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.
How Does a Roth IRA Conversion Work?
As mentioned, when converting to a Roth IRA, an individual must pay taxes on the contributions and gains in their current retirement plan because only after-tax contributions are allowed to a Roth IRA. They can typically convert their funds to a Roth IRA in one of three ways:
• An indirect rollover: With this method, the owner of the account receives a distribution from a traditional IRA and can then contribute it to a Roth IRA within 60 days.
• A trustee-to-trustee, or direct IRA rollover: The account owner tells the financial institution currently holding the traditional IRA assets to transfer an amount directly to the trustee of a new Roth IRA account at a different financial institution.
• A same-trustee transfer: This is used when a traditional IRA is housed in the same financial institution as the new Roth IRA. The owner of the account alerts the institution to transfer an amount from the traditional IRA to the Roth IRA.
Roth IRA Conversion Rules
There are a number of rules that govern a Roth IRA conversion. Before you proceed with a conversion, it’s important to understand what;’s involved. Roth IRA conversion rules include:
Taxes
You’ll pay taxes on a traditional IRA or 401(k) before you convert it to a Roth IRA. This includes the tax-deductible contributions you’ve made to the account as well as the tax-deferred earnings. They will be taxed as ordinary income in the year that you make the conversion. Because they’re considered additional income, they could put you into a higher marginal tax bracket. You’ll also need to make sure you have the money on hand to pay the taxes.
Limits
There are two types of limits to be aware of with a Roth IRA conversion. First, there is no limit to the number or size of Roth IRA conversions you can make. You might want to convert smaller amounts of money into a Roth IRA over a period of several years to help manage the amount of taxes you’ll need to pay in one year.
Second, Roth IRAs have contribution limits. For instance, in 2025 you can contribute up to $7,000, or up to $8,000 if you’re 50 or older. In 2026, you can contribute up to $7,500 or $8,600 if you’re 50 or older.
Withdrawals
The withdrawals you make from a Roth IRA are tax-free. However, with a Roth IRA conversion, if you are under age 59 ½, you will need to wait at least five years before withdrawing the money or you’ll be subject to a 10% early withdrawal penalty (more on that below).
Backdoor Roth IRAs
A Roth IRA conversion may be an option to consider if you earn too much money to otherwise be eligible for a Roth IRA. Roth IRAs have contribution phase-out ranges, and individuals whose income exceeds those limits cannot contribute to a Roth fully or at all.
• For 2025, the income limits begin to phase out at $236,000 for those who are married and filing jointly, and $150,000 for those who are single.
• For 2026, the income limits phase-out begins at $242,000 for those who are married and filing jointly, and $153,000 for single filers.
However, if you have a traditional IRA and convert it to a Roth IRA — a process known as a backdoor Roth IRA — those income phase-out rules don’t apply. You can use a backdoor IRA as long as you pay taxes on any contributions to the traditional IRA that you deducted from your taxes, as well as any profits you earned.
5-Year Rule
According to the 5-year rule, if you are under age 59 ½, the funds that you convert to a Roth IRA must remain in your account for at least five years or you could be subject to a 10% early withdrawal penalty.
The five years starts at the beginning of the calendar year in which you do the conversion. So even if you don’t do the conversion until, say, December 2024, the five years still begins in January 2024. That means you could withdraw your funds in January 2029.
Also, if you complete separate Roth IRA conversions in different years, the 5-year rule would apply to each of them, so keep this in mind.
💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.
Is Converting to a Roth IRA Right for You?
Doing a Roth IRA conversion means paying taxes now on the funds you are converting in order to withdraw money tax-free in retirement. Here’s how to decide if converting a Roth IRA may be right for you
Reasons For
If you anticipate being in a higher tax bracket in retirement than you’re in now, a Roth IRA conversion may make sense for you. That’s because you’ll pay taxes on the money now at a lower rate, rather than paying them when you retire, when you expect your tax rate will be higher.
