Markets are often described as being either bullish vs. bearish. These are common terms used to refer to how a market is performing over a shorter or longer period of time. Investors can also be bullish or bearish on a specific stock, a sector, an asset class, or on the economy in general.
Read on to learn more about the definitions of bearish vs. bullish, where the terms bullish and bearish come from, and the bullish and bearish meaning for investors in stocks or other markets.
Key Points
• A bull market features rising stock prices and high investor confidence.
• Bear markets are generally marked by a 20% drop in stock prices and sustained low investor confidence.
• Investor behavior in bull markets includes increased buying and holding of stocks.
• In bear markets, investors tend to move to safer investments and may sell assets.
• Diversifying investments and dollar cost averaging may help manage risks in bear and bull markets.
What Does Bullish Mean?
Bullish refers to stock market sentiment that the direction of the overall market will go up. A market that is increasing in value over a long period of time is said to be in a bull market. A bullish trend means that there may be an upward trend in prices for an asset.
For investors, being bullish means they feel positive about a stock, index, or the overall stock market. For example, if an investor says they are bullish on Stock X, the investor expects the market value of Stock X to increase in the long-term. That bullishness may even compel the investor to buy more shares of the company.
A bullish market is generally one where prices go up by 20% from a previous low for a sustained period.
What Does Bearish Mean?
Bearish refers to a sentiment that the direction of securities or the overall market will move down in price. An investor characterized as a bear believes the stock market will decrease in value, even if current prices are going up. An investor investing in a bearish market may even sell shares of their portfolio if they believe the market will turn negative.
A bear market is one that has fallen 20% from recent highs and remains below that threshold for at least two months. Since investors are bearish during this period, there may be lower trading activity.
Where Do the Terms Bullish and Bearish Come From?
While there are several theories as to the origins of bullish vs. bearish. The consensus believes the difference between bullish and bearish reflects the way each animal responds when they attack. When a bull goes into attack mode, it races at its target with confidence. In a bull market, investors are confident that stock prices will rise and correspondingly, the value of the market will trend upward.
When bears attack, they swipe their paws in a downward motion and often in fear. That is why in a bear market, prices drop. When investors are bearish, they do not have confidence in stocks and usually end up selling off some of their investments.
How Bullish Markets Can Impact Investors
In a bull market, demand is greater than supply. There are many investors who want to buy stocks while only a few are willing to sell. Bullish traders tend to have long positions in stocks or other assets.
How Bearish Markets Can Impact Investors
In a bear market, supply is greater than demand — and investors may look to offload their shares when there is not a lot of demand for market participants to buy. As a result, share prices decrease. A bear market is challenging for investors because stock prices keep falling, and that means more losses in an investment portfolio.
Your first instinct may be to sell in a bear market, but to increase chances of securing a profit in the long-term, it may make more sense to remain invested. Bear markets do not last forever.
Still, some investors prefer to adjust their investments in a bear market, turning to defensive stocks like consumer staples, healthcare, or utilities. They also may consider going into safer investments like bonds that offer stable fixed-income.
Bear markets can also present a good buying opportunity for investors who use dollar-cost averaging. This involves investing a fixed amount of money consistently. This way, investors can purchase stocks at a more affordable price.
Tips on Withstanding Bullish vs Bearish Markets
One of the best investing strategies during a bull or bear market is diversification. Diversifying your investment portfolio with different securities in a variety of different industries — along with various asset classes that may fare better in bear vs. bull markets — can help protect a portfolio by potentially minimizing losses and maximizing gains over the long-term.
Diversification means buying shares of companies in different sectors and companies of different sizes, rather than just investing in a select few of stocks, and also investing in different types of assets, such as low-risk bonds as well as stocks.
Stock Market
Investors who are not sure how to pick individual stocks can purchase an exchange-traded fund (ETF) or index fund, which are pre-selected baskets of securities all in one investment vehicle. For example, investors who own a fund that follows the S&P 500 will see their investments perform in line with that index.
In an ETF, investors own hundreds of companies, which means they don’t need to painstakingly choose one or two companies, rather, they own the entire index. Investing in these types of securities may be a strategy that utilizes diversification principles to help protect value.
The Takeaway
A market doesn’t necessarily have to be either bearish or bullish. It can actually be neither. The stock market can be in a state that is relatively flat. This may mean there are normal market fluctuations leading to either small gains or small losses.
Even if markets experience a sharp decline or rise in the short-term, this still cannot be defined as bearish or bullish because bull and bear markets are maintained over a period of time.
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FAQ
Does being bearish mean that you want to sell your assets?
“Bearish” means general pessimism about the direction of the market. In some cases, people are not even aware of a bear market until it’s over because it’s difficult to predict the direction of the markets. Investors who are invested for the long run do not pay attention to the peaks and troughs of the market and may take a dollar-cost averaging approach by investing consistently over time in both bear and bull markets.
How can you tell if a market is bearish or bullish?
Predicting and timing the markets is a challenging task. However, if stock prices have fallen by more than 20% from their recent peaks, and remained there for more than two months, that’s typically considered a bear market. A sustained increase in prices is a bull market.
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SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Investment opportunities are different ways to put your money to work, and they can include any number of things, such as buying assets and waiting for them to appreciate, or investing in real estate or a business opportunity.
There are varying degrees of risks and potential rewards with each option, but if you’re looking to put your money to work this year, you may want to consider a range of ideas. Every idea needs to be vetted, of course, and it’s important to do your due diligence before investing. Only you can decide which opportunities make sense, given your goals and long-term plans.
