Dec
30
2024
Guide to Achieving a Better Life Experience (ABLE) Accounts

Guide to Achieving a Better Life Experience (ABLE) Accounts

By | Budgeting & Goals, Financial Independence, money | Comments Off on Guide to Achieving a Better Life Experience (ABLE) Accounts

An ABLE account — short for Achieving a Better Life Experience — is a tax-advantaged savings vehicle that’s designed for eligible people with disabilities. Designated beneficiaries can use an ABLE savings account to set aside money to pay for qualified disability-related expenses.

An ABLE savings account can offer substantial tax benefits for qualified individuals, as contributions grow tax deferred and qualified withdrawals are also tax free. Also referred to as a 529 A account (owing to its similarity to a 529 college savings plan), the ABLE account is designed to make saving and investing more advantageous for people with disabilities and their families.

What Is an ABLE Account?

An ABLE account is a tax-advantaged savings account for people with disabilities and their families. ABLE savings accounts allow people to pay for qualified disability expenses (QDEs) without impacting their ability to qualify for Medicaid or other government assistance programs.

The Achieving a Better Life Experience Act became law in December 2014. The intention behind the ABLE Act and the creation of ABLE accounts was to ease financial stress associated with paying for many of the QDEs associated with different disabilities. Qualified expenses include: housing, education, assistive technologies, specially equipped vehicles, and even food.

Under the ABLE Act, states have the authority to establish an ABLE disability account program. As of June 2022, all 50 states offer at least one ABLE savings account program, according to the ABLE National Resource Center. However, plans are currently inactive in Idaho, North Dakota, South Dakota, and Wisconsin.

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How Do ABLE Accounts Work?

An ABLE account is a type of tax-deferred savings account similar to a 529 college savings plan. These accounts work by allowing designated beneficiaries to contribute money, up to prescribed limits.

The money can come from various sources, including individual or corporate contributions, or a trust. The money in an ABLE savings account does not affect your eligibility for other government benefits.

Also like a 529 plan, the money grows on a tax-deferred basis and can be withdrawn tax free when it’s used to pay for qualified disability expenses. Broadly speaking, QDEs are any expenses a person with disability pays in order to maintain their health, independence, and quality of life.

However, withdrawals from an ABLE savings account for non-qualified expenses can result in those distributions being subject to tax. Using money in an ABLE disability account for non-qualified expenses could also affect eligibility for government assistance.

Benefits of an ABLE Account

Generally speaking, ABLE savings accounts are designed to make paying for certain expenses easier for people with disabilities. Here are some of the main advantages of opening an ABLE savings account.

Tax-Deferred Growth and Tax-Free Withdrawals

One of the main draws of ABLE accounts is their tax-advantaged status. The money that goes into an ABLE account can be invested and allowed to grow on a tax-deferred basis. As long as distributions are used to pay for QDEs, withdrawals are always 100% tax-free.

ABLE accounts have an edge over savings accounts, since designated beneficiaries can invest their money in the market. That means they have an opportunity to grow their savings through the power of compound interest.

Flexibility

The ABLE account allows for flexibility, since the money can be used to pay for a wide range of disability-related costs. With a traditional 529 plan, savers are limited to using funds to pay for education-related expenses. The ABLE savings account allows designated beneficiaries (i.e. the disabled individual or family member) to use the money for the categories noted above — housing, transportation, technology, food, etc. — as well as employment training, health and wellness costs, legal and administrative fees, and more.

Friends, family members, and others can contribute to ABLE accounts on behalf of the designated beneficiary, up to the annual limit. For 2024, the annual contribution limit, including rollovers from 529 plans, is $18,000.

And beneficiaries don’t have to worry about those contributions affecting their ability to qualify for Medicaid, Supplemental Security Income (SSI), or other forms of government aid, assuming they’re within certain limits. To learn more about who can make qualified contributions, check the ABLE website, or consult the ABLE program in your state.

One further note: In addition, a U.S.-resident ABLE account owner who doesn’t participate in an employer-sponsored retirement plan can contribute up to an additional $14,580 from their earnings into their ABLE account. The amount that can be added to the account is higher for residents of Alaska at $18,210 and Hawaii at $16,770. (More details on this below.)

Financial Autonomy

ABLE accounts afford designated beneficiaries with a measure of financial independence, since they can set up an ABLE account themselves and make contributions on their own behalf. Individuals can also manage the account, and decide how to invest their savings and when to take qualified distributions for eligible expenses.

An ABLE account can give a person with disabilities more control than something like a special needs trust, a type of trust fund. In a special needs trust, the trust grantor sets aside assets for a disabled beneficiary but that beneficiary doesn’t have a say in how the money can be used.

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Drawbacks of an ABLE Account

While ABLE accounts have some positives, they’re not necessarily right for everyone who has a disability. Here are some of the potential drawbacks to consider when deciding whether to open an ABLE account.

Non-Deductible Contributions

Contributions to an ABLE savings account do not offer a tax break in the form of a deduction. (This is also true of some state 529 plans.) So even if you fully fund an ABLE account up to the annual limit each year, you can’t use those contributions as tax deductions.

Age Restrictions

An ABLE account can only be established for someone who has a blindness or disability that began before age 26. So someone who becomes disabled at age 27 or later would not be able to open an ABLE disability account.

The age requirement puts this type of special needs savings account out of reach for some individuals, though they could still be named the beneficiary of a special needs trust.

Worth knowing: There’s legislation afoot to raise the age of eligibility to “before 46” versus “before 26” in 2026.

Means Testing

Money held in an ABLE account is subject to means testing for the purposes of qualifying for Supplemental Security Income and Medicaid. The first $100,000 in ABLE account assets is disregarded for SSI but going over that limit can result in a suspension of your benefit payments.

The $100,000 account balance threshold doesn’t affect Medicaid eligibility. But if a designated beneficiary passes away with money remaining in their ABLE account, the state can lay claim to those assets in order to recoup any Medicaid benefits that were received.

Opening an ABLE Account

People with disabilities can open an ABLE account in any state, as long as that state’s plan is open for enrollment. The ABLE National Resource Center maintains a map with details for each state’s program, including whether out-of-state residents are accepted.

