Mar
24
2025
Guide to Employee Stock Ownership Plans

Guide To Employee Stock Ownership Plans

By | Growing Wealth, invest, Investing, Preparing for Retirement, Terminology | Comments Off on Guide To Employee Stock Ownership Plans

You may have come across the term “ESOP” and wondered, what does ESOP stand for? An employee stock ownership plan (ESOP) is a type of defined contribution plan that allows workers to own shares of their company’s stock. While these plans are covered by many of the same rules and regulations that apply to 401(k) plans, an ESOP uses a different approach to help employees fund their retirement.

The National Center for Employee Ownership estimates that there are approximately 6,533 ESOPs covering nearly 15 million workers in the U.S. But what is an employee stock ownership plan exactly? How is an ESOP a defined contribution plan? And how does it work?

If you have access to this type of retirement plan through your company, it’s important to understand the ESOP meaning and where it might fit into your retirement strategy.

What Is an Employee Stock Ownership Plan (ESOP)?

An ESOP as defined by the IRS is “an IRC section 401(a) qualified defined contribution plan that is a stock bonus plan or a stock bonus/money purchase plan.” (IRC stands for Internal Revenue Code.) So what is ESOP in simpler terms? It’s a type of retirement plan that allows you to own shares of your company’s stock.

Though both ESOPs and 401(k)s are qualified retirement plans, the two are different in terms of how they are funded and what you’re investing in. For example, while employee contributions to an ESOP are allowed, they’re not required. Plus, you can have an ESOP and a 401(k) if your employer offers one. According to the ESOP Association, 93.6% of employers who offer an ESOP also offer a 401(k) plan for workers who are interested in investing for retirement.

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

How Employee Stock Ownership Plans Work

In creating an ESOP, the company establishes a trust fund for the purpose of holding new shares of stock or cash to buy existing shares of stock in the company. The company may also borrow money with which to purchase shares. Unlike employee stock options, with an ESOP employees don’t purchase shares themselves.

Shares held in the trust are divided among employee accounts. The percentage of shares held by each employee may be based on their pay or another formula, as decided by the employer. Employees assume ownership of these shares according to a vesting schedule. Once an employee is fully vested, which must happen within three to six years, they own 100% of the shares in their account.

ESOP Distributions and Upfront Costs

When an employee changes jobs, retires, or leaves the company for any other reason, the company has to buy back the shares in their account at fair market value (if a private company) or at the current sales price (if a publicly-traded company). Depending on how the ESOP is structured, the payout may take the form of a lump sum or be spread over several years.

For employees, there are typically no upfront costs for an ESOP.

Get a 1% IRA match on rollovers and contributions.

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1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Employee Stock Ownership Plan Examples

A number of companies use employee stock ownership plans alongside or in place of 401(k) plans to help employees save for retirement, and there are a variety of employee stock ownership plan examples. Some of the largest companies that are at least 50% employee-owned through an ESOP include:

•   Publix Super Markets

•   WinCo Foods

•   Amsted Industries

•   Brookshire Grocery Company

•   Houchens Industries

•   Performance Contracting, Inc.

•   Parsons

•   Davey Tree Expert

•   W.L. Gore & Associates

•   HDR, Inc.

Seven of the companies on this list are 100% employee-owned, meaning they offer no other retirement plan option. Employee stock ownership plans are popular among supermarkets but they’re also used in other industries, including engineering, manufacturing, and construction.

Pros & Cons of ESOP Plans

ESOPs are attractive to employees as part of a benefits package, and can also yield some tax benefits for employers. Whether this type of retirement savings plan is right for you, however, can depend on your investment goals, your long-term career plans, and your needs in terms of how long your savings will last. Here are some of the employee stock ownership plans pros and cons.

Pros of ESOP Plans

With an ESOP, employees get the benefit of:

•   Shares of company stock purchased on their behalf, with no out-of-pocket investment

•   Fair market value for those shares when they leave the company

•   No taxes owed on contributions

•   Dividend reinvestment, if that’s offered by the company

An ESOP can be an attractive savings option for employees who may not be able to make a regular payroll deduction to a 401(k) or similar plan. You can still grow wealth for retirement as you’re employed by the company, without having to pay anything from your own pocket.

Cons of ESOP Plans

In terms of downsides, there are a few things that might make employees think twice about using an ESOP for retirement savings. Here are some of the potential drawbacks to consider:

•   Distributions can be complicated and may take time to process

•   You’ll owe income tax on distributions

•   If you change jobs means you’ll only be able to keep the portion of your ESOP that you’re vested in

•   ESOPs only hold shares of company stocks so there’s no room for diversification

Pros and Cons of ESOP Plan Side-by-Side Comparison

Pros Cons

•   Shares of company stock purchased on employees’ behalf, with no out-of-pocket investment

•   Fair market value for those shares when they leave the company

•   No taxes owed on contributions

•   Dividend reinvestment, if that’s offered by the company

•   Distributions can be complicated and may take time to process

•   You’ll owe income tax on those distributions

•   Changing jobs means you’ll only be able to keep the portion of your ESOP that you’re vested in

•   ESOPs only hold shares of company stocks so there’s no room for diversification

By comparison, a 401(k) could offer more flexibility in terms of what you invest in and how you access those funds when changing jobs or retiring. But it’s important to remember that the amount you’re able to walk away with in a 401(k) largely hinges on what you contribute during your working years, whereas an ESOP can be funded without you contributing a single penny.

