Feb
25
2026
Covered Calls: The Basics of Covered Call Strategy

Covered Call Options Strategy: Key Decisions, Examples, and Execution

By | Growing Wealth, invest, Investing | Comments Off on Covered Call Options Strategy: Key Decisions, Examples, and Execution

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

With most things in life, it helps to be covered — by a coworker, an insurance policy, or a roof over your head. In investing, it can also be helpful to have coverage through specific strategies. A covered call is an options trading strategy that involves selling call options on stocks you already own, with the goal of generating income. It is typically appropriate to use when an investor has a neutral to slightly bullish outlook on the underlying stock.

Here’s a breakdown of how a covered call strategy works, when to consider it, and how it may — or may not — perform depending on market positions.

Key Points

•   A covered call strategy involves selling call options on owned stock to generate income, with limited upside if the stock’s price surges.

•   Using covered calls provides additional income from stock holdings through the premiums received from selling a call option.

•   Premiums from covered calls offer limited protection against stock price declines, which helps offset potential losses in whole or in part.

•   Capped gains risk occurs if the stock price rises above the call option’s strike price. The investor will collect any gain between — but not above — the stock purchase price and the strike price.

•   Covered call writers can select their exit price (i.e., the strike price plus the premium received) in the event the stock price were to rise. If the stock rises above the strike price, the investor keeps both the premium and the gain between the stock purchase price and the strike price.

•   Employing covered calls restricts the ability to sell stocks freely, as the call option must either be sold first or honored if held and the buyer exercises it.

•   An investor with an objective of generating income may purchase stock they wish to hold in their portfolio and simultaneously sell a covered call to generate income. This is sometimes called a buy/write strategy.

What Is a Covered Call?

A covered call is an options trading strategy used to generate income by selling call options on a security an investor already owns or decides to purchase. This strategy can be beneficial to the investor if they expect the stock’s price to experience limited movement or remain neutral, though it may limit potential gains if the stock rises sharply above the strike price.

Call Options Recap

A call is a type of option that gives purchasers the right, but not the obligation, to buy shares of an underlying asset or stock at a specific, prearranged price, called the strike price. A call is in contrast to a put option, which gives buyers the right, but not the obligation, to sell the underlying asset at the strike price.

An investor who purchases a call option holds a long position in the option — that is, they anticipate that the underlying stock may appreciate. For example, an investor who anticipates a stock’s price increase might buy shares, hold them, wait for appreciation, and — assuming they do appreciate — sell them to potentially realize a gain.

Call options allow options buyers to pursue a similar strategy without buying the underlying shares. Instead, a premium is paid for the right to buy the shares at the strike price, allowing buyers to profit if the market price rises above the strike price.

Call option writers (or sellers), on the other hand, typically sell call options when they anticipate that the price of the underlying asset will not rise above the strike price, allowing them to keep the premium, or price they collected for selling the option, when the option expires worthless.

What’s the Difference Between a Call and a Covered Call?

The main difference between a regular call and a covered call is that a covered call is “covered” by an options seller who holds the underlying asset. That is, if an investor sells call options on Company X stock, it would be “covered” if they already own an equivalent number of shares in Company X stock.

Conversely, if an investor does not own any Company X stock and sells a call option, they’re executing what’s known as a “naked” option, which carries a much higher risk because losses can theoretically be unlimited if the stock rises sharply. The covered call strategy combines and leverages the owned stock to limit risk and allow them to sell a call to collect premium.

In a covered call, the seller’s maximum profit is limited to the premium plus any stock appreciation up to the call’s strike price, while the maximum loss equals the price paid for the stock minus the premium received.

In contrast, in a portfolio where the investor is only holding the stock, the maximum profit is theoretically unlimited, based on how high the stock price trades minus the price paid for the stock. The maximum loss is the price paid for the stock minus the stock’s lowest trading price (theoretically zero, which would equal the whole value of the position).

It’s worth noting that similar to only holding stock, the losses with covered calls would also be substantial if the price of the stock purchased were to fall to zero and became worthless. However, the premium received from the call option sold may cushion the loss to a certain extent.

Example of a Covered Call

The main goal in employing a covered call trading strategy is typically to generate income from existing (or newly acquired) stock positions. If, for example, you have 100 shares of Company X stock and were looking for ways to pursue additional income, you might consider selling a covered call.

Here’s what that might look like in practice:

Your 100 shares of Company X stock are worth $4.77 each, or $477 at the current market value. To make a little extra money, you decide to sell a call option with a $0.08-per-share premium at a strike price of $5.50 and 21 days to expiration. Since standard options contracts typically represent 100 shares, you receive a total of $8 for the option.

Let’s say that Company X stock’s price only rises to $5, so it expires worthless. In this scenario, you’ve earned a total of $8 by the selling covered call option, and your shares have also appreciated to a value of $500. So, you now have a total of $508.

Max Profit: The ideal outcome in this strategy is that your shares rise in value to the strike price of $5.50. In that scenario, you still own your shares (now worth $550) and get the $8 premium. Your profit is $81 ($558 – $477).

Capped Gain Risk: One risk of selling covered call options is that you might forgo higher gains if the stock exceeds the strike price. In this scenario, let’s assume the stock price rises above the strike to $6. The 100 shares of stock held is now worth $600, but since the option was exercised in the money at $550, the strategy will sell the stock for $550 and miss out on the extra $50 ($600 – $550) of stock appreciation value.

While this risk is slightly offset by the $8 collected by selling the option, it is easy to see that for each dollar increase above the strike price, the strategy will miss out on that gain. Effectively, you still have turned a holding valued at $477 into $558, but missed the extra gain of $50 beyond the strike price. This illustrates the trade-off involved in selling covered calls: capped upside in exchange for income.

Max Loss: Another risk of selling covered call options is that the stock price may drop. In this scenario, let’s assume the stock price drops to $4.00. The 100 shares of stock held is now worth $400. Your loss is -$77 ($400 – $477). This risk is slightly offset by the $8 collected by selling the option.

In a worst case scenario, the stock price could move to $0 and you could lose the entire stock value, while keeping the $8 premium you received by selling the covered call. If your long term outlook on the stock was positive, then you may still be OK holding the stock at this lower price level. If you only purchased the stock to support the covered call strategy, this loss would be realized as a loss of the capital invested.

Break Even: If the stock price drops by the amount of the premium, the investor breaks even on the trade. In this scenario $4.69 ($4.77 – $0.08) as the break-even stock price.

Income Generated: When selling a covered call, the premium received is income to the portfolio. In this scenario, the income generated is the premium of $8, which is realized at the time the call is sold.

Recommended: How to Sell Options for Premium

How to Sell a Covered Call: A Step-by-Step Example

A covered call strategy consists of a defined sequence of steps that combine owning (or purchasing) a stock while also selling a call option against it. Here’s how to implement the strategy in a way that may help you generate additional income from your stock holdings.

