Figuring out when to retire can be challenging. It isn’t always easy to know what the right time is. And, of course, you need to make sure you’re financially prepared for retirement. You might be saving and investing diligently, but do you have enough money to cover your expenses and live comfortably in your golden years?
Taking a retirement quiz can help you determine the best time to retire. It can show you where you are in terms of saving for the future, and it can help you identify an action plan for reaching your retirement goals.
Get started with this “are you prepared for retirement” quiz. And then, after taking the retirement quiz, read on to find out more about saving for retirement.
Retirement Quiz
Take this 8 question quiz to see how prepared you are for retirement.
⏲️ Takes 45 seconds
You’re on Track for Retirement
Your retirement quiz answers indicate that you’re well on your way to planning and preparing financially for retirement. You’re maxing out your 401(k) and taking advantage of your employer’s matching contributions, you’re contributing to another retirement account like an IRA, and you’re working diligently to pay off your debt. You even have a financial and lifestyle plan that maps out what you want to do in retirement and how you’ll pay for it.
Nice work! Now just keep it going.
You’ve Made a Start But You Still Have Some Work To Do
When it comes to retirement planning, you’re in fairly decent shape, according to your “are you ready to retire?” quiz answers, but there’s more you can do to maximize your savings.
For one thing, contribute the maximum amount to your 401(k) if you can. This will help you put away more funds for your retirement years. After that, if you have money left over, open an IRA to save even more. You can choose between a traditional and Roth IRA, depending which type makes the most sense for your situation. Both IRAs may have some tax advantages.
In addition, work at paying off your debt, including your mortgage, student loans, and credit card debt. You don’t want that hanging over your head and dragging down your budget in retirement.
And finally, map out your retirement lifestyle as well as the retirement expenses you’ll likely face. Once you have a retirement budget, you’ll know how much you need to save to live contentedly in your golden years.
You Need to Get Serious About Saving
Your quiz answers show that you’ve got real work to do. While you’ve clearly thought about retirement and know you need to save for it, the financial obligations you’re facing now are your main concern.
If it’s any comfort, you’re not alone. While 35% of Americans say they want to retire between the ages of 60 and 69, according to a recent SoFi survey, only 37% of them say they’re actually on track to meet that goal.
However, it’s vital to take action now to help secure your future. Start by creating a budget and sticking to it. This will help you keep tabs on your spending so that you can avoid taking on more debt.
And speaking of debt, work on a plan to consistently pay off what you owe. There are different debt payment strategies, such as the debt avalanche and snowball methods. Decide which one makes the most sense for you and start using it.
At work, sign up for your company’s 401(k) if you haven’t already. Contribute enough to the 401(k) to get your employer’s matching contribution — otherwise, you’re essentially forfeiting free money. With a 401(k), money is automatically taken from your paycheck and deposited into your account, so you don’t even have to think about it. Having at least one retirement account will help you start saving up for your retirement years.
The Takeaway
Deciding when to retire is one of the most important life decisions you’ll make. And determining if you’re financially prepared for this time of your life is vital. A retirement quiz can help you figure out if you’re on track for your retirement goals or if you still have work to do. It’s a good way to assess where you are financially and what you need to do to secure your financial future.
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.
Invest with as little as $5 with a SoFi Active Investing account.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/damircudic
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.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
When opening an Individual Retirement Account (IRA), it’s important to consider any fees that might be involved. Typical IRA fees may include annual maintenance fees and account closure fees. You may also pay a fee to roll funds over to an IRA or close your account and transfer funds elsewhere.
Factoring in fees matters when deciding where to open an IRA. The more you pay in fees, the less of your investment dollars you get to keep. Understanding the various IRA fees you might encounter can make it easier to choose the right option for your retirement savings.
Key Points
• IRAs, including traditional and Roth, may incur fees such as maintenance (custodial) fees, and account closure fees.
• A good IRA maintenance fee is ideally below 1% annually, with some brokerages waiving fees entirely.
• IRA fees can be charged one-time, monthly, yearly, or per transaction, affecting overall investment returns.
• Roth IRAs are funded with after-tax dollars, offering tax-free qualified distributions, while traditional IRAs typically use pre-tax dollars with taxable distributions.
• Comparing fee schedules of different brokerages is crucial to minimize costs and maximize retirement savings.
Fees IRAs Can Charge
Brokerages and banks that offer retirement accounts can charge a variety of IRA fees and some are more fee-friendly than others. Some of the most common fees you might encounter with an IRA can include:
• Account maintenance fees. Some brokerages charge IRA maintenance (or custodial) fees simply for having an account. You may pay a flat fee or a percentage of the assets in your account on a monthly or yearly basis. It doesn’t matter what type of account you have, as there’s typically no real difference between traditional IRA and Roth IRA maintenance fees.