Key Points
• Investment opportunities may include buying assets, investing in real estate, or investing in a business opportunity.
• Each opportunity comes with varying degrees of risk and potential rewards.
• Examples of investment opportunities may include bonds, real estate or REITs, ETFs and passive investing, automated investing, and investing in startups.
• Buying precious metals like gold and silver are also potential investment opportunities.
• Investors should do their due diligence and consider their goals and long-term plans before investing.
1. Bonds
Bonds are a common type of investment, and are actually debt instruments that are often used to diversify or balance the risk profile of a portfolio.
• Types:
There are many different types of bonds. The most common, and generally considered to be the lowest-risk category of bonds, might be the U.S. Treasury bonds, typically called treasuries.
The Treasury regularly auctions off both short-term and long-term Treasury bonds and notes. These bonds are, generally, thought to be one of the safest investments on the market, as they’re guaranteed by the U.S. government. The only way for investors to lose their entire investment would be for the U.S. government to become insolvent, which has never occurred.
Governments are not the only entities that issue bonds. Corporations can also raise money by offering corporate bonds. These types of bonds tend to be riskier, but they often pay a higher rate of interest (known as the yield).
• Benefits:
Investing in bonds is relatively low-risk compared to assets like stocks. So, it can be a conservative investment strategy, designed to seek a small-but-safe return.
Governments, municipalities, and companies issue bonds to investors who lend them money for a set period of time. In exchange, the issuer pays interest over the life of the loan, and returns the principal when the bond “matures.” Individuals can buy them on bond markets or on exchanges.
Upon maturity, the bond-holder gets their original investment (known as the principal) back in full. In other words, a bond is a loan, with the investor loaning another party money, in exchange for interest payments for a set period of time.
• Risks and Challenges:
Bonds generally don’t generate returns like stocks or other assets do. So, investors may want to temper their expectations. Aside from that, bonds also have risks, including that the issuer could default, changes to interest rates can affect their values.
• How to Get Started:
Investors can purchase bonds through their brokerage account, or even directly from issuers, in some cases. For example, it’s possible to buy Treasury bonds directly from the U.S. government.
2. Real Estate or REITs
Real estate is the largest asset class in the world, with a market cap well into the hundreds of trillions of dollars. Accordingly, there are a lot of opportunities for investors to add real estate, in some form, to their portfolio.
• Types of Real Estate Investments:
When thinking about investing in real estate, residential properties may be one of the first things that comes to mind, such as buying a single family home. But owning property, like a home, can come with an array of responsibilities, liabilities, and expenses. In that way, it’s different from owning a stock or bond.
Generally, real estate investments take the form of actual real estate — such as a home, apartment building, or commercial property — or through shares of REITs, which are real estate investment trusts. These are similar to “real estate ETFs,” in a way.
REITs are popular among passive-income investors, as they tend to have high dividend yields because they are required by law to pass on 90% of their amount of their income to shareholders.
Historically, REITs have often provided better returns than fixed-income assets like bonds, although REITs do tend to be higher-risk investments.
There are many different types of REITs. Some examples of the types of properties that different REITs might specialize in include:
◦ Residential real estate
◦ Data centers
◦ Commercial real estate
◦ Health care
• Benefits:
Real estate tends to appreciate over time, but there are many factors that can affect property values. REITs can also allow investors to gain exposure to the real estate world without the hassle and liability of owning physical property, though they do come with risks.
• Risks and Challenges:
For people with smaller amounts of capital, investing in physical real estate might not be a realistic or desirable option — first and foremost. Annual property taxes, maintenance and upkeep, and paying back mortgage interest can add to the cost of treating a home as an investment. It’s also worth remembering that residential properties can appreciate or depreciate in value, too.
Other real-estate investment options involve owning multi-family rental properties (like apartment buildings or duplexes), commercial properties like shopping malls, or office buildings. These tend to require large initial investments, but those who own them could potentially see significant returns from rental income. (Naturally, few investments guarantee returns and rental demands and pricing can change over time).
As for REITs, these have certain pros and cons, like other investments, and generally are high-risk investments. But companies can be classified as REITs if they derive at least 75% of their income from the operation, maintenance, or mortgaging of real estate. Additionally, 75% of a REITs assets must also be held in the form of real property or loans directly tied to them. So, there may need to be some research before an investment is made.
• How to Get Started:
Shares of a REIT can be purchased and held in a brokerage account, just like a stock or ETF. To buy some, it’s often as simple as looking up a specific REIT’s ticker symbol.
Buying real property is a much more complicated process, and speaking with a real estate agent might be a good place to start — not to mention a financial professional.
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3. ETFs and Passive Investing
Passive investing, which refers to exchange-traded funds (ETFs), mutual funds, and other instruments that track an index and do not have an active manager, have become increasingly popular over the years.
Weighing the merits of passive vs. active investing is an ongoing debate, with strong advocates on both sides.
• Types:
Passive investing tends to be lower cost compared with active investing, and over time these strategies tend to do well. Passive investing can include buying ETFs or index funds, or even mutual funds.
An ETF is a security that usually tracks a specific industry or index by investing in a number of stocks or other financial instruments.
ETFs are commonly referred to as one type of passive investing, because most ETFs track an index. Some ETFs are actively managed, but most are not.
These days, there are ETFs for just about everything — no matter your investing goal, interest area, or industry you wish you invest in. Small-cap stocks, large-cap stocks, international stocks, short-term bonds, long-term bonds, corporate bonds, and more.
• Benefits:
Some potential advantages of ETFs include lower costs and built-in diversification. Rather than having to pick and choose different stocks, investors can choose shares of a single ETF to buy, gaining some level of ownership in the fund’s underlying assets.
