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Q: What Is the Average Age of Retirement in the US?

The average age ofretirement from the workforcein the U.S. is 62, according to at least two recent studies.

Mar

2025

What Is the Average Retirement Age?

By MP Dunleavey | Budgeting & Goals, invest, Preparing for Retirement | Comments Off

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, 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.

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.

• 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.

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 You Should 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.

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.

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.

3 Steps to Start Preparing for Retirement

It’s not enough to have an idea of when you want to retire. To really reach that goal, it’s important to have a financial plan in place. These steps break down how to prepare for retirement.

Step 1: Estimate how much money you’ll need

One of the first steps a person could take toward their retirement saving journey is to estimate how much money they need to save. Besides the method outlined above, there is also a retirement savings formula that can help you estimate: Start with your current income, subtract your estimated Social Security benefits, and divide by 0.04. That’s the target number of retirement savings per year you’ll need.

Step 2: Set up retirement saving goals

It might be worth considering what retirement savings plans are available, whether that is an employer-sponsored 401(k), an IRA, or a savings account. Contributing regularly is key, even if big contributions can’t be made to retirement savings right now.

Making small additions to savings can add up, especially if extra money from finishing car payments, getting a holiday bonus, or earning a raise can be diverted to a retirement savings account. And periodically review the investments in your account, which may be mutual funds or exchange-traded funds (ETFs), to make sure they’re working for you.

If an employer offers a 401(k) match, it is typically beneficial to take advantage of that feature and contribute as much as the employer is willing to match.

Along with receiving free money from an employer, there are also tax benefits of contributing to a 401(k). Contributions to a 401(k) are pre-tax — that lowers taxable income, which means paying less in income taxes on each paycheck.

In addition, 401(k) contributions aren’t taxed when deposited, but they are taxed upon withdrawal. Withdrawing money early, before age 59 ½, also adds a 10% penalty.

Step 3: Open a Retirement Account

If access to an employer-sponsored 401(k) plan isn’t available — or even if it is — investors might want to consider opening an IRA account. For investors who need a little help sticking to a retirement savings plan, they could consider setting up an automatic monthly deposit from a checking or savings account into an IRA.

In 2024 and 2025, IRAs allow investors to put up to $7,000 a year into their account ($8,000 if they’re 50 and older). There are two options for opening an IRA — a traditional IRA or a Roth IRA, both of which have different tax advantages.

Traditional IRA

Any contributions made to a traditional IRA can be either fully or partially tax-deductible, and typically, earnings and gains of an IRA aren’t taxed until distribution.

Roth IRA

For Roth IRAs, earnings are not taxable once distributed if they are “qualified”—which means they meet certain requirements for an untaxed distribution.

Once you set up an IRA, you’ll need to choose investment vehicles for your funds. Investors who don’t have a lot of money to work with might consider something like fractional shares that allow individuals to invest in a portion of an ETF or share of stock, for instance.

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 2024 and 2025 are allowed on a 401(k), 403(b), or governmental 457(b). In 2025, those ages 60 to 63 can make a catch-up contribution up to $11,250, 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 be made on either a pre-tax or after-tax basis.

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.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

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.

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.

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.

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Feb

2025

When Can I Retire This Formula Will Help You Know_780x440

When Can I Retire Calculator

By Pam O’Brien | Budgeting & Goals, invest, Investing, Life & Career, Preparing for Retirement | No Comments

When it comes to figuring out when you can retire, there are a number of factors to consider: Social Security, inflation, and health care costs.

Thankfully, there’s retirement calculators for figuring out these costs, which might help you plan for the future. But first, to decide when you can retire, determine at what age you want to retire and then see how that decision affects your finances.

Key Points

• Factors to consider when deciding when to retire include Social Security benefits, inflation, and healthcare costs.

• The full retirement age for Social Security benefits varies based on birth year.

• Early retirement can result in reduced Social Security benefits, while delaying retirement can increase monthly benefits.

• Different retirement accounts have specific rules for withdrawals, such as Roth IRAs and traditional IRAs.

• Other sources of retirement income to consider include part-time work, pensions, inheritance, and rental income.

When Can You Get Full Social Security Benefits?

As you consider when to apply for Social Security, you’ll want to understand at what age the government allows people to retire with full Social Security benefits. Not only that, at what age can people start withdrawing from their retirement accounts without facing penalties? For Social Security, the rules are based on your birth year.

The Social Security Administration has a retirement age calculator . For example, people born between 1943 and 1954 could retire with full Social Security benefits at age 66.

Meanwhile, those born in 1955 could retire at age 66 and two months, and those born in 1956 could retire at age 66 and four months. Those born in or after 1960 can retire at age 67 to receive full benefits. This can help with your retirement planning.

Social Security Early Retirement

A recipient will be penalized if they retire before full retirement age. The earlier a person retires, the less they’ll receive in Social Security.

Let’s use Jane Doe as an example and say she was born in 1960, so full retirement age is 67. If she retires at age 66, she’ll receive 93.3% of Social Security benefits; age 65 will get Jane 86.7%. If she retires on her 62nd birthday — the earliest she can receive Social Security — she’ll only receive 70% of earnings.

Here’s a retirement planner table for those born in 1960, which shows how one’s benefits will be reduced with early retirement.

How Early Retirement Affects Your Social Security Benefits

Source: Social Security Administration

Social Security Late Retirement

If a person wants to keep working until after full retirement age, they could earn greater monthly benefits. This is helpful to know when choosing your retirement date.

For example, if the magic retirement number is 66 years but retirement is pushed back to 66 and one month, then Social Security benefits rise to 100.7% per month. So if your monthly benefit was supposed to be $1,000, but you wait until 66 years and one month, then your monthly allotment would increase to $1,007.

If retirement is pushed back to age 70, earnings go up to 132% of monthly benefits. But no need to calculate further: Social Security benefits stop increasing once a person reaches age 70. Here is a SSA table on delayed retirement .

