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Withdrawing money from a 401(k) to buy a house may be allowed by your company-sponsored plan, but this tactic is not always advisable, especially for first-time home buyers.
When it comes to using money from a 401(k), first-time home buyers need to keep in mind a few things, including the rules and penalties around early withdrawals from a 401(k) account — as well as the potential loss of retirement savings.
Before you consider using a 401k to buy a house, explore alternatives like withdrawing funds from a Roth IRA, seeking help from a Down Payment Assistance Program (DAP), or seeing if you qualify for other types of home loans.
Let’s take a look at the pros, cons, and important considerations that can help prospective homebuyers make a more informed decision about using funds from a 401(k) to buy a home.
Before you quickly search up “401k first time home buyer,” here’s the answer: If you’re a first-time home buyer, and your employer plan allows it, you can use your 401(k) to help buy a house. There are a couple of ways to access the funds.
First, it’s possible for a first-time homebuyer to take a loan from an existing 401(k). Your employer generally sets the rules for 401(k) loans, but you typically must pay back the loan, with interest, within five years. You pay yourself interest to help offset the loss of investment growth, since the funds are no longer invested in the market.
You can take out a 401(k) loan for a few different reasons (e.g., qualified educational expenses, medical expenses), depending on your plan’s policies. Those using a loan to purchase a residence may have more time to pay back the loan.
In certain rare circumstances, in the case of an “immediate and heavy financial need,” the IRS will allow you to make a 401(k) hardship withdrawal to purchase a primary residence. Hardship withdrawals do not cover mortgage payments, but using a 401(k) for a down payment for a first-time home buyer could be allowed.
The IRS has very strict rules for qualifying for a hardship withdrawal . And if you don’t meet them, the funds you withdraw will be subject to income tax and a 10% early withdrawal penalty.
Generally, home buyers who want to use their 401(k) funds to finance a real estate transaction can borrow or withdraw up to 50% of their vested balance or a maximum of $50,000 — whichever is less. This limit typically applies to any 401(k) loan, not only a home purchase.
Taking money out of a 401(k) to buy a house may be allowed, but it’s not always recommended.
Since there are limits on the amount you can withdraw or borrow for a home purchase, bear in mind that the total amount you can access may not cover all the costs (e.g., the down payment and closing costs) of the transaction. Be sure to run the numbers, to ensure that a 401(k) loan makes sense.
Homebuyers who borrow from their 401(k) plans can’t make additional contributions to the accounts or receive matching contributions from their employers while paying off the loan. Depending on how much they were contributing, these home buyers could miss out on years of retirement contributions while they’re paying back the loan. That could take a substantial bite out of their overall retirement savings.
Generally, it’s not up to you to repay the loan; your company will deduct the loan payments automatically from your paycheck. This could be viewed as a convenience, since you don’t have to think about it, or as an inconvenience, as it lowers your take-home pay.
Finally, if an individual borrows from their 401(k) to purchase a home and leaves employment at their company (whether voluntarily or via layoff), the loan balance may be deducted from their remaining 401(k) funds in what’s called an offset. An offset is then treated like an early withdrawal, and potentially subject to taxes and a 10% penalty if the borrower is under 59 ½.
As an example: Derek is 35 and has $100,000 in his 401(k) and borrows $30,000 for a home purchase. He pays back $5,000 including interest, but still owes $25,000 when he takes another job. The remaining $25,000 would be deducted from his 401(k) as an offset, leaving $75,000 in the 401(k) or rollover IRA. Worse, the $25,000 would be treated by the IRS as an early withdrawal or distribution, and Derek would owe taxes, plus a 10% penalty ($2,500).
Terms may vary depending on the terms of your loan and the plan rules.
💡 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.
Here are the pros and cons of using a 401(k) to buy a home, at a glance:
| Individuals may be able to purchase a home that they might otherwise not be able to afford. | Individuals can’t make regular contributions to their 401(k) while making loan payments. |
| When using a 401(k) loan, individuals are borrowing money from themselves, so they don’t owe interest to a bank or other institution. | Borrowed or withdrawn funds aren’t growing inside the 401(k) account, potentially derailing an individual’s retirement savings. |
| Interest rates are generally low. | If a person doesn’t qualify for a hardship withdrawal and they’re under age 59 ½, withdrawals would be subject to income tax and a 10% early withdrawal penalty. |
| You don’t have to meet any credit requirements. | If a person leaves their job before the loan is repaid, the balance owed could be deducted from the remainder of their 401(k) funds as an offset. For those under 59 ½, the amount of the offset would be considered a distribution and the borrower would potentially owe taxes and a 10% penalty. |
Here’s a side-by-side look at some key differences between taking out a 401(k) loan and withdrawing funds from a 401(k).