Once you find an eligible program, you can open an ABLE account online. There’s some basic information you’ll need to provide, including:

•   Your name

•   Date of birth

•   Social Security number

•   Bank account number

Parents can open an ABLE account on behalf of a minor child with disabilities. You also have to meet the definition of a designated beneficiary. In New York, for example, you must be able to show that one of the following is true:

•   You’ve been classified as blind as defined in the Social Security Act

•   You’re entitled to SSI or Social Security Disability Insurance (SSDI) due to a disability

•   You have a disability that’s included on the Social Security Administration’s List of Compassionate Allowances Conditions

•   You have a written diagnosis from a licensed physician documenting a physical or mental impairment which severely limits function, and is expected to last at least one year, or can cause death

Similar to opening a bank account, there may also be a low minimum deposit requirement to open an ABLE account.

Requirements of an ABLE Account

There are certain requirements that must be met in order to open an ABLE account. Generally, you’re eligible for one of these accounts if you:

•   Become eligible for Supplemental Security Income based on disability or blindness that began before age 26; or

•   Are entitled to disability insurance benefits, childhood disability benefits, or disabled widow’s or widower’s benefits based on a disability or blindness that began before age 26; or

•   Certify that you have a medical impairment resulting in blindness or disability that began before age 26.

Again, age and disability status are the most important requirements for ABLE savings accounts. You can open an ABLE account in your home state or in another state, if that state’s program allows non-residents to enroll. It’s important to note, however, that you can only have one ABLE account in your name.

How Much Can You Contribute to an ABLE Account?

The annual contribution limit is pegged to the gift tax exclusion limit each year, which is $18,000 for 2024. Eligible designated beneficiaries can, however, contribute additional money if they’re employed and have earned income for the year.

The IRS limits those contributions to an amount up to the lesser of:

•   The designated beneficiary’s compensation for the year, OR

•   The poverty line amount for a one-person household as established by the Community Services Block Grant Act

For 2024, the allowable amount for persons with disabilities in the continental United States is up to $14,580. The limit for residents of Alaska $18,210 and Hawaii at $16,770.

Funds from a 529 college savings account can be rolled into an ABLE account. Any rollovers count toward the annual contribution limit. So if $6,000 have been contributed to the plan for the year already, in theory you could rollover up to $12,000 into an ABLE account from a 529 savings account for 2024.

How Can You Use ABLE Money?

As discussed earlier, money in an ABLE savings account can be used to pay for qualified disability expenses. That means expenses that are paid by or for the designated beneficiary and are related to their disability.

Examples of things you can use ABLE money for include such living expenses and other costs as:

•   Education

•   Housing expenses

•   Food

•   Transportation

•   Employment and career training and support

•   Assistance technology and related services

•   Health care

•   Prevention and wellness

•   Financial management and administrative services

•   Legal expenses

•   Funeral and burial expenses

•   Day-to-day living expenses

The IRS can perform audits to ensure that ABLE account funds are only being used for qualified disability expenses. So designated beneficiaries may want to keep a detailed record of withdrawal and how those funds are used, including copies of receipts.

ABLE Accounts vs Special Needs Trusts

A special needs trust (SNT) is another option for setting aside money for disability expenses. In a special needs trust, the beneficiary does not own any of the trust assets but the money in the trust can be used on their behalf. A trustee manages trust assets according to the direction of the trust grantor.

Here’s how ABLE accounts and special needs trusts compare at a glance. You may benefit from consulting a tax professional to understand when and how income from an SNT may be taxed.

ABLE Account

 Special Needs Trust
Tax Treatment Growth is tax-deferred and qualified withdrawals are tax-free; there is no tax deduction for contributions. Income generated by the trust (i.e. withdrawals) is generally taxable to the beneficiary during their lifetime.
Control Designated beneficiaries can control how assets in their account are managed. The trustee manages the trust on behalf of the beneficiary, according to the wishes of the grantor.
Contribution Limits Contribution limits correspond to annual gift tax exclusion limits. No limit on contributions, though the gift tax may apply to contributions over the exclusion limit.
Medicaid/SSI Impact Up to the first $100,000 in assets is not counted for SSI purposes; balances are not counted for Medicaid eligibility. Assets are not counted toward Medicaid or SSI eligibility.
Use of Funds Funds can be withdrawn tax-free to pay for qualified disability expenses. Funds can be withdrawn for any purpose, though they’re typically used for disability expenses. The beneficiary may owe taxes.
Age Requirement Disability must have occured before age 26. Beneficiaries must be under age 65 when the trust is created.

Alternatives to ABLE Accounts

If you don’t qualify for an ABLE account or you’re looking for ways to save on behalf of a disabled child or dependent, there are other accounts you might consider. Here are some options to weigh when looking for alternatives to ABLE accounts.

Special Needs Trust

As mentioned, an SNT can also be used to pay for disability-related expenses. Establishing a trust can be a little more involved than opening an ABLE account, since you’ll need to create the trust on paper, name a trustee, and fund it with assets. But doing so could make sense if you care for a disabled child or dependent and you want to ensure that they’ll be taken care of should something happen to you.

529 College Savings Account

A 529 college savings account is designed to help parents and other individuals save money for education while enjoying some tax benefits. Contributions can be made on behalf of a beneficiary with disabilities. That money can grow tax-deferred, then be withdrawn tax-free to pay for qualified education expenses.

You might open a 529 college savings account for yourself or your child to help them pay for school without incurring student debt.

Bank Accounts

Opening one or more bank accounts is another way to set aside money to pay for disability expenses. Bank accounts won’t yield any tax breaks but they can allow for convenience and accessibility.

•   Opening deposits: Brick-and-mortar banks might require an opening deposit of anywhere from $5 to $100 while online banks might allow you to open a checking or savings account with as little as $1 or even $0, with funds to be deposited in the future.

•   You’ll need government-issued ID, like a driver’s license, to open an account.

•   So how long does it take to open a bank account? Not long, if you’re doing it online. Typically, when you have your basic forms of ID ready, the time it takes to open an online account is minimal.

•   When can you create a bank account online? The simple answer is when you’re old enough to do so. Keep in mind that the legal age to open a bank account in your name is typically 18 so if you’re underage, you may need your parents to open the account for you.

