Preparing for Retirement Archives

Aug

2025

Inherited 401(k): Rules and Tax Information

By Ashley Kilroy | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

Table of Contents

What Is an Inherited 401(k)?
How RMDs Impact Inherited 401(k)s
How to Handle Unclaimed Financial Assets
FAQ

When you inherit a 401(k) retirement account, there are tax rules and other guidelines you must follow in order to make the most of your inheritance.

Inheriting a 401(k) isn’t as simple as an inheritance like cash, property, or jewelry. How you as the beneficiary must handle the account is determined by your relationship to the deceased, your age, and other factors.

Understanding the tax treatment of an inherited traditional 401(k) is especially important because these 401(k) accounts are tax-deferred vehicles. That means regardless of your status as a beneficiary you will owe taxes on the withdrawals from the account, now or later.

Key Points

• Beneficiaries face different rules and tax implications for inherited 401(k) based on their relationship to the account holder.

• Beneficiaries can disclaim, take a lump-sum, or roll over funds into an inherited IRA.

• Spouse beneficiaries can also roll over funds into their own 401(k) or IRA without tax penalties. Non-spouse beneficiaries don’t have this option.

• In general non-spouse beneficiaries must withdraw funds within 10 years, with exceptions.

• Managing required minimum distributions (RMDs) is crucial to avoid penalties and optimize tax efficiency.

What Is an Inherited 401(k)?

The rules for inheriting a 401(k) account are different when you inherit the account from a spouse versus someone who wasn’t your spouse. Depending on your relationship, there are different options for what you can do with the money and how your tax situation will be affected.

A traditional 401(k) is a tax-deferred retirement account, and the beneficiary will owe taxes on any withdrawals from that account, based on their marginal tax rate.

Inheriting a 401(k) From a Spouse

A spouse has a number of options when inheriting a 401(k). These include:

• Roll over the inherited 401(k) into your own 401(k) or into an inherited IRA: For many spouses, taking control of an inherited 401(k) by rolling over the funds is often the preferred choice. For instance, you could open an IRA and roll over the inherited 401(k) into it. A rollover gives the money more time to grow, which could be useful as part of your own retirement strategy. Also, rollovers do not incur penalties or taxes.

However, it’s worth noting that if you convert funds from a traditional 401(k) to a Roth 401(k) or a Roth IRA, you will likely owe taxes on the conversion to a Roth account.

Also, once the rollover is complete, traditional 401(k) or IRA rules apply, meaning you’ll face a 10% penalty for early withdrawals before age 59½.

And when you reach age 73, you must start taking required minimum distributions (RMDs). Because RMD rules have recently changed, owing to the SECURE Act 2.0, it may be wise to consult a financial professional to determine the strategy that’s best for you.

• Take a lump sum distribution: Withdrawing all the money at once will not incur a 10% early withdrawal penalty as long as you’re over 59 ½, but you’ll owe income tax on the money in the year you withdraw it — and the amount you withdraw could move you into a higher tax bracket.

• Reject or disclaim the inherited account: By doing this, you would be passing the account to the next beneficiary.

• Leave the inherited 401(k) where it is (as long as the plan allows this option): If you don’t touch or transfer the inherited 401(k), you are required to take RMDs if you’re at least 73. If you’re not yet 73, other rules apply and you may want to consult a professional.

Inheriting a 401(k) From a Non-Spouse

The options for a non-spouse beneficiary such as a child or sibling are more limited. For example, as a non-spouse beneficiary you cannot roll over an inherited 401(k) into your own retirement account. These are the options you have:

• “Disclaim” or basically reject the inherited account.

• Take a lump-sum distribution. If you are 59 ½ or older, you won’t face the 10% penalty, but you will have to pay taxes on the distribution.

• Roll over the inherited 401(k) into an inherited IRA. This allows you to take distributions based on a specific timeline, as follows:

If the account holder died in 2019 or earlier, one option you have is to take withdrawals for up to five years — as long as the account is empty after the five-year period. This is known as the five-year rule. The other option is to take distributions based on your own life expectancy beginning the end of the year following the account holder’s year of death.

If the account holder died in 2020 or later, you have 10 years to withdraw all the funds. You must start taking withdrawals starting no later than December 31 of the year after the death of the account holder. This rule is known as the 10-year rule.

Note that if you are a non-spouse beneficiary and you’re younger than 59 ½ at the time the withdrawals begin, you won’t face a 10% penalty for early withdrawals.

The exception to the 10-year rule is if you’re a minor child, chronically ill or disabled, or not more than 10 years younger than the deceased, you are considered an eligible designated beneficiary and you can take distributions throughout your life (see more about this below). In that case, you might want to use the distributions to set up a retirement account of your own, such an IRA, in a brokerage account or an online brokerage, for instance.

Tax Implications for Spouses vs. Non-Spouse Beneficiaries

In general, distributions from inherited traditional 401(k)s for both spouse and non-spouse beneficiaries are subject to income tax. That means the beneficiaries pay taxes based on their current tax rate for any withdrawals they make. This is something to keep in mind if you are considering a lump sum distribution. In that case, the taxes could push you into a higher tax bracket.

One option spouse beneficiaries have that non-spouse beneficiaries don’t, is to roll over the 401(k) into their own 401(k) or IRA. Such a rollover will not incur taxes at the time it takes place — the funds are treated as if they were originally yours. With this option, RMDs (and the taxes they entail) don’t need to be taken until you are 73.

How RMDs Impact Inherited 401(k)s

If the account holder died prior to January 1, 2020, beneficiaries can use the so-called “life expectancy method” to withdraw funds from an inherited 401(k). That means taking required minimum distributions, or RMDs, based on your own life expectancy per the IRS Single Life Life Expectancy Table (Publication 590-B).

But if the account holder died after December 31, 2019, the SECURE Act outlines different withdrawal rules for those who are defined as eligible designated beneficiaries.

Calculating RMDs for Inherited 401(k)s

Calculating RMDs is different for spouse beneficiaries and non-spouse beneficiaries. Spouse beneficiaries who roll over the 401(k) into an inherited IRA can take RMDs based on their age and life expectancy factor that’s in the IRS Single Life Expectancy Table.

For non-spouse beneficiaries, if the original 401(k) account holder died before January 1, 2020, and the account holder’s death occurred before they started taking RMDs (called the required beginning date), the beneficiary can take distributions based on their own life expectancy starting at the end of the year following the account holder’s year of death. Or they can follow the five-year rule outlined above.

However, if the account holder’s death occurred after they started taking RMDs, non-spouse beneficiaries can take distributions based on their own life expectancy or the account holder’s remaining life expectancy, whichever is longer.

The scenario changes if the account holder died in 2020 or later because of SECURE 2.0. This is when the withdrawal ranges depend on whether the non-spouse beneficiary is an eligible designated beneficiary or a designated beneficiary. An eligible designated beneficiary can take RMDs based on their own life expectancy or the account holder’s remaining life expectancy, whichever is longer — or they can use the 10-year rule mentioned above. A designated beneficiary, on the other hand, must follow the 10-year rule.

What Is an Eligible Designated Beneficiary?