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• Must be repaid with interest in a certain period of time — usually 5 years. • Qualified loans are penalty free and tax free, unless the borrower defaults or leaves their job before closing the loan. • The maximum loan amount is 50% of the vested account balance, or $50,000, whichever is less. (For accounts with a vested account balance of less than $10,000, the maximum loan amount is $10,000.) • Interest accrued on the loan goes back into the 401(k), so the borrower is basically paying interest back to themselves. The interest is also tax-deferred until retirement. • If the borrower doesn’t repay the loan on time, the loan is treated as a regular distribution (a.k.a. withdrawal) and subject to taxes and an early withdrawal penalty of 10%. |
• Do not have to be repaid. • Usually allowed only in the case of “financial hardship,” which can include medical expenses, funeral expenses, and primary home-buying expenses, if the individual meets strict IRS criteria for “hardship.” ◦ Subject to income tax and a 10% early withdrawal penalty for people under age 59 ½. • One can only withdraw enough to cover the immediate expense (a down payment, for example, not future monthly mortgage payments), with a limit of 50% of the vested balance or $50,000—whichever is less • You can only withdraw enough to cover the immediate expense (a down payment, for example, not future mortgage payments), with a limit of 50% of the vested balance or $50,000 — whichever is less. |
For some first-time homebuyers, there may be other, more attractive options for securing a down payment than taking money out of a 401(k) to buy a house. Here are a few of the alternatives.
Using a Roth IRA to help buy a first home can be a smart alternative to borrowing from a 401(k) that might be beneficial for some home buyers. Unlike 401(k)s, Roth IRA contributions are made with after-tax dollars.
Contributions can be withdrawn at any time, tax free; earnings can be withdrawn without a penalty at age 59 ½ or older, as long as you’ve held the account for at least five years.
If you’re under 59 ½ or don’t meet the five-year criteria, some exceptions may apply for a first-time home purchase.
• After the account has been open for five years, Roth IRA account holders who are buying their first home are allowed to withdraw up to $10,000 in investment earnings with no taxes or penalties. (Meaning a person could withdraw the amount of their total contribution plus up to $10,000 in investment earnings.) The $10,000 is a lifetime limit.
• Roth IRA funds can be used to help with the purchase of a first home not only for the account holders themselves, but for their children, parents, or grandchildren.
One important requirement to note is that time is of the essence when using a Roth IRA to purchase a first home: The funds have to be used within 120 days of the withdrawal.
💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.
There are certain low- and no-down-payment home loans that homebuyers may qualify for that they can use instead of using a 401(k) for a first time home purchase. This could allow them to secure the down payment for a first home without tapping into their retirement savings.
• FHA loans are insured by the Federal Housing Administration and allow home buyers to borrow with few requirements. Home buyers with a credit score lower than 580 qualify for a loan with 10% down, and those with credit scores higher than 580 can get a loan with as little as 3.5% down.
• Conventional 97 loans are Fannie Mae-backed mortgages that allow a loan-to-value ratio of up to 97% of the cost of the loan. In other words, the home buyer could purchase a house for $400,000 and borrow up to $388,000, leaving only a down payment requirement of 3%, or $12,000, to purchase the house.
• VA loans are available for U.S. veterans, active duty members, and surviving spouses, and they require no down payment or monthly mortgage insurance payment. They’re provided by private lenders and banks and guaranteed by the United States Department of Veterans Affairs.
• USDA loans are a type of home buyer assistance program offered by the U.S. Department of Agriculture to buy or possibly build a home in designated rural areas with an up-front guarantee fee and annual fee. Borrowers who qualify for USDA loans require no down payment and receive a fixed interest rate for the lifetime of the loan. Eligibility requirements are based on income, and vary by region.
For home buyers who are ineligible for no-down payment loans, there are a few more alternatives instead of using 401(k) funds:
• Down Payment Assistance (DAP) programs offer eligible borrowers financial assistance in paying the required down payment and closing costs associated with purchasing a home. They come in the form of grants and second mortgages, are available nationwide, can be interest-free, and sometimes have lower rates than the initial mortgage loan.
• Certain mortgage lenders provide financial assistance by offering credits to cover all or some of the closing costs and down payment.
• Gifted money from friends or family members can be used to cover a down payment or closing costs on certain home loans.
Generally speaking, a 401(k) can be used to buy a house, either by taking out a 401(k) loan and repaying it with interest, or by making a 401(k) withdrawal (which is subject to income tax and a 10% withdrawal fee for people under age 59 ½).
However, using a 401(k) for a first-time home purchase is usually not advisable. Both qualified loans and withdrawals have some potential drawbacks — primarily the possibility of owing taxes and a penalty under certain conditions. Fortunately, there are other options. Certain Roth IRA withdrawals can be made tax and penalty free. Qualified homebuyers can also seek financial help from down payment assistance programs and other low- or no-interest plans.