•   Online banks and traditional banks can offer a variety of account options. Student checking and savings accounts, for example, are designed for younger teens. Older teens who are headed off to university might be interested in opening a bank account for college students.

Banks can also offer certificate of deposit (CD) accounts and money market accounts.

If you’re wondering whether you can open a bank account with no ID, the answer is no. You’ll need some form of personal identification, such as a government-issued ID, in order to open a bank account online or at a brick-and-mortar bank.

The Takeaway

An ABLE account can make it easier for someone with disabilities to meet their needs while maintaining control over their finances. With an ABLE account, the money that’s contributed grows tax-free and can be withdrawn tax free to pay for qualified expenses relating to the care of a disabled person. Another benefit: Those qualified expenses aren’t limited to health care. The range of expenses include housing, food, transportation, employment — as well as health and wellness and preventive care.

In addition, you may want to consider other options, such as online bank accounts, for growing your savings.

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.


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FAQ

What is considered an ABLE account?

An ABLE account is a tax-advantaged account that’s administered through a state program for the purposes of helping persons with disabilities to save and invest money. An ABLE account’s tax status sets it apart from bank accounts, college savings accounts, or Individual Retirement Accounts (IRAs). You can sign up with your state program.

Should you have both an ABLE account and a special needs trust?

It’s possible to have both if that’s desired. An ABLE account can be managed by its designated beneficiary, allowing them control over their finances. Special needs trusts are managed by a trustee on behalf of the beneficiary, meaning they cannot direct how the money is spent. Having both an ABLE account and a special needs trust can help to ensure that someone with disabilities is taken care of financially while allowing them a measure of independence.

Is a Roth IRA an ABLE account?

No. A Roth IRA is a tax-advantaged account that’s used for retirement savings. Roth IRAs are funded with after-tax dollars and qualified distributions are tax-free. They’re not limited to persons with disabilities while an ABLE account is designed to be used specifically for qualified disability expenses.

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As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 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 a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% 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 Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Dec
30
2024
All You Need to Know About IRA Certificates of Deposit (CDs)

All You Need to Know About IRA Certificates of Deposit (CDs)

By | Budgeting & Goals, Growing Wealth, Investing, money, Preparing for Retirement | Comments Off on All You Need to Know About IRA Certificates of Deposit (CDs)

An IRA CD is simply an individual retirement account (IRA) in which the investor has opened one or more certificates of deposit (CDs).

This may provide tax advantages and be a smart long-term move for some savers. Keep reading to learn how an IRA CD works and its pros and cons.

What Is an IRA CD?

An IRA CD is an IRA where your money is invested in certificates of deposit. In other words, an IRA CD is a traditional, Roth, or other type of IRA account where the funds are invested at least partly in CDs.

Investing in CDs can offer some tax advantages and may be a good option for long-term savings. As you may know, a CD, or certificate of deposit, is a time deposit. You agree to keep your funds on deposit for a certain amount of time, typically at a fixed interest rate.

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How Do IRA CDs Work?

If you choose to put your retirement money in an IRA, you have the chance to choose investments that might include stocks, mutual funds, bonds — and also CDs. By investing in CDs within an IRA, you can add to your portfolio’s diversification. Unlike equities, CDs can offer a predictable rate of return.

By investing in an IRA CD, you no longer have to pay taxes on the interest gains, and the money can grow taxed-deferred.

But if you withdraw funds prior to the CD’s maturity date, and you’re under age 59½, you’ll need to pay income taxes and likely a 10% penalty. Plus, your bank may charge you a fee for making an early withdrawal from the CD. Once the IRA CD matures, you can renew the CD or transfer the funds into another investment held in your IRA.

How much can you contribute to an IRA CD? It depends on the type of IRA account you choose. The annual contribution limit for a traditional and Roth IRA is $7,000 for both 2024 and 2025. Those 50 and older can contribute an additional $1,000 per individual, for a total of $8,000 per year. The contribution limits for SEP IRAs are typically higher.

If you choose an IRA CD with a bank or credit union backed by the Federal Deposit Insurance Corp., or FDIC, your money in the IRA CD is insured for up to $250,000 per depositor, per account ownership category, per insured institution. This means that if the bank goes under for any reason, your retirement funds are covered up to that amount.

CD Basics

A CD or a certificate of deposit is a type of savings or deposit account that usually offers a fixed interest rate for locking up your money for a certain period of time, known as the term. An investor deposits funds for the specified terms (usually a few months to a few years), and cannot add to the account or withdraw funds from the account until the CD matures.

In exchange, for keeping your money in a CD, the bank will offer a higher interest rate compared with a traditional savings account. But the chief appeal for retirement-focused investors is that CDs can provide a steady rate of return, versus other securities in a portfolio which may entail more risk.

You may be able to find variable-rate and promotional-rate CDs as well.

Recommended: How Investment Risk Factors into a Portfolio

IRA Basics

An IRA or individual retirement account is a tax-advantaged account designed for retirement planning. There are different IRA types to choose from, such as a traditional IRA, Roth IRA, or SEP IRA. By contributing to this type of account, you can have your money grow tax-free or tax-deferred, depending on the type of IRA you open.

Think of an IRA as a box in which you place your retirement investments. With an IRA, investors have the flexibility to invest in a variety of securities for their portfolio.

For this reason, it might make sense for some investors to include CDs as part of their asset allocation within the IRA.

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Pros and Cons of IRA CDs

IRA CDs have unique characteristics that can benefit account holders as they think about how to handle their retirement funds. The upsides include:

•   Compared to investing in the stock market where investment returns can be volatile and unpredictable, IRA CDs are low-risk cash investments.

•   CDs guarantee a fixed return.

•   With an IRA CD, there are similar tax benefits that come with a traditional IRA. Investors can enjoy tax benefits such as growing your account with pretax dollars while having your earnings accumulate tax-deferred until you reach retirement.

There are some cons associated with IRA CDs to keep in mind:

•   With an IRA CD, you have to keep your money locked away for a period of time that varies depending on the maturity date you choose. During this time, you cannot access your funds in the event you need capital.

•   If you decide to withdraw cash prior to the IRA CD’s maturity, you will incur early withdrawal penalties. After age 59 ½ there is no penalty for withdrawing cash.