In addition, with a Roth IRA, you won’t have to take required minimum distributions (RMDs) every year after the age of 73 as you would with a traditional IRA. Instead, the money can stay right in the account — where it may continue to grow — until it’s actually needed.
If your income is too high for you to be eligible for a Roth IRA, a Roth IRA conversion might be beneficial through a backdoor IRA. You will just need to put your funds into a traditional IRA first and pay the taxes on them.
Finally, if you won’t need the funds in your Roth IRA for at least five years, a conversion may also be worth considering.
Reasons Against
A Roth IRA conversion may not be the best fit for those who are nearing retirement and need their retirement savings to live on. In this case, you might not be able to recoup the taxes you’d need to pay for doing the conversion.
Additionally, if you receive Social Security or Medicare benefits, a Roth IRA conversion would increase your taxable income, which could increase the taxes you pay on Social Security. The cost of your Medicare benefits might also increase.
Those who don’t have the money readily available to pay the taxes required by the conversion should also think twice about an IRA conversion.
And if you expect to be in a lower tax bracket in retirement, a conversion also likely doesn’t make sense for you.
Finally, if you think you might need to withdraw funds from your account within five years, and you’re under age 59 ½, you could be subject to an early withdrawal penalty if you convert to a Roth IRA.
The Takeaway
A Roth IRA conversion may help individuals save on taxes because they can make qualified withdrawals tax-free withdrawals in retirement. For those who expect to be in a higher tax bracket in retirement, a Roth IRA may be worth considering.
It’s important to be aware of the tradeoffs involved, especially the amount of taxes you might have to pay in order to do the conversion. Making the right decisions now can help you reach your financial goals as you plan and save for retirement.
Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.
FAQ
How much tax do you pay on a Roth IRA conversion?
You pay tax on the money you convert, but the specific amount of tax you’ll pay depends on the marginal tax rate you’re in. Before doing a Roth IRA conversion, you may want to calculate to see if the funds you’re converting will put you into a higher tax bracket.
How many Roth iRA conversions are allowed per year?
There is no limit to the number of Roth conversions you can do in one year.
When is the deadline for Roth IRA conversions?
The deadline for a Roth IRA conversion is December 31 of the year you’re doing the conversion.
Is there a loophole for Roth IRA conversions?
A backdoor IRA might be considered a loophole for a Roth IRA conversion. Roth IRAs have contribution phase-out ranges, and individuals whose income exceeds those limits cannot contribute to a Roth fully or at all. However, a backdoor IRA may be a way to get around the income limits. To do it, you will need to have a traditional IRA that you convert to a Roth IRA.
How do I avoid taxes on Roth conversion?
You cannot avoid paying taxes on a Roth conversion. You must pay taxes on the money you convert.
How do you not lose money in a Roth IRA conversion?
To reduce the tax impact of a Roth IRA conversion, you may want to split the conversion into multiple conversions of smaller amounts over several years. If possible, try to do the conversions in years when your taxable income is lower.
Do you have to pay taxes immediately on Roth conversion?
Taxes on a Roth conversion are not due until the tax deadline of the following year.
Should a 65 year old do a Roth conversion?
It depends on an individual’s specific situation, but a Roth conversion may not make sense for a 65 year old if they need to live off their retirement savings or if they are receiving Social Security or Medicare benefits. A Roth IRA conversion could increase the taxes they pay on Social Security, and the cost of their Medicare benefits might rise.
Does a Roth conversion affect my Social Security?
It might. A Roth IRA conversion increases your taxable income, which could potentially increase the taxes you pay on Social Security.
Does a Roth conversion affect Medicare premiums?
A Roth IRA conversion may affect your Medicare premiums. Because it increases your taxable income, the cost of your Medicare benefits might increase as well.
What is the best Roth conversion strategy?
The best Roth conversion strategy depends on your particular situation, but in general, to help reduce your tax bill, you can aim to make the conversion in a year in which you expect your taxable income to be lower. You may also want to do multiple smaller conversions over several years, rather than one big conversion in one year, to help manage the taxes you owe.