As you weigh your choices, it helps to know where your retirement stands. Many people lose track of retirement accounts when they change jobs. To help manage your retirement funds, consider doing a 401(k) rollover. That’s when you move funds from an old 401(k) to an IRA.
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).
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A health maintenance organization, or HMO, is a type of health insurance plan that typically offers lower premiums and out-of-pocket costs in exchange for members using the plan’s network of providers.
That network is usually confined to a certain city or geographic area.
An HMO can be a good choice for healthy people who don’t anticipate needing a lot of specialized care in the coming year.
However, these plans tend to offer less flexibility in where you can go for care than other types of health plans, such as preferred provider organizations (PPOs).
Read on to learn if an HMO could be the right plan for you and your family.
HMOs contract with a group of doctors, hospitals, and other healthcare providers within a certain area for a negotiated fee.
In return for accepting lower payments, HMOs offer providers a steady stream of patients. Insurers can then pass the savings onto patients in the form of lower premiums and out-of-pocket costs.
To take advantage of these lower costs, HMO members must, for the most part, receive care only from network providers.
This starts with your primary care physician (PCP). HMO members typically should choose a PCP from the plan’s network. Your PCP takes care of annual check-ups and other medical needs that require an office visit.
In an HMO, your PCP is typically also the gatekeeper for your other health needs. To see a specialist, such as a podiatrist or a dermatologist, you would likely need to first visit your PCP to get a referral to a specialist within the network.
There are often some exceptions to network-only care, however. Emergency care received out-of-network is usually covered. And, with some preventive care services, such as mammograms and gynecological visits, you may be able to see a network doctor without first getting a referral.
In cases where you may have a serious health condition requiring a specialist not included in the network, the HMO may cover that treatment as long as you request pre-approval.
In addition to low premiums, there are often low or no deductibles with an HMO. Instead, the plan will typically charge a copayment, or copay, for each clinical visit, test, or prescription.
Another commonly available health plan offered by employers and health insurance companies is a preferred provider organization, or PPO. These plans have many features in common with HMOs, but also a few key differences.
As with an HMO, members of a PPO plan have access to a network of providers. When they use providers within that network, they will typically pay less out-of-pocket costs, such as copays.
Unlike an HMO, however, care outside of the network is usually also covered, but at an additional cost.
How much the PPO will pay for an out-of-network doctor may be capped at what the PPO deems the “customary and usual” payments for providers in your area. Depending on where you live, that could mean a small or potentially large additional out-of-pocket cost.
Depending on where you live, that could mean a small or potentially large additional out-of-pocket cost.
Another key difference between these two types of plans: With a PPO, you typically do not need a referral to see a specialist, either within or outside of the network.
In addition, PPO plans usually have deductibles, while some HMOs do not. PPO plans also typically have more expensive premiums than HMOs.
However, not having to see your PCP (and pay a copay) to get a referral to a specialist can be a cost saver for members of PPOs.
💡 Quick Tip: Next time you review your budget, consider making room for additional insurance coverage. Think of it as an investment that can help protect you from a major financial loss.
It can be a good idea to weigh the advantages and disadvantages of HMOs before you choose a plan, just as you would with any other option.
Here are some of the most common pros and cons.
• Lower costs. Premiums, deductibles, and copays are usually lower with an HMO compared to other types of health care plans. Some plans even have no deductible. Your out-of-pocket costs will also likely be lower for your prescriptions.
• Less paperwork. Because your care is managed through your PCP and you are receiving care through the HMO network, billing tends to be less complicated for those with an HMO.
• Care is often high quality. Because preventive services are generally fully covered and because your PCP can act as your advocate for early intervention medical care, many people find HMOs provide good quality of health care.
• Provider Restrictions. With an HMO, you must choose a primary care physician from the plan’s network. This doctor will manage your care and refer you to specialists within the network. If your current doctor is not in the HMO network, you would likely need to switch.
• Restricted emergency care. Emergency care is usually covered even if it is received from out-of-network providers. But HMOs often have strict rules on what constitutes an emergency and which emergency providers will be covered.
• Geographic restrictions. Because HMO networks are usually located within one geographic area, your network of providers will only be available within that location. That means if you’re traveling and you need medical care, those bills may not be covered, unless it is an emergency. Also, dependent college children who attend school out of state are usually not covered.
HMO plans can be a very efficient, low-cost way to manage your health care needs. These plans can foster a close relationship with your primary care physician, who can help you navigate both preventive and specialty care.
Some consumers feel the restrictions on receiving care from out-of-network providers and the hassles of getting a referral can be an obstacle to optimal care.
HMOs are often compared to PPOs, which generally allow members more freedom to see out-of-network providers (though going out of network may cost more). PPOs typically don’t require referrals to see specialists.
