Aug
31
2023
Inherited IRA: Distribution Rules for Beneficiaries

Inherited IRA Distribution Rules Explained

By | invest, Investing, Preparing for Retirement | Comments Off on Inherited IRA Distribution Rules Explained

When an IRA account holder passes away, they might choose to leave their account to a loved one. But whether the recipient is surprised or knew about the inheritance ahead of time, they may have questions about what to do with this inherited IRA.

How does an inherited IRA work? The key to properly handling an inherited IRA is to understand what it means for you as a beneficiary. Your relationship with the deceased, for example, could impact the tax consequences on the inheritance. Plus there are inherited IRA distribution rules you’ll need to know.

An inherited IRA can also be a tremendous financial opportunity, as long as you understand the inheritance IRA rules. Here’s what you should know about the beneficiary IRA distribution rules.

What Is An Inherited IRA?

An inherited IRA, also called a beneficiary IRA, is a type of account you open to hold the funds passed down to you from a deceased person’s IRA. The original retirement account could have been any IRA, such as a Roth, traditional IRA, SEP IRA, or SIMPLE IRA. The deceased’s 401(k) plan can also be used to fund an inherited IRA.

Spouses won’t necessarily need to open an inherited IRA, because spouses are allowed to transfer any inherited assets directly into their own retirement accounts. However, any other beneficiary of the deceased’s account — such as someone who inherited an IRA from a parent — will need to open an inherited IRA, whether or not they already have a retirement account.

Some people prefer to open their inherited IRA account with the same firm that initially held the money for the deceased. It can make it simpler for the beneficiary while planning after the loved one’s passing. However, you can set up your account with almost any bank or brokerage.

💡 Quick Tip: Did you know that opening a brokerage account online typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

How Does an Inherited IRA Work?

When it comes to IRAs, there are two types of beneficiaries: designated and non-designated. Designated includes people, such as a spouse, child, or friend. Non-designated beneficiaries are entities like estates, charities, and trusts.

This article focuses on designated beneficiaries. While your relationship with the deceased may impact your options and any inherited IRA distribution rules, as can the age of the deceased at the time of death, certain inheritance IRA rules apply to everyone:

1.    You cannot make additional contributions to the inherited IRA. You can only make changes to the investments or buy and sell assets held by the IRA.

2.    You must withdraw from the inherited IRA. The required minimum distribution (RMD) rules depend on your age and relationship to the deceased, but according to inherited Roth IRA distribution rules, withdrawals are required even if the original IRA was a Roth IRA (which typically does not have RMD requirements).

What are The RMD Rules For Inherited IRAs?

When it comes to required minimum distributions, there are different rules for inherited IRA RMDs for spouses and non-spouses.

One recent difference between the rules for spouse and non-spouse beneficiaries is a result of the SECURE Act, established in early 2020. It states that non-spouse beneficiaries have to withdraw all the funds from their inherited IRA within a maximum of 10 years. After that time, the IRS will impose a 50% penalty tax on any funds remaining.

Spouses, on the other hand, can take yearly distributions from the account based on their own life expectancy.

RMD Rules for Spouses

Once a spouse takes ownership of the deceased’s IRA account, they can either roll over the assets into their own pre-existing IRA within 60 days, or transfer funds to their newly opened inherited IRA they can withdraw based on their age.

Note that taking a distribution from the account if you are under age 59 ½ results in a 10% early withdrawal penalty.

RMD Rules for Non-Spouses

For non-spouses (relatives, friends, and grown children who inherited an IRA from a parent), once you’ve opened an inherited IRA and transferred the inherited funds into it, RMDs generally must start before December 31st following a year from the person’s death. All assets must be withdrawn within 10 years, though there are some exceptions: if the heir is disabled, more than a decade younger than the original account owner, or a minor.

💡 Quick Tip: Did you know that a traditional Individual Retirement Account, or IRA, is a tax-deferred account? That means you don’t pay taxes on the money you put in it (up to an annual limit) or the gains you earn, until you retire and start making withdrawals.

Multiple Beneficiaries

If there is more than one beneficiary of an inherited IRA, the IRA can be split into different accounts so that there is one for each person. However, in general, you must each start taking RMDs by December 31st of the year following the year of the original account holder’s death, and all assets must be withdrawn from each account within 10 years (aside from the exceptions noted above).

Inherited IRA Situation Examples

These are some of the different instances of inherited IRAs and how they can be handled.

Spouse inherits and becomes the owner of the IRA: When the surviving spouse is the sole beneficiary of the IRA, they can opt to become the owner of it by rolling over the funds into their own IRA. The rollover must be done within 60 days.This could be a good option for someone who is younger than the original owner of the IRA because it delays the RMDs until the surviving spouse turns 73.