Thus, investing in ETFs could make the process of buying into different investments easier, while potentially increasing portfolio diversification (i.e., investing in distinct types of assets in order to manage risk).
Overall the biggest advantage to passive investing is that it’s hands-off, and as such, relatively cheaper (in terms of saving on fees and commissions) compared to an active approach.
• Risks and Challenges:
Specific ETFs or funds may have their own risks — those risks will largely depend on the securities, industries, or other factors contained within each one. But in a more broad sense, if there is a challenge or downside to a passive investment strategy, it may be that there’s the possibility of missing out on appreciation within specific stocks or assets.
That said, passive investing is supposed to be a relatively low-risk approach, but it’s not risk-free.
• How to Get Started:
Perhaps the simplest way to start passive investing is to buy ETFs or index funds through your brokerage account. It can be that simple.
Automated investing often incorporates a “robo-advisor” to handle the heavy lifting. Typically, a robo advisor is an online investment service that provides you with a questionnaire so you can input your preferences: e.g. your financial goals, your personal risk tolerance, and time horizon. Using these parameters, as well as investing best practices, the robo advisor employs a sophisticated algorithm to recommend a portfolio that suits your goals.
These automated portfolios are pre-set, and they can tilt toward an aggressive allocation or a conservative one, or something in between. Typically, these portfolios are built of low-cost exchange-traded funds (ETFs). These online portfolios are designed to rebalance over time, using technology and artificial intelligence to do so.
You can use a robo investing as you would any account — for retirement, as a taxable investment account, or even for your emergency fund — and you typically invest using automatic deposits or contributions.
Some investors may also use a target-date fund to automate their investing. Target-date mutual funds, which are a type of mutual fund often used for retirement planning and college savings, also use technology to automate a certain asset allocation over time.
By starting out with a more aggressive allocation and slowly dialing back as years pass, the fund’s underlying portfolio may be able to deliver growth while minimizing risk. This ready-made type of fund can be appealing to those who have a big goal (like retirement or saving for college), and who don’t want the uncertainty or potential risk of managing their money on their own.
• Benefits:
The biggest benefit of automated investing is that it’s, well, automated! It’s a hands-off approach, which means you don’t need to worry about what’s happening with your portfolio on a day to day basis – though it can still be wise to monitor regularly. Again, if you want to take a set-it-and-forget-it approach to investing, this may be worth checking out.
• Risks and Challenges:
Some investors may not like handing the reins off to an algorithm or robo-advisor. Accordingly, the approach may oversimplify your portfolio, costing you potential gains (or avoiding losses). And, of course, technology isn’t perfect, so it’s possible that there could be a glitch in a system somewhere, and other cybersecurity risks in the mix.
• How to Get Started:
There are numerous robo-advisors on the market — check some of them out, do a bit of research, and choose one. You can also look at specific target-date mutual funds that could be a good fit, and start investing in those.
Gold is one of the most valued commodities. For thousands of years, gold has been prized because it is scarce, difficult to obtain, has many practical uses, and does not rust, tarnish, or erode.
Silver has historically held a secondary role to gold, and today, serves more of an industrial role. For those looking to invest in physical precious metals, silver will be a relatively affordable option.
• Benefits:
Gold, silver, and related securities are sometimes considered to be “safe havens,” meaning most investors perceive them as low risk. This asset class tends to perform well during times of crisis (and conversely tends to drop when the economy is going well), but past trends don’t guarantee that gold will perform one way or the other.
• Risks and Challenges:
Precious metals are volatile, and the industry itself is volatile as well. Also, for investors who are buying physical precious metals, they may face a challenge in storing them and keeping them safe from thieves. You may need to even get insurance on physical assets, or add them to an existing insurance policy.
• How to Get Started:
Buying physical gold or bullion (which comes in coins and bars) isn’t the only way to invest in gold and silver. There are many related securities that allow investors to gain exposure to precious metals. There are ETFs that tend to track the prices of gold and silver, respectively. Other ETFs provide an easy vehicle for investing in gold and silver mining stocks. So, there are some different ways to invest in the field.
Companies that explore for and mine silver and gold tend to see their share prices increase in tandem with prices for the physical metals.
The Takeaway
The investment opportunities described above are just some potential points of entry for investors in 2025. Investors can look to the stock, bond, or crypto markets for new ways to put their money to work, or consider active strategies vs. passive (i.e. index) strategies. They can look at commodities, like precious metals, or automated portfolios.
All these investment opportunities come with their own set of potential risks and rewards. There are no guarantees that choosing X over Y will increase your investment returns. It’s up to each investor to weigh these options, especially in light of current economic trends, such as inflation and rising rates.
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 most popular thing to invest in right now?
Stocks, bonds, and ETFs tend to be among the most popular investments at any given time, though the specific popularity among those classes can vary wildly.
What are some of the best investment opportunities for beginners?
For beginning investors, investing in ETFs, index funds, or mutual funds may be a simple way to get started. Those assets will give investors exposure to broad parts of the market.
What are the lowest risk investment opportunities?
Generally, the investment with the lowest risks are Treasuries, but even those are not risk-free. Bonds tend to be less risky than stocks, too.
What are the highest risk investment opportunities?
There are many high-risk investments out there, including cryptocurrencies, certain stocks, REITs, and even venture capital all have a relatively high risk compared to, say, Treasuries.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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.
Mutual Funds (MFs): 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 clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
The rule of 55 is a provision in the Internal Revenue Code that allows workers to withdraw money from their employer-sponsored retirement plan without a penalty once they reach age 55. Distributions are still taxable as income but there’s no additional 10% early withdrawal penalty.