Can you do Roth conversions after age 72?
Yes, you can do Roth conversions at any age. Some individuals may want to consider a Roth IRA conversion at 72 if they prefer to avoid paying the required minimum distributions (RMDs) for traditional IRAs that begin at age 73. If you convert before you turn 73, you will not be required to take RMDs.
How do I calculate my Roth conversion basis?
The concept of basis, or money that you’ve paid taxes on already, might be applicable if you’ve made non-deductible contributions to a tax-deferred retirement account. When you convert the money in that account, in order to calculate the percentage that’s tax-free, you need to divide your total nondeductible contributions by the end-of-year value of your IRA account plus the amount you’ve converting.
Do you have to wait 5 years for each Roth conversion?
No. There is no time limit for doing Roth conversions, and in fact, you can do as many as you like in one year. However, if you’re under age 59 ½, you do have to wait five years after each conversion to be able to withdraw money from the account without being subject to an early withdrawal penalty.
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.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
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.
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services available to eligible residents of the 50 U.S. states and Puerto Rico. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
SOIN0124013
CN-Q425-3236452-19
Sep
09
2026
What Is the Roth IRA 5-Year Rule? Are There Exceptions?
The Roth IRA 5-year rule is one of the rules that governs what an investor can and can’t do with funds in a Roth IRA. The Roth IRA 5-year rule comes into play when a person withdraws funds from the account; rolls a traditional IRA account into a Roth; or inherits a Roth IRA account.
Here’s what you need to know.
Key Points
• The Roth IRA 5-year rule requires accounts to be open for five years before earnings can be withdrawn tax-free after age 59 ½.
• Contributions to a Roth IRA can be withdrawn at any time without penalties.
• Exceptions to the 5-year rule include reaching age 59 ½, disability, and using funds for a first home purchase.
• Each conversion from a traditional IRA to a Roth IRA starts a new 5-year period for tax purposes.
• Inherited Roth IRAs also adhere to the 5-year rule, affecting the taxation of earnings withdrawals.
What Is the Roth IRA 5-Year Rule?
The Roth IRA 5-year rule pertains to withdrawals of earnings from a Roth IRA. A quick reminder of how a Roth works: An individual can contribute funds to a Roth IRA, up to annual limits. For 2025, the maximum IRS contrbution limit for Roth IRAs is $7,000, while investors 50 and older can contribute an extra $1,000. For 2026, the maximum contribution limit is $7,500, and investors ages 50 and older can contribute an addiitional $1,100.
Roth IRA contributions can be withdrawn at any time without tax or penalty, for any reason at any age. However, investment earnings on those contributions can only typically be withdrawn tax- and penalty-free once the investor reaches the age of 59 ½ — and as long as the account has been open for at least a five-year period. The five-year period begins on January 1 of the year you made your first contribution to the Roth IRA. Even if you make your contribution at the very end of the year, you can still count that entire year as year one.
Example of the Roth IRA 5-Year Rule
To illustrate how the 5-year rule works, say an investor opened a Roth IRA in 2022 to save for retirement. The individual contributed $5,000 to a Roth IRA and earned $400 in interest and they now want to withdraw a portion of the money. Since this retirement account is less than five years old, only the $5,000 contribution could be withdrawn without tax or penalty. If part or all of the investment earnings is withdrawn sooner than five years after opening the account, this money may be subject to a 10% penalty.
In 2027, the investor can withdraw earnings tax-free from the Roth IRA because the five-year period will have passed.
💡 Quick Tip: How much does it cost to open a new IRA account? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.
Exceptions to the 5-Year Rule
There are some exceptions to the Roth IRA 5-year rule, however. According to the IRS, a Roth IRA account holder who takes a withdrawal before the account is five years old may not have to pay the 10% penalty in the following situations:
• They have reached age 59 ½.
