A jumbo loan is a mortgage that is larger than the loan-servicing limits set by the Federal Housing Finance Agency (FHFA). If you know you need a large loan to cover a higher home mortgage loan, you might be wondering how to qualify for a jumbo loan.
Jumbo loan qualifications are more stringent than conforming conventional loans. Because a jumbo loan is a nonconforming loan, banks take on more risk as they are not able to sell the loan to government-sponsored enterprises Fannie Mae and Freddie Mac. Since the loans are not guaranteed by the government, lenders are more cautious about the type of borrowers they do business with.
What this means for your money: You need conditions to be pretty optimal to qualify for a jumbo loan. But it can be done. Learn more here, including:
• How to qualify for a jumbo loan
• What factors lenders consider for jumbo loans
• The jumbo loan qualification process
• How to decide if a jumbo loan is right for you
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Questions? Call (888)-541-0398.
Jumbo Mortgage Requirements
The current limits for jumbo loans are defined as exceeding $726,200 for single-family homes, except in Alaska, Hawaii, and some federally designated markets that are considered high-cost. In those areas, the limit that’s exceeded is $1,089,300 since these locations tend to have pricier housing markets.
Jumbo mortgage requirements are similar to conventional conforming loan requirements, but there are some key differences that make them harder to qualify for.
A High Credit Score
Experts recommend a credit score of 700 or above for jumbo loan borrowers. A higher credit score when buying a house is indicative of a borrower’s behavior with credit and how likely they are to repay the loan. A higher credit score is needed for the higher loan amounts of a jumbo loan. That lofty score can help the lender feel more secure that you’ll pay back the amount you borrow.
Cash Reserves
A cash reserve is how much liquid money you have at your disposal. What counts as liquid money can vary from lender to lender. For example, some will allow a percentage of vested 401(k) funds to count toward the reserve requirement. Others do not.
Because jumbo loans are so large, lenders look for cash reserves in your account to guard against default. For the best jumbo loan terms, lenders can require as much as 12 months of reserves.
A Low Debt-to-Income Ratio
A debt-to-income ratio is the amount of income you make relative to the amount of debt obligations you have. If you have what is considered too much debt, the lender will not offer a loan to you. With jumbo loans, a healthy DTI ratio is essential to qualify for the mortgage. A DTI ratio below 43% is recommended or possibly a lower figure.
What Does the Jumbo Qualification Process Include?
When you’re looking at jumbo loan requirements and the qualification process, there are some things you should keep in mind. Here, what’s needed to get a mortgage:
Documents Required for Jumbo Loan
When you apply for a jumbo loan, the lender will look to verify the information you provided. Some documents you may be required to provide include:
• Two years of tax returns
• Profit & Loss (P&L) statement if you’re a business owner
• Pay stubs
• Bank statements
• Documentation for other income
Loan-to-Value Ratio Evaluation
In addition to your application, the jumbo loan will require an appraisal of your property to ensure they’re not lending too much on the home (that is, more than it’s worth). This appraisal will ensure the home’s price is not too high and determine that the loan-to-value ratio (LTV) is within its guidelines.
Evaluating How Jumbo Down Payments Will Impact You
How much you put down on the home of your dreams will impact what loan you qualify for. If you’re able to put down enough, you may be able to forgo the jumbo loan requirements and get into a conforming conventional loan.
Is a Jumbo Mortgage Right for You? Questions To Ask
When it comes to making a decision on a jumbo loan, it’s helpful to ask yourself some questions that can help determine if a jumbo loan will work for you.
Do I Have Good Credit?
Ask yourself if your credit is strong enough to qualify for a jumbo loan. These mortgages do come with higher loan amounts and higher payments, and a good credit score range (over 700 typically) can help you get the best terms possible to qualify for a jumbo loan.
Do I Have a Low DTI and High Cash Reserves?
It’s important to have a low debt-to-income ratio and ample reserves to qualify for a jumbo mortgage, as discussed above. While some lenders may go up to as high as a 43% DTI, others will want to see a lower number.
Can I Prove I’m in Good Financial Health?
Qualifying for a jumbo mortgage goes beyond the numbers. Can you demonstrate to the lender that you’re able to continue making payments? Do you have a consistent job history? Are all the other financial factors in your life lined up so you can afford the mortgage?
Is the Property Value High Enough for a Jumbo Loan?
The jumbo loan value minimum (and conforming loan limits) is $726,200 for most areas in the U.S. If your mortgage is below this amount, you’ll want to look at financing with a conforming conventional loan instead. In high-cost areas, the home would have to hold a value of more than $1,089,300.
Do I Have Enough Money Saved?
A down payment on a property that merits a jumbo loan will often be a significant amount of cash. And while some closing costs are a flat fee that won’t go up, many are labor-intensive or percentage-based (3% to 6% of the loan amount), so your jumbo loan closing costs are larger than for a conventional, conforming loan.