To be an eligible-designated beneficiary, and be allowed the option to take RMDs based on your own life expectancy, an individual must be one of the following:

• A surviving spouse

• No more than 10 years younger than the original account holder at the time of their death

• Chronically ill

• Disabled

• A minor child

Individuals who are not eligible-designated beneficiaries must withdraw all the funds in the account by December 31st of the 10th year following the year of the account owner’s death.`

Exceptions to the 10-Year Rule for Eligible Designated Beneficiaries

Eligible designated beneficiaries are exempt from the 10-year rule (that is, unless they choose to take it). With the exception of minor children, eligible designated beneficiaries can take distributions over their life expectancy.

Minor children must take any remaining distributions within 10 years after their 18th birthday.

Recommended: Retirement Planning Guide

How to Handle Unclaimed Financial Assets

What if someone dies, leaving a 401(k) or other assets, but without a will or other legally binding document outlining the distribution of those assets?

That money, or the assets in question, may become “unclaimed” after a designated period of time. Unclaimed assets may include money, but can also refer to bank or retirement accounts, property (such as real estate or vehicles), and physical assets such as jewelry.

Unclaimed assets are often turned over to the state where that person lived. However, it is possible for relatives to claim the assets through the appropriate channels. In most cases, it’s incumbent on the claimant to provide supporting evidence for their claim, since the deceased did not leave a will or other documentation officially bequeathing the money to that person.

Tips for Locating and Claiming Unclaimed 401(k) Accounts

Because of the SECURE 2.0 Act, it is now generally easier to track down an unclaimed 401(k). As part of the Act, the Department of Labor set up a lost and found database for workplace retirement plans. To use the database, you’ll first need a Login.gov account. You can set up an account online by supplying your legal name, date of birth, Social Security number, and the front and back of an active driver’s license. You’ll also need a cell phone for verification purposes.

Through the lost and found database for workplace retirement plans, you can search for retirement accounts associated with a person’s Social Security number. Once you find an account, the database will provide contact information for the plan administrators. You can reach out to the administrators to find out more about the account and what you might be eligible to collect.

The Takeaway

Inheriting a 401(k) can be a wonderful and sometimes unexpected financial gift. It’s also a complicated one. For anyone who inherits a 401(k) — spouse or non-spouse — it can be helpful to review the options for what to do with the account, in addition to the rules that come with each choice, as well as consider your financial situation and possibly consult with a financial professional.

In some cases, the beneficiary may have to take required distributions (withdrawals) based on their age. In other cases, those required withdrawals may be waived. But in almost all cases, withdrawals from the inherited 401(k) will be taxed at the beneficiary’s marginal tax rate.

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🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of individual retirement accounts (IRAs).

FAQ

Can an inherited 401(k) be rolled into an IRA?

Yes, an inherited 401(k) can be rolled over into an IRA. Spouse beneficiaries of a 401(k) can have it directly rolled over into an inherited IRA account in their name. Non-spouse beneficiaries can do the same. However, if the original account holder died after December 31, 2019, the non-spouse beneficiary must withdraw the entire amount in the account within 10 years.

Are there penalties for not taking RMDs from an inherited 401(k)?

There is a 25% penalty for not taking RMDs from an inherited 401(k). However, if the mistake is corrected within two years, the penalty may be reduced to 10%.

How are inherited 401(k) distributions taxed?

For both spouse and non-spouse beneficiaries, distributions from inherited 401(k)s are subject to income tax. This means the beneficiaries pay taxes based on their current tax rate for any distributions or withdrawals they make.

What happens to a 401(k) with no designated beneficiary?

A 401(k) with no designated beneficiary is automatically inherited by the account holder’s spouse upon their death. For those who are unmarried with no designated beneficiary, the 401(k) may become part of their estate and go through probate with their other possessions.

Do non-spouse beneficiaries have to withdraw inherited 401(k) funds within 10 years?

If the 401(k) account holder died in 2020 or later, non-spouse beneficiaries generally have to withdraw all the funds from the inherited 401(k) within 10 years. However, there is an exception for eligible designated beneficiaries (which includes a spouse, a minor child, a beneficiary who is chronically ill or disabled, or a beneficiary who is not more than 10 years younger than the account holder at the time of their death). These eligible designated beneficiaries are exempt from the 10-year rule and can instead take distributions over their lifetime if they choose.

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

SOIN-Q325-041

Aug

2025

Top 10 Part-Time Jobs for Seniors

By Kelly Boyer Sagert | Budgeting & Goals, Preparing for Retirement, relay | Comments Off

Whether you want to earn extra income to make ends meet or stay engaged with the community, there are plenty of reasons why you may decide to seek out part-time employment after you leave the workforce. And because these jobs don’t require 40 hours a week, you still have plenty of time to enjoy the retirement experience.

Table of Contents

10 Part-Time Jobs for Seniors
FAQ

Key Points

• Part-time jobs provide seniors with flexibility and extra income.

• Common positions include dog sitting, office management, content writing, tutoring, retail, and more.

• Pay rates vary from $16 to $80 per hour.

• Job fit depends on individual skills and experience.

• Social Security benefits are unaffected for seniors at full retirement age.

10 Part-Time Jobs for Seniors

Maybe your ideal part-time job allows you to work from home. Or perhaps you’re looking for a side hustle that keeps you moving for most of the day. Whatever your needs are, there are lots of employment options to explore. Here are 10 to consider.

#1: Dog Sitter and Walker

Many people need help with their dogs while they work or when they go out of town. If you’re an animal lover and understand basic pet first aid, offering your services as a dog sitter and walker allows you to care for man’s best friend while also earning cash to help cover retirement expenses.

• General duties: Main duties generally include feeding, walking, and overseeing the care of the dogs. If you’re pet sitting, you might care for them in your home, stay in the client’s home, or check in on the pooches throughout the day.

• Average pay: A dog walker charges an average of $16 per hour, while a pet sitter charges around $16-$24 per hour, per Care.com. However, rates vary by location and the services offered.

#2: Office Manager

Know how to make the workplace run smoothly? An office manager job may be right up your alley. Note that these jobs can sometimes be competitive, so you may want to contact former employers to see if there are part-time positions available. Or consider expanding your search to include a variety of industries. After all, the skills that the job requires — organization, time management, attention to details, problem-solving, communication — are essential no matter what type of office you’re in.

• General duties: These can vary by location but typically consist of coordinating administrative activities in an efficient and cost-effective way.

• Average pay: A typical office manager makes nearly $25 an hour, per ZipRecruiter.

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#3: Content Writer

If you have the writing chops, you may be able to find opportunities to hone your craft and earn some money. In fact, companies across the country need outstanding writers to create their content, so this could be an excellent choice for introverts looking for remote work.

• General duties: You may write content for companies to help them market themselves to potential customers or decision-makers. If you have technical skills — perhaps knowing about search engine optimization or photo editing — all the better!

• Average pay: A content writer typically charges around $40 per hour, per Glassdoor, though some prefer to charge a flat rate for each piece of content they create.

#4: Private Tutor

When it comes to retiree-friendly jobs, it’s tough to beat private tutoring. For starters, you have the option to tutor in person or over a video platform. It’s also a chance to help students with a subject you’re passionate or knowledgeable about. Plus, private tutoring can be a low-stress way to earn money.

• General duties: A private tutor provides one-on-one assistance to help one or more students learn and finish school assignments. This can involve studying the student’s textbooks or other materials and answering their questions on the subject matter.

• Average pay: Private tutors generally charge anywhere between $25-$80 per hour, though that rate can vary by location and expertise.