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

ESOP Contribution Limits

The IRS sets contribution limits on other retirement plans, and ESOPs are no different. In particular, there are two limits to pay attention to:

•   Limit for determining the lengthening of the five-year distribution period

•   Limit for determining the maximum account balance subject to the five-year distribution period

Like other retirement plan limits, the IRS raises ESOP limits regularly through cost of living adjustments. Here’s how the ESOP compares for 2023 and 2024.

ESOP Limits

 2024

 2025
Limit for determining the lengthening of the five-year distribution period $275,000 $280,000
Limit for determining the maximum account balance subject to the five-year distribution period $1,380,000 $1,415,000

Cashing Out of an ESOP

In most cases, you can cash out of an ESOP only if you retire, leave the company, lose your job, become disabled, or pass away.

Check the specific rules for your plan to find out how the cashing-out process works.

Can You Roll ESOPs Into Other Retirement Plans?

You can roll an ESOP into other retirement plans such as IRAs. However, there are possible tax implications, so you’ll want to plan your rollover carefully.

ESOPs are tax-deferred plans. As long as you roll them over into another tax-deferred plan such as a traditional IRA, within 60 days, you generally won’t have to pay taxes.

However, a Roth IRA is not tax-deferred. In that case, if you roll over some or all of your ESOP into a Roth IRA, you will owe taxes on the amount your shares are worth.

Because rolling over an ESOP can be a complicated process and could involve tax implications, you may want to consult with a financial professional about the best way to do it for your particular situation.

ESOPs vs 401(k) Plans

Although ESOPs and 401(k)s are both retirement plans, the funding and distribution is different for each of them. Both plans have advantages and disadvantages. Here’s a side-by-side comparison of their pros and cons.

ESOP

 401(k)
Pros

•   Money is invested by the company, typically, and requires no contributions from employees.

•   Employees get fair market value for shares when they leave the company.

•   Company may offer dividend reinvestment.

•   Many employers offer matching funds.

•   Choice of options to invest in.

•   Generally easy to get distributions when an employee leaves the company.

Cons

•   ESOPs are invested in company stock only.

•   Value of shares may fall or rise based on the performance of the company.

•   Distribution may be complicated and take time.

•   Some employees may not be able to afford to contribute to the plan.

•   Employees must typically invest a certain amount to qualify for the employer match.

•   Employees are responsible for researching and choosing their investments.

Recommended: Should You Open an IRA If You Already Have a 401(k)?

3 Other Forms of Employee Ownership

An ESOP is just one kind of employee ownership plan. These are some other examples of plans an employer might offer.

Stock options

Stock options allow employees to purchase shares of company stock at a certain price for a specific period of time.

Direct stock purchase plan

With these plans, employees can use their after-tax money to buy shares of the company’s stock. Some direct stock purchase plans may offer the stock at discounted prices.

Restricted stock

In the case of restricted stock, shares of stock may be awarded to employees who meet certain performance goals or metrics.

Investing for Retirement With SoFi

There are different things to consider when starting a retirement fund but it’s important to remember that time is on your side. No matter what type of plan you choose, the sooner you begin setting money aside for retirement, the more room it may have to grow.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can employees contribute to an ESOP?

In most cases, the employer makes contributions to an ESOP on behalf of employees. Rarely, employers may allow for employee contributions to employee stock ownership plans.

What is the maximum contribution to an ESOP?

The maximum account balance allowed in an employee stock ownership plan is determined by the IRS. For 2024, this limit is $1,380,000, though amounts are increased periodically through cost of living adjustments.

What does ESOP stand for?

ESOP stands for employee stock ownership plan. This is a type of qualified defined contribution plan which allows employees to own shares of their company’s stock.

How does ESOP payout work?

When an employee changes jobs, retires, or leaves the company for any other reason, the company has to buy back the shares in their account at fair market value or at the current sales price, depending if the company is private or publicly-traded. The payout to the employee may take the form of a lump sum or be spread over several years. Check with your ESOP plan for specific information about the payout rules.

Is an ESOP better than a 401(k)?

An ESOP and a 401(k) are both retirement plans, and they each have pros and cons. For instance, the employer generally funds an ESOP while an employee contributes to a 401(k) and the employer may match a portion of those contributions. A 401(k) allows for more investment options, while an ESOP consists of shares of company stock.

It’s possible to have both an ESOP and a 401(k) if your employer gives you that option. Currently, almost 94% of companies that offer ESOPs also offer a 401(k), according to the ESOP Association.