Step 1: Own at Least 100 Shares of an Underlying Stock

First, you first need to own at least 100 shares of the stock you intend to write the call option upon. This minimum is required since options contracts typically represent 100 shares of the underlying security. Owning these shares is what “covers” your obligation if the call buyer decides to exercise the option.

Step 2: Sell-to-Open One Call Option Contract

Once you hold the required shares, you place a sell-to-open order for a call option against those shares. This creates an obligation for you to sell your shares at the specified strike price if the option buyer chooses to exercise the contract.

Step 3: Choose a Strike Price and Expiration Date

Selecting the strike price and the expiration date is a key decision in covered call writing.

•   Strike price: Choose a price above the current market price if you want to retain some upside potential while collecting premium.

•   Expiration date: Shorter expirations (e.g., 30–60 days) can offer frequent income opportunities, but may require more active management. Longer expirations typically provide higher premiums but may tie up your shares longer.

Both choices depend on your outlook for the stock and your income goals.

Step 4: Collect the Premium

After submitting the sell-to-open order, you’ll receive the option premium — the cash payment from the buyer of the call option. This premium is yours to keep regardless of whether the option is exercised. It effectively increases your total return on the stock during the period you wrote the call.

Step 5: Manage the Outcome at Expiration

When the call option approaches expiration, there are a few possible outcomes:

•   Option expires worthless: If the stock stays below the strike price, the option likely expires worthless and you keep both your shares and the premium.

•   Option is exercised: If the stock price rises above the strike price, the buyer may exercise the option. You would then sell your shares at the strike price and still keep the premium received.

•   Rolling the option: Some investors choose to buy back the expiring call and sell a new one with a later expiration or different strike price if they want to continue generating income without losing their shares.

Key Decisions When Selling Covered Calls

There are a number of factors that could influence the value of an option. When writing a covered call and choosing the contract’s strike price and expiration, it’s important to understand the fundamentals of how options are priced.

Basic Options Valuation

When determining an option’s strike price and expiration, it is helpful to break down an option’s value into two main value buckets: intrinsic value and extrinsic value. An option’s price is the sum of its intrinsic value and extrinsic value:

•   Options price = intrinsic value + extrinsic value.

An option’s intrinsic value is the tangible value that would be realized if it was exercised in the current moment. For a call option, it is the difference between the current price of the option’s underlying stock price and the option’s strike price.

•   Call Option Intrinsic Value = Current price of underlying stock – strike price

An option’s extrinsic value is the difference between its market value and intrinsic value. An option’s estimated market value is influenced by its time until expiration and the anticipated volatility of the stock price between now and expiration.

As the time until expiration decreases, the time value of the option will decay since there is less time for the stock’s price to potentially move above the strike and put the call option in the money. This concept is called time decay.

In a covered call, the writer typically wants the option’s time value to decay to zero so they are able to keep the full premium. One other thing to note is that the closer the strike is to the current stock price, the more extrinsic value there will be in the option. This is because the option requires a smaller stock price movement to become in the money.

As with any trade, the decision comes down to a risk vs. reward tradeoff. The reward is the amount of premium that will be collected and the risk is the likelihood that the stock price will go above the strike price or fall below the value of the premium collected in the days leading up until expiration.

Choosing a Strike Price

In terms of the strike price, there are a few potential considerations an investor might evaluate. Typically, the investor would sell an out-of-the-money call to give the stock price room to move upward before they would be obligated to sell it.

1.    The investor should generally be aware that as an option’s strike price becomes further away from the current stock price, there will be a smaller chance that the option may expire in the money, thus reducing that option’s value (the premium that could be received when selling the option contract).

2.    The investor might have a target price where they would be willing to sell the stock if it reached that level. Using this price as the strike price would meet that target.

3.    The investor might have a feel for the range of prices they believe the stock will stay between based on historical pricing, fundamentals, upcoming events, or other insights.

4.    The investor might not want to sell a call that is already in the money unless they have a belief that the stock price will go down before expiration, or if they are willing to sell the stock at a loss to the current stock price in order to collect more premium than an out-of-the-money call would provide.

Choosing an Expiration

In terms of the expiration date, there are also a few potential considerations an investor might evaluate. Typically, the investor would sell a call that is between 15-60 days from expiration to balance the tradeoff between premium received vs. the time and volatility value or amount of time for the stock price to move.

1.    The investor should generally be aware that as the expiration becomes further into the future, there will be more time for the stock price to move. That will typically translate into an increased options value or premium that could be received when selling the contract.

2.    It’s possible that short duration contracts may not yield enough premium income to overcome the risk of a quick, unexpected stock price movement.

3.    The investor might not want to have the prolonged exposure of a long-duration covered call, or they may notice that there is a diminishing return value for selling option contracts that expire too far into the future.

4.    The investor might know that an event is coming up and want to ensure their covered call is not exposed to the potential price movement from that event.

Final Decision and Selling the Call

In practice, the covered call writer will want to look at the options chain to see the tradeoffs between the amount of premium they can receive or the potential reward for the risk associated with trading an option with a particular strike and expiration. The investor will use these inputs along with the other objectives they have for their portfolio and choose a call to sell.

When selling a covered call, note that you will be able to sell one call for every 100 shares of stock in your portfolio. In order to keep the strategy balanced, you can either buy more shares of the stock and sell more covered calls or sell less covered calls.

💡 Quick Tip: When selling an option on SoFi’s option trading platform, the SoFi app will guide you through the process and let you know if you are trying to sell more calls than you have the stock to cover.

What Are the Risks and Rewards of Covered Calls?

Using a covered call strategy could serve specific purposes for income generation or risk management. As with any trading strategy, investors need to keep in mind that covered call gains (along with any other gains or losses realized by the strategy) are subject to capital gains taxes.

Here are several pros and cons of the covered call strategy to consider.

Potential Rewards

The benefits of utilizing covered calls include the potential to receive added income and offset downside risk.

•   Investors can earn income by keeping the premiums they collect from selling the options contracts. Depending on how often they sell covered calls, this can lead to recurring income opportunities.

•   Investors can determine an adequate selling price for the stocks they own and use that for the strike of the call option to be sold. If the option is exercised, an investor will realize their intended profit from the sale (as well as the premium).

•   The premium the investor receives for the sold call will help offset a potential decline in a stock’s price. This provides limited downside protection, though losses can still occur.

•   Covered calls may be permitted in certain IRA accounts, subject to account eligibility and approval requirements.

Potential Risks

There are also a few drawbacks to using a covered call strategy:

•   Investors could forgo additional upside if a stock’s price rises, and continues to rise, above the strike price. This is an inherent trade-off of the strategy that was described above. Investors that sell covered calls must accept the obligation to sell the stock at the strike price if the buyer exercises the option.

