Jun
08
2026

What Is the Average Retirement Age?

By | Budgeting & Goals, invest, Preparing for Retirement | Comments Off on What Is the Average Retirement Age?

The average retirement age in the US is age 62, but that number doesn’t reveal the wide range of ages at which people can and do retire.

Some people retire in their 50s, some in their 70s; other people find ways to keep pursuing their profession and thus never completely “retire” from the workforce. The age at which someone retires depends on a host of factors, including how much they’ve saved, their overall state of health, and their desire to keep working versus taking on other commitments.

Still, having some idea of the average age of retirement can be helpful as a general benchmark for your own retirement plans.

Key Points

  • The average retirement age in the U.S. is 62, with variations by state.
  • Retirement age is influenced by financial, health, and personal factors.
  • Many people retire earlier than planned due to unforeseen circumstances, which can lead to financial challenges.
  • Specific savings benchmarks are recommended at different life stages to achieve retirement goals.
  • One rule of thumb is to save 10 times one’s income by age 67 for a comfortable retirement.

What Is the Average Age of Retirement in the US?

The average age of retirement from the workforce in the U.S. is 62, according to at least two recent studies.

Age 65 may be what many of us think of as the traditional age to retire, and according to 2024 research by the Employee Benefit Research Institute[1], more than half of workers surveyed expect to retire at age 65 or older. Yet 70% of the retirees in that study reported retiring before age 65.

In addition, the age of retirement by state varies widely. According to the U.S. Census Bureau’s American Community Survey, these are the states with the highest and lowest average U.S. retirement ages:

  • Hawaii, Massachusetts, and South Dakota is 66.
  • Washington, D.C., is 67.
  • Residents of Alaska and West Virginia it’s 61.

A lower cost of living may be what’s helping West Virginia residents retire so young. West Virginia was one of the 10 states in the country with the lowest costs of living, according to the latest Cost of Living Index.[2]

While those previously mentioned states give a look at two ends of the average retirement age spectrum in the U.S., many states have an average retirement age that falls closer to what one might expect.

Colorado, Connecticut, Iowa, Kansas, Maryland, Minnesota, Nebraska, New Hampshire, New Jersey, North Dakota, Rhode Island, Texas, Utah, Vermont, and Virginia all have an average retirement age of 65.

Factors Influencing Retirement Age

There are many different factors that affect the typical retirement age. Some key factors include:

  • Financial situation and retirement savings: How much retirement savings a person has, whether it’s in an investment account or an employer-sponsored plan, is an important determinant of their average retirement age. A recent survey by the AARP found that more than half of all respondents were worried about not having enough money for retirement.

    Concerns like this may delay retirement age. In addition, those who are waiting to get their full Social Security benefits may decide to wait until the government’s designated full retirement age of 66 or 67, depending on their year of birth.[3]

  • Health: The state of a person’s health can also influence the age at which they retire. Those in good health may opt to work for more years, while those with medical conditions or disabilities may need to retire earlier.
  • Location: Where they live may also affect how long an individual keeps working. In places where the cost of living is higher, people may work longer to pay their expenses now and in retirement. Others who are expecting to move to a more affordable place might retire earlier.
  • Lifestyle goals: How a person plans to spend their retirement affects how much money they may need, which can impact when they retire. Someone who hopes to travel frequently may choose to work longer to keep earning money, for instance.

Retirement Expectations vs. Reality

Expectations can lead to disappointment. Anyone who has ever planned for a sunny beach vacation only to see it rain every day knows that.

Now imagine a person spending most of their adult life expecting to retire at 65 or earlier, and then realizing their retirement savings just isn’t enough.

According to the Employee Benefit Research Institute’s 2024 Retirement Confidence Survey, the expected average age of retirement is 65 or older. However, as noted previously, the actual average retirement age in the U.S. is 62, according to that same survey as well as other research. Retiring at 62, or earlier than planned, could lead to not having enough money to retire comfortably.

How to Know When to Retire

Not everyone retires early by choice. Six in 10 people retired earlier than they expected, mostly because of health problems, disabilities, or changes within their companies, according to a 2024 survey by the Transamerica Center for Retirement Studies.[4]

It can be difficult for workers to exactly predict at what age they will retire due to circumstances that may be out of their control. For example, among adults who save regularly for retirement, 33% say they won’t have enough money to be financially secure in their post-employment years, and 31% don’t know if they will have enough, the AARP survey found.

In order to bridge any financial gap caused by not having enough retirement savings, 75% of pre-retirees in the Employee Benefit Research Institute’s survey expect they will earn an income during their retirement by working either full time or part time.

The survey found that half of respondents have calculated how much money they will need in retirement, and 33% estimate they will need $1.5 million. However, there is a gap between their expectations and their actions. One-third of respondents currently have less than $50,000 in retirement savings.

Common Misconceptions About Retirement Age

There are some misconceptions about the typical retirement age. These are two of the more common ones:

  • There is an ideal age to retire. While research shows that many people believe age 63 is the best age to retire, it is a highly individual decision. Some people may need to work longer for financial reasons; others may have to take retirement sooner than anticipated.
  • Age 65 is the traditional retirement age. The average retirement age in the U.S. is actually 62. Many people retire earlier than they think they will, often for health reasons or changes within their companies.

How Much Should You Have Saved for Retirement?

To retire comfortably, the IRS recommends that individuals have up to 80% of their current annual income saved for each year of retirement. With the average Social Security monthly payment being $1,177, retirees may need to do a decent amount of saving to cover the rest of their future expenses.[5]

This is something to keep in mind when choosing a retirement date.

Retirement Savings Benchmarks by Age

To have enough savings for a comfortable retirement, one common rule of thumb is to save 10 times your income by the age of 67. To stay on track toward that goal, these are some retirement savings benchmarks individuals can aim for along the way.

Age Retirement savings
30 1x income
35 3x income
40 3x income
45 4x income
50 6x income
55 7x income
60 8x income
67 10x income

Calculating Your Personalized Retirement Goal

To help determine how much money you’ll need for retirement, look at how much you currently have in retirement savings, what your Social Security benefit will be at the age you plan to retire — you can use the Social Security calculator to find this number — and any other income sources you may have, such as a pension or inheritance funds.

Then, draw up a retirement budget to get a sense of how much money you may need. Be sure to include estimated living expenses, housing, and health care costs. Plugging those numbers into a retirement calculator can help you determine how much money you might need per year.

Comparing what you’ll need annually for approximately 30 years of retirement with your savings, Social Security benefit, and other income sources will help you see how much money you still need to save in order to get there — and give you a target goal to aim for.[6]

It’s Never Too Early to Start Saving for Retirement

Since retirement can last 30 years or more, financial security is key to enjoying your golden years.

Any day is a good day to start saving, but saving for retirement while a person is young could help put them on the path toward a more secure retirement. The more years their savings have to grow, the better.

“A very helpful habit,” explains Brian Walsh, CFP® at SoFi, “Is truly automating what you need to do. Recurring contributions. Saving towards your goals. Automatically increasing those contributions. That way you can save now and save even more in the future.”

You could even use something like automated investing if you think it could be helpful. Whatever you do, be sure to start saving as soon as possible. The longer you wait to save for retirement, the more you will need to save in a shorter period of time.

Benefits of Starting Early with Compounded Growth

Starting retirement saving early can be powerful because of a process called compounding returns.

Here’s how it works: Say you have money invested in your retirement account, or maybe you even do self-directed investing, and that money earns returns. As long as those returns are reinvested, you will earn money on your original investment and also on your returns.

Compound returns can be a way for your money to grow over time. The returns you earn each period are reinvested to potentially earn additional returns. And the longer you invest, the more time your returns may have to compound.