If you are in the market for a high-value home, a jumbo mortgage can help you make it your own. However, you will need to meet the loan requirements, which may be somewhat more demanding than those for a conforming loan. By focusing on optimizing your credentials and financial profile, you can work to secure the mortgage that makes your home-ownership dreams come true.
When you’re ready to take the next step, consider what SoFi home loans have to offer. Jumbo loans are offered with competitive interest rates, with no PMI, and down payments as low as 10%.
SoFi Mortgage Loans: We make the home loan process smart and simple.
FAQ
Is it harder to qualify for a jumbo loan?
Yes, jumbo loans are harder to qualify for. You will need a larger down payment than you would with a conforming loan, a higher credit score, a low debt-to-income ratio, more cash reserves, and a tighter loan-to-value ratio.
What credit score do you need for a jumbo loan?
For a jumbo loan, you may want to aim for a credit score above 700.
Do jumbo loans require a 20% down payment?
It is possible to obtain a jumbo loan with a down payment as low as 10% or possibly even lower.
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SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
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.
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The total number of homes for sale hit a record low in August 2023. That means home sellers may get several offers when they put their house on the market.
To help stand out from the pack, some buyers choose to write an offer letter. They may believe an offer letter could help personalize the negotiation and possibly make a connection with the seller. But writing an offer letter comes with potential risks buyers should be aware of.
Thinking about writing an offer letter? Read on to learn how to write an offer letter for a house, what to say in the letter, what to avoid, how long the letter should be, and the risks that may be involved.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Questions? Call (888)-541-0398.
What Is a House Offer Letter?
A house offer letter is a personal letter written in hopes of helping to convince the seller to choose the buyer’s offer, especially when there are multiple offers on a house.
Offer letters have become more popular in recent years due to the high number of real estate bidding wars.
In an offer letter, a buyer, whether they’re a millennial homebuyer or any homebuyer, is trying to show the seller why they’re the ideal candidate for the house.
• Introductions. The potential buyer will want to say who they are, of course.
• Contract details that might help. Buyers may want to briefly note that they’ve been pre-approved for a mortgage, are flexible with the closing date, or can otherwise meet the seller’s needs.
• Compliments about the house. If there’s a well-tended garden or custom wall finishes, a buyer may want to note how much they like those things.
• Points of connection. If a buyer noticed something in the house that could help them relate to the seller, like fishing gear in the garage or a piano in the living room, they might mention that they share those hobbies.
• Explanation about their offer. A buyer could include the reason why they offered what they did for the house, but anyone who does this should be careful. Review it with your agent first to make sure you’re not saying something that might jeopardize the deal.
• Thank them. Express gratitude to the seller for considering the offer.
💡 Quick Tip: You deserve a more zen mortgage. Look for a mortgage lender who’s dedicated to closing your loan on time.
How Does a House Offer Letter Work?
Since an offer letter is an informal gesture, writing such a letter is optional. Plus offer letters do have drawbacks (more on that below).
If a buyer does write an offer letter, it would typically be sent, along with the formal offer on the house, to the seller’s agent.
Is It Worth It to Write a Letter With a House Offer?
A personal letter could help you stand out from others who are bidding on a house, but there’s no guarantee of that. Plus, an offer letter could cause problems. The National Association of Realtors is wary of offer letters because they might run the risk of violating the Fair Housing Act, even unintentionally. The Fair Housing Act seeks to create a level playing field for all people renting or buying a home, getting a mortgage, or seeking housing assistance.
For that reason, your real estate agent may advise against writing an offer letter. Instead, they may suggest that you choose another strategy for making your offer on a house more attractive.
How Long Should a House Offer Letter Be?
If you do decide to write an offer letter, the letter should be short and succinct. One page is plenty. And if your bid isn’t competitive enough to be on the seller’s radar in the first place, the offer letter probably won’t even be read.
What Should Not Be Included in a House Offer Letter
Perhaps even more important than what you write in your offer letter is what you should not include. Stay away from:
• Overly saccharine statements. Sellers may get overwhelmed by buyers who are too profuse about their love for the property. Be complimentary, but don’t overdo it.
• Letters that are too long. The seller doesn’t need to know everything you love about the house. Offer letters are more effective when they’re a page or less.
• Too much personal detail. If you mention your partner or children, be aware that familial status is protected against discrimination under the Fair Housing Act. It’s wise not to share too much.
• A picture of yourself or your family. This is another red flag. Race and gender, among other things, are protected against discrimination under the Fair Housing Act.
💡 Quick Tip: Not to be confused with prequalification, preapproval involves a longer application, documentation, and hard credit pulls. Ideally, you want to keep your applications for preapproval to within the same 14- to 45-day period, since many hard credit pulls outside the given time period can adversely affect your credit score, which in turn affects the mortgage terms you’ll be offered.
How Do You Write a Strong Offer Letter?
First, make sure your home contracts offer is strong. You want to submit a strong offer before you work on a letter.