•   Since the sold call is covered by the stock, an investor would need to buy back the covered call option they sold before they may sell their stocks on the market. This limits the investor’s flexibility to respond to price movements. (Be aware that uncovered calls present too much risk in SoFi member portfolios and are not allowed.)

What Is the Best Market Environment for a Covered Call?

There is no single correct time to use a covered call strategy — as with any trading strategy, it depends on evaluating the market environment and weighing the potential risks vs. the rewards of the premium income that could be generated. When an investor is holding a long stock position that they are planning to keep long-term, this is one key consideration. In terms of stock sentiment, there are three cases where an investor might choose to write a covered call.

1.    When they feel the stock price will remain neutral.

2.    When they feel the stock price will rise some, but not dramatically.

3.    When they feel the stock price will rise dramatically and they are comfortable with the capped gain at the strike price (plus the premium received) where they might sell the covered call.

4.    When they feel the stock price might drop temporarily, but their long term outlook for the stock is positive or neutral. Since market outcomes are uncertain, investors should be ready and willing to accept the risk considerations outlined above.

As for why an investor might use covered calls? The goal is often to generate income from existing or purchased stock holdings. Another potential reason to use covered calls, for some investors, is to offset some risk using the premium received.

The Takeaway

A covered call may be attractive to some investors as it’s a way to generate additional income from a stock position. That said, as with all trading strategies, outcomes may vary based on market conditions and timing. There are no guarantees, and the strategy involves trade-offs between income potential and capped gains.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.


Explore SoFi’s user-friendly options trading platform.

FAQ

Are covered calls free money?

Covered calls are not “free money.” They can generate income from the premiums received for the covered call, but they can also limit upside potential if the stock’s value increases significantly or the option is exercised when the price rises toward the strike.

Are covered calls profitable?

Covered calls can allow you to generate income, but results depend on the performance of the underlying stock and the terms of the option contract. If the option expires unexercised, the seller keeps the premium and the stock. The strategy tends to work best in neutral to moderately bullish markets, and profitability may depend on strike price and expiration the seller has chosen.

What happens when a covered call expires?

If a covered call expires without being exercised, nothing happens: the option just expires worthless. The seller keeps the premium received, which is a benefit of the strategy. Because an option is only that — an option to execute a trade at a predetermined price for a select period of time — if the stock price remains below the strike price the option will expire worthless.

If the stock price goes above the strike price, the option’s buyer will exercise the option. This obligates the option writer to sell their stock at the strike price. This technically happens the evening of expiration and on the following trading day, the covered call seller will have cash to replace the stock and the option position will no longer exist. With this cash, the trader can choose to re-buy the stock or use it the same as any settled cash position.

Can you make a living selling covered calls?

Living strictly off income from covered calls may be theoretically possible, but it would likely require a large portfolio to make it work. There are other factors to consider, too, like potential capital gains taxes and the fact that the market won’t always be in a favorable environment for the strategy to work.

What is the maximum profit on a covered call?

The maximum profit is the premium received plus any stock gains up to the strike price. Gains above the strike are capped, however, since the shares may be called away at (or potentially below) the strike if the option is exercised.

About the author

Samuel Becker

Samuel Becker

Sam Becker is a freelance writer and journalist based near New York City. He is a native of the Pacific Northwest, and a graduate of Washington State University, and his work has appeared in and on Fortune, CNBC, Time, and more. Read full bio.

Photo credit: iStock/millann

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.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

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.

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.

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Feb
11
2026
Understanding Highly Compensated Employees (HCEs)

Understanding Highly Compensated Employees (HCEs)

By | invest, Investing, Preparing for Retirement | Comments Off on Understanding Highly Compensated Employees (HCEs)

Internal Revenue Service (IRS) rules require companies with 401(k) retirement plans to identify highly compensated employees (HCEs). An HCE, according to the IRS, passes either an ownership test or a compensation test. Someone owning more than 5% of the company would qualify as an HCE, as would someone who was compensated more than $160,000 for tax years 2025 or 2026.

The IRS uses this information to help all employees receive fair treatment when participating in their 401(k). As a result, your HCE status can affect the amount you can contribute to your 401(k).

What Does It Mean to Be an HCE?

A highly compensated employee’s 401(k) contributions will be subject to additional scrutiny by the IRS. Again, you’re identified as an HCE if you either:

•   Owned more than 5% of the business this year or last year, regardless of how much compensation you earned or received, or

•   Received at least $160,000 in compensation for tax years 2025 or 2026 and, if your employer so chooses, you were in the top 20% of employees ranked by compensation.

If you meet either of these criteria, you’re considered an HCE, though that doesn’t necessarily mean that you earn a higher salary.

For example, someone could own 6% of a business while also drawing a salary of less than $100,000 a year. Because they meet the ownership test, they would still be classified as an HCE.

It’s also possible for you to be on the higher end of your company’s salary range and yet not qualify as an HCE. This can happen if your company chooses to rank employees by pay. If your income is above the IRS’s HCE threshold but you still earn less than the highest-paid 20% of employees (while not owning 5% of the company), you don’t meet the definition of an HCE.

Highly Compensated Employee vs Key Employee

Highly compensated employees may or may not also be key employees. Under IRS rules, a key employee meets one of the following criteria:

•   An officer making over $230,000 for 2025; $235,000 for 2026

•   Someone who owns more than 5% of the business

•   A person who owns more than 1% of the business and also makes more than $150,000 a year

•   Someone who meets none of these conditions is a non-key employee.

In order for a highly compensated employee to be a key employee, they must pass the ownership or officer tests. For IRS purposes, ownership is determined on an aggregate basis. For example, if you and your spouse work for the same company and each own a 2.51% share, then you’d collectively pass the ownership test.

Benefits of Being a Highly Compensated Employee

Being a highly compensated employee can offer certain advantages. Here are some of the chief benefits of being an HCE:

•   Having an ownership stake in the company you work for may entail additional employee benefits or privileges, such as bonuses or the potential to purchase company stock at a discount.

•   Even with a high salary, you can still contribute to your 401(k) retirement plan, possibly with matching contributions from your employer.

•   You may be able to supplement 401(k) contributions with contributions to an individual retirement account (IRA) or health savings account (HSA).

There are, however, some downsides to consider if you’re under the HCE umbrella.

Disadvantages of Being a Highly Compensated Employee

Highly compensated employees are subject to additional oversight when making 401(k) contributions. If you’re an HCE, here are a few disadvantages to be aware of:

•   You may not be able to max out your 401(k) contributions each year.

•   Lower contribution rates could potentially result in a shortfall in your retirement savings goal.

•   Earning a higher income could make you ineligible to contribute to a Roth IRA for retirement.