• Account closure fees. If you open an IRA at one brokerage, then decide to close it, you may pay a fee to terminate your account.
It’s difficult to determine how much an investor might pay in IRA fees on average, as every brokerage follows a different fee schedule. For example, you might pay a small account maintenance fee at one brokerage, while another charges no maintenance fee at all.
As for fees for opening a Roth IRA or traditional IRA, many financial institutions don’t charge this fee. If they do, account setup fees may be in the neighborhood of $25 to $50. Additionally, it could cost $100 or more to close your account and move it elsewhere.
How Are IRA Fees Charged?
Traditional IRA fees and Roth IRA fees are set by the financial institution that’s offering the account. Typically, there are fours ways fees can be assessed:
• One-time
• Monthly
• Yearly
If you’re worried about losing money in an IRA, it’s important to know when fees can apply and how much you’ll pay. You may be focused on making sure your investments do well to avoid losses, but fees can easily leech away your earnings little by little if you’re not paying attention.
Reviewing a brokerage’s fee schedule before opening an IRA can give you a better idea of what you might pay in terms of upfront fees and ongoing costs. You can also review the prospectus for each mutual fund or ETF you plan to invest in to see how much you might pay for the expense ratio. The expense ratio is set by the mutual fund company, not the brokerage.
The Takeaway
Opening an IRA can get you closer to your retirement savings goals, while allowing you to enjoy some tax benefits along the way. When deciding where to open an IRA, it’s important to zero in on the fees as that can affect your overall account growth long-term.
If you’re ready to get started with retirement planning, it’s easy to open an IRA with SoFi. You can get your account up and running in minutes online, and choose between automated or DIY investing to help you reach your goals.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Help build your nest egg with a SoFi IRA.
FAQ
What is a good IRA maintenance fee?
A good IRA maintenance fee is no fee at all, as some brokerages waive annual and monthly account maintenance fees.
How are fees paid in an IRA?
Some IRA providers charge account maintenance fees that you may pay one time, monthly, or annually. Check with the financial institution offering the account.
Are IRA fees higher than 401(k) fees?
A 401(k) can charge its own fees and whether they’re higher or lower than IRA fees largely depends on who manages the plan. Fees for a 401(k) may outpace IRA fees in some instances.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/supersizer
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
Individual retirement accounts (IRAs) are retirement savings accounts that offer certain tax-advantages. Some types of IRAs, including traditional and inherited Roth IRAs, are subject to required minimum distribution (RMD) rules.
What is an RMD on an IRA? In simple terms, it’s a withdrawal you make from an RMD every year once you reach a certain age. RMDs are a way for the IRS to ensure that retirement savers meet their tax obligations. Failing to take distributions when you’re supposed to could result in a tax penalty, so it’s important to know when you must take an RMD on an IRA.
Key Points
• Required minimum distributions (RMDs) are mandatory withdrawals from IRAs that account owners must start taking at age 73, as per IRS rules.
• RMDs apply to traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k)s, and other defined contribution plans.
• The RMD amount account holders need to withdraw is calculated using the IRS Uniform Lifetime or life expectancy tables.
• Failing to take RMDs can result in a 25% excise tax, reduced to 10% if corrected within two years.
• RMDs are taxed as ordinary income, and qualified charitable distributions (QCDs) can be used to reduce tax liability.
Required Minimum Distribution (RMD) Definition
A required minimum distribution is an amount you need to withdraw from an IRA account each year once you turn 73. (In 2023 the SECURE 2.0 Act increased the age that individuals had to start taking RMDs to age 73 for those who reach 72 in 2023 or later.) You can take out more than the minimum amount with an RMD, but you must withdraw at least the minimum to avoid an IRS tax penalty.
The minimum amount you need to withdraw when taking an RMD is based on specific IRS calculations (see more about that below).
Special Considerations for RMDs
RMD rules apply to multiple types of retirement accounts. You’re subject to RMDs if you have any of the following:
You must calculate RMDs for each account separately.
Failing to take RMD distributions from IRAs or other eligible investment accounts on time can be costly. The SECURE 2.0 Act allows the IRS to assess a 25% excise tax on the amount you failed to withdraw. That penalty might drop to 10% if the RMD is properly corrected within two years.
Why Do You Have to Take an RMD?
The IRS imposes RMD rules on IRAs and other retirement accounts to prevent savers from deferring taxes on earnings indefinitely. Here’s how it works.
When you contribute to a traditional IRA, SEP IRA, SIMPLE IRA, 401(k), or a simple retirement plan, you fund your account with pre-tax dollars (meaning you haven’t yet paid tax on that money). In exchange, you may be able to deduct some or all of the contributions you make.
Your account grows tax-deferred, and when you make qualified withdrawals in retirement, you pay ordinary income tax on earnings. If you were to leave the money in your IRA untouched, the IRS couldn’t collect tax on earnings, hence the need for RMDs.