To determine which type of health plan is best for you, you’ll likely want to weigh the costs and plan offerings against your budget and health needs. Before choosing a plan, it might also be helpful to track your spending for a few months to see how much you are currently spending on medical care.
When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.
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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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You probably have things you want to do with your money down the road: buy a house, save for retirement, fund college for your kids, maybe even go on a big trip or do a major remodel. And you may be wondering if investing can help you achieve those goals.
It’s never too early or too late to start investing. There are a number of different ways you can put your money to work, including choosing different investment types.
Before deciding on your investments, ask yourself what your financial goals are. Then try to build a portfolio that achieves those goals, balancing risk with return and maintaining a diverse mix of assets.
Having different types of investments, as well as short term vs long term investments can help you achieve portfolio diversification.
When you think of investing and investment types, you probably think of the stock market. They are, essentially, investment fund basics. A stock gives an investor fractional ownership of a public company in units known as shares.
Only public companies trade on the stock market; private companies are privately owned. They can sometimes still be invested in, though the process isn’t always as easy and open to as many investors.
A stock makes money in two ways: It could pay dividends if the company decides to pay out part of its profits to its shareholders, or an investor could sell the stock for more than they bought it.
Some investors are looking for steady streams of income and therefore pick stocks because of their dividend payments. Others may look at value or growth stocks, companies that are trading below their true worth or those that are experiencing revenue or earnings gains at a faster pace.
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Pros and Cons of Stock Investments |
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| Pros | Cons |
| If the stock goes up, you can sell it for a profit. | There are no guaranteed returns. For instance, the market could suddenly go down. |
| Some stocks pay dividends to investors. | The stock market can be volatile. Returns can vary widely from year to year. |
| Stocks tend to offer higher potential returns than bonds. | You typically need to hang onto stocks for many years to achieve the highest potential returns. |
| Stocks are considered liquid assets, so you can typically sell them quickly if necessary. | You can lose a lot of money or get in over your head if you don’t do your research before investing. |
Bonds are essentially loans you make to a company or a government — federal or local — for a fixed period of time. In return for loaning them money, they promise to pay it back to you in the future and pay you interest in the meantime.
When it comes to bonds vs. stocks, the former are typically backed by the full faith and credit of the government or large companies. Because of this, they’re often considered lower risk than stocks.
However, the risk varies, and bonds are rated for their quality and credit-worthiness. Because the U.S. government is less likely to go bankrupt than an individual company, Treasury bonds are considered to be some of the least risky investments. However, they also tend to have lower returns.
Treasurys: These are bonds issued by the U.S. government. Treasurys can have maturities that range from one-month to 30-years, but the 10-year note is considered a benchmark for the bond market as a whole.
Municipal bonds: Local governments or agencies can also issue their own bonds. For example, a school district or water agency might take out a bond to pay for improvements or construction and then pay it off, with interest, at whatever terms they’ve established.
Corporate bonds: Corporations also issue bonds. These are typically given a credit rating, with AAA being the highest. High-yield bonds, also known as junk bonds, tend to have higher yields but lower credit ratings.
Mortgage and asset-backed bonds: Sometimes financial institutions bundle mortgages or other assets, like student loans and car loans, and then issue bonds backed by those loans and pass on the interest.
Zero-coupon bonds: Zero coupon bonds may be issued by the U.S. Treasury, corporations, and state and local government agencies. These bonds don’t pay interest. Instead, investors buy them at a great discount from their face value, and when a bond matures, the investor receives the face value of the bond.
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Pros and Cons of Bond Investments |
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| Pros | Cons |
| Bonds offer regular interest payments. | The rate of returns with bonds tends to be much lower than it is with stocks. |
| Bonds tend to be lower risk than stocks. | Bond trading is not as fluid as stock trading. That means bonds may be more difficult to sell. |
| Treasurys are considered to be safe investments. | Bonds can decrease in value during periods of high interest rates. |
| High-yield bonds tend to pay higher returns and they have more consistent rates. | High-yield bonds are riskier and have a higher risk of default, and investors could potentially lose all the money they’ve invested in them. |
💡 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.
A mutual fund is an investment managed by a professional. Funds typically focus on an asset class, industry or region, and investors pay fees to the fund manager to choose investments and buy and sell them at favorable prices.
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Pros and Cons of Mutual Fund Investments |
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| Pros | Cons |
| Mutual funds are easy and convenient to buy. | There is typically a minimum investment you need to make. |
| They ate more diversified than stocks and bonds so they carry less risk. | Mutual funds typically require an annual fee called an expense ratio and some funds may also have sales charges. |
| A professional manager chooses the investments for you. | Trades are executed only once per day at the close of the market, which means you can’t buy or sell mutual funds in real time. |
| You earn money when the assets in the mutual fund rise in value. | The management team could be poor or make bad decisions. |
| There is dividend reinvestment, meaning dividends can be used to buy additional shares in the fund, which could help your investment grow. | You will generally owe taxes on distributions from the fund. |
Exchange traded funds can appear to be similar to a mutual fund, but the main difference is that ETFs can be traded on a stock exchange, giving investors the flexibility to buy and sell throughout the day. They also come in a range of asset mixes.