Non-spouse designated beneficiaries: An adult child or friend of the original IRA owner can open an inherited IRA account and transfer the inherited funds into it. They generally must start taking RMDs by December 31 of the year after the year in which the original account holder passed away. And they must withdraw all funds from the account 10 years after the original owner’s death.

Both a spouse and a non-spouse inherit the IRA: In this instance of multiple beneficiaries, the original account can be split into two new accounts. That way, each person can proceed by following the RMD rules for their specific situation.

How Do I Avoid Taxes on An Inherited IRA?

Money from IRAs is generally taxed upon withdrawals, so your ordinary tax rate would apply to any tax-deferred IRA that was inherited — traditional, SEP IRA, or SIMPLE IRA.

However, if you have inherited the deceased’s Roth IRA, which allows for tax-free distributions, you should be able to make withdrawals tax-free, as long as the original account was set up at least five years ago.

Spouses who inherit Roth accounts have an extra opportunity to mitigate the bite of taxes. Since spousal heirs have the power to take ownership of the original account, they can convert their own IRA into a Roth IRA after the funds roll over. Though the spouse would be expected to pay taxes on the amount converted, it may ultimately be financially beneficial if they expect higher taxes during their retirement.

Recommended: Is a Backdoor Roth IRA Right For You?

The Takeaway

Once you inherit an IRA, it’s up to you to familiarize yourself with the inherited IRA rules and requirements that apply to your specific situation. No matter what your circumstance, inheriting an IRA account has the potential to put you in a better financial position in your own retirement.

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 grow your nest egg with a SoFi IRA.

FAQ

Are RMDs required for inherited IRAs in 2023?

The IRS recently delayed the final RMD rule changes regarding inherited IRAs to calendar year 2024. That’s because rules regarding RMDs have changed in the last few years, leaving many people confused. What this means is that the IRS will, in some cases, waive penalties for missed RMDs on inherited IRAs in 2023 — but only if the original owner died after 2019 and had already started taking RMDs.

What are the disadvantages of an inherited IRA?

The disadvantages of an inherited IRA is knowing how to navigate and follow the many complex rules regarding distributions and RMDs, and understanding the tax implications for your specific situation. However, it’s important to realize that an inherited IRA is a financial opportunity and it could help provide you with money for your own retirement.

How do you calculate your required minimum distribution?

To help calculate your required minimum distribution, you can consult IRS Publication 590-B. There you can find information and tables to help you determine what your specific RMD would be.

Photo credit: iStock/shapecharge

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.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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Aug
30
2023
couple holding keys

Should You Use Your 401(k) as a First-Time Home Buyer?

By | Growing Wealth, Investing, Preparing for Retirement | Comments Off on Should You Use Your 401(k) as a First-Time Home Buyer?

Withdrawing money from a 401(k) to buy a house may be allowed by your company-sponsored plan, but this tactic is not always advisable, especially for first-time home buyers.

When it comes to using money from a 401(k), first-time home buyers need to keep in mind a few things, including the rules and penalties around early withdrawals from a 401(k) account — as well as the potential loss of retirement savings.

Before you consider using a 401k to buy a house, explore alternatives like withdrawing funds from a Roth IRA, seeking help from a Down Payment Assistance Program (DAP), or seeing if you qualify for other types of home loans.

Let’s take a look at the pros, cons, and important considerations that can help prospective homebuyers make a more informed decision about using funds from a 401(k) to buy a home.

Can You Use a 401(k) to Buy a House?

Before you quickly search up “401k first time home buyer,” here’s the answer: If you’re a first-time home buyer, and your employer plan allows it, you can use your 401(k) to help buy a house. There are a couple of ways to access the funds.

First, it’s possible for a first-time homebuyer to take a loan from an existing 401(k). Your employer generally sets the rules for 401(k) loans, but you typically must pay back the loan, with interest, within five years. You pay yourself interest to help offset the loss of investment growth, since the funds are no longer invested in the market.

You can take out a 401(k) loan for a few different reasons (e.g., qualified educational expenses, medical expenses), depending on your plan’s policies. Those using a loan to purchase a residence may have more time to pay back the loan.

In certain rare circumstances, in the case of an “immediate and heavy financial need,” the IRS will allow you to make a 401(k) hardship withdrawal to purchase a primary residence. Hardship withdrawals do not cover mortgage payments, but using a 401(k) for a down payment for a first-time home buyer could be allowed.

The IRS has very strict rules for qualifying for a hardship withdrawal . And if you don’t meet them, the funds you withdraw will be subject to income tax and a 10% early withdrawal penalty.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

How Much of Your 401(k) Can Be Used For Home Purchase?

