Financial Topics Archives | Page 209 of 823

Jan

2025

Understanding Special Needs Financial Planning

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

Special needs financial planning is a subset of financial planning concerned with meeting the short and long-term needs of children and adults with disabilities. If you’re the primary caregiver for a child or another family member with special needs, it’s important to consider how they’ll be provided for during your lifetime and beyond.

Financial planning for special needs families requires a personalized approach, as every family’s situation is different. It’s never too late, or too early, to think about how to shape your family’s plan.

Key Points

• Personalized financial planning for those with special needs can help provide tailored support and quality of life.

• Government benefits like Medicaid, Supplemental Security Income (SSI), and Medicare are essential for covering care costs.

• ABLE accounts offer tax-advantaged savings for disability expenses without disrupting eligibility for federally funded benefits, such as SSI.

• Estate planning can include creating wills and trusts and appointing guardians to secure financial stability.

• A letter of intent guides future caregivers on daily routines and care needs.

The Importance of Special Needs Financial Planning

A financial plan is a roadmap to help you reach your financial goals, whether that means paying off your home early or retiring with $1 million in the bank. Accordingly, financial planning for special needs has some additional considerations. It also takes into account the financial demands of caring for someone with disabilities or special healthcare needs and what’s necessary to provide them with the best quality of life possible.

Developing a special needs financial plan is important for several reasons.

• Planning allows you to establish some continuity in the type of care your loved one receives while you’re living and after you’re gone.

• Government benefit programs may have specific requirements your loved one will need to meet to receive care. Setting up a disability trust account or another type of trust as part of your special needs financial plan can help ensure they’re eligible.

• While your focus may be on providing care for your loved one, you can’t afford to neglect your own goals, like retirement. A special needs financial plan helps you balance those goals against your loved one’s care priorities.

A comprehensive plan spans every stage of your loved one’s life and anticipates their needs at different ages. Financial planning for special needs adults, for instance, may look very different from financial planning for special needs infants, children, or teens. And planning ahead, and getting the planning process started at an early age means you don’t have to catch up later on.

Key Components of a Special Needs Financial Plan

What a special needs financial plan should cover depends largely on the specifics of your situation. At a minimum, you should probably be thinking about:

• Your immediate and long-term financial planning needs, including life insurance, disability insurance, and retirement savings

• Your loved one’s eligibility for government benefits that could help cover the cost of their care

• Whether you’ll need to create a transition plan that allows your loved one to live independently

• Long-term care planning for your loved one

• Estate planning and what you’d like to happen to your assets after you’re gone

It’s also important to think about who will help you execute your plan. That might include a financial advisor, accountant, and/or estate planning attorney. You’ll also need to decide who will act as guardian or power of attorney for your loved one in your absence if they’re unable to make decisions for themselves.

Long-Term Care Considerations

Special needs financial planning means thinking about the degree of care someone will need lifelong, the cost of that care, and how to pay for it. It’s important to consider your loved one’s needs and the options you have.

There are different ways to approach care, including:

• Taking care of your loved one yourself

• In-home care assistance, either on a part-time or full-time basis

• Day programs that provide care for special needs children or adults

• Group or community care homes

• Intermediate care facilities

• Independent living

Your loved one’s age and health care needs can dictate which type of care is most suited to their situation. Cost is an important consideration in each scenario.

Your health insurance may pay for some of your loved one’s needs if they’re eligible for enrollment in your plan. You may also apply for Medicaid on their behalf. Medicaid is a government-funded program administered at the state level that can cover a variety of costs related to special needs care, including:

• Preventive services

• Primary and specialty care

• Prescription drugs

• Medical devices

• Long-term care and support

Eligibility for Medicaid is automatic in most states when someone qualifies for Supplemental Security Income (SSI). SSI provides cash payments to children and adults with disabilities.
Medicare is also available to individuals under 65 with qualifying disabilities and can cover certain nursing care needs.

Independent of these programs, you may set up an ABLE account to help cover long-term care needs. The Achieving a Better Life Experience (ABLE) Act of 2014 created ABLE accounts which offer a tax-advantaged way to save money for qualified disability expenses.

You can open an ABLE account on behalf of a designated beneficiary and contribute up to the annual gift tax exclusion limit each year. Funds in an ABLE account can be used to pay for qualified disability expenses, including:

• Higher education

• Housing

• Transportation

• Job training and support

• Healthcare

• Personal support expenses

• Basic living expenses

• Legal expenses

• End-of-life care

• Burial and funeral expenses4

Someone can have an ABLE account and still be eligible to receive Medicaid, Medicare, or SSI to help pay for special needs care. If their ABLE account balance exceeds $100,000 that can affect their ability to continue drawing SSI benefits but it won’t impact their Medicaid or Medicare eligibility.

These are all issues that you might want to talk about with a financial advisor. They can go into detail with you about how to qualify for Medicaid in your state, how to plan ABLE account contributions, or whether it makes sense to establish a special needs trust for your loved one.

Retirement Planning With a Special Needs Child

While you may be focused on meeting your child’s needs, it’s important to consider where your retirement fits into your financial plan. Start by evaluating your assets, which may include:

• A 401(k) or similar workplace retirement plan

• A traditional or Roth IRA

• SEP IRAs or a solo 401(k) if you’re self-employed

• A taxable brokerage account

• A Health Savings Account (HSA) if you have a high deductible health plan

Look at how much you contribute to each account, what you’re paying in fees, and the returns your investments generate. Then, consider what age you’d like to retire and how much you think you’ll need.

Calculators can help with this step. You can use a 401(k) or an IRA calculator to estimate how much your money will grow, based on what you’re saving now.

Once you have a target savings number, ask yourself what you can do to increase your chances of reaching it. For instance, could you:

• Increase your 401(k) contribution rate

• Max out an IRA or HSA

• Change up your investment mix to seek better returns and/or reduce the fees you’re paying

• Supplement tax-advantaged retirement accounts with a taxable brokerage account

• Stash money in high-yield savings accounts or CDs for liquidity

What if you don’t have anything saved for retirement? You could open an IRA through an online brokerage and start contributions based on what your budget allows. For 2025, you can save up to $7,000 in an IRA or $8,000 if you’re 50 or older, the same as 2024.

Estate Planning for Special Needs Families

Special needs estate planning considers both your needs and your loved ones. What you’ll include in this plan can depend on whether you’re talking about estate planning for a special needs child or estate planning for special needs adults.

At a minimum, you’ll need a last will and testament. Your will allows you to specify how you want your assets to be distributed when you pass away but you can also use it to name one or more guardians for your special needs loved one. You may want to work with a special needs attorney to draft a will since the laws for creating one vary from state to state.

Another aspect of special needs estate planning centers on what will happen to your retirement accounts. When managing retirement accounts that allow you to name a beneficiary, it’s important to choose wisely.

Leaving your 401(k) or IRA directly to your child could impact the eligibility to receive certain government benefits. Aside from that, inherited IRAs are subject to required minimum distribution (RMD) rules, which could add another wrinkle to financial planning for special needs children.