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Pros and Cons of ETF Investments |
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| Pros | Cons |
| ETFs are easy to buy and sell on the stock market. | The ease of trading ETFs might tempt an investor to sell an investment they should hold onto. |
| They often have lower annual expense ratios (annual fees) than mutual funds. | A brokerage may charge commission for ETF trades.This could be in addition to fund management fees. |
| ETFs can help diversify your portfolio. | May provide a lower yield on asset gains (as opposed to investing directly in the asset). |
| They are more liquid than mutual funds. | |
An annuity is an insurance contract that an individual pays upfront and, in turn, receives set payments.
There are fixed annuities, which guarantee a set payment, and variable annuities, which put people’s payments into investment options and pay out down the road at set intervals. There are also immediate annuities that begin making regular payments to investors right away.
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Pros and Cons of Annuity Investments |
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| Pros | Cons |
| Annuities are generally low risk investments. | Annuities typically offer lower returns compared to stocks and bonds. |
| They offer regular payments. | They typically have high fees. |
| Some types offer guaranteed rates of return. | Annuities are complex and difficult to understand. |
| Can be a good supplement investment for retirement. | It can be challenging to get out of an annuities contract. |
There are several types of derivatives but two popular ones are futures and options. Futures contracts are agreements to buy or sell something (a security or a commodity) at a fixed price in the future.
Meanwhile, in options trading, buyers have the right, but not the obligation, to buy an asset at a set price.
A derivatives trading guide can be helpful to learn more about how these investments work.
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Pros and Cons of Derivative Investments |
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| Pros | Cons |
| Derivatives allow investors to lock in a price on a security or commodity. | Derivatives can be very risky and are best left to traders who have experience with them. |
| They can be helpful for mitigating risk with certain assets. | Trading derivatives is very complex. |
| They provide income when an investor sells them. | Because they expire on a certain date, the timing might not work in your favor. |
💡 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.
A commodity is a raw material — such as oil, gold, corn or coffee. Trading commodities has a reputation for being risky and volatile. That’s because they’re heavily driven by supply and demand forces. Say for instance, there’s a bad harvest of coffee beans one year. That might help push up prices. But on the other hand, if a country discovers a major oil field, that could dramatically depress prices of the fuel.
Investors have several ways they can gain exposure to commodities. They can directly hold the physical commodity, although this option is very rare for individual investors (Imagine having to store barrels and barrels of oil).
So many investors wager on commodity markets via derivatives — financial contracts whose prices are tied to the underlying raw material. For instance, instead of buying physical bars of precious metals to invest in them, a trader might use futures contracts to make speculative bets on gold or silver. Another way that retail investors may get exposure to commodities is through exchanged-traded funds (ETFs) that track prices of raw materials.
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Pros and Cons of Commodity Investments |
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| Pros | Cons |
| Commodities can diversify an investor’s portfolio. | Commodities are considered high-risk investments because the commodities market can fluctuate based on factors like the weather. Prices could plummet suddenly. |
| Commodities tend to be more protected from the volatility of the stock market than stocks and bonds. | Commodities trading is often best left to investors experienced in trading in them. |
| Prices of commodities are driven by supply and demand instead of the market, which can make them more resilient. | Commodities offer no dividends. |
| Investing in commodities can help hedge against inflation because commodities prices rise when consumer prices do. | An investor could end up having to take physical possession of a commodity if they don’t close out the position, and/or having to sell it. |
Owning real estate, either directly or as part of real estate investment trust (REIT) investing or limited partnerships, gives you a tangible asset that may increase in value over time.
If you become invested in real estate outside of your own home, rent payments can be a regular source of income. However, real estate can also be risky and labor-intensive.
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Pros and Cons of Real Estate Investments |
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| Pros | Cons |
| Real estate is a tangible asset that tends to appreciate in value. | Real estate is not liquid. You may have a tough time selling it quickly. |
| There are typically tax deductions and benefits, depending on what you own. | There are constant ongoing expenses to maintain a property. |
| Investing in real estate with a REIT can help diversify your portfolio. | Owning rental property is a lot of work. You have to handle managing it, cleaning it, and making repairs. |
| By law, REITs must pay 90% of their income in dividends. | With a REIT, dividends are taxed at a rate that’s usually higher than the rate for many other investments. |
| REITs offer more liquidity than owning rental property you need to sell. | REITs are generally very sensitive to changes in interest rates, especially rising rates. |
| REITs don’t require the work that maintaining a rental property does. | REITs can be a risky short-term investment and investors should plan to hold onto them for the long term. |
Only public companies sell shares of stock, however private companies do also look for investment at times — it typically comes in the form of private rounds of direct funding. If the company you invest in ends up increasing in value, that can pay off, but it can also be risky.