Roth IRAs generally don’t have RMDs. When you make contributions to a Roth account you use after-tax dollars — in other words, you’ve already paid taxes on that money. So you don’t have to pay taxes again when you make qualified withdrawals in retirement. However, if you inherit a Roth IRA, you will be required to take RMDs.
RMDs for Roth and Traditional IRAs
When you open an IRA, you will typically choose between a Roth IRA or traditional IRA. There are differences between them when it comes to RMDs. Traditional IRAs are always subject to RMD rules. If you contribute to a traditional IRA, whether you max out the annual contribution limit or not, you can expect to take RMDs from your account later. RMD rules also apply when you inherit a traditional IRA.
Are there RMDs on Roth IRA accounts? No, if you’re making original contributions to a Roth IRA that you own. But you will need to take RMDs if you inherit a Roth IRA from someone else.
The IRS determines when you must take distributions from an inherited Roth IRA. The timing depends on whether the person you inherited a Roth IRA from was your spouse and whether they died before 2020 or in 2020 or later.
If you inherit an IRA from a spouse who passed away before 2020, you may:
• Keep the account as your own, taking RMDs based on your life expectancy, or follow the 5-year rule, meaning you generally fully withdraw the account balance by the end of the 5th year following the year of death of the account holder
OR
• Roll over the account to your own IRA
If you inherit an IRA from a spouse who passed away in 2020 or later, you may:
• Keep the account as your own, taking RMDs based on your life expectancy, delay beginning distributions until the spouse would have turned 72, or follow the 10-year rule, generally fully withdrawing the account balance by the end of the 10th year following the year of death of the account owner
OR
• Roll over the account to your own IRA
If you inherit an IRA from someone who is not your spouse and who passed away before 2020, you may:
• Take distributions based on your own life expectancy beginning the end of the year following the year of death
OR
• Follow the 5-year rule
If you inherited an IRA from someone who is not your spouse and who passed away in 2020 or later and you are a designated beneficiary, you may:
• Follow the 10-year rule
IRA withdrawal rules for inherited IRAs can be tricky so if you know that someone has named you as their IRA beneficiary, you may find it helpful to discuss potential tax implications with a financial advisor.
How To Calculate RMDs on an IRA
To calculate RMDs on an IRA, you divide the balance of your account on December 31 of the prior year by the appropriate life expectancy factor set by the IRS. The IRS publishes life expectancy tables for RMDs in Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs). You choose the life expectancy table that applies to your situation.
IRA Required Minimum Distribution Table Example
The IRS uses the Uniform Lifetime Table to determine RMDs for people who are:
• Unmarried account owners
• Married IRA owners whose spouses aren’t more than 10 years younger
• Married IRA owners whose spouses are not the sole beneficiaries of their account
Here’s how RMD distributions break down.
Age
Distribution Period (Years)
Age
Distribution Period (Years)
72
27.4
97
7.8
73
26.5
98
7.3
74
25.5
99
6.8
75
24.6
100
6.4
76
23.7
101
6.0
77
22.9
102
5.6
78
22.0
103
5.2
79
21.1
104
4.9
80
20.2
105
4.6
81
19.4
106
4.3
82
18.5
107
4.1
83
17.7
108
3.9
84
16.8
109
3.7
85
16.0
110
3.5
86
15.2
111
3.4
87
14.4
112
3.3
88
13.7
113
3.1
89
12.9
114
3.0
90
12.2
115
2.9
91
11.5
116
2.8
92
10.8
117
2.7
93
10.1
118
2.5
94
9.5
119
2.3
95
8.9
120 and over
2.0
96
8.4
Source: IRS Uniform Lifetime Table
And here’s an example of how you might use this table to calculate RMDs on an IRA.
Assume that you’re 75 years old and have $1 million in your IRA as of last December 31. You find your distribution period on the chart, which is 24.6, then divide your IRA balance by that number.
$1 million/24.6 = $40,650 RMD
You’ll need to recalculate your RMDs each year, based on the new balance in your IRA and your life expectancy factor. You can use an online calculator to figure out RMD on an IRA annually.
Withdrawing Required Minimum Distribution From an IRA
There are two deadlines to know when making RMDs from an IRA: when distributions must begin and when you must complete distributions for the year. The SECURE 2.0 Act introduced some changes to the timing of RMD withdrawals from an IRA.
When Do RMDs Start?
Beginning in 2023, the minimum age at which you must begin taking RMDs rose to 73 (that’s the same age you must begin taking RMDs for 401(k)s, in case you are wondering). The deadline for the very first RMD you’re required to make when you turn 73, is April 1 of the following year. So, if you turned 73 in 2025, then your first RMD would be due no later than April 1, 2026.
Once you make your first RMD, all other RMDs after that are due by December 31 each year. So, using the example above, if you make your first RMD on April 1, 2026, then you’d need to make your second RMD by December 31 of that same year to avoid a tax penalty. Just keep in mind that taking two RMDs in one year could increase your tax burden for the year.