Late to the Retirement Savings Game?

Starting to save for retirement late is better than not starting at all. In fact, the government allows catch-up contributions for those aged 50 and over. Catch-up contributions of up to $7,500 in 2025 and up to $8,000 in 2026 are allowed on a 401(k), 403(b), or governmental 457(b). In both 2025 and 2026, those aged 60 to 63 can make a catch-up contribution up to $11,250 (instead of $7,500 or $8,000), thanks to SECURE 2.0.

A catch-up contribution is a contribution to a retirement savings account that is made beyond the regular contribution maximum. Catch-up contributions can generally be made on either a pre-tax or after-tax basis. However, under a new law that went into effect on January 1, 2026, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k), 403(b), or 457(b) catch-up contributions into a Roth 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.

As retirement gets closer, future retirees can plan their savings around their estimated Social Security payments. While this estimate is not a guarantee, it might give a retiree — or anyone planning when to retire — an idea of how much they might consider saving to supplement these earnings.

Social Security benefits can begin at age 62, which is considered the Social Security retirement age minimum. However, full benefits won’t be earned until full retirement age, which is 66 to 67 years old, depending on your birth year.

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FAQ

Does the average retirement age matter?

The age at which you retire affects your Social Security benefit. For instance, if you retire at age 62, your benefit will be about 30% lower than if you wait until age 67.[7]

What is the full retirement age for Social Security?

The full age of retirement is 67 for anyone born in 1960 or later. Before that, the full retirement age is 66 for those born from 1943 to 1954. And for those born between 1955 to 1959, the age increases gradually to 67.[8]

How long will my retirement savings last?

One strategy you could use to help determine how long your retirement savings might last is the 4% rule. The idea behind the rule is that you withdraw 4% of your retirement savings during your first year of retirement, then adjust the amount each year after that for inflation. By doing this, ideally, your money could last for about 30 years in retirement.

However, your personal circumstances and market fluctuations may affect this number, which means it could vary. It’s best to use the 4% rule only as a general guideline.

Is early retirement realistic for most people?

While early retirement can sound enticing, for most people, it is not realistic because they don’t have enough retirement savings. For example, one-third of respondents to a survey by the Employee Benefit Research Institute said they have only $50,000 saved for retirement. And according to an AARP survey, 33% of adults who save regularly for retirement say they won’t have enough money to be financially secure in their retirement years.

What’s the difference between early and full retirement age?

When it comes to receiving Social Security benefits, early retirement age is 62 and full retirement age is 66 or 67, depending on your birth year. However, retiring early at age 62 and starting these benefits can result in a benefit that’s as much as 30% lower than waiting until the full retirement age of 67.

Article Sources
  1. Employee Benefit Research Institute. 2024 Retirement Confidence Survey.
  2. World Population Review. Cost of Living Index by State 2026.
  3. AARP. AARP Financial Security Trends Survey, January 2024.
  4. Transamerica Center for Retirement Studies. 24th Annual Transamerica Retirement Survey.
  5. IRS. 24th Annual Transamerica Retirement Survey.
  6. National Council on Aging. Addressing the Nation’s Retirement Crisis: The 80%.
  7. Social Security Administration. Early or Late Retirement?.
  8. Social Security Administration. Normal Retirement Age.

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Jun
08
2026
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Types of Retirement Plans and Which to Consider

By | Budgeting & Goals, Growing Wealth, invest, Investing | No Comments

Retirement will likely be the most significant expense of your lifetime, which means saving for retirement is a big job. This is especially true if you envision a retirement that is rich with experiences such as traveling through Europe or spending time with your grown children and grandkids. A retirement savings plan may help you achieve these financial goals and stay on track.

There are all types of retirement plans you may consider to help you build your wealth, from 401(k)s to Individual Retirement Accounts (IRAs) to annuities. Understanding the nuances of these different retirement plans, like their tax benefits and various drawbacks, may help you choose the right mix of plans to achieve your financial goals.

Key Points

  • There are various types of retirement plans, including traditional and non-traditional options, such as 401(k), IRA, Roth IRA, SEP IRA, and Cash-Balance Plan.
  • Employers offer defined contribution plans (e.g., 401(k)) where employees contribute and have access to the funds, and defined benefit plans (e.g., Pension Plans) where employers invest for employees’ retirement.
  • Different retirement plans have varying tax benefits, contribution limits, and employer matches, which should be considered when choosing a plan.
  • Individual retirement plans like Traditional IRA and Roth IRA provide tax advantages but have contribution restrictions and penalties for early withdrawals.
  • It’s possible to have multiple retirement plans, including different types and accounts of the same type, but there are limitations on tax benefits based on the IRS regulations.
🛈 SoFi does not offer employer-sponsored plans, such as 401(k) or 403(b) plans, but we do offer a range of individual retirement accounts (IRAs).

Different Types of Retirement Accounts

There are several different types of retirement plans, including some traditional plan types you may be familiar with as well as non-traditional options.

Traditional retirement plans can be IRA accounts or 401(k). These tax-deferred retirement plans allow you to contribute pre-tax dollars to an account. With a traditional IRA or 401(k), you only pay taxes on your investments when you withdraw from the account.

Non-traditional retirement accounts can include Roth 401(k)s and IRAs, for which you pay taxes on funds before contributing them to the account and withdraw money tax-free in retirement.

types of retirement plans and their pros and cons

Employer-Sponsored Retirement Plans

There are typically two types of retirement plans offered by employers:

  • Defined contribution plans (more common): The employee invests a portion of their paycheck into a retirement account. Sometimes, the employer will match up to a certain amount (e.g. up to 5%). In retirement, the employee has access to the funds they’ve invested. 401(k)s and Roth 401(k)s are examples of defined contribution plans.
  • Defined benefit plans (less common): The employer invests money for retirement on behalf of the employee. Upon retirement, the employee receives a regular payment, which is typically calculated based on factors like the employee’s final or average salary, age, and length of service. As long as they meet the plan’s eligibility requirements, they will receive this fixed benefit (e.g. $100 per month). Pension plans and cash balance accounts are common examples of defined benefit plans.
Common Employer-Sponsored Retirement Plans
Type of Retirement Plan May be Funded By Pro Con
401(k) Employee and Employer Contributions are deducted from paycheck Limited investment options
403(b) Employee and Employer Contributions are deducted from paycheck Usually offer a narrow choice of investment options
457(b) Employee You don’t have to wait until age 59 ½ to withdraw Does not have same employer match possibility like a 401(k)
Pensions Employer Fixed payout upon retirement May be difficult to access benefits

Let’s get into the specific types of plans employers usually offer.

Traditional 401(k)

A 401(k) plan is a type of work retirement plan offered to the employees of a company. Traditional 401(k)s allow employees to contribute pre-tax dollars, where Roth 401(k)s allow after-tax contributions.

  • Income Taxes: If you choose to make a pre-tax contribution, your contributions may reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Some employers allow you to make after-tax or Roth contributions to a 401(k). You should check with your employer to see if those are options.
  • Contribution Limit: $23,500 in 2025 and $24,500 in 2026 for the employee; people 50 and older can contribute an additional $7,500 in 2025 and $8,000 in 2026. However, in 2025 and 2026, under the SECURE 2.0 Act, a higher catch-up limit of $11,250 applies to individuals ages 60 to 63.

    And 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.

  • Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. There is a significantly higher limit than with Traditional IRA and Roth IRA accounts.
  • Cons: With a 401(k) plan, you are largely at the mercy of your employer — there’s no guarantee they will pick plans that you feel are right for you or are cost effective for what they offer. Also, the value of a 401(k) comes from two things: the pre-tax contributions and the employer match, if your employer doesn’t match, a 401(k) may not be as valuable to an investor. There are also penalties for early withdrawals before age 59 ½, although there are some exceptions, including for certain public employees.
  • Usually best for: Someone who works for a company that offers one, especially if the employer provides a matching contribution. A 401(k) retirement plan can also be especially useful for people who want to put retirement savings on autopilot.
  • To consider: Sometimes 401(k) plans have account maintenance or other fees. Because a 401(k) plan is set up by your employer, investors only get to choose from the investment options they provide.

403(b)

A 403(b) retirement plan is like a 401(k) for certain individuals employed by public schools, churches, and other tax-exempt organizations. Like a 401(k), there are both traditional and Roth 403(b) plans. However, not all employees may be able to access a Roth 403(b).

  • Income Taxes: With a traditional 403(b) plan, you contribute pre-tax money into the account; the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers allow you to make after-tax or Roth contributions to a 403(b); the money will grow tax-deferred and you will not have to pay taxes on withdrawals in retirement. You should check with your employer to see if those are options.
  • Contribution Limit: $23,500 in 2025 and $24,500 in 2026 for the employee; people 50 and older can contribute an additional $7,500 in 2025 and $8,000 in 2026. In 2025 and 2026, under the SECURE 2.0 Act, those ages 60 to 63 can contribute a higher catch-up amount of $11,250. As noted above with 401(k) plans, as of January 1, 2026, individuals aged 50 and older with FICA wages exceeding $150,000 in 2025 are required to put their catch-up contributions into a Roth account.

    The maximum combined amount both the employer and the employee can contribute annually to the plan (not including the catch-up amounts) is generally the lesser of $70,000 in 2025 and $72,000 in 2026 or the employee’s most recent annual salary.

  • Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. Also, these plans often come with lower administrative costs because they aren’t subject to Employee Retirement Income Security Act (ERISA) oversight.
  • Cons: A 403(b) account generally lacks the same protection from creditors as plans with ERISA compliance.
  • To consider: 403(b) plans offer a narrow choice of investments compared to other retirement savings plans. The IRS states these plans can only offer annuities provided through an insurance company and a custodial account invested in mutual funds.

457(b)

A 457(b) retirement plan is an employer-sponsored deferred compensation plan for employees of state and local government agencies and some tax-exempt organizations.

  • Income taxes: If you choose to make a pre-tax contribution, your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Some employers also allow you to make after-tax or Roth contributions to a 401(k).
  • Contribution limits: The lesser of 100% of employee’s compensation or $23,500 in 2025 and $24,500 in 2026; some plans allow for “catch-up” contributions. For those plans that do allow catch-ups, under the new law that went into effect on January 1, 2026, individuals aged 50 and older with FICA wages above $150,000 in 2025 are required to put their catch-up contributions into a Roth account.
  • Pros: Plan participants can withdraw as soon as they are retired at any age, they do not have to wait until age 59 ½ as with 401(k) and 403(b) plans.
  • Cons: 457 plans do not have the same kind of employer match as a 401(k) plan. While employers can contribute to the plan, it’s only up to the combined limit for individual contributions.
  • Usually best for: Employees of governmental agencies.

Pension Plans (Defined Benefit Plans)

These plans, more commonly known as pension plans, are retirement plans provided by the employer where an employee’s retirement benefits are calculated using a formula that factors in age, salary, and length of employment.

  • Income taxes: Deferred; assessed on distributions from the plan in retirement.
  • Contribution limit: Determined by an enrolled actuary and the employer.
  • Pros: Provides tax benefits to both the employer and employee and provides a fixed payout upon retirement that many retirees find desirable.
  • Cons: These plans are increasingly rare, but for those who do have them, issues can include difficulty realizing or accessing benefits if you don’t work at a company for long enough.
  • Usually best for: Companies that want to provide their employees with a “defined” or pre-determined benefit in their retirement years.
  • To consider: These plans are becoming less popular because they cost an employer significantly more in upkeep than a defined contribution plan such as a 401(k) program.

Profit-Sharing Plans (PSPs)

A Profit-Sharing Plan is a retirement plan funded by discretionary employer contributions that gives employees a share in the profits of a company.

  • Income taxes: Deferred; assessed on distributions from the account in retirement.
  • Contribution Limit: The lesser of 25% of the employee’s compensation or $70,000 in 2025 (On top of that, people 50 and older are allowed to contribute an additional $7,500 in 2025. And people ages 60 to 63 can make a higher contribution of $11,250 in 2025 under SECURE 2.0.) In 2026, the contribution limit is $72,000 or 25% of the employee’s compensation, whichever is less. Those 50 and up can contribute an extra $7,500 in 2025 and $8,000 in 2026. And people ages 60 to 63 can once again make a higher contribution of $11,250 in 2026 under SECURE 2.0.
  • Pros: An employee receives a percentage of a company’s profits based on its earnings. Companies can set these up in addition to other qualified retirement plans, and make contributions on a completely voluntary basis.
  • Cons: These plans put employees at the mercy of their employers’ profits, unlike retirement plans that allow employees to invest in securities issued by other companies.
  • Usually best for: Companies who want the flexibility to contribute to a PSP on an ad hoc basis.
  • To consider: Early withdrawal from the plan is subject to penalty.

Employee Stock Ownership Plans (ESOPs)

An Employee Stock Ownership Plan is a qualified defined contribution plan that invests in the stock of the sponsoring employer.

  • Income taxes: Deferred. When an employee leaves a company or retires, they receive the fair market value for the stock they own. They can either take a taxable distribution or roll the money into an IRA.
  • Contribution limits: Allocations are made by the employer, usually on the basis of relative pay. There is typically a vesting schedule where employees gain access to shares in one to six years.
  • Pros: Could provide tax advantages to the employee. ESOP plans also align the interests of a company and its employees.
  • Cons: These plans concentrate risk for employees: An employee already risks losing their job if an employer is doing poorly financially, by making some of their compensation employee stock, that risk is magnified. In contrast, other retirement plans allow an employee to invest in stocks in other securities that are not tied to the financial performance of their employer.

Federal Employees Retirement System (FERS)

The Federal Employees Retirement System (FERS) consists of three government-sponsored retirement plans: Social Security, the Basic Benefit Plan, and the Thrift Savings Plan.

The Basic Benefit Plan is an employer-provided pension plan, while the Thrift Savings Plan is most comparable to what private-sector employees can receive.

  • Income Taxes: Contributions to the Thrift Savings Plan are made before taxes and grow tax-free until withdrawal in retirement.
  • Contribution Limit: The contribution limit for employees is $23,500 in 2025, and the combined limit for all contributions, including from the employer, is $70,000. In 2026, the employee contribution limit is $24,500, and the combined limit for contributions, including those from the employer, is $72,000. Also, those 50 and over are eligible to make an additional $7,500 in “catch-up” contributions in 2025 and an additional $8,000 in 2026. And in both 2025 and 2026, those ages 60 to 63 can make a higher catch-up contribution of $11,250 under the SECURE 2.0 Act.
  • Pros: These government-sponsored plans are renowned for their low administrative fees and employer matches.
  • Cons: Only available for federal government employees.
  • Usually best for: Federal government employees who will work at their agencies for a long period; it is comparable to 401(k) plans in the private sector.

Cash-Balance Plans

This is another type of pension plan that combines features of defined benefit and defined contribution plans. They are sometimes offered by employers that previously had defined benefit plans. The plans provide an employee an “employer contribution equal to a percent of each year’s earnings and a rate of return on that contribution.”