Generally, home buyers who want to use their 401(k) funds to finance a real estate transaction can borrow or withdraw up to 50% of their vested balance or a maximum of $50,000 — whichever is less. This limit typically applies to any 401(k) loan, not only a home purchase.

4 Potential Drawbacks of Using Your 401(k) to Buy a House

Taking money out of a 401(k) to buy a house may be allowed, but it’s not always recommended.

1. Withdrawal limits

Since there are limits on the amount you can withdraw or borrow for a home purchase, bear in mind that the total amount you can access may not cover all the costs (e.g., the down payment and closing costs) of the transaction. Be sure to run the numbers, to ensure that a 401(k) loan makes sense.

2. Lost contributions

Homebuyers who borrow from their 401(k) plans can’t make additional contributions to the accounts or receive matching contributions from their employers while paying off the loan. Depending on how much they were contributing, these home buyers could miss out on years of retirement contributions while they’re paying back the loan. That could take a substantial bite out of their overall retirement savings.

3. Automatic repayment terms

Generally, it’s not up to you to repay the loan; your company will deduct the loan payments automatically from your paycheck. This could be viewed as a convenience, since you don’t have to think about it, or as an inconvenience, as it lowers your take-home pay.

4. Loan terms change if you leave your job.

Finally, if an individual borrows from their 401(k) to purchase a home and leaves employment at their company (whether voluntarily or via layoff), the loan balance may be deducted from their remaining 401(k) funds in what’s called an offset. An offset is then treated like an early withdrawal, and potentially subject to taxes and a 10% penalty if the borrower is under 59 ½.

As an example: Derek is 35 and has $100,000 in his 401(k) and borrows $30,000 for a home purchase. He pays back $5,000 including interest, but still owes $25,000 when he takes another job. The remaining $25,000 would be deducted from his 401(k) as an offset, leaving $75,000 in the 401(k) or rollover IRA. Worse, the $25,000 would be treated by the IRS as an early withdrawal or distribution, and Derek would owe taxes, plus a 10% penalty ($2,500).

Terms may vary depending on the terms of your loan and the plan rules.


💡 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.

Pros and Cons of Using a 401(k) to Buy a House

Here are the pros and cons of using a 401(k) to buy a home, at a glance:

Pros of Using a 401(k) to Buy a House
Cons of Using a 401(k) to Buy a House
Individuals may be able to purchase a home that they might otherwise not be able to afford. Individuals can’t make regular contributions to their 401(k) while making loan payments.
When using a 401(k) loan, individuals are borrowing money from themselves, so they don’t owe interest to a bank or other institution. Borrowed or withdrawn funds aren’t growing inside the 401(k) account, potentially derailing an individual’s retirement savings.
Interest rates are generally low. If a person doesn’t qualify for a hardship withdrawal and they’re under age 59 ½, withdrawals would be subject to income tax and a 10% early withdrawal penalty.
You don’t have to meet any credit requirements. If a person leaves their job before the loan is repaid, the balance owed could be deducted from the remainder of their 401(k) funds as an offset. For those under 59 ½, the amount of the offset would be considered a distribution and the borrower would potentially owe taxes and a 10% penalty.

What are the Rules & Penalties for Using 401(k) Funds to Buy a House?

Here’s a side-by-side look at some key differences between taking out a 401(k) loan and withdrawing funds from a 401(k).

401(k) loans
401(k) withdrawals

•   Must be repaid with interest in a certain period of time — usually 5 years.

•   Qualified loans are penalty free and tax free, unless the borrower defaults or leaves their job before closing the loan.

•   The maximum loan amount is 50% of the vested account balance, or $50,000, whichever is less. (For accounts with a vested account balance of less than $10,000, the maximum loan amount is $10,000.)

•   Interest accrued on the loan goes back into the 401(k), so the borrower is basically paying interest back to themselves. The interest is also tax-deferred until retirement.

•   If the borrower doesn’t repay the loan on time, the loan is treated as a regular distribution (a.k.a. withdrawal) and subject to taxes and an early withdrawal penalty of 10%.

•   Do not have to be repaid.

•   Usually allowed only in the case of “financial hardship,” which can include medical expenses, funeral expenses, and primary home-buying expenses, if the individual meets strict IRS criteria for “hardship.”

◦  Subject to income tax and a 10% early withdrawal penalty for people under age 59 ½.

•   One can only withdraw enough to cover the immediate expense (a down payment, for example, not future monthly mortgage payments), with a limit of 50% of the vested balance or $50,000—whichever is less

•   You can only withdraw enough to cover the immediate expense (a down payment, for example, not future mortgage payments), with a limit of 50% of the vested balance or $50,000 — whichever is less.

What are the Alternatives to Using a 401(k) to Buy a House?

For some first-time homebuyers, there may be other, more attractive options for securing a down payment than taking money out of a 401(k) to buy a house. Here are a few of the alternatives.