💡 Quick Tip: You can’t just sit on the money you save in an IRA account forever. The government requires withdrawals each year, starting at age 73 (for those born in 1950 or later). These are called required minimum distributions or RMDs.

Other Retirement Income to Consider

In retirement, you may have other income sources that can help you support your lifestyle and pay the bills. These might include:

Part-Time Work

Working after retirement by getting a part-time job, especially if it’s one you enjoy, could help cover your retirement expenses. And as long as you have reached your full retirement age (which is based on your year of birth, as noted above), your Social Security benefits will not be reduced, no matter what your earnings are.

However, if you retire early, you need to earn under an annual limit, which is $22,320 in 2024, and $23,400 in 2025, to keep your full benefits. If you earn more than that, you’ll lose $1 in Social Security benefits for every $2 you earn over the limit.

Pension

A pension, also sometimes known as a defined benefits plan, from your employer is usually based on how long you worked at your company, how much you earned, and when you stopped working. You’ll need to be fully vested, which typically means working at the company for five years, to collect the entire pension. Check with the HR rep at your company to get the full details about your pension.

A pension generally gives you a set monthly sum for life or a lump sum payment when you retire.

Inheritance

If you inherit money from a relative, these funds could also help you pay for your retirement. And fortunately, receiving an inheritance won’t affect your Social Security benefits, because Social Security is based on money you earn.

Rental Income

Another potential money-earning idea: You could rent out a home you own, or rent out just the upper floors of the house you live in, for some extra income in retirement. Like an inheritance, rental income will not affect your social security benefits.

Major Expenses in Retirement

It’s important to draw up a budget for retirement to help determine how much money you might need. The amount may be higher than you realize. These are some of the major expenses retirees commonly face.

Healthcare

For most people, healthcare costs increase as they get older, as medical problems can become more serious or pervasive. According to Fidelity, the average amount that a couple who are both age 65 will spend on healthcare during their first year of retirement is $12,300.

Housing

Your mortgage, home insurance, and the costs of maintaining your house can be a significant monthly and yearly expense. In fact, Americans aged 65 and older spent $16,880 annually on housing during the years from 2016 to 2020, according to the Bureau of Labor Statistics.

Travel

If you’re planning to take trips in retirement, or even just drive to visit family, transportation costs can quickly add up. From 2016 to 2020, people over age 65 averaged about $7,062 in transportation costs a year.

When Can You Withdraw From Retirement Accounts?

Now let’s look at retirement accounts. Each type of account has different rules about when money can be taken out.

If a Roth IRA account has existed for at least five years, withdrawals from the account are usually okay after age 59 ½ without consequences. Taking out money earlier or withdrawing money from a Roth IRA that’s been open for fewer than five years could result in paying penalties and/or taxes.

There is a little wiggle room. Retirement withdrawal rules do have exceptions for issues like disability or educational expenses, and there is an option to withdraw money early and pay taxes or penalties.

If a person is at least 59 ½ and has a Roth IRA that is less than five years old, taxes will need to be paid upon withdrawal but not penalties. Taxes or penalties might not need to be paid at age 59 ½ and if the Roth IRA has been open for five years or more.

People with a traditional IRA can make withdrawals from ages 59 ½ to 72 without being penalized. The government will charge a 10% penalty on withdrawals before age 59.5, and depending on location, a state penalty tax might also be charged.

People with 401(k)s can typically retire by age 55 and make withdrawals without receiving a penalty. People with either a traditional IRA or 401(k) must start making withdrawals by age 72 or face a hefty penalty.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Test your understanding of what you just read.

The Takeaway

Deciding at what age to retire is a personal choice. However, by planning ahead for some common expenses, and understanding the age at which you can get full Social Security benefits, you can use a retirement calculator formula to figure out how much money you’ll need each year to live on. And you can supplement your Social Security benefits with other forms of income and by making smart decisions about savings and investments.

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

FAQ

How do I calculate my retirement age?

To calculate your full retirement age, which is the age you can receive your full retirement benefits, you can use the Social Security administration’s retirement age calculator . Essentially, if you were born in 1960 or later, your full retirement age is 67. For those born between 1954 and 1959, the full retirement age is between 66 and 67, depending exactly how old they are when they retire (such as age 66 and two months). And for those born between 1943 and 1954, full retirement age is 66.

The earlier you retire before your full retirement age, the less you’ll receive in benefits. Conversely, the longer you keep working, up to age 70, the more you can receive.

Can you legally retire before 55?

Yes, you can legally retire before age 55. However, your Social Security benefits typically won’t kick in until age 62. And even then, because you’ll be tapping into those benefits before your full retirement age of 66 or 67, you’ll get a reduced amount, or just 70%, of your benefits.

There is something called the rule of 55 that allows you to withdraw funds from a 401(k) or 403(b) at age 55 without paying a penalty. That may be something to look into if you’re planning to retire early.

Can you retire after 20 years of work?

In some lines of work, you can retire after 20 years on the job and likely get a pension. This includes those in the military, firefighters, police officers, and certain government employees.

That said, anyone in any industry can retire at any time. However, Social Security benefits don’t typically begin until age 62.

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

Jan

2025

How to Save for Retirement

By Pam O’Brien | Budgeting & Goals, invest, Preparing for Retirement | No Comments

Between paying for your regular expenses including groceries, rent or mortgage, student loans, and bills, it can seem nearly impossible to find a few dollars left over for saving for retirement — especially when that might be decades away. However, building up a nest egg isn’t just important, it’s urgent. The sooner you start, the more financially secure you should be by the time retirement rolls around.