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#5: Retail Sales Worker

If you enjoy engaging with people and helping them to find what they need, there are numerous retail sales positions to consider. Do you love fashion? Look for jobs where you sell clothing and accessories. Interested in technology? You might be ideal in shops that sell computers, tablets, cell phones, and so forth.

• General duties: You’ll answer customer questions, provide courteous service, and accept payments for transactions. You may also stock shelves and tidy up your area.

• Average pay: On average, retail sales workers earn around $16 per hour.

#6: Receptionist

If your idea of retirement planning involves finding easy part-time jobs for seniors — easy on the feet, that is — and you enjoy talking to people, then a receptionist position could be the ticket. If you don’t mind working weekends, you may want to consider a position in a hospital, nursing home, or similar facility.

• General duties: Receptionists often greet customers or patients and help them register, if necessary. They also answer phones and offer general guidance to people who contact the organization.

• Average pay: Although pay can vary by the type of organization and the state where you live, figure an average of $18 an hour.

#7: Groundskeeper

Many of the part-time jobs for seniors on this list take place indoors. But if you appreciate spending time outdoors, you might enjoy being a groundskeeper.

Note that depending on where you live, this could be a seasonal position, so you may need to adjust your budget accordingly. Either way, consider reviewing your budget a few times a year and making any adjustments if needed with a money tracker app.

• General duties: Groundskeepers generally mow lawns, edge, pull weeds, and plant and care for flowers.

• Average pay: The national average is $18.50 an hour for groundskeeping services.

#8: School Bus Driver

A school bus driver may seem like a surprising job for seniors, but the majority of part-time bus drivers are in fact over the age of 55. To get accepted for this job, you’ll need to have or get a commercial driver’s license, a clean driving record and background, and (probably) plenty of patience.

• General duties: In the mornings, you’ll pick up students from bus stops or homes and drive them to school. Later in the day, you’ll drop them back off. You’ll also need to manage student behavior on the bus.

• Average pay: School bus drivers earn around $23 an hour on average.

#9: Consulting

There are pros and cons of working after retirement, but one benefit is the ability to share your expertise and skills with others. A consulting gig can provide such an opportunity. By the time you reach 65, you’ve likely gained plenty of knowledge that you can impart to business leaders in your field. Plus, as a consultant, you can have a decent amount of control over your when and how much you work.

• General duties: You’ll analyze a situation from an outsider’s perspective, looking for inefficiencies and providing guidance based on your expertise. Typically, consulting is a contract-based position that could continue until a situation has been addressed.

• Average pay: The range for consulting work can largely depend upon your background and expertise. Sometimes, you might charge per project.

#10: Customer Support Representative

Whether your cable conked out or your income tax software hit a glitch, you’ve almost certainly reached out for customer support for help in times of need. If you’re a strong communicator and enjoy helping others, you may want to consider serving as a customer support representative yourself.

• General duties: You’ll receive phone calls or chat messages from a customer in need of a fix. You can help them solve the problems, create tickets for others to address, and offer outstanding customer service to keep people satisfied.

• Average pay: This position typically pays around $20 an hour.

The Takeaway

After you retire, you might be looking for a side hustle that can help bring in some income and keep you active. Fortunately, when it comes to part-time jobs for seniors, there’s no shortage of options to explore. As you review potential positions, consider your work experience, skill set, interests, how much time you plan on working, and how much money you could potentially earn.

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FAQ

Can seniors still work part time and receive Social Security benefits?

According to the Social Security Administration, once you reach the full retirement age, what you earn will no longer reduce your benefits — no matter the amount. As of 2025, if you’re below the full retirement age, the Social Security Administration will deduct $1 out of every $2 you earn above the amount of $23,400.

What skills and experience are needed for a part-time job as a senior?

Required skills will vary widely based on the position. If you’re applying to be an administrative assistant, for example, it’s important to be organized and capable of managing a variety of tasks in a professional way. Being a nanny, on the other hand, requires strong communication skills with parents and children alike. When you’re looking at job ads, check the requirements listed and see how closely they match your experiences and skills.

How many hours a week should seniors work part time?

There’s no one-size-fits-all number of hours a senior should work each week. They’ll want to consider a number of factors to determine the appropriate workload for them, including how much income they need, how much free time they have, and how much they’re able to earn and still receive Social Security benefits.

Photo credit: iStock/Pranithan Chorruangsak

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SORL-Q325-001

Jul

2025

What Is a Roth 401(k)?

By Pam O’Brien | Growing Wealth, invest, Investing, Life & Career, Preparing for Retirement | Comments Off

Table of Contents

Roth 401(k) Definition
History and Purpose of the Roth 401(k)
How a Roth 401(k) Works
Roth 401(k) Contribution Limits
Roth 401(k) Withdrawal Rules
Roth 401(k) RMDs
Pros and Cons of a Roth 401(k)
Is a Roth 401(k) Right for You?
FAQ

A Roth 401(k) is a type of retirement plan that may be offered by your employer. You contribute money from your paychecks directly to a Roth 401(k) to help save for retirement.

A Roth 401(k) is somewhat similar to a traditional 401(k), but the potential tax benefits are different.

Here’s what you need to know to understand how Roth 401(k)s work and to decide if it may be the right type of retirement account for you.

Key Points

• Contributions to a Roth 401(k) are made with after-tax dollars, generally allowing tax-free growth and tax-free withdrawals in retirement.

• Withdrawals are penalty-free if the account is open for at least five years and the individual is 59 1/2 or older.

• Employers can now match contributions directly into a Roth 401(k), rather than into a separate traditional 401(k) due to the SECURE Act 2.0.

• Catch-up contributions are available for those 50 and older, with higher limits in 2025 for individuals ages 60 to 63.

• As of 2024, required minimum distributions (RMDs) are no longer required for Roth 401(k)s.

Roth 401(k) Definition

A Roth 401(k) combines some of the features of a traditional 401(k) plan and a Roth IRA.

Like a traditional 401(k), a Roth 401(k) is an employer-sponsored retirement account. Your employer may offer to match some of your Roth 401(k) contributions.

Like a Roth IRA, contributions to a Roth 401(k) are made using after-tax dollars, which means income tax is paid upfront on the money you contribute.

History and Purpose of the Roth 401(k)

The Roth 401(k) was first offered in 2006 as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001. Modeled after the Roth IRA, the Roth 401(k) was created to give employees an employer-sponsored investment savings plan that allowed them to save for retirement with after-tax dollars. Employees with a Roth 401(k) pay taxes on their contributions when they make them and withdraw their money tax-free in retirement, as long as the account has been funded for at least five years.

Originally, the Roth 401(k) was due to expire at the end of 2010, but the Pension Protection Act of 2006 made it permanent.

How a Roth 401(k) Works

Contributions to a Roth 401(k) are typically made directly and automatically from your paycheck. As mentioned above, your contributions are taxed at the time you contribute them, and you pay income taxes on them. In general, your money grows in the account tax-free and withdrawals in retirement are also tax-free, as long as the account has been open at least five years.

Differences Between a Roth 401(k) and a Traditional 401(k)

While a Roth 401(k) shares some similarities to a traditional 401(k), there are some differences between the two plans that you should be aware of. When it comes to 401(k) vs Roth 401(k), these are the differences:

• Contributions to a Roth 401(k) are made with after-tax dollars and you pay taxes on them upfront. With a traditional 401(k), your contributions are made with pre-tax dollars, and you pay taxes on them later.