Under these rules, non-spouse beneficiaries are required to withdraw all the money in the account within 10 years. The SECURE Act allows certain individuals with disabilities, or a special needs trust fund established on their behalf, to qualify as eligible designated beneficiaries. An eligible designated beneficiary may follow the 10-year withdrawal rule or take withdrawals over their life expectancy.

You’d have to determine whether your child qualifies as an eligible designated beneficiary and if so, whether it makes sense to name them as beneficiary to your retirement accounts directly or establish a special needs trust to inherit those accounts. If you prefer to establish a trust you could name it as the beneficiary to any life insurance policies you have as well.

Recommended: Why You Need a Trust

Creating a Letter of Intent

A letter of intent (LOI) includes a detailed profile of your special needs loved one, including their daily routine, care needs, and financial situation. This document is not legally binding; instead, it’s meant to act as a guide for those who will assume care duties after you’re gone.

Including a letter of intent in your special needs financial plan allows you to communicate what your loved one needs now and what their needs might be in the future. You can update your LOI annually to adjust for any changes to your situation.

There’s no specific template or form your letter of intent needs to take, however, it’s important to make it as detailed and thorough as possible. If you need direction on how to write a letter of intent you can find free templates to use as a guide online.

Working With Special Needs Financial Planners

If you find the idea of creating a financial plan for special needs overwhelming or you don’t know where to start, you may benefit from talking to a financial planner or advisor who specializes in this area. A special needs financial planner can look at your situation and help you create a financial plan that allows you to reach your goals while making sure your loved one is taken care of.

You may look for a financial planner or advisor who holds a chartered special needs consultant (ChSNC) designation. This credential means they’ve completed education courses in the area of special needs financial planning.

When choosing a financial advisor, consider:

• What experience they have with special needs planning

• What kind of clients they typically serve

• Which services they can help you with

• How much they charge

If you’d like to find a certified financial planner near you, you can use the CFP Board’s search tool to see who’s available in your area.

The Takeaway

Financial planning and estate planning for special needs are important priorities if you care for a child or adult with disabilities or significant medical issues. Creating your plan can take time, but you don’t have to go it alone. Take this financial planning quiz to find out how a financial advisor can help.

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).

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

FAQ

How does special needs financial planning differ from traditional planning?

Traditional financial planning concerns itself with your goals, which may include college planning, paying off your mortgage, or retirement planning. Special needs financial planning can include those things but it also extends to creating a lifelong plan of care for a loved one with disabilities. The issues and challenges of financial planning for special needs tend to be more complex.

When should I start special needs financial planning?

The best time to start special needs financial planning is when you become the caregiver for someone with disabilities. Delaying planning could put the person you’re responsible for at risk of not getting the care they need if something should happen to you.

Can siblings be involved in special needs financial planning?

If you’re the parent of a child with special needs, involving siblings in financial planning often makes sense. You may designate them as the person you’d like to assume responsibility for their sibling’s care or financial assets after you’re gone. Making sure they’re involved in each stage of planning can make the transition as smooth as possible when the time comes.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/Unaihuiziphotography

SoFi Invest®

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

SOIN-Q424-006

Jan

2025

HSAs and Medicare: What You Need to Know

By Rebecca Lake | Financial Topics, Terminology | Comments Off

Health Savings Accounts (HSA) are tax-advantaged accounts that help you pay for out-of-pocket healthcare expenses. Medicare is government-funded health insurance for those aged 65 and older.

While it’s possible to have an HSA and Medicare at the same time, there are some important rules to be aware of to avoid penalties when you have both. Here’s how Medicare affects an HSA.

Key Points

• It’s possible to have both an HSA and Medicare, but there are rules regarding Medicare enrollment and HSA contributions.

• Once enrolled in Medicare, you cannot make new contributions to an HSA, and doing so can lead to IRS penalties.

• HSA funds can still be used tax-free for qualified medical expenses after enrolling in Medicare.

• Individuals aged 55 and older can make an additional $1,000 catch-up contribution annually to HSAs until enrolling in Medicare.

• Maximizing HSA contributions before Medicare enrollment may allow for potential investment growth, which could benefit healthcare expenses in retirement.

Understanding Health Savings Accounts (HSAs)

Health Savings Accounts are tax-advantaged accounts that can be used with high-deductible health plans (HDHP).1 HDHPs are plans that, by law, must set a minimum deductible amount and a maximum out-of-pocket limit for coverage.

In 2024, a plan is considered an HDHP by the IRS when it has a minimum deductible of $1,600 for an individual and $3,200 for a family, and doesn’t exceed $8,050 for an individual and $16,100 for a family. In 2025, a plan qualifies as an HDHP when it has a minimum deductible of $1,650 for an individual and $3,300 for a family, and does not exceed $8,300 for an individual and $16,600 for a family.

When you have an HDHP, you have the option to use an HSA as a way to contribute pre-tax dollars to help cover the higher out-of-pocket upfront costs of these plans. It’s also important to note that HSAs offer investment options such as stocks, bonds, and mutual funds, as well as the possibility for tax-free growth.

If you’re wondering how to set up a health savings account, just remember that being enrolled in an HDHP, either through your employer or self-employed health insurance coverage, is a requirement.

The benefits of an HSA include:

• Contributions are tax-deductible

• You and your employer can both contribute, up to annual limits

• Contributions grow tax-deferred

• Funds roll over year to year, which is a major difference between an HSA vs. FSA

• Withdrawals are tax-free when you use them for qualified medical expenses

The IRS sets the annual contribution limits for HSAs. Limits are determined by your coverage type. Here’s how much you could contribute for 2024 and 2025.

	2024 HSA Limit	2025 HSA Limit
Individual Coverage	$4,150	$4,300
Family Coverage	$8,300	$8,550

Annual contribution limits apply to employer and employee contributions. So if you have family coverage and your employer contributes $3,000 to your account for 2024, the most you could contribute is $5,300.

If you’re 55 or older, you can contribute an extra $1,000 a year to your HSA until you enroll in Medicare.

Recommended: What Is a Flexible Spending Account?

HSA Contributions and Medicare Enrollment

Using an HSA for retirement can make sense if you’d like to minimize your out-of-pocket costs for healthcare. But it’s important to properly coordinate your Health Savings Account and Medicare enrollment.

Here’s how the HSA Medicare rules work as you’re looking to manage your healthcare costs in retirement.

How Medicare Affects HSA Eligibility

You can have an HSA with Medicare, but there are some rules. If you enroll in Medicare the month you turn 65, you’ll need to stop contributing to your HSA at the beginning of the month before your 65th birthday month. If you delay enrolling in Medicare until after age 65, a six-month look-back period stipulates that you must stop contributing to your HSA six months before you enroll in Medicare or begin receiving Social Security benefits. Also, you cannot set up a new HSA after enrolling in Medicare.

The reason for these rules? One of the conditions of contributing to an HSA is that you can’t have any other health insurance besides a high-deductible health plan. Thus, since Medicare is health insurance, enrollment automatically disqualifies you from making new HSA contributions.

You can still make withdrawals from your HSA, but according to the HSA rules with Medicare, if you (or your employer) make new contributions to your HSA after Medicare enrollment, the IRS will treat them as excess contributions. Excess contributions are subject to a 6% excise tax penalty, which applies each year those contributions remain in your account.