So, how to save for retirement? Finding a solid retirement plan to suit your needs may be easier than you think. Here are 10 ways to save for retirement to help make those golden years feel, well, golden.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

Assess Your Retirement Goals and Needs

When it comes to saving for retirement, first do an inventory of your current financial situation. This includes your income, savings, and investments, as well as your expenses and debts. That way you’ll know how much you have now.

Next, figure out what you want your retirement to look like. Are you wondering how to retire early? Do you plan to travel? Move to a different location? Pursue hobbies like tennis, golf, or biking? Go back to school? Start a business?

You may not be able to answer these questions quickly or easily, but it’s important to think about them to determine your retirement goals. Deciding what you want your lifestyle to look like is key because it will affect how much money you’ll need for retirement saving.

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

Determine How Much You’ll Need to Retire

Now the big question: How much money will it take for you to retire comfortably? You may also be wondering, when can I retire? There are several retirement savings formulas that can help you estimate the amount of your nest egg. And there are various calculators that can help generate an estimate as well.

While using a ballpark figure may not sound scientific, it’s a good exercise that can help lay the foundation for the amount you want to save. And it may inspire you to save more, or rethink your investment strategy thus far.

As an example, you can use the following basic formula to gauge the amount you might need to save, assuming your retirement expenses are similar to your present ones. Start with your current annual income, subtract your estimated annual Social Security benefits, and divide by 0.04.

Example

Let’s say your income today is $100,000, and you went on the Social Security website using your MySSA account (the digital dashboard for benefits) to find out what your monthly benefits are likely to be when you retire: $2,000 per month, or $24,000 per year.

$100,000 – $24,000 = $76,000 / 0.04 = $1.9 million

That’s the target amount of retirement savings you would need, theoretically, to cover your expenses based on current levels. Bear in mind, however, that you may not need to replace 100% of your current income, as your expenses in retirement could be lower. And you may even be contemplating working after retirement. But this is one way to start doing the math.

10 Ways to Save For Retirement

So, how to save money for retirement? Consider the following 10 options part of your retirement savings toolkit.

1. Leverage the Power of Time

Giving your money as much time to grow as you possibly can is one of the most important ways to boost retirement savings. The reason: Compounding returns.

Let’s say you invest $500 in a mutual fund in your retirement account, and in a year the fund gained 5%. Now you would have $525 (minus any investment or account fees). While there are no guarantees that the money would continue to gain 5% every year — investments can also lose money — historically, the average stock market return of the S&P 500 is about 10% per year.

That might mean 0% one year, 10% another year, 3% the year after, and so on. But over time your principal would likely continue to grow, and the earnings on that principal would also grow. That’s compound growth.

2. Create and Stick to a Budget

Another important step in saving for retirement is to create a budget and stick to it. Calculating your own monthly budget can be simple — just follow these steps.

• Gather your documents. Gather up all your bills including credit cards, loans, mortgage or rent, so that you can document every penny coming out of your pocket each month.

• List all of your income. Find your pay stubs and add up any extra cash you make on the side using your after-tax take-home pay.

• List all of your current savings. From here, you can see how far you have to go until you reach your retirement goals.

• Calculate your retirement spending. Decide how much money you need to live comfortably in retirement so that you can establish a retirement budget. If you’re unsure of what your ideal retirement number is, plug your numbers into the formula mentioned above, or use a retirement calculator to get a better idea of what your retirement budget will be.

• Adjust accordingly. Every few months take a look at your budget and make sure you’re staying on track. If a new bill comes up, an expensive life event occurs, or if you gain new income, adjust your budgets and keep saving what you can.

3. Take Advantage of Employer-Sponsored Retirement Plans

Preparing for retirement should begin the moment you start your first job — or any job that offers a company retirement plan. There are many advantages to contributing to a 401(k) program (if you work at a for-profit company) or a 403(b) plan (if you work for a nonprofit), or a 457(b) plan (if you work for the government).

In many cases, your employer can automatically deduct your contributions from your paycheck, so you don’t have to think about it. This can help you save more, effortlessly. And in some cases your employer may offer a matching contribution: e.g. up to 3% of the amount you save.

Starting a 401(k) savings program early in life can really add up in the future thanks to compound growth over time. In addition, starting earlier can help your portfolio weather changes in the market.

On the other hand, if you happen to start your retirement savings plan later in life, you can always take advantage of catch-up contributions that go beyond the 2024 annual contribution limit of $23,000 and 2025 annual contribution limit of $23,500. Individuals 50 and older are allowed to contribute an additional $7,500 a year to a 401(k), to help them save a bit more before hitting retirement age. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

If you have a 403(b) retirement plan, it’s similar to a 401(k) in terms of the contribution limit and automatic deductions from your paycheck. Your employer may or may not match your contributions. However, the range of investment options you have to choose from may be more limited than those offered in a 401(k).

With a 457(b) plan, the contribution limit is similar to that of a 403(b). But employers don’t have to provide matching contributions for a 457(b) plan, and again, the investment options may be narrower than the options in a 401(k).

4. Add an Individual Retirement Account (IRA) to the Mix

Another strategy for how to save for retirement, especially if you’re one of the many freelancers or contract workers in the American workforce, is to open an IRA account.

Like a 401(k), an IRA allows you to put away money for your retirement. However, for both 2024 and 2025, the maximum contribution you can put into your IRA caps at $7,000 ($8,000 for those 50 and older).

Both the traditional IRA and 401(k) offer tax-deductible contributions. Roth IRAs are another option: With a Roth IRA, your contributions are taxed, which means your withdrawals in retirement will be tax free.

You control your IRA, not a larger company, so you can decide which financial institution you want to go with, how much you want to contribute each month, how to invest your money, and if you want to go Roth or traditional.

For those who can afford to invest money in both an IRA and a 401(k), and who meet the necessary criteria, that’s also an option that can boost retirement savings.

5. Deal With Debt

Should you save for retirement or pay off debt? And, more specifically, if you’re dealing with student loans, you may be wondering, should I save for retirement or pay off student loans? That is a financial conundrum for modern times. A good solution to this problem is to do both.