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Pros and Cons of Investing in Private Companies |
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| Pros | Cons |
| Potential for good returns on your investment. | You could lose your money if the company fails. |
| Lets investors get in early with promising startups and/or innovative technology or products. | The value of your shares in the company could be reduced if the company issues new shares or chooses to raise additional capital. Your shares may then be worth less (this is known as dilution). |
| Investing in private companies can help diversify your portfolio. | Investing in a private company is illiquid, and it can be very difficult to sell your assets. |
| Dividends are rarely paid by private companies. | |
| There could be potential for fraud since private company investment tends to be less regulated than other investments. | |
An investor can put money into different types of investment accounts, each with their own benefits. The type of account can impact what kinds of returns an investor sees, as well as when and how they can withdraw their money.
A 401(k) plan is a retirement account provided by your employer. You can often put money into a 401(k) account via a simple payroll deduction, and in a traditional 401(k), your contribution isn’t taxed as income. Many employers will also match your contributions to a certain point. The IRS puts caps on how much you can contribute to a 401(k) annually.
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Pros and Cons of 401(k)s |
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| Pros | Cons |
| Contributions you make to a 401(k) can reduce your taxable income. The money is not taxed until you withdraw it when you retire. | There is a cap on how much you can contribute each year. |
| Contributions can be automatically deducted from your paycheck. | Most withdrawals before age 59 ½ will incur a 10% penalty |
| Your employer may provide matching funds up to a certain limit. | You must take required minimum distributions from the plan (RMDs) when you reach a certain age. |
| You can roll over a 401(k) if you leave your job. | You may have limited investment options. |
IRA stands for “individual retirement account” — so it isn’t tied to an employer. There are IRS guidelines for IRAs, but, essentially, they’re retirement accounts for individuals. IRAs allow people to set aside money pre-tax for retirement without needing an employer-backed 401(k).
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Pros and Cons of 401(k)s |
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| Pros | Cons |
| Contributions are tax deferred. You don’t pay taxes until you withdraw the funds. | Low contribution limits ($6,500 in 2023). |
| You can choose how the money is invested, giving you more control. | There is a 10% penalty for most early withdrawals before age 59 ½. |
| Those aged 50 and over can contribute an extra $1,000 in catch-up contributions. | |
A brokerage account is a taxed account through which you can buy most of the investments discussed here: stocks, bonds, ETFs. Some brokerage firms charge fees on the trades you make, while others offer free trading but send your orders to third parties to execute — a practice known as payment for order flow. Investors can be taxed on any realized gains.
You might also consider enlisting the help of a wealth manager or financial advisor who can provide financial planning and advice, and then manage your portfolio and wealth. Typically, these advisors are paid a fee based on the assets they manage.
There are even a number of investment options out there not listed here — like buying into a venture capital firm if you’re a high-net-worth individual or putting funding into your own business.
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Pros and Cons of 401(k)s |
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|---|---|
| Pros | Cons |
| Offer flexibility to invest in a wide range of assets. | You must pay taxes on your investment income and capital gains in the year they are received. |
| Brokerage accounts provide the potential for growth, depending on your investments. However, all investments come with risks that include the potential for loss. | Investments in brokerage accounts are not tax deductible. |
| You can contribute as much as you like to a brokerage account. | There is a risk that you could lose the money you invested. |
It might still seem overwhelming to figure out what kinds of investments will help you achieve your goals. There are different investment strategies and finding the right one can depend on where you are in your career, what your financial goals are and how far away retirement is.
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).
Stocks are one of the most common and well-known types of investments. A stock gives an investor fractional ownership of a public company in units known as shares.
Some prime times to start investing include when you have a retirement fund at work that you can contribute to and that your employer may contribute matching funds to (up to a certain amount); you have an emergency fund of three to six months’ worth of money already set aside and you have additional money to invest for your future; there are financial goals you’re ready to save up for, such as buying a house, saving for your kids’ college funds, or investing for retirement. Please remember you need to consider your investment objectives and risk tolerance when deciding the “right” time to start investing.
Yes. It’s wise to diversify your portfolio. That way, you’ll have different types of assets which will increase the chances that some of them will do well even when others don’t. This will also help reduce your risk of losing money on one single type of investment. In short, having a diverse mix of assets helps you balance risk with return. However, diversification does not eliminate all risk.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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Most people aren’t prepared for the wild and sometimes-bumpy ride of negotiating counter offers in real estate, even though the experience is remarkably common.