• With a Roth 401(k), your take-home pay is a little less because you’re paying taxes on your contributions now. With a traditional 401(k), your contributions are taken before taxes.

• Your money generally grows tax-free in a Roth 401(k). And in retirement, you withdraw it tax-free, as long as the account is at least five years old and you are at least 59 ½. With a traditional 401(k), you pay taxes on your withdrawals in retirement at your ordinary income tax rate.

• You can start withdrawing your Roth 401(k) money at age 59 ½ without penalty or taxes. However, you must have had the account for at least five years. With a traditional 401(k), you can withdraw your money at age 59 ½. There is no 5-year rule for a traditional 401(k).

Recommended: IRA vs 401(k)

How Employer Matching Works in a Roth 401(k)

Roth 401(k)s are typically matched by employers at the same rate as traditional 401(k)s plans. Your employer may match your Roth 401(k) contributions up to a certain amount or percentage, depending on the employer and the plan.

Historically, matching contributions for employees with a Roth 401(k) had to be put into a separate traditional 401(k). But because of the SECURE Act 2.0, this changed in 2023. Now employers have the option to make matching contributions directly into an employee’s Roth 401(k).

There are two main methods employers typically use to match employees’ Roth 401(k) contributions:

• Partial matching: This is when the employer matches part of an employee’s contribution, usually up to a particular percentage of their salary, such as $0.50 for every employee dollar contributed up to 6% of the employee’s salary.

• Dollar-for-dollar matching: In this case, the employer matches the employee’s contributions 100%, typically up to a certain percentage of the employee’s salary.

It’s important to note that not all employers offer Roth 401(k) matching. Those who do offer it may have certain stipulations. For example, employees may be required to contribute a specific minimum amount to their Roth 401(k) for the employer match to kick in. Check with your Roth 401(k) plan documents or your HR department to find out about your employer’s policy for matching contributions.

Roth 401(k) Contribution Limits

A Roth 401(k) and a traditional 401(k) share the same contribution limits. Both plans allow for the same catch-up contributions for those 50 and older (learn more about catch-up contributions below).

Here are the 2025 contribution limits for each type of plan.

	Roth 401(k)	Traditional 401(k)
2025 contribution limit for those under age 50)	$23,500	$23,500
2025 standard catch-up contribution limit for individuals age 50 and up	$7,500	$7,500
2025 contribution limit for those 50 and older with standard catch-up	$31,000	$31,000
2025 enhanced catch-up contribution limit for those ages 60 to 63 due to SECURE 2.0	$11,250	$11,250
2025 contribution limit for those ages 60 to 63, per SECURE 2.0	$34,750	$34,750
2025 contribution limit for employee and employer contributions combined	$70,000 $77,500 with standard catch-up $81,250 with enhanced Secure 2.0 catch-up	$70,000 $77,500 with standard catch-up $81,250 with enhanced Secure 2.0 catch-up

Catch-Up Contributions for Those 50 and Older

Individuals who are age 50 and up have the opportunity to make catch-up contributions to a Roth 401(k). Catch-up contributions are additional money individuals can contribute to their Roth 401(k) beyond the standard yearly limit.

So, in 2025, if you contribute the standard annual limit of $23,500 to your Roth 401(k), you have the option of contributing an additional $7,500 for the year — for a total of $31,000, as long as you are age 50 or older. And if you are aged 60 to 63, in 2025, you can take advantage of enhanced SECURE 2.0 catch-up contributions of $11,250 instead of $7,500, for a total of $34,750.

Just like the standard contributions you make to a Roth 401(k), when you make catch-up contributions to your account, you also use after-tax dollars. That means you can withdraw the money tax-free in retirement.

Making catch-up contributions is one important factor to consider when you’re thinking about how to manage your 401(k), especially as you get closer to retirement.

Roth 401(k) Withdrawal Rules

A Roth 401(k) has certain withdrawal rules, including the 5-year rule. Under this rule, an individual can start taking tax-free and penalty-free withdrawals from a Roth 401(k) at age 59 ½ only when they’ve had the account for at least five years.

This means that if you open a Roth 401(k) at age 56, you can’t take tax- or penalty-free withdrawals of your earnings at age 59 ½ the way you can with a traditional 401(k). Instead, you’d have to wait until age 61, when your Roth 401(k) is five years old.

Early Withdrawal Rules

There are some exceptions to the withdrawal rules. For example, it’s possible to take early withdrawals — meaning withdrawals taken before age 59 ½ or from an account that’s less than five years old — from a Roth 401(k) without taxes and penalties, if an individual is disabled or passes away.

Other early withdrawals may be taken as well, but they are subject to taxes and a 10% penalty. However, you may not owe taxes and penalties on the entire amount, only on the earnings.

Here’s how it typically works: You can withdraw as much as you’ve contributed to a Roth 401(k) without paying taxes or penalties because your contributions were made with after-tax dollars. In other words, you’ve already paid taxes on them. Any earnings you withdraw, though, are subject to taxes and penalties, and you’ll owe tax proportional to your earnings.

For example, if you have $150,000 in a Roth 401(k) and $130,000 of that amount is contributions and $20,000 is earnings, those $20,0000 in earnings are taxable gains, and they represent 13.3% of the account. Therefore, if you took an early withdrawal of $30,000, you would owe taxes on 13.3% of the amount to account for the gains, which is $3,990.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA online, but you typically pay investment costs for the securities in your portfolio.

Roth 401(k) RMDs

Previously, individuals with a Roth 401(k) had to take required minimum distributions (RMDs) starting at age 73 (the age for RMDs was raised from 72 to 73 in 2023, thanks to SECURE 2.0). However, in 2024, as a stipulation of SECURE 2.0, RMDs were eliminated for Roth accounts in employer retirement plans.

By comparison, traditional 401(k)s still require taking RMDs starting at age 73.

Pros and Cons of a Roth 401(k)

A Roth 401(k) has advantages, but there are drawbacks to the plan as well. Here are some pros and cons to consider:

Pros

You can make tax-free withdrawals in retirement with a Roth 401(k).
This can be an advantage if you expect to be in a higher tax bracket when you retire, since you’ll pay taxes on your Roth 401(k) contributions upfront when you’re in a lower tax bracket. Your money grows tax-free in the account.

There are no longer RMDs for a Roth 401(k).
Because of the SECURE 2.0 Act, required minimum distributions are no longer required for Roth 401(k)s as of 2024. With a traditional 401(k), you must take RMDs starting at age 73.

Early withdrawals of contributions in a Roth 401(k) are not taxed.
Because you’ve already paid taxes on your contributions, you can withdraw those contributions early without paying a penalty or taxes. However, if you withdraw earnings before age 59 ½, you will be subject to taxes on them.

Cons

Your Roth 401(k) account must be open for at least five years for penalty-free withdrawals.
Otherwise you may be subject to taxes and a 10% penalty on any earnings you withdraw if the account is less than five years old. This is something to consider if you are an older investor.

A Roth 401(k) will reduce your paycheck now.
Your take home pay will be smaller because you pay taxes on your contributions to a Roth 401(k) upfront. This could be problematic if you have many financial obligations or you’re struggling to pay your bills.

Is a Roth 401(k) Right for You?