Withdrawing Money from a Roth IRA

Using a Roth IRA to help buy a first home can be a smart alternative to borrowing from a 401(k) that might be beneficial for some home buyers. Unlike 401(k)s, Roth IRA contributions are made with after-tax dollars.

Contributions can be withdrawn at any time, tax free; earnings can be withdrawn without a penalty at age 59 ½ or older, as long as you’ve held the account for at least five years.

If you’re under 59 ½ or don’t meet the five-year criteria, some exceptions may apply for a first-time home purchase.

•  After the account has been open for five years, Roth IRA account holders who are buying their first home are allowed to withdraw up to $10,000 in investment earnings with no taxes or penalties. (Meaning a person could withdraw the amount of their total contribution plus up to $10,000 in investment earnings.) The $10,000 is a lifetime limit.

•  Roth IRA funds can be used to help with the purchase of a first home not only for the account holders themselves, but for their children, parents, or grandchildren.
One important requirement to note is that time is of the essence when using a Roth IRA to purchase a first home: The funds have to be used within 120 days of the withdrawal.

💡 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.

Low- and No-Down-Payment Home Loans

There are certain low- and no-down-payment home loans that homebuyers may qualify for that they can use instead of using a 401(k) for a first time home purchase. This could allow them to secure the down payment for a first home without tapping into their retirement savings.

•  FHA loans are insured by the Federal Housing Administration and allow home buyers to borrow with few requirements. Home buyers with a credit score lower than 580 qualify for a loan with 10% down, and those with credit scores higher than 580 can get a loan with as little as 3.5% down.

•  Conventional 97 loans are Fannie Mae-backed mortgages that allow a loan-to-value ratio of up to 97% of the cost of the loan. In other words, the home buyer could purchase a house for $400,000 and borrow up to $388,000, leaving only a down payment requirement of 3%, or $12,000, to purchase the house.

•  VA loans are available for U.S. veterans, active duty members, and surviving spouses, and they require no down payment or monthly mortgage insurance payment. They’re provided by private lenders and banks and guaranteed by the United States Department of Veterans Affairs.

•  USDA loans are a type of home buyer assistance program offered by the U.S. Department of Agriculture to buy or possibly build a home in designated rural areas with an up-front guarantee fee and annual fee. Borrowers who qualify for USDA loans require no down payment and receive a fixed interest rate for the lifetime of the loan. Eligibility requirements are based on income, and vary by region.

Other Types of Down Payment Assistance

For home buyers who are ineligible for no-down payment loans, there are a few more alternatives instead of using 401(k) funds:

•  Down Payment Assistance (DAP) programs offer eligible borrowers financial assistance in paying the required down payment and closing costs associated with purchasing a home. They come in the form of grants and second mortgages, are available nationwide, can be interest-free, and sometimes have lower rates than the initial mortgage loan.

•  Certain mortgage lenders provide financial assistance by offering credits to cover all or some of the closing costs and down payment.

•  Gifted money from friends or family members can be used to cover a down payment or closing costs on certain home loans.

The Takeaway

Generally speaking, a 401(k) can be used to buy a house, either by taking out a 401(k) loan and repaying it with interest, or by making a 401(k) withdrawal (which is subject to income tax and a 10% withdrawal fee for people under age 59 ½).

However, using a 401(k) for a first-time home purchase is usually not advisable. Both qualified loans and withdrawals have some potential drawbacks — primarily the possibility of owing taxes and a penalty under certain conditions. Fortunately, there are other options. Certain Roth IRA withdrawals can be made tax and penalty free. Qualified homebuyers can also seek financial help from down payment assistance programs and other low- or no-interest plans.

As you weigh your choices, it helps to know where your retirement stands. Many people lose track of retirement accounts when they change jobs. To help manage your retirement funds, consider doing a 401(k) rollover. That’s when you move funds from an old 401(k) to an IRA.

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.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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.

SoFi Mortgages
Terms and conditions apply. Not all products are offered in all states. See SoFi.com/eligibility for more information.

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

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Aug
29
2023
IRA Withdrawal Rules: All You Need to Know

Guide to IRA Withdrawal Rules

By | invest, Investing, Preparing for Retirement | Comments Off on Guide to IRA Withdrawal Rules

The purpose of Individual Retirement Accounts (IRAs) is to allow you to save for your golden years, so there are strict IRA withdrawal rules meant to make it harder to access that money for other reasons.

Ideally you sock away money consistently and your investment grows over time. You also get the benefit of tax breaks. But it’s important to keep the IRA rules for withdrawals in mind to make the most of your accounts.