•   Any excess contributions that get refunded to you will count as taxable income when you file your return.

Benefits

 Disadvantages
HCEs may get certain perks or bonuses. 401(k) contributions may be limited.
Can still contribute to a company retirement plan. Limits may make it more difficult to reach retirement goals.
Can still contribute to an IRA. High earnings may make you ineligible to contribute to a Roth IRA.
Refunds of excess contributions could raise employee’s taxable income.

Recommended: Rollover IRA vs. Regular IRA: What’s the Difference?

Nondiscrimination Regulatory Testing

The IRS requires employers to conduct 401(k) plan nondiscrimination compliance testing each year. The purpose of this testing is to ensure that highly compensated employees and non-highly compensated employees have a more level playing field when it comes to 401(k) contributions.

Employers calculate the average contributions of non-highly compensated employees when testing for nondiscrimination. Depending on the findings, highly compensated employees may have their contributions restricted in certain ways. If you aren’t sure, it’s best to ask someone in your HR department, or the plan sponsor.

If an employer reviews the plan and finds that it’s overweighted in favor of HCEs, the employer must take steps to correct the error. The IRS allows companies to do that by either making additional contributions to the plans of non-HCEs or refunding excess contributions back to HCEs.

401(k) Contribution Limits for HCEs

In theory, highly compensated employees’ 401(k) limits are the same as retirement contribution limits for other employees. For 2025, the contribution limit is $23,500. Those 50 and older can add another $7,500, for a total of $31,000. Those aged 60 to 63 can contribute an additional $11,250, for a total of $34,750. For 2026, the contribution limit is $24,500. Those 50 and older can add another $8,000, for a total of $32,500. Those aged 60 to 63, can contribute an additional $11,250, for a total of $35,750.

One change that HCEs should be aware of: Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make eligible withdrawals tax-free in retirement.

But, as noted above, these plans may be restricted for HCEs, so it’s wise to know the terms before you begin contributing.

Other Retirement Plan Considerations

For example, one thing to watch out for if you’re a highly compensated employee is the possibility of overfunding your 401(k). If your employer determines that you, as an HCE, have contributed more than the rules allow, the employer may need to refund some of that money back to you.

As mentioned earlier, refunded money would be treated as taxable income. Depending on the refunded amount, you could find yourself in a higher tax bracket and facing a larger tax bill. So it’s important to keep track of your contributions throughout the year so the money doesn’t have to be refunded to you.

Recommended: Should You Retire at 62?

401(k) vs IRAs for HCEs

A highly compensated employee might consider opening an IRA account, traditional or Roth IRA, to supplement their 401(k) savings. Either kind of IRA lets you contribute money up to the annual limit and make qualified withdrawals after age 59 ½ without penalty.

However, income-related rules could constrain highly compensated employees in terms of funding both a 401(k) and a traditional or Roth IRA.

•   An HCE’s contributions to a traditional IRA may not be fully tax-deductible if they or their spouse are covered by a workplace retirement plan. Phaseouts depend on income and filing status.

•   Highly compensated employees may be barred from contributing to a Roth IRA. Eligibility phases out as income rises. For the 2025 tax year, people become ineligible when their MAGI reaches $165,000 (if single) or $246,000 (if married, filing jointly). For the 2026 tax year, people cannot contribute to a Roth IRA when their MAGI reaches $168,000 (single filers) or $252,000 (married, filing jointly).

The Takeaway

A highly compensated employee is generally someone who owns more than 5% of the company that employs them, or who received compensation of more than $160,000 in 2025 or 2026.

Being an HCE can restrict how much you’re able to save in your company’s 401(k); under certain circumstances the IRS may require the employer to refund some of your contributions, with potential tax consequences for you. Even so, HCEs may still be able to save and invest through other retirement accounts.

SoFi offers traditional and Roth IRAs to help you grow your retirement savings. You can open an account online in minutes and build a diversified portfolio that suits your goals. It’s a hassle-free way to work toward a secure financial future.

Help grow your nest egg with a SoFi IRA.

FAQ

Does HCE income include bonuses?

The IRS treats bonuses as compensation for determining which employees are highly compensated. Overtime, commissions, and salary deferrals to a 401(k) account are also counted as compensation.

What is the difference between a key employee and a highly compensated employee?

A highly compensated employee is someone who passes the IRS’s ownership test or compensation test. A key employee is someone who is an officer or meets ownership criteria. Highly compensated employees can also be key employees.

Can you be a key employee and not an HCE?

It is possible to be a key employee and not a highly compensated employee in certain situations. For example, you might own 1.5% of the business and make between $150,000 and $200,000 per year, while not ranking in the top 20% of employees by compensation.

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/nensuria

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.

SOIN1122014
CN-Q425-3236452-92
Q126-3525874-057

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Feb
11
2026
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Top 5 401(k) Alternatives: Saving for Retirement Without a 401(k)

By | Growing Wealth, invest, Investing | Comments Off on Top 5 401(k) Alternatives: Saving for Retirement Without a 401(k)

A 401(k) is a popular way to save for retirement. But not everyone has access to these employer-sponsored 401(k) savings plans. For instance, many small companies don’t offer them. And self-employed individuals don’t have access to regular 401(k)s.

For those who don’t have access to a 401(k) at work or want to consider other retirement savings options, there are a number of 401(k) alternatives. Read on to learn about how to save for retirement without a 401(k), some 401(k) alternatives, and what you need to know about each of them to choose a plan that aligns with your retirement savings goals.

5 Alternatives to a 401(k)

These are some popular retirement savings plans available beyond a regular 401(k).

Traditional IRA

A traditional IRA (Individual Retirement Account) is similar to a 401(k) in that contributions aren’t included in an individual’s taxable annual income. Instead, they are deferred and taxed later when the money is withdrawn at age 59 ½ or later.

Early withdrawals from an IRA may be subject to an added 10% penalty (plus income tax on the distribution). However the main difference between an IRA vs. 401(k) is that IRAs tend to give individuals more control than company-sponsored plans—an individual can decide for themselves where to open an IRA account and can exert more control in determining their investment strategy.

Learning how to open an IRA is relatively simple—such accounts are available with a variety of financial services providers, including online banks and brokerages. This flexibility allows individuals to comparison shop, evaluating providers based on criteria such as account fees and other costs.

Once an individual opens an account, they may make contributions up to an annual limit at any time prior to the tax filing deadline. For tax year 2025, the limit is $7,000 ($8,000 for individuals 50 and older). For tax year 2026, the limit is $7,500 ($8,500 for individuals 50 and older).

