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Q: Should I use a Roth IRA as a savings account?

While you could use a Roth IRA as a savings account, that could be problematic if you need to make a withdrawal. Generally, the IRS expects you to wait until age 59 ½ to withdraw money from a Roth IRA. Withdrawing money before then could trigger tax penalties.

Q: What is the downside of a Roth IRA?

The main downside of a Roth IRA is that not everyone can open and contribute to one. If your income is above the thresholds allowed by the IRS, you’d only be able to open a traditional IRA instead. It’s possible, however, to convert traditional IRA funds to a Roth IRA, though that can result in a tax bill at the time of the conversion.

Mar

2025

Roth IRA vs. Savings Account

By Rebecca Lake | money, Preparing for Retirement, Terminology | Comments Off

Saving is an important part of your financial health and building wealth, but it can be confusing to understand all the different vehicles out there. For instance, if you want to stash cash away for a good long while, should you open a Roth IRA or a savings account?

A Roth Individual Retirement Account (IRA) offers a tax-advantaged way to invest money for retirement. Brokerages and banks can offer Roth IRAs for investors who want to set aside money that they don’t anticipate spending for the near future.

Savings accounts can also be used to hold money you plan to spend at a later date. The main difference between a Roth IRA and savings account, however, lies in what they’re intended to be used for.

If you’re debating whether to keep your money in a Roth IRA or savings account, it’s helpful to understand how they work, their similarities and differences, and the pros and cons of each option.

Key Points

• Roth IRAs are designed for retirement savings, offering tax-free growth and tax-free withdrawals in retirement.

• Savings accounts are ideal for short-term goals and emergency funds, offering more accessibility and flexibility.

• Roth IRAs can potentially yield higher returns through investments, while savings accounts provide safety and liquidity.

• Both account types can be opened with low initial deposits and are insured if held at banks.

• Choosing between them depends on financial goals, with Roth IRAs generally being better for long-term growth.

What Is a Savings Account?

A savings account is a type of deposit account that can be opened at a bank, credit union, or another financial institution. Savings accounts are designed to help you separate money you plan to spend later from money you plan to spend now.

Here’s how a savings account works:

• You open the account and make an initial deposit.

• Money in your account can earn interest over time, at a rate set by the bank.

• When you need to spend the money in your savings account, you can withdraw it.

Previously, savers were limited to making six withdrawals from a savings account per month under Federal Reserve rules. In 2020, the Federal Reserve lifted that restriction, though banks can still impose monthly withdrawal limits on savings accounts. Exceeding the allowed number of withdrawals per month could trigger a fee or could lead to the account being converted to a checking account.

Types of Savings Accounts

Banks can offer more than one kind of savings account. The range of savings accounts available can depend on whether you’re dealing with a traditional bank, an online bank, or a credit union.

Typically, these accounts will be insured up to $250,000 by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

Generally, the types of savings accounts you can open include:

• Traditional savings. Traditional savings accounts, also called regular, basic, or standard savings accounts, allow you to deposit money and earn interest. Rates for traditional savings may be on the low side, and you might pay a monthly fee for these accounts at brick-and-mortar banks.

• High-yield savings. The main benefits of high-yield savings accounts include above-average interest rates and low or no monthly fees. For example, online banks may offer high-yield savings accounts with rates that are many times higher than the national average savings rate, with no monthly fee.

• Money market savings. Money market savings accounts, or money market accounts, combine features of both savings accounts and checking accounts. For example, you can earn interest on deposits but have access to your money via paper checks or a debit card.

• Specialty savings. Some types of savings accounts are created with a specific purpose in mind. For example, Christmas Club accounts are designed to help you save money for the holidays. A Health Savings Account (HSA) is a tax-advantaged specialty savings account that’s meant to be used for health care expenses.

You could also add certificates of deposit (CDs) to this list, though a CD works differently than a savings account. CDs are time deposit accounts, meaning that when you put money in the account, you agree to leave it there for a set term. If you take the funds out before then, you will likely be charged a fee.

Once the CD matures, you can withdraw your initial deposit and the interest earned. For that reason, CDs offer less flexibility than other types of savings accounts.

Recommended: Savings Account Calculator

Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.

Pros and Cons of Using a Savings Account for Retirement Savings

Savings accounts can be used to save for a variety of financial goals, including retirement. You might be wondering whether it makes a difference if you use, say, a high yield savings account vs. Roth IRA or other retirement account to save, as long as you’re setting money aside consistently.

While savings accounts can offer convenience and earn interest, they’re not necessarily ideal when saving for retirement if your primary goal. Here are some of the advantages and disadvantages of using a savings account to plan for retirement.

Pros	Cons
Savings accounts are easy to open and typically don’t require a large initial deposit.	A savings account does not offer any tax benefits or incentives for use as a retirement account.
Banks and credit unions can pay interest on savings account deposits, allowing you to grow your money over time.	Interest rates for savings accounts can be low and may not outpace inflation.
You can withdraw money as needed and don’t have to reach a specific age in order to use your savings.	Banks can impose fees or even convert your savings account to checking if you’re making frequent withdrawals.
Savings accounts are safe and secure; deposits are protected up to $250,000 when held at an FDIC member bank.	If you’re putting all of your retirement funds into the same savings account, it’s possible that your balance might exceed the insured limit.

What Is a Roth IRA?

A Roth IRA is a type of individual retirement account that works somewhat differently than a traditional IRA. Traditional IRAs are funded with pre-tax dollars and allow for tax-deductible contributions when doing taxes. Once you turn 72, you’re required to begin taking money from this kind of account.

The way a Roth IRA works is that you set aside money using after-tax dollars, up to the annual contribution limit. That means you can’t deduct contributions to a Roth IRA. However, you won’t pay taxes on account earnings and will be able to withdraw funds tax-free in retirement.

You can leave money in your Roth IRA until you need it, which may allow it even more time to grow. Unlike traditional IRAs, there are no required minimum distributions for Roth IRAs. If you don’t use all of the money in your Roth IRA in retirement, you can pass it on to anyone you’d like to name as your beneficiary.

The IRS allows you to make a full contribution to a Roth IRA if you’re within certain income thresholds, based on your tax filing status. The full contribution limit for 2024 and 2025 is $7,000, or $8,000 for those 50 and up. You can make a full contribution if your tax status is:

• Married filing jointly or a qualified widow(er) with a modified adjusted gross income of up to $230,000 in 2024 (up to $236,000 in 2025)

• Single, head of household, or married filing separately and did not live with your spouse during the year with a modified adjusted gross income of up to $146,000 in 2024 (up to $150,000 in 2025)

Contributions are reduced once you exceed these income thresholds. They eventually phase out completely for higher earners.