  • Income Taxes: Contributions come out of pre-tax income, similar to 401(k).
  • Contribution Limit: The plans combine a “pay credit” based on an employee’s salary and an “interest credit” that’s a certain percentage rate; the employee then gets an account balance worth of benefits upon retirement that can be paid out as an annuity (payments for life) or a lump sum. Limits depend on age, but for those over 60, they can be more than $250,000.
  • Pros: Can reduce taxable income.
  • Cons: Cash-balance plans have high administrative costs.
  • Usually best for: High earners, business owners with consistent income.

Nonqualified Deferred Compensation Plans (NQDC)

These are plans typically designed for executives at companies who have maxed out other retirement plans. The plans defer payments — and the taxes — you would otherwise receive as salary to a later date.

  • Income Taxes: Income taxes are deferred until you receive the payments at the agreed-upon date.
  • Contribution Limit: None
  • Pros: The plans don’t have to be entirely geared around retirement. While you can set dates with some flexibility, they are fixed.
  • Cons: Employees are not usually able to take early withdrawals.
  • Usually best for: Highly-paid employees for whom typical retirement plans would not provide enough savings compared to their income.

Individual Retirement Accounts (IRAs)

Common Individual Retirement Accounts (IRA)
Type of Retirement Plan Pro Con
IRA Contributions may be tax deductible Penalty for withdrawing funds before age 59 ½
Roth IRA Distributions are not taxed Not available for individuals with high incomes
Payroll Deduction IRA Automatically deposits money from your paycheck into the account Participants can’t borrow against the plan

Traditional IRA

Traditional individual retirement accounts (IRAs) are managed by the individual policyholder.

With an IRA, you open and fund the IRA yourself. As the name suggestions, it is a retirement plan for individuals. This is not a plan you join through an employer.

  • Income Taxes: You may receive an income tax deduction on contributions (depending on your income and access to another retirement plan through work). The balance in the IRA is tax-deferred, and withdrawals will be taxed (the amount will vary depending on whether contributions were deductible or non-deductible).
  • Contribution Limit: In 2025, the contribution limit is $7,000, or $8,000 for people 50 and older. In 2026, the contribution limit is $7,500, or $8,600 for people 50 and older.
  • Pros: You might be able to lower your tax bill if you’re eligible to make deductible contributions. Additionally, the money in the account is tax-deferred, which can make a difference over a long period of time. Finally, there are no income limits for contributing to a traditional IRA..
  • Cons: Traditional IRAs come with a number of restrictions, including how much can be contributed and when you can start withdrawals without penalty. Traditional IRAs are also essentially a guess on the tax rate you will be paying when you begin withdrawals after age 59 ½, as the money in these accounts are tax-deferred but are taxed upon withdrawal. Also, traditional IRAs generally mandate withdrawals starting at age 73.
  • Usually best for: People who can make deductible contributions and want to lower their tax bill, or individuals who earn too much money to contribute directly to a Roth IRA. Higher-income earners might not get to deduct contributions from their taxes now, but they can take advantage of tax-deferred growth between now and retirement. An IRA can also be used for consolidating and rolling over 401(k) accounts from previous jobs.
  • To consider: You may be subject to a 10% penalty for withdrawing funds before age 59 ½. As a single filer, you cannot deduct IRA contributions if you’re already covered by a retirement account through your work and earn more (according to your modified gross adjusted income) than $89,000 or more in 2025, with a phase-out starting at more than $79,000, and $91,000 or more in 2026, with a phase-out starting at more than $81,000.

Roth IRA

A Roth IRA is another retirement plan for individuals that is managed by the account holder, not an employer.

  • Income Taxes: Roth IRA contributions are made with after-tax money, which means you won’t receive an income tax deduction for contributions. But your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.
  • Contribution Limit: In 2025, the contribution limit is $7,000, or $8,000 for those 50 and up. In 2026, the contribution limit is $7,500, or $8,600 for those 50 and up.
  • Pros: While contributing to a Roth IRA won’t lower your tax bill now, having the money grow tax-free and being able to withdraw the money tax-free down the road could provide value in the future.
  • Cons: Like a traditional IRA, a Roth IRA has tight contribution restrictions. Unlike a traditional IRA, it does not offer tax deductions for contributions. As with a traditional IRA, there’s a penalty for taking some kinds of distributions before age 59 ½.
  • Usually best for: Someone who wants to take advantage of the flexibility to withdraw from an account during retirement without paying taxes. Additionally, it can be especially beneficial for people who are currently in a low income-tax bracket and expect to be in a higher income tax bracket in the future.
  • To consider: To contribute to a Roth IRA, you must have an earned income. Your ability to contribute begins to phase out when your income as a single filer (specifically, your modified adjusted gross income) reaches $150,000 in 2025, and $153,000 in 2026. As a married joint filer, your ability to contribute to a Roth IRA begins to phase out at $236,000 in 2025, and $242,000 in 2026.

Payroll Deduction IRAs

This is either a traditional or Roth IRA that is funded through payroll deductions.

  • Income Taxes: For a Traditional IRA, you may receive an income tax deduction on contributions (depending on income and access to a retirement plan through work); the balance in the IRA will always grow tax-deferred, and withdrawals will be taxed (how much is taxed depends on if you made deductible or non-deductible contributions). For a Roth IRA, contributions are made with after-tax money, your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.
  • Contribution Limit: In 2025, the limit is $7,000, or $8,000 for those 50 and older. In 2026, the limit is $7,500, or $8,600 for those 50 and older.
  • Pros: Automatically deposits money from your paycheck into a retirement account.
  • Cons: The employee must do the work of setting up a plan, and employers can not contribute to it as with a 401(k). Participants cannot borrow against the retirement plan or use it as collateral for loans.
  • Usually best for: People who do not have access to another retirement plan through their employer.
  • To consider: These have the same rules as a Traditional IRA, such as a 10% penalty for withdrawing funds before age 59 ½. Only employees can contribute to a Payroll Deduction IRA.

Self-Employed and Small Business Plans

Solo 401(k)

A Solo 401(k) plan is essentially a one-person 401(k) plan for self-employed individuals or business owners with no employees, in which you are the employer and the employee. Solo 401(k) plans may also be called a Solo-k, Uni-k, or One-participant k.

  • Income Taxes: The contributions made to the plan are tax-deductible.
  • Contribution Limit: $23,500 in 2025 and $24,500 in 2026, or 100% of your earned income, whichever is lower, plus “employer” contributions of up to 25% of your compensation from the business. The 2025 total cannot exceed $70,000, and the 2026 total cannot exceed $72,000. (On top of that, people 50 and older are allowed to contribute an additional $7,500 in 2025 and $8,000 in 2026. In 2025 and 2026, those ages 60 to 63 can contribute a higher catch-up amount of $11,250 under the SECURE 2.0 Act .)
  • Pros: A solo 401(k) retirement plan allows for large amounts of money to be invested with pre-tax dollars. It provides some of the benefits of a traditional 401(k) for those who don’t have access to a traditional employer-sponsored 401(k) retirement account.
  • Cons: You can’t open a solo 401(k) if you have any employees (though you can hire your spouse so they can also contribute to the plan as an employee — and you can match their contributions as the employer).
  • Usually best for: Self-employed people with enough income and a large enough business to fully use the plan.

SIMPLE IRA(Savings Incentive Match Plans for Employees)

A SIMPLE IRA plan is set up by an employer, who is required to contribute on employees’ behalf, although employees are not required to contribute.