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

Roth IRA

There are a few key differences when it comes to a traditional IRA vs. a Roth IRA. To begin with, not everyone qualifies to contribute to a Roth IRA. The upper earnings limit to contribute even a reduced amount for tax year 2025 is $165,000 for singles, and $246,000 for married joint filers. The upper earnings limit for even a partial contribution for tax year 2026 is $168,000 for singles, and $252,000 for married joint filers.

Another thing that distinguishes Roth IRAs is that they’re funded with after-tax dollars—meaning that while contributions are not income tax deductible, qualified distributions (typically after retirement) are tax-free. Additionally, while an IRA has required minimum distributions (RMD) rules that state investors must start taking distributions upon turning 73, there are no minimum withdrawals required on Roth IRAs.

Like a traditional IRA, Roth IRAs carry an annual contribution limit of $7,000 ($8,000 for those 50 and up) for 2025 and $7,500 ($8,600 for those 50 and up) for 2026. Roth IRAs also offer similar flexibility to traditional IRAs in that individuals can open online IRA accounts with a provider that best suits their needs—whether that means an account that offers more hands-on investing support or one with cheaper fees.

Self-Directed IRA (SDIRA)

Another 401(k) alternative is a self-directed IRA. A SDIRA can be either a traditional or Roth IRA.

But whereas IRA accounts typically allow for investment in approved stocks, bonds, mutual funds, and CDs, self-directed IRAs allow for a much broader set of holdings, including things like REITs, promissory notes, tax lien certificates, and private placement securities. Some self-directed IRAs also permit investment in digital assets such as crypto trading and initial coin offerings.

While having the freedom to make alternative investments may be appealing to some individuals, the Security and Exchange Commission cautions that such ventures may be more vulnerable to fraud than traditional investing products.

The SEC cautions that individuals considering a self-directed IRA should do their homework before investing, taking steps to confirm both the investments and the person or firm selling them are registered. They also advise investors to be cautious of unsolicited offers and any promises of guaranteed returns.

Simplified Employee Pension (SEP) IRA

A SEP (Simplified Employee Pension) IRA follows the same rules as traditional IRAs with one key difference: They are employer-sponsored and allow companies to make contributions on workers’ behalf, up to 25% of the employee’s salary.

Though the proceeds of SEP IRAs are 100% vested with the employee, only the employer contributes to this type of retirement account. To be eligible, the employee must have worked for the company for three out of the last five years.

Because people who are self-employed or own their own companies are eligible to set up SEP IRAs—and can contribute up to a quarter of their salary—this type of account can be an attractive option for those individuals who would like to put away more each year than traditional or Roth IRAs allow.

Solo 401(k)

Self-employed individuals and business owners may want to consider a solo 401(k). This type of 401(k) is designed for those who have no employees other than their spouse, and the way it works is similar to a traditional 401(k). Contributions are made using pre-tax dollars and taxed when withdrawn in retirement. (However, there are also Roth solo 401(k)s using after-tax dollars.) The biggest difference between a regular 401(k) and a solo 401(k) is that there is no matching contribution from an employer with a solo 401(k).

In 2025, total contribution limits for a solo 401(k) are $70,000 if you’re under 50. You can contribute an additional $7,500 in catch-up contributions if you’re age 50-59 or age 64 or older. Those between age 60 and 63 can contribute an additional $11,250 (instead of $7,500) in catch-up contributions.

In 2026, total contribution limits are $72,000 if you’re under 50. You can contribute an additional $8,000 if you’re age 50-59 or age 64 or older. Those between age 60 and 63 can contribute an additional $11,250 (instead of $8,000).

Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their solo 401(k) catch-up contributions into a Roth account. With Roths, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

One thing to consider: There are extra IRS rules and reporting requirements for a solo 401(k), which may make these plans more complicated.

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How a 401(k) Differs From Alternatives

As mentioned, a 401(k) is an employer-sponsored retirement fund. 401(k) contributions are determined by an employee and then drawn directly from their paycheck and deposited into a dedicated fund.

Income tax on 401(k) contributions is deferred until the time the money is withdrawn—usually after retirement—at which point it is taxed as income.

During the time that an employee contributes pre-tax dollars to their 401(k) plan, the contributions are deducted from their taxable income for the year, potentially lowering the amount of income tax they might own. For example, if a person earned a $60,000 annual salary and contributed $6,000 to their 401(k) in a calendar year, they would only pay income tax on $54,000 in earnings.

There are annual limits on 401(k) contributions, and the ceilings on contributions change annually. In 2025, the limit for traditional 401(k)s is $23,500 (individuals 50 and older can contribute an additional $7,500 in catch-up contributions; individuals aged 60 to 63 can contribute an additional $11,250, instead of $7,500).

In 2026, the 401(k) contribution limit is $24,500 (those age 50 or older can contribute an additional $8,000; individuals aged 60 to 63 can contribute up to $11,250, instead of $8,000). If a person participates in multiple 401(k) plans from several employers, they still need to abide by this limit, so it’s a good idea to add up all contributions across plans.

Again, because of the new law that went into effect on January 1, 2026, individuals aged 50 and older whose FICA income exceeded $150,000 in 2025 are required to put their 401(k) catch-up contributions into a Roth account.

A 401(k) can be a helpful savings tool for a variety of reasons. Because withdrawals are set up in advance, and automatically deducted from an individual’s paycheck, it essentially puts retirement savings on “auto-pilot.” In addition, employers often contribute to these plans, whether through matching contributions or non-elective contributions.

But there are also some drawbacks to the plan, including penalties for early withdrawals . There are also mandatory fees, which may include plan administration and service fees, as well as investment fees such as sales and management charges. It’s helpful to brush up on all the costs associated with an employer’s 401(k) and look into other 401(k) alternatives if it makes sense.

The Takeaway

With a number of 401 (k) alternatives to choose from, it’s clear there’s no one right way to save for retirement. There are a variety of factors for an investor to consider, including current income, investment interests, and whether it makes sense to invest pre- or after-tax dollars.

Ultimately, the important thing is to identify a good retirement savings account for one’s individual needs, and then contribute to it regularly.

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.

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FAQ

What is a better option than a 401(k)?

There isn’t necessarily a better option than a 401(k), but if you’re looking for another type of retirement savings plan, you may want to consider a traditional IRA or Roth IRA. These retirement savings plans allow you to invest your contributions in different types of investments, and you will generally have a wider array of offerings than you might get with a 401(k). Plus, you can have an IRA in addition to a 401(k), which could help you save even more for retirement.

How to save for retirement if my employer doesn’t offer 401(k)?

If your employer does not offer a 401(k), you can still save for retirement using several other tax-advantaged accounts such as individual retirement accounts (IRAs) and health savings accounts (HSAs), or a standard taxable brokerage account. Self-employed individuals have even more options, including SEP IRAs and Solo 401(k)s.

What 401(k) alternatives are there for the self-employed?