Pros and Cons of Using a Roth IRA for Retirement Savings

Roth IRAs are specifically designed to be used for retirement saving. Again, that’s the chief difference between a Roth IRA and savings account. That doesn’t mean, however, that a Roth IRA is necessarily right for everyone. For example, you may need to weigh whether a Roth IRA or traditional IRA is better, based on your income and tax situation.

Here are some of the advantages and disadvantages associated with choosing a Roth IRA for retirement savings.

Pros	Cons
Money in a Roth IRA can be invested in stocks, mutual funds, and other securities, potentially allowing your money to grow faster.	Investing money in the market is riskier than stashing it in a savings account; there’s no guarantee that you won’t lose money in a Roth IRA.
You may be able to open a Roth IRA with as little as $500 or $1,000, depending on the brokerage or bank you choose.	Brokerages can charge various fees for Roth IRAs. Individual investments may also carry fees of their own.
Earnings grow tax-free and you can withdraw original contributions at any time, without a penalty.	You can’t withdraw earnings tax-free until age 59 ½ and the account is at least 5 years old.
You can save money in a Roth IRA in addition to contributing money to a 401(k) plan at work.	Not everyone is eligible to open a Roth IRA, and there are annual contribution limits.

Similarities Between a Roth IRA and a Savings Account

Roth IRAs and savings accounts do have some things in common. For example:

• Both can be used to save money for the long-term and both can earn interest. So you could use either one or both as part of a retirement savings strategy.

• You can open a Roth IRA or savings account at a bank and initial deposits for either one may be relatively low. Some banks also offer Roth IRA CDs, which are CD accounts that follow Roth IRA tax rules.

• Savings accounts and Roth IRAs held at banks are also FDIC-insured. The FDIC insures certain types of retirement accounts, including Roth IRAs, when those accounts are self-directed and the investment decisions are made by the account owner, not a plan administrator.

• It’s possible to open a savings account for yourself or for a child. Somewhat similarly, you can also open a Roth IRA for a child if they have income of their own but haven’t turned 18 yet.

When comparing the benefits of Roth IRAs vs. savings accounts, however, Roth accounts have an edge for retirement planning. Whether it makes sense to choose something like a high-yield savings account vs. a Roth IRA can depend on what you want to set money aside for.

Roth IRA vs Savings Account: Key Differences

To understand how savings accounts and Roth IRAs compare, it helps to look at some of the key differences between them.

	Roth IRA	Savings Account
Purpose	A Roth IRA is designed to save for retirement.	Savings accounts can fund virtually any short- or long-term goal.
Who Can Open	Taxpayers who are within certain income thresholds can open a Roth IRA.	Adults with valid proof of ID can open a savings account, regardless of income or tax status.
Interest	Money in a Roth IRA earns compounding interest based on the value of underlying investments.	Savings accounts earn interest at a rate set by the bank.
Tax Benefits	Roth IRAs grow tax-free and allow for tax-free qualified distributions, with no required minimum distributions.	Savings accounts don’t offer any tax benefits; interest earned is considered taxable income.
Contribution Limits	Roth IRAs have an annual contribution limit. For 2024 and 2025, the limit is $7,000 ($8,000 if you’re 50 or older.)	There are no contribution limits, though FDIC protection only applies to the first $250,000 per depositor, per account ownership type, per financial institution.
Withdrawals	Generally, you can’t withdraw earnings without paying a penalty before age 59 ½ (though there are some exceptions). Original contributions can be withdrawn at any time without a penalty.	Banks can limit the number of withdrawals you’re allowed to make from a savings account each month and impose a fee for exceeding that limit.
Risk	Investing money in a Roth IRA can be risky; you may lose money.	Your deposits are protected (up to the insured limit).

How to Decide If a Roth IRA or Savings Account Is Right for You

If you’re unsure whether to open a Roth IRA vs. a high-yield savings account, it’s helpful to consider your goals and what you want to do with your money.

You might decide to open a Roth IRA if you:

• Specifically want to save for retirement and potentially earn a higher rate of return

• Would like to be able to withdraw money tax-free to buy a home or pay higher education expenses (the IRS allows you to avoid a tax penalty for these distributions)

• Want to supplement the money you’re contributing to a 401(k) at work

• Expect to be in a higher tax bracket at retirement and want to be able to withdraw savings tax-free

• Don’t want to be required to make minimum distributions at age 72

On the other hand, you might open a savings account if you:

• Have a short- or medium-term goal you’re saving for

• Want a safe place to keep your money

• Are satisfied with earning a lower rate of return on savings

• Need to be able to keep some of your money liquid and accessible

• Aren’t concerned with getting any type of tax break for your savings

The good news is that you don’t have to choose between a high-interest savings account vs. a Roth IRA. You can open one of each type of account to save for both retirement and other financial goals.

The Takeaway

Opening a retirement account can be a smart move if you’d like to save money for your later years while enjoying some tax breaks. A Roth IRA could be a good fit if you’re eligible to open one and you’d like to be able to make tax-free withdrawals once you retire.

Having a savings account is also a good idea if you’re building an emergency fund, saving for a vacation, or have another money goal that is a few months or years away. Your deposits will earn interest and you’ll be able to easily access your funds (penalty-free) when you need them.

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

FAQ

Is it better to put money in savings or a Roth IRA?

A savings account can be better for setting aside cash you know you’ll need in the next few months or years. A Roth IRA, on the other hand, is better suited for saving for retirement, since it has greater growth potential (though returns are not guaranteed), while also providing tax benefits.

Should I use a Roth IRA as a savings account?

While you could use a Roth IRA as a savings account, you generally can’t access earnings on the account until age 59 ½ without paying a penalty. Another downside of using a Roth IRA as a savings account is that funds are typically invested for long-term growth. If you withdraw money in the short-term, you could lose money due to fluctuations in the value of your assets.

What is the downside of a Roth IRA?

One of the main disadvantages to a Roth IRA is that contributions are made with after-tax money, which means you don’t get a tax deduction in the years you contribute. Another drawback is that not everyone can take advantage of a Roth IRA, since there are income limits on contributions.

Also keep in mind that the maximum annual contribution to Roth IRA is relatively low compared with a 401(k). As a result, you will likely need other accounts to adequately save for retirement.

Can I move money from savings to a Roth IRA?