Just as it can be helpful to create a budget and stick to it, it can be helpful to create a loan repayment plan as well. Add those payments to your monthly budgeting expenses and if you still have dollars left over after accounting for all your bills, start socking that away for retirement.

If your student loan debt feels out of control, as it does for many Americans, you may want to look into student loan refinancing. By refinancing your student loan, you could significantly lower your interest rate and potentially pay off your debt faster. Once the loan is paid off, you will be able to reallocate that money to save for retirement.

6. Add Income With a Side Hustle

Working a side gig in your spare time can seriously pay off in the future, especially when you consider that the average side hustle can bring in several hundred dollars a month, according to one survey.

There are several things to consider when thinking of adding an extra job to your résumé, including evaluating what you’re willing to give up in order to make time for more work. But, if you can put your skills to use — such as copy editing, photography, design, or consulting — you can think about this as less of a side hustle and more of a way to hone your client list.

A side hustle should be one way to save for retirement that you’ll enjoy doing. And it could help if you find yourself dealing with a higher cost of living and retirement at some point.

7. Consider Putting Your Money in the Market

There’s no one best way to save for retirement — sometimes a multi-pronged approach can work best. If you already have a budget and an emergency savings account, and you’re maxing out your contributions to your 401(k), 403(b), 457, or IRA, then investing in the market could be another way to diversify your portfolio and potentially help build your nest egg. For instance, historically, stocks have been proven to be one of the best ways to help build wealth.

Putting your money in the market means you’ll have a variety of options to choose from. There are stocks, of course, but also mutual funds, exchange-traded funds, and even real estate investment trusts (REITs), which pool investor assets to purchase or finance a portfolio of properties.

However, investing in any of these assets, and in the market in general, comes with risk. So you’ll want to keep that in mind as you choose what to invest in. Consider what your risk tolerance is, how much you’re investing, when you’ll need the money, and how you might diversify your portfolio. Carefully weighing your priorities, needs, and comfort level, can help you make informed selections.

Once you have your asset allocation, be sure to evaluate it, and possibly rebalance it, to stay in line with your goals each year.

8. Automate Your Savings

Setting up automated savings accounts takes the thought and effort out of saving your money because it happens automatically. It could also help you hit your financial goals faster, because you don’t have to decide to save (or agonize over giving in to a spending temptation) and then do the manual work of putting the money into an account. It just happens like clockwork.

Enrolling in a 401(k), 403(b), or 457 at work is one way to automate savings for retirement. Another way to do it is to set up direct deposit for your paychecks. You could even choose to have a portion of your pay deposited into a high-interest savings account to help increase your returns.

9. Downsize and Cut Costs

To help save more and spend less, pull out that monthly budget you created. When you look at your current bills vs. income, how much is left over for retirement savings? Are there areas you can be spending less, such as getting rid of an expensive gym membership or streaming service, dialing back your takeout habit, or shopping a bit less?

This is when you need to be very honest with yourself and decide what you’re willing to give up to help you hit that target retirement number. Finding little ways to save for retirement can have a big impact down the road.

10. Take Advantage of Catch-Up Contributions

If you’re getting closer to retirement and you haven’t started saving yet, it’s not too late! In fact, the government allows catch-up contributions for those age 50 and older.
A catch-up contribution is a contribution to a retirement savings account that is made beyond the regular contribution maximum. Catch-up contributions can be made on either a pre-tax or after-tax basis.

For 2024 and 2025, catch-up contributions of up to $7,500 are permitted on a 401(k), 403(b), or 457(b). And again, for 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500).

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Common Retirement Savings Mistakes to Avoid

These are some of the biggest retirement pitfalls to watch out for.

• Not having a retirement plan in place. Neglecting to make any kind of plan means you’ll likely be unprepared for retirement and won’t have enough money for your golden years.

• Failing to take advantage of employer-sponsored plans. If you haven’t enrolled in one of these plans, you’re potentially leaving free money on the table. Sign up for a 401(k), 403(b), or 457(b) to tap into employer-matching contributions, when available.

• Underestimating how much money you’ll need for retirement. Financial specialists typically advise having enough savings to last you for 25 to 30 years after you retire.

• Accumulating too much debt. Try to avoid taking on too much debt as you get closer to retirement. And work on paying down the debt you do have so you won’t be saddled with it when you retire.

• Taking Social Security too early. It’s possible to file for Social Security at age 62, but the longer you wait (up until age 70), the higher your benefit will be — approximately 32% higher, in fact.

The Takeaway

It’s never too early to start planning for retirement. And there are many ways to start saving, and set up a system so that you’re saving steadily over time. You can contribute to a retirement plan that your employer offers; you can set up your own retirement plan (e.g. an IRA); and you can choose your own investments.

The most important thing to remember is that you have more control than you think. While your retirement vision may change over time, starting to save and invest your nest egg now will give you a head start.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

What is the fastest way to save for retirement?

Take a two-pronged approach: First, invest as much as you can in your employer-sponsored retirement account like a 401(k). You’ll likely get some matching contributions from your employer, as well as tax advantages. You can invest up to $23,000 in a 401(k) in 2024 and $23,500 in a 401(k) in 2025, plus an extra $7,500 if you are 50 or older. (In 2025, those aged 60 to 63 can contribute an extra $11,250, instead of $7,500.)

Second, if you qualify you can also set up and invest in a Roth IRA. You can contribute up to $7,000 annually to a Roth IRA in 2024 and 2025 ($8,000 if you’re 50 or older).

Having these two accounts could really help you start building up your retirement savings.

How much do I need to save for retirement?

To estimate how much you need to save for retirement, use this retirement savings formula: Start with your current income, subtract your estimated Social Security benefits, and divide by 0.04. That’s the approximate amount of total retirement savings you’ll need, based on your current income and expenses. You can try other calculators or formulas that might indicate that you’ll need less in retirement. It all depends.