• They are totally and permanently disabled.
• They are the beneficiary of a deceased IRA owner.
• They are using the distribution (up to $10,000) to buy, build, or rebuild a first home.
• The distributions are part of a series of substantially equal payments.
• They have unreimbursed medical expenses that are more than 7.5% of their adjusted gross income for the year.
• They are paying medical insurance premiums during a period of unemployment.
• They are using the distribution for qualified higher education expenses.
• The distribution is due to an IRS levy of the qualified plan.
• They are taking qualified reservist distributions.
5-Year Rule for Roth IRA Conversions
Some investors who have traditional IRAs may consider rolling them over into a Roth IRA. Typically, the money converted from the traditional IRA to a Roth is taxed as income, so it may make sense to talk to a financial or tax professional before making this move.
If this Roth IRA conversion is made, the 5-year rule still applies. The key date is the tax year in which the conversion happened. So, if an investor converted a traditional IRA to a Roth IRA on September 15, 2022, the five-year period would start on January 1, 2022. If the conversion took place on March 10, 2023, the five-year period would start on January 1, 2023. So, unless the conversion took place on January 1 of a certain year, typically, the 5-year rule doesn’t literally equate to five full calendar years.
If an investor makes multiple conversions from a traditional IRA to a Roth IRA, perhaps one in 2023 and one in 2024, then each conversion has its own unique five-year window for the rule.
5-Year Rule for Inherited Roth IRA
The 5-year rule also applies to inherited Roth IRAs. Here’s how it works.
When the owner of a Roth IRA dies, the balance of the account may be inherited by beneficiaries. These beneficiaries can withdraw money without penalty, whether the money they take is from the principal (contributions made by the original account holder) or from investment earnings, as long as the original account holder had the Roth IRA for at least five years. If the original account holder had the Roth IRA for fewer than five tax years, however, the earnings portion of the beneficiary withdrawals is subject to taxation until the five-year anniversary is reached.
People who inherit Roth IRAs, unlike the original account holders, must take required minimum distributions (RMDs). They can do so by withdrawing funds by December 31 of the 10th year after the original holder died if they died after 2019 (or the fifth year if the original account holder died before 2020), or have the withdrawals taken out based upon their own life expectancy.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
How to Shorten the 5-Year Waiting Period
To shorten the five-year waiting period, an investor could open a Roth IRA online and make a contribution on the day before income taxes are due and have it applied to the previous year. For example, if one were to make the contribution in April 2023, that contribution could be considered as being made in the 2022 tax year. As long as this doesn’t cause problems with annual contribution caps, the five-year window would effectively expire in 2027 rather than 2028.
If the same investor opens a second Roth IRA — say in 2024 — the five-year window still expires (in this example) in 2027. The initial Roth IRA opened by an investor determines the beginning of the five-year waiting period for all subsequently opened Roth IRAs.
The Takeaway
For Roth IRA account holders, the 5-year rule is key. After the account has been opened for five years, an account holder who is 59 ½ or older can withdraw investment earnings without incurring taxes or penalties. While there are exceptions to this so-called 5-year rule, for anyone who has a Roth IRA account, this is important information to know about.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
FAQ
Do I have to wait 5 years to withdraw from my Roth IRA?
Because of the Roth IRA 5-year rule, you generally have to wait at least five years before withdrawing earnings tax-free from your Roth IRA. You can, however, withdraw contributions you made to your Roth IRA at any time tax-free.
Does the 5-year rule apply to Roth contributions?
No, the Roth IRA rule does not apply to contributions made to your Roth IRA, only to earnings. You can withdraw contributions you made to your IRA tax-free at any time.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services available to eligible residents of the 50 U.S. states and Puerto Rico. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
SOIN0124023
CN-Q425-3236452-05
Sep
01
2026
Rollover IRA vs Traditional IRA: What’s the Difference?
Table of Contents
- What Is a Rollover IRA?