You can link a savings account to a Roth IRA to transfer funds. If you’d like to move money from savings to your Roth account, you’d just log into your brokerage account and schedule the transfer. Keep in mind that Roth IRAs do have annual limits on how much you can contribute.

Are Roth IRAs Insured?

The FDIC insures Roth IRAs held at banks when those accounts are self-directed, meaning the owner, not a plan administrator, directs how the funds are invested. The same FDIC insurance limits that apply to savings accounts apply to these Roth IRAs.

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/dima_sidelnikov

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

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Mar

2025

Guide to Rolling Over a 403(b) Into an IRA

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

If you have a 403(b) plan at work and you leave your employer, you could roll over some or all of your savings into an IRA. Rolling a 403(b) over to an IRA simply means moving money from one retirement account to another.

You might consider a 403(b) rollover if you’d like to gain access to a wider range of investment options. Understanding how the process works can help you decide if rollover 403(b) makes sense.

Key Points

• A 403(b) is a retirement plan for employees of public schools, religious organizations, and certain non-profits.

• Rolling over a 403(b) to an IRA can offer more investment options and potentially lower fees.

• There are various types of IRAs, including traditional, Roth, SIMPLE, and SEP IRAs, each with different tax implications.

• Consider tax implications, fees, and investment options before rolling over a 403(b) to an IRA.

• Rolling over a 403(b) to a Roth IRA requires paying income tax on the rollover amount, but allows for tax-free withdrawals in retirement.

What Is a 403(b)?

If you don’t know what a 403(b) plan is, it’s a retirement plan that’s offered to employees of public schools, religious organizations, and certain other 501(c)(3) tax-exempt organizations.

A 403(b) plan may also be called a tax-sheltered annuity or TSA, because in some instances the organization’s 403(b) plan may include an annuity option; in other cases the plan can be structured more like an investment account, similar to a 401(k).

Like a 401(k), these plans allow you to defer (i.e., contribute) part of your salary each year to the 403(b) plan, and pay no tax on the money until you begin taking distributions.

In many cases you can choose to make your 403(b) a Roth-designated account, in which case you’d make contributions using after-tax dollars and withdraw them tax-free in retirement, similar to a Roth IRA.

How a 403(b) Works

Eligible employers can establish a 403(b) plan on behalf of their employees. IRS rules define eligible employers as:

• Public schools, including public colleges and universities

• Churches

• Charitable entities that are tax-exempt under Section 501(c)(3)

Elementary school teachers, college professors, and ministers are all examples of employees who may be eligible to contribute to a 403(b) plan. Contributions reduce taxable income in the year they’re made, and are taxed as ordinary income when withdrawn.

The maximum contribution limit is $23,000 for 2024. Employees age 50 or older can make catch-up contributions of up to $7,500 per year, for a total of $30,500. The maximum contribution limit is $23,500 for 2025. Employees age 50 or older can make catch-up contributions of up to $7,500 per year, for a total of $31,000, and those aged 60 to 63 can contribute $11,250 instead of $7,500, for a total of $34,750, thanks to SECURE 2.0.

There are special catch-up rules for workers who have at least 15 years of service, who may be eligible to contribute an additional $3,000 per year if they meet certain criteria.

Combined contributions from the employee and the employer — employers can also make matching contributions — may not exceed the lesser of 100% of the employee’s most recent yearly compensation or $69,000 in 2024, or $70,000 in 2025.

Like most other types of employer-sponsored retirement plans, 403(b) accounts are subject to required minimum distribution rules (RMDs), which require plan participants to start withdrawing a certain sum of money each year when they reach a certain age.

Per IRS.gov: “You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).” This may factor into your decision about whether to do a rollover to an IRA.

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

What Is an IRA?

An individual retirement account, also referred to as an IRA, is a tax-advantaged savings account that you can open independently of your employer.

You can open an IRA online through a brokerage and make contributions up to the annual limit. Whether you pay tax on distributions from your IRA depends on which type of account you open.

Types of IRAs

It’s important to know how an IRA works, since the options are quite different, especially when it comes to making a 403(b) rollover:

• Traditional IRAs. Traditional IRAs allow for tax-deductible contributions, and qualified distributions are subject to ordinary income tax. Whether you’re eligible to claim IRA tax deductions, and how much, is determined by your income, filing status, and whether you’re covered by an employer’s retirement plan at work.

A rollover from a 403(b) account to a traditional IRA is an apples-to-apples transfer in terms of tax treatment, as both are tax-deferred accounts. Traditional IRAs also fall under RMD rules.

• Roth IRA. It’s important to understand the distinctions between a Roth IRA vs a 403(b). Roth IRAs do not offer tax-deductible contributions, but they do allow you to take qualified distributions tax-free in retirement. Also, you’re not required to take RMDs from a Roth IRA, unless it’s inherited.

A rollover to a Roth IRA from a 403(b) is essentially a Roth conversion (see below), and would require you to pay income tax on the rollover amount. That said, you might be able to avoid the income limits for traditional Roth accounts. As this option is more complicated, you may want to consult a tax professional.

Note: while IRA contributions for traditional and Roth accounts are capped at $7,000 for 2024 and 2025, with an additional catch-up contribution limit of $1,000 for those 50 and up, those limits don’t apply to rollovers of higher balances from other retirement accounts.

• SIMPLE IRA. SIMPLE IRAs are designed for small business owners and their employees. These plans allow employees to defer part of their salary while requiring employers to make a contribution each year.

SIMPLE IRAs generally follow traditional IRA tax rules, and a rollover from a 403(b) would not trigger a tax event in most cases, when using a direct rollover method (see below for details).

• SEP IRA. A SEP IRA is another retirement savings option for business owners and individuals who are self-employed. SEP IRAs offer higher annual contribution limits than SIMPLE IRAs, though they also follow traditional IRA tax rules, and the same rollover terms generally apply.

Unlike many employer-sponsored plans, ordinary traditional and Roth IRAs don’t offer employer matching contributions. Withdrawing money early from an IRA could trigger a 10% early withdrawal penalty, with some exceptions. Traditional IRAs are subject to required minimum distributions (RMDs) beginning at age 72, or 73 if you turn 72 after Dec. 31, 2022.

Recommended: How to Open an IRA in 5 Steps

Can You Roll Over a 403(b) Into an IRA?

Yes, the IRS allows you to roll a 403(b) over to an IRA. That includes rollovers to a traditional IRA, SIMPLE IRA, or a SEP IRA. You may be able to do a rollover to a Roth IRA, with possible tax implications.