Financial professionals typically advise having enough savings for 25 to 30 years’ worth of retirement.

How do I save for retirement without a 401(k)?

If you don’t have a 401(k), you can set up another type of tax-advantaged account for retirement, such as a traditional IRA and/or a Roth IRA. With a traditional IRA, the money grows tax free and is taxed when you withdraw it during retirement.

A Roth IRA, on the other hand, doesn’t provide a tax break upfront, but the funds you withdraw after age 59 ½ are tax free, as long as you’ve had the Roth IRA account for at least five years. You can contribute up to $7,000 a year to both types of IRAs for 2024 and 2025 ($8,000 if you’re 50 or older).

What is the average monthly income for a person who is retired?

The average monthly retirement income for a person who is retired, adjusted for inflation, is $4,381, according to a 2022 U.S. Census report.

How do taxes affect retirement income?

You will need to pay taxes on any withdrawals you make from tax-deferred investments like a 401(k) or traditional IRA. You will also have to pay federal taxes on a pension, if you have one. At the state level, some states tax pensions and some don’t. Additionally, you might have to pay tax on a portion of your Social Security benefits, depending on your overall income.

How can I supplement my income in retirement?

In addition to any retirement plans and pensions you have plus Social Security, you can supplement your retirement income with such strategies as: making investments generally considered to be safe, like investing in CDs (certificate of deposit), getting a part-time job or starting a small business, or renting out any additional property you might own, such as a vacation cabin, to make some extra money.

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

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

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

SoFi Invest®

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SOIN-Q224-1831913

Jan

2025

When Should You Start Saving for Retirement?

By Melanie Mannarino | Budgeting & Goals, Growing Wealth, invest, Preparing for Retirement | No Comments

If you ask any financial advisor when you should start saving for retirement, their answer would likely be simple: Now, or in your 20s if possible.

It’s not always easy to prioritize investing for retirement. If you’re in your 20s or 30s, you might have student loans or other goals that seem more “immediate,” such as a down payment on a house or your child’s tuition. But starting early is important because it can allow you to save much more. In fact, setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age.

No matter what age you are, putting away money for the future is a good idea. Read on to learn more about when to start saving for retirement and how to do it.

Key Points

• Starting to save for retirement in your 20s is ideal, as it gives your money more time to potentially grow and benefit from compounding. Compounding occurs when any earnings received are added to your principal balance, so future earnings are calculated on this updated, larger amount.

• Assessing personal financial situations and retirement goals is crucial when determining how much to save for retirement, regardless of age.

• Individuals in their 30s, 40s, 50s, or 60s can still successfully start saving for retirement, with different strategies tailored to each age group.

• Regular contributions and taking advantage of employer-sponsored plans are key steps in building a solid retirement savings strategy at any age.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.

What Is the Ideal Age to Start Saving for Retirement?

Ideally, you should start saving for retirement in your 20s, if possible. By getting started early, you could reap the benefits of compound interest. That’s when money in savings accounts earns interest, that interest is added to the principal amount in the account, and then interest is earned on the new higher amount.

Starting to save for retirement in your 20s can allow you to save much more. In fact, setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age.

That said, if you are older than your 20s, it’s not too late to start saving for retirement. The important thing is to get started, no matter what your age.

The #1 Reason to Start Early: Compound Interest

If you start saving early, you could reap the benefits of compound interest.

CFP^®, Brian Walsh says, “Time can either be your best friend or your worst enemy. If you start saving early, you make it a habit, and you start building now, time becomes your best friend because of compounded growth. If you delay — say 5, 10, 15 years to save — then time becomes your worst enemy because you don’t have enough time to make up for the money that you didn’t save.”

Here’s how compound interest works and why it can be so valuable: The money in a savings account, money market account, or CD (certificate of deposit) earns interest. That interest is added to the balance or principle in the account, and then interest is earned on the new higher amount.

Depending on the type of account you have, interest might accrue daily, weekly, monthly, quarterly, twice a year, or annually. The more frequently interest compounds on your savings, the greater the benefit for you.

Investments — including investments in retirement plans, such as an employee-sponsored 401(k) plan or a traditional or Roth IRA — likewise benefit from compounding returns. Over time, you can see returns on both the principal as well as the returns on your contributions. Essentially, your money can work for you and potentially grow through the years, just through the power of compound returns.

The sooner you start saving and investing, the more time compounding has to do its work.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Saving Early vs Saving Later

To understand the power of compound returns, consider this:

If you start investing $7,000 a year at age 25, by the time you reach age 67, you’d have a total of $2,129,704.66. However, if you waited until age 35 to start investing the same amount, and got the same annual return, you’d have $939,494.76.

Age	Annual Return	Savings
25	8%	$2,129,704.66
35	8%	$939,494.76

As you can see, starting in your 20s means you may save double the amount you would have if you waited until your 30s.

Starting Retirement Savings During Different Life Stages

Retirement is often considered the single biggest expense in many peoples’ lives. Think about it: You may be living for 20 or more years with no active income.

Plus, while your parents or grandparents likely had a pension plan that kicked off right at the age of 65, that may not be the case for many workers in younger generations. Instead, the 401(k) model of retirement that’s more common these days requires employees to do their own saving.

As you get started on your savings journey, do a quick assessment of your current financial situation and goals. Be sure to factor in such considerations as:

• Age you are now

• Age you’d like to retire

• Your income

• Your expenses

• Where you’d like to live after retirement (location and type of home)

• The kind of lifestyle you envision in retirement (hobbies, travel, etc.)

To see where you’re heading with your savings you could use a retirement savings calculator. But here are more basics on how to get started on your retirement savings strategy, at any age.

Starting in Your 20s

Starting to save for retirement in your 20s is something you’ll later be thanking yourself for.