About the author

Rebecca Lake

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/pixelfit


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


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

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.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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Mar
24
2025

Understanding Divorce and Retirement Accounts

By | Family Finances, invest, Investing, Preparing for Retirement | Comments Off on Understanding Divorce and Retirement Accounts

Getting divorced can cause both emotional and financial upheaval for everyone involved. One of the most important questions you and your soon-to-be former spouse may have to decide centers on how to divide retirement assets.

Understanding the key issues around divorce and retirement can make it easier to untangle them as you bring your marriage to a close.

Taking Note of Your Retirement Accounts

The average cost of divorce can range from several hundred to several thousand dollars, so it’s important to know what’s at stake financially. Managing retirement accounts in divorce starts with understanding what assets you have.

There are several possibilities for saving money toward retirement, and different rules apply when dividing each. Here’s a look at what types of retirement accounts you may hold and thus will need to consider in your divorce.

401(k)

A 401(k) plan is a defined contribution plan that allows you to save money for retirement on a tax-advantaged basis. Your employer may also make matching contributions to the plan on your behalf. According to the Census Bureau, 34.6% of Americans have a 401(k) or a similar workplace plan, such as a 403(b) or Thrift Savings Plan.

IRA

Individual retirement accounts, or IRAs, also allow you to set aside money for retirement while enjoying some tax benefits. The difference is that these accounts are not offered by employers. There are several IRA options, including:

•   Traditional IRAs, which allow for tax-deductible contributions.

•   Roth IRAs, which allow for tax-free withdrawals in retirement.

•   SEP IRAs, which follow traditional IRA tax rules and are designed for self-employed individuals.

•   SIMPLE IRAs, which also follow traditional IRA tax rules and are designed for small business owners.

Each type of IRA has different rules regarding who can contribute, how much you can contribute annually, and the tax treatment of contributions and withdrawals.

💡 For more info, check out our guide on individual retirement accounts (IRAs).

Pension Plan

A pension plan is a type of defined benefit plan. The amount you can withdraw in retirement is determined largely by the number of years you worked for your employer and your highest earnings. That’s different from a 401(k), since the amount you can withdraw depends on how much you (and your employer) contribute during your working years.

How Are Retirement Accounts Split in a Divorce?

How retirement accounts are split in divorce can depend on several factors, including what type of accounts are up for division, how those assets are classified, and divorce laws regarding property division in your state. There are two key issues that must be determined first:

•   Whether the retirement accounts are marital property or separate property

•   Whether community property or equitable distribution rules apply

Legal Requirements for Dividing Assets

Marital property is property that’s owned by both spouses. An example of a tangible marital property asset is a home the two of you lived in together. Separate property is property that belongs to just one spouse.

In community property states, spouses have an equal share in assets accrued during the marriage. Equitable distribution states allow for an equitable — though not necessarily equal — split of assets in divorce.

You don’t have to follow state guidelines if you and your spouse can come to an agreement yourselves about how divorce assets should be divided. However, if you can’t agree, then you’ll be subject to the property division laws for your state.

If retirement assets are to be divided in divorce, there are certain steps that have to be taken to ensure the division is legal. With a workplace plan, you’ll need to obtain a Qualified Domestic Relations Order (QDRO). This is a court order that specifies how much each spouse should receive when dividing a 401(k) or similar workplace plan in divorce.

IRAs do not require a QDRO. You would, however, still need to put in writing who gets what when dividing IRAs in divorce. That information is typically included in the final divorce settlement agreement, which a judge must sign off on.

Protecting Your 401(k) in a Divorce

The simplest option for how to protect your 401(k) in a divorce may be to offer your spouse assets of equivalent value. For example, if you’ve saved $500,000 in your 401(k) and you jointly own a home that’s worth $250,000, you might agree to let them keep the home as part of the divorce settlement.

If they’re not open to the idea of a trade-off, you may have to split the assets through a QDRO. That could make a temporary dent in your savings, but you might be able to make it up over time if you continue to make new contributions.

You could skip the QDRO and withdraw money from your 401(k) to fulfill your obligations to your spouse under the terms of the divorce settlement. However, doing so could trigger a 10% early withdrawal penalty if you’re under age 59 ½, along with ordinary income tax on the distribution.

Protecting Your IRA in a Divorce

Traditional and Roth IRAs are subject to property division rules like other retirement accounts in divorce. Depending on where you live and what laws apply, you might have to split your IRA 50/50 with your spouse.

Again, you might be able to protect your IRA by asking them to accept other assets instead. Whether they’re willing to agree to that might depend on the nature of those assets, their value, and their own retirement savings.

If you’re splitting an IRA with a spouse, the good news is that you can avoid tax consequences if the transaction is processed as a transfer incident to divorce. Essentially, that would allow you to transfer money out of the IRA to your spouse, who would then be able to deposit it into their own IRA.

Divorce and Pensions

Pension plans are less common than 401(k) plans, but there are employers that continue to offer them. Generally, pension plan assets are treated as marital property for divorce purposes. That means your spouse would likely be entitled to receive some of your benefits even though the marriage has ended. State laws will determine how much your spouse is eligible to collect from your pension plan.