•   While putting your retirement funds in an IRA CD is a safer and lower-risk option than investing in the stock market, the returns can be quite low. If you are in retirement and are concerned about the stock market’s volatility, an IRA CD could be a safer option than other securities. But if you are many years away from retirement, an IRA CD may not yield enough returns to outpace inflation over time.

Pros of IRA CDs

 Cons of IRA CDs
Low-risk investment Money is locked away until maturity
Guaranteed return Penalty for early withdrawal
Tax-deferred growth Returns can be low vs. other retirement savings options

Who Should and Should Not Invest in an IRA CD?

IRA CDs are a safe way to invest money for retirement. However, they are best suited for pre-retirees who are looking for low-risk investments as they approach retirement age.

If you are many years away from retirement, an IRA CD is probably not the best option for you because they are low-risk and low-return retirement saving vehicles. In order to see growth on your investments you may need to take on some risk.

If you decide an IRA CD is the right option for you, you also must determine if you are comfortable with keeping your money stowed away for a period of time. Account holders can choose the length of maturity that best suits them.

How to Open an IRA CD

The first step is to open an IRA at a bank, brokerage, or other financial institution. Decide if a traditional, SEP, or Roth IRA is right for you. You can set up the IRA in-person or online. Once you open an IRA account, you can buy the CD.

Choose the CD that fits your minimum account requirements and length of maturity preference. Typically, the shorter the CD maturity, the lower the minimum to open the account. When considering maturity, you also should compare rates. Often, the longer the maturity, the higher the rate of return.

The Takeaway

If you’re looking to add diversification to the cash or fixed-income part of your portfolio, you might want to consider opening an IRA CD — which simply means funding a CD account within a traditional, Roth, or SEP IRA. Bear in mind that CDs typically offer very low interest rates, though, and your money might see more growth if you chose other securities, such as bonds or bond funds.

If you’re thinking about how to earn a steady rate of return on your savings, consider an account with SoFi.

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 4.00% APY on SoFi Checking and Savings.

FAQ

What is the difference between an IRA CD and a regular CD?

A standard CD is a separate account you open at a bank or credit union. An IRA CD is where the CD is funded within the IRA itself.

Can you withdraw from an IRA CD?

With a regular CD, you withdraw the funds penalty-free when the CD matures. With an IRA CD, however, you can withdraw the funds penalty free starting at age 59½, per the rules and restrictions of the IRA.

What happens when an IRA CD matures?

Once your IRA CD matures, you’ll receive the principal plus interest. Then you can either leave the IRA CD as is or renew it. You cannot withdraw the funds from an IRA CD until age 59 ½, as noted above.

Are IRA CDs safe?

Yes, IRA CDs are considered low-risk. If you open an IRA CD with a federally insured institution, your funds can be covered up to $250,000 per depositor, per account ownership category, per insured institution.

Who offers IRA CDs?

IRA CDs can typically be found at traditional and online-only banks as well as credit unions and brokerage firms.

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SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 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 direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer 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 Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 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 a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% 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 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 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 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 Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://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.

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.

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

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

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Dec
30
2024
Opening a Savings Account For a Baby

Opening a Savings Account for a Newborn Baby: What You Need to Know First

By | Budgeting & Goals, Family Finances, money | Comments Off on Opening a Savings Account for a Newborn Baby: What You Need to Know First

When a new baby arrives, there’s much to celebrate and so many milestones ahead. It’s not uncommon to want to help secure a child’s future by opening a savings account. That can start Junior off with a little nest egg and hopefully, in time, some good financial habits.

If you’re thinking you might like to open one of these accounts, read on to learn more.

Key Points

•   Opening a savings account for a newborn can secure their future and instill good financial habits.

•   Compounding interest over time significantly increases the initial savings placed in these accounts.

•   Such accounts typically feature low initial deposits, minimal balance requirements, and nominal fees.

•   Essential documents for opening an account include the baby’s birth certificate and Social Security number.

•   Alternatives like 529 College Savings Accounts or custodial accounts offer different benefits for long-term financial planning.

•   At this time, SoFi only allows members 18 years old or above to open a savings account.

🛈 Currently, SoFi does not offer custodial bank accounts and requires members to be 18 years old and above.

Why Open a Savings Account for a Baby?

There are actually some very good reasons to consider opening a bank account for a baby and start saving. You might be wondering why someone would open this kind of account for a newborn. After all, they don’t have any bills or expenses to pay so what would they need to have money in the bank for? Consider how opening an account and saving for a baby can have real benefits:

•   Time is on your side. Compounding interest can help you grow your baby’s savings account over time. The younger your child is when you start saving, the longer that money has to earn compound interest.

•   Plan for specific goals. Opening a savings account for a baby can make it easier to fund long-term goals. For example, you might want to set aside money to help them buy their first car or pay for college when the time comes.

•   Tax advantages. Savings accounts may not be earning a lot of interest right now. Still, the fact that babies usually don’t typically earn enough dough to pay taxes is a bonus.

•   Increase financial literacy. Teaching kids about saving from an early age can help them get into the habit. By opening a savings account for them when they’re young, you can help them learn the money skills they’ll need as adults.

Kids’ savings accounts can also be appealing because they tend to have low initial deposit requirements, low minimum-balance requirements, and low fees. So you don’t need a lot of money to start saving on behalf of your newborn — and you may not have to worry about paying a lot of fees to maintain the account as they grow.

How to Open a Savings Account for a Baby

Opening a bank account for a baby isn’t a complicated process. To open a savings account for a newborn, you’ll need the following:

•   Information about yourself

•   Information about your baby

•   Required documentation

•   Minimum initial deposit and funding details.

You should be able to open a savings account for a baby either at an online bank or a traditional bank or credit union. You’ll need to fill out the savings account application and provide the deposit via check, money order, cash or ACH transfer if you’re opening an account with an online bank. The minimum deposit may be as little as $1 or even $0, though some banks may require a larger deposit ($25 and up) to open a baby savings account.

Keep in mind that some banks may require you to have an account of your own before you can open a savings account for a child. That could influence where you decide to set up a savings account for a newborn.

Also look into any account maintenance fees that may be assessed monthly. You don’t want fees eating up the principal and interest in the account. Let’s look at this a little more closely next.

Can You Withdraw Money from Your Baby’s Savings Account?