Qualified Charitable Distributions (QCDs)
Qualified charitable distributions (QCDs) are amounts you contribute to an eligible charity from your IRA. QCDs are tax-free and count toward your annual RMD amount, and you can contribute up to $100,000 per year. Using your IRA to make QCDs can lower the amount of tax you have to pay while supporting a worthy cause.
For a distribution to count as a QCD, it must be made directly from your IRA to an eligible charity. You can’t withdraw funds from your IRA to your bank account and then use the money to write a check to your favorite charity.
Note that QCDs are not tax-deductible on Schedule A, the way that other charitable donations are.
How RMDs Are Taxed
RMDs are taxed as ordinary income, assuming that all of the contributions you made were tax-deductible. If you have a traditional IRA, your RMDs would be taxed according to whichever bracket you fall into at the time the withdrawals are made.
With an inherited Roth IRA, withdrawals of original contributions are tax-free. Most withdrawals of earnings from an inherited Roth IRA are also tax-free unless the account is less than five years old at the time of the distribution.
The Takeaway
The IRS requires you to take RMDs on certain types of IRAs, including traditional IRAs and inherited Roth IRAs. Knowing at what age you’re required to take money from an IRA and your deadline for withdrawing it can help you plan ahead and avoid a potentially steep tax penalty.
In general, coming up with a financial plan for your future can help you work toward your retirement goals. You can consider different options for saving and investing, including IRAs, 401(k)s, or other types of savings or investment vehicles, to help determine the best fit for your money.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Invest with as little as $5 with a SoFi Active Investing account.
FAQ
What happens if you don’t take RMDs from an IRA?
Failing to take an RMD from an IRA on time can result in a tax penalty. The current penalty is generally a 25% excise tax, assessed against the amount you were required to withdraw.
Do you have to take your IRA RMD if you are still working?
You do have to take RMDs from an IRA even if you’re still working. It’s worth noting that the IRS does typically allow you to defer RMDs from a 401(k) while you’re working — however, that rule doesn’t extend to IRAs.
Are you required to use IRA RMD money for specific purposes?
You can use RMDs money in any way that you like. Some common uses for IRA RMDs include medical expenses, home repairs, and day-to-day costs. You can also use IRA RMDs to make qualified charitable donations (QCD), which could minimize some of the tax you might owe. QCDs must be made directly from your IRA to the charity.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/FG Trade
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
An IRA recharacterization allows you to make changes to the type of contribution you made to one IRA by transferring it to a second IRA within the same tax year. For example, you might recharacterize traditional IRA contributions as Roth contributions, or vice versa.
This process is different from an IRA conversion, which is not limited to the tax year in which you made a contribution. A conversion typically involves moving funds from a traditional IRA into a Roth IRA, not the reverse. In most cases, you would owe income tax on the amount converted to a Roth.
There are different reasons for the recharacterization of an IRA, and some important IRS rules to know for completing one.
Key Points
• An IRA recharacterization allows you to change the type of IRA contribution made within the same tax year, such as from traditional to Roth IRA or vice versa.
• Executing a recharacterization typically involves notifying the IRA custodian, opening a second IRA, if needed, and meeting the tax-filing deadline or extension.
• Reasons for recharacterization may include avoiding tax penalties for excess contributions, or taking advantage of certain tax benefits.
• A recharacterization differs from a conversion, which can be done anytime with contributions from multiple years, and typically involves moving funds from a traditional IRA to a Roth IRA.
• Following the Tax Cuts and Jobs Act passed in 2017, a conversion from a traditional IRA to a Roth IRA cannot be reversed using a recharacterization.
What Is an IRA Recharacterization?
An IRA recharacterization allows you to treat contributions made to one type of IRA as contributions made to a second, different type of IRA. The IRS allows taxpayers to recharacterize contributions to traditional or Roth IRAs only up until the tax-filing deadline each year, assuming you meet relevant income limits and other restrictions for the second IRA account.
For instance, say you deposit money in a Roth IRA, but when it’s time to file taxes you realize that you’ve made contributions in excess of what’s allowed for your tax filing status and income (see details below).
You could execute a recharacterization to have some of that contribution amount treated as traditional IRA contributions for the tax year, and transfer the assets (and any earnings or net losses) to the second IRA.
In that scenario, a recharacterization of Roth IRA contributions could allow you to avoid the 6% excise tax penalty the IRS imposes on excess contributions.
How Do IRA Recharacterizations Work?
IRA recharacterizations work by allowing you to change your IRA contributions for the year from one type of IRA to another. The process is fairly simple; you’ll just need to notify the company, a.k.a. the custodian that holds your IRA, that you’d like to recharacterize your contributions, and open a second IRA for that purpose (unless you have an existing IRA).