If you expect to be in a higher tax bracket when you retire, a Roth 401(k) may be right for you. It might make sense to pay taxes on the account now, while you are making less money and in a lower tax bracket.

However, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) might be a better choice since you’ll pay the taxes on withdrawals in retirement.

Your age can play a role as well. A Roth 401(k) might make sense for a younger investor, who is likely to be earning less now than they may be later in their careers. That’s something to keep in mind as you choose a retirement plan to help reach your future financial goals.

The Takeaway

Participating in a Roth 401(k) through your employer can help you save for retirement. Employees make contributions using after-tax dollars, and the money can be withdrawn tax-free in retirement. Your employer may match your contributions, which is essentially free money.

Of course, a Roth or traditional 401(k) isn’t the only way to save for retirement. Along with an employer-sponsored account, you might want to boost your savings with an IRA or a brokerage account, for instance. Whatever type of accounts you choose, the important thing is to have a retirement savings strategy in place to help make your post-working life as comfortable as possible.

Help build your nest egg with a SoFi IRA.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of individual retirement accounts (IRAs).

FAQ

How is a Roth 401(k) taken out of a paycheck?

Contributions to a Roth 401(k) are automatically deducted from your paycheck. Because contributions are made with after-tax dollars, meaning you pay taxes on them upfront, your paycheck will be lower.

What is the 5-year rule for a Roth 401(k)?

According to the 5-year rule for a Roth 401(k), the account must have been open for at least five years in order for an investor to take qualified withdrawals of their Roth 401(k) earnings at age 59 ½ without being subject to taxes and a 10% penalty.

What happens to a Roth 401(k) when you quit?

When you quit a job, you can either keep your Roth 401(k) with your former employer, transfer it to a new Roth 401(k) with your new employer, or roll it over into a Roth IRA.

There are some factors to consider when choosing which option to take. For instance, if you leave the plan with your former employer, you can no longer contribute to it. If you are able to transfer your Roth 401(k) to a plan offered by your new employer, your money will be folded into the new plan and you will choose from the investment options offered by that plan. If you roll over your Roth 401(k) into a Roth IRA, you will be in charge of choosing and making investments with your money.

Do I need to report a Roth 401(k) on my taxes?

Because your contributions to a Roth 401(k) are made with after tax dollars and aren’t considered tax deductible, you generally don’t need to report them on your taxes. And when you take qualified distributions from a Roth 401(k) they are not considered taxable income and do not need to be reported on your taxes. However, it’s best to consult with a tax professional about your particular situation.

Can you roll over a Roth 401(k) into a Roth IRA?

Yes, you can roll over a Roth 401(k) into a Roth IRA. You can do this, for example, if you leave your job. Rolling over your Roth 401(k) typically gives you a wider range of investment options to choose from. Roth IRA rollovers can be complicated, however, so you may want to consult a tax professional to make sure you don’t incur any unexpected tax situations.

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

SOIN-Q325-058

Jul

2025

Pros & Cons of the FIRE Movement

By Krystal Etienne | Budgeting & Goals, invest, Preparing for Retirement | Comments Off

Table of Contents

What Is the FIRE Movement?
FIRE vs. Traditional Retirement
Target Age for Early Retirement
Saving Strategies for Retiring Early
Financial Independence Retire Early: Pros and Cons
Investing for FIRE
FAQ

Many people dream of the day that they clock into work for the very last time. In most cases, we imagine that’ll be when we’re in our 60s. But what if you could take the freedom and independence of retirement and experience it 20 or 30 years earlier?

That’s the basic principle of the Financial Independence, Retire Early (FIRE) movement, a community of young people who aim to live a lifestyle that allows them to retire in their 50s, 40s, or even 30s rather than their 60s or 70s.

While it may sound like the perfect life hack, attempting to live out this dream comes with some serious challenges. Read on to learn more about the FIRE movement and some techniques followers have used to help achieve their goal of early retirement. That can help you determine whether any of their savings strategies might be right for you.

Key Points

• FIRE stands for Financial Independence, Retire Early, with proponents aiming to retire earlier than the traditional time frame of 65 to 70 years-old.

• The movement originated from the book Your Money or Your Life in 1992, and gained traction in the 2010s.

• Achieving FIRE may require saving 50% to 75% of income and living frugally.

• Benefits include increased time flexibility, reduced financial stress, and a more passion-driven life.

• Drawbacks involve unpredictability, potential boredom, and challenges in re-entering the workforce.

What Is the FIRE Movement?

FIRE stands for “financial independence, retire early,” and it’s a movement where followers attempt to gain enough wealth to retire far earlier than the traditional timeline would allow.

The movement traces its roots to a 1992 book called Your Money or Your Life by Vicki Robin and Joe Dominguez. FIRE started to gain a lot of traction, particularly among millennials, in the 2010s.

In order to achieve retirement at such a young age, FIRE proponents may devote 50% to 75% of their income to savings. They also use dividend-paying investments in order to create passive income sources they can use to support themselves throughout their retired lives.

Of course, accumulating the amount of wealth needed to live for six decades or more without working is a considerable feat, and not everyone who attempts FIRE succeeds.

FIRE vs. Traditional Retirement

FIRE and traditional retirement both aim to help people figure out when they can retire, but there are major differences between the two.

Retiring Early

Given the challenge many people have of saving enough for retirement even by age 65 or 70, what kinds of lengths do the advocates of the FIRE movement go to?

Some early retirees blog about their experiences and offer tips to help others follow in their footsteps. For instance, Mr. Money Mustache is a prominent figure in the FIRE community, and advocates achieving financial freedom through, in his words, “badassity.”

His specific perspective includes reshaping simple but expensive habits, such as eliminating smoking cigarettes or drinking alcohol, and limiting dining out.

Of course, the basic premise of making financial freedom a reality is simple in theory: spend (much) less money than you make in order to accumulate a substantial balance of savings.

Investing those savings can potentially make the process more attainable by providing, in the best-case scenario, an ongoing passive income stream. However, many people who achieve FIRE are able to do so in part because of generational wealth or special circumstances that aren’t guaranteed.

For instance, Mr. Money Mustache and his wife both studied engineering and computer science and had “standard tech-industry cubicle jobs,” which tend to pay pretty well — and require educational and professional opportunities not all people can access.

In almost all cases, pursuing retirement with the FIRE movement requires a lifestyle that could best be described as basic, foregoing common social and leisure enjoyments like restaurant dining and travel.

Target Age for Early Retirement

Early retirement means different things to different people. While some individuals may consider age 55 to be an early retirement, many FIRE proponents aspire to retire in their 40s or even in their 30s, if possible.

According to a SoFi 2024 Retirement Survey, 12% of respondents say their target retirement age is 49 or younger. Of that group, 35% are using FIRE strategies to reach their goal, making it one of the top methods.

Strategies to Retire Early
Source: SoFi Retirement Survey, April 2024

Saving Strategies for Retiring Early

Retiring early can involve making some serious adjustments to an individual’s current lifestyle. People who follow the FIRE movement generally try to put 50% to 75% of their income in savings. That can be challenging because once they pay their bills, there may not be much leftover for things like going to the movies or having dinner out.

As noted above, among the SoFi survey respondents, roughly one-third (35%) say they are using FIRE strategies.

Traditional Retirement

Most working people expect to retire sometime around the age of 65 or so. For those born in 1960 or later, Social Security benefits can begin at age 62, but those benefits will be significantly less than they would be if an individual waited until 67, their full retirement age, to collect them.