Protecting Your Pension in a Divorce

The best method for protecting a pension in divorce may be understanding how your pension works. The type of payout option you elect, for instance, can determine what benefits your spouse is eligible to receive from the plan. It’s also important to consider whether it makes sense to choose a lump-sum or annuity payment when withdrawing those assets.

If your spouse is receptive, you might suggest a swap of other assets for your pension benefits. When in doubt about how your pension works or how to protect pensions in a divorce, it may be best to talk to a divorce attorney or financial advisor.

Opening a New Retirement Account

Splitting retirement accounts in a divorce can be stressful. It’s important to know what your rights and obligations are going into the process. If you’re leaving a marriage with less money in retirement, it’s a good idea to know what options you have for getting back on track. That can include opening a new retirement account.

SoFi offers individual retirement accounts for people who want to invest with minimal hassle. You can open a traditional or Roth IRA online and choose between active or automated investing to fit your needs and goals.

Easily manage your retirement savings with a SoFi IRA.

FAQ

How long do you have to be married to get part of your spouse’s retirement?

If you’re interested in getting spousal retirement benefits from Social Security, you have to be married for at least one continuous year prior to applying. The one-year rule does not apply if you are the parent of your spouse’s child. Divorced spouses must have been married at least 10 years to claim spousal benefits.

Is it better to divorce before or after retirement?

Neither situation is ideal, but divorcing before retirement may be easier if there are fewer assets to divide. Getting a divorce after retirement can raise questions over how to divide retirement and non-retirement assets. It may also lead to financial insecurity on the part of one or both spouses if the distribution of assets is unequal.

Who pays taxes on a 401(k) in a divorce?

If you’re dividing up your 401(k) prior to divorcing then you would be responsible for paying any taxes or penalties owed. Waiting until after the divorce is finalized to split your 401(k) with your former spouse could reduce the amount of taxes and penalties you owe.

About the author

Rebecca Lake

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 Latin

This article is not intended to be legal advice. Please consult an attorney for advice.


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

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

SoFi Invest®

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

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

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Mar
24
2025

Tips for Helping Your Parents Retirement

By | invest, Investing, Preparing for Retirement | Comments Off on Tips for Helping Your Parents Retirement

Saving for retirement can have its challenges, and there’s one you might not be expecting. You may find yourself helping to plan your parents’ retirement if they’ve fallen short of their savings goals.

Learning that your parents have no, or very little, retirement savings may be disheartening, especially if you’re expected to help fill the gaps in their financial plan. Figuring out how to retire your parents while still keeping your own financial goals in sight can be tricky, but it’s not impossible.

Key Points

•   Encourage your parents to discuss retirement openly and build a support system to address financial concerns.

•   Your family or a financial advisor can help analyze parents’ financial situation, including savings, debts, and monthly expenses, to plan effectively.

•   Help parents find ways to save for retirement by reducing expenses and increasing income.

•   If your parents have earned income, ask them to consider opening a retirement investment account, like an IRA, to boost savings.

•   Utilize available resources and federal programs to support parents’ retirement planning and saving.

What to Do If Your Parents Didn’t Save for Retirement

When your parents can’t afford to retire your first instinct might be to get angry or place blame. However, it’s important to remember that you’re not alone and there are others like you in the same situation.

Consider this: More than half of retirees and pre-retirees aged 50 to 74 report feeling financially fragile. And the median retirement savings among them, per recent data, was just $128,000. Among pre-retirees, too, almost one-third said they had no plans for when to retire.

Statistically, women are less likely to have retirement savings than men. About 50% of women aged 55 to 66 have nothing saved for retirement, compared to 47% of men according to Census Bureau data. Being married more than once decreases women’s likelihood of having something saved for retirement.

The numbers aren’t encouraging, but it’s not too late to help your parents get back on track to retire. Assuming one or both of your parents are still working there are some things you can do to help them make the most of their current income in order to save for retirement.

How to Help Your Parents Retire

Retiring your parents may not be an easy task but it’s important to stay focused on the bigger goal. Also, remember that while it’s fine to want to help your parents retire, sidelining your own finances to do that could put your own retirement at risk.

1. Talk to Them About the Situation

Talking about money with your parents may be uncomfortable if they’ve never been forthcoming about their finances. However, it’s important to have an honest discussion about where they are with regard to retirement planning.

Doing so can help you both set realistic expectations. Some of the possible topics to discuss include:

•   Living arrangements: Will they continue to live in their current home? If so, is that home paid for? And if they don’t plan to stay in the home, will they expect to live with you or move somewhere else?

•   Financial support: If they lack retirement savings of any kind, will they expect you to help out financially? If the answer is yes, what does that translate to in hard numbers?

•   Long-term planning: Should one or both of your parents require nursing care, what will that look like? Will you be their caregiver or will they need to move to an assisted living or long-term care facility? How much will that cost and where will the money come from to pay for it?

Those are just some of the issues that might come as you dig into the retirement planning conversation. Keep in mind that it shouldn’t be a one-time chat, either. If you’re planning to help retire your parents, then you’ll all need to be comfortable with discussing it on an ongoing basis.