You can also transfer the amount you want recharacterized to an IRA at a different institution. This is known as a trustee-to-trustee transfer. In most cases, either one of these methods is preferable to withdrawing the money and redepositing it yourself, which can be tricky and could lead to taxes and/or a penalty if you fail to transfer the money within a 60-day window.
Again, you have until the annual IRA contribution deadline to complete an IRA recharacterization. If you filed an extension, then you’ll have until the October extension-filing cutoff. You should receive a Form 1099-R documenting the recharacterization that you’ll need to file with your tax return.
Reasons for a Recharacterization
Why would you need to recharacterize IRA contributions? There are reasons for doing a recharacterization in either direction (Roth to traditional IRA, or traditional IRA to a Roth). You might consider recharacterization if you:
• Contributed too much to a Roth IRA for the year and need to shift some of that money to a traditional IRA in order to avoid a tax penalty.
• Made traditional IRA contributions, but later learned that you can’t deduct them because you’re covered by a retirement plan at work and your income puts you over the threshold to claim a deduction.
• Contributed to a Roth IRA, but believe you’d benefit more from getting a deduction for traditional IRA contributions.
• Initially contributed to a traditional IRA, but later decided that you’d prefer to contribute to a Roth IRA to enjoy its tax benefits later in life.
Sample Calculation of IRA Recharacterization
How you calculate an IRA recharacterization can depend on whether you’re recharacterizing some or all of your contributions for the year. To keep things simple, let’s assume that you contributed $5,000 to a Roth IRA at the beginning of the year. The IRA earned $1,000 in investment gains.
You’d now like to recharacterize the entire amount to a traditional IRA. You’d tell your IRA custodian that you’d like to do a full recharacterization. This strategy does not require a separate calculation of investment earnings, because the entire balance of the IRA is being recharacterized.
However, if you only wanted to convert $3,000 of your contributions you’d have to do a separate calculation to figure the amount of earnings that need to be recharacterized.
The IRS offers a formula for doing so, which looks like this:
Net Income = Contributions x (Adjusted closing balance – Adjusted opening balance) / Adjusted opening balance
If you don’t want to do the math by hand, it might be easier to plug the numbers into an IRA recharacterization calculator, or consult with a tax professional.
Pros and Cons of Recharacterizing an IRA
There are pros and cons to using a recharacterization strategy.
Pros
IRA recharacterization offers some flexibility with regard to how your IRA contributions are treated, if your financial circumstances or tax considerations change.
If you start off the year making one type of IRA contribution, you can decide to switch things up at any time before the tax filing deadline. There’s no penalty for changing your mind about what type of IRA contributions you’d like to make, as long as you’re doing so before the filing or extension deadlines.
Recharacterizing an IRA is a simpler process than converting IRA assets, which we’ll discuss shortly. There’s less paperwork involved, and since the transaction can be completed by the custodian without any money being withdrawn from your IRA, a recharacterization can be a more tax-efficient way to adjust your contribution choices.
Cons
That said, there are downsides to a recharacterization. For one thing, you’ll need to be mindful of the tax filing deadlines if you want to recharacterize IRA contributions. If you miss the tax or extension deadline, you won’t be able to recharacterize your contribution amount.
If you recharacterize traditional IRA contributions as Roth IRA contributions, you will owe taxes.
If you recharacterize Roth IRA contributions as traditional IRA contributions, you can only claim the tax deduction a) if you qualify and b) you cannot deduct any earnings on the original contribution, if there were any.
Recharacterization vs. Conversion of an IRA
Recharacterization of an IRA and an IRA conversion are not the same thing. When you recharacterize IRA contributions, you’re changing the type of contributions you made for that specific tax year.
When you convert an IRA, you’re moving money from one type of IRA to another that may include contributions from multiple years. Generally, an IRA conversion refers to moving money from a traditional IRA to a Roth IRA.
If you have a Roth IRA, there would be little benefit to doing a conversion to a traditional IRA since you couldn’t then take the tax deduction. Also, if you first converted a traditional IRA to a Roth, it’s no longer possible to convert it back to a traditional IRA, thanks to changes implemented by the 2017 Tax Cuts and Jobs Act.
For example, you might have chosen a traditional option when opening your first IRA but later decided that you’d like to have the tax benefits of a Roth IRA. Converting an IRA to a Roth would allow you to make contributions to a Roth IRA if you’d otherwise be prevented from doing so because your income is too high.
As noted, you’d have to pay taxes on the money you’re converting to a Roth IRA, because the money you deposited in your traditional IRA originally was tax deductible. Roth IRAs are funded with after-tax contributions.
IRA Recharacterization
IRA Conversion
How It Works
Recharacterization allows you to change the type of IRA contributions you make for the current tax year.
Conversion allows you to move amounts in one type of IRA to another, typically a traditional IRA to a Roth IRA.