Managing Your HSA When Transitioning to Medicare

The most important thing to consider with HSA contributions and Medicare is knowing when you need to halt them. If your employer makes contributions to your account for you, you’ll also need to tell them when to discontinue the contributions.

As mentioned previously, if you enroll in Medicare the month you turn 65, you and your employer will need to stop contributing to your HSA at the beginning of the month before your 65th birthday month. That means if your birthday is in July, you should stop contributing at the beginning of June.

If you delay enrolling in Medicare until after age 65, you must stop contributing to your HSA six months before you enroll in Medicare. So, let’s say you plan to enroll in the month you turn 65 and your birthday is September 15th. You would make contributions to your HSA no later than March 15th to avoid a tax penalty.

Recommended: Can You Retire at 62?

Using HSA Funds in Retirement

Like many people, you’re probably wondering how much do you need to retire. Healthcare can be a significant retirement expense, so factoring your HSA into the equation can be helpful.

The more money you have in an HSA, the less you may need to draw from your 401(k), traditional IRA, Social Security benefits, or other assets to pay for medical expenses.

Here are some tips for making the most of HSA funds once you retire.

• Pay for qualified medical expenses first. The IRS defines what counts as a qualified medical or dental expense in Publication 502. It helps to know what counts and what doesn’t to make sure you’re withdrawing funds tax-free whenever possible.

• Time non-medical withdrawals carefully. Withdrawing money for anything other than healthcare expenses before age 65 can trigger a 20% tax penalty and you’ll owe income tax on the withdrawal. Once you reach 65, the 20% tax penalty goes away so it’s important to consider the timing if you need to use HSA funds for non-medical expenses.

• Keep good records. It’s important to keep track of healthcare expenses to get the most mileage out of your HSA. For example, medical billing errors could end up charging you more than you actually need to pay, so it’s wise to review estimates and medical bills carefully before you make a payment.

HSAs vs. Medicare Savings Accounts

A Medicare Savings Account or Medical Savings Account (MSA) is somewhat similar to a Health Savings Account that Medicare enrollees can open. More specifically, an MSA is a special type of savings account you can access through a Medicare Advantage Plan, also known as Medicare Part C.

These accounts combine a high-deductible health plan with a medical savings account. Medicare gives your HDHP a set amount each year for your healthcare expenses, which goes into your MSA. You don’t contribute to your MSA directly; Medicare makes contributions for you. It’s up to you to decide which Medicare-eligible costs you want to use the money to pay for. You can access funds through a checking account, debit card, or credit card, depending on how your MSA is set up.

Recommended: Guide to Health Insurance

Maximizing HSA Benefits Before Medicare

The best way to maximize HSA benefits before enrolling in Medicare is to contribute as much as you can to your account annually, starting in the first year you’re eligible to contribute. The longer you have to invest your HSA funds, the more time your HSA investments may have to grow through the power of compounding returns.

Once you turn 55, remember that you can make an additional $1,000 catch-up contribution each year. That’s an extra $10,000 you could contribute to your plan until you hit your Medicare enrollment window at age 65.

You can also make the most of your benefits by choosing investments in your HSA that offer a combination of solid returns and low fees. If you have multiple HSA accounts with previous employers you may consider consolidating HSAs before enrolling in Medicare so your savings is easier to manage.

Common Mistakes to Avoid

The biggest mistake to avoid with HSAs and Medicare is continuing to contribute after Medicare enrollment. Doing so could trigger a sizable IRS tax penalty, not to mention that correcting excess HSA contributions can be a hassle.

The next biggest mistake is not contributing to your HSA at all in the years leading up to Medicare enrollment. When you don’t contribute anything to your HSA, you miss out on some key tax benefits both now and down the line.

Even if you’re young and healthy now and Medicare enrollment is decades away, you can still benefit from tax-deductible contributions to your HSA. And when you need the money, you’ll appreciate being able to withdraw it tax-free for qualified medical expenses.

The Takeaway

An HSA is a way to help pay for out-of-pocket medical costs and also save and invest money for healthcare needs in retirement. Just be sure to know the rules regarding HSAs and Medicare to maximize your HSA and avoid any penalties.

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.

🛈 While SoFi does not offer Health Savings Accounts (HSAs), we do offer a range of Individual Retirement Accounts (IRAs) to help with retirement planning.

FAQ

Can I contribute to an HSA after enrolling in Medicare?

Once you enroll in Medicare you cannot make new contributions to an existing HSA or set up a new HSA account. If you continue to make HSA contributions after enrolling in Medicare, the IRS can impose a tax penalty until you remove the contributions from your account.

How can I use my HSA funds after enrolling in Medicare?

Once you enroll in Medicare, you can use your HSA funds to pay for qualified medical expenses and those withdrawals are tax-free. Starting at age 65, you can withdraw HSA funds for any reason without a penalty. You’ll just pay income tax on the withdrawals.

What happens to my HSA if I delay enrolling in Medicare?

Delaying Medicare enrollment doesn’t affect your HSA, though you will still need to stop making HSA contributions at least six months before you enroll. However, it’s important to note that late enrollment in Medicare could trigger penalties, so be sure to research and consider all the possible implications before choosing to delay.

About the author

Rebecca Lake

photo credit: iStock/SethCortright
SoFi Invest®

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

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

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

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

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOIN-Q424-005

Jan

2025

What Is a Self-Directed SEP IRA?

By Rebecca Lake | Financial Topics, Terminology | Comments Off

A self-directed Simplified Employee Pension (SEP) IRA is a tax-advantaged retirement savings plan that’s designed for small business owners and self-employed individuals. When a SEP IRA is self-directed, it means that the account owner chooses their own investment options.

A self-directed SEP IRA can be used to invest in a broad range of investments. At the same time, the SEP IRA has the tax benefits of a standard IRA, when certain conditions are met.

Key Points

• A self-directed SEP IRA allows small business owners and self-employed individuals to choose their own investment options, offering a broad range of investment opportunities.

• Contributions are made by employers, with limits set at 25% of an employee’s compensation or $69,000 in 2024, and $70,000 in 2025.

• The account offers tax benefits to employers and self-employed individuals, including tax-deferred growth. Employers, not employees, can deduct contributions.

• Qualified withdrawals from a self-directed SEP IRA are taxed as ordinary income. Early withdrawals may incur a 10% penalty.

• Self-directed SEP IRAs allow for a range of investments, including alternative investments and precious metals. Prohibited investments include life insurance and collectibles.

Understanding SEP IRAs

A SEP IRA is one of several types of retirement accounts that are geared toward business owners and self-employed individuals. Here’s a look at how these plans work.

Definition and Eligibility

A SEP IRA allows the self-employed and business owners to make contributions toward their own retirement — and toward the retirement of any employees they may have. SEP IRAs operate like traditional IRAs in terms of how they’re treated for tax purposes.

Here are some key points to know about these retirement accounts:

• Contributions to a SEP IRA are made by the employer.

• Employers are not required to make contributions to the plan every year.