Then, when you sit down to write the letter, consider this: If you were having a conversation with your seller about the house, what would you want to tell them? Explain briefly why you love the home, and thank them for considering your offer. Keep the focus of the letter on the house, and avoid giving too many personal details. Use a friendly tone, and be genuine and sincere.
Rather than an offer letter, you may want to consider one of the following strategies instead:
• Submit a higher offer.Winning a bidding war often comes down to one factor: price. Offering a higher price for the house is an option to think about. You might also want to add an escalation clause, which can automatically increase your offer above other offers.
• Offer all cash. That is, if you have the resources to do this. Data from Redfin suggests buyers who offer all-cash are two to four times more likely to be chosen.
• Waive the financing contingency. Waiving this contingency could potentially increase your odds of winning the contract over other buyers, according to Redfin. Keep in mind, however, that waiving the financing contingency means you forfeit your earnest money if you can’t get financing before the contract deadlines.
And, finally, if you’re a first-time home buyer, you may want to look into first-time homebuyer programs that could be helpful to you in your quest to buy this particular home — or any home.
The Takeaway
Offer letters have become popular in recent years as the real estate market has heated up, but these letters do have drawbacks. They could even run the risk of violating the Fair Housing Act. Discuss it with your real estate agent and weigh the pros and cons carefully before writing an offer letter.
Also, consider other options that might help improve your chances of becoming a homeowner. For instance, you may decide that offering a higher price on the house, getting preapproved for a mortgage, or being flexible about the closing date is a better way to go.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
SoFi Mortgages: simple, smart, and so affordable.
FAQ
How do you write a strong offer on a house?
In addition to making a strong offer on a house, you can write an offer letter. To write a strong offer letter, focus on the property. Tell the seller why you love the home, and thank them for considering your offer. Use a friendly tone, be genuine and sincere, and keep the letter to one page or less.
How to write an offer letter for a house for sale by owner?
In a house that’s for sale by owner, you’re likely dealing directly with the seller. In that case, you can address the seller by name in the letter and tell them why you like the house. Also, if you know there’s something they’re looking for, like a quick transaction, you could indicate that you’re flexible with the closing date. And if you’re preapproved for a mortgage, you could mention that as well.
How do you write a good offer letter?
Be succinct, genuine, and sincere in your offer letter. Focus on the house and why you like it, and avoid giving personal details. Thank the owner for considering your offer.
Photo credit: iStock/Gorica Poturak
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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.
While it’s common for people to use their IRA to invest in stocks, bonds, and other securities, it’s also possible to set up a self-directed IRA to invest in physical gold bars, coins, or bullion.
Although the assets within a self-directed IRA are considered alternative investments, these accounts still follow the standard IRS rules regarding tax advantages, annual contribution limits, and so forth.
That said, not all brokers offer self-directed IRAs. And investing in gold within an IRA may be more expensive owing to the cost of storing a physical commodity like gold.
Establishing a Gold IRA Account
It’s important to understand that there isn’t a dedicated “gold IRA” that’s geared toward investing in gold alone (or any other type of precious metal). Rather, investors interested in investing in gold or other types of alternative investments can set up what’s known as a self-directed IRA (or SIDRA) in order to choose investments that aren’t normally available through a traditional IRA account.
While alternative investments can be illiquid, volatile, or subject to other risk factors, investors interested in alts may be curious about the potential for greater diversification since these assets typically don’t move in tandem with conventional markets. In the case of precious metals, they can be an inflation hedge.
Understanding Self-Directed IRAs
Typically, most IRA providers only allow you to invest in securities like stocks, bonds, ETFs or mutual funds. If you want to invest in gold by buying shares in an ETF focusing on gold, or by purchasing stock in a gold mining company, then a traditional IRA custodian is fine.
But if you want to hold physical gold in your IRA, you’ll need to find a broker that will allow you to set up a self-directed IRA.
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.
While a custodian or a trustee administers the SDIRA, the account holder typically manages the portfolio of assets themselves. These accounts may also come with higher fees than regular IRAs owing to the higher cost of storing physical assets like gold.
That said, a self-directed IRA follows the same general rules as ordinary IRAs in terms of tax rules, withdrawal restrictions, income caps, and annual contribution limits (see details below). A self-directed IRA can be set up as a traditional, tax-deferred account, or a self-directed Roth IRA.
Setting Up a Gold IRA Account
Once you’ve found an IRA custodian or brokerage that allows you to open a self-directed IRA and purchase physical gold, you can fund your account. Be sure you’re working with a reputable, experienced precious metals IRA custodian, and that the company is registered with the SEC (Securities and Exchange Commission) and with FINRA (Financial Industry Regulatory Authority).
The two most common ways to fund a gold IRA are by contributing cash or transferring money from an existing IRA or 401(k) account.
After you’ve funded your account, your broker will purchase the physical gold and store it for you. These same steps will hold true if you want to invest in other precious metals, including silver or platinum.