Rules
Recharacterizations must be completed before the annual tax filing deadline.
Conversions can be done at any time and may include contributions made over multiple years.
Advantages
IRA recharacterization allows some flexibility in deciding what type of IRA contributions you want to make.
Converting a traditional IRA to a Roth IRA can allow you to take advantage of tax-free withdrawals in retirement.
Disadvantages
You must complete a recharacterization by the tax filing deadline or extension deadline; you cannot recharacterize IRA contributions pertaining to one year in a subsequent year.
You will likely owe taxes on converted amounts, which can increase your tax bill.
The Takeaway
Recharacterization of an IRA could make sense if it allows you to gain a tax advantage, or avoid a tax penalty for excess contributions. If you’re unsure whether a recharacterization makes sense, it might be a good idea to talk to a tax professional first.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Easily manage your retirement savings with a SoFi IRA.
FAQ
Are IRA recharacterizations still allowed?
Yes, the IRS still allows IRA recharacterizations. There are some limitations, however, as converted IRAs cannot be recharacterized back, after the fact. You also can’t recharacterize rollovers from a 401(k) or 403(b) to a Roth IRA either.
What is the reason for recharacterizing an IRA?
One of the most common reasons to recharacterize Roth IRA contributions is to avoid a tax penalty for having made excess contributions. It may also be necessary to recharacterize Roth contributions in order to be able to claim a tax deduction for traditional IRA contributions.
Meanwhile, one reason to recharacterize traditional IRA contributions might be that you don’t qualify for the full (or any) tax deduction, and therefore a Roth might look appealing from a tax standpoint.
What is the difference between an IRA conversion and recharacterization?
Converting an IRA means moving assets from one type of IRA to another, typically involving amounts you’ve contributed over several years. Recharacterization of IRA contributions is more limited, and it means you’ve changed your mind about the type of contributions you want to make for the current tax year. A recharacterization of IRA contributions can only be done only for the tax year the contributions were made; an IRA conversion can be done at any time.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/nortonrsx
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
There are a couple of ways to use an IRA to invest in real estate. First, you can invest in mutual funds, exchange-traded funds (ETFs), or real-estate investment trusts (REITs) that focus on real estate investments within an IRA.
It’s also possible to set up a self-directed IRA, or SDIRA, that can own physical real estate, as well as other types of alternative investments.
Using an IRA to invest in real estate property directly, however, is a complicated and potentially risky proposition. It’s important to understand the many rules and restrictions, as well as the potential advantages and disadvantages of investing in real estate in an IRA before doing so.
Key Points
• It’s possible to invest in real estate in an IRA via conventional methods, such as buying shares of a mutual fund, ETF, or REIT.
• Direct ownership of physical property using an IRA means setting up a self-directed IRA, or SDIRA, which requires a specialized custodian, not an ordinary broker.
• While a SDIRA gives investors the ability to invest in alternative investments (such as real estate, commodities, and precious metals), the account holder must oversee and manage the account and all investments.
• Investing in real estate in an IRA comes with stringent rules, including that neither the investor nor anyone in their family can own or live in the property.
• Investors considering investing in real estate through a SDIRA should weigh their risk tolerance, overall portfolio allocation, and the potential time commitment involved.
Can You Invest in Real Estate Using an IRA?
IRAs can offer a wide variety of investment opportunities, including those that target the real estate sector. While conventional investment options within an IRA are often confined to equity and fixed-income mutual funds, exchange-traded funds (ETFs), and index funds, it is in fact possible to use an IRA to invest in real estate in various ways.
Investing in real estate may be appealing to some investors because this asset class tends not to move in sync with traditional stock and bond markets; thus real estate may provide portfolio diversification. Some real estate investments also offer the potential for passive income.
But real estate is a type of alternative investment, and as such tends not to be very liquid, which may present risks for some investors.
Ways to Invest in Real Estate With an IRA
Here are some choices investors can consider for IRA real-estate investments. But not all types of real estate can be held in any type of IRA:
• Real estate mutual funds, real estate-focused exchange-traded funds (ETFs), real estate investment trusts (REITs) are typically available through a traditional, Roth, SEP, or SIMPLE IRA.
• Investing directly or owning residential and commercial investment properties, tax-lien certificates, crowdfunded real estate investments typically require a self-directed IRA or SDIRA (see detail below).
1. Real Estate-Related Funds
Like any type of mutual fund, real estate funds hold a basket of investments. Real estate mutual funds tend to be actively managed funds that may hold shares of real estate-related stocks, REITs, or they may track an index.
A real estate index fund, for example, seeks to mimic the performance of a market benchmark or index.
ETFs, meanwhile, are pooled investments similar to mutual funds, but are traded on an exchange like stocks, so they offer more liquidity. ETFs may also hold real-estate related investments — typically shares of REITs.
💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA online and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.
2. Real Estate Investment Trusts
Investors can also invest in Real estate investment trusts (REITs) directly. REITs own and manage properties on behalf of investors. REITs can target a specific niche or segment of the real estate market, such as retail shopping centers or storage facilities. Or they might hold a wide mix of property investments, including residential rental properties, office buildings, and industrial warehouses.
Dividends are often at the top of the list of benefits when weighing the pros and cons of REITs. They’re required to pay out 90% of profits to shareholders as dividends, making them a potentially reliable source of passive income.
Some of the advantages of REITs include passive income from dividends, and portfolio diversification, but these vehicles come with a number of risks. Potential risks include less liquidity and sensitivity to interest rates, as well as other factors that can negatively impact real estate markets: i.e., consumer trends, property destruction (from wear and tear, or weather), local laws and regulations.
3. Investment Properties
It’s also possible to own investment properties directly, such as commercial and residential real estate, among other types of properties. Investment properties can generate passive income through rent payments, and they may offer a profit when sold.
But investment properties typically require an upfront investment of capital, managing a mortgage, and ongoing maintenance that may be beyond the reach of most investors.
4. Tax-Lien Certificates
Tax-lien certificate investing involves buying liens that have been placed against properties in connection with unpaid tax debts. The holder of the certificate can collect interest while the property owner repays the debt. If the owner defaults on the debt, the certificate holder can take ownership of the property.
These are high-risk instruments, typically owing to the potential for losing money on tax payments and low-quality properties that don’t yield a profit.
5. Real Estate Crowdfunding
Real estate crowdfunding platforms, also known as online real estate platforms, allow a number of investors to purchase property by pooling their investment funds. Depending on which platform you’re using, the minimum investment could be as low as $500, but terms vary and the risks can be high.
Crowdfunding is even less liquid than many other types of real estate investments, since there’s typically a minimum holding period — which means investors’ money can be tied up for long periods, and there is no guarantee that a certain property or properties will turn a profit.
What IRAs Can You Use to Invest in Real Estate?
If you’re interested in real estate funds or REITs, you may be able to invest in these through a traditional, Roth, SEP, or SIMPLE IRA. Many brokerages include real estate funds and REITs as investment options for ordinary IRA investors.
On the other hand, if you’re specifically interested in property investments or tax-lien certificates — i.e., directly investing your IRA in real estate — you’ll need to open a self-directed IRA (SDIRA) instead.
What Is a Self-Directed IRA?
A self-directed IRA is a traditional or Roth IRA that’s held by a specialized custodian that allows investors access to a broader range of investments, including alternative investments like real estate.
Unlike ordinary IRAs which are overseen by a broker, all assets in a SDIRA are researched and managed by the account holder.
Self-directed IRAs are subject to a number of IRS restrictions. Many of these rules also apply to ordinary IRAs, but it’s important to bear them in mind when thinking about investing your IRA in real estate. Specifically, you’re barred from:
• Transacting with disqualified persons. These include your spouse and any family members, as well as your IRA beneficiary if they don’t fit either of those categories. The prohibition also extends to any business entity that’s owned by a disqualified person.
• Using the IRA or investments in the IRA for personal benefit. Using an IRA for personal benefit in any way is not allowed. For example, if you’re collecting rental income from a property you own in the IRA, you have to deposit any profit into the IRA, along with any other income generated by self-directed IRA assets.
• Making disallowed investments. Finally, there are some limits on what you can own in a self-directed IRA. Disallowed investments include life insurance, collectibles, and business interests in S-corporations. Transactions that count as “self-dealing” are also prohibited: i.e., borrowing money from a SDIRA, selling property to it, using it as loan collateral.
If you’d like to invest in property or tax lien certificates with an IRA, you need to set up a self-directed IRA, and then purchase the property or similar investment through the SDIRA . Because it can be very difficult to secure a mortgage for this kind of purchase, most direct property purchases are paid for with cash from the SDIRA.
1. Find a Custodian
The first thing you’ll need to do is find a qualified custodian that offers self-directed IRAs for real estate investment. When researching custodians, it’s a good idea to consider their reputation in the space, customer service and satisfaction, as well as the fees you’ll pay.
2. Open a Self-Directed IRA
Once you select a custodian, you can open your SDIRA. Your custodian should be able to guide you through this process, which usually involves completing the appropriate paperwork.
Remember, you’ll need to specify whether you’d like to open a traditional or Roth self-directed IRA. Traditional IRAs allow for tax-deductible contributions, while Roth SDIRAs can offer qualified withdrawals tax free in retirement.
Your custodian may give you the option (or require you) to establish a self-directed IRA as a limited liability company (LLC). Doing so can offer an advantage, since it allows you to have full control with regard to signing authority over IRA funds.
However, setting up an LLC real estate IRA can trigger additional IRS rules against prohibited transactions.