Roth IRA Withdrawal Rules

When can you withdraw from a Roth IRA? The rules for IRA withdrawals are different for Roth IRAs and traditional IRAs. For instance, you’ll never owe income taxes on money you contribute to a Roth IRA, since it goes into the retirement account after taxes. However, there are still some Roth IRA withdrawal rules to keep in mind when it comes to the account’s growth.

The Five-year Rule

If you have a Roth IRA, you may face a Roth IRA withdrawal penalty if you withdraw funds you deposited less than five years ago. This is known as the “five-year rule“. These Roth IRA withdrawal rules also apply to the funds in a Roth rolled over from a traditional IRA. In those cases, if you make a withdrawal from a Roth IRA account that you’ve owned for less than five years, you’ll owe a 10% tax penalty on the account’s gains.

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

Required Minimum Distributions (RMDs) on Inherited Roth IRAs

If you’re wondering about Roth IRA distribution rules, in most cases, you do not have to pay required minimum distributions on money in a Roth IRA account. However, for inherited Roths, IRA withdrawal rules mandate that you take required minimum distributions.

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.


💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

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 gains, per IRA tax deduction rules, plus a 10% penalty.

RMDs on a Traditional IRA

The rules for withdrawing from an IRA mean that required minimum distributions kick in the year you turn 73. 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 50% penalty on the amount that you did not withdraw.

When Can You Withdraw from an IRA Without Penalties?

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.

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 a traditional IRA before you turn 59 ½, there are some instances where you don’t have to pay the 10% penalty on your 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 permanently disabled and can no longer work, 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 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.

Recommended: Inherited IRA Distribution Rules Explained

6. IRS Levy

If you owe taxes to the IRS, the agency may take it directly out of your IRA account. In that case, the IRS will not assess the 10% penalty. If you take the money out of the account yourself, however, to pay taxes, you’d also have to pay 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 after September 11, 2001.

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 goes 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.

💡 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.

Is Early IRA Withdrawal Worth It?

While there may be cases where it makes sense to take an early withdrawal, most advisors 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 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.

Opening an IRA With SoFi

Like 401(k)s, IRAs are powerful, 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 an immediate tax 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).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can you withdraw money from a Roth IRA without penalty?

You can withdraw your own contributions to a Roth IRA without penalty no matter what your age. However, you 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.

Photo credit: iStock/Fly View Productions

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.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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Aug
29
2023
When Can I Retire This Formula Will Help You Know_780x440

When Can I Retire Calculator

By | Budgeting & Goals, invest, Investing, Life & Career, Preparing for Retirement | No Comments

When it comes to figuring out when you can retire, there are a number of factors to consider: Social Security, inflation, and health care costs.

Thankfully, there’s retirement calculators for figuring out these costs, which might help you plan for the future. But first, to decide when you can retire, determine at what age you want to retire and then see how that decision affects your finances.

When Can You Get Full Social Security Benefits?

As you consider when to apply for Social Security, you’ll want to understand at what age the government allows people to retire with full Social Security benefits. Not only that, at what age can people start withdrawing from their retirement accounts without facing penalties? For Social Security, the rules are based on your birth year.

The Social Security Administration has a retirement age calculator . For example, people born between 1943 and 1954 could retire with full Social Security benefits at age 66.

Meanwhile, those born in 1955 could retire at age 66 and two months, and those born in 1956 could retire at age 66 and four months. Those born in or after 1960 can retire at age 67 to receive full benefits. This can help with your retirement planning.

Social Security Early Retirement

A recipient will be penalized if they retire before full retirement age. The earlier a person retires, the less they’ll receive in Social Security.

Let’s use Jane Doe as an example and say she was born in 1960, so full retirement age is 67. If she retires at age 66, she’ll receive 93.3% of Social Security benefits; age 65 will get Jane 86.7%. If she retires on her 62nd birthday — the earliest she can receive Social Security — she’ll only receive 70% of earnings.

Here’s a retirement planner table for those born in 1960, which shows how one’s benefits will be reduced with early retirement.

How Early Retirement Affects Your Social Security Benefits

Source: Social Security Administration

Social Security Late Retirement

If a person wants to keep working until after full retirement age, they could earn greater monthly benefits. This is helpful to know when choosing your retirement date.

For example, if the magic retirement number is 66 years but retirement is pushed back to 66 and one month, then Social Security benefits rise to 100.7% per month. So if your monthly benefit was supposed to be $1,000, but you wait until 66 years and one month, then your monthly allotment would increase to $1,007.

If retirement is pushed back to age 70, earnings go up to 132% of monthly benefits. But no need to calculate further: Social Security benefits stop increasing once a person reaches age 70. Here is a SSA table on delayed retirement .

💡 Quick Tip: You can’t just sit on the money you save in an IRA account forever. The government requires withdrawals each year, starting at age 73 (for those born in 1950 or later). These are called required minimum distributions or RMDs.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.