• If an employer decides to contribute to a SEP IRA, they must do so on behalf of all eligible employees.

• Employees cannot contribute to their SEP IRA.

• SEP IRA rules allow employers, not employees, to deduct contributions.

• Employer contributions don’t affect what employees can contribute to any traditional or Roth IRAs they may own.

• Qualified withdrawals beginning at age 59 ½ are taxed as ordinary income.

• Withdrawals made before age 59 ½ can trigger a 10% early withdrawal penalty unless an exception is met.

• SEP IRAs are subject to required minimum distribution (RMD) rules.

Small businesses of any size can open a SEP IRA, including sole proprietorships. If you run a small business alone you could use a SEP IRA to fund your own retirement.

If you’re self-employed and considering a solo 401(k) vs. SEP IRA, a SEP account is easier to start and generally has fewer fees and paperwork requirements. SEP accounts also offer the same annual contribution limits as individual 401(k) plans.

Contribution Limits and Tax Advantages

The IRS determines the annual contribution limits for SEP IRAs and other retirement plans. For 2024, employers can contribute the lesser of:

• 25% of the employee’s compensation

• $69,000

For 2025, employers can contribute the lesser of:

• 25% of an employee’s compensation

• 70,000

Unlike other retirement plans, SEP IRAs do not allow for catch-up contributions. Again, all of the money comes from the employer; employees cannot make elective salary deferrals.

There are certain tax benefits of a SEP IRA for employers and self-employed individuals. Employers can deduct contributions made to employee plans. For the self-employed, there’s a special formula for determining what to deduct. You’ll use your net earnings from self-employment, less deductions for one-half of your self-employment tax and contributions made to the plan.

Employees don’t get a tax deduction and they’ll owe taxes on qualified withdrawals in retirement. However, they receive the benefit of contributions made to their account on their behalf and they still have the option to contribute to a traditional or Roth IRA themselves.

What Makes a SEP IRA Self-Directed?

With a traditional or Roth IRA, or a workplace retirement plan, your plan’s custodian, which is the financial institution that holds your plan’s investments, decides which investment options to offer. Typically, that might mean a mix of mutual funds, index funds, target-date funds, and exchange-traded funds (ETFs).

Self-directed SEP accounts allow you to choose investments yourself, including alternative investments. Your custodian holds your IRA but you decide how much to contribute up to the annual contribution limits, and how to invest that money.

Benefits of a Self-Directed SEP IRA

A self-directed SEP IRA offers several benefits for people who are comfortable choosing investments themselves. You’ll need to follow self-directed SEP IRA rules to set up one of these accounts, but it could be worth considering if you run a business or are self-employed. Advantages of a self-directed SEP IRA include:

Tax-Deferred Growth and Diversification

When you contribute to a SEP IRA self-directed plan, you fund your account with pre-tax dollars. Those contributions may grow in the account on a tax-deferred basis; qualified withdrawals are taxed at ordinary income tax rates in retirement.

You may be able to increase diversification in your portfolio with a self-directed SEP account since you can choose from a broader range of investment vehicles. While mutual funds can offer exposure to a variety of investments in a single basket, a self-directed IRA could allow you to move beyond that by choosing other types of investments.

Potential for Higher Returns

A self-directed retirement account has the potential to generate higher or lower returns than other retirement accounts, depending on what you choose to invest in and how those investments perform. No investment is without risk. It’s important to research investments for a self directed SEP IRA to compare:

• Historical performance

• How performance is affected by current market trends

• Risk profiles

• Fees

Higher returns often correspond to higher levels of risk, which is something you’ll need to factor into your decision-making. The closer you are to retirement age, the less comfortable you may be with taking on more risk for the possibility of more profits.

Estate Planning Opportunities

Self-directed SEP IRAs have potential as an estate-planning tool if you’re using them to invest in higher-value assets. The tax-advantaged status of a self-directed IRA may help you preserve more of your wealth if you hold investments that generate significant returns.

You can pass that wealth on by naming one or more beneficiaries to your SEP IRA. You could leave your account to an individual, or name a trust as the beneficiary. Choosing a trust to inherit your self directed IRA funds could make sense if you’d like to maintain a degree of control over how the money is managed after you’re gone.

For instance, if you’re caring for a child, sibling, or other relative with special needs, you might establish a special needs trust on their behalf. You could name the trust as beneficiary to your self- directed retirement accounts to ensure that money is set aside and used for their care.

Setting Up a Self-Directed SEP IRA

Establishing a self-directed IRA for yourself requires some research, as you’ll need to decide which IRA custodian to use and how to fund the account. Once your account is open you’ll need to adhere to tax and reporting requirements.

Choosing a Self-Directed IRA Custodian

A self-directed IRA custodian holds your account and has no responsibility for your investment choices or how those investments perform. When deciding which custodian to use, consider:

• How easy the new account setup process is

• What fees you’ll pay

• Customer support and service if you have questions or need help

• The company’s overall reputation

The SEC warns investors about fraudulent self-directed IRA custodians who may establish fake companies in an effort to take their money. It’s wise to verify whether a custodian is IRS-approved and licensed before opening a self-directed SEP IRA or transferring any money to the account.

Rollover or Transfer Process

Once you’ve found a reputable custodian to work with, you can begin the process of opening and funding your account. The IRS allows you to roll over or transfer funds from an existing retirement account into a self-directed SEP IRA.

• Trustee-to-trustee transfers allow you to move money directly from your old IRA custodian or trustee to your new one. No money enters your hands directly and no taxes are withheld from the transfer amount.

• Direct rollovers let you move money from one type of retirement account, such as a solo 401(k), into a different one, like a self-directed SEP IRA. Similar to transfers, no money enters your hands and no taxes are withheld from the rollover amount.

• Indirect rollovers involve the administrator of your old retirement account sending you a check for the money in the plan, with taxes on the distribution withheld. You then have 60 days to deposit the check into your new self-directed SEP account to avoid a tax penalty.

Of these options, a direct transfer or rollover IRA is the simplest option. Your new custodian should provide you with the paperwork you need to fill out and the information you need to give to your old custodian to initiate a transfer or rollover.

Account Administration and Reporting

Your custodian should handle annual tax filing and reporting requirements with the IRS for you. However, you’re responsible for keeping track of contributions and investment choices, as well as adhering to self-directed SEP IRA rules to maintain the account’s tax-advantaged status.

The IRS outlines the prohibited transactions you must avoid. Failing to follow self-directed IRA rules would cause you to lose their associated tax benefits, including the ability to deduct contributions and tax-deferred growth.

Examples of prohibited transitions include:

• Borrowing money from your self-directed IRA

• Selling property to it

• Using your IRA assets as collateral for a loan

• Using money from your IRA to buy property for personal use

The rules surrounding self directed IRAs and prohibited transactions are complex. You may benefit from talking to a financial advisor so you know what to avoid when managing your account.