- What Is a Traditional IRA?
- Is a Rollover IRA the Same as a Traditional IRA?
- Rollover IRA vs. Traditional IRA: A Side-by-Side Comparison
- Should You Roll Over to an IRA or Leave Your Money in an Employer Plan?
- Can You Contribute to a Rollover IRA?
- Can You Combine a Traditional IRA With a Rollover IRA?
- How to Open a Rollover or Traditional IRA
- FAQ
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 a traditional IRA or a rollover IRA before age 59 ½ are subject to both income taxes and an early withdrawal penalty, aside from certain eligible exceptions.
- The IRS requires owners of both types of IRAs to start making withdrawals at age 73 (for people born in 1951 through 1959) or age 75 (for people born in 1960 or later); these withdrawals are also called required minimum distributions (RMDs).
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 like a 401(k). 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-deferred until you withdraw the money in retirement. And because you choose the provider rather than your employer, you can compare your options on investment selection, fees, and account access.
Moving the money through a direct rollover, where the funds go straight from your old plan to the IRA, keeps that tax-deferred status intact and avoids taxes and penalties.
What Is a Traditional IRA?
A traditional IRA is an individual retirement account that you can fund with your own contributions. If you or your spouse have taxable compensation for the year, you may be able to contribute up to the annual limit set by the IRS.
When you open a traditional IRA, your contributions may be tax deductible, depending on your income and whether you or your spouse is covered by a retirement plan at work.[1] Your savings then grow tax-deferred, which means you owe no tax on earnings while they stay in the account. You pay ordinary income tax on the money when you withdraw it 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.
Is a Rollover IRA the Same as 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: Types of Retirement Plans and Which to Consider
Rollover IRA vs. Traditional IRA: A Side-by-Side Comparison
| 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: • $7,500 for tax year 2026 plus an additional $1,100 if you’re 50 or older.[2] • $7,000 for tax year 2025 plus an additional $1,000 if you’re 50 or older. |
• Up to $7,500 for tax year 2026, plus an additional $1,100 if you’re 50 or older.[2] • Up to $7,000 for tax year 2025, 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, or age 75 if you were born in 1960 or later[3] (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, or age 75 if you were born in 1960 or later[3] (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 |
Should You Roll Over to an IRA or Leave Your Money in an Employer Plan?
Because a rollover IRA generally follows the same tax rules as a traditional IRA, the bigger decision is whether to move money from your old employer plan into an IRA or leave it in the plan.
Reasons to Roll Over Into an IRA
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.
Reasons to Leave Your Money Where It Is
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, or age 75 if you were born in 1960 or later, 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: 4 Step Guide to Retirement Planning
Can You Contribute to a Rollover IRA?
Yes, a rollover IRA can accept new contributions just like any other traditional IRA. You can make contributions to a rollover IRA, up to IRA contribution limits. For tax year 2026, you can contribute up to $7,500 (with an additional catch-up contribution of $1,100). 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 holds money rolled over from an employer-sponsored retirement plan. Because of this, you can generally combine a rollover IRA and a traditional IRA by moving the assets from one account into the other.
How you move the money matters. With an indirect, or 60-day, rollover, the money is paid to you and you generally have 60 days to deposit it into another eligible retirement account.[4] With a trustee-to-trustee transfer or direct rollover, the money moves directly between financial institutions, so it never passes through your hands and there’s no 60-day deadline to manage.
One catch applies when money from an employer-sponsored retirement plan is paid directly to you. The plan generally must withhold 20% for federal income taxes, even if you intend to roll over the full amount. To complete a full rollover, you would need to replace that 20% with money from another source within the 60-day period. Any taxable portion you don’t roll over generally counts as a distribution and, if you’re under age 59½, may also be subject to a 10% additional tax unless an exception applies.