2. Get Support

Trying to help your parents retire can be overwhelming and it’s a good idea to look for outside support if possible. If you have siblings, for example, you can ask them to join in the discussions about money and retirement planning. You might enlist the help of your parents’ siblings if you’re an only child.

It may also be beneficial to get an expert’s opinion. If your parents are receptive, you might want to consult with an advisor who specializes in financial planning or starting a retirement plan for families, whether that entails opening an IRA online or managing debt. They may be able to offer outside perspectives on the biggest issues that need to be addressed right away to get their retirement plan in shape.

3. Break Down the Numbers

Figuring out how to help your parents retire means taking a close look at their finances. Depending on your family situation, there might be some pushback here but it’s important for you and your parents to sit down and do the math.

Specifically, it’s helpful to understand:

•   How much they have saved for retirement, if anything

•   What retirement benefits they have through their employer (i.e., a 401(k), pension, etc.)

•   How much debt they’re carrying and what types of debt they have

•   What their spending looks like in a typical month and how that might change once they retire

•   What type of assets they might have, such as a home, investments, or a life insurance policy

Having the numbers in front of you can help figure out what’s realistic, with regard to how much income they’ll need to fund their lifestyle in retirement and how much financial support you might need to provide.

4. Help Them Find Money to Save

If your parents have money coming in from working, then you’re already one step ahead of the game in helping them prepare for retirement. The challenge now is to help them find the money they need to set aside something for the future.

There are several ways to do that:

•   Reduce expenses

•   Increase income

•   Look for “free” money

If you’ve already gone over the details of their monthly spending, the next step is walking through their budget with them to find expenses they can cut out. The more drastically your parents can cut their expenses, the more money they may be able to free up for retirement savings.

When there’s debt in the picture, whether it’s credit cards, car loans, or a mortgage, consider how they could get rid of those expenses. Taking a personal loan to consolidate credit cards, for example, could help them save on interest while paying off what they owe faster. The same goes for refinancing their mortgage.

Increasing income may be trickier, but you could suggest things like getting a part-time job or second job, or starting a small side hustle. Even something like selling things around the house they don’t need can bring in extra income they could use to save for retirement.

Finally, consider what free money they might be passing up. If they have a 401(k) at work, for example, but aren’t contributing enough to get the full company match then a simple adjustment to their annual contribution rate could fix that. That’s a smart way to encourage them to start investing or at least reviewing stock market basics in retirement with the income they already have.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

5. Open a Retirement Investment Account

If your parents don’t have a 401(k) or similar plan at work, it’s never too late to think about starting a retirement plan. And even if they do have a workplace plan, they could still benefit from opening a secondary account for retirement savings.

Among the different types of retirement plans, an Individual Retirement Account (IRA) is the most accessible for savers who have earned income. You could encourage your parents to open a traditional or Roth IRA, depending on their current tax situation and where they expect to be tax-wise once they retire.

With traditional IRAs, contributions are typically tax-deductible and anyone can contribute. A Roth IRA, on the other hand, allows for tax-free qualified withdrawals in retirement. Eligibility to contribute is based on income and filing status. Understanding the differences can help with choosing a retirement plan for your parents, or yourself if you have yet to start saving.

6. Take Advantage of Available Resources

There are numerous federal programs that are designed to help retirees manage their financial lives. Researching what’s available can help you figure out what benefits your parents might qualify for once they retire.

For example, it’s important to consider when parents should take Social Security benefits if they don’t have retirement savings. The earliest age for claiming benefits is 62, but taking benefits early can reduce the amount retirees receive. Delaying benefits to age 70 can increase their monthly payments, but that may not be realistic.

Other options for getting financial help include:

•   Medicare, which provides health insurance coverage for seniors 65 and older

•   Medicaid, which provides healthcare services for low-income families and individuals

•   HUD public housing (for seniors with disabilities or limited income)

•   Assistance programs that help with utility bills, heating bills, or phone bills

•   Food assistance programs, including Supplemental Nutrition Assistance Program (SNAP) Benefits, and Meals on Wheels

•   Assistance programs for military veterans if either of your parents served in the armed forces

•   Property tax or homestead exemptions for seniors

•   Programs that help with home repairs for eligible seniors

Your parents may not need all of these programs, but it’s still a good idea to know what’s out there. If you’re not sure how to find resources for retirees, you can contact your local departments of health, social services, or adult services to ask for guidance. You can also try your local council on aging, if one exists in your area.

7. Address Long-Term Financial Planning

One of the most staggering costs in retirement for many seniors is healthcare. At the low end, the cost may average almost $25,000 per year for adult assisted living or community care. At the high end, you might pay almost $117,000 on average annually for a private room in a nursing phone.

Purchasing long-term care insurance can help to pick up the tab but policies can be expensive. Medicaid could pay for coverage but your parents would need to meet the income and resource guidelines set by their state to qualify for help.