You can also roll over a 403(b) into another 403(b), a 457(b) account — which is for state and local government employees, and some non-profits. If you have a 403(b) with a designated Roth feature, you can do a rollover to a Roth IRA without tax implications.

There are, however, a few things to consider before rolling over a 403(b).

Investment Options

Some people may choose to roll a 403(b) to an IRA if the IRA custodian (i.e., the brokerage holding the account) has better investment options. In many cases an IRA can offer a wider range of investment options.

If you’re feeling limited by what your 403(b) offers, then it may be to your advantage to move your savings elsewhere. However, it’s important to look at not only the range of investments an IRA offers but the types of investment fees you’ll pay for them. Ideally, you’re able to find a rollover IRA that features a variety of low-cost investments.

Rollover Methods

There are different ways to rollover a 403(b) to an IRA, including:

• Direct rollovers

• Indirect rollovers

With a direct rollover, your plan administrator moves the money from your 403(b) to a tax-deferred IRA for you. All you may need to do is fill out some paperwork to tell the plan administrator where to transfer the money. No taxes are withheld for this type of transfer, as long as the account designations match, i.e. a tax-deferred 403(b) to a tax-deferred or traditional type of IRA; a Roth-designated 403(b) to a Roth IRA.

Indirect rollovers may allow you to receive a paper check, then deposit the money to an IRA yourself. The problem with that, however, is that if you fail to deposit the funds within 60 days of receiving them, the entire amount becomes a taxable distribution (meaning: you will owe income tax on that money, as if it were a straight withdrawal).

You may want to ask your plan administrator what options you have for rolling over a 403(b), and choose the method that’s easiest for you.

Withholding

If you decide to request an indirect rollover with a check made payable to you, your distribution is subject to a 20% mandatory withholding. The withholding is required even if you plan to deposit the money into an IRA within the 60-day window.

Should you choose the indirect rollover option, you’d need to keep in mind that you wouldn’t be receiving the full balance, unless you have the rollover check made out to the institution holding the receiving IRA.

Other Retirement Plans

Certain employees may be eligible to contribute to both a 403(b) and a 457(b). For example, public school teachers who are also classified as state employees may have access to both plans.

If you have a 403(b) and a 457(b) you’d need to decide if you want to rollover funds from both plans, or just one, when you leave work or retire. That might require you to take a closer look at how much money you have in each plan, how it’s invested, and the fees you’re paying before you make a decision.

Do You Pay Taxes When Rolling a Pension Into an IRA?

Whether you pay taxes when rolling a pension into an IRA depends on which type of IRA you’re moving the money into, and whether you’re completing a direct or indirect rollover. If you’re rolling over your 403(b) to a traditional IRA, then you’d pay no tax if you’re doing a direct rollover.

If you choose an indirect rollover, the 20% withholding applies.

Roth Rollovers

Rolling over a 403(b) to a Roth IRA would, however, trigger tax consequences if your plan was funded with pre-tax dollars. In that case, you’d have to pay income tax on those assets when you roll over the money to a Roth IRA, similar to doing a Roth conversion. When you make qualified distributions from the Roth IRA later, those would be tax-free.

If you’re rolling funds from a Roth-designated account to a Roth IRA that would be a tax-free rollover. Qualified withdrawals would also be tax-free, though taking money out prior to age 59 ½ could result in a 10% early withdrawal penalty.

Pros and Cons of Rolling a 403(b) Into an IRA

A 403(b) rollover to an IRA can offer some advantages but there are some potential drawbacks to consider, too.

Pros of a 403(b) Rollover

Rolling over a 403(b) to an IRA could benefit you if you’re looking for different investment options or you want to convert traditional retirement savings to a Roth account.

Roth IRAs can be attractive thanks to the ability to take qualified tax-free distributions. If your income is too high to make direct contributions to a Roth account, then rolling over 403(b) funds could offer a backdoor point of entry (sometimes called a backdoor Roth).

A 403(b) to IRA rollover may also be attractive if your current retirement plan charges high fees or you’re finding it difficult to diversify based on the current range of investments offered. You may also prefer rolling over a 403(b) to your IRA so that all of your retirement savings are held in one centralized account.

Cons of a 403(b) Rollover

One of the biggest cons of rolling over 403(b) funds has to do with taxes. If you choose an indirect rollover, 20% of your savings is automatically withheld. You also run the risk of having the rollover treated as a taxable distribution if you’re not able to deposit the money to your IRA within the 60-day window.

Aside from that, there are also the tax implications from rolling a traditional 403(b) into a Roth IRA. If you’re rolling over a large amount of money, that could lead to a much higher than usual tax bill.

Deciding Which Retirement Account Is Right for You

Choosing the right retirement account starts with understanding your needs and goals. One of the best features of 403(b) plans and other workplace plans is that you may be able to get additional savings in the form of employer-matching contributions. Those contributions could help you to build a larger nest egg.

The annual contribution limits for 403(b)s and similar plans are also much higher than what you’re allowed with an IRA.

On the other hand, IRAs can offer more investing options and some tax savings in retirement, if you rollover funds to a Roth account.

• When deciding which retirement account to use, it can help to ask the following questions:

• How much money do I need to save for retirement?

• Do I expect to be in the same tax bracket at retirement, a higher one, or a lower one?

• When do I think I’ll need to start taking distributions?

• Am I comfortable taking required minimum distributions?

• How much can I contribute to the plan each year?

Asking those kinds of questions can help you figure out which type of retirement plan may be best suited to your needs. And of course, you’ll also want to take a look at the investment options and fees for any retirement plan you might be considering.

The Takeaway

Whether you should roll over money from your existing 403(b) retirement account can depend on whether you’re still working, what kind of investment options you’re looking for, and how much you’re paying in fees.

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 a 403(b) plan be rolled over into an IRA?

Yes. It’s possible to roll a 403(b) plan into a traditional IRA, SIMPLE IRA, or SEP IRA. You can also rollover a 403(b) to a Roth IRA, but there may be tax implications. Before rolling over a 403(b), it’s important to consider the reasons for doing so, and how you’ll be able to invest your retirement funds should you decide to move them elsewhere.

Is a rollover from a 403(b) to an IRA taxable?

A rollover from a 403(b) to an IRA may incur a 20% tax withholding if you’re requesting an indirect rollover instead of a direct rollover. A rollover can be taxable if you’re rolling over funds from a traditional 403(b) to a Roth IRA. This would not apply if your 403(b) is a Roth-designated account and the rollover is to a Roth IRA.