Investment Options in a Self-Directed SEP IRA

What can you invest in with a self directed SEP account? Besides mutual funds, ETFs, stocks, and bonds, there are typically a range of alternative investments, such as:

• Real estate, including land

• Precious metals

• Private equity

• Private debt

• Cryptocurrency

• Tax liens

• Commodities

• Mineral rights or land rights

• Bonds

• Convertible notes

• Venture capital

There are, however, a few things you can’t use a self-directed IRA to invest in. The IRS does not allow you to use them to invest in life insurance or anything that’s considered a collectible, such as artwork, antiques, gems, stamps, coins, or fine wines.

The Takeaway

Self-directed SEP IRA accounts may help you build retirement wealth while enjoying some tax advantages along the way. Once you set up an investment account for your SEP IRA, you have the freedom to choose what you’d like to invest in and how you’d like to shape your investment strategy. Just be sure to thoroughly research any investment options you’re considering, and make sure you’re comfortable with the risk involved.

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

Who can open a self-directed SEP IRA?

Self-directed SEP IRAs are available to small businesses of all sizes, including sole proprietorships. If you’re self-employed, you may choose to invest for retirement through a self- directed SEP IRA instead of a solo 401(k) or SIMPLE IRA.

What are the contribution limits for a self-directed SEP IRA?

The annual contribution limit for a self-directed SEP IRA in 2024 is the lesser of 25% of an employee’s compensation or $69,000. In 2025, the contribution limit is the lesser of 25% or $70,000. If you’re self-employed, you’ll need to use a special formula to determine how much of your contributions you can deduct.

Are there any prohibited investments in a self-directed SEP IRA?

The IRS prohibits transactions that involve “self-dealing,” meaning using your self-directed SEP IRA in a way that gives you a personal financial benefit rather than benefiting the IRA (such as using the IRA to buy a property you already own). You’re also barred from using a self-directed SEP IRA to invest in life insurance and collectibles, such as artwork, antiques, fine wines, or rare coins.

About the author

Rebecca Lake

photo credit: iStock/SethCortright
SoFi Invest®

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

SOIN-Q424-004

Jan

2025

Can You Have Mutual Funds in a Roth IRA?

By Rebecca Lake | Investing, Money & Life, Preparing for Retirement | Comments Off

A Roth IRA is a tax-advantaged investment account designed for retirement savings, and a mutual fund is a type of pooled investment that might be found within an IRA.

It may help to think of a Roth IRA as the container that can hold a variety of investments, including shares of mutual funds, which are baskets of securities (like stocks, bonds, or other assets). Like other IRAs, a Roth IRA offers certain tax advantages when saving for retirement.

A mutual fund, on the other hand, is a type of security investors may purchase for their IRA or other type of portfolio. Mutual funds hold a range of securities, and may be actively managed or passively managed. Passive funds are also known as index funds.

Key Points

• A Roth IRA is a tax-advantaged retirement account funded with after-tax money.

• A mutual fund is an investment that can be held within a Roth IRA, as well as other types of investment and retirement accounts.

• A Roth IRA has annual contribution limits. Roth IRAs are also subject to income limits; if you exceed the IRS income limits, you can’t fund a Roth.

• Mutual funds are pooled investment funds that can hold a range of securities (e.g., stocks, bonds, cash, and more).

• There are no annual limits or income restrictions on purchasing mutual fund shares.

What Is a Roth IRA?

A Roth IRA is an individual retirement account that you can open independently of a workplace retirement plan. Because a Roth is funded with after-tax contributions — versus a traditional IRA, which is considered pre-tax, or tax deferred — qualified withdrawals from a Roth IRA are tax free in retirement.

If you open a Roth IRA or a traditional IRA, there are specific rules and restrictions that come with these accounts. There are also certain advantages, especially when saving and investing for retirement.

Roth IRAs have annual contribution limits, just like traditional IRAs and SIMPLE or SEP IRAs (which are designed for self-employed individuals and small business owners).

The maximum annual contribution limit for a Roth IRA in 2024 is $7,000, or $8,000 with the $1,000 catch-up contribution amount for those age 50 or older. For tax year 2025, the contribution limits are unchanged for traditional and Roth IRAs.

As noted above, a Roth IRA can act as a container for a portfolio of assets, including mutual funds.

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

What Is a Mutual Fund?

A mutual fund is a type of pooled investment that is often compared to a basket of securities. It’s not an investment account, but a type of investment itself. Mutual funds may include stocks, bonds, cash or cash equivalents, commodities, and other securities.

Investors typically buy shares of a mutual fund, which provides a level of exposure to a variety of companies or assets, thus offering some basic diversification.

Unlike stocks, which trade throughout the day, mutual fund shares only trade once per day, at the end of the day.

This quick guide to mutual funds explains the basics, and there are more details below about how a mutual fund works.

Recommended: What Is Portfolio Diversification?

How a Roth IRA Works

Roth IRAs are more complicated than traditional IRAs, because they not only come with the standard annual contribution limits, there are also income restrictions that pertain only to Roth IRAs.

In addition, Roth IRAs are subject to a different kind of tax treatment than other types of IRAs.

Tax Advantages of a Roth IRA

Roth IRAs are funded with after-tax dollars. This means you don’t get an upfront tax deduction for Roth IRA contributions the way you would with a traditional IRA. However, you do get the benefit of tax-free withdrawals beginning at age 59 ½.

A Roth IRA also offers the following advantages:

• Tax-free investment growth over time.

• Penalty-free and tax-free withdrawals of original contributions at any time.

• You’re not required to take money from your account starting at age 73, as you are with a traditional IRA.

• Money can remain in your Roth account indefinitely and be passed on to one or more beneficiaries.

Contribution and Income Rules

Anyone with earned income can contribute to a Roth IRA, as long as their modified adjusted gross income (MAGI) is within certain limits.

Here’s a table showing what you can contribute for tax year 2024 and tax year 2025, based on your modified AGI and filing status. You can also use an IRA eligibility calculator to determine your contribution amount.

If you are…	And your modified AGI for tax year 2024 is…	And your modified AGI for tax year 2025 is…	You can contribute…
Married and file jointly or are a qualifying surviving spouse	Less than $230,000	Less than $236,000	Up to $7,000 per year, $8,000 if you’re 50 or older
	More than $230,000 but less than $240,000	More than $236,000 but less than $246,000	A partial amount
	More than $240,000	More than $246,000	No contribution
Married, file separately, and you lived with your spouse at any time during the year	Less than $10,000	Unchanged	A partial amount
	More than $10,000	Unchanged	No contribution
Single, the head of household, or married and filing separately but you did not live with your spouse at any time during the year	Less than $146,000	Less than $150,000	A full contribution
	More than $146,000 but less than $161,000	More than $150,000 but less than $165,000	A partial amount
	More than $161,000	More than $165,000	No contribution

Roth IRA Withdrawal Rules

When you’re ready to withdraw money from your Roth IRA, there are some rules to know. To make a tax- and penalty-free Roth IRA withdrawal, you must:

• Be 59 ½ or older

• Have had your Roth IRA for five years or more, also known as the five-year rule

The IRS allows you to withdraw original contributions from your Roth IRA at any time, with no taxes or penalties. But if you need to take an early distribution of earnings, you’d owe ordinary income tax on the amount of earnings withdrawn.