A hybrid life insurance policy could kill two birds with one stone, so to speak. These policies can pay out benefits toward long-term care during your parents’ lifetime should they need them. They can also pay out a death benefit when they pass away, which could help you to cover things like final expenses or any remaining debts they leave behind.

Again, it may be in everyone’s best interest to sit down and talk these things through with a financial advisor, which may help them think about starting a retirement plan.

Investing for Retirement With SoFi

Discussing their financial plan and sharing tips for investing can help your parents to feel more comfortable about the idea of retirement. At the same time, it’s important to consider where you are on your financial journey. It’s generally a good idea to start saving for retirement as early as possible, but if your parents did not, there are still options.

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

Help grow your nest egg with a SoFi IRA.

FAQ

Can I open a retirement account for my parents?

No, but you can help them open a retirement account of their own. For example, you could walk them through opening a traditional or Roth IRA at a brokerage. You can also help them to review their retirement account options at work to make sure they’re getting the most benefit possible.

What do you do when your parents haven’t saved for retirement?

When parents have no retirement savings, it’s important to take a deep breath and not panic. It’s possible to help your parents get on track with retirement savings if they’re committed to setting realistic expectations and taking action to set aside as much money as possible in the remaining years before they retire. You may also encourage them to talk to a financial advisor about how to get their finances in shape.

How much does the average family need to retire?

The amount of money one family needs to retire may be very different from another’s, depending on the number of family members and their desired retirement lifestyle. Saving at least $1 million for retirement is a commonly-accepted target, though it may be possible for one person to retire with just $500,000 while someone else might need $2 million to live comfortably.

About the author

Rebecca Lake

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/Fly View Productions

SoFi Invest®

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

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

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Mar
21
2025
Choosing a Retirement Date: The Best Time to Retire

Choosing Your Retirement Date: Here’s What You Should Know

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Choosing Your Retirement Date: Here’s What You Should Know

Choosing a retirement date is one of the most important financial decisions you’ll ever make. Your retirement date can determine how much money you’ll need to save to achieve your desired lifestyle — and how many years that money will need to last.

Selecting an optimal retirement date isn’t an exact science. Instead, it involves looking at a number of different factors to determine when you can realistically retire. Whether you’re interested in retiring early or delaying retirement to a later age, it’s important to understand what can influence your decision.

The Importance of Your Retirement Date

When preparing to retire, the date you select matters for several reasons. First, your retirement date can influence other financial decisions, including:

•   When you claim Social Security benefits

•   How much of your retirement savings you’ll draw down monthly or annually

•   In what order you’ll withdraw from various accounts, such as a 401(k), Individual Retirement Account (IRA), pension, or annuity

•   How you’ll pay for health care if you’re retiring early and not yet eligible for Medicare

•   Whether you’ll continue to work on a part-time basis or start a business to generate extra income

These decisions can play a part in determining when you can retire based on what you have saved and how much money you think you’ll need for retirement.

It’s also important to consider how timing your retirement date might affect things like taxes on qualified plans or the amount of benefits you can draw from a defined benefit plan, if you have one.

If your employer offers a pension, for example, waiting until the day after your first-day-of-work anniversary adds one more year of earnings into your benefits payment calculation.

Likewise, if you plan to retire in the year you turn 59 ½, you’d want to wait until six months after your birthday has passed to withdraw money from your 401(k) in order to avoid a 10% early withdrawal penalty on any distributions you take.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Choosing Your Date for Retirement

There are many questions you might have when choosing the best retirement date: What is the best day of the month to retire? Is it better to retire at the beginning or end of the year? Does it matter if I retire on a holiday?

Weighing the different options can help you find the right date of retirement for you.

End of the Month

Waiting to retire at the end of the month could be a good idea if you want to get your full pay for that period. This can also eliminate gaps in pay, depending on when you plan to begin drawing retirement benefits from a workplace plan.

If you have a pension plan at work, for example, your benefits may not start paying out until the first of the following month. So, if you were to retire on the 5th instead of the 30th, you’d have a longer wait until those pension benefits showed up in your bank account.

Consider End of Pay Period

You could also consider waiting to the end of the pay period if you don’t want to go the whole month. This way, you can draw your full pay for that period. Working the entire pay period could also help you to accumulate more sick pay, vacation pay, or holiday pay benefits toward your final paycheck.

Lump Sums Can Provide Cash

If you’ve accumulated unused vacation time, you could cash that out as you get closer to your retirement date. Taking a lump sum payment can give you a nice amount of cash to start your retirement with, and you don’t have to worry about any of the vacation time you’ve saved going unused.

Other Exceptions to Consider

In some cases, your retirement date may be decided for you based on extenuating circumstances. If you develop a debilitating illness, for example, you may be forced into retirement if you can no longer perform your duties. Workers can also be nudged into retirement ahead of schedule through downsizing if their job is eliminated.

Thinking about these kinds of what-if scenarios can help you build some contingency plans into your retirement plan. Keep in mind that there may also be different rules and requirements for retirement dates if you work for the government versus a private sector employer.

Starting a Retirement Plan

The best time to start planning for retirement is yesterday, as the common phrase says, and the next best time is right now. If you haven’t started saving yet, it’s not too late to begin building retirement wealth.