Is it better to leave money in my 403(b) or roll it over to an IRA?

Whether it makes sense to leave money in your 403(b) or roll it over to an IRA can depend on how happy you are with the investments offered by your plan, what you’re paying in fees, and if you need access to any of the money right away. An IRA rollover could offer more investment options with fewer fees. You could also withdraw funds, though tax penalties may apply.

About the author

Rebecca Lake

Photo credit: iStock/FreshSplash

SoFi Invest®

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

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

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

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.

SOIN1222019

Mar

2025

Guide to Rolling Over a Pension Into an IRA

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

If you have a defined-benefit pension plan, you could opt for a lump-sum distribution when you retire or roll the money over to an individual retirement account (IRA). Rolling pension benefits to an IRA is something you might consider if you don’t necessarily need the money right away for retirement and you want to maintain those funds on a tax-advantaged basis.

Rolling a pension into an IRA isn’t a complicated process, though it’s important to understand how it works to avoid triggering an unexpected tax bill.

Key Points

• A traditional pension plan is offered and funded by employers, while an IRA is generally opened and funded by an individual.

• Rolling a pension over to an IRA involves opening an IRA, requesting a rollover, and choosing investment options, with direct rollovers typically being the simplest method.

• Rolling a pension into a Roth IRA may help individuals avoid required minimum distributions (RMDs).

• Rolling over a pension into an IRA may allow for more investment control and flexibility, but it’s important to understand investment risks.

• Understanding the implications of a rollover as well as tax differences between pensions and IRAs is crucial for making informed rollover decisions.

What Is a Pension Plan?

A pension plan is a type of benefit plan that employers can establish on behalf of their employees. Traditional pension plans are defined benefit plans that provide employees with retirement income based on their earnings, years of service, or a combination of the two. These plans are funded by the employer and may provide retiring employees with a lump-sum distribution or annuitized payments.

Defined benefit pension plans, along with defined contribution plans, are protected under the Employee Retirement Income Security Act (ERISA). Defined contribution plans are funded by employee contributions, with the option for employer matching. The most common example of a defined contribution plan is a 401(k).

What Is an IRA?

If you don’t know what an IRA is, it’s an Individual Retirement Arrangement, also referred to as an Individual Retirement Account. In simpler terms, an IRA is a tax-advantaged retirement savings account that is not offered through an employer. You can typically open an IRA at a brokerage or a bank and make contributions up to the annual limit.

Note, too, that IRAs are subject to required minimum distribution rules (RMDs), which means that owners must start making withdrawals from IRAs at age 73.

There are two main types of IRAs:

• Traditional IRAs, which allow for tax-deductible contributions and tax-qualified withdrawals as ordinary income.

• Roth IRAs, which do not offer a tax deduction for contributions but do allow for tax-free qualified distributions.

You must have taxable income to save in either type of plan. Your ability to contribute to a Roth IRA is determined by your tax filing status and adjusted gross income. There are also IRA tax deduction rules that determine how much of your traditional IRA contributions you can write off.

The maximum annual contribution for either type of IRA is $7,000 for 2024 and 2025. Both plans allow for catch-up contributions of $1,000 if you’re age 50 or older. Each type of IRA also allows you to roll funds into your account from another eligible retirement plan.

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.

Can You Roll Over a Pension Into an IRA?

A rollover occurs when you withdraw funds from one eligible retirement plan and redeposit them to another eligible plan. The IRS allows you to roll funds from qualified plans, which includes defined benefit plans, into an IRA. Technically, if you have a pension plan that’s classified as a defined benefit plan, you could roll funds from it to any of the following:

• Traditional IRA

• Roth IRA

• SIMPLE IRA

• SEP IRA

• 457(b) plan

• 403(b) plan

• Designated Roth 401(k), 403(b), or 457(b)

The IRS allows for full or partial rollovers, though whether you’d be required to withdraw all of the money in your pension for a rollover may depend on the terms of the plan.

Rolling over pension funds may potentially help you to avoid tax penalties while preserving your savings so that it can continue to grow through the power of compounding returns. But it’s also important to remember that there can be increased risks of rolling pension funds into an IRA. It may be a good idea to parse through those risks, in your specific situation, with a financial advisor or professional.

Reasons You May Want to Roll Over a Pension

There are different scenarios where a rollover pension, and specifically a rollover to an IRA, could make sense. It’s a good idea to consider both your current financial situation and the timing when deciding whether to roll a pension into an IRA.

Reason #1: You Want More Control Over Your Investments

Rolling a pension to an IRA may offer more flexibility when it comes to how the money is invested. With an IRA, you might have a broader range of mutual funds, index funds, or exchange-traded funds (ETFs) to choose from. That could make it easier to build a diversified portfolio that aligns with your goals.

Reason #2: You’d Like to Avoid RMDs

As noted, most retirement plans are subject to required minimum distribution (RMD) rules. These rules require you to take a minimum amount from your retirement account each year, starting at age 73 (if you turn 72 after December 31, 2022). Rolling a pension over to a Roth IRA, however, would allow you to avoid RMDs and draw down your retirement assets at your own pace. Note that pensions are typically rolled over into traditional IRAs, so this may require utilizing a “backdoor Roth IRA” strategy.

Reason #3: Your Pension Is Small

Rolling a pension to a Roth IRA can trigger tax consequences, as you’ll need to pay income tax on the earnings at the time the rollover is completed. However, you might choose to go ahead with a pension rollover to a Roth account if the balance is small and your tax liability would not be that great.

Reason #4: You’re Worried About Losing Benefits

Though it’s not a common occurrence, there have been instances of employees losing pension benefits as a result of their employer filing bankruptcy or encountering other financial issues. If you’re concerned about seeing your pension go up in smoke, rolling it over to an IRA could eliminate that risk. You would, however, still be subject to the risk that always accompanies investing money.

Reason #5: You Want Convenient Access

Certain pension plans may allow for loans, though loans are more commonly associated with 401(k) plans. There may be some rules for private pensions around withdrawals, which may prevent you from making a withdrawal – it’ll depend on the specific pension.

But if you’d like to be able to withdraw money from retirement for emergencies or other purposes, an IRA could potentially allow you to do that more easily, or in a more straightforward manner. Keep in mind, however, that withdrawing money from an IRA before age 59 ½ may trigger a 10% tax penalty unless an exception or exclusion applies.

How Do You Roll a Pension Into an IRA?

Rolling a pension into an IRA typically isn’t difficult. There are only a few steps required to complete the process.

• Open an IRA. If you don’t have an IRA, you’ll need to open one – you can even open an IRA online.