Home sellers are free to make a counter offer if they’re dissatisfied with a buyer’s initial bid. Usually, that counter offer indicates they’ve accepted the buyer’s offer subject to certain changes, including updates to contingencies, closing date, and sales price.
Counter offers are a fairly standard part of the home-buying process, but the rules of engagement might not seem remotely intuitive at the time. To help understand how counter offers in real estate work, what the typical negotiating steps look like, and how to counter offer on real estate, here’s a little guide you can cram with.
From the beginning of the home-buying process, unexpected twists and turns can arise. After sifting through hundreds of listings, attending several showings, and putting an offer in on a dream home (or two, or three), the deal can be far from done.
There are many reasons why it takes time to buy a house, and counter offers can certainly be one of them. Counter offers in real estate can come into play in these scenarios:
One of the most commonly contested items in the purchase of a house is the sales price. If buyers come in lower than the asking price with their offer, sellers might counter with the original asking price (if they’re unwilling to negotiate) or somewhere between the asking price and the offer.
Recommended: What to Know About Getting Preapproved for a Home Loan
Sometimes sellers simply need more time to vacate the premises. Whether they have unfinished business or unexpected plans, they may present a counter offer that extends the escrow period to allow them more time to move out.
In some cases, the seller could up the ante by increasing the earnest, or “good faith,” money deposit the buyer submits with the offer. Earnest money deposits are typically between 1% and 3% of the purchase price, but in a hot market, there’s a chance the seller could ask for more to ensure the buyer is serious about purchasing the property.
💡 Quick Tip: To see a house in person, particularly in a tight or expensive market, you may need to show the real estate agent proof that you’re preapproved for a mortgage. SoFi’s online application makes the process simple.
Contingency clauses are actions or conditions that must be met before a real estate contract becomes binding. If you’re a first-time homebuyer (or even if you aren’t) it’s wise to brush up on these terms. Common contingencies, which most sellers will see as standard in a real estate offer, are:
• An appraisal contingency to protect buyers if the property is valued lower than the amount they offer.
• A financing contingency that allows buyers adequate time to get a mortgage or other financing to purchase the property.
• An inspection contingency that ensures buyers have the right to a thorough inspection of the property within a specified period of time.
Some contingencies, however, are considered less than standard. For example, a home sale contingency grants buyers a set amount of time to sell their existing home so they can finance the new property. Some sellers may find this contingency burdensome, particularly in a hot market, so they could make a counter offer that removes the home sale contingency. They can also counter with a “kick-out clause” that gives a real estate agent the right to keep showing the house while buyers attempt to sell their existing home.
If a home inspection reveals necessary repairs or renovations to the property, the buyer could submit a counter offer to negotiate a lower price or ask the seller to complete the repairs before closing.
In a buyer’s market, it might be possible to negotiate the house price or some or all of the closing costs to be paid by the seller. These costs include appraisal fees, settlement fees, title policies, recording fees, land surveys, and transfer tax. Many buyers are surprised by how expensive closing costs are, but in particularly hot markets with multiple offers, sellers can counter with a simple “no” to indicate they won’t be covering those costs for the buyer.
While real estate counter offers vary depending on the market, the seller’s unique circumstances, and other standalone factors, there are some fairly standard parameters to the counter offer process:
There’s no legal limit to the number of counter offers in real estate transactions. Initial offers, counter offers, and subsequent counter offers could ping pong back and forth for weeks or more.
Knowing the local real estate market trends can be key here. In a buyer’s market with plenty of houses for sale, sellers might want to be cautious about submitting an unnecessary number of counter offers.
Similarly, in a seller’s market where inventory is low and buyer competition is high, buyers might want to limit the number of counter offers they push back at the seller.
Depending on the state where the real estate transaction takes place, a seller may or may not be able to make counter offers to more than one buyer. That said, most real estate agents advise against multiple simultaneous counter offers, as it could end up in two legally binding contracts for the seller.
Number of counter offers aside, homebuyers can expect a closing to take about 45 days, on average. But how long it takes still varies from buyer to buyer, with factors like whether they’re paying cash, how long it takes them to find an inspector, and if the house appraises at a lower value, affecting the overall timeline.
💡 Quick Tip: You deserve a more zen mortgage. SoFi Mortgage Loan Officers are dedicated to closing your loan on-time — backed by a $5,000 guarantee offer.‡
To some degree there’s such a thing as real estate counter offer etiquette. Here are a few things to consider when engaging in the counter offer process:
For buyers, having an accurate handle on what it will cost to buy the house is essential for negotiating counter offers discerningly.
Closing costs can be one of the most negotiated items between buyers and sellers and add up to as much as 5% of the mortgage amount. Having a firm grasp of how much to expect in closing costs can help guide the counter offer process.
Setting realistic expectations for the monthly housing payment (including the mortgage principal and interest, insurance, maintenance, any homeowners association fees, and other costs) and what they can afford to pay as a lump sum at closing can help shape this picture for the buyer.