You’d also pay a 10% early withdrawal penalty on the earnings withdrawn unless you qualify for one of the following exceptions:

• You’re withdrawing the money to pay for unreimbursed medical expenses that exceed 7.5% of your adjusted gross income.

• You need the money to cover medical insurance while you’re unemployed.

• You’re withdrawing funds to pay for qualified higher education expenses.

• The distribution is part of a series of substantially equal periodic payments.

• You’re a domestic abuse survivor and withdraw less than $10,000.

• The IRS levies your Roth IRA to satisfy a tax debt.

• You’re taking a distribution to fund the birth or adoption of a child.

• You’re a military reservist on active duty.

• You’re using the money for expenses related to qualified disaster recovery.

• You become totally and permanently disabled.

• You withdraw up to $10,000 towards the purchase of a home.

The 10% penalty is also waived if your Roth IRA beneficiary withdraws money early because you’ve passed away. Because IRA rules are subject to change, it’s wise to consult with a professional, or check IRS.gov, for updates.

How a Mutual Fund Works

If you choose to invest in a mutual fund in your Roth IRA, or in any type of retirement account or taxable account, it’s important to understand the wide variety of mutual funds available.

Active vs. Passive Mutual Funds

The first point of distinction in the world of mutual funds is the difference between active management and passive management.

• Active investing refers to a strategy where human portfolio managers oversee the fund’s portfolio, and pick investments they believe will outperform the market.

• By contrast, passive investing doesn’t involve live portfolio managers. This strategy relies on an algorithm to mirror the performance of certain market sectors or indexes.

Passive investing is also known as index investing, as the fund’s portfolio tracks an index. For example, the S&P 500 index tracks the performance of the top 500 biggest companies in the U.S. The Dow Jones Industrial Average (often called the Dow) tracks 30 top industrial companies. The Nasdaq composite index tracks over 3,000 companies mainly in the tech sector.

Types of Mutual Funds

Mutual funds are then categorized by what they hold. Some of the most common types of mutual funds include:

• Stock mutual funds, which concentrate holdings in corporate stocks

• Bond funds, which are focused on different types of bonds

• Money market funds, which hold short-term investments issued by corporations and government entities

• Target-date funds, which adjust their asset allocation based on the investor’s target retirement date

Within those categories, you’ll find plenty of variety. For example, some stock funds invest exclusively in growth stocks or large-cap companies, while others primarily hold stocks that pay dividends to investors.

Bond funds may center on corporate bonds, municipal bonds, green bonds, or a mix of different bond types.

Fees and Expenses Associated With Mutual Funds

Mutual funds have fees, which reduce the returns you earn. Before you buy a mutual fund, it’s important to review the prospectus so you know what you’ll pay. Some of the most common mutual fund fees include:

• Sales loads

• Redemption fees

• Exchange fees

• Purchase fees

• Account fees

• Management fees

• Distribution fees

If you’re confused by the various fees, it may be easier to focus on the expense ratio. The expense ratio, which is expressed as a percentage, represents the fund’s total operating expenses. The lower this number is, the less you’ll pay to own the fund. For example, there’s a noticeable difference in the amount you’ll pay annually when your fund’s expense ratio is 0.02% vs. 0.20%.

A $10,000 investment in a mutual fund with an expense ratio of 0.02% would cost $200 per year; an expense ratio of 0.20% would cost $2,000 per year, hypothetically.

Roth IRAs and Mutual Funds: Key Points to Know

When considering investing in mutual funds through a Roth IRA account, it’s important to understand how each of them works, since you’re talking about two separate things. Here’s a table that highlights the main points to know about each.

	Roth IRA	Mutual funds
What it is	A tax-advantaged investment account that’s designed for retirement.	A pooled investment vehicle that holds a collection of securities.
How it’s taxed	Roth IRAs offer tax-free qualified withdrawals beginning at age 59 ½, with no required minimum distributions at any age.	Mutual funds are subject to capital gains tax when held in a taxable account; funds held in a Roth IRA are subject to Roth IRA tax rules.
Who it’s for	Individuals who want to save for retirement on a tax-advantaged basis, and who meet the IRS income guidelines.	Individuals who want to gain exposure to a broad range of investments in a single vehicle.

Investing in Mutual Funds Within a Roth IRA

One misconception is that you have to choose between a Roth IRA or mutual fund to invest in; in reality, you can do both. You can hold one or more mutual funds inside a Roth IRA (or any type of IRA). You can also invest in mutual funds within a taxable brokerage account outside of your Roth.

Types of Funds to Consider

When you open a Roth IRA, you’ll have to decide what you want to invest in. Your brokerage will likely offer you a selection of mutual funds to choose from, including:

• Index funds

• Bond funds

• Growth funds

• Dividend funds

Your choice of funds can depend on your risk tolerance and overall objectives. If you’re in your 30s and have years to invest, for instance, you might be comfortable with more aggressive growth funds.

Once you reach your 60s, on the other hand, you may want to shift more of your assets into bond funds to minimize risk.

As you compare fund options, consider:

• Historical performance

• Risk profiles

• Expense ratios

It’s also important to look at the underlying holdings of each fund so you understand what it owns and how often investments turn over.

Can you lose money in a Roth IRA? Yes, if your investments don’t perform as well as you expected when the market is down. When selecting mutual funds for your Roth IRA account, remember that past performance isn’t a guaranteed indicator of what a fund will do in the future.

Asset Location and Tax Efficiency

Should you keep mutual funds in a Roth IRA? It can make sense from a tax perspective. Funds held within your Roth IRA are subject to Roth taxation rules. That means qualified withdrawals are tax free, starting at age 59 ½.

If you were to hold mutual funds in a taxable brokerage account, on the other hand, you’d likely owe capital gains tax if you sold your shares at a profit.

Rebalancing and Portfolio Management

Rebalancing means reevaluating your portfolio’s asset allocation and buying or selling assets as needed to maintain your ideal mix of assets. It’s usually a good idea to rebalance at least once a year to make sure that you’re maintaining the right mix to meet your goals.

For example, say that you prefer a 70% to 30% split between stocks and bonds in your Roth IRA. Over the past year, that split may have crept closer to 60/40, and you feel you’re missing out on returns. You might sell some of the bond funds in your account and replace them with growth or dividend funds instead.

Rebalancing doesn’t trigger tax consequences since a Roth IRA is tax-advantaged. If you’re not sure what you should be doing to keep your asset allocation aligned, you may want to get help from a financial advisor.

The Takeaway

With the clarification that a Roth IRA is a type of tax-advantaged retirement account, and a mutual fund is a type of investment that can be held within an IRA, it may be easier to take the next step with your own investment plans.

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

Help grow your nest egg with a SoFi IRA.

FAQ

Can you invest in both a Roth IRA and mutual funds?

Yes, in that you can open a Roth IRA account, and purchase mutual fund shares within the IRA account. But an IRA is not a type of investment, whereas a mutual fund is. You would invest your money in a mutual fund or other type of asset, and you could then hold those investments in the Roth or traditional IRA account.

What are the contribution limits for a Roth IRA and for a mutual fund?