  • Income Taxes: Employee contributions are made with pre-tax dollars. Additionally, the money will grow tax-deferred and employees will pay taxes on the withdrawals in retirement.
  • Contribution Limit: $16,500 in 2025 and $17,000 in 2026. Employees aged 50 and over can contribute an extra $3,500 in 2025 and $4,000 in 2026, bringing their total to $20,000 in 2025 and $21,000 in 2026. In 2025 and 2026, under the SECURE 2.0 Act, people ages 60 to 63 can contribute a higher catch-up amount of $5,250.
  • Pros: Employers contribute to eligible employees’ retirement accounts at 2% their salaries, whether or not the employees contribute themselves. For employees who do contribute, the company will match up to 3%.
  • Cons: The contribution limits for employees are lower than in a 401(k) and the penalties for early withdrawals — up to 25% for withdrawals within two years of your first contribution to the plan — before age 59 ½ may be higher.
  • To consider: Only employers with less than 100 employees are allowed to participate.

Recommended: Comparing the SIMPLE IRA vs. Traditional IRA

SEP IRA (Simplified Employee Pension)

This is a retirement account established by a small business owner or self-employed person for themselves (and if applicable, any employees).

  • Income Taxes: Your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on withdrawals in retirement.
  • Contribution Limit: For 2025, $70,000 or 25% of earned income, whichever is lower; for 2026, $72,000 or 25% of earned income, whichever is lower.
  • Pros: Higher contribution limit than IRA and Roth IRAs, and contributions are tax deductible for the business owner.
  • Cons: These plans are employer contribution only and greatly rely on the financial wherewithal and available cash of the business itself.
  • Usually best for: Self-employed people and small business owners who wish to contribute to an IRA for themselves and/or their employees.
  • To consider: Because you’re setting up a retirement plan for a business, there’s more paperwork and unique rules. When opening an employer-sponsored retirement plan, it generally helps to consult a tax advisor.

Multiple Employer Plans (MEPs)

A multiple employer plan (MEP) is a retirement savings plan offered to employees by two or more unrelated employers. It is designed to encourage smaller businesses to share the administrative burden of offering a tax-advantaged retirement savings plan to their employees. These employers pool their resources together to offer a defined benefit or defined contribution plan for their employees.

Administrative and fiduciary responsibilities of the MEP are performed by a third party (known as the MEP Sponsor), which may be a trade group or an organization that specializes in human resources management.

Other Types of Retirement Accounts

Guaranteed Income Annuities (GIAs)

Guaranteed Income Annuities are products sold by insurance companies. They are similar to the increasingly rare defined benefit pensions in that they have a fixed payout that will last until the end of life. These products are generally available to people who are already eligible to receive payouts from their retirement plans.

  • Income Taxes: If the annuity is funded by 401(k) benefits, then it is taxed like income. Annuities purchased with Roth IRAs, however, have a different tax structure. For “non-qualified annuities,” i.e. annuities purchased with after-tax income, a formula is used to determine the taxes so that the earnings and principal can be separated out.
  • Contribution Limit: Annuities typically do not have contribution limits.
  • Pros: These are designed to allow for payouts until the end of life and are fixed, meaning they’re not dependent on market performance.
  • Cons: Annuities can be expensive, often involving significant fees or commissions.
  • Usually best for: People who have high levels of savings and can afford to make expensive initial payments on annuities.

Cash-Value Life Insurance Plan

Cash-value life insurance typically covers the policyholder’s entire life and has tax-deferred savings, making it comparable to other retirement plans. Some of the premium paid every month goes to this investment product, which grows over time.

  • Income Taxes: Taxes are deferred until the policy is withdrawn from, at which point withdrawals are taxed at the policyholder’s current income tax rate.
  • Contribution Limit: The plan is drawn up with an insurance company with set premiums.
  • Pros: These plans have a tax-deferring feature and can be borrowed from.
  • Cons: While you may be able to withdraw money from the plan, this will reduce your death benefit.
  • Usually best for: High earners who have maxed out other retirement plans.

Specific Benefits to Consider

As you’re considering the different types of retirement plans, it’s important to look at some key benefits of each plan. These include:

  • the tax advantage
  • contribution limits
  • whether an employer will add funds to the account
  • any fees associated with the account

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

Determining Which Type of Retirement Plan Is Best for You

Depending on your employment circumstances, there are many possible retirement plans in which you can invest money for retirement. Some are offered by employers, while other retirement plans can be set up by an individual. Brian Walsh, a CFP® at SoFi, says “a mixture of different types of accounts help you best plan your retirement income strategy down the road.”

Likewise, the benefits for each of the available retirement plans differ. Here are some specific benefits and disadvantages of a few different plans to consider.

With employer-offered plans like a 401(k) and 403(b), you have the ability to:

  • Take them with you. If you leave your job, you can roll these plans over into a plan with a new employer or an IRA.
  • Possibly get an employer match. With some of these plans, an employer may match a certain percentage or amount of your contributions.
  • With retirement plans not offered by employers, like a SEP IRA, you may get:
  • A wider variety of investment options. You might have more options to choose from with these plans.
  • You may be able to contribute more. The contribution limits for some of these plans may be higher.

Despite their differences, the many different types of retirement accounts all share one positive attribute: utilizing and investing in them is an important step in saving for retirement.

Because there are so many retirement plans to choose from, it may be wise to talk to a financial professional to help you decide your financial plan.

Can You Have Multiple Types of Retirement Plans?

You can have multiple retirement savings plans, whether employer-provided plans like a 401(k), IRAs, or annuities. Having various plans can let you take advantage of the specific benefits that different retirement savings plans offer, thus potentially increasing your total retirement savings.

Additionally, you can have multiple retirement accounts of the same type; you may have a 401(k) at your current job while also maintaining a 401(k) from your previous employer.

Nonetheless, there are limitations on the tax benefits you may be allowed to receive from these multiple retirement plans. For example, the IRS does not allow individuals to take a tax deduction for traditional IRA contributions if they also have an employer-sponsored 401(k).

Opening a Retirement Investment Account With SoFi

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Easily manage your retirement savings with a SoFi IRA.

FAQ

Why is it important to understand the different types of retirement plans?

Understanding the different types of retirement plans is important because of the nuances of taxation in these accounts. The various rules imposed by the Internal Revenue Service (IRS) can affect your contributions, earnings, and withdrawals. And not only does the IRS have rules around taxation, but also about contribution limits and when you can withdraw money without penalties.

Additionally, the various types of retirement plans differ regarding who establishes and uses each account and the other plan rules. Ultimately, understanding these differences will help you determine which combination of retirement plans is best for you.

How can you determine which type of retirement plan is best for you?

The best type of retirement plan for you is the one that best meets your needs. Many types of retirement plans are available, and each has its own benefits and drawbacks. When choosing a retirement plan, some factors to consider include your age, investing time horizon, financial goals, risk tolerance, and the fees associated with a retirement plan.

Photo credit: iStock/damircudic

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

Mutual Funds (MFs): Investors should read and carefully consider the information contained in the prospectus, which contains the Mutual Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or SoFi's customer service at: 1.855.456.7634. Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risks. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may have tax implications.

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What Does Bullish and Bearish Mean in Investing and Crypto?

What Does Bullish and Bearish Mean in Investing?

By | Growing Wealth, invest, Investing, Terminology | Comments Off on What Does Bullish and Bearish Mean in Investing?

Markets are often described as being either bullish vs. bearish. These are common terms used to refer to how a market is performing over a shorter or longer period of time. Investors can also be bullish or bearish on a specific stock, a sector, an asset class, or on the economy in general.

Read on to learn more about the definitions of bearish vs. bullish, where the terms bullish and bearish come from, and the bullish and bearish meaning for investors in stocks or other markets.