The IRS rule of 55 applies to 401(k) and 403(b) plans. If you have either of these types of retirement accounts through your employer, it’s important to understand how this rule works when taking retirement plan distributions.
Key Points
• The rule of 55 allows penalty-free withdrawals from employer-sponsored retirement plans for individuals aged 55 or older.
• This rule applies to 401(k) and 403(b) plans, allowing early access to retirement funds without the usual 10% penalty.
• To qualify, individuals must have separated from their employer at age 55 or older and leave the funds in the employer’s plan.
• The rule of 55 does not apply to IRAs, and certain conditions and restrictions may vary depending on the specific retirement plan.
• While the rule of 55 can be beneficial for early retirees, it’s important to consider tax implications and other factors before utilizing it.
What Is the Rule of 55?
The rule of 55 is an exception to standard IRS withdrawal rules for qualified workplace plans, including 401(k) and 403(b) plans. Normally, you can’t withdraw money from these plans before age 59 ½ without paying a 10% early withdrawal penalty. This penalty is only waived for certain allowed exceptions, of which the rule of 55 is one.
Specifically, the rule of 55 applies to “distributions made to you after you separated from service with your employer after attainment of age 55,” per the IRS. It doesn’t matter whether you quit, get laid off or retired — you can still withdraw money from your retirement plan penalty-free. If you’re a qualified public safety employee, this exception kicks in at age 50 instead of 55.
💡 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.
How Does the Rule of 55 Work?
The rule of 55 for 401(k) and 403(b) plans allows workers to access money in their retirement plans without a 10% early withdrawal penalty. This rule applies to current workplace retirement plans only.
You can’t use the rule of 55 to take money from a 401(k) or 401(b) you had with a previous employer penalty-free unless you first roll over those account balances into your current plan before separating from service.
This rule doesn’t apply to individual retirement accounts (IRA) either. So, you can’t use the rule of 55 to tap into an IRA before age 59 ½ without a tax penalty. There are, however, some exclusions that might allow you to do so. For example, you could take money penalty-free from an IRA if you’re using it for the purchase of a first home.
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Rule of 55 Requirements
To qualify for a rule of 55 401(k) or 403(b) withdrawal, you’ll need to:
• Be age 55 or older
• Separate from your employer at age 55 or older
• Leave the money in your employer’s plan (rule of 55 benefits are lost if you roll funds over to an IRA)
You also need to have a 401(k) or 403(b) plan that allows for rule of 55 withdrawals. If your plan doesn’t permit early withdrawals before age 59 ½ , then you won’t be able to take advantage of this rule.
Also keep in mind that IRS rules require a 20% tax withholding on early withdrawals from a 401(k) or similar plan. This applies even if you plan to roll the money over later to another qualified plan or IRA. So you’ll need to consider how that withholding will affect what you receive from the plan and how much you may still owe in taxes on your 401(k) later when reporting the distribution on your return.
Example of the Rule of 55
Here’s how the rule of 55 works. Say you lose your job or decide to retire early at age 55, and you need money to help pay your bills and cover lifestyle expenses. Under the rule of 55, you can take distributions from the 401(k) or 403(b) plan you were contributing to up until the time you left your job. You will not be charged the typical 10% early withdrawal penalty in this instance.
Also worth noting: If you decide to go back to work a year or two later at age 56 or 57, say, you can still continue to take distributions from that same 401(k) or 403(b) plan, as long as you have not rolled it over into another employer-sponsored plan or IRA.
Should You Use the Rule of 55?
The IRS rule of 55 is designed to benefit people who may need or want to withdraw money from their retirement plan early for a variety of reasons. For example, you might consider using this rule if you:
• Decide to retire early and need your 401(k) to close the income gap until you’re eligible for Social Security benefits
• Are taking time away from work to act as a caregiver for a spouse or family member and need money from your retirement plan to cover basic living expenses
• Want to take some of the money in your 401(k) early to help minimize required minimum distributions (RMDs) later
In those scenarios, it could make sense to apply the rule of 55 in order to access your retirement savings penalty-free. On the other hand, there are some situations where you may be better off letting the money in your employer’s plan continue to grow.
For instance, if your employer’s plan requires you to take a lump sum payment, this could push you into a substantially higher tax bracket. Having to pay taxes on all of the money at once could diminish your account balance more so than spreading out distributions — and the associated tax liability — over a longer period of time.
You may also reconsider taking money from your 401(k) early if you still plan to work in some capacity. If you have income from a new full-time job or part-time job, for instance, you may not need to withdraw funds from your 401(k) at all. But if you change your mind later and decide to return to work, you can continue to take withdrawals from the same retirement plan penalty-free.
Other Ways to Withdraw From a 401(k) Penalty-Free
Aside from the rule of 55, there are other exceptions that could allow you to take money from your 401(k) penalty-free. The IRS allows you to do so if you:
• Reach age 59 ½
• Pass away (for distributions made to your plan beneficiary)
• Become totally and permanently disabled
• Need the money to pay for unreimbursed medical expenses exceeding 10% of your adjusted gross income (AGI)
• Need the money to pay health insurance premiums while unemployed
• Are a qualified reservist called to active duty
You can also avoid the 10% early withdrawal penalty by taking a series of substantially equal periodic payments. This IRS rule allows you to sidestep the penalty if you agree to take a series of equal payments based on your life expectancy. You must separate from service with the employer that maintains your 401(k) in order to be eligible under this rule. Additionally, you must commit to taking the payment amount that’s required by the IRS for a minimum of five years or until you reach age 59 ½, whichever occurs first.