An obvious way to do this is to start contributing to your employer’s retirement plan at work. This might be a 401(k) plan, 403(b), or 457 plan depending on where you work. You may also have the option to save in a Simplified Employee Pension (SEP) IRA or SIMPLE IRA if you work for a smaller business. Any of these options could help you set aside money for retirement on a tax-advantaged basis.

If you don’t have a workplace retirement plan, you can still save through an IRA. Traditional and Roth IRAs offer different types of tax benefits; the former allows for tax-deductible contributions while latter offers tax-free qualified distributions. You could also open a SEP IRA if you’re self-employed, which offers higher annual contribution limits.

If you decide to start any of these retirement plans, it may be helpful to use a retirement calculator to determine how much you need to save each month to reach your goals. Checking in regularly can help you see whether you are on track to retire or if you need to adjust your contributions or investment targets.

💡 Quick Tip: Can you save for retirement with an automated investment portfolio? Yes. In fact, automated portfolios, or robo advisors, can be used within taxable accounts as well as tax-advantaged retirement accounts.

Retirement Investing With SoFi

Choosing a retirement date is an important decision, but it doesn’t have to be an overwhelming one. Looking at the various factors that can influence how much you’ll need to save and your desired lifestyle can help you pin down your ideal retirement date. Reviewing contributions to your employer’s retirement plan and supplementing them with contributions to an IRA can get you closer to your goals.

Not everyone’s journey to retirement is going to look the same, so you should weigh your options. Think about your goals, and what tools you can use to help you reach them. If you need guidance, it may be a good idea to speak with a financial professional.

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

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

Is it better to retire at the beginning or end of the month?

Retiring on the last day of the month is typically the best option. This enables you to collect all your paychecks during this period. You may also benefit from collecting any holiday pay that might be offered by your employer for that month. As a note, it doesn’t necessarily matter if the last day of the month is a work day for you.

What is the best day to retire?

The best day to retire can be the end of the month or the end of the year, depending on how pressing your desire is to leave your job. If you can wait until the very last day of the year, for example, you can collect another full year of earnings while maxing out contributions to your workplace retirement plan before you leave.

Is my retirement date my last day of work?

Depending on how your employer handles payroll, your retirement date is usually the day after your last day of work or the first day of the next month following the date you stop working.

About the author

Rebecca Lake

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/Tatomm

SoFi Invest®

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

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

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.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Mar
21
2025
Guide to Cash Balance Pension Plans

Guide to Cash Balance Pension Plans

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Guide to Cash Balance Pension Plans

A cash balance pension plan is a defined benefit plan that offers employees a stated amount at retirement. The amount of money an employee receives can be determined by their years of service with the company and their salary. Employers may offer a cash balance retirement plan alongside a 401(k) or in place of one.

If you have a cash balance plan at work, it’s important to know how to make the most of it when preparing for retirement. Read on to learn more about what a cash balance pension plan is and the pros and cons.

What Are Cash Balance Pension Plans?

A cash balance pension plan is a defined benefit plan that incorporates certain features of defined contribution plans. Defined benefit plans offer employees a certain amount of money in retirement, based on the number of years they work for a particular employer and their highest earnings. Defined contribution plans, on the other hand, offer a benefit that’s based on employee contributions and employer matching contributions, if those are offered.

In a cash balance plan, the benefit amount is determined based on a formula that uses pay and interest credits. This is characteristic of many employer-sponsored pension plans. Once an employee retires, they can receive the benefit defined by the plan in a lump sum payment.

This lump sum can be rolled over into an individual retirement account (IRA) or another employer’s plan if the employee is changing jobs, rather than retiring. Alternatively, the plan may offer the option to receive payments as an annuity based on their account balance.

Get a 1% IRA match on rollovers and contributions.

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1

1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

How Cash Balance Pension Plans Work

Cash balance pension plans are qualified retirement plans, meaning they’re employer-sponsored and eligible for preferential tax treatment under the Internal Revenue Code. In a typical cash balance retirement plan arrangement, each employee has an account that’s funded by contributions from the employer. There are two types of contributions:

•   Pay credit: This is a set percentage of the employee’s compensation that’s paid into the account each year.

•   Interest credit: This is an interest payment that’s paid out based on an underlying index rate, which may be fixed or variable.

Fluctuations in the value of a cash pension plan’s investments don’t affect the amount of benefits paid out to employees. This means that only the employer bears the investment risk.

Here’s an example of how a cash balance pension works: Say you have a cash balance retirement plan at work. Your employer offers a 5% annual pay credit. If you make $120,000 a year, this credit would be worth $6,000 a year. The plan also earns an interest credit of 5% a year, which is a fixed rate.