There are a few other considerations when combining accounts. Mixing regular IRA contributions with rollover assets may make it more complicated to move those assets into a future employer-sponsored retirement plan, depending on the plan’s rules. Also, you generally can make only one 60-day rollover between IRAs in any 12-month period. That limit does not apply to trustee-to-trustee transfers, rollovers from an employer plan to an IRA, rollovers from an IRA to an employer plan, or conversions from a traditional IRA to a Roth IRA.
How to Open a Rollover or Traditional IRA
Opening a traditional IRA and a rollover IRA are identical processes — the only difference is the funding. You can open a traditional or rollover IRA by doing the following:
- Decide where to open your IRA. For instance, you can choose an online brokerage 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.
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.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of individual retirement accounts (IRAs).
FAQ
Can you take money out of a rollover IRA?
Yes, 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-deferred 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.
About the author
Kate Ashford
Kate Ashford is a freelance journalist who writes about personal finance, work and consumer trends. She has written for BBC, Forbes, LearnVest, Money, Real Simple and Parents, among others. Read full bio.
Article Sources
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services available to eligible residents of the 50 U.S. states and Puerto Rico. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
Fund Fees
If you purchase investment funds, including Exchange Traded Funds (ETFs), through SoFi Invest, either on your own or with automated investing, the funds have their own management fees. These fees are paid by the fund itself, not directly by you and can reduce the fund's returns. More detailed information about a fund's fees can be found in its prospectus.
SoFi Invest and its affiliates do not receive sales commissions or other fees from the ETFs it invests in on your behalf, but may earn management fees if SoFi Invest creates its own fund(s). SoFi may waive or change its fees at any time. The most current fee schedule is available in your Account Documents within the SoFi app or online account.
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.
SOIN-Q325-042
CN-Q425-3236452-04
Aug
25
2026
Guide to Managing Debt in Retirement
Table of Contents
Investing for a comfortable retirement might be challenging if you’re also trying to pay down debt. Dedicating more of your budget to debt means you might have less to invest. You might consider paying off certain debts after retirement so that you can save more now, but that can have disadvantages as well.
If you expect to have debt in retirement, it’s important to know how to manage it.
Key Points
• Using debt management methods, such as the debt snowball or avalanche, may help individuals effectively repay debts.
• Debt consolidation options, such as loans or 0% annual percentage rate (APR) balance transfers, may help reduce interest costs and simplify payments.
• Using retirement funds to pay off debt is generally discouraged, as it can hinder financial growth and create tax liabilities.
• Planning for a debt-free retirement may lower living expenses and increase financial security.
• Professional financial advice can aid in creating a debt repayment plan and optimizing retirement savings strategies.
Retiring With Debt
One of the first steps in retirement planning is determining how much money you’ll need to meet your expenses once you stop working. The numbers might be inflated if you’re paying off retirement debt on top of funding basic living expenses. Working out a realistic budget that includes debt repayment is critical for determining how much you’ll need to save and invest.
How Much Debt Is Common to Have in Retirement?
Having debt in retirement is fairly common among older Americans. In fact, roughly two-thirds of seniors between the ages of 65-74 carry some level of debt, and half of those over 75 also do.
In terms of how much debt retirees have by age, here’s how the numbers break down.
| Age Range | Median Debt | Mean Debt |
|---|---|---|
| 55-64 years old | $90,000 | $171,530 |
| 65-74 years old | $45,000 | $134,950 |
| 75 and older | $36,000 | $94,620 |
Source: Survey of Consumer Finances, 2022.
The types of debt you might have at retirement may include:
• Mortgage loans
• Home equity loans or lines of credit
• Student loans, either for yourself or loans you’ve cosigned for your child
• Vehicle loans
• Credit card balances
• Medical bills
• Personal loans
• Business loans
A reverse mortgage is another form of debt, though it typically doesn’t have any repayment obligation. Reverse mortgages allow eligible seniors to tap into their home equity as a secondary income stream. The mortgage is typically repaid when the homeowner passes away and the home is sold.