A 401(k) loan might be another option for withdrawing money from your retirement account without a tax penalty. You might consider this if you’re not planning to retire but need to take money from your retirement plan.
With a 401(k) loan, you’ll have to pay the money back with interest. Your employer may stop you from making new contributions to the plan until the loan is repaid, generally over a five-year term. If you leave your job where you have your 401(k) before the loan is repaid, any remaining amount becomes payable in full. If you can’t pay the loan off, the whole amount is treated as a taxable distribution and the 10% early withdrawal penalty also may apply if you’re under age 59 ½.
The Takeaway
Early retirement may be one of your financial goals, and achieving it requires some planning. Maxing out your 401(k) or 403(b) can help you save the money you’ll need to retire early, and you may be able to access the funds early with the rule of 55.
You may also consider investing in an IRA or a taxable brokerage account to save for retirement. A brokerage account doesn’t have age restrictions, so there are no penalties for early withdrawals before age 59 ½. You’ll have to pay capital gains tax on any profits realized from selling investments, but you can allow the balances in your 401(k) or IRA to continue to grow on a tax-advantaged basis.
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
Can I use the rule of 55 if I get another job?
Yes, you can use the rule of 55 to keep withdrawing from your 401(k) if you get another job. As long as it’s the same 401(k) you were contributing to when you left your job and you haven’t rolled it over into an IRA or another plan, you can still continue to take distributions from it whether you get a full-time or part-time job.
How do I know if I qualify for Rule of 55?
First, find out if your employer allows for the rule 55 withdrawals. Check with your HR or benefits department. If they do, and you are 55 or older (or age 50 or older if you are a public safety worker), you should qualify for the rule of 55 and be able to take distributions from your most recent employer’s plan. You cannot take penalty-free distributions from 401(k) plans with previous employers.
How do I claim the rule of 55?
To start taking rule of 55 withdrawals, typically all you need to do is reach out to your plan’s administrator and prove that you qualify — meaning that you are age 55 or older and that you’re leaving your job.
What is the rule of 55 lump sum?
Some 401(k) plans may require you to take a lump sum payment if you are using the rule of 55. That could create a big tax liability since you will need to pay income tax on the money you withdraw. In this case you might want to explore other alternatives to the rule of 55. It may also be helpful to speak with a tax professional.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/bagi1998
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third-Party 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.
Relative Strength Index, or RSI, is a momentum indicator used to measure a stock’s price relative to itself and its past performance. Developed by technical analyst J. Welles Wilder, the Relative Strength Index focuses purely on individual stock price movements to identify trading trends for a specific security, based on the speed and direction of those price changes.
RSI allows swing investors to compare the price of something to itself, without factoring in the performance of other stocks or the market as a whole. Investors use RSI to pinpoint positive or negative divergences in price for a security or to determine whether a stock is overbought or oversold.
The RSI indicator is useful in technical analysis, which revolves around finding trends in stock movements to determine optimal entry and exit points. Understanding what the Relative Strength Index measures and how it works is central to a technical trading strategy.
What Is RSI in Stocks?
The Relative Strength Index is a rate of change or momentum oscillator that tracks stock price movements. You can visualize it as a line graph that moves up or down, based on a stock’s price at any given time. The Relative Strength Index operates on a scale from 0-100. Where the RSI indicator is within this range can suggest whether a stock has reached an overbought level or if it’s oversold.
RSI is not the same thing as Relative Strength analysis. When using a Relative Strength Comparison (RSC), you’re comparing two securities or market indexes to one another to measure their relative performance.
💡 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.
How Does the RSI Indicator Work?
The Relative Strength Index operates on a range from 0-100. As stock prices fluctuate over time, the index can move up or down accordingly. Traders typically use the RSI to track price movements over 14 periods (i.e. trading days), though some may use shorter or longer windows of time.
When the RSI indicator reaches 70 or above, it could mean the underlying asset being measured is overbought. An RSI reading of 30 or below, on the other hand, suggests that the asset is oversold. The length of time a stock remains in overbought or oversold territory depends largely on the strength of the underlying trend that’s driving price movements.
The Relative Strength Index can throw off different patterns, depending on whether stocks are in a bull market or bear market. Investors compare the movements of the RSI indicator with actual price movements to determine whether a defined pricing trend actually exists and, if so, in which direction it might be heading. Analyzing moving averages for the stock can help determine the presence of a clear pricing trend.
Here’s what the Relative Strength Index formula looks like:
RSI = 100 – (100 / (1 + RS))
In this formula, RS represents the ratio of the moving average of the tracking period’s gains divided by the absolute value of the moving average of the tracking period’s losses.
Here’s another way you might see the Relative Strength Index formula displayed:
RSI = 100 – [100 / ( 1 + (Average of Upward Price Change / Average of Downward Price Change ) ) ]
The RSI formula assumes that you’re able to follow a stock’s pricing changes over your desired tracking period. More importantly than that, however, is knowing how to make sense of Relative Strength Index calculations, which investors often display via a stock oscillator.
Interpreting RSI Results
Reading the Relative Strength Index isn’t that difficult when you understand how the different ranges work. Depending on where the RSI indicator is for a particular stock or market index, it can tell you whether the market is bullish or bearish. You can also use the RSI, along with other technical analysis indicators, to determine the best time to buy or sell.