Your account balance would increase year over year, based on the underlying pay credits and interest credits posted to the account. The formula for calculating your balance would look like this:

Annual Benefit = (Compensation x Pay Credit) + (Account Balance x Interest Credit)

Now, say your beginning account balance is $100,000. Here’s how much you’d have if you apply this formula:

($120,000 x 0.05) + ($100,000 x 1.05) = $111,000

Cash balance plans are designed to provide a guaranteed source of income in retirement, either as a lump sum or annuity payments. The balance that you’re eligible to receive from one of these plans is determined by the number of years you work, your wages, the pay credit, and the interest credit.

Cash Balance Plan vs 401(k)

Cash balance plans and 401(k) plans offer two different retirement plan options. It’s possible to have both of these plans through your employer or only one.

In terms of how they’re described, a cash balance pension is a defined benefit plan while a 401(k) plan is a defined contribution plan. Here’s an overview of how they compare:

Cash Balance Plan

 401(k)
Funded By Employer contributions Employee contributions (employer matching contributions are optional)
Investment Options Employers choose plan investments and shoulder all of the risk Employees can select their own investments, based on what’s offered by the plan, and shoulder all of the risk
Returns Account balance at retirement is determined by years of service, earnings, pay credit, and interest credit Account balance at retirement is determined by contribution amounts and investment returns on those contributions
Distributions Cash balance plans must offer employees the option of receiving a lifetime annuity; can also be a lump sum distribution Qualified withdrawals may begin at age 59 ½; plans may offer in-service loans and/or hardship withdrawals

Pros & Cons of Cash Balance Pension Plans

A cash balance retirement plan can offer both advantages and disadvantages when planning your retirement strategy. If you have one of these plans available at work, you may be wondering whether it’s worth it in terms of the income you may be able to enjoy once you retire.

Here’s more on the pros and cons associated with cash balance pension plans to consider when you’re choosing a retirement plan.

Pros of Cash Balance Pension Plans

A cash balance plan can offer some advantages to retirement savers, starting with a guaranteed benefit. The amount of money you can get from a cash balance pension isn’t dependent on market returns, so there’s little risk to you in terms of incurring losses. As long as you’re still working for your employer and earning wages, you’ll continue getting pay credits and interest credits toward your balance.

From a tax perspective, employers may appreciate the tax-deductible nature of cash balance plan contributions. As the employee, you’ll pay taxes on distributions but tax is deferred until you withdraw money from the plan.

As for contribution limits, cash balance plans allow for higher limits compared to a 401(k) or a similar plan. For 2024, the maximum annual benefit allowed for one of these plans is $275,000. For 2025, the maximum annual benefit allowed is $280,000.

When you’re ready to retire, you can choose from a lump sum payment or a lifetime annuity. A lifetime annuity may be preferable if you’re looking to get guaranteed income for the entirety of your retirement. You also have some reassurance that you’ll get your money, as cash balance pension plans are guaranteed by the Pension Benefit Guaranty Corporation (PBGC). A 401(k) plan, on the other hand, is not.

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

Cons of Cash Balance Pension Plans

Cash balance pension plans do have a few drawbacks to keep in mind. For one, the rate of return may not be as high as what you could get by investing in a 401(k). Again, however, you’re not assuming any risk with a cash balance plan so there’s a certain trade-off you’re making.

It’s also important to consider accessibility, taxation, and fees when it comes to cash balance pension plans. If you need to borrow money in a pinch, for example, you may be able to take a loan from your 401(k) or qualify for a hardship withdrawal. Those options aren’t available with a cash balance plan. And again, any money you take from a cash balance plan would be considered part of your taxable income for retirement.

Pros Cons

•   Guaranteed benefits with no risk

•   Tax-deferred growth

•   Flexible distribution options

•   Higher contribution limits

•   Guaranteed by the PBGC

•   Investing in a 401(k) may generate higher returns

•   No option for loans or hardship withdrawals

•   Distributions are taxable

Investing for Retirement With SoFi

A cash balance retirement plan is one way to invest for retirement. It can offer a stated amount at retirement that’s based on your earnings and years of service. You can opt to receive the funds as either a lump sum or an annuity. Your employer may offer these plans alongside a 401(k) or in place of one, and there are pros and cons to each option to weigh.

If you don’t have access to either one at work, you can still start saving for retirement with an IRA. You can set aside money on a tax-advantaged basis and begin to build wealth for the long-term.

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

Help grow your nest egg with a SoFi IRA.

FAQ

Is a cash balance plan worth it?

A cash balance plan can be a nice addition to your retirement strategy if you’re looking for a source of guaranteed income. Cash balance plans can amplify your savings if you’re also contributing to a 401(k) at work or an IRA.

Is a cash balance plan the same as a pension?

A cash balance plan is a type of defined benefit plan or pension plan, in which your benefit amount is based on your earnings and years of service. This is different from a 401(k) plan, in which your benefit amount is determined by how much you (and possibly your employer) contribute and the returns on those contributions.

Can you withdraw from a cash balance plan?

You can withdraw money from a cash balance plan in a lump sum or a lifetime annuity once you retire. You also have the option to roll cash balance plan funds over to an IRA or to a new employer’s qualified plan if you change jobs.

About the author

Rebecca Lake

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/sturti


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.


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

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

SoFi Invest®

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

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

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