Other Retirement Income to Consider

In retirement, you may have other income sources that can help you support your lifestyle and pay the bills. These might include:

Part-Time Work

Working after retirement by getting a part-time job, especially if it’s one you enjoy, could help cover your retirement expenses. And as long as you have reached your full retirement age (which is based on your year of birth, as noted above), your Social Security benefits will not be reduced, no matter what your earnings are.

However, if you retire early, you need to earn under an annual limit, which is $21,240 in 2023, to keep your full benefits. If you earn more than that, you’ll lose $1 in Social Security benefits for every $2 you earn over the limit.

Pension

A pension, also sometimes known as a defined benefits plan, from your employer is usually based on how long you worked at your company, how much you earned, and when you stopped working. You’ll need to be fully vested, which typically means working at the company for five years, to collect the entire pension. Check with the HR rep at your company to get the full details about your pension.

A pension generally gives you a set monthly sum for life or a lump sum payment when you retire.

Inheritance

If you inherit money from a relative, these funds could also help you pay for your retirement. And fortunately, receiving an inheritance won’t affect your Social Security benefits, because Social Security is based on money you earn.

Rental Income

Another potential money-earning idea: You could rent out a home you own, or rent out just the upper floors of the house you live in, for some extra income in retirement. Like an inheritance, rental income will not affect your social security benefits.

Major Expenses in Retirement

It’s important to draw up a budget for retirement to help determine how much money you might need. The amount may be higher than you realize. These are some of the major expenses retirees commonly face.

Healthcare

For most people, healthcare costs increase as they get older, as medical problems can become more serious or pervasive. According to Fidelity, the average amount that a couple who are both age 65 will spend on healthcare during their first year of retirement is $12,300.

Housing

Your mortgage, home insurance, and the costs of maintaining your house can be a significant monthly and yearly expense. In fact, Americans aged 65 and older spent $16,880 annually on housing during the years from 2016 to 2020, according to the Bureau of Labor Statistics.

Travel

If you’re planning to take trips in retirement, or even just drive to visit family, transportation costs can quickly add up. From 2016 to 2020, people over age 65 averaged about $7,062 in transportation costs a year.

When Can You Withdraw From Retirement Accounts?

Now let’s look at retirement accounts. Each type of account has different rules about when money can be taken out.

If a Roth IRA account has existed for at least five years, withdrawals from the account are usually okay after age 59 ½ without consequences. Taking out money earlier or withdrawing money from a Roth IRA that’s been open for fewer than five years could result in paying penalties and/or taxes.

There is a little wiggle room. Retirement withdrawal rules do have exceptions for issues like disability or educational expenses, and there is an option to withdraw money early and pay taxes or penalties.

If a person is at least 59 ½ and has a Roth IRA that is less than five years old, taxes will need to be paid upon withdrawal but not penalties. Taxes or penalties might not need to be paid at age 59 ½ and if the Roth IRA has been open for five years or more.

People with a traditional IRA can make withdrawals from ages 59 ½ to 72 without being penalized. The government will charge a 10% penalty on withdrawals before age 59.5, and depending on location, a state penalty tax might also be charged.

People with 401(k)s can typically retire by age 55 and make withdrawals without receiving a penalty. People with either a traditional IRA or 401(k) must start making withdrawals by age 72 or face a hefty penalty.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

Deciding at what age to retire is a personal choice. However, by planning ahead for some common expenses, and understanding the age at which you can get full Social Security benefits, you can use a retirement calculator formula to figure out how much money you’ll need each year to live on. And you can supplement your Social Security benefits with other forms of income and by making smart decisions about savings and investments.

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), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How do I calculate my retirement age?

To calculate your full retirement age, which is the age you can receive your full retirement benefits, you can use the Social Security administration’s retirement age calculator . Essentially, if you were born in 1960 or later, your full retirement age is 67. For those born between 1954 and 1959, the full retirement age is between 66 and 67, depending exactly how old they are when they retire (such as age 66 and two months). And for those born between 1943 and 1954, full retirement age is 66.

The earlier you retire before your full retirement age, the less you’ll receive in benefits. Conversely, the longer you keep working, up to age 70, the more you can receive.

Can you legally retire before 55?

Yes, you can legally retire before age 55. However, your Social Security benefits typically won’t kick in until age 62. And even then, because you’ll be tapping into those benefits before your full retirement age of 66 or 67, you’ll get a reduced amount, or just 70%, of your benefits.

There is something called the rule of 55 that allows you to withdraw funds from a 401(k) or 403(b) at age 55 without paying a penalty. That may be something to look into if you’re planning to retire early.

Can you retire after 20 years of work?

In some lines of work, you can retire after 20 years on the job and likely get a pension. This includes those in the military, firefighters, police officers, and certain government employees.