Because a child cannot legally open or hold a bank account, an adult is a required presence. The parent or custodian who opens the account holds it jointly with the child and can indeed withdraw funds. It’s similar to a joint account that couples may have. However, there may be limits regarding whether your child can make withdrawals as they age and for how much.

If you were to open what’s called a custodial account (which becomes property of the child at adulthood; more on these accounts below), you may withdraw funds, but the intention is that they only be used for the kid’s benefit.

Types of Savings Account for Newborns

The best savings accounts for newborns are ones that allow you to save regularly, earn interest, and avoid high fees. You might look to your current bank first to open a savings account for the baby. Consider what type of features or benefits are offered. If you have to pay a monthly service fee, for example, you may be better off considering a savings account for a newborn at an online bank instead.

Online banks can offer the dual advantages of higher annual percentage yields, or APYs, on savings and lower fees. You won’t have branch banking access but that may not be important if you prefer to deposit money via mobile deposit or ACH transfer anyway. And once your child gets a little bigger, you can introduce them to the world of mobile banking and how to manage it on their own.

Also, consider how well a newborn savings account can grow with your kid’s needs. Some questions you might ask: Can you switch the account to a teen savings account or teen checking account down the line? Could you add a prepaid debit card for teens into the mix at some point? Asking these kinds of questions can help you pinpoint the best savings account for a newborn, based on your child’s needs now and in the future.

For some people, it can be a benefit to know that the bank has figured out ways to help accounts grow with their youngest customers and coach them along their journey to financial literacy.

Requirements for Opening a Savings Account for a Baby

The requirements for opening a bank account for a newborn are a little different from opening a bank account for yourself. That’s because the bank needs to be able to verify your identity as well as the baby’s.

Generally, the list of things you’ll be required to provide to open a savings account for baby include:

•   Your name and your baby’s name

•   Dates of birth for yourself and the baby

•   A copy of your government-issued photo ID

•   The baby’s birth certificate

•   Your address, phone number, email address, and Social Security number.

The bank may ask for the baby’s Social Security number though it’s possible you may not have this yet at the newborn stage. And if you don’t have a Social Security number of your own, you may have to provide a substitute federal ID.

Alternatives to Newborn Savings Accounts

A savings account at a bank or credit union isn’t the only way to set aside money for a newborn. While these accounts can earn interest, there are other types of savings you might use to fund different goals for your child. Here are some of the other options you might consider when saving money for a baby.

529 College Savings Accounts

Many parents — even brand-new ones! — wonder how to start saving for college. A 529 college savings account is a type of tax-advantaged plan that’s designed to help you save for education expenses. These accounts can be opened by the parent but anyone can make contributions, including grandparents, aunts and uncles, or family friends.

All 50 states offer at least one 529 plan. There are no annual limits on 529 plan contributions and you can open any state’s plan, regardless of which state you live in. Contributions are subject to annual gift tax exclusion limits, which are $18,000 for individuals and $36,000 for married couples in 2024 ($19,000 and $38,000, respectively, in 2025).

With a 529 plan, you’re investing money rather than saving it. You can invest the money you contribute in a variety of mutual funds, including index funds and target-date funds. This money grows tax-deferred, and withdrawals are tax-free when used for qualified education expenses, such as tuition and fees, books and room and board.

Coverdell Education Savings Accounts

There are other ways to save for a child’s college tuition. A Coverdell Education Savings Account (ESA) is a type of custodial account that can be set up to save for education expenses. This account grows tax-deferred just like a 529 plan and qualified withdrawals are tax-free. But there are some key differences:

•   Annual contributions are capped at $2,000 and are not tax-deductible

•   Contributions must end once the child reaches age 18 (an exception is made for special-needs beneficiaries)

•   All funds must be distributed by the time the child reaches age 30.

If you leave money in a Coverdell ESA past the child’s 30th birthday, the IRS can impose a tax penalty. Any withdrawals of ESA funds that aren’t used for qualified education expenses are subject to income tax.

Custodial Accounts

Custodial accounts are savings accounts that allow minors to hold assets other than savings, such as stocks or other securities. You can set up a custodial account with a brokerage on behalf of your child. As the custodian, you maintain ownership of the account and its assets until your child reaches the age of majority, typically either 18 or 21. At that point, all the money in the account becomes theirs.

Opening a custodial account could make sense if you want to make irrevocable financial gifts to your kids. This could be one of the best strategies for building an investment plan for your child. The biggest drawback, however, is that once they turn 18 (or 21) you no longer have control over the account or how the money inside of it is used. For some parents, relinquishing that control can be hard, but remember: There’s lots of financial literacy that can be gained between your child’s birth and officially entering adulthood.

FAQ

Can I start a savings account for my baby?

Yes, opening a savings account for a baby is something you can do even if they’re still a newborn. Traditional banks, credit unions, and online banks can offer savings account options for babies and kids. You can also explore savings account alternatives, such as 529 college savings plans or custodial accounts.

What type of savings account should I open for my newborn?

The type of savings account you open for a baby can depend on your financial goals. If you just want to get them started saving early, a basic savings account might work best. On the other hand, you might consider creating an investment plan for your child that includes a 529 savings account if you’re interested in putting aside money for future college expenses.

What are the typical requirements for opening a bank account for a newborn baby?

You’ll likely need to provide your name, address, and phone number, plus your email address, Social Security number, and government-issued photo ID. You’ll probably be asked for the baby’s birth certificate and an opening deposit as well, which may be as little as $1 or even zero.

Photo credit: iStock/michellegibson

SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. 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 (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer 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 Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% 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 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 a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% 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 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 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 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 Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% 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 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 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.

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

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

SoFi Invest®

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

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

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Dec
30
2024
What Is a Self Directed IRA (SDIRA)?

Guide to Self-Directed IRAs (SDIRA)

By | Growing Wealth, invest, Investing | Comments Off on Guide to Self-Directed IRAs (SDIRA)

Individual retirement accounts, or IRAs, typically allow for a lot of flexibility in the kinds of investments you can make, from stocks and bonds to mutual funds and exchange-traded funds (ETFs).

However, most IRAs don’t allow certain alternative investments like precious metals and real estate. If you want to hold assets like these in your retirement account, you’ll need a self directed IRA (SDIRA), a specific type of Roth or traditional IRA.