Roth IRAs are subject to annual contribution limits, as determined by the IRS; mutual funds are not. For 2024 and 2025, the maximum contribution to a traditional or Roth IRA is $7,000; $8,000 if you’re age 50 or older. Mutual funds have no maximum contribution limit, though there may be a minimum contribution required to invest in a fund.

About the author

Rebecca Lake

Photo credit: iStock/zamrznutitonovi

SoFi Invest®

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

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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.

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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN-Q424-009

Jan

2025

How to Stop Online Shopping

By Ashley Kilroy | Budgeting & Goals, money, Money & Life | Comments Off

Since it’s so easy to do and omnipresent, online shopping can sometimes lead to debt. If this is the case for you, there are steps you can take to rein in your digital purchases, such as identifying triggers, deleting your card info from apps and websites, and trying other strategies.

Online shopping can give you access to a multitude of retailers with just a click or two, and its popularity continues to grow. The number of Americans using e-commerce is expected to grow by almost 22% between 2024 and 2029, adding 60 million online shoppers to the current estimate of 273.5 million. To help you curb excessive online shopping, try these tactics for spotting bad spending habits and building better ones.

Key Points

• Online shopping can lead to debt; identifying triggers and removing saved card information can help curb spending.

• Developing new hobbies can replace time spent online shopping, and unsubscribing from retailer emails can help avoid temptation.

• Setting specific financial goals and sharing them with others can provide accountability and motivation.

• Creating a realistic budget using methods like the 50/30/20 rule can help manage spending effectively.

• Using apps and tools to track spending can help maintain progress towards financial goals.

Understanding Your Online Shopping Habits

It’s easy to ignore poor online shopping habits and assume they’re no big deal. Until, that is, you see how low your checking account is or how high your credit card balance has risen. That can quickly bring you back to reality.

When those moments occur (or, better still, before they do), it can be wise to evaluate whether you need to cut back on online shopping.

Identifying Triggers and Patterns

If you’re wondering whether it’s time to cut back on shopping and spending, here are a few signs to watch for:

• You’re spending a lot of your free time and money on online shopping.

• Your online shopping is making it hard to stick to your budget.

• Buying items online is causing you to have credit card debt or owe a higher balance than in the past.

• It’s tough to resist making purchases, even when you know it might hurt your finances or lead to debt.

• You may be prioritizing shopping over other important responsibilities.

• You feel uneasy or tense when you’re not shopping.

• There’s a sense of guilt or regret about your online spending habits.

• After a tough day, you often turn to online shopping to lift your mood.

• You often buy something just because it’s on sale.

These can be signals that it’s time to stop online shopping and develop better financial habits.

Recommended: How to Combine Bank Accounts

Assessing the Impact on Your Finances

Do you know that around 40% of Americans say they have a budget for online shopping, but about 32% admit they often go over it, according to Badcredit.org? While going over budget now and then might not hurt your finances too much, doing so regularly can lead to debt and make it harder to get back on track to reaching your money goals.

If you want to see how much you’re really spending online, here are some ways you might track your purchases and check if you’re overspending:

• Keep your receipts: Holding onto your receipts (whether paper or emailed) can make it easier to remember and review what you’ve spent at the end of the month.

• Check credit card and bank statements: Many credit cards and banks have built-in budget trackers on their online platforms and in their apps. Some even break your spending into categories so you can easily see where your money is going.

• Record your transactions: Even small buys, like toothpaste from Amazon, count as online spending. Keep your eyes peeled for these items which are easy to overlook. Budgeting apps, whether from your bank or a third party, or a little notebook can help you easily track your transactions.

By keeping an eye on your online spending with one of these methods, you can see if you’re going over your budget and determine if you need to cut back on your spending habits.

Strategies to Curb Online Shopping

Whether your spending habits are big or small, using a few smart tactics can help you reduce your online shopping and make the most of your money. Here’s how.

Creating a Realistic Budget

Creating a budget (and sticking to it) is one of the best ways to manage your spending habits more effectively. While there’s no one-size-fits-all solution, there are plenty of strategies you can use to find what works best for you. A few to consider:

• 50/30/20 Rule: This budgeting method has you split your monthly take-home income into three categories: 50% for needs (like rent or mortgage, groceries, utilities, and minimum debt payments), 30% for wants (like dining out, travel, or movies), and 20% for savings or additional debt payments. Say you net $5,000 a month. If you use this method, you’d set aside $2,500 for needs, $1,500 for wants, and $1,000 for savings. You can use an online 50/30/20 budget calculator to do the math.

• 70/20/10 Rule: This strategy is similar to the 50/30/20 rule, but you allocate 70% for needs and wants, 20% for savings, and 10% for paying off debt or charitable donations. This is a good option if debt repayment is one of your main focuses or if you have big savings goals.

• Zero-based budgeting: With this strategy, you assign every dollar to a job or expense, like dining out, health care, or clothes. Start with your monthly income and subtract all your expenses — including savings — until you reach zero. This approach helps you stay aware of where every dollar is going.

• Envelope budget system: Set aside a specific amount of cash divided into envelopes for each spending category, like $3,000 for housing or $600 for food. Once the money in each category is gone, you either wait until next month or adjust by borrowing from another category, like cutting back on streaming services to fund your grocery bill.

Developing Healthier Shopping Habits

If you find that impulse buying is becoming a bad habit, there are ways to start building healthier spending patterns. Here are some tips to help you get started:

• Try the 24-hour rule. When you find something you want to buy that isn’t a necessity, try waiting at least 24 hours before buying it. This gives you more time to think about whether you really need it. If you still want it after waiting, shop around to find the best deal, as different sites usually offer different prices and deals. Some people find that the 24-hour period isn’t long enough to have the “I’ve got to have it” feelings potentially subside. You could extend it to a week or even a month.

• Delete your saved credit card details. Today’s digital tools can make life more convenient, as with online banking and hotel reservation apps. But online shopping can lower the barrier to purchase and make it easy (some might say too easy) to buy items with just one click. By removing your saved card info, you add an extra step to the purchase process. This also gives you more time to decide if the purchase is really necessary.

• Pick up a new hobby. Instead of browsing shopping sites when at loose ends or bored, try picking up a new inexpensive hobby like reading, photography, or learning coding or social media strategy online. Swapping out your old shopping habit for a new hobby can help reduce the temptation to shop online.

• Unsubscribe from retailer and merchant emails. Stores love to tempt you with emails about their latest deals. Unsubscribing from these emails can help you avoid the urge to make impulse purchases. If you don’t know about the deal, you won’t be tempted to buy.

• Limit your shopping time. The more time you spend looking at online retail sites or being served ads on social media, the more enticing objects you’ll be exposed to. Try to limit how much time you spend browsing to help reduce the temptation to shop. You might use a browser extension (such as Pause) to limit access to shopping sites as an easy way to save money.

Seeking Support and Accountability

Setting financial goals is a great way to help you stay accountable. Start by creating specific savings or spending goals. For example, you might want to build your emergency savings fund to cover three to six months’ worth of income or save money for that dream beach vacation. Whatever your goals are, make them specific, set a deadline, and create a savings plan.