That said, anyone in any industry can retire at any time. However, Social Security benefits don’t typically begin until age 62.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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.

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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Aug
25
2023

Investing for Retirement: Tips and Options to Consider

By | invest, Investing, Preparing for Retirement | Comments Off on Investing for Retirement: Tips and Options to Consider

Saving steadily for retirement is important, but how you invest that money also matters. Fortunately, today’s retirement saver has a number of options to consider — many of which can make the task of investing for the future less daunting.

These days, you can choose from DIY investing options like a portfolio of stocks and bonds or other securities you choose yourself. You can also invest in mutual funds or exchange-traded funds to help lower costs and add diversification. There are also certain types of pre-set retirement funds and automated platforms (i.e. robo advisors) that use technology to help manage your portfolio.

If you’re saving for retirement, it helps to understand the options that best suit your goals and your personality so that you’re more likely to stick with a plan for the long term.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

money management guide for beginners

The Importance of Investing for Retirement

Retirement may be a long way off or a short way down the road, depending on your age and stage of life. Either way, developing an investment strategy that can help your savings to grow is essential. For many people, retirement might last 10, 20, 30 years — or even more. A solid long-term investment strategy can help you build up the amount you need for those years where you’re no longer in the workforce.

Remember that the longer your money is invested, the more time you have for potential gains to compound and help your money grow. Compounding simply means that if your money potentially sees a return, or a profit from various investments, that growth can compound over time, with both your savings and your earnings seeing gains.

Time can also help with losses. The longer your time horizon, the more volatility or risk it may be safe for you to assume. If you have a time horizon of 30 or 40 years before you retire, you can probably afford to weather some short-term losses, knowing that your investment returns will likely balance themselves out over time.

Understanding Retirement Accounts

While this article will focus on investment options, it’s worth a reminder that the type of retirement account you choose is also important. You may have a workplace retirement account like a 401(k) or 403(b). You may have opened an Individual Retirement Arrangement (IRA), like a traditional IRA, a Roth IRA, or a SEP IRA.

Different accounts have different contribution limits, and different tax implications. Since both the amount you can save and how it will be taxed can have a long-term impact on your nest egg, be sure to spend time strategizing about which types of accounts make the most sense for you.

With a suitable combination of accounts, you can then begin to choose the investments that will populate that account.

Remember: Just because you open an IRA or set up your 401(k) at work doesn’t mean it comes with any investments. Like moving into a new home, it’s up to you to furnish the account.

Recommended: 401(k) vs IRA: What’s the Difference?

Investment Options

While investing for retirement can seem overwhelming, it doesn’t have to be. Again, there are various retirement strategies that have stood the test of time, as well as a number of investment options that can make a retirement saver’s life easier.

Here are a few options for retirement investing that you can consider:

DIY Investing

For investors who feel confident in managing their own retirement portfolio, and the securities within it, taking a DIY approach is an option.

You can purchase stocks, bonds, commodities, mutual funds, or any other types of securities for your long-term portfolio. While the term active investing brings to mind day traders, active investing can also mean taking a hands-on approach to managing your own portfolio.

This approach isn’t for everyone. It’s time and energy intensive, and it requires a certain amount of expertise in order to be successful. In addition, if you go this route, bear in mind that the same rules apply to all long-term investors.

•   Be mindful of the contribution limits and tax implications of the retirement account you choose.

•   Consider the cost of your investments, as fees can reduce your earnings over time.

•   Consider using a strategy that includes some diversification, as this may help mitigate certain risks over time.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

Index Funds

Index funds offer a basic way to invest for retirement. An index fund is a type of fund that tracks a broad market index. One of the most popular types of index funds tracks the S&P 500 index, for example, which mirrors the performance of the 500 largest U.S. companies.

There are hundreds of indexes, and many have corresponding funds that track different sectors of the market, e.g.: smaller companies, technology companies; sustainable or green companies; various types of bonds, and more.

Index funds don’t rely on a live team of portfolio managers, so they tend to be less expensive than actively managed funds. However, they have a downside which is that your money is pegged to the securities in that sector.

Automated Options

In the world of investing there really isn’t a truly automated “set it and forget it” strategy that will work on its own, without any input, for decades. But there are some options that are more hands-off than others.

•   Target Date Funds

One such option is a target date fund. A target date fund is designed to be an all-inclusive portfolio option for people that are looking to retire on or near a certain date. For example, a 2050 target date fund is intended for people that will be ready for retirement in 2050.

Target date funds use a set of calculations to adjust the portfolio’s asset allocation over time. When a target date fund is decades away from the specified date, it might invest 80% in equities and 20% in fixed income or cash/cash equivalents. As the date draws nearer, it will automatically move more of its investments away from equities towards bonds, cash, or other investments with lower risk. This automatic readjustment is referred to as the glide path.