People saving for traditional retirement typically save much of their retirement funds in tax-incentivized retirement accounts, like 401(k)s and traditional IRAs, which carry age-related restrictions. For example, 401(k)s generally can’t be accessed before age 59½ without incurring a penalty.

But remember that even a traditional retirement timeline can be difficult for many savers. For example, the SoFi survey found that just 17% of respondents are saving 15% of their income for retirement, the amount many financial professionals recommend.

Online calculators and budgeting tools can help you determine when you can retire, and they are customizable to your exact retirement goals and specifications.

Financial Independence Retire Early: Pros and Cons

Although financial independence and early retirement are undoubtedly appealing, getting there isn’t all sunshine and rainbows. There are both strong benefits and drawbacks to this financial approach that individuals should weigh before undertaking the FIRE strategy.

Pros of the FIRE Approach

Benefits of the FIRE lifestyle include:

• Having more flexibility with your time. Those who retire at, say 45, as opposed to 65 or 70, have more of their lifetime to spend pursuing and enjoying the activities they choose.

• Building a meaningful, passion-filled life. Retiring early can be immensely freeing, allowing someone to shirk the so-called golden handcuffs of a job or career. When earning money isn’t the primary energy expenditure, more opportunities to follow one’s true calling can be taken.

• Learning to live below one’s means. “Lifestyle inflation” can be a problem among many working-age people who find themselves spending more money as they earn more income. The savings strategies necessary to achieve early retirement and financial independence require its advocates to learn to live frugally, or follow a minimalist lifestyle, which can help them save more money in the long run — even if they don’t end up actually retiring early.

• Less stress. Money is one of the leading stressors for many Americans. Gaining enough wealth to live comfortably without working could wipe out a major cause of anxiety, which could lead to a more enjoyable, and healthier, life.

Cons of the FIRE Approach

Drawbacks of the FIRE lifestyle include:

• Unpredictability of the future. Although many people seeking early retirement thoroughly map out their financial plans, the future is unpredictable. Social programs and tax structures, which may figure into future budgeting, can change unexpectedly, and life can also throw wrenches into the plan. For instance, a major illness or an unexpected life event could wreak havoc on even the best-laid plans for financial independence.

• Some find retirement boring. While never having to go to work again might sound heavenly to those on the job, some people who do achieve financial security and independence and take early retirement, struggle with filling their free time. Without a career or specific non-career goals, the years without work can feel unsatisfying.

• Fewer professional opportunities. If someone achieves FIRE and then discovers it’s not right for them — or they must re-enter the workforce due to an extenuating circumstance — they may find reintegration challenging. Without a history of continuous job experience, one’s skill set may not match the needs of the economy, and job searching, even in the best of circumstances, may be difficult.

• FIRE is hard! Even the most dedicated advocates of the financial independence and early retirement approach acknowledge that the lifestyle can be difficult — both in the extreme savings strategies necessary to achieve it and in the ways it changes day-to-day life. For instance, extroverts might find it difficult to forgo social activities like eating out or traveling with friends. Others may find it challenging to create a sense of personal identity that doesn’t revolve around a career.

Investing for FIRE

Investing allows FIRE advocates — and others — to earn income in two important ways: dividends and market appreciation.

Dividends

Shareholders earn dividend income when companies have excess profits. Dividends are generally offered on a quarterly basis, and if you hold shares of a stock you could earn them.

However, because dividend payments depend on company performance, they’re not guaranteed. Those relying on them to live should have other income sources (including substantial savings accounts) as a back up income stream.

Market Appreciation

Investors can also earn potential profits through market appreciation when they sell stocks and other assets for a higher price than what they initially paid for them.

Even for those who seek retirement at a traditional pace, stock investing is a common strategy to create the kind of compound growth over time that can build a substantial nest egg. There are many accounts built specifically for retirement investing, such as 401(k)s, IRAs, and 403(b) plans.

However, these accounts carry age-related restrictions and contribution limits which means that those interested in pursuing retirement on a FIRE timeline will need to explore additional types of accounts and saving and investing options.

For example, brokerage accounts allow investors to access their funds at any point — and to customize the way they allocate their assets to help support growth goals.

The Takeaway

Whether you’re hoping to retire in a traditional fashion, shorten your retirement timeline, or you’re simply looking to increase your wealth to achieve shorter-term financial goals, like buying a new car, investing can be an effective way to reach your objectives.

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.

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

FAQ

What does “FIRE” stand for?

FIRE is an acronym that stands for “financially independent, retire early.” It’s a movement where followers try to save enough to retire much earlier than the traditional age, such as in their 30s and 40s rather than their 60s.

How many people are using FIRE strategies to save for retirement?

According to the SoFi 2024 Retirement Survey, 35% of those who wish to retire by age 50 are utilizing FIRE strategies to save for retirement.

What are some drawbacks of FIRE strategies?

Potential drawbacks of using FIRE strategies include the fact that saving so much and spending so little is very challenging, retirement may not be what many people envision once they achieve it, and the future is unpredictable, and their plans may change.

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

SOIN-Q325-004

Jul

2025

Ultimate Guide to Retirement Planning for Millennials

By Pam O’Brien | Budgeting & Goals, invest, Preparing for Retirement | Comments Off

Table of Contents

Why Retirement Planning Matters for Millennials
Setting Your Retirement Goals: What Does Your Future Look Like?
Understanding Your Retirement Savings Options
Key Steps to Start Your Retirement Plan
Common Retirement Planning Mistakes Millennials Should Avoid
FAQ

As millennials enter their 30s and 40s, retirement suddenly doesn’t seem as far off as it once did. In fact, many millennials hope to retire by age 59, according to one recent survey — six years before the traditional retirement age of 65.

The average millennial believes they’ll need $1.65 million to be comfortable in retirement, according to a 2024 study by Northwestern Mutual. But they’ve got a long way to go to reach that number: Millennials have saved just $62,600 on average, the research found. That means they’ll need to save at least $1.59 million between now and the day they retire to reach their goal.

No matter what your specific retirement goal is, ramping up millennial retirement savings now can pay off. The sooner an individual starts saving for retirement, the more time their money potentially has to grow. Read on for ways to kickstart your retirement savings — and some common mistakes to avoid — in our millennial’s guide to retirement planning.

Key Points

Saving early and consistently for retirement could help millennials take advantage of compounding returns and meet long-term financial goals.
Creating a budget helps manage expenses and allocate funds for retirement.
Retirement savings account options include a workplace 401(k), an IRA, or a brokerage account.
Understanding risk tolerance can help investors make informed investment decisions.
Diversifying investments is a way to spread money out across a range of assets to reduce the risk of losses.

Why Retirement Planning Matters for Millennials

Since young adulthood, millennials have faced a series of financial challenges. They graduated college with an average of $40,438 in student loan debt, according to the Education Data Initiative. They often struggled to find jobs during the Great Recession, and when they did land a position, their wages typically stagnated. Then, during their peak earning years, the Covid pandemic hit, and a large chunk of the economy slowed or shut down.

In addition, home prices have skyrocketed since 2020, putting homeownership out of reach for many millennials. Rents have also risen sharply, taking a chunk of their paychecks. Add to that increases in the cost of living across the board and rising credit card debt, and it’s no wonder millennials find themselves falling behind.