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Gold Standards for IRAs
Just as with a silver IRA, there are restrictions on the physical gold you are allowed to hold in an IRA. Any gold that is held in an IRA must be at least 99.5% pure.
Some common types of gold coins that are allowed to be held in a gold IRA include American Eagle bullion or coins, Canadian Maple Leaf coins and Australian Koala bullion coins.
Managing a Gold IRA Portfolio
The process for managing an IRA invested in gold is similar to managing an IRA that holds any commodity or security.
When you open a gold IRA, you will issue instructions to your broker to buy and sell physical gold, just as you would if you were buying stocks in a more traditional IRA. The value of your gold IRA portfolio fluctuates with the value of the physical gold that you hold.
You are not allowed to hold the gold yourself while it is part of your IRA. If you want to take possession of the physical gold bullion in your gold IRA, you will need to make a withdrawal from your IRA — which is subject to standard IRS rules governing IRA withdrawals.
An early withdrawal before age 59 ½ may result in taxes and/or penalties, so make sure you understand the terms before you take a withdrawal from a self-directed IRA.
Remember that an IRA invested in gold still follows the basic structure and tax rules of traditional and Roth IRAs. The annual contribution limit for a regular, Roth, or self-directed IRA is $7,000 for tax years 2024 and 2025, or $8,000 for those 50 and older.
• With a self-directed traditional IRA, you save money that’s considered pre-tax (just as in a traditional IRA account). The value of the assets within the account may grow over time, but taxes are deferred. This means you will owe tax on the money when you withdraw it, which you can do without penalty starting at age 59 ½.
• With a self-directed Roth IRA you make after-tax contributions, just as you would with a regular Roth IRA. Here the money grows tax free over time. In the case of a Roth account, qualified withdrawals are tax free starting at age 59 ½, as long as you have had the account for at least five years, according to the five-year rule.
In addition, investors who want to set up a Roth SIDRA must meet certain income requirements (the same income caps as for a regular Roth IRA). For single and joint tax filers: in order to contribute the full amount to a Roth IRA in 2024, you must earn less than $146,000 (for single filers) or $230,000 (if you’re married, filing jointly), respectively. In 2025, to contribute the full amount to a Roth IRA, you must earn less than $150,000 as a single filer and less than $236,000 if you’re married filing jointly. See IRS.gov for additional details, or consider consulting a tax professional.
One of the biggest drawbacks of a gold IRA is that the money in your IRA is generally intended for retirement. That means that if you withdraw the money in any IRA before you reach 59 ½, you may have to pay additional taxes and/or a 10% penalty. Another drawback is that you are limited by how much you can contribute to a gold IRA each year.
The Takeaway
There isn’t a specific type of IRA called a gold IRA — this is just a common way to refer to a self-directed IRA that is used to invest in physical gold. A gold IRA might be a traditional or a Roth IRA, which each come with certain tax advantages. Any gold that you hold in a self-directed IRA must be at least 99.5% pure. Additionally, not all brokers allow you to self-direct your investments and hold gold in your IRA.
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FAQ
What types of gold investments can be held in a gold IRA?
Like other commodities including silver or platinum, there are specific rules about what kinds of gold investments can be held in a gold IRA. Gold must be at least 99.5% pure to be eligible to be held in an IRA. This includes coins like the Australian Koala, Canadian Maple Leaf, or American Eagle.
How do you set up and fund a gold IRA account?
The most important step to setting up and funding a gold IRA is to find a custodian that will allow you to open a self-directed IRA and invest in precious metals. Once you have found a custodian that will, simply follow their account setup instructions. Then you can fund your gold IRA, by either making a new contribution, or transferring money from a 401(k) account or an existing IRA.
What are the tax benefits and restrictions associated with a gold IRA?
The tax benefits and restrictions of a self-directed gold IRA are the same as any other IRA. With a traditional gold IRA, you may be eligible for a tax deduction in the year that you make a contribution, but you’ll owe taxes on withdrawals. With a Roth gold IRA, you don’t get a tax deduction when you make your contribution — instead, your withdrawals are tax free. In most circumstances, you will have to pay taxes and/or penalties if you make a withdrawal before age 59 ½.
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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.
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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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
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.
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.
The average rate of return on 401(k)s is typically between 5% and 8%, depending on specific market conditions in a given year. Keep in mind that returns will vary depending on the individual investor’s portfolio, and that those numbers are a general benchmark.
While not everyone has access to a 401(k) plan, those who do may wonder if it’s an effective investment vehicle that can help them reach their goals. The answer is, generally, yes, but there are a lot of things to take into consideration. There are also alternatives out there, too.
Key Points
• The average rate of return on 401(k)s is typically between 5% and 8%, depending on market conditions and individual portfolios.
• 401(k) plans offer benefits such as potential employer matches, tax advantages, and federal protections under ERISA.
• Fees, vesting schedules, and early withdrawal penalties are important considerations for 401(k) investors.