Key Points

•   A self-directed IRA (SDIRA) allows individuals to invest in a broader array of assets, including real estate, cryptocurrency, and precious metals, compared to traditional IRAs.

•   Account holders of SDIRAs manage their investments independently, which involves conducting research and due diligence on potential assets, thus increasing their responsibility.

•   While SDIRAs can offer high potential returns, they also carry higher fees and risks, particularly due to the illiquidity of many alternative investments.

•   Contribution limits for SDIRAs mirror those of traditional IRAs, allowing up to $7,000 annually, or $8,000 for individuals aged 50 and older.

•   Opening an SDIRA requires finding an approved custodian, selecting investments, completing transactions through a reputable dealer, and planning for less liquid withdrawals.

What Is a Self-Directed IRA (SDIRA)?

Self directed IRAs and self directed Roth IRAs allow account holders to buy and sell a wider variety of investments than regular traditional IRAs and Roth IRAs. Experienced investors, familiar with sophisticated or risky investments, often use these.

While a custodian or a trustee administers the SDIRA, the account holder typically manages the allocation themselves, taking on responsibility for researching investments and due diligence. These accounts may also come with higher fees than regular IRAs, which can cut into the size of your retirement nest egg over time.

What Assets Can You Put in a Self-Directed IRA or a Self-Directed Roth IRA?

Individuals can hold a number of unique alternative investments in their SDIRA, including but not limited to:

•   Real estate and land

•   Cryptocurrency

•   Precious metals

•   Mineral, oil, and gas rights

•   Water rights

•   LLC membership interest

•   Tax liens

•   Foreign currency

•   Startups through crowdfunding platforms

Recommended: Types of Alternative Investments

Types of SDIRAs

There are specific kinds of SDIRAs customized to investors looking for certain types of investments. The different types include:

Self-directed SEP IRAs

Simplified Employee Pension IRAs (SEP IRAs) are for small business owners or those who are self-employed so that they can make contributions that are tax deductible for themselves and any eligible employees they might have. This type of retirement account gives them the flexibility to invest in alternative investments.

Self-directed SIMPLE IRAs

A Savings Incentive Match Plan IRA (SIMPLE IRA) is a tax-deferred retirement plan for employers and employees of small businesses. Both the employer and the employees can make contributions to this plan. It allows for some alternative kinds of investments.

Recommended: SIMPLE IRA vs Traditional

Self-directed Precious Metal IRAs

Similarly, there are self-directed IRAs for those who would like to invest in precious metals like gold. However, be aware that some precious metal IRAs may charge higher fees than the market price for precious metals.

How Do Self-Directed IRAs Work?

Now that you know the answer to the question, what is a self directed IRA?, it’s important to understand how these accounts work and the self directed IRA rules. You’ll also want to familiarize yourself with the guidelines regarding opening an IRA if you have a 401(k).

Aside from their ability to hold otherwise off-limits alternative investments, SDIRAs work much like their traditional counterparts. SDIRAs are tax-advantaged retirement accounts, and they can come in two flavors: traditional SDIRAs and Roth SDIRAs.

Traditional IRA Contributions and Withdrawal Rules

IRA contributions to traditional accounts goes in before taxes, which reduces investors’ taxable income, lowering their income tax bill in the year they make the contribution. For both 2024 and 2025, individuals can contribute up to $7,000 in total across accounts. Those age 50 and up can make an extra $1,000 catch-up contribution for a total of $8,000. Investments inside the account grow tax-deferred.

It’s important to pay close attention to self directed IRA rules, particularly rules for IRA withdrawals. Once individuals begin to make withdrawals at age 59 ½, they are taxed at normal income tax rates. Account holders who make withdrawals before that age may owe taxes and a possible 10% early withdrawal penalty. Traditional SDIRA account holders must begin making required minimum distributions (RMDs) after age 73.

Roth IRA Contributions and Withdrawal Rules

Roth SDIRAs have the same contribution limits as traditional SDIRAs. However, retirement savers contribute to Roths with after-tax dollars. Investments inside the account grow tax-free, and withdrawals after age 59 ½ aren’t subject to income tax.

Roths are also not subject to RMD rules. As long as an individual has had the account for at least five years (as defined by the IRS), they can withdraw Roth contributions at any time without penalty, though earnings may be subject to tax if withdrawn before age 59 ½.

There are also rules restricting who can contribute to a Roth IRA, based on their income. In 2024, Roth eligibility begins phasing out at $146,000 for single people, and $230,000 for people who are married and file their taxes jointly.

Individuals can maintain both traditional and Roth IRA accounts, however, contribution limits are cumulative across accounts, and cannot exceed $7,000, or $8,000 for those 50 and over.

Traditional vs Roth SDIRA

There are some differences between a self-directed traditional IRA and a self-directed Roth IRA.

With a traditional SDIRA, you save pre-tax money for your retirement, just like you do with a traditional IRA plan. You pay taxes on the money when you withdraw it, which you can do without penalty starting at age 59 ½. However, a self-directed traditional IRA gives you the flexibility to invest in alternative assets, like real estate or precious metals.

With a self-directed Roth IRA, just like a regular Roth IRA, you make after-tax contributions to the plan. The withdrawals you make starting at age 59 ½ are tax-free, as long as you have had the account for at least five years, according to the five-year rule. With this type of self-directed IRA, you can invest in alternative investments, such as private equity, real estate, and precious metals.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

Pros and Cons of Self-Directed IRAs

Self-directed IRAs offer unique perks for the right investor. However, those interested must weigh those benefits against potential drawbacks.

Benefits of Self-Directed IRAs

An SDIRA allows investors to branch out into different types of investments to which they might otherwise not have access. This allows investors to seek out potentially higher returns and diversify their portfolios beyond the offerings in traditional IRAs.

Alternative investments have the potential to offer higher returns than investors might achieve with stock market investments. However, investors beware: These opportunities for higher rewards come at the price of higher risk.

Also, investors’ ability to hold a broader spectrum of investments that can help them diversify their portfolio and potentially manage risks, such as inflation risk or longevity risk, the chance an investor will run out of money before they die. For example, some SDIRAs allow investors to hold gold, a traditional hedge against inflation.