Above 70
An RSI reading of 70 or higher could indicate that a stock is overbought and that its price might move back down. This could happen through a reversal of the current price movement trend or as part of a broader correction. It’s not unusual for stocks to have an RSI in this range during bull market environments when prices are rising. If you believe that the stock’s price has reached or is approaching an unsustainable level, an RSI of 70 or higher could suggest it’s time to exit.
Below 30
When a stock’s RSI reading is 30 or below, it typically means that it’s oversold or undervalued by the broader market. This could signal a buying opportunity for value investors but it could also indicate the market is turning bearish. It’s more common to see RSI readings of 30 or below during downtrends when stock prices may be in decline across the board.
40 to 90 Range
During bull markets, it’s not uncommon to see the Relative Strength Index for a stock linger somewhere in the 40 to 90 range. It’s less common to see the RSI dip to 30 or below when prices are steadily moving up. An RSI reading of 40 to 50, roughly the middle of the 0-100 scale can indicate support for an upward trend.
10 to 60 Range
In bear markets, or those filled with fear, uncertainty, and doubt, it’s more common to see the Relative Strength Index hover somewhere in the 10 to 60 range. It’s not unusual for stocks to reach 30 or below when the market is already in a downward trend. The middle point of the RSI can act as a support point, though the range shifts slightly to between 50 and 60.
Common RSI Indicators
Relative Strength Index indicators can help investors spot pricing trends. That includes identifying up and down trends, as well as sideways trends when pricing levels consolidate. The reliability of these indicators often hinges on the current phase of a stock or the market as a whole. When reading RSI indicators, it’s important to understand divergence and swing rejections.
Divergence
A divergence represents a variation or disagreement between the movement of the RSI indicator and the price movements on a stock chart. For example, a bullish divergence means the indicator is making higher lows while the price movement is establishing lower lows. This type of divergence can hint at increasing bullish momentum with a particular stock or the greater market.
A bearish divergence, on the other hand, happens when the indicator is making lower highs while prices are establishing higher highs. This could indicate that investor sentiment is becoming less bullish.
Swing Rejections
A swing rejection is a specific trading technique that involves analyzing RSI movements when pushing above 30 or below 70. Swing rejections can be bullish in nature or bearish.
For example, a bullish swing rejection has four parts or steps:
• RSI is at an oversold level
• RSI moves above 30
• A dip is recorded without rating as oversold
• RSI passes its recent high
Meanwhile, a bearish swing rejection also has four parts or steps:
• RSI reaches an overbought level
• RSI drops below 70
• RSI hits new highs without dropping back to overbought levels
• RSI passes recent lows
Swing rejections make it possible to utilize divergence indicators to spot bullish or bearish trends in their earliest stages.
💡 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.
Is RSI a Good Indicator to Use?
Yes, in certain circumstances. Relative Strength Index can be a good indicator to use in technical analysis, as it can make it easier to detect when a stock or the broader market is overbought or oversold. Understanding how to interpret RSI and its correlation to price movements could help you spot buy or sell signals and detect bull market or bear market trends.
That said, RSI also has some limitations. For example, the RSI can produce false positives or false negatives when bullish or bearish trends don’t align with the way a stock’s price is moving. Like other technical analysis indicators, it’s not an exact way to gauge the market’s momentum. So if stocks are hovering somewhere in the 40 to 60 range, it may be difficult to decipher whether the mood is bearish or bullish.
When using RSI, it’s helpful to incorporate other technical analysis indicators to create a comprehensive picture of the market. Exponential moving average (EMA), for example, is a type of moving average that uses the weighted average of recent pricing data to draw conclusions about the market.
Traders often use RSI in conjunction with other trend indicators, such as the Moving Average Convergence Divergence, the Stochastic Oscillator, or the Volume-Weighted Average Price.
RSI vs MACD
Moving Average Convergence Divergence (MACD) is a technical analysis indicator that investors may use alongside RSI. This indicator can help them determine when to buy or sell, based on the correlation between two moving averages for the same security.
Specifically, it requires looking at a 12-period moving average and a 26-period moving average. To find the MACD line, you’d subtract the 26-period from the 12-period, resulting in a main line. The next step is creating a trigger line, which is the nine-period exponential moving average of the main line. The interactions between these two lines can generate trading signals.
For example, when prices are strongly trending in a similar direction the main line and trigger line tend to move further apart. When prices are consolidating, the lines move closer together. If the main line crosses the trigger line from below, that can produce a buy signal. If the main line crosses the trigger line from above, that can be construed as a signal to sell.
While RSI and MACD are both trend indicators, there are some differences. Relative Strength Index measures the distance between pricing highs and lows. So you’re looking at the average gain or loss for a security over time, which again usually means 14 periods. The MACD, on the other hand, focuses on the relationship between moving averages for a security. It’s a trend-following signal that, like RSI, can indicate momentum.
RSI vs Stochastic Oscillator
The stochastic oscillator is a momentum indicator for technical analysis that shows where a stock’s closing price is relative to its high/low pricing range over a set period of time. The stochastic oscillator can also be used to track pricing for a market index.
Central to the use of the stochastic oscillator is the idea that as a stock’s price increases, the closing price inches closer to the highest point over time. When the stock’s price decreases, the closing price lands closer to the lowest low. Investors use this indicator to determine entry and exit points when making trades.
However, investors interpret RSI and stochastic oscillator readings differently. For example, with a stochastic oscillator, a reading of 20 or below generally means a stock is oversold, versus the 30 or below range for RSI readings. When used together, Relative Strength Index and stochastic oscillators can help with timing trades to maximize profit potential while minimizing the risk of losses.
Can You Use RSI to Time the Crypto Market?