Tips for Managing Debt in Retirement
If you have debt, retirement might feel a little more stressful, financially speaking. You might be torn between trying to manage retirement expenses while also making a dent in your debt balances.
Here are some simple tips for managing debt in retirement.
• List out each debt you have, including the remaining balance owed, monthly minimum payment due, and the interest rate.
• Consider whether it makes sense to use the debt snowball or debt avalanche method to repay what’s owed.
• Consider contacting your credit card issuers to ask for an interest rate reduction.
• If no rate reduction is offered, look into 0% APR credit card balance transfers to save money on interest.
• Automate payments if possible to avoid late payments, which can trigger fees and potentially damage your credit score.
• Research debt consolidation loan options to see if you might be able to save money by combining multiple debts.
• Prioritize repaying debts that are secured by collateral, such as your mortgage or a car loan.
• Weigh the pros and cons of using a home equity loan or line of credit to consolidate unsecured debts.
• If you owe private student loans, consider shopping around for refinancing options which might help you lower your interest rate.
• Avoid taking on new debt unnecessarily if possible.
If you’re truly struggling with debt in retirement, there are other things you might consider, including a debt management plan, credit counseling, debt settlement, or even bankruptcy. Talking to a credit counselor or financial advisor can help you decide if any of those possibilities might be right for you.
And if you need to get started saving for retirement, you can look at your options to open an online IRA (individual retirement account).
Using Retirement to Pay Off Debt
If you have retirement savings in a 401(k) or similar workplace plan, you might be tempted to withdraw some of the money to pay off debt. For example, you might decide to take a 401(k) loan to pay off credit cards or other debts. You would then pay back the loan, with the interest going back into your account.
It may sound good on the surface, but using retirement savings to pay off debt can be problematic in more ways than one. For one thing, money you take out of your 401(k) or another retirement account doesn’t have the chance to continue growing through the power of compound interest. That could leave you with a sizable savings gap once you’re ready to retire.
You might be paying interest back to yourself with a 401(k) loan, but the rate you’re earning might be much less than what you could have gotten if you’d left the money in place. Additionally, your employer might not allow you to make new contributions to the plan until the loan is fully repaid.
More importantly, you could end up with a tax liability for a 401(k) loan. If you leave your employer with a loan balance in place, you’ll have to pay it all back at once. If you can’t do that, the IRS can treat the entire loan amount as a taxable distribution. For that reason, using a 401(k) loan to pay off debt is one of the most common retirement mistakes you’re usually better off avoiding.
Getting Out of Debt Before Retirement
If you’d like to retire debt-free or as close to it as possible, it’s better to start working on repaying what you owe sooner rather than later. How you approach paying off debt before you retire can depend on how much you owe, what types of debt you have, and how much money you have to work with in your budget.
Here are a few additional tips for paying down debt before retirement.
Paying Off Your School Loans
More than 2 million Americans over the age of 55 have outstanding student debt. So, it’s not out of the realm of possibility that you might be torn between saving for retirement or paying student loans. And it’s helpful to know what debt relief options you might have. If you have federal student loans, you might be able to:
• Enroll in an income-driven repayment plan, which might allow you to eventually have some of your debt forgiven
• Qualify for Public Service Loan Forgiveness if you’re working or plan to work in a civil service job
• Apply for other types of federal loan forgiveness, such as Nursing Corps Loan Repayment
• Consolidate your loans to streamline your monthly payments
If you have private student loans, you might look into refinancing them. Student loan refinancing allows you to take out a new loan, ideally at a lower interest rate, to pay off your existing loans. Depending on how the new loan is structured, you might save a significant amount of money on interest over the long term.
Paying Off Your House
Should retirees pay off their mortgage? Entering retirement with no mortgage debt could mean much lower living expenses. But if you’re trying to pay off your home before you retire, you might have to commit substantially more of your monthly income to the payments.
If you’re interested in paying off your home faster, there are a few hacks you might try, including:
• Paying biweekly, which allows you to make one additional full mortgage payment per year.