Drawbacks of Self-Directed IRAs

While there are some very real advantages to using SDIRAs, these must be weighed against their disadvantages.

For starters, investments like stocks and shares of ETFs are highly liquid. Investors who need their money quickly can sell them in a relatively short period of time, usually a matter of days.

However, some of the investments available in SDIRAs are not liquid. For example, real estate and physical commodities like precious metals may take quite a bit of time to sell if you need to access your money. Individuals who need to sell these assets quickly may find themselves in a situation in which they must accept less than they believe the asset is worth.

SDIRAs may also carry higher fees. Individuals who hold regular IRA accounts may not have to pay management or investment fees. However, SDIRA holders may have to pay fees associated with holding the account and with the purchase and maintenance of certain assets.

Finally, SDIRAs place a lot of responsibility in the hands of their account holders. Investors must research investments themselves and perform due diligence to make sure that whatever they’re buying is legitimate and matches their risk tolerance.

What’s more, investors must make sure the assets they hold meet IRS rules. Running afoul of these rules can be costly, in some cases causing investors to pay taxes and penalties.
Here’s a look at the pros and cons of SDIRAs at a glance:

Pros

 Cons
Tax-advantaged growth. Contributions to traditional accounts are tax deductible. Investments grow tax-deferred in traditional accounts and tax-free in Roth accounts. Not liquid. Selling alternative investments may be slow and difficult.
Same contribution limits as regular IRAs. In 2024, individuals can contribute up to $7,000 a year, or $8,000 for those aged 50 and up. Higher fees. Individuals may be on the hook for account fees and fees associated with alternative investments.
Higher returns. Alternative investments may offer higher returns than those available in the stock market. Increased responsibility. Investors must research investments carefully themselves and ensure they stay within rules for approved IRA investments.
Diversification. SDIRAs offer investors the ability to invest in assets beyond the stock and bond markets. Higher risk. Alternative investments tend to be riskier than more traditional investments.

4 Steps to Opening a Self-Directed IRA

Investors who want to open an SDIRA will need to take the following steps:

1. Find a custodian or trustee.

This can be a bank, trust company, or another IRS-approved entity. You’ll need to follow their requirements for opening an IRA account. Some SDIRAs specialize in certain asset classes, so look for a custodian that allows you to invest in the asset classes in which you’re interested.

2. Choose investments.

Decide which alternatives you want to hold in your SDIRA. Perform necessary research and due diligence.

3. Complete the transaction.

Find a reputable dealer from which your custodian can purchase the assets, and ask them to complete the sale.

4. Plan withdrawals carefully.

Because alternative assets have less liquidity than other types of investments, you may need to plan sales well in advance of needing retirement income or meeting any required minimum distributions.

Investing in Your Retirement With SoFi

If you’re opening your first IRA account, you’re likely best served with a traditional or Roth IRA. Because of the complications involved in using an SDIRA, only sophisticated investors should consider it.

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

Are self-directed IRAs a good idea?

There are advantages and disadvantages to self-directed IRAs. Benefits include the fact that you can make alternative types of investments you might not otherwise be able to. That could help you diversify your portfolio and potentially increase your returns.

However, there are drawbacks to SDIRAs, including higher risk because alternative investments tend to be riskier, and potentially higher fees for maintenance of investments in the plan and account fees. In addition, investors need to research the investments themselves and follow the IRS rules carefully to make sure they comply. Finally, many alternative investments are not liquid, which means they could take longer and be more difficult to sell.

Can you set up a self-directed IRA yourself?

To set up a self-directed IRA, find a custodian or trustee such as a bank or trust company to open an account, research and choose your investments, find a reputable dealer for the investments you’d like to make, and have your custodian complete the transactions.

How much money can you put in a self-directed IRA?

In 2024, you can contribute up to $7,000 to a traditional or Roth self-directed IRA, plus an additional $1,000 if you’re 50 or older.

Photo credit: iStock/Andres Victorero


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

SoFi Invest®

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

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

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Dec
30
2024

Guide to the Average Savings in America by Age

By | Budgeting & Goals, Preparing for Retirement | Comments Off on Guide to the Average Savings in America by Age

How much does the average American have in savings? Age tends to have a lot to do with it. Generally, as people get older, they are likely to have more savings.

But what the average person has in a savings account also depends on their financial goals and personal circumstances.

If you’re looking for a benchmark of just how much you should save by a specific age, or how much you should start contributing right now, read on for average savings by age and some tips that could help.

Key Points

•   The average savings for individuals under 35 is $11,200.

•   Individuals between the ages of 35 and 44 have an average savings of $27,900.

•   Those aged 45 to 54 have an average savings of $48,200.

•   The average savings for individuals between 55 and 64 is $57,800.

•   Individuals aged 65 and older have an average savings of $60,400.

The Importance of Saving for the Future

Life can happen fast. For example, the average cost of having a new baby can run parents approximately $3,000 in out-of-pocket expenses for pregnancy and delivery. And then there’s the cost of caring for a child, which some estimates put at more than $18,000 for raising them through age 17.

And, if that baby wants to get a college degree, you’re looking at a whole new realm of savings. The cost of a college education can range from about $44,000 to well past $150,000.

There’s one other big reason to save for the future: People are living longer. According to a 2023 survey by the Employee Benefit Research Institute, only 18% of American workers are “very confident they will be able to retire comfortably.” Four in 10 workers say their lack of confidence is because they have little to no savings.


💡 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.

A Savings Shortfall

More than half of Americans can’t cover an unexpected $1,000 expense, according to Bankrate’s 2023 emergency savings report. Only 43% say they could cover it.

And 37% of all Americans don’t have enough cash in savings to cover even a $400 emergency, the Federal Reserve found in its “Economic Well-Being of U.S. Households in 2022” report.

Recommended: Try our emergency fund calculator to see how much you should save for an emergency fund.

Get a 1% IRA match on rollovers and contributions.

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

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

Average Savings by Age in the USA

The Fed’s latest Survey of Consumer Finances shows that the typical American household has $5,300 in a savings account at a bank or credit union. But this number varies greatly by age and number of people in a household. Here’s what savings by age looks like.

Average Savings for Those 35 and Younger

Americans under the age of 35 had an average savings account balance of $11,200, according to the Fed’s survey.