As discussed, the earlier you start investing, the better off you’re likely to be. No matter how much or little you start with, having a longer time horizon till retirement means you’ll be able to handle the typical ups and downs of the markets.

Plus, the sooner you start saving, the more time you’ll be able to benefit from compound returns, as noted.

Start by setting a goal: At what age would you like to retire? Based on current life expectancy, how many years do you expect to be retired? What do you imagine your retirement lifestyle will look like, and what might that cost?

Then, create a budget, if you haven’t already. Document your income, expenses, and debt. Once you do that, determine how much you can save for retirement, and start saving that amount right now.

💡 Learn more: Savings for Retirement in Your 20s

Starting in Your 30s

If your 20s have come and gone and you haven’t started investing in your retirement, your 30s is the next-best time to start. While there may be other expenses competing for your budget right now — saving for a house, planning for kids or their college educations — the truth remains that the sooner you start retirement savings, the more time they’ll have to grow.

If you’re employed full-time, one easy way to start is to open an employer-sponsored retirement savings plan, like a 401(k). We’ll get into details on that below, but one benefit to note is that your savings will come out of your paycheck each month before you get taxed on that money. Not only does this automate retirement savings, but it means after a while you won’t even miss that part of your paycheck that you never really “had” to begin with. (And yes, Future You will thank you.)

💡 Learn more: Savings for Retirement in Your 30s

Starting in Your 40s

When it comes to how much you should have saved for retirement by 40, one general guideline is to have the equivalent of your two to three times your annual salary saved in retirement money.

Once you have high-interest debt (like debt from credit cards) paid off, and have a good chunk of emergency savings set aside, take a good look at your monthly budget and figure out how to reallocate some money to start building a retirement savings fund.

Not only will regular contributions get you on a good path to savings, but one-off sources of money (from a bonus, an inheritance, or the sale of a car or other big-ticket item) are another way to help catch up on retirement savings faster.

Starting in Your 50s

In your 50s, a good ballpark goal is to have six times your annual salary in your retirement savings by the end of the decade. But don’t panic if you’re not there yet — there are a few ways you can catch up.

Specifically, the government allows individuals aged 50 and older to make “catch-up contributions” to 401(k), traditional IRA, and Roth IRA plans. That’s an additional $7,500 in 401(k) savings, and an additional $1,000 in IRA savings for 2024 and 2025. (Note that in 2025, those aged 60 to 63 may contribute an additional $11,250, instead of $7,500.)

The opportunity is there, but only you can manage your budget to make it happen. Once you’ve earmarked regular contributions to a retirement savings account, make sure to review your asset allocation on your own or with a professional. A general rule of thumb is, the closer you get to retirement age, the larger the ratio of less risky investments (like bonds or bond funds) to more volatile ones (like stocks, mutual funds, and ETFs) you should have.

Starting in Your 60s

It’s never too late to start investing, especially if you’re still working and can contribute to an employer-sponsored retirement plan that may have matching contributions. If you’re contributing to a 401(k), or a Roth or traditional IRA, don’t forget about catch-up contributions (see the information above).

In general, when you’re this close to retirement it makes sense for your investments to be largely made up of bonds, cash, or cash equivalents. Having more fixed-income securities in your portfolio helps lower the odds of suffering losses as you get closer to your target retirement date.

💡 Learn more: Savings for Retirement in Your 60s

The Takeaway

Investing in retirement and wealth accounts is a great way to jump-start saving and investing for your golden years, whether you invest $10,000 or just $100 to get started.

The first step is to open an account or use the one that’s already open. You could also increase your contribution. If you’re opening an account, you may want to consider one without fees, to help maximize your bottom line.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is 20 years enough to save for retirement?

It’s never too late to start investing for retirement. If you’re just starting in your 40s, consider contributing to an employer-sponsored plan if you can, so that you can take advantage of any employer matching contributions. In addition to regular bi-weekly or monthly contributions, make every effort to deposit any “windfall” lump sums (like a bonus, inheritance, or proceeds from the sale of a car or house) into a retirement savings vehicle in an effort to catch up faster.

Is 25 too late to start saving for retirement?

It’s not too late to start saving for retirement at 25. Take a look at your budget and determine the max you can contribute on a regular basis — whether through an employer-sponsored plan, an IRA, or a combination of them. Then start making contributions, and consider them as non-negotiable as rent, mortgage, or a utility bill.

Is 30 too old to start investing?

No age is too old to start investing for retirement, because the best time to start is today. The sooner you start investing, the more advantage you can take of compound returns, and potentially employer matching contributions if you open an employer-sponsored retirement plan.

Should I prioritize paying off debt over saving for retirement?

Whether you should prioritize paying off debt over saving for retirement depends on your personal situation and the type of debt you have. If your debt is the high-interest kind, such as credit card debt, for instance, it could make sense to pay off that debt first because the high interest is costing you extra money. The less you owe, the more you’ll be able to put into retirement savings.

And consider this: You may be able to pay off your debt and save simultaneously. For instance, if your employer offers a 401(k) with a match, enroll in the plan and contribute enough so that the employer match kicks in. Otherwise, you are essentially forfeiting free money. At the same time, put a dedicated amount each week or month to repaying your debt so that you continue to chip away at it. That way you will be reducing your debt and working toward saving for your retirement.

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SOIN0623043

Jan

2025

Roth IRA Explained

By AJ Smith | Budgeting & Goals, invest, Terminology | No Comments

Table of Contents

What Is a Roth IRA and How Does It Work?
Roth IRA Contributions
Tax Treatment
Contribution Limits
Tax-Free Withdrawals
Advantages of a Roth IRA
Disadvantages of a Roth IRA
Roth IRA Withdrawal Rules
Roth IRA Investments
Is a Roth IRA Right for You?
FAQ

A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars and then withdraw your money tax-free in retirement. A Roth IRA is different from a traditional IRA in which you contribute pre-tax dollars but owe tax on the money you withdraw in retirement.