• Request the rollover. Once your IRA is open, you can ask your pension plan administrator what’s required to initiate a rollover transaction. The simplest option is to request a direct rollover, which would allow funds to be transferred from your pension to your IRA without having to get a paper check and deposit it yourself.

• Choose your investment options. Once your pension funds have been rolled over to your IRA, you can decide how you’d like to invest it. You may also want to update your IRA beneficiary if you haven’t selected one.

If you can’t choose a direct rollover, or you’d rather roll over the funds yourself, you’d have to ask your plan administrator to send you a paper check for the amount you’re withdrawing. You’d then need to deposit the funds to your IRA within 60 days from the date you receive it. If you fail to do so, the entire amount becomes a taxable distribution.

Also know that there may be a mandatory income tax withholding of 20%. THough that generally doesn’t apply in a direct rollover to an IRA.

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

Pros and Cons of Rolling a Pension Into an IRA

Rolling a pension into an IRA or Roth IRA has some advantages and disadvantages, and it’s important to weigh both before making a decision.

On the pro side, a pension rollover to an IRA may give you greater control of how your retirement money is invested. You can make changes to your investments as needed. That assumes, however, that you’re comfortable with making your own investment decisions and with the risk that’s involved.

The pros and cons of rolling into an IRA will depend on the type of IRA you’re rolling funds into. For instance, pension rollovers to a Roth IRA could help you avoid RMD rules, and may allow for tax-free withdrawals, though again, there would be tax consequences at the time you roll the funds over. Additionally, you may face tax penalties if you roll money over to a Roth, then make a withdrawal prior to age 59 ½. Again, it may be helpful to discuss your specific options, and your specific situation, with a financial advisor to get an idea of what the best course of action is.

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Pros:

• Rolling a pension into an IRA may offer greater flexibility and freedom when making investment choices.

• Rolling a pension to a Roth IRA allows you to avoid RMDs.

• A direct rollover is fairly simple to complete and doesn’t require a lot of effort on your part.

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Cons:

• Making a change to your investments could increase your risk exposure if you’re not sure what you’re doing.

• You’ll may need to pay income tax on your pension when rolling it into a Roth IRA (but not a traditional IRA).

• Rolling pension funds to an IRA yourself could result in a sizable tax penalty if you don’t deposit the money on time.

Taxes on Pensions vs. IRAs

One of the most common questions about IRAs and pensions centers on taxes. Specifically, how much tax will you pay on pension or IRA distributions?

The answer can depend on which tax bracket you’re in when you take distributions and in the case of an IRA, whether you have a traditional or Roth account. Where you live can also play a part as there are a handful of states that don’t tax pensions.

If you’re receiving annuitized or periodic payments from a pension, then those distributions would be taxed at your ordinary income tax rate. The same rate would apply if you’re taking your pension in a lump sum, though you’d owe taxes on the entire amount all at once.

Taxable rollover distributions from employer-sponsored pension plans may also be subject to 20% withholding at the time the money is rolled over. That withholding may not apply in a direct rollover, however, if the rollover involves sending funds to another eligible retirement plan, such as an IRA. Any amounts that are withdrawn but not rolled over to an IRA may be subject to a 10% early withdrawal penalty if you’re under age 59 ½.

With a traditional IRA, you’ll pay ordinary income tax on distributions beginning at age 59 ½. Distributions taken before 59 ½ may incur a 10% early withdrawal penalty. Qualified withdrawals from a Roth IRA, and withdrawals of original contributions, are tax-free. Understanding what your tax picture might look like if you keep your money in a pension vs. rolling it to an IRA can help you decide if it’s the right option.

The Takeaway

Saving for retirement early and often can help you build financial security for the future. If you don’t have a pension plan or you have a retirement plan at work and you want to supplement your savings, you might consider opening an IRA.

SoFi offers both traditional and Roth IRAs and it’s easy to open one online. You can choose from automated or self-directed investing to build your portfolio. If you need help getting your retirement plan started, you can book a complimentary 30-min session with a SoFi Financial Planner as a perk of being a SoFi member.

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

Help build your nest egg with a SoFi IRA.

FAQ

Can I roll my pension into an IRA?

Yes, you can roll a pension into an IRA. You might choose a traditional IRA or a Roth IRA rollover, depending on the amount you need to move and your expected tax situation in retirement. Keep in mind that you’ll need to pay taxes on a Roth IRA rollover at the time that you complete it.

Is a pension better than an IRA?

A pension can be attractive, since it’s funded by the employer and you don’t have to contribute any money to it yourself. On the other hand, an IRA can allow for more flexibility and you may be able to gain certain tax benefits from rolling your pension to a Roth IRA, such as avoiding required minimum distributions.

How much of your pension can you roll over to an IRA?

You can initiate a partial or full rollover of your pension money to a traditional or Roth IRA. If you’re considering a partial rollover, it’s helpful to understand what that might mean from a tax perspective and how you’ll be able to withdraw the amount that you don’t rollover.

About the author

Rebecca Lake

Photo credit: iStock/Andrii Zastrozhnov

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.

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.

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SOIN1222020

Mar

2025

Should You Buy a Home While Still Renting?

By Alene Laney | Family Finances, Home Ownership, mortgage | Comments Off

Buying an investment property while living in a rental, sometimes referred to as “rentvesting,” can be a compelling and financially sound plan. An investment property that you can rent to others offers clear advantages — it can generate cash flow, let you build equity, and benefit you and your family for years to come.

Investment property options may include a vacation home, a multi-family home, a single-family home, or a condo that you will rent to others. If you are informed and manage a rental property wisely, it may produce a strong enough income for the unit to pay for itself.

But you need to contemplate a few disadvantages of this concept to successfully make the dream come true. Here, learn what needs to happen if you’re planning to buy an investment property while continuing to live in a rental.

Key Points

• It could be a smart financial move to buy an investment property while continuing to rent the place where you live.

• Potential benefits include capital growth and rental income.

• Challenges include a higher down payment than you would pay on a home you would live in, and stricter financing terms from lenders.

• Managing a rental property is time-consuming and involves landlord duties and regular maintenance tasks.

• Success requires detailed financial planning and effective management.

What Is Rentvesting?

The idea is about buying an investment property to rent to tenants while you continue to rent where you are (or, say, live with a significant other, or with your family). The rental income you earn can help you to pay your own rent, but it will also be necessary to cover the costs of owning your property.

Why Do It?