A mortgage calculator helps buyers break down the cost of purchasing a home. Understanding the various factors that might affect your home loan costs is important, too.
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A “strong” offer is backed by data that defines what’s happening in the market, and research (with the help of an agent) around what’s considered “fair market value.” Being preapproved for a home loan will make you an attractive candidate from the seller’s point of view.
Coming in at 15% or more under the fair market value is generally considered a “lowball” offer and can start buyers off on the wrong foot. In some cases, sellers might skip right over anything that isn’t considered a strong offer.
One of the first steps in making a real estate counter offer is knowing what can be negotiated:
• Possession date. Giving the sellers more time to move out could mean an exchange for a condition the buyer desires. Buyers hoping to move in sooner might make a counter offer requesting an earlier possession date.
• Personal property. Some of the seller’s personal property like furniture, window treatments, artwork, or gardening tools could be negotiated into the contract in a counter offer.
• Home warranty. Older houses can come with their own unique sets of systems and appliances, so buyers might make a counter offer asking the sellers to cover the cost of a one- to two-year home warranty ($350 to $600 annually, on average) if unexpected repairs need to be made after move-in.
• Earnest money deposit. Whether buyers are trying to reduce their risk of something going wrong during closing or strengthen their offer, they can negotiate a lower or higher earnest money deposit with a counter offer.
Real estate offers and counter offers often come with a set expiration date, so time is usually of the essence. Forty-eight hours is a standard acceptance window in many real estate markets, but in hot markets offers might expire within 24 hours or less.
Some sellers take this concept to a whole new level, setting stringent requirements around offer acceptance. It’s up to buyers to determine whether or not they’re willing to reply quickly enough to meet the sellers’ time demands or risk losing the deal.
It might not feel like “all’s fair in buying and selling a home” since it’s one of the biggest financial transactions many will make in their lifetime. But buyers and sellers shouldn’t be surprised if it comes with a little bit of literal give and take.
And while it might seem like a personal affront to have a real estate offer rejected, it’s possible (and even likely) that the seller has multiple offers or was simply able to strike a better deal.
When push comes to shove and purchase comes to close, buying a house is a matter of business, no matter how personal the home-buying journey can feel.
Real estate offers and counter offers are a common form of business negotiation, and a first step in making a counter offer is knowing what can be negotiated. Being cognizant of counter offer etiquette can be helpful.
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.
Counter offers are an expected part of the negotiation process so approach any counter offer calmly. Know your goal for the overall cost of your home purchase or sale, and what levers you can pull to get there (lower/higher price? Change in contingencies or closing timeline?). Come back with your strongest counter offer but always be prepared to walk away.
Understand the complete picture of costs in the transaction. Go in with your strongest counter offer, in a timely fashion, and don’t take it personally if you don’t get 100 percent of what you want from the deal.
The number one rule of counter offers, whether you’re buying or selling, is to know what total price you can ultimately afford. Keep calm and negotiate on, but don’t get emotionally involved — you may need to walk away at any time.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
‡SoFi On-Time Close Guarantee: If all conditions of the Guarantee are met, and your loan does not close on or before the closing date on your purchase contract accepted by SoFi, and the delay is due to SoFi, SoFi will give you a credit toward closing costs or additional expenses caused by the delay in closing of up to $10,000.^ The following terms and conditions apply. This Guarantee is available only for loan applications submitted after 04/01/2024. Please discuss terms of this Guarantee with your loan officer. The mortgage must be a purchase transaction that is approved and funded by SoFi. This Guarantee does not apply to loans to purchase bank-owned properties or short-sale transactions. To qualify for the Guarantee, you must: (1) Sign up for access to SoFi’s online portal and upload all requested documents, (2) Submit documents requested by SoFi within 5 business days of the initial request and all additional doc requests within 2 business days (3) Submit an executed purchase contract on an eligible property with the closing date at least 25 calendar days from the receipt of executed Intent to Proceed and receipt of credit card deposit for an appraisal (30 days for VA loans; 40 days for Jumbo loans), (4) Lock your loan rate and satisfy all loan requirements and conditions at least 5 business days prior to your closing date as confirmed with your loan officer, and (5) Pay for and schedule an appraisal within 48 hours of the appraiser first contacting you by phone or email. This Guarantee will not be paid if any delays to closing are attributable to: a) the borrower(s), a third party, the seller or any other factors outside of SoFi control; b) if the information provided by the borrower(s) on the loan application could not be verified or was inaccurate or insufficient; c) attempting to fulfill federal/state regulatory requirements and/or agency guidelines; d) or the closing date is missed due to acts of God outside the control of SoFi. SoFi may change or terminate this offer at any time without notice to you. *To redeem the Guarantee if conditions met, see documentation provided by loan officer.
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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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