For self-employed individuals, there are several tax-advantaged retirement plan alternatives to a traditional 401(k), including Solo 401(k)s, SEP IRAs, SIMPLE IRAs, and traditional or Roth IRAs. The best choice depends on factors like income, number of employees, and desired contribution limits. 

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.

Investment Risk: Diversification can help reduce some investment risk, but cannot guarantee profit nor 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.

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.

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Alternative investments are highly risky and may not be suitable for all investors. These investments often involve leveraging, speculative practices, and the potential for complete loss of investment. They typically charge high fees, lack diversification, and can be highly illiquid and volatile. Be aware that both registered and unregistered alternative investments, including Interval Funds, are not subject to the same regulatory requirements as mutual funds, and their illiquid nature may restrict your ability to trade on your timeline. Always review the specific fee schedule for Interval Funds within their prospectus.

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Investing Checklist: Things to Do Before the End of 2022

Investing Checklist: Things to Do Before the End of 2025

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Investing Checklist: Things to Do Before the End of 2025

There are numerous things that investors can and perhaps should do before the clock strikes midnight on New Year’s Eve, such as maxing out retirement or college savings account contributions, and harvesting tax losses.

Read on to find out what should probably be on your investing checklist for the end of the year, what to consider tackling before your tax return is due in April, and how some simple moves this December can help set you up nicely for 2025, 2026, and beyond.

Key Points

•   Investors should maximize their 401(k) contributions by the end of 2025. They can contribute up to $23,500 for the year, plus an additional $7,500 for those over 50. People 60 to 63 can contribute a higher catch-up limit of $11,250 in 2025.

•   Tax-loss harvesting, a strategy to offset investment gains with losses and reduce tax burdens, should be considered before year-end if applicable.

•   Contributing to a 529 college savings plan before the year ends can offer state tax deductions, depending on the state.

•   Reviewing and updating estate plans and insurance policies is crucial to ensure they are current and accurate.

•   Donating appreciated stocks to charity by December 31 can provide a tax deduction for the full market value of the shares.

End-of-Year vs Tax-Day Deadlines

Before diving into the year-end investing checklist, it’s important to remember that there are a couple of key distinctions when it comes to the calendar. Specifically, though the calendar year actually ends on December 31 of any given year, Tax Day is typically in the middle of April (April 15, usually). That’s the due date to file your federal tax return, unless you file for an extension.

As it relates to your investing checklist, this is important to take into account because some things, like maxing out your 401(k) contributions must be done before the end of the calendar year, while others (like maxing out contributions to your IRA account) can be done up until the Tax Day deadline.

In other words, some items on the following investing checklist will need to be crossed off before New Year’s Day, while others can wait until April.

7 Things to Do With Your Investments No Later Than Dec. 31

Here are seven things investors can or should consider doing before the calendar rolls around to 2026.

1. Max Out 401(k) Contributions

Perhaps the most beneficial thing investors can do for their long-term financial prospects is to max out their 401(k) contributions. A 401(k) is an employer-sponsored retirement account, where workers can contribute tax-deferred portions of their paychecks.

There are also Roth 401(k) accounts, which may be available to you, which allow you to preemptively pay taxes on the contributions, allowing for tax-free withdrawals in the future.

You can only contribute a certain amount of money per year into a 401(k) account, however. For 2025, that limit is $23,500, and those over 50 can contribute an additional $7,500, for a total of $31,000. And in 2025, under SECURE 2.0, those aged 60 to 63 can make a higher catch-up limit of $11,250 (instead of $7,500) for a total of $34,750.

In 2026, the contribution limit rises to $24,500, with a $8,000 catch-up provision if you’re 50 and up, for a total of $32,500. And again, under the SECURE 2.0 Act, a higher catch-up limit of $11,250 (instead of $8,000) applies to individuals ages 60 to 63 in 2026, for a total of $35,750.

Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

So, if you are able to, it may be beneficial to contribute up to the $23,500 limit for 2025 before the year ends. After December 31, any contributions will count toward the 2026 tax year.

2. Harvest Tax Losses

Tax-loss harvesting is an advanced but popular strategy that allows investors to sell some investments at a loss, and then write off their losses against their gains to help lower their tax burden.

Note that investment losses realized during a specific calendar year must be applied to the gains from the same year, but losses can be applied in the future using a strategy called a tax-loss carryforward. But again, tax-loss harvesting can be a fairly complicated process, and it may be best to consult with a professional

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3. Consider 529 Plan Contributions

A 529 college savings plan is used to save for education expenses. There are two basic types of 529 plans, but the main thing that investors should focus on, as it relates to their year-end investing checklist, is to stash money into it before January as some states allow 529 contributions as tax deductions.

There is no yearly federal contribution limit for 529 plans — instead, the limit is set at the state level. Gift taxes, however, may apply, which is critical to consider.

4. Address Roll-Over Loose Ends

Another thing to check on is whether there are any loose ends to tie up in regard to any account roll-overs that you may have executed during the year.

For example, if you decided to roll over an old 401(k) into an IRA at some point during the year, you’ll want to make sure that the funds ended up with your new brokerage or retirement plan provider.

It may be easy to overlook, but sometimes checks get sent to the wrong place or other wires get crossed, and it can be a good idea to double-check everything is where it should be before the year ends.

5. Review Insurance Policies

Some employers require or encourage employees to opt into certain benefits programs every year, including insurance coverage. This may or may not apply to your specific situation, but it can be a good idea to check and make sure your insurance coverage is up to date — and that you’ve done things like named beneficiaries, and that all relevant contact information is also current.

6. Review Your Estate Plan

This is another item on your investing checklist that may not necessarily need to be done by the end of the year, but it’s a good idea to make a habit of it: Review your estate plan, or get one started.

There are several important documents in your estate plan that legally establish what happens to your money and assets in the event that you die. If you don’t have an estate plan, you should probably make it an item on your to-do list. If you do have one, you can use the end of the year as a time to check in and make sure that your heirs or beneficiaries are designated, that there are instructions about how you’d prefer your death or incapacitation to be handled, and more.

7. Donate Appreciated Stocks

Finally, you can consider donating stocks to charity by the end of the year. There are a couple of reasons to consider a stock donation: One, you won’t pay any capital gains taxes if the shares have appreciated, and second, you’ll be able to snag a tax deduction for the full market value of the shares at the time that you donate them. The tax deduction limit is for up to 30% of your adjustable gross income — a considerable amount.

Remember, though, that charitable donations must be completed by December 31 if you hope to deduct the donation for the current tax year.

3 Things for Investors to Do by Tax Day 2026

As mentioned, there are a few items on your investing checklist that can be completed by Tax Day, or April 15, 2026. Here are the few outstanding items that you’ll have until then to complete.