• 401(k) plans offer limited investment options, typically focused on stocks, bonds, and mutual funds.
• Asset allocation and individual risk tolerance play a significant role in determining 401(k) returns and investment strategies.
Some 401(k) Basics
To understand what a 401(k) has to offer, it helps to know exactly what it is. The IRS defines a 401(k) as “a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.”
In other words, employees can choose to delegate a portion of their pay to an investment account set up through their employer. Because participants put the money from their paychecks into their 401(k) account on a pre-tax basis, those contributions reduce their annual taxable income.
Taxes on the contributions and their growth in a 401(k) account are deferred until the money is withdrawn (unless it’s an after-tax Roth 401(k)).
A 401(k) is a “defined-contribution” plan, which means the participant’s balance is determined by regular contributions made to the plan and by the performance of the investments the participant chooses.
This is different from a “defined-benefit” plan, or pension. A defined-benefit plan guarantees the employee a defined monthly income in retirement, putting any investment risk on the plan provider rather than the employee.
Benefits of a 401(k)
There are a lot of benefits that come with a 401(k) account, and some good reasons to consider using one to save for retirement.
Potential Employer Match
Employers aren’t required to make contributions to employee 401(k) plans, but many do. Typically, an employer might offer to match a certain percentage of an employee’s contributions.
Tax Advantages
As mentioned, most 401(k)s are tax-deferred. This means that the full amount of the contributions can be invested until you’re ready to withdraw funds. And you may be in a lower tax bracket when you do start withdrawing and have to pay taxes on your withdrawals.
Federal Protections
One of the less-talked about benefits of 401(k) plans is that they’re protected by federal law. The Employee Retirement Security Act of 1974 (ERISA) sets minimum standards for any employers that set up retirement plans and for the administrators who manage them.
Those protections include a claims and appeals process to make sure employees get the benefits they have coming. Those include the right to sue for benefits and breaches of fiduciary duty if the plan is mismanaged, that certain benefits are paid if the participant becomes unemployed, and that plan features and funding are properly disclosed. ERISA-qualified accounts are also protected from creditors.
💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.
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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.
401(k) Fees, Vesting, and Penalties
There can be some downsides for some 401(k) investors as well. It’s a good idea to be aware of them before you decide whether to open an account.
Fees
The typical 401(k) plan charges a fee of around 1% of assets under management. That means an investor who has $100,000 in a 401(k) could pay $1,000 or more. And as that participant’s savings grow over the years, the fees could add up to thousands of dollars.
Fees eat into your returns and make saving harder — and there are companies that don’t charge management fees on their investment accounts. If you’re unsure about what you’re paying, you should be able to find out from your plan provider or your employer’s HR department, or you can do your own research on various 401(k) plans.
Vesting
Although any contributions you make belong to you 100% from the get-go, that may not be true for your employer’s contributions. In some cases, a vesting schedule may dictate the degree of ownership you have of the money your employer puts in your account.
Early Withdrawal Penalties
Don’t forget, when you start withdrawing retirement funds, some of the money in your tax-deferred retirement account will finally go toward taxes. That means it’s in Uncle Sam’s interest to keep your 401(k) savings growing.
So, if you decide to take money out of a 401(k) account before age 59 ½, in addition to any other taxes due when there’s a withdrawal, you’ll usually have to pay a 10% penalty. (Although there are some exceptions.) And at age 73, you’re required to take minimum distributions from your tax-deferred retirement accounts.
Potentially Limited Investment Options
One more thing to consider when you think about signing up for a 401(k) is what kind of investing you’d like to do. Employers are required to offer at least three basic options: a stock investment option, a bond option, and cash or stable value option. Many offer more than that minimum, but they stick mostly to mutual funds. That’s meant to streamline the decision-making. But if you’re looking to diversify outside the basic asset classes, it can be limiting.
How Do 401(k) Returns Hold Up?
Life might be easier if we could know the average rate of return to expect from a 401(k). But the unsatisfying answer is that it depends.
Several factors contribute to overall performance, including the investments your particular plan offers you to choose from and the individual portfolio you create. And of course, it also depends on what the market is doing from day to day and year to year.
Despite the many variables, you may often hear an annual return that ranges from 5% to 8% cited as what you can expect. But that doesn’t mean an investor will always be in that range. Sometimes you may have double-digit returns. Sometimes your return might drop down to negative numbers.
Issues With Looking Up Average Returns As a Metric
It’s good to keep in mind, too, that looking up average returns can create some issues. Specifically, averages don’t often tell the whole story, and can skew a data set. For instance, if a billionaire walks into a diner with five other people, on average, every single person in the diner would probably be a multi-millionaire — though that wouldn’t necessarily be true.
It can be a good idea to do some reading about averages and medians, and try to determine whether aiming for an average return is feasible or realistic in a given circumstance.
Some Common Approaches to 401(k) Investing
There are many different ways to manage your 401(k) account, and none of them comes with a guaranteed return. But here are a few popular strategies.