When you own a property, you have potential to achieve capital growth — your investment can increase in value as time passes. Maybe you’re not ready to settle down just yet. Or perhaps you don’t have the money to buy where you want to be. Rentvesting might be a way for you to grow your capital, anyway.

Buying an Investment Property

Purchasing an investment or rental property can be similar to buying a regular home. When you’re looking at buying an investment property that you don’t plan to live in, however, you will have to make some special considerations.

If you’ve decided to purchase an investment property and keep living in your current rental, that plan will affect what types of properties you look at, how you will finance the purchase property, and how much down payment you’ll need.

Here’s a quick summary of the difference between owner-occupied and non-owner-occupied rental properties.

Owner-Occupied	Non-Owner-Occupied
Down payment options from 3.5%	Down payment minimum tends to be 15%; some lenders require up to 25%
Lower interest rates by about ½ to ¾ of a basis point	Lower interest rates by about ½ to ¾ of a basis point

Keep in mind, if you buy a house with two to four units, live in one yourself, and rent the others, you may be able to finance the purchase as an owner-occupied property. You’ll qualify for reduced interest rates, lower down payment options, and more favorable loan options.

But you must live on the property and qualify as a first-time homebuyer. Financing a property with an owner-occupied loan without living on the property as this is considered a type of mortgage fraud.

How to Pull Off the Buy

Step 1: Get Preapproved for a Loan

Before you shop, make sure a lender is willing to give you a mortgage. Qualifying as a first-time buyer has positives. You may have a better debt-to-income ratio, as mentioned above. However, you may have a shorter credit history or a smaller down payment to work with. Whatever the case, it’s helpful to get some numbers from your lender to assist with your investment.

Typical requirements for a rental property mortgage:

• Credit score minimum of 620. Borrowers with scores of 740 and higher tend to receive better rates and terms.

• Down payment: Borrowers for investment real estate generally have to put down 15-25%.

• Debt-to-income ratio (DTI): This is the percentage of a borrower’s monthly income that goes toward debt. A 43% DTI is typically the highest ratio a borrower can have to qualify for a mortgage. When buying an investment property, a lender will generally allow you to count up to 75% of your expected rental income toward monthly income in the ratio.

• Savings: A borrower should have cash available to cover three to six months of mortgage payments, including principal, interest, taxes, and insurance.

Your lender will also take into account what programs you qualify for. Financing options for an investment property are wide, and underwriting standards can be stricter for rental property applicants.

Some may include:

• FHA

• VA

• USDA

• Conventional

• Seller financing

Step 2: Find a Property that Meets Your Criteria

Now that you have your budget and parameters set, you’re ready to find a property. You may want to enlist the help of a real estate agent who can serve as your first-time homebuyer guide, especially since you want to buy an investment property right off the bat.

Your agent can help you write an offer while your lender may be able to help you apply for a mortgage online. You’re well on your way to buying a house to rent at this stage.

Step 3: Think About the Future

If you’re buying an investment property, it shouldn’t be with only a short-term plan. Consider how this property might fit into your life in the long run. If you plan to get married and/or have kids, for example, you may want to look for a property that will suit you later. If you think other family members may need to move in with you down the road, room for them might be one of your criteria.

Step 4: Consider the Costs

Buying an investment property probably means carrying a mortgage, paying interest, and covering utilities and maintenance on the property. Home insurance is necessary and different plans apply depending on the property, so make sure you get covered. As an investor, you must also consider potential property management fees, periods of vacancy, and possible tax implications. Make certain you can afford these costs and still pay your own rent.

Step 5: Start Your Rental Business

Be sure to check local ordinances and business requirements for becoming a landlord. If you’ve got a plan and do your research, you may achieve success. Just don’t believe what you may see on TV, which makes owning a rental property look easy. Landlording is a tough job, and there’s a lot you need to know about the business before you start. Buying a house while renting is an endeavor that takes time and effort.

What to Know As a New Landlord

Unlike what you may have heard or imagined, becoming a landlord can be anything but light work. You’ll also want to research all you can and put proper systems in place. Here’s a little of what you can expect to encounter as a new landlord.

• Housing laws can make or break you. Are short-term rentals allowed (if that’s what you’re planning)? What rights does your tenant have? If you need to evict a tenant, what does the process look like? Will you benefit by putting your property in an LLC? Always research and understand local housing laws.

There’s a lot to navigate, and you may want to consider hiring a property management company that specializes in this.

• Determine how much to charge for rent. You’ll want to look at what other properties in the area are charging for rent and position yourself competitively. Also, consider what other landlords are allowing and charging when it comes to pets.

• Prescreening is key. The reliability of your tenant is so important. It’s incredibly stressful when you’re not paid rent. Don’t rent to someone who “feels” like they would be a good tenant. Do your due diligence. Check credit and their background, and call references.

• Create a plan for home maintenance, repairs, and other issues. If you’re hiring a property management company, plan for the expense. If you’re doing it yourself, make a list of contacts to call for the different issues that come up (electrical, plumbing, locks, handyman, etc).

• Have procedures in place for unit turnover. It’s an incredibly intense time when a tenant leaves and another needs to move in. How are you going to handle inspections? Cleaning? Deposits? You will need a system for logging such events and being prepared for changing tenants.

The Takeaway

While landlording has a lot of responsibilities and risk, there can also be a lot of reward. If you’re really interested in buying a house while renting, you’ll find a way to make it work.

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 much profit should you make on a rental property?

There’s no easy answer for how much profit you should make on a rental property. Some investors buy property for the appreciation alone. There are also a number of methods for determining how much profit investors want to make on an investment property, such as cash flow, the 1% rule, gross rent multiplier, cash on cash return, cap rate, or internal rate of return. Those can help provide guidelines.

Is it better to buy an investment property and live in it?

Possibly. If you live in your investment property, you can qualify for owner-occupied financing, which means lower down payments and better interest rates. But it also depends on your plans. If you want to renovate an investment property, living in it during renovations could be challenging.

Is rental property a good investment in 2025?

Rental demand is strong in 2025, but buying property is more dependent on your individual situation rather than market conditions.

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Mar

2025

Retail vs Corporate Banking: What’s the Difference?

By Rebecca Lake | Life & Career, money, SMB | Comments Off

The main difference between retail vs. corporate banking lies in what type of services they provide and to whom. Retail banking is consumer-focused while corporate banking, also referred to as business banking, is designed to meet the needs of businesses.

Banks can offer both retail and business banking services to attract both types of clients. Understanding how each one works makes it easier to distinguish between retail vs. corporate banking.