Faced with so many financial pressures, millennials may feel that saving for retirement is less of a priority because it’s far in the future. But that’s a misconception. In order to amass enough retirement savings, an individual generally needs to routinely put money away for at least 25 years, and ideally, even longer. Starting now on your millennial retirement savings plan could make all the difference.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA online, but you typically pay investment costs for the securities in your portfolio.

Setting Your Retirement Goals: What Does Your Future Look Like?

According to the 2024 SoFi Retirement Survey, 75% of Americans don’t know how much they’ll need to retire. Before you can understand how much to save for your post-work years, you need to figure out what you’d like your retirement to look like. Do you hope to travel? Would you like to relocate to another part of the country — or move to a different country altogether? Or are you planning to downsize and move to a smaller home in the same general area?

Envisioning the lifestyle you hope to have in retirement can help you calculate what your retirement costs might be.

How to Determine How Much You Need to Retire

There isn’t one millennial retirement savings amount that will work for everyone. How much you need to retire depends on your unique situation. However, there are several rules of thumb you may want to consider as ballpark estimates.

The 4% rule: The 4% rule suggests that retirees can safely withdraw 4% of their savings in the first year of retirement, and then adjust that amount for inflation in subsequent years, to help ensure their savings will last for 30 years. You can also use this rule to back out how much you’ll need to set aside for retirement. To do this, you estimate what your annual retirement costs will be and divide that number by 4%. For example, if you believe your annual retirement expenses will be $60,000, dividing that number by 0.04 would result in $1.5 million. That would be your retirement savings goal.
The 80% rule: This rule says retirees should aim to replace 80% of their pre-retirement income to maintain a similar standard of living. So if you’re earning $120,000, you would aim to have enough retirement income, from savings and other sources like Social Security, to generate $96,000 per year.
Age-based savings rule: Another guideline offers rough targets for retirement savings based on your age as follows:

By age …	You should have saved …
30	1x your salary
40	3x your salary
50	6x your salary
60	8x your salary

Remember, each of these three rules offers only rough amounts or guidelines for the amount you’ll need to save. But they can give you a starting point for estimating your retirement savings.

Average Retirement Age for Millennials

The average retirement age in the U.S. is 62, according to a 2024 study by MassMutual. As noted earlier, many millennials hope to retire by age 59. That means the oldest millennials, who are 44 in 2025, have approximately 15 to 18 years to save for retirement.

Understanding Your Retirement Savings Options

Whether you’re just starting to save for retirement as a millennial, or you’ve already started saving but want to kick your efforts up a notch, there are a number of different types of retirement plans you can consider.

Employer-Sponsored Plans (401(k), 403(b))

You can sign up for an employer-sponsored retirement plan if your workplace offers one. This might be a 401(k) plan if your company is for-profit, or a 403(b) if your employer is a nonprofit.

With employer-sponsored plans, you decide how much you want to contribute, and your contributions are typically automatically deducted from your paycheck. This can help you save without even thinking about it. Individuals under age 50 can contribute up to $23,500 in a 401(k) in 2025.

Additionally, your employer may offer a 401(k) match, which means they match your contributions up to a certain percentage. That’s basically “free money,” so if your workplace offers 401(k) matching, it’s a good idea to participate.

You may be able to direct how you want to invest the money you contribute to your 401(k) by choosing from a number of options offered by the plan, which may include stocks, bonds, and mutual funds, and exchange-traded funds (ETFs).

For those who are self-employed, there are solo 401(k) plans to help them save for retirement. The way these plans work is similar to a traditional 401(k), but solo 401(k)s are specifically for individuals who run a business by themselves or only employ their spouse.

Nonprofits may offer their employers a 403(b) plan, which is also similar to a 401(k). As with a 401(k), your employer may or may not offer matching contributions. However, your investment options with a 403(b) may be more limited than the investment options in a 401(k).

Individual Retirement Accounts (IRAs)

Another option for saving for retirement is an individual retirement account, or IRA. Freelancers or contract workers may want to consider opening an IRA, and so might millennials who don’t have a workplace retirement plan, or who have maxed out their employer-sponsored plan and want to save even more. (Keep in mind: If you already have a 401(k), you may or may not be eligible for tax-advantaged contributions to an IRA in any given tax year, depending on your income.)

There are different types of IRAs, but two of the most common are Roth and traditional IRAs. Each has the same annual contribution limits, which is $7,000 in 2025 for those under age 50.

Both traditional IRAs and Roth IRAs are tax-advantaged accounts, but they work differently. With a traditional IRA, you make pre-tax contributions. You can deduct the contributions in the year you make them, as long as you meet certain conditions. When you withdraw your savings from a traditional IRA in retirement, you pay taxes on the withdrawals.

With a Roth IRA, your contributions are made with after-tax dollars. You can’t deduct your contributions, but your potential earnings grow tax-free in the account, and your qualified withdrawals in retirement are tax-free. Roth IRAs do have income limits ($150,000 for those who are single in 2025 and $236,000 for those who are filing jointly) to make a full contribution.

There are specific withdrawal rules for traditional and Roth IRAs. For example, withdrawals from a traditional IRA before age 59½ typically incur income taxes and a 10% penalty. Withdrawals of Roth IRA contributions can be made anytime and they are tax- and penalty- free. However, any earnings withdrawn before age 59 ½ may be subject to income taxes and a 10% penalty.

Brokerage Accounts for Retirement Savings

There is no single best way to save for retirement; sometimes an approach that includes different kinds of retirement savings accounts may be worth exploring. For example, millennials who have an IRA or a 401(k) may also want to consider opening an investment account, such as a taxable brokerage account, to invest in the market.

Once you open a brokerage account and deposit money into it, you can start investing. You might choose to buy stocks, mutual funds, ETFs, or other securities, for instance. There are no contribution limits with a brokerage account, and you have a wide range of investment options.

Just be aware that because brokerage accounts are taxable, selling investments can result in gains or losses, which generally have tax implications. Interest and dividends earned may also be taxable. You can consult with a tax professional to learn more.

💡 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.

Key Steps to Start Your Retirement Plan

One of the most important moves you can make as an investor is getting started. Here’s how to put your millennial retirement savings plan into action to help secure your financial future.

Create a Budget and Track Your Spending

Making a budget, and then sticking to it, can help you reduce expenses and free up money you can put toward retirement.

To make a monthly budget, gather all your bills (including mortgage or rent, utilities, credit card bills, student loan payments, and car payments) so that you can add up your typical monthly expenses. Next, calculate your average monthly income. Besides your regular job, include any side gigs you may have.

Once you have those figures and you can clearly see what you’re paying out and taking in, you can create a monthly budget. Look for any expenses you may be able to eliminate or reduce, such as streaming services, gym memberships, or eating out at restaurants.

Start Saving Early and Consistently

The sooner you start saving for retirement, the more time your money potentially has to grow. One reason for this is the power of compounding returns. This refers to the process where investment earnings are reinvested to generate further earnings. This creates a snowball effect, where returns are earned not only on the initial investment (principal) but also on the accumulated returns from previous periods, leading to exponential growth over time.

This is one key reason people are encouraged to invest as young adults, such as investing in your 20s. The longer money is invested, the more it may compound.

Understand Your Risk Tolerance

Investing your money inherently involves risk. That means you’ll need to determine what your risk tolerance is.