60/40 Asset Allocation
One technique sometimes used to try to maintain balance in a portfolio as the market fluctuates is a basic 60/40 mix. That means the account allocates 60% to equities (stocks) and 40% to bonds. The intention is to minimize risk while generating a consistent rate of return over time — even when the market is experiencing periods of volatility.
Target-Date Funds
As a retirement plan participant, you can figure out your preferred mix of investments on your own, with the help of a financial advisor, or by opting for a target-date fund — a mutual fund that bases asset allocations on when you expect to retire.
A 2050 target-date fund will likely be more aggressive. It might have more stocks than bonds, and it will typically have a higher rate of return. A 2025 target-date fund will lean more toward safety. It will likely be designed to protect an investor who’s nearer to retirement, so it might be invested mostly in bonds. (Again, the actual returns an investor will see may be affected by the whims of the market.)
Most 401(k) plans offer target-date funds, and they make investing easy for hands-off investors. But if that’s not what you’re looking for, and your 401(k) plan makes an advisor available to you, you may be able to get more specific advice. Or, if you want more help, you could hire a financial professional to work with you on your overall plan as it relates to your long- and short-term goals.
Multiple Retirement Accounts
Another possibility might be to go with the basic choices in your workplace 401(k), but also open a separate investing account with which you could take a more hands-on approach. You could try a traditional IRA if you’re still looking for tax advantages, a Roth IRA (read more about what Roth IRAs are) if you want to limit your tax burden in retirement, or an account that lets you invest in what you love, one stock at a time.
There are some important things to know, though, before deciding between a 401(k) vs. an IRA.
💡 Quick Tip: Can you save for retirement with an automated investment portfolio? Yes. In fact, automated portfolios, or robo advisors, can be used within taxable accounts as well as tax-advantaged retirement accounts.
How Asset Allocation Can Make a Difference
How an investor allocates their resources can make a difference in terms of their ultimate returns. Generally speaking, riskier investments tend to have higher potential returns — and higher potential losses. Stocks also tend to be riskier investments than bonds, so if an investor were to construct a portfolio that’s stock-heavy relative to bonds, they’d probably have a better chance of seeing bigger returns.
But also, a bigger chance of seeing a negative return.
With that in mind, it’s going to come down to an investor’s individual appetite for risk, and how much time they have to reach their financial goals. While there are seemingly infinite ways to allocate your investments, the chart below offers a very simple look at how asset allocation associates with risks and returns.
Asset Allocations and Associated Risk/Return
Asset Allocation
Risk/Return
75% Stock-25% Bonds
Higher risk, higher potential returns
50% Stock-50% Bonds
Medium risk, variable potential returns
25% Stock-75% Bonds
Lower risk, lower potential returns
Ways to Make the Most of Investment Options
It’s up to you to manage your employer-sponsored 401(k) in a way that makes good use of the options available. Here are some pointers.
Understand the Match
One way to start is by familiarizing yourself with the rules on how to maximize the company match. Is it a dollar-for-dollar match up to a certain percentage of your salary, a 50% match, or some other calculation? It also helps to know the policy regarding vesting and what happens to those matching contributions if you leave your job before you’re fully vested.
Consider Your Investments
With or without help, taking a little time to assess the investments in your plan could boost your bottom line. It may also allow you to tailor your portfolio to better accomplish your financial goals. Checking past returns can provide some information when choosing investments and strategies, but looking to the future also can be useful.
Plan for Your Whole Life
If you have a career plan (will you stay with this employer for years or be out the door in two?) and/or a personal plan (do you want to buy a house, have kids, start your own business?), factor those into your investment plans. Doing so may help you decide how much to invest and where to invest it.
Find Your Lost 401(k)s
Have you lost track of the 401(k) plans or accounts you left behind at past employers? It may make sense to roll them into your current employer’s plan, or to roll them into an IRA separate from your workplace account. You might also want to review and update your portfolio mix, and you might be able to eliminate some fees.
Know the Maximum Contributions for Retirement Accounts
Keep in mind that there are different contribution limits for 401(k)s and IRAs. Contribution limits for a 401(k) are $23,000 in 2024 and $23,500 in 2025 for those under age 50. Those age 50 and over can make an additional catch-up contribution of $7,500, per year, to a 401(k) in 2024 and 2025.
And in 2025, those aged 60 to 63 may contribute an additional $11,250 to a 401(k) instead of $7,500, thanks to SECURE 2.0.
For tax years 2024 and 2025, the contribution limits for traditional and Roth IRAs are $7,000; $8,000 for those who are 50 and older.
Learn How to Calculate Your 401(k) Rate of Return
This information can be useful as you assess your retirement saving strategy, and the math isn’t too difficult.
For this calculation, you’ll need to figure out your total contributions and your total gains for a specific period of time (let’s say a calendar year).
You can find your contributions on your 401(k) statements or your pay stubs. Add up the total for the year.