A Roth IRA can be a valuable way to help save for retirement over the long-term with the potential for tax-free growth. Read on to learn how Roth IRAs work, the rules about contributions and withdrawals, and how to determine whether a Roth IRA is right for you — just think of it as Roth IRA information for beginners and non-beginners alike.

Key Points

• A Roth IRA is a retirement savings account that offers tax-free growth and tax-free withdrawals in retirement.

• Contributions to a Roth IRA are made with after-tax dollars, and qualified withdrawals are not subject to income tax.

• Roth IRAs have income limits for eligibility, and contribution limits that vary based on age and income.

• Unlike traditional IRAs, Roth IRAs do not entail required minimum distributions (RMDs) during the account holder’s lifetime.

• Roth IRAs can be a valuable tool for long-term retirement savings, especially for individuals who expect to be in a higher tax bracket in the future.

What Is a Roth IRA?

A Roth IRA is a retirement account that provides individuals with a way to save on their own for their golden years.

You can open a Roth IRA at most banks, online banks, or brokerages. Once you’ve set up your Roth account, you can start making contributions to it. Then you can invest those contributions in the investment vehicles offered by the bank or brokerage where you have your account.

What differentiates a Roth IRA from a traditional IRA is that you make after-tax contributions to a Roth. Because you pay the taxes upfront, the earnings in a Roth grow tax free. When you retire, the withdrawals you take from your Roth will also be tax free, including the earnings in the account.

With a traditional IRA, you make pre-tax contributions to the account, which you can deduct from your income tax, but you pay taxes on the money, including the earnings, when you withdraw it in retirement.

Roth IRA Contributions

There are several rules regarding Roth IRA contributions, and it’s important to be aware of them. First, to contribute to a Roth IRA, you must have earned income. If you don’t earn income for a certain year, you can’t contribute to your Roth that year.

Second, Roth IRAs have annual contribution limits (see more on that below). If you earn less than the Roth IRA contribution limit for the year, you can only deposit up to the amount of money you made. For instance, if you earn $5,000 in 2025, that is the maximum amount you can contribute to your Roth IRA for that year.

In addition, there are income restrictions regarding Roth IRA contributions. In 2025, in order to contribute the full amount to a Roth, single filers must have a modified adjusted gross income (MAGI) of less than $150,000, and married joint filers must have a MAGI of less than $236,000. Single filers whose MAGI is $150,000 up to $165,000 can contribute a reduced amount, and if their MAGI is $165,000 or more, they can’t contribute to a Roth. Married couples filing jointly who earn $236,000 up to $246,000 can contribute a reduced amount, and if their MAGI is $246,000 or more, they are not eligible to contribute.

Tax Treatment

Contributions to a Roth IRA are made with after-tax dollars — meaning you pay taxes on the money before contributing it to your Roth. You can’t take your contributions as income tax deductions as you can with a traditional IRA, but you can withdraw your contributions at any time with no taxes or penalties. Once you reach age 59 ½ or older, you can withdraw your earnings, along with your contributions, tax-free.

If you expect to be in a higher tax bracket in retirement, or if you want to maximize your savings in retirement and not have to pay taxes on your withdrawals then, a Roth IRA may make sense for you.

Contribution Limits

As mentioned, Roth IRAs have annual contribution limits, which are the same as traditional IRA contribution limits.

For both 2024 and 2025, the annual IRA contribution limit is $7,000 for individuals under age 50, and $8,000 for those 50 and up. The extra $1,000 is called a catch-up contribution for those closer to retirement.

Remember that you can only contribute earned income to a Roth IRA. If you earn less than the contribution limit, you can only deposit up to the amount of money you made that year.

Calculate your IRA contributions.

Get a head start on retirement planning with SoFi’s 2024 IRA contribution calculator.

Tax-Free Withdrawals

As noted, you can make withdrawals, including earnings, tax-free from a Roth once you reach age 59 ½. And you can withdraw contributions tax-free at any time. However, there are some specific Roth IRA withdrawal rules to know about so that you can make the most of your IRA.

Qualified Distributions

Since you’ve already paid taxes on the money you contribute to your Roth IRA, you can withdraw contributions at any time without paying taxes or a 10% early withdrawal penalty. But you cannot withdraw earnings tax- and penalty-free until you reach age 59 ½.

For example, if you’re age 45 and you’ve contributed $25,000 to a Roth through your online brokerage over the last five years, and your investments have seen a 10% gain (or $2,500), you would have $27,500 in the account. But you could only withdraw up to $25,000 of your contributions tax-free, and not the $2,500 in earnings.

The 5-Year Rule

According to the 5-year rule, you can withdraw Roth IRA account earnings without owing tax or a penalty, as long as it has been five years or more since you first funded the account, and you are 59 ½ or older.

The 5-year rule applies to everyone, no matter how old they are when they want to withdraw earnings from a Roth. For example, even if you start funding a Roth when you’re 60, you still have to wait five years to take qualified withdrawals.

Non-Qualified Withdrawals

Non-qualified withdrawals of earnings from a Roth IRA depends on your age and how long you’ve been funding the account.

• If you meet the 5-year rule, but you’re under age 59 ½, you’ll owe taxes and a 10% penalty on any earnings you withdraw, except in certain cases, as noted below.

• If you don’t meet the 5-year rule, meaning you haven’t had the account for five years, and if you’re less than 59 ½ years old, in most cases you will also owe taxes and a 10% penalty.

Exceptions

You can take an early or non-qualified withdrawal prior to 59 ½ without paying a penalty or taxes in certain circumstances, including:

• For a first home. You can take out up to $10,000 to pay for buying, building, or rebuilding your first home.

• Disability. You can withdraw money if you qualify as disabled.