Risk tolerance is the amount of risk you are willing to assume to achieve your financial goals. Typically there are three main categories of risk tolerance: conservative, moderate, and aggressive.

To help figure out what your tolerance for risk is, consider:

How much money you have to invest and whether you expect your salary to increase over the coming years. If you do expect your income to go up, your risk tolerance may be higher since it might be easier to recover from any losses.
What your expenses are now and what they’re likely to be in retirement. If you are looking at higher expenses in retirement, your risk tolerance might be lower, and vice versa.
How you feel about the stock market. If volatility makes you nervous you may want to assume lower investment risk, for example.
When you want to retire. If you hope to retire early, you may want to be more conservative with your investment strategy.

Diversify Your Investments

When investing, it’s important not to limit your portfolio or put all your investments into one basket. If you do, it could make you vulnerable to losses. For instance, if you invest in stocks that are all in the same area or sector — energy, say — and a negative event causes those stocks to drop, the value of your entire portfolio could plummet as a result.

Diversifying your portfolio means investing in different kinds of asset classes, such as stocks, bonds, mutual funds, and money market funds, for instance. From there, you can invest in different types of assets in each asset class. So you might choose medium- and large-cap stocks and a variety of different kinds of bonds. That way, if one sector or type or investment drops in value, the other investments you have may hold steady or even go up to help balance things out.

While diversification is not a way to avoid risk, it does spread your money out across a range of assets in a way that could be beneficial.

Consider Professional Financial Planning

If you don’t feel confident about investing for retirement on your own, or you need help making a financial plan for your future, you may want to consider using a financial advisor who could help you map out your saving and investing strategy. Talk with friends or family members whose opinion you trust to get a recommendation. Then meet with the advisor to make sure you’ll feel comfortable with them. You may want to speak with a few financial advisors to determine which one is right for your needs.

Ask upfront how the advisor is compensated. Some advisors charge a flat fee or an hourly rate, and some earn commissions or combinations of fees and commissions.

Regularly Review and Adjust Your Plan

It’s generally a good idea to periodically review and, if needed, adjust your retirement savings plan. Life circumstances often change — such as changing jobs, marriage, having children, or facing health issues — which can impact your financial needs and goals.

Market conditions also fluctuate, affecting the performance of your investments. Rebalancing your portfolio as needed can help manage risk and keep your strategy aligned with your retirement timeline. Changes in tax laws or retirement account rules (like contribution limits) can also impact your plan. Staying informed and adjusting accordingly helps you avoid penalties and make the most of your benefits.

Regular reviews also allow you to monitor your overall progress and make changes if you are falling behind, such as increasing contributions or changing the mix of investments in your portfolio.

Common Retirement Planning Mistakes Millennials Should Avoid

As you work on your retirement plan, watch out for these five common blunders that could set back your savings strategy.

Delaying Saving for Retirement

Waiting too long to save for retirement is one of the biggest mistakes people make. In a 2024 survey by the Transamerica Center for Retirement Studies, 76% of retirees said they wish they had saved more on a consistent basis, and 49% said they waited too long to concern themselves with saving and investing for retirement.

Starting the savings process early is critical because, as noted above, the power of compounding returns can help you build wealth over time. Generally, the sooner millennials begin saving and investing your money for the future, the better.

Not Taking Advantage of Employer Matching

The employer match on a workplace retirement plan like a 401(k) is essentially a salary bonus. If you’re not taking advantage of it, you’re missing out.

If possible, contribute at least enough to your 401(k) to get the match. To get an idea of how employer matching could benefit you, consider this example:

Let’s say your annual salary is $60,000 and your employer offers $0.50 per dollar on the first 6% of your pay (a common formula). When you contribute $3,600 (6% of your salary), your employer kicks in $1,800, for a total of $5,400.

Withdrawing From Retirement Accounts Early

Taking early withdrawals from retirement accounts like IRAs and 401(k)s before age 59 ½ typically means incurring taxes and penalties. Not only does this cost you money, but you’re also losing out on the potential compound growth you would have had if the money had remained in your account. That could significantly set back your retirement savings.

While there are some specific situations where you can tap a retirement account early without penalties (such as financial hardship or buying your first home), it’s best not to withdraw money early from a retirement account if possible.

Being Too Conservative or Too Aggressive With Investments

As mentioned earlier, an investor’s tolerance for risk typically impacts how they approach investing. Going too far in one direction or the other, however, could end up costing you money. For example, millennials who take an approach that’s too risky — such as a portfolio heavily weighted with stocks — may end up taking big losses if the market dips.

Conversely, millennials who use a more conservative investing approach may be leaving money on the table by having too many lower-risk assets in their portfolio. Remember, the younger you are, the more time you have to recover from market downturns.

Ignoring Inflation

Many people calculate how much they’ll need in retirement based on today’s prices. But as the cost of goods and services rises due to inflation, your retirement income won’t stretch as far as you may have originally planned.

For example, if you need $50,000 to cover your expenses in the first year of retirement, a consistent inflation rate of 2.5% could mean you’d need to spend closer to $80,000 20 years later to maintain the same standard of living.

To make sure you’re setting aside a sufficient nest egg, it’s important to adjust your goals and investment strategies to keep up with inflation.

The Takeaway

Millennials face a number of financial challenges, including student loan debt, stagnating wages, and a higher cost of living. While retirement may feel like less of a priority at this stage of life, it’s important for millennials to start saving now so that their money will have a chance to grow over time. Options for retirement saving and investing for millennials include participating in an employer’s 401(k), opening an IRA, or opening a brokerage account.

The sooner millennials begin building their nest egg, the better their chances of achieving a secure retirement.

Easily manage your retirement savings with a SoFi IRA.

FAQ

How much should I be saving for retirement as a millennial?

How much you should be saving for retirement as a millennial depends on your specific situation, but there are popular rules of thumb that can give you some guidance. For instance, the 80% rule says you should have enough savings to replace roughly 80% of your pre-retirement income in retirement. Another guideline offers rough savings targets based on your age: By age 30, you should have saved 1x your salary; by 40, you should have saved 3x your salary; by 50, 6x your salary;and by 60, 8x your salary.

What’s the difference between a 401(k) and an IRA?

A 401(k) and an IRA are both retirement savings accounts. The difference between them is that a 401(k) is an employer-sponsored retirement plan that you can participate in at work if your employer offers it, and an IRA is an individual retirement account that you open and manage on your own.

Is it too late to start saving for retirement in my 30s or 40s?

It’s never too late to start saving for retirement. It’s true that the sooner you start, the better, since your money will potentially have more time to grow through compounding returns. But time is still on your side: If you’re 35 and you start saving now, that still gives you 30 years to save up for the traditional retirement age of 65. If you’re 40, you have 25 years to reach your retirement savings goals.

What are some good investment options for millennials just starting out?

Millennials who are just starting out can participate in their workplace 401(k) plan if their employer offers one or they can open an individual retirement account (IRA) that they manage themselves to save for their retirement. With either type of retirement account, you can typically choose from such assets as mutual funds, index funds, exchange-traded funds (ETFs), and stocks.

Should I factor in Social Security for my retirement?

Yes, you should factor in Social Security when planning for retirement. To find out what your Social Security benefit in retirement is expected to be, you can create a Social Security account at www.ssa.gov/myaccount. Then, you can get an estimate of what your future retirement benefits might be by using the Social Security Administration’s online benefits calculator.

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