Key Points

  • A bull market features rising stock prices and high investor confidence.
  • Bear markets are generally marked by a 20% drop in stock prices and sustained low investor confidence.
  • Investor behavior in bull markets includes increased buying and holding of stocks.
  • In bear markets, investors tend to move to safer investments and may sell assets.
  • Diversifying investments and dollar cost averaging may help manage risks in bear and bull markets.

What’s the Difference Between Bullish and Bearish?

The main difference between bullish and bearish is whether investors expect prices to rise or fall. Bullish refers to stock market sentiment that the direction of the overall market will go up, while bearish refers to sentiment that the direction of securities or the overall market will move down in price.

What Does Bullish Mean?

Bullish refers to stock market sentiment that the direction of the overall market will go up. A market that is increasing in value over a long period of time is said to be in a bull market. A bullish trend means that there may be an upward trend in prices for an asset.

For investors, being bullish means they feel positive about a stock, index, or the overall stock market. For example, if an investor says they are bullish on Stock X, the investor expects the market value of Stock X to increase in the long-term. That bullishness may even compel the investor to buy more shares of the company.

A bullish market is generally one where prices go up by 20% from a previous low for a sustained period.

What Does Bearish Mean?

Bearish refers to a sentiment that the direction of securities or the overall market will move down in price. An investor characterized as a bear believes the stock market will decrease in value, even if current prices are going up. An investor investing in a bearish market may even sell shares of their portfolio if they believe the market will turn negative.

A bear market is one that has fallen 20% from recent highs and remains below that threshold for at least two months. Since investors are bearish during this period, there may be lower trading activity.

Where Do the Terms Bullish and Bearish Come From?

While there are several theories as to the origins of bullish vs. bearish. The consensus believes the difference between bullish and bearish reflects the way each animal responds when they attack. When a bull goes into attack mode, it races at its target with confidence. In a bull market, investors are confident that stock prices will rise and correspondingly, the value of the market will trend upward.

When bears attack, they swipe their paws in a downward motion and often in fear. That is why in a bear market, prices drop. When investors are bearish, they do not have confidence in stocks and usually end up selling off some of their investments.

How Bullish Markets Can Impact Investors

In a bull market, demand is greater than supply. There are many investors who want to buy stocks while only a few are willing to sell. Bullish traders tend to have long positions in stocks or other assets.

How Bearish Markets Can Impact Investors

In a bear market, supply is greater than demand — and investors may look to offload their shares when there is not a lot of demand for market participants to buy. As a result, share prices decrease. A bear market is challenging for investors because stock prices keep falling, and that means more losses in an investment portfolio.

Your first instinct may be to sell in a bear market, but to increase chances of securing a profit in the long-term, it may make more sense to remain invested. Bear markets do not last forever.

Still, some investors prefer to adjust their investments in a bear market, turning to defensive stocks like consumer staples, healthcare, or utilities. They also may consider going into safer investments like bonds that offer stable fixed-income.

Bear markets can also present a good buying opportunity for investors who use dollar-cost averaging. This involves investing a fixed amount of money consistently. This way, investors can purchase stocks at a more affordable price.

Tips on Withstanding Bullish vs Bearish Markets

One of the best investing strategies during a bull or bear market is diversification. Diversifying your investment portfolio with different securities in a variety of different industries — along with various asset classes that may fare better in bear vs. bull markets — can help protect a portfolio by potentially minimizing losses and maximizing gains over the long-term.

Diversification means buying shares of companies in different sectors and companies of different sizes, rather than just investing in a select few of stocks, and also investing in different types of assets, such as low-risk bonds as well as stocks.

Stock Market

Investors who are not sure how to pick individual stocks can purchase an exchange-traded fund (ETF) or index fund, which are pre-selected baskets of securities all in one investment vehicle. For example, investors who own a fund that follows the S&P 500 will see their investments perform in line with that index.

In an ETF, investors own hundreds of companies, which means they don’t need to painstakingly choose one or two companies, rather, they own the entire index. Investing in these types of securities may be a strategy that utilizes diversification principles to help protect value.

The Takeaway

A market doesn’t necessarily have to be either bearish or bullish. It can actually be neither. The stock market can be in a state that is relatively flat. This may mean there are normal market fluctuations leading to either small gains or small losses.

Even if markets experience a sharp decline or rise in the short-term, this still cannot be defined as bearish or bullish because bull and bear markets are maintained over a period of time.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

FAQ

Does being bearish mean that you want to sell your assets?

“Bearish” means general pessimism about the direction of the market. In some cases, people are not even aware of a bear market until it’s over because it’s difficult to predict the direction of the markets. Investors who are invested for the long run do not pay attention to the peaks and troughs of the market and may take a dollar-cost averaging approach by investing consistently over time in both bear and bull markets.

How can you tell if a market is bearish or bullish?

Predicting and timing the markets is a challenging task. However, if stock prices have fallen by more than 20% from their recent peaks, and remained there for more than two months, that’s typically considered a bear market. A sustained increase in prices is a bull market.

Photo credit: iStock/NoSystem images

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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


¹Probability of member receiving $1,000 is 0.026%. If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease.

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How Bid and Ask Price Work in Trading

Bid and Ask Price: Definition, Example, How It Works

By | Growing Wealth, invest, Investing | Comments Off on Bid and Ask Price: Definition, Example, How It Works

Bid and ask are commonly used investing terms, and they refer to the best potential price at which a security on the market could be bought or sold for at any given time. In other words, the best price that buyers and sellers would potentially be willing to buy (the “bid” price) or sell (the “ask” or offer price) the asset.

It’s important for traders to understand the bid vs. ask price of a security, as well as the difference between the two, which is known as the bid-ask spread. The market price is a historical price: the price of the last trade that occurred with the security. The bid and ask prices, on the other hand, show what buyers and sellers would be willing to trade the security for now.

Key Points

  • The bid price is the highest price a buyer is willing to pay for a security, reflecting market demand.
  • The ask price is the lowest price a seller is willing to accept, representing market supply.
  • The bid-ask spread, the difference between bid and ask prices, serves as a transaction cost and indicates market liquidity.
  • Narrow bid-ask spreads suggest high liquidity and trading volume, while wider spreads indicate lower liquidity.
  • Investors use the bid-ask spread to assess market sentiment and risk, with narrower spreads indicating lower risk.

What Is Bid and Ask?

If you’re new to online investing or investing in stocks, you’re probably wondering about bid and ask prices. Bid and ask prices show the current market supply and demand for the security. The bid price represents demand for a security; the ask price represents supply.[1]

When an asset has high liquidity — i.e. the market has a high trading volume not dominated by selling — the bid and ask prices will be fairly close. In other words the bid-ask spread, or the difference between the bid and ask prices, will be narrow in a highly liquid market. When there’s a greater gap between demand and supply, the spread will be wider.

That’s why the bid-ask spread is often considered a gauge of liquidity.

Bid Price

The bid price is the best potential price that retail investors would be willing to pay to buy a security.

So if a trader wants to sell a security, they would want to know how much they’d be able to sell it for. They can find out the best price they could get for the security by looking at the current bid price in the market, which would show the highest potential amount they could get for it.

Ask Price

Conversely, ask price is the lowest price investors are willing to sell a security for at any given time. If a trader wants to buy a security, they want to get the lowest possible price, so they look at the ask price to find out what that is.

Example of Bid and Ask Price

Let’s imagine that an investor wants to buy Stock X at the quoted price of $75, so they plan to buy 10 shares for $750. But they end up paying $752. That’s not an error, but rather because the ask price (the selling price) is $75.20.

Here’s the breakdown:

Quoted Price Ask Price Shares Purchased Total Paid
$75.00 $75.20 10 $752

The current price of $75 per share is the last traded price. But prices can change quickly, and in this case the ask price was 20 cents higher. The bid or buyer’s price is almost always lower than the ask price.