• Applying your extra paycheck during a three-paycheck month to your mortgage’s principal balance.
• Using tax refunds, bonuses, or other windfalls to pay down the principal.
You could also look into refinancing your mortgage to a shorter loan term. Doing so may raise your monthly payment, but you could get out of debt faster, potentially saving money on interest.
Paying Off Your Credit Cards
Credit cards are usually considered to be “bad” debt, and you might want to get rid of them as quickly as possible, especially if they’re carrying high APRs. Transferring balances to a card with a lower or 0% rate can cut the amount of interest you pay, so more of your monthly payment goes to the principal. However, 0% balance transfer interest rate offers are typically temporary, so it’s a good idea to learn about future rate changes in advance.
You could also consider a personal loan for debt consolidation if the interest rate is lower than the combined average rate on your cards. Keep in mind that it pays to shop around to find the optimal loan option for your needs.
Paying Off Your Car
Car loans can come with sizable monthly payments, which may keep you from investing as much as you’d like for retirement. Refinancing may be an option, though whether you can get a new car loan may depend on the vehicle’s value and what you owe on the old loan.
Paying biweekly or applying tax refunds to your balance can help you get out of car loan debt faster if you’re not able to refinance. You could also try rounding up your card payments to the next $100 each month. So if your regular payment is $347.55, you could round it up to $400. That’s a simple hack for paying off car loan debt in less time.
Saving for Retirement
If you’re trying to save for retirement while paying down debt, it’s important to find the right balance in your budget. It’s also a good idea to know what your options are for saving and investing. That might include:
• 401(k) or 457(b) plans at work
• Traditional and Roth individual retirement accounts
• SEP (Simplified Employee Pension) IRA, if you’re self-employed
• Solo 401(k), if you’re self-employed
You can also invest in a taxable brokerage account, though you won’t get the same tax breaks as qualified retirement plans. If you have a high-deductible health plan, you may also have access to a health savings account (HSA). While an HSA is not a retirement account, per se, you could still use it to save money on a tax-advantaged basis for your future health care needs.
If you’re not sure how much you can afford to save or need to save, using a retirement calculator can help. You can revisit your plan each year to see if you have room to increase the amount you’re saving, based on changes to your budget or income.
Seeking a Financial Advisor
Getting professional financial advice can be helpful if you’re not sure how to go about creating a debt repayment plan or preparing for retirement. A financial advisor can help you figure out:
• How much you’ll need to save to reach your target retirement goals
• Which debts to prioritize and how to make them less expensive, so you may be able to pay them off faster
• Where to focus your savings and investing efforts first (e.g., a 401(k) vs. an IRA)
• How to diversify your portfolio to target the outcome you’re seeking with an amount of risk you can tolerate
The Takeaway
Debt doesn’t have to be an obstacle to your retirement goals. Creating a debt repayment strategy and actively avoiding unnecessary debt can help you create a secure financial future.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Help build your nest egg with a SoFi IRA.
FAQ
Is it wise to use retirement to pay off debt?
Using retirement funds to pay off debt is generally not recommended by financial experts, as it may leave you playing catch up later. Other options for paying off debt before or during retirement may include a debt consolidation loan, a home equity loan or line of credit, or a 0% annual percentage rate (APR) balance transfer offer.
How much debt is common to have at retirement?
Federal Reserve data suggests that the typical retiree between the ages of 55-74 has somewhere from $90,000-$134,950 in debt. That includes mortgage debt, student loans, auto loans, and credit card balances.
What percent of Americans retire with debt?
According to Federal Reserve data, 77% of older Americans aged 55-64 have debt. Among Americans aged 65-74, 65% have some debt, while 53% of those 75 and older have debt obligations.
Photo credit: iStock/bernardbodo
This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Investment Risk: Diversification can help reduce some investment risk, but cannot guarantee profit nor fully protect in a down market.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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.
SOIN-Q126-071
Read more