Stocks are not the only asset class for which investors use the RSI. Investors also use the Relative Strength Index to assess conditions in the crypto markets and whether it’s time to sell or continue to HODL.
Cryptocurrency traders may use RSI to gauge momentum for individual currencies. Again, they’re looking at the highs and lows to get a sense of which way prices are moving at any given time. The RSI indicator can help with choosing when to buy or sell, based on previous price movements.
The same rules apply to crypto that apply to stocks: An RSI reading of 70 or above means overbought while a reading of 30 or below means oversold. Likewise, a reading above 50 signals a bullish trend while a reading below 50 can signal a bearish trend. Investors can also use a bearish divergence or bullish divergence to spot a pullback or an upward push.
As with stocks, however, it’s important to remember that RSI is not 100% accurate.
RSI can be used to pinpoint positive or negative divergences in price for a stock or to determine whether it’s overbought or oversold. If you’re interested in technical analysis and trending trading, RSI can be a useful metric for making investment decisions.
The RSI is just one tool that you can use to devise a strategy for your portfolio. There are other less technical tools you can use as well when you’re starting to build a portfolio.
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).
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About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Both Thrift Savings Plans (TSPs) and Individual Retirement Accounts (IRAs) come in traditional and Roth versions. One of the main differences between a Roth TSP vs. Roth IRA is who can contribute. Federal employees and members of the military can save in a Roth TSP. Anyone with earned income that’s within IRS income thresholds can contribute to a Roth IRA.
In either case, your contributions are not tax-deductible, but you can make tax-free qualified withdrawals when you retire.
Key Points
• Roth TSPs are available to federal employees and military members, while Roth IRAs are accessible to anyone with earned income within IRS income thresholds.
• Contributions to both Roth TSPs and Roth IRAs are made with after-tax dollars, allowing for tax-free qualified withdrawals in retirement.
• Roth TSPs have higher annual contribution limits and allow for employer matching contributions, unlike Roth IRAs.
• Roth IRAs typically offer a broader choice of investment options than Roth TSPs.
• Choosing between a Roth TSP and Roth IRA depends on employment status, contribution capacity, and retirement goals.
What Are Roth Thrift Savings Plans (TSP)?
The Thrift Savings Plan is a retirement plan that’s designed specifically for federal employees. You’re generally eligible to contribute to a TSP if you’re covered by the Federal Employees’ Retirement System (FERS) or the Civil Service Retirement System (CSRS). Members of the military can also save for retirement in a TSP.
A Roth TSP allows you to contribute after-tax dollars. When you make qualified withdrawals in retirement, those withdrawals are not taxed. Earnings are considered qualified if:
• At least 5 years have passed since January 1 of the first year in which you began making contributions, and
• You’re 59 ½ or older, permanently disabled, or deceased.
Contributions are made through elective salary deferrals, similar to a 401(k) plan. Catch-up contributions are allowed for workers aged 50 or older. Under the SECURE 2.0 Act, a higher catch-up contribution limit applies in 2025 for those ages 60 to 63. The IRS determines how much you can save in a Roth TSP each year. Here are the contribution limits for 2024 and 2025.
2024
2025
Elective Deferrals
$23,000
$23,500
Catch-Up Contributions
$7,500
$7,500
$11,250 for those ages 60-63
Annual Additions Limit
$69,000
$70,000
The annual additions limit is the total amount you can contribute in a calendar year. It includes employee contributions, as well as automatic and matching contributions made by your employing agency. Catch-up contributions do not count in this total.
🛈 While SoFi does not offer a Roth TSP, we do offer a Roth IRA to help members save for retirement.
What Are Roth IRAs?
A Roth IRA retirement account is an individual retirement account that allows you to contribute after-tax dollars, then make qualified withdrawals tax-free. Roth IRAs are available to individuals through brokerages, banks, and other financial institutions, rather than through employers.
You’ll need to have earned income to contribute to a Roth IRA. The IRS sets the maximum annual contribution limit. Catch-up contributions are allowed if you’re 50 or older. Here’s how the limits compare for 2024 and 2025.
2024
2025
Annual Contributions
$7,000
$7,000
Catch-Up Contributions
$1,000
$1,000
The annual limit does not apply to rollover or reservist contributions. How much you can contribute to a Roth IRA is based on your income and tax filing status.
You can make the full contribution in 2024 if:
• You file single or head of household and your modified adjusted gross income (MAGI) is less than $146,000
• You’re married, file separately, did not live with your spouse during the year and your MAGI is less than $146,000
• You’re married and file jointly or are a qualifying widow(er) and your MAGI is less than $230,000
You can make a full contribution in 2025 if:
• You file single or head of household and your MAGI is less than $150,000
• You’re married, file separately, did not live with your spouse during the year, and your MAGI is less than $150,000
• You’re married and file jointly or are a qualifying widow(er) and you’re MAGI is less than $236,000
There are no required minimum distributions for Roth IRAs, so you can leave money in your account until you need it. You can also withdraw original contributions at any time, without a tax penalty.
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.
Similarities Between Roth TSP vs. Roth IRA
It’s important to open a retirement account that fits your needs. In terms of what’s similar between a Roth IRA vs. Roth TSP, they both allow you to contribute money on an after-tax basis. In other words, you pay taxes on the money that goes into the plan upfront so you can withdraw it tax-free later.
Once you reach age 59 ½, you can begin taking distributions without triggering any tax consequences. In terms of early withdrawals from a TSP vs. Roth IRA, there’s no difference. The IRS can assess a 10% early withdrawal penalty when taking money out of either account prematurely.