Investors can use limit orders to set specific parameters around the price at which they’re willing to buy or sell a security. This can give investors some control, so they’re not simply paying the current price, which may or may not be advantageous.

Evaluating the bid-ask spread can be part of an investor’s due diligence when trying to gauge rates of return for different securities.

What the Bid-Ask Spread Signals

How far apart the ask price and bid price are can give you a sense of how the market views a particular security’s worth.

If the bid price and ask price are fairly close together, that suggests that buyers and sellers are more or less in agreement on what a security is worth. On the other hand, if there’s a wider spread between the bid and ask price, that might signal that buyers and sellers don’t necessarily agree on a security’s value.

How Are Bid and Ask Prices Determined?

Essentially it’s the supply and demand of the market that sets the bid and ask prices. And many factors can play into supply vs. demand. Because of this, investors who are interested in active investing can use the difference in price between the bid and the ask of a security to gauge what the market thinks the security is worth.

Investors and market-makers can place buy or sell orders at a price they set. These orders will be fulfilled if someone is willing to sell or buy the security at that bid or ask price. Those order placements determine the bid and ask price.

What’s the Difference Between Bid and Ask Prices?

In any market, from stocks to real estate to lemonade stands, there is almost always a difference between what someone is willing to pay for an item versus what someone wants to sell it for.

A buyer may want to buy a house for $300,000, but the seller is selling it for $325,000. An investor may want to buy a stock for $100, but the sell or ask price is $105.

That difference in price is called the spread, and when the spread is narrow it’s a lot easier to close the sale. When the spread is wider, there is a bigger gap between what the buyer thinks an item is worth vs. what the seller thinks it’s worth.

What Does It Mean When Bid and Ask Are Close?

A narrow spread, i.e. when the bid and ask price are close, means traders will be able to buy and sell the security at roughly the same price. This generally means there is a high trading volume for the security, with a lot of people willing to buy and sell because of high demand.

If demand increases for the security, the bid and ask prices will move higher, and vice versa. If there is a surge in demand, but not enough supply, that might drive the bid price up. Conversely, if supply outpaces demand, the bid price of a security could fall In either case, the spread would likely get wider when the bid or the ask prices outweighs the other.

The Bid-Ask Spread

The bid-ask spread is the gap between the two prices: the bid or buyer’s price and the ask or offer price. There are different factors that can affect a stock’s spread, including:

  • Liquidity. A measure of how easily a stock or security can be bought and sold or converted to cash. The more liquid an investment is, the closer the bid and ask price may be, since the market is in agreement about what the security is worth.
  • Trading volume. This means how many shares of a stock or security are traded on a given day. As with liquidity, the more trading volume a security has, the closer together the bid and ask price are likely to be.
  • Volatility. A way of gauging how rapidly a stock’s price moves up or down. When there are wider swings in a stock’s price, i.e. more volatility, the bid-ask price spread can also be wider as market makers attempt to profit from the price changes.

Who Benefits From the Bid-Ask Spread?

The difference in price between the bid and the ask is where brokers and market makers make their profit.

But traders can also benefit from the bid-ask spread, if they use limit orders to get the best possible price on a desired trade, as opposed to using market orders.

How the Bid-Ask Spread Is Used

When you understand how bid-ask spread works, you can use that to invest strategically and manage the potential for risk. This means different things whether you are planning to buy, sell, or hold a stock.

If you’re selling stocks, that means getting the best bid price; when you’re buying, it means paying the best ask price. Essentially, the goal is the same as with any other investing strategy: to buy low and sell high.

Bid-Ask Spread Impact on Trading Profits

Naturally, the bid-ask spread impacts trading profits, and in fact can act almost as a hidden cost.

For example, if an investor places a market order on a stock with a bid price of $90 and an ask price of $91, they’ll get the stock at $91 per share. If the price of the stock rises 5%, so the bid price is now $94.50 and the ask price is $95.55 and the bid-ask spread is $1.05.

If the investor decides to sell the shares they bought at $91 through a market order, they will receive $94.50 per share. So their profit is $3.50 per share, even though the stock price rose by $4.55. The $1.05 gap in profit reflects the $1.05 bid-ask spread on this stock.

Wide vs Narrow Bid-Ask Spread

What is the difference between wide and narrow bid-ask spreads, and what is the significance of each? Here’s a rundown.

Narrow Bid-Ask Spreads

The bid-ask spread, often just called the spread, is tighter when a security has more liquidity, i.e. there’s higher trading volume for that stock. When you think of big companies, industry leaders, constituents of different indexes like the Dow Jones or the S&P 500, those companies may have higher volume and narrower spreads.

Wider Bid-Ask Spreads

Conversely, smaller companies or those that aren’t in demand tend to have wider spreads, reflecting a lower level of market interest. These trades tend to be more expensive, as investors must contend with lower liquidity.

Impact of the Bid-Ask Spread

The narrower the bid-ask spread, the more favorable it is for traders. If an investor wants to buy 100 shares of Stock A at $60, but shares are being offered at $60.25, that 25 cent spread may not seem like much. It would add up to $25 (100 x 0.25). But if that trader wanted to buy 500 shares or more, the cost of the spread is about $125.

The Takeaway

Bid and ask prices help traders know exactly how much they may buy and sell securities for. The bid price is the highest price a buyer is willing to pay for a security. The ask price is the lowest price a seller is willing to accept. The difference between them is the bid-ask spread, or “spread.” The spread ends up being a transaction cost, as market makers pocket the cost of the spread.

Since the bid price and the ask price are essentially a function of supply and demand in the market, investors can consider the bid-ask spread as a gauge of risk. The narrower the spread, the more aligned buyers and sellers are on the value of a certain security, and thus there’s higher volume and more liquidity — and lower risk to the investor that the stock or security might lose value (although it could, as there are no guarantees).

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

FAQ

Do I buy a stock at the bid or ask price?

You buy a stock at the ask price, that’s the lowest price the seller is willing to offer.

Is the last price the same as the market price?

The last price is the last traded price for a security, or the last price at which it closed. The market price is the best current price.

Is it better if your bid is higher than the asking price?

The bid price is typically lower than the seller’s price or ask price, so it would be unusual if the bid was higher than the ask. If a bid price is higher than the ask, a trade would occur, but it would put the buyer at risk of a potential loss.

About the author

Laurel Tincher

Laurel Tincher

Laurel Tincher is an entrepreneur and investor with a passion for climate solutions, emerging industries, and storytelling. With experience spanning climate tech, blockchain, event production, and other industries, she is known for her creative and forward-thinking approach to problem-solving and strategic investments. Read full bio.

Article Sources
  1. Investor.gov. Bid Price/Ask Price.

Photo credit: iStock/eclipse_images

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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


¹Probability of member receiving $1,000 is 0.026%. If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease.

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A woman sits at a desk, looking at spreadsheets and charts printed out and on her laptop, calculating initial vs. maintenance margin for her account.

Similarities and Differences Between Initial and Maintenance Margin

By | Growing Wealth, invest, Investing | Comments Off on Similarities and Differences Between Initial and Maintenance Margin

Margin trading, the practice of using borrowed funds to place bigger trades, comes with strict requirements, including the amount of cash required to place a margin trade (initial margin), and how much cash or equity as collateral must remain in the account (maintenance margin).

The two requirements are similar in that they both refer to the amount of collateral the broker requires an investor to have in their account in order to open or maintain a position with a margin loan.

The main difference between the two is that the initial margin is the amount of money required to open a position, while the maintenance margin is the amount needed to keep one or more positions open.