3. Deposit Funds to Your IRA
The next step is transferring funds into your self-directed IRA. That may be as simple as scheduling an electronic transfer from a bank account. You can also roll funds over from a 401(k) or another eligible plan.
Keep in mind that self-directed IRAs follow the same annual contribution limits as other IRAs, but those limits do not apply to IRA rollovers.
4. Compare Investment Options
Once you have money in your self-directed IRA, you’ll need to decide how you want to invest it. If you’re focused on real estate, that might mean purchasing an investment property. It’s important to perform due diligence to find a property that aligns with your investment needs, goals, and risk tolerance.
Remember that self-directed IRA investment options can include:
• Single-family or multifamily homes
• Commercial and rental properties
• Land
• Tax liens
• Mortgage notes
Each one can have a different risk/reward profile so it’s important to understand what you might gain from each one and what you may stand to lose. It’s also a good idea to consider how much of your self-directed IRA funds, and your portfolio as a whole, you’d like to allocate to real estate.
5. Purchase a Property
If you’re investing in a rental property and you’ve found one you want to buy, the final step is making the purchase. You’ll need to make an offer and once that’s accepted, you’ll need to authorize your IRA custodian to complete the transaction on your behalf. That’s important, as the property needs to be held in contract by the IRA, rather than yourself.
Pros and Cons of Investing Your IRA in Real Estate
Investing an IRA in real estate can yield some advantages but there are some serious considerations to keep in mind.
While you can use a self-directed IRA to hold real estate, which may offer some tax advantages, it’s important to know the rules so you don’t risk losing those benefits. Also, keep in mind that holding real estate inside a self-directed IRA can mean missing out on some tax advantages you’d get by owning property directly.
A self-directed IRA can offer high return potential but that means doing your homework first to find solid investments. You’ll need to spend some time researching properties to ensure that you understand the risks, as well as the level of returns you might be able to expect.
Managing a self-directed IRA may be more time-consuming than investing in a regular IRA, especially if you’re not hiring a property manager to oversee property investments. Self-directed IRAs offer less liquidity and depending on which custodian you choose, the fees may be high.
thumb_upPros:
• Potentially for returns
• IRA-related tax benefits
• Diversification
• IRAs are protected from creditors
thumb_downCons:
• Physical real estate is subject to numerous risks
• Stringent rules and requirements
• Less liquid than other investments
• Time-consuming to set up and manage
• Fees may be high
Is Investing Your IRA in Real Estate Right for You?
Deciding whether to invest in real estate with your IRA can start with reviewing your portfolio as a whole. Here are some questions to consider:
• Do you already own any real estate investments, including REITs or index funds?
• If so, how much of your portfolio is allocated to real estate?
• How much time and effort do you have to put into managing real estate investments?
• How much money are you able to invest?
• Do you have a trusted custodian and if not, do you know where to find one?
• What degree of risk are you willing to take and what kind of returns are you hoping to earn?
• Asking those kinds of questions can help you to evaluate where real estate fits into your investment plans and whether a self-directed IRA is the best option for you.
Alternative IRA Investment Options
In addition to real estate, you can also hold a wide variety of other alternative investments in a SDIRA.
• Commodities
• Gold and other precious metals
• Limited partnerships
• Private equity
Remember that the IRS bars you from owning things like artwork, antiques, rare coins or stamps, and fine wine in a self-directed IRA.
The Takeaway
Opening an IRA for real estate investing could be worth the effort if you’re hoping to diversify your portfolio beyond stocks and bonds, but it requires opening a specific type of IRA called a self-directed IRA, or SDIRA. This type of IRA isn’t available from a traditional broker, because you can use a SDIRA to hold alternative investments, such as real estate and commodities.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Help grow your nest egg with a SoFi IRA.
FAQ
Can I invest in real estate using my IRA?
You can invest in real estate using a self-directed IRA, or SDIRA. This type of IRA is held by a custodian and allows you to choose from a wider range of investment options than regular IRAs. With a self-directed IRA, you can own rental properties, mortgage notes, and tax lien certificates.
How is real estate taxed in an IRA?
Real estate held in an IRA is subject to the tax rules that apply to the type of IRA. For example, if you have real estate in a traditional SDIRA then any earnings or income generated by those investments would grow tax-deferred. You’d pay ordinary income tax on them when you make qualified withdrawals in retirement. A Roth-style SDIRA would provide tax-free income on qualified withdrawals. Owing to the complexity of self-directed IRAs to begin with, it might make sense to consult a professional regarding tax implications.
What type of real estate can be held in an IRA?
A self-directed IRA can hold residential rental properties, commercial real estate investment properties, tax lien certificates, and mortgage notes. If you have a regular traditional or Roth IRA, you can use it to invest in real estate funds, ETFs, or REITs.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/boonstudio
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
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.
An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
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.