Both Roth IRAs and Roth TSPs are subject to the five-year rule mentioned earlier. Again, that rule dictates that at least five years must have passed since making your first contribution in order to avoid a tax penalty when making withdrawals.
TSP Roth vs. Roth IRA Similarities
Funded with…
After-tax dollars
Contributions are…
Not tax-deductible
Qualified withdrawals are…
Tax-free
Differences Between Roth TSP vs. Roth IRA
While they do have some things in common, there are some notable differences between a Roth IRA vs. TSP.
First, the TSP is an employer-sponsored plan, while an IRA is not. If you don’t work for the federal government you wouldn’t have access to a Roth TSP, but you could still open a Roth IRA and contribute to it.
Next, Roth TSPs have much higher annual contribution limits and catch-up contribution limits. They also allow for employer matching contributions, something you won’t get with a Roth IRA. Your ability to contribute to a TSP is not limited by your income either.
While Roth IRAs allow you to withdraw original contributions at anytime without a tax penalty, that’s not the case for Roth TSPs.
TSP Roth vs. Roth IRA Differences
Contribution limits…
Are higher for Roth TSPs
Matching contributions…
Only apply for Roth TSPs
Contribution withdrawals…
Only Roth IRAs allow you to withdraw original contributions at anytime without a tax penalty
Roth TSP vs. Roth IRA: The Pros
There are several types of retirement plans that can offer tax advantages, including both Roth TSP and Roth IRA accounts. In terms of the pros, the main benefits of choosing either of these accounts lies in the ability to withdraw money when you retire tax-free.
If you expect to be in a higher tax bracket when you retire, Roth TSP or Roth IRA withdrawals won’t increase your tax liabilities. That’s a good thing if the value of your investments within either account has risen significantly since you first begin making contributions.
Roth TSPs may help you save a decent amount of money for retirement if you’re able to max out your plan each year. The addition of employer matching contributions is another benefit, since that’s essentially “free” money. You don’t get that with Roth IRAs, but these accounts can still be a good way to save if you don’t have access to a retirement plan at work.
Roth TSP Pros
Roth IRA Pros
• Contribute money on an after-tax basis
• Contributions grow tax-free
• Qualified withdrawals are tax-free
• High annual contribution and catch-up contribution limits
• Employer matching contributions may help your savings grow faster
• Eligibility to contribute is not tied to your income
• Contribute money on an after-tax basis
• Contributions grow tax-free
• Qualified withdrawals and withdrawals of original contributions are tax-free
• Save for retirement even if you don’t have a workplace retirement plan
Roth TSP vs. Roth IRA: The Cons
While there are some advantages to saving in a Roth TSP or Roth IRA, there are also some potential downsides. For one thing, you’ll need to have a federal job (that is, work for the federal government is some capacity) in order to contribute to a Roth TSP. With a Roth IRA, your ability to make a contribution hinges on your income and filing status.
Roth TSPs are also known for offering a narrower range of investment options. If you make an in-service withdrawal from your account and you’re not age 59 ½ yet, you should be prepared to pay a tax penalty.
A Roth IRA doesn’t offer matching contributions, nor can you borrow from it. Any early withdrawals that are not qualified or don’t otherwise meet the five-year rule could be subject to tax penalties. While you might have more investment options to choose from, it’s important to be mindful of the fees you may pay.
Roth TSP Cons
Roth IRA Cons
• Must be an eligible federal employee to contribute
• Investment selection may be limited
• In-service withdrawals only allowed for financial hardship
• Early withdrawal penalty may apply
• Must be within the IRS threshold guidelines to contribute
• How much you can contribute is tied to income and filing status
• No option to take loans
• No employer matching contributions
• Early withdrawal penalty may apply
Roth TSP vs. Roth IRA: Which Is Better for Your Retirement Goals?
Selecting a retirement plan is an important decision as you want to choose an option that aligns with your needs, goals, risk tolerance, and objectives. Contributing to a Roth TSP could be wise if you’re a federal employee, since you can take advantage of higher contribution limits and employer matching contributions.
A Roth IRA, meanwhile, could make sense if you don’t have access to a retirement plan at work or you want to supplement your employer’s plan. Contributing to a retirement plan at work doesn’t bar you from also contributing to a Roth IRA, as long as you’re within the income limits set by the IRS.
The one that’s better for you may depend on where you work, how much money you’re able to contribute to retirement savings each year, and when you plan to retire. When comparing investment options for a Roth TSP vs. Roth IRA, consider the overall track record of those investments as well as the fees you might pay.
The Takeaway
Whether you choose a Roth IRA vs. Roth TSP or something else, it’s important to save for retirement early and often. Even if you can only afford to contribute small amounts to a retirement account, they can add up over time as long as you remain consistent.
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
Should I max out my TSP or Roth IRA?
If you can afford to max out your TSP, it might make sense to do so before maxing out a Roth IRA. The simple reason for that is TSPs have higher annual contribution limits and you can also get a matching contribution from your employer. If you only have a Roth IRA, then maxing it out each year can help you save the most money possible toward your retirement goals.
Is a Roth IRA better for retirement or a Roth TSP?
A Roth IRA is a good retirement savings option if you want to be able to make tax-free withdrawals later. However, a Roth TSP allows you to contribute a larger amount of money each year and your employer can also make matching contributions on your behalf.
Does a Roth TSP reduce taxable income?
Roth TSP contributions are made using after-tax dollars, so they do not reduce your taxable income for the year. You can, however, manage your tax liability by taking advantage of any deductions and credits you might be eligible for.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
Photo credit: iStock/nortonrsx
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