1. Max Out IRA Contributions

One of the important differences between 401(k)s and IRAs is the contribution deadline. While 401(k) contributions must be made before the end of the calendar year, investors can keep making contributions to their IRA accounts up until Tax Day 2026, within the contribution limits of course.

So, if you want to max out your IRA contributions for 2025, the limit is $7,000. But people over 50 can contribute an additional $1,000 — and you’ll have until April to contribute for 2025 and still be able to deduct contributions from your taxable income (assuming it’s a tax-deferred IRA, not a Roth IRA).

The contribution limits rise in 2026 to $7,500, and a $1,100 catch-up provision for those 50 and up. And some taxpayers may be able to deduct their contributions, too, under certain conditions.

2. Max Out HSA Contributions

If you have a health savings account (HSA), you’ll want to make sure you’ve hit your contribution limits before Tax Day, too. The contribution limits for HSAs in 2025 are $4,300 for self-only coverage and $8,550 for family coverage. People over 55 can contribute an additional $1,000. For 2026, the contribution limits are $4,400 for self-only coverage and $8,750 for family coverage. People aged 55 and up can contribute an additional $1,000 in both 2025 and 2026.

3. Take Your RMD (if Applicable)

If you’re retired, you may need to take a required minimum distribution (RMD) from your retirement account by the beginning of April next year, if it’s your first RMD. But if you’ve taken an RMD before, you’ll need to do so before the end of 2025 — so, be sure to check to see what deadline applies to your specific situation.

This generally only applies to people who are in their 70s (typically age 73 if you reach age 72 after December 31, 2022), but it may be worth discussing with a professional what the best course of action is, especially if you have multiple retirement accounts or if you have an inherited account.

The Takeaway

Doing a year-end financial review can be extremely beneficial, and a checklist can help make sure you don’t miss any important steps for 2025 — and set you up for 2026. That investing checklist should probably include things like maxing out contributions to your retirement accounts, harvesting tax losses in order to manage your tax bill, and possibly even taking minimum required distributions. Everyone’s situation is different, so you’ll need to tailor your investing checklist accordingly.

Also, it’s important to keep in mind that you may have until Tax Day in April to get some of it done — though it may be good practice to knock everything out by the end of the year. If you’re only beginning to invest, keeping this list handy and reviewing it annually can help you establish healthy financial habits.

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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.

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.

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Investment Strategies By Age

By | Growing Wealth, invest, Investing, Life & Career | No Comments

Your age is a major factor in the investment strategy you choose and the assets you invest in. The investments someone makes when they’re in their 20s should look very different from the investments they make in their 50s.

Generally speaking, the younger you are, the more risk you may be able to tolerate because you’ll have time to make up for investment losses you might incur. Conversely, the closer you are to retirement, the more conservative you’ll want to be since you have less time to recoup from any losses. In other words, your investments need to align with your risk tolerance, time horizon, and financial goals.

Most important of all, you need to start saving for retirement now so that you won’t be caught short when it’s time to retire. According to a 2024 SoFi survey of adults 18 and older, 59% of respondents had no retirement savings at all or less than $49,999.

Here is some information to consider at different ages.

Investing in Your 20s

In your 20s, you’ve just started in your career and likely aren’t yet earning a lot. You’re probably also paying off debt such as student loans. Despite those challenges, this is an important time to begin investing with any extra money you have. The sooner you start, the more time you’ll have to save for retirement. Plus, you can take advantage of the power of compounding returns over the decades. These strategies can help get you on your investing journey.

Strategy 1: Participate in a Retirement Savings Plan

One of the easiest ways to start saving for retirement is to enroll in an employer-sponsored plan like a 401(k). Your contributions are generally automatically deducted from your paycheck, making it easier to save.

If possible, contribute at least enough to qualify for your employer’s 401(k) match if they offer one. That way your company will match a percentage of your contributions up to a certain limit, and you’ll be earning what’s essentially free money.

Those who don’t have access to an employer-sponsored plan might want to consider setting up an individual retirement account (IRA). There are different types of IRAs, but two of the most common are traditional and Roth IRAs. Both let you contribute up to $7,000 in 2025 and 7,500 in 2026 for those under age 50. (Note that Roth IRAs have income limits.) But one key difference is the way the two accounts are taxed. With Roth IRAs, contributions are not tax deductible, but you can withdraw money tax-free in retirement. With traditional IRAs, you deduct your contributions upfront and pay taxes on distributions when you retire.

Strategy 2: Explore Diversification

As you’re building a portfolio, consider diversification. Diversification involves spreading your investments across different asset classes, such as stocks, bonds, and real estate investment trusts (REITs). One way twentysomethings might diversify their portfolios is by investing in mutual funds or exchange-traded funds (ETFs). Mutual funds are pooled investments typically in stocks or bonds, and they trade once per day at the end of the day. ETFs are baskets of securities that trade on a public exchange and trade throughout the day.

You may be able to invest in mutual funds or ETFs through your 401(k) or IRA. Or you could open a brokerage account to begin investing in them.

Strategy 3: Consider Your Approach and Comfort Level

As mentioned, the younger an individual is, the more time they may have to recover from any losses or market downturns. Deciding what kind of approach they want to take at this stage could be helpful.

For instance, one approach involves designating a larger portion of investments to growth funds, mutual funds or ETFs that reflect a more aggressive investing style, but it’s very important to understand that this also involves higher risk. You may feel that a more conservative approach that’s less risky suits you better. What you choose to do is fully up to you. Weigh the options and decide what makes sense for you.

Investing in Your 30s

Once you’re in your 30s, you may have advanced in your career and started earning more money. However, at this stage of life you may also be starting a family, and you likely have financial obligations such as a mortgage, a car loan, and paying for childcare. Plus, you’re probably still paying off your student loans. Still, despite these expenses, contributing to your retirement should be a top priority. Here are some ways to do that.

Strategy 1: Maximize Your Contributions

Now that you’re earning more, this is the time to max out your 401(k) or IRA if you can, which could help you save more for retirement. In 2025, you can contribute up to $23,500 in a 401(k) and up to $7,000 in an IRA. In 2026, you can contribute up to $24,500 in a 401(k) and up to $7,500 in an IRA. (Note: If you or your spouse have a 401(k), your ability to deduct traditional IRA contributions may be limited once your income passes certain thresholds.) If you have a Roth IRA, there are income limits you need to meet to be eligible to contribute the full amount, which is one thing to consider when choosing between a Roth IRA vs. a traditional IRA.

Strategy 2: Consider Adding Fixed-Income Assets to the Mix

While you can likely still afford some risk since you have several decades to recover from downturns or losses, you may also want to add some fixed-income assets like bonds or bond funds to your portfolio to help counterbalance the risk of growth funds and give yourself a cushion against potential market volatility. For example, an investor in their 30s might want 20% to 30% of their portfolio to be bonds. But, of course, you’ll want to determine what specific allocation makes the most sense for your particular situation.