•   Robo Advisors

Another option is an automated portfolio, commonly known as a robo advisor (although these services are not robots, and don’t typically offer advice).

A robo advisor platform offers a questionnaire for investors to gauge their time horizon (i.e. years to retirement or another goal), their risk level, and so forth.

The platform then uses sophisticated technology to recommend a portfolio of low-cost exchange-traded funds (ETFs).

While these are two of the more hands-off options, and they do offer the convenience of managing a portfolio on your behalf, these options have some downsides. The cost can be higher than other types of investment options. And there is very little flexibility. Investors typically cannot adjust the securities in these funds (although there may be some hybrid options in the market).

Recommended: How Do Robo Advisors Work

Hire an Advisor

If you still are not feeling comfortable investing for retirement on your own, you may want to consider using a financial advisor. Talk with your trusted friends or family members to get a recommendation.

Because an advisor introduces a new level of cost, be sure to ask how the person is compensated. Some advisors charge a flat fee, or an hourly rate, or some earn commissions — or combinations of the above.

Tips When Investing for Retirement

As you start investing for retirement, here are a few things that you’ll want to keep in mind:

Ask About Fees

Many investments come with fees that are charged by the advisor or company that manages the investment. These investment fees may be explicitly charged to your account, or they may be captured as part of the investment’s returns. Make sure to check any fees that are charged before you invest. There are many low-cost mutual funds that offer investment fees under 0.1% as compared to a financial advisor who may charge 1% or more. Even a small difference in the fees charged can make a huge difference on your returns when compounded over decades.

Plan for Taxes

You’ll also want to account for how your retirement investments will be taxed.

•   Tax-Deferred Accounts

If you contribute to a traditional 401(k) or IRA, you may be eligible for a tax deduction in the tax year that you make the contribution (i.e. a contribution for tax year 2023 can be deducted on your 2023 taxes).

These accounts are called tax-deferred because you will owe taxes on your withdrawals.

•   After-Tax Accounts

If you contribute to a Roth 401(k) or Roth IRA, you won’t get a tax deduction when you contribute — because you deposit after-tax dollars — instead, your withdrawals will be tax-free.

There are other differences between tax-deferred and after-tax accounts that can impact your nest egg. For example, once you reach the age of 73, you’re required to withdraw a minimum amount from a traditional IRA or 401(k) every year (also called RMDs or required minimum distributions). That doesn’t apply to Roth accounts.

•   Taxable Investment Accounts

On the other hand, if you invest for retirement in a non-retirement or taxable account, you will owe income taxes on your gains whenever you sell those securities, which will affect your portfolio’s overall performance.

How Often Should I Adjust My Investments?

It’s generally considered a good idea to periodically adjust your investments by rebalancing your portfolio. Portfolio rebalancing is a way to adjust the mix of your investments. It means realigning the assets of a portfolio’s holdings to match your desired asset allocation.

If you have a robo advisor or investment advisor, they likely have you set up with a specific target of different types of investments. Over time, the advisor will rebalance your portfolio to keep it in line with your target percentages.

If you’re managing your investments yourself, you might rebalance your portfolio monthly, quarterly or annually, depending on the type of investments that you have.

The Takeaway

Investing for your retirement is one of the smartest things that you can do as part of an overall financial plan. While it may seem overwhelming, there are a few things that you can do to help streamline your investment plan.

Make sure that you understand the fees and taxes that come with different investment options. If you don’t feel comfortable managing your own portfolio, consider working with an advisor or investing in an automated portfolio.

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 grow your nest egg with a SoFi IRA.

FAQ

Can I invest for retirement if I have limited funds?

It is possible to invest for retirement if you have limited funds. In fact, if you have limited funds, that is one reason it’s even more important to invest for retirement. Especially if you are younger and have a long time before retirement, even a small amount can grow to be a sizable nest egg when its returns are compounded over many decades.

Should I adjust my investment strategy as I approach retirement?

How you choose to invest will depend on a number of factors, one of which is how close you are to retirement. One common strategy is to be more aggressive with your investment strategy when you are years or decades away from retirement. This can possibly lead to higher overall returns while you have a long time to smooth out the ups and downs of a high-risk, high-reward strategy. Then, as you get closer to retirement, you start to be more conservative with your investments in an attempt to better preserve capital.

What investment options are suitable for conservative investors?

Choosing your investment options will depend on your overall financial situation and tolerance for risk. Some examples of more conservative investments include bonds, cash, CDs, or Treasury bills. As you get closer to retirement, it can make sense to choose more conservative investments. You may give up some possible returns, but you may also be better insulated against large losses.

Photo credit: iStock/monkeybusinessimages

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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

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

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