• Death. Your heirs or estate can withdraw money if you die.

Additionally you may be able to avoid the 10% penalty (although you’ll still generally have to pay income taxes) if you withdraw earnings for such things as:

• Medical expenses. Specifically, those that exceed 7.5% of your adjusted gross income.

• Medical insurance premiums. This applies to health insurance premiums you pay for yourself during a time in which you’re unemployed.

• Qualified higher education expenses. This includes expenses like college tuition and fees.

Advantages of a Roth IRA

Depending on an individual’s income and circumstances, a Roth IRA has a number of advantages.

• No age restriction on contributions. Roth IRA account holders can make contributions at any age as long as they have earned income for the year.

^* You can fund a Roth and a 401(k). Funding a 401(k) and a traditional IRA can sometimes be tricky, because they’re both tax-deferred accounts. But a Roth IRA is after-tax, so you can contribute to a Roth and a 401(k) at the same time and stick to the contribution limits for each account.

• Early withdrawal option. With a Roth IRA, an individual can generally withdraw money they’ve contributed at any time without tax or penalties (but not earnings). In contrast, withdrawals from a traditional IRA before age 59 ½ may be subject to a 10% penalty.

• Qualified Roth withdrawals are tax-free. Investors who have had the Roth for five years or more, and are at least 59 ½, are eligible to take tax- and penalty-free withdrawals of contributions and earnings.

• No required minimum distributions (RMDs). Unlike traditional IRAs, which require account holders to start withdrawing money at age 73, Roth IRAs do not have RMDs. That means an individual can withdraw the money as needed without fear of triggering a penalty.

Disadvantages of a Roth IRA

Roth IRAs also have some disadvantages to consider. These include:

• No tax deduction for contributions. A primary disadvantage of a Roth IRA is that your contributions are not tax deductible, as they are with a traditional IRA and other tax-deferred accounts like a 401(k).

• Higher earners often can’t contribute to a Roth. Individuals with a higher MAGI are generally excluded from Roth IRA accounts, unless they do what’s known as a backdoor Roth or a Roth conversion.

• The 5-year rule applies. The 5-year rule can make withdrawals more complicated for investors who open a Roth later in life. If you open a Roth or do a Roth conversion at age 60, for example, you must generally wait five years to take qualified withdrawals of contributions and earnings or face a penalty.

• Low annual contribution limit. The maximum amount you can contribute to a Roth IRA each year is low compared to other retirement accounts like a SEP IRA or 401(k). But, as noted above, you can combine saving in a 401(k) with saving in a Roth IRA.

Roth IRA Investments

How does a Roth IRA make money? Once you contribute money to your IRA account you can invest those funds in different assets such as mutual funds, exchange-traded funds (ETFs), stocks, and bonds. Depending on how those investments perform, you may earn money on them (however, no investment is guaranteed to earn money). And if you leave your earnings in the account, you can potentially earn money on your earnings through a process called compounding returns, in which your money keeps earning money for you.

To choose investments for your Roth IRA, consider your financial circumstances, goals, timeframe (when you will need the money), and risk tolerance level. That way you can determine which investment options are best for your situation.

Is a Roth IRA Right for You?

How do you know whether you should contribute to a Roth IRA? This checklist may help you decide.

• You might want to open a Roth IRA if you don’t have access to an employer-sponsored 401(k) plan, or if you do have a 401(k) plan but you’ve already maxed out your contribution to it. You can fund both a Roth IRA and an employer-sponsored plan.

• Because Roth contributions are taxed immediately, rather than in retirement, using a Roth IRA can make sense if you are in a lower tax bracket currently. It may also make sense to open a Roth IRA if you expect your tax bracket to be higher in retirement than it is today.

• Individuals who are in the beginning of their careers and earning less might consider contributing to a Roth IRA now, since they might not qualify under the income limits later in life.

• A Roth IRA may be helpful if you think you’ll work past the traditional retirement age, as long as your income falls within the limits. Since there is no age limit for opening a Roth and RMDs are not required, your money can potentially grow tax-free for a long period of time.

The Takeaway

A Roth IRA can be a valuable tool to help save for retirement. With a Roth, your earnings grow tax-free, and you can make qualified withdrawals tax-free. Plus, you can withdraw your contributions at any time with no taxes or penalties and you don’t have to take required minimum distributions (RMDs).

That said, not everyone is eligible to fund a Roth IRA. You need to have earned income, and your modified adjusted gross income cannot exceed certain limits. You must fund your Roth for at least five years and be 59 ½ or older in order to make qualified withdrawals of earnings. Otherwise, you would likely owe taxes on any earnings you withdraw, and possibly a penalty.

Still, the primary advantage of a Roth IRA — being able to have an income stream in retirement that’s tax-free — may outweigh the restrictions.

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

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FAQ

Are Roth IRAs insured?

If your Roth IRA is held at an FDIC-insured bank and is invested in bank products like certificates of deposit (CDs) or money market account, those deposits are insured up to $250,000 per depositor, per institution. On the other hand, if your Roth IRA is with a brokerage that’s a member of the Securities Investor Protection Corporation (SIPC), and the brokerage fails, the SIPC provides protection up to $500,000, which includes a $250,000 limit for cash. It’s very important to note that neither FDIC or SIPC insurance protects against market losses; they only cover losses due to institutional failures or insolvency.

How much can I put in my Roth IRA monthly?

For tax years 2024 and 2025, the maximum you can deposit in a Roth or traditional IRA is $7,000, or $8,000 if you’re over 50. How you divide that per month is up to you. But you cannot contribute more than the annual limit.

I opened a Roth IRA — now what?

After you open a Roth IRA, you can make contributions up to the annual limit. Then you can invest those contributions in assets offered by your IRA provider. Typically you can choose from such investment vehicles as mutual funds, exchange-traded funds, stocks and bonds.

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