This is a large age bracket that can range from those just graduating high school to recent college grads to young professionals well into a decade’s worth of work.

It’s wise to have three to six months of expenses in an emergency fund. At the very least, aiming to have $1,000 handy in a savings account for unexpected expenses is recommended.

For those who have started their careers, employer-sponsored retirement funds such as an IRA or a 401(k) can be good options to start saving for long-term retirement goals.

It makes sense to contribute at least enough to get matching funds from an employer, if that’s an option with your company’s plan. For reference, the average 401(k) savings for someone between the ages of 20 and 29 in the Fed’s survey was $10,500.

Recommended: Why You Should Start Retirement Planning in Your 20s

Average Savings by Age: 35 to 44

Americans between the ages of 35 and 44 had an average savings account balance of $27,900, according to the Federal Reserve Survey of Consumer Finances. Those in this age bracket are now well into adulthood. At this stage of life, it’s prudent to have that three-to six-months’ worth of savings in an emergency fund, to cover the cost of everything from an accident to a lost job.

This may also be the time to think about diversifying a financial portfolio and possibly investing in the stock or bond market.

And, of course, keep contributing to your 401(k). For reference, the average 401(k) savings for someone between the ages of 30 and 39 was $38,400.

Average Savings by Age: 45 to 54

People between the ages of 45 and 54 had an average savings account balance of $48,200, according to the Fed’s survey.

At this point, general financial advice dictates that a 50-year-old should have at least six times their annual salary if their intention is to retire at 67.

And by the age of 40 to 49, a person may want to have the average amount of retirement savings, which sits at $93,400.

average savings for people in their 40s

Average Savings by Age: 55 to 64

The Fed survey found that Americans between the ages of 55 and 64 had an average savings account balance of $57,800.

Since this is the time when most Americans are staring down retirement in a few years, it’s generally a good idea to boost retirement savings into high gear.

That’s because while younger people in 2024 are capped at contributing $23,000 a year to a 401(k) account, those age 50 and up are allowed to contribute an additional $7,500.This is known as a catch-up contribution.

For 2025, those under age 50 can contribute up to $23,500, and those 50 and up can contribute an additional $7,500. Also for 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

The average retirement savings account for a person between the ages of 50 and 59 is $160,000. It’s important to note that taking a withdrawal from such a plan before the age of 59 ½ could mean tax penalties.

average savings for people in their 50s

Average Savings by Age: 65 and Older

This is when savings really peaks for the average American. The latest Federal Reserve Survey of Consumer Finances found that Americans between the ages of 65 and 74 had an average savings account balance of $60,400.

However, that savings number does drop over time. According to the survey, Americans above the age of 75 had an average savings account balance of $55,600.

This underscores the importance of creating a retirement budget and sticking to it in order to have enough savings for as long as needed.

But before retirement, try to hit the average retirement savings amount for those ages 60 to 69, which was $182,100.

This chart offers an at-a-glance comparison of the average American savings by age.

Age

 Average savings
Under 35 $11,200
35-44 $27,900
45-54 $48,200
55-64 $57,800
65+ $60,400

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Median Savings by Age

Median savings is different from average savings. The median is the number in the middle of all the other numbers, meaning half the numbers are higher and half are lower. So with median savings, half the people in an age category will have saved more and half will have saved less.

These are the median savings by age, according to the latest Federal Reserve Survey of Consumer Finances:

•   Under 35: $3,240

•   35-44: $4,710

•   45-54: $5,620

•   55-64: $6,400

Savings vs Retirement Savings

What Americans have saved for emergencies, expenses, and other near-future goals is different from what they have in their retirement savings accounts, as you can see from all the information above. And it’s critical to have both types of savings at the same time.

And keep this in mind: As you get older, and closer to retirement, it’s important that your retirement savings grow even more. It’s a good idea to contribute the maximum amount allowed to your retirement accounts at this time, if you can. This is one of the ways to save for retirement.

Recommended: Average Retirement Savings By State

Saving a Little Bit More

Reaching specific savings goals doesn’t have to be complicated. It just means doing a bit of homework, strategizing, and staying diligent about personal finances.

The first step in saving more is to analyze current expenses to see what can be cut back on or cut out altogether to make more room for saving. This means creating a monthly personal budget and tracking current personal spending.

To track spending, a person could create an excel spreadsheet and list all expenditures by categories like groceries, phone bill, car expenses, housing, medical, entertainment and others over the course of a month, filling it in with every single dollar spent to see where the money is going. Or you can use an online tracker like SoFi, which allows users to connect all their accounts to one dashboard and track spending habits in real time.

After the month is up, the next step is to look back on the expenditures list. Was there anything that surprised you? Do you need all those streaming subscriptions? How about that gym membership — did it actually get used? This is the time to get a little ruthless.

After figuring out what’s left, try implementing a general financial outline like the 50/30/20 rule. This means that approximately 50% of your after-tax income goes toward essential expenses like food and rent, while 30% goes toward discretionary expenses like nights out at the movies or concerts. The last 20% belongs to savings and retirement account goals.

Next, it’s time to get creative about saving even more for the future. This can be done by putting more cash into a savings or retirement account via direct deposit right from a paycheck.

Those looking to save a few more bucks every month could also do so by getting rid of unnecessary expenses. But, instead of pocketing that cash, consider using mobile deposit to direct that cash right to savings.

Still feeling the pinch and don’t really have room to save more from a budget? Working part-time for, say, a ride-sharing company could allow you to set your own hours and earn extra income based on how much time you can dedicate to it. Other options might include freelance work in photography, writing, or other creative arts.

Saving and Investing With SoFi

Along with all these savings strategies to help put away extra money, investing for your future goals is also important to help your money grow.

For instance, you may want to consider setting up an investment account. Investing a little now could go a long way in saving for tomorrow, next year, and your life after retirement.

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

How much should a 30 year old have in savings?

By age 30, you should have the equivalent of your annual salary saved. So if you make $60,000 a year, you should have $60,000 in savings.

How much money does an average person have in savings?

The average American has $65,100 in savings, according to a 2023 study by Northwestern Mutual.

How many Americans have $100,000 in savings?

According to one 2023 survey, only 14% of Americans have at least $100,000 in savings.

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

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

SoFi Invest®

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

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

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