Your gains may be listed on your 401(k) statements as well. If not, you can take the ending balance of your account for the year and subtract the total of your contributions and the account balance at the beginning of the year. That will give you your total gains.
Once you have those factors, divide your gains by your ending balance and multiply by 100 to get your rate of return.
Here’s an example. Let’s say you have a beginning balance of $10,000. Your total contributions for the year are $6,000. Your ending balance is $17,600. So your gains equal $1,600. To get your rate of return, the calculation is:
(Gains / ending balance) X 100 =
($1,600 / $17,600) X 100 = 9%
Savings Potential From a 401(k) Potential by Age
It can be difficult to really get a feel for how your 401(k) savings or investments can grow over time, but using some of the math above, and assuming that you keep making contributions over the years, you’ll very likely end up with a sizable nest egg when you reach retirement age.
This all depends, of course, on when you start, and how the markets trend in the subsequent years. But for an example, we can make some assumptions to see how this might play out. For simplicity’s sake, assume that you start contributing to a 401(k) at age 20, with plans to start taking distributions at age 70. You also contribute $10,000 per year (with no employer match, and no inflation), at an average return of 5% per year.
Here’s how that might look over time:
401(k) Savings Over Time
Age
401(k) Balance
20
$10,000
30
$128,923
40
$338,926
50
$680,998
60
$1,238,198
70
$2,145,817
Using time and investment returns to supercharge your savings, you could end up with more than $2 million through dutiful saving and investing in your 401(k). Again, there are no guarantees, and the chart above makes a lot of oversimplified assumptions, but this should give you an idea of how things can add up.
Alternatives to 401(k) Plans
While 401(k) plans can be powerful financial tools, not everyone has access to them. Or, they may be looking for alternatives for whatever reason. Here are some options.
Roth IRA
Roth IRAs are IRAs that allow for the contribution of after-tax dollars. Accordingly, the money contained within can then be withdrawn tax-free during retirement. They differ from traditional IRAs in a few key ways, the biggest and most notable of which being that traditional IRAs are tax-deferred accounts (contributions are made pre-tax).
Learn more about what IRAs are, and what they are not.
Traditional IRA
As discussed, a traditional IRA is a tax-deferred retirement account. Contributions are made using pre-tax funds, so investors pay taxes on distributions once they retire.
HSA
HSAs, or health savings accounts, are another vehicle that can be used to save or invest money. HSAs have triple tax benefits, in that account holders can contribute pre-tax dollars to them, allow that money to grow tax-free, and then use the holdings on qualified medical expenses — also tax-free.
Retirement Investment
Typical returns on 401(k)s may vary, but looking for an average of between 5% and 8% would likely be a good target range. Of course, that doesn’t mean that there won’t be up or down years, and averages, themselves, can be a bit misleading.
While your annual return on your 401(k) may vary, the good news is that, as an investor, you have options about how you save for the future. The choices you make can be as aggressive or as conservative as you want, as you choose the investment mix that best suits your timeline and financial goals.
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
What is the typical 401(k) return over 20 years?
The typical return for 401(k)s over 20 years is between 5% and 8%, assuming a portfolio sticks to an asset mix of roughly 60% stocks and 40% bonds. There’s also no guarantee that returns will fall within that range.
What is the typical 401(k) return over 10 years?
Again, the average rate of return for 401(k)s tends to land between 5% and 8%, with some years providing higher returns, and some years providing lower, or even negative returns.
What was the typical 401(k) return for 2022?
The average 401(k) lost roughly 20% of its value during 2022, as increasing interest rates and shifting economic conditions over the course of the year (largely due to increasing inflation) caused the economy to sputter.
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You’re ready to make home improvements. When looking for a trustworthy pro, it’s a good idea to get referrals, check references, get multiple bids, and nail down your financing. Let’s drill down to the details on how to find a good contractor for remodeling and what you need to ask as you move through the process.
💡 Quick Tip: With SoFi, it takes just minutes to view your rate for a home loan online.
Ask for Referrals
Often the easiest way to find a reputable contractor for your project is through word-of-mouth referrals, whether from a friend, neighbor, family member, or colleague. Maybe you’ve watched your friend remodel the kitchen on social media; you may want to ask for the name of the contractor behind the job. Likewise, if you see a big construction project going up in your neighborhood, you can ask the homeowner for insight on the contractor behind it.
You might also want to ask owners of local lumber yards, where contractors do their bulk business, who’s reliable.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Questions? Call (888)-541-0398.
Search Online for the Top-Reviewed Contractors
Before hiring a contractor to renovate or remodel your home, it’s smart to do your due diligence and collect as many references as possible. But if you’re new to a town or neighborhood, for example, you may wonder how to find a contractor who works in your area.
This is where online reviews come in handy. There are many websites out there that offer lists of licensed contractors with accompanying reviews.