Strategy 3: Get Your Other Financial Goals On Track

While saving for retirement is crucial, you should also make sure that your overall financial situation is stable. That means paying off your debts, especially high-interest debt like credit cards, so that it doesn’t continue to accrue interest. In addition, build up your emergency fund with enough money to tide you over for at least three to six months in case of a financial setback, such as a major medical expense or getting laid off from your job. And finally, make sure you have enough funds to cover your regular expenses, such as your mortgage payment and insurance.

Investing in Your 40s

You may be in — or approaching — your peak earning years now. At the same time, you likely have more expenses, as well, such as putting away money for your children’s college education, and saving up for a bigger house. Fortunately, you probably have at least 20 years before retirement, so there is still time to help build your nest egg. Consider these steps:

Strategy 1: Review Your Progress

According to one rule of thumb, by your 40s, you should have 3x the amount of your salary saved for retirement. This is just a guideline, but it gives you an idea of what you may need. Another popular guideline is the 80% rule of aiming to save at least 80% of your pre-retirement income. And finally, there is the 4% rule that says you can take your projected annual retirement expenses and divide them by 4% (0.04) to get an estimate of how much money you’ll need for retirement.

These are all rough targets, but they give you a benchmark to compare your current retirement savings to. Then, you can make adjustments as needed.

Strategy 2: Get Financial Advice

If you haven’t done much in terms of investing up until this point, it’s not too late to start. Seeking help from financial advisors and other professionals may help you establish a financial plan and set short-term and long-term financial goals.

Even for those who have started saving, meeting with a financial specialist could be useful if you have questions or need help mapping out your next steps or sticking to your overall strategy.

Strategy 3: Focus on the Your Goals

Since they might have another 20-plus years in the market before retirement, some individuals may choose to keep a portion of their portfolio allocated to stocks now. But of course, it’s also important to be careful and not take too much risk. For instance, while nothing is guaranteed and there is always risk involved, you might feel more comfortable in your 40s choosing investments that have a proven track record of returns.

Investing in Your 50s

You’re getting close to retirement age, so this is the time to buckle down and get serious about saving safely. If you’ve been a more aggressive investor in earlier decades, you’ll generally want to become more conservative about investing now. You’ll need your retirement funds in 10 years or so, and it’s vital not to do anything that might jeopardize your future. These investment strategies by age may be helpful to you in your 50s:

Strategy 1: Add Stability to Your Portfolio

One way to take a more conservative approach is to start shifting more of your portfolio to fixed-income assets like bonds or bond funds. Although these investments may result in lower returns in the short term compared to assets like stocks, they can help generate income when you begin withdrawing funds in retirement since bonds provide you with periodic interest payments.

You may also want to consider lower-risk investments like money market funds at this stage of your investment life.

Strategy 2: Take Advantage of Catch-up Contributions

Starting at age 50, you become eligible to make catch-up contributions to your 401(k) or IRA. In 2025, you can contribute an additional $7,500 to your 401(k) for a total contribution of $31,000. In 2026, you can contribute an extra $8,000 for a total contribution of $32,500.

In 2025, the catch-up contribution for an IRA is an additional $1,000 for a total maximum contribution of $8,000. In 2026, you can contribute an extra $1,100 for a total of $8,600.This allows you to stash away even more money for retirement.

Just be aware that under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roths, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

Strategy 3: Consider Downsizing

Your kids may be out of the house now, which can make it the ideal time to cut back on some major expenses in order to save more. You might want to move into a smaller home, for instance, or get rid of an extra car you no longer need.

Think about what you want your retirement lifestyle to look like — lots of travel, more time for hobbies, starting a small business, or whatever it might be — and plan accordingly. By cutting back on some expenses now, you may be able to save more for your future pastimes.

Investing in Your 60s

Retirement is fast approaching, but that doesn’t mean it’s time to pull back on your investing. Every little bit you can continue to save and invest now can help build your nest egg. Remember, your retirement savings may need to last you for 30 years or even longer. Here are some strategies that may help you accumulate the money you need.

Strategy 1: Get the Most Out of Social Security

The average retirement age in the U.S. is 65 for men and 63 for women. But you may decide you want to work for longer than that. Waiting to retire can pay off in terms of Social Security benefits. The longer you wait, the bigger your monthly benefit will be.

The earliest you can start receiving Social Security Benefits is age 62, but your benefits will be reduced by as much as 30% if you take them that early. If you wait until your full retirement age, which is 67 for those born in 1960 or later, you can begin receiving full benefits.

However, if you wait until age 70 by working longer or working part time, say, the size of your benefits will increase substantially. Typically, for each additional year you wait to claim your benefits up to age 70, your benefits will grow by 8%.

Strategy 2: Review Your Asset Allocation

Just before and during retirement, it’s important to make sure your portfolio has enough assets such as bonds and dividend-paying stocks so that you’ll have income coming in. You’ll also want to stash away some cash for unexpected expenses that might pop up in the short term; you could put that money in your emergency fund.

Some individuals in their 60s may choose to keep some stocks with growth potential in their asset allocation as a way to potentially avoid outliving their savings and preserve their spending power. Overall, people at this stage of life may want to continue the more conservative approach to investing they started in their 50s, and not choose anything too aggressive or risky.

Strategy 3: Keep investing in your 401(k) as long as you’re still working.

If you can, max out your 401(k), including catch-up contributions, in your 60s to sock away as much as possible for retirement. In 2025 and 2026, those aged 60 to 63 can take advantage of an extra catch-up provision, thanks to SECURE 2.0: In 2025, they can contribute an additional $11,250 for a total of $34,750; in 2026, they can also contribute an extra $11,250 for a total of $35,750.

Again, because of the new law that went into effect on January 1, 2026, individuals aged 50 and older with FICA wages exceeding $150,000 in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account.

Also, you can continue to contribute to any IRAs you may have — up to the limit allowed by the IRS, which is $8,000 in 2025 and $8,600 in 2026, including catch-up contributions. Just keep in mind that if your or your souse is covered by a workplace 401(k), you can only contribute pre-tax dollars if you stay under certain income thresholds. 

The Takeaway

Investing for retirement should be a priority throughout your adult life, starting in your 20s. The sooner you begin, the more time you’ll have to save. And while it’s never too late to start investing for retirement, focusing on investment strategies by age, and changing your approach accordingly, can generally help you reach your financial goals.

For instance, in your 20s and 30s you can typically be more aggressive since you have time to make up for any downturns or losses. But as you get closer to retirement in your 40s, 50s, and 60s, your investment strategy should shift and take on a more conservative approach. Like your age, your investment strategy should adjust across the decades to help you live comfortably and enjoyably in your golden years.

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