Key Points

•   Initial margin is the amount of money required to open a position, while maintenance margin is the amount needed to keep one or more positions open.

•   The Federal Reserve Board’s Regulation T mandates a minimum initial margin deposit of 50% for stock purchases.

•   FINRA sets the minimum maintenance margin requirement at 25% of the total market value of securities bought on margin.

•   Both initial margin and maintenance margin function as collateral required by the broker to cover potential losses from a margin loan.

•   If an investor’s equity drops below the maintenance margin, the broker may issue a margin call or sell assets to restore the required balance.

What Is Initial Margin?

Because margin trading is considered a higher-risk strategy, whether you’re investing online or through a traditional brokerage, only investors that meet certain criteria and follow specific requirements before they can trade on margin.

To open a margin account, investors must deposit 50% of the securities they want to buy, or $2,000, whichever is larger. In addition, investors must pass a basic screening and meet certain criteria (e.g., investment knowledge, credit history, etc.). Once the margin account is established, investors must provide initial margin for each subsequent trade.

Initial Margin Requirements

Initial margin is the minimum amount of cash or collateral an investor must deposit in a margin account in order to buy securities on margin.

The Federal Reserve Board’s Regulation T requires a minimum initial margin deposit of 50% for stock purchases. Meaning: Investors must have cash or collateral to cover at least half of the market value of stocks they buy on margin.

However, Regulation T only sets the minimum for margin accounts. Stock exchanges and brokerage firms can set their initial margin requirement higher than 50% based on a stock’s volatility, the state of the markets, or other considerations.

How Initial Margin Works

If you meet the initial margin requirement of having 50% in cash or equity as collateral, your broker may provide you with a margin loan to cover the rest of the trade’s purchase price. For example, if an investor wants to purchase $6,000 of stock, then the investor will have to cover an initial margin of $3,000 with cash or other equity and borrow $3,000 from the broker to make the trade.

Investors use margin trading as a way to increase their buying power. In the example above, if the investor bought the same amount of stock in a cash account, then they would need $6,000 in cash to make the trade. By using margin, the investor doubles their buying power by using only $3,000 to buy $6,000 worth of stock.

However, using margin involves risk, and may lead to more significant losses than buying stock directly in a cash account. If a trade declines below the threshold, investors will need to bring it back up to effectively pay back the margin loan.

Recommended: Cash Account vs Margin Account: Key Differences

What Is Maintenance Margin?

Maintenance margin is the minimum amount of equity an investor must keep in their margin account after making a trade. The margin equity in the account is the value of securities minus the amount of the margin loan borrowed to make the trade. If the account’s equity falls below the maintenance margin, the broker may issue a margin call or close out the investor’s trade.

Maintenance Margin Requirements

Maintenance margin is usually expressed as a percentage of the position’s value. The Financial Industry Regulatory Authority (FINRA), which regulates maintenance requirements, says maintenance margin must be at least 25% of the total market value of the securities bought on margin. However, like initial margin, brokerage firms may have higher maintenance requirements, depending on various factors like market volatility and liquidity.

How Maintenance Margin Works

Suppose an investor purchased $6,000 worth of stock by paying $3,000 in cash and borrowing $3,000 from their broker, and the broker has a 25% maintenance margin requirement. If the market value of the stock drops from $6,000 to $5,000, the investor’s equity will now be $2,000 ($5,000 – $3,000 margin loan) and the maintenance margin will be $1,250 ($5,000 x 25%). In this case, the investor still has enough equity to cover the maintenance margin.

However, if the stock’s value drops to $3,500, the investor will no longer have enough equity to cover the maintenance margin requirement. The investor’s account has $500 in equity ($3,500 – $3,000), while the maintenance margin is $875 ($3,500 x 25%).

If the investor doesn’t restore the correct balance in the account within a few days, the broker may issue a margin call, requiring the investor to deposit additional funds into the account — or sell assets to increase the equity in the account.

The broker may also sell some of the investor’s holdings without notifying them to bring the account back up to the maintenance margin level.

The purpose of the maintenance margin is to protect the broker in case the value of the securities in the account falls.

Increase your buying power with a margin loan from SoFi.

Borrow against your current investments at just 4.75% to 9.50%* and start margin trading.

*For full margin details, see terms.

Initial Margin vs Maintenance Margin

Here’s a quick look at how initial margin and maintenance margin stack up:

Initial Margin vs Maintenance Margin
Initial Margin

 Maintenance Margin
50% minimum initial margin requirement regulated by the Federal Reserve Board’s Regulation T 25% minimum maintenance margin requirement regulated by FINRA
Initial margin is deposited at the start of a trade Maintenance margin is required for all open positions

Similarities

Initial margin and maintenance margin are similar in that they are both used as deposits to cover potential losses in a margin account. These margin requirements are each calculated as a percentage of the value of the account’s assets.

Additionally, both initial margin and maintenance margin can be increased or decreased by an exchange or brokerage firm, depending on a stock’s volatility, the financial situation of a client, and other factors.

In either case, a brokerage can set their own requirements for initial or maintenance margin.

Differences

The initial margin is the amount of cash or collateral an investor must deposit with a broker when buying or selling an asset on margin. In contrast, the maintenance margin is the minimum amount of equity an investor must maintain in their account to keep the account open and avoid a margin call. Another difference between the two is that initial margin is typically higher than maintenance margin.

Calculating Initial and Maintenance Margin

There are formulas for calculating both initial margin and maintenance margin.

Initial Margin Calculation

The formula for calculating initial margin is:

Initial margin = initial margin percentage x total purchase price of security

So, if a brokerage firm has an initial margin percentage of 65% and an investor wants to buy $10,000 worth of stock ABC, then the initial margin for that trade would equal $6,500:

$6,500 initial margin = 65% initial margin percentage x $10,000 total purchase price

In this scenario, the investor would need to have $6,500 in an account and borrow $3,500 with a margin loan.

Maintenance Margin Calculation

The formula to calculate maintenance margin is:

Maintenance margin = Total value of securities owned on margin x maintenance margin percentage

If a brokerage firm has a maintenance margin percentage of 30% and an investor holds $1,000 of stock XYZ (100 shares at $10 per share) in their margin account, then the maintenance margin would equal $300:

$300 = $1,000 x 30% maintenance margin percentage

In this scenario, the investor would need to have $300 in equity in their margin account to avoid being subject to a margin call.

The Takeaway

Understanding the similarities and differences between initial and maintenance margin is essential before investors can start trading on margin. Utilizing margin can help investors increase their buying power, but it comes with more risk, and the higher potential for losses.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


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

FAQ

Why is initial margin higher than maintenance margin?

The initial margin is higher because the Federal Reserve Board’s Regulation T sets a 50% minimum initial margin requirement, while FINRA sets a lower 25% minimum maintenance margin requirement.

How do you calculate maintenance margin?

Maintenance margin is the minimum equity an investor must have in the margin account after making a trade. Maintenance margin is expressed as a percentage of an investor’s total trade. Investors can calculate maintenance margin by multiplying the maintenance margin percentage by the total value of the margin account.

What is a margin call?

If the balance of cash or equity in an investor’s account falls below the required minimum maintenance margin, and if the investor doesn’t bring up the balance in a timely fashion, the brokerage can issue a margin call — demanding that the investor restore the maintenance margin, or selling off securities in the account to do so.

Photo credit: iStock/PeopleImages

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

Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC. For a full listing of the fees associated with Sofi Invest, see our fee schedule.

Trading securities on margin loans involves high risk and costs and is not suitable for all investors. It is possible to lose more than your initial investment when using margin. Please see more details at https://www.sofi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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.

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