You may also want to share your goals with friends or family members who can support you and hold you accountable. You can even schedule regular check-ins to track your progress, make adjustments if needed, and recommit to your money goals. Having someone to share this process with can keep you motivated and on track. Plus, isn’t it more fun when you have someone cheering you on?

Dealing with Setbacks and Maintaining Progress

Even after you’ve created a budget, set goals, and built healthy spending habits, setbacks are bound to happen — and that’s okay. It’s not about being perfect 100% of the time. It’s about making progress and continuing to move toward your goals.

Here are a few tips to help you handle those bumps in the road when it comes to reducing online shopping:

• Review your budget and make adjustments. Set aside time to regularly review your budget, perhaps weekly and monthly. By tracking your spending, you can see where you stand. If something isn’t working, don’t be afraid to tweak it to fit your current needs.

• Set up automatic bank transfers. Setting up automatic transfers between bank accounts (say, from your checking to savings right after you’re paid) can simplify the saving process for you. This way, you can stay consistent without having to think about it, which can help you stay on track to achieve your goals. Also, having money whisked out of your checking account can be a good thing. You won’t be feeling as rich and therefore tempted to start shopping.

• Build an emergency fund. Unexpected expenses pop up all the time. Not having an emergency fund can leave you vulnerable to going into debt when surprise costs arise — like pricey car repairs or plane tickets for holiday travel. This cushion will help ease the stress when life throws you a curveball.

• Use budgeting tools. Plenty of apps and tools are available to help you track spending and savings. One of these can keep you on top of your spending habits and help you avoid going over budget. You might start by seeing what your financial institution offers and then research third-party apps, if needed.

The Takeaway

If your spending habits have become a problem and you’re wondering how to stop online shopping, there are plenty of ways to tackle it. Start by creating a budget, blocking access to your favorite shopping sites, and focusing on positive spending habits. You may find that you need new hobbies to fill the time you used to spend shopping online, or that you can delete your banking details saved on websites and in apps, thereby discouraging impulse buys.

The right banking partner can also help make it easier to monitor your money and stay on track.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 3.80% APY on SoFi Checking and Savings.

FAQ

What are some effective strategies to curb impulse online purchases?

Some of the best ways to curb your online impulse buying are to create a budget, stick to shopping lists, limit time spent online, and delete financial information saved online or in apps (that could lead to impulse buying). You can also try delaying gratification, where you wait at least a period of time before making a purchase. This gives you time to think it over, and often you’ll realize you don’t really need the item.

How can I block or limit access to online shopping sites?

One way to limit your online shopping is by using a browser extension like Pause, which blocks distracting sites (it comes preloaded with some; you can add more) for a brief, programmable period of time. This gives you time to think before diving in. You can also block specific sites directly through your browser’s privacy and security settings. Deleting saved financial details (such as credit card numbers) from sites and in apps can also slow down the online shopping process and give you time to reconsider a purchase.

Are there apps that can help control online shopping habits?

Yes, there are apps like Stop Impulse Buying and the Daily Bean (a diary-style log) that can help you reduce those online shopping urges by tracking your spending habits. You can also try budgeting apps and tools provided by your financial institution to keep a closer eye on where your money is going.

About the author

Ashley Kilroy

Ashley Kilroy is a seasoned personal finance writer with 15 years of experience simplifying complex concepts for individuals seeking financial security. Her expertise has shined through in well-known publications like Rolling Stone, Forbes, SmartAsset, and Money Talks News. Read full bio.

Photo credit: iStock/Bevan Goldswain

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2025 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with Eligible Direct Deposit activity can earn 3.80% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below).

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.

As an alternative to Direct Deposit, SoFi members with Qualifying Deposits can earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Eligible Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving an Eligible Direct Deposit or receipt of $5,000 in Qualifying Deposits to your account, you will begin earning 3.80% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Eligible Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Eligible Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Eligible Direct Deposit or Qualifying Deposits until SoFi Bank recognizes Eligible Direct Deposit activity or receives $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Eligible Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Eligible Direct Deposit.

Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

Members without either Eligible Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, or who do not enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days, will earn 1.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 1/24/25. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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

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

This content is provided for informational and educational purposes only and should not be construed as financial advice.

SOBNK-Q424-023

Understanding Special Needs Financial Planning

The Importance of Special Needs Financial Planning

Key Components of a Special Needs Financial Plan

Long-Term Care Considerations

Retirement Planning With a Special Needs Child

Estate Planning for Special Needs Families

Creating a Letter of Intent

Working With Special Needs Financial Planners

The Takeaway

FAQ

How does special needs financial planning differ from traditional planning?

When should I start special needs financial planning?

Can siblings be involved in special needs financial planning?

HSAs and Medicare: What You Need to Know

Understanding Health Savings Accounts (HSAs)

HSA Contributions and Medicare Enrollment

How Medicare Affects HSA Eligibility

Managing Your HSA When Transitioning to Medicare

Using HSA Funds in Retirement

HSAs vs. Medicare Savings Accounts

Maximizing HSA Benefits Before Medicare

Common Mistakes to Avoid

The Takeaway

FAQ

Can I contribute to an HSA after enrolling in Medicare?

How can I use my HSA funds after enrolling in Medicare?

What happens to my HSA if I delay enrolling in Medicare?

What Is a Self-Directed SEP IRA?

Understanding SEP IRAs

Definition and Eligibility

Contribution Limits and Tax Advantages

What Makes a SEP IRA Self-Directed?

Benefits of a Self-Directed SEP IRA

Tax-Deferred Growth and Diversification

Potential for Higher Returns

Estate Planning Opportunities

Setting Up a Self-Directed SEP IRA

Choosing a Self-Directed IRA Custodian

Rollover or Transfer Process

Account Administration and Reporting

Investment Options in a Self-Directed SEP IRA

The Takeaway

FAQ

Who can open a self-directed SEP IRA?

What are the contribution limits for a self-directed SEP IRA?

Are there any prohibited investments in a self-directed SEP IRA?

Can You Have Mutual Funds in a Roth IRA?

What Is a Roth IRA?

Get a 1% IRA match on rollovers and contributions.

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

What Is a Mutual Fund?

How a Roth IRA Works

Tax Advantages of a Roth IRA

Contribution and Income Rules

Roth IRA Withdrawal Rules

How a Mutual Fund Works

Active vs. Passive Mutual Funds

Types of Mutual Funds

Fees and Expenses Associated With Mutual Funds

Roth IRAs and Mutual Funds: Key Points to Know

Investing in Mutual Funds Within a Roth IRA

Types of Funds to Consider

Asset Location and Tax Efficiency

Rebalancing and Portfolio Management

The Takeaway

FAQ

Can you invest in both a Roth IRA and mutual funds?

What are the contribution limits for a Roth IRA and for a mutual fund?

How to Stop Online Shopping

Understanding Your Online Shopping Habits

Identifying Triggers and Patterns

Assessing the Impact on Your Finances

Strategies to Curb Online Shopping

Creating a Realistic Budget

Developing Healthier Shopping Habits

Seeking Support and Accountability

Dealing with Setbacks and Maintaining Progress

The Takeaway

FAQ

What are some effective strategies to curb impulse online purchases?

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

Student Loan
Refinancing

Personal
Loans

Online
Investments