Look at Credentials and Portfolio
As you begin speaking with each potential contractor, ask to see a copy of their contractor’s license and insurance policy, and ask about any specialty certifications or membership to any professional organizations like the National Association of Home Builders, the National Association of the Remodeling Industry, or the National Kitchen & Bath Association.
Be aware that some states require contractor licensing; others, certification or registration. Registration doesn’t guarantee expertise; it’s merely a written record of who is performing the work. Many but not all states have websites where you can verify your pro’s license number. If your property is governed by a homeowners association or condo association, remember that the association may require proof of licensing.
Most reputable builders or contractors should have a website or basic social media presence, but if you can’t find one, request an email link to the contractor’s portfolio to see examples of past projects, from countertop replacement to closet remodels, as well as before and after photos.
Interview Candidates
Once you have a list of potential contractors narrowed down to your three top picks, it’s a good move to interview each of them before you go a step further. Maybe you won’t jibe with one of them, or perhaps another won’t seem as knowledgeable about certain components of construction or remodeling as you’d like for your particular project.
Treat hiring any contractor or handyman just like you would hiring an employee for your work, and if you don’t get a good feeling about the candidate, trust your gut. Communication is key for any successful project, and if the communication feels lacking in the interview process, it’s likely you’ll get frustrated down the line when all the moving parts of a remodeling project are also thrown into the mix.
Check References
After you’ve compiled a list of contractors and interviewed your top candidates, you’ll want to check references. Professionals should be able to provide a list of contacts from past jobs, and if they can’t do so right on the spot, that’s probably a red flag.
When checking references, you might want to ask past customers if the contractor completed the job on time and within budget, if there were any problematic interactions, and how the work has held up since.
Review the Cost Estimate
You could find the perfect contractor for the job, only to learn that the pro is far out of your budget.
It’s smart to get at least three competitive quotes from contractors before you move forward. A cost estimate should include labor, materials, change-order language, and a timeline, at minimum. Many contractors also have payment schedules so you will know when you’ll need to have your finances in order.
One positive if you have second thoughts about the expense: While the cost to remodel a house may not be cheap, if you keep your property modern and up to date, it’s possible you’ll recoup those dollars in resale value down the line.
💡 Quick Tip: Compared to credit cards and other unsecured loans, you can usually get a lower interest rate with a cash-out refinance loan.
Consider the Red Flags
If it’s your first time hiring a contractor, you may not know what to look for — or what’s a red flag. To save yourself headaches down the road, if the contractor checks any of the below boxes, the person’s professionalism might be in question and it’s probably wise to move on to the next candidate.
How to find a contractor for home renovations? Hiring a contractor is a process that you’d be smart to treat like a job interview. It’s a good idea to check references and credentials, get bids, look for red flags, and have financing lined up, whether you take out a personal loan or opt for a home equity line of credit (HELOC).
SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.
Unlock your home’s value with a home equity line of credit brokered by SoFi.
FAQ
Before you sign on the dotted line for your remodeling job, there are some things about working with a contractor you need to know before locking one in.
What should a remodel contract include?
You’ll want to make sure the contract lays out the overall project budget and scope of work, when payments are due, and how to handle the inevitable changes that will arise.You’ll also want to have a dispute resolution and waiver of the lien clause so that a subcontractor cannot put a lien on your home, and a warranty for the work that is an acceptable time frame for the amount you’ve invested.
What questions should I ask a contractor?
When you’re meeting with each potential contractor, ask about past projects and if they have specific experience doing the type of renovation work that you’d like done. It’s also helpful to ask how they would approach the project and how much of an impact it’ll have on your ability to live in the home while work is taking place.
You’ll also want to inquire about insurance. Ask for proof that the contractor carries an insurance policy that protects you, the homeowner, as well. All of these are things a professional contractor should have and easily be able to produce.
What should you know before hiring a contractor?
Know that there are always bad actors who can take advantage of the huge sums of money that Americans pouring into real estate investment — and that no reputable contractor should be offended if you ask for references, proof of insurance, and all promises in writing.
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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.
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²SoFi Bank, N.A. NMLS #696891 (Member FDIC), offers loans directly or we may assist you in obtaining a loan from SpringEQ, a state licensed lender, NMLS #1464945. All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state. You should consider and discuss with your loan officer whether a Cash Out Refinance, Home Equity Loan or a Home Equity Line of Credit is appropriate. Please note that the SoFi member discount does not apply to Home Equity Loans or Lines of Credit not originated by SoFi Bank. Terms and conditions will apply. Before you apply, please note that not all products are offered in all states, and all loans are subject to eligibility restrictions and limitations, including requirements related to loan applicant’s credit, income, property, and a minimum loan amount. Lowest rates are reserved for the most creditworthy borrowers. Products, rates, benefits, terms, and conditions are subject to change without notice. Learn more at SoFi.com/eligibility-criteria. Information current as of 06/27/24. In the event SoFi serves as broker to Spring EQ for your loan, SoFi will be paid a fee.