What Is Retail Banking?

Retail banking refers to banking services and products offered to retail customers, meaning individuals. Retail banking can also be referred to as consumer banking or personal banking. The kinds of products and services offered by retail banks are designed for personal money management — such as checking and savings accounts, certificates of deposit (CDs), debit cards, and more.

In the U.S., the Office of the Comptroller of the Currency (OCC) is responsible for overseeing banks at the national level. Banks with assets in excess of $10 billion are also regulated by the Consumer Financial Protection Bureau (CFPB). In addition to federal regulation, retail banks can also be subject to regulation and oversight at the state level. These organizations help ensure that services are being provided in keeping with the law and that charges are not excessive.

Recommended: How Do Retail Banks Make Money?

Services Offered Under Retail Banking

Retail banks typically offer products and services that are designed to help everyday people manage their finances. This is the key distinguishing factor between retail vs. business banking. For example, some of the services retail banks may offer include:

• Deposit account services: Retail banks can allow consumers to open checking accounts, savings accounts, money market accounts, and other deposit accounts to hold their money safely and securely.

• Mortgage lending: Homeowners often require a loan to purchase a home, and many retail banks provide mortgages to qualified borrowers.

• Secured and unsecured loans: In addition to home loans, retail banks can issue other types of loans, including auto loans, personal loans, home equity loans, and lines of credit.

• Credit cards: Credit cards offer convenience for making purchases; many of them also offer rewards to consumers for using them. Retail banks may issue credit cards to creditworthy customers.

• Certificates of deposit: Certificates of deposit (or CD accounts) are special types of deposit accounts that allow you to earn interest on your money for a set term.

Banks may also offer insurance to their retail clients. Private banking may also be available for higher net-worth customers.

Retail banks usually make money by accruing interest on the money they lend via loans and other vehicles. They may also charge various fees for banking services, including overdraft fees, loan origination fees, and checking account fees. Some retail banks have physical branches, while others operate exclusively online.

What Is Corporate Banking?

Corporate banking is the branch of banking that offers its services and products to business entities. That includes large corporations as well as small and medium-sized business operations. Corporate banks may also serve government agencies and entities. While services may include deposit accounts, these banks also may offer credit and asset management, lines of credit, payment processing, and tools that facilitate international trade.

Like retail banks, corporate banks can charge fees for the various services they provide. Banking services can be directed toward a corporate audience in general or be tailored to target the needs of specific industries, such as healthcare or companies that operate in the tech space.

Services Offered Under Corporate Banking

The services offered by corporate banks are designed to suit the needs of businesses large and small. The kinds of services a corporate bank can offer include:

• Deposit account: Business banking can include many of the same deposit options as retail banking, such as checking accounts, savings accounts, and money market accounts.

• Debt financing: Corporate banks can offer debt financing options to startups and established businesses that need capital to fund expansion projects and growth.

• Trade lines of credit: Trade financing can make it easier for businesses to cover day-to-day operating expenses. Examples of trade financing that corporate banks may offer include merchant cash advances, purchase order financing, and accounts receivable processing.

• Payments processing: Corporate banks can act as payment processors to help businesses complete financial transactions when providing products or services to their customers.

• Treasury management: Treasury management services can help businesses keep cash flowing steadily and smoothly.

• Global banking: Businesses that are interested in expanding into foreign markets may rely on business banking services to reach their goal.

Key Differences Between Retail and Corporate Banking

Retail and corporate banking both have the same goal: serving the needs of their customers. But the way they achieve this goal differs. Here are some of the most noteworthy differences between retail banking vs. business banking.

Business Model

Retail banking’s business model is built around meeting the needs of retail banking clients. Banks that operate in the retail space are primarily concerned with three things: deposits, money management, and consumer credit.

Corporate banks, on the other hand, base their business models around products and services that are utilized by business entities. That includes offering business bank accounts, providing avenues for securing capital, and offering financial advice.

Customer Base

Retail banks are geared toward consumers who rely on financial products like personal checking accounts, savings accounts, or unsecured loans. A retail bank can offer accounts to different types of consumers, including specialized accounts for kids, teens, students, or seniors. But generally, they’re consumer-facing and work with everyday people to help them manage their money.

That’s a difference between retail vs. corporate banking: The latter is business-centric. For example, a corporate bank may offer services to companies with a valuation in the millions. Or it may cater to smaller businesses that need help with things like payment processing or cash flow management. Some business banks may serve companies both large and small.

Processing Costs

As mentioned, both retail and corporate banks can charge fees for the services they provide. These fees are designed to make up for the bank’s own handling costs for processing transactions. Both types of banks can also charge interest on loans, lines of credit, and credit cards. These are some of the ways that banks earn money.

In general, retail banks tend to have lower handling costs which means lower fees for consumers. Corporate banks, on the other hand, typically have higher processing costs which means their clients pay more for their products and services.

Value of Transactions

Since retail banks serve everyday consumers, the average value of transactions processed tends to be lower compared to that of corporate banks. A corporate bank, for example, might process a transaction valued at several million dollars for a single customer. Someone who’s adding money to their personal checking account vs. a business checking account, meanwhile, may be depositing a few hundred or few thousand dollars.

Profitability

Here’s another key difference between business banking vs. retail banking: Business banking tends to generate more profits. That’s because corporate banks typically deal in higher value transactions than retail banks.

The Takeaway

The difference between retail vs. business banking is quite straightforward: Retail banking serves individual customers’ needs, while corporate banking serves the needs of companies of all sizes, as well as other organizations.

For most people, retail banking is a good choice to manage and optimize their financial lives. For instance, you can use a retail bank account to pay bills, deposit your paychecks, transfer money to savings, and make purchases or withdrawals using your debit card.

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

FAQ

Is corporate banking better than retail?

Corporate banking is not necessarily better than retail banking; they’re designed to serve different audiences. Corporate banking is usually a wise choice for a business entity, while retail banking is designed to serve individuals with their personal banking needs.

Is a current account retail or corporate?

Current accounts can be offered by retail and corporate banks. Generally speaking, a current account is a bank account that allows you to make deposits and withdrawals. A checking account, either personal or business, is an example of a current account.

Why do banks focus on retail banking?

Banks focus on retail banking because there’s a need for it among consumers; many adults might be interested in a checking account, a debit card, and a credit card, for example. The demand for retail banking also allows banks to generate revenue by charging fees for deposit accounts and interest on loans and lines of credit. That said, corporate banking also serves an important need and generates income for banks as well.

About the author

Rebecca Lake

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

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

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

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