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There are a variety of taxes you may have to pay, such as Income tax, capital gains tax, sales tax, and property tax. Whether you’re new to the workforce or a seasoned retiree, taxes can be complicated to understand and to pay.

This guide can help. Here, you’ll learn more about what taxes are, the different types of taxes to know about, and helpful tax filing ideas. Read on to raise your tax I.Q.

What Are Taxes?

At a high level, taxes are involuntary fees imposed on individuals or corporations by a government entity. The collected fees are used to fund a range of government activities, including but not limited to schools, road maintenance, health programs, and defense measures.

Different Types of Taxes to Know

Here’s a detailed look at what are many of the different types of taxes that can be levied and the ways in which they are typically calculated and imposed, plus insights into how they might impact your checking account.

Income Tax

The federal government collects income tax from people and businesses, based upon the amount of money that was earned during a particular year. There can also be other income taxes levied, such as state or local ones. Specifics of how to calculate this type of tax can change as tax laws do.

The amount of income tax owed will depend upon the person’s tax bracket; it will typically go up as a person’s income does. That’s because the U.S. has a progressive tax system for federal income tax, meaning individuals who earn more are taxed more.

If you’re wondering what tax bracket you are in, know that there are currently seven different federal tax brackets. The amount owed will also depend on filing categories like single; head of household; married, filing jointly; and married, filing separately.

Deductions and credits can help to lower the amount of income tax owed (which might leave you with more money in your savings account).

And if a federal or state government charges you more than you actually owed, you’ll receive a tax refund. It can be helpful to check the IRS website or online tax help centers to learn more about income tax.

Property Tax

Property taxes are charged by local governments and are one of the costs associated with owning a home.

The amount owed varies by location and is calculated as a percentage of a property’s value. The funds typically help to fund the local government, as well as public schools, libraries, public works, parks, and so forth.

Property taxes are considered to be an ad valorem tax, which means they are based on the assessed value of the property.

Payroll Tax

Employers withhold a percentage of money from employees’ pay and then forward those funds to the government. The amount being withheld will vary, based on a particular employee’s wages, with federal payroll taxes being used to fund Medicare and Social Security. For 2025, the income threshold goes up to $176,100.

There are limits on the portion of income that would be taxed. For example, in 2024, a person’s income that exceeds $168,600 is not subject to a common payroll deduction, Social Security tax.

Because this tax is applied uniformly, rather than based on income throughout the system, payroll taxes are considered to be a regressive tax.

Inheritance/Estate Tax

These are actually two different types of taxes.

•   The first — the inheritance tax — can apply in certain states when someone inherits money or property from a deceased person’s estate. The beneficiary would be responsible for paying this tax if they live in one of several different states where this tax exists and the inheritance is large enough.

•   The federal government does not have an inheritance tax. Instead, there is a federal estate tax that is calculated on the deceased person’s money and property. It’s typically paid out from the assets of the deceased before anything is distributed to their beneficiaries.

There can be exemptions to these taxes and, in general, people who inherit from someone they aren’t related to can anticipate higher rates of tax.

Regressive, Progressive, and Proportional Taxes

These are the three main categories of tax structures in the U.S. (two of which have already been mentioned above). Here are definitions that include how they impact people with varying levels of income.

What’s a Regressive Tax?

Because a regressive tax is uniformly applied, regardless of income, it takes a bigger percentage from people who earn less and a smaller percentage from people who earn more.

As a high-level example, a $500 tax would be 1% of someone’s income if they earned $50,000; it would only be half of one percent if someone earned $100,000, and so on. Examples of regressive taxes include state sales taxes and user fees.

What’s a Progressive Tax?

A progressive tax works differently, with people who are earning more money having a higher rate of taxation. In other words, this tax (such as an income tax) is based on income.

This system is designed to allow people who have a lower income to have enough money for cost of living expenses.

What’s Proportional Tax?

A proportional tax is another way of saying “flat tax.” No matter what someone’s income might be, they would pay the same proportion. This is a form of a regressive tax and proportional taxes are more common at the state level and less common at the federal level.

Capital Gains Tax

Next up, take a closer look at the capital gains tax that an investor may be responsible for paying when having stocks in an investment portfolio. This can happen, for example, if they sell a stock that has appreciated in value over the purchase price.

The difference in the increased value from purchase to sale is called “capital gains” and, typically, there would be a capital gains tax levied.

An exception can be when an investor sells increased-in-value stocks through a tax-deferred retirement investment inside of the account. Meanwhile, dividends are taxed as income, not as capital gains.

It’s also important for investors to know the difference between short-term and long-term capital gains taxes. In the U.S. tax code, short-term is one year or less, while long-term is anything longer. For tax years 2024 and 2025, gains made by short-term investments are taxed at the same rate as ordinary income. Long-term capital gains tax rates are 0%, 15%, and 20%, depending on your income.

Recommended: High-Yield Savings Account Calculator

Ideas For Tax-Efficient Investing

Ideas for tax-efficient investing can include to select certain investment vehicles, such as:

•   Exchange-traded funds (ETFs): These are baskets of securities that trade like a stock. They can be tax-efficient because they typically track an underlying index, meaning that while they allow investors to have broad exposure, individual securities are potentially bought and sold less frequently, creating fewer events that will likely result in capital gains taxes.

•   Index mutual funds: These tend to be more tax efficient than actively managed funds for reasons similar to ETFs.

•   Treasury bonds: There are no state income taxes levied on earned interest.

•   Municipal bonds: Interest, in general, is exempted from federal taxes; if the investor lives within the municipality where these local government bonds are issued, they can typically be exempt from state and local taxes, as well.

VAT Consumption Tax

In the U.S., taxpayers are charged a regressive form of tax, a sales tax, on many items that are purchased. In Europe, the system works differently. A VAT tax is a form of consumption tax that’s due upon a purchase, calculated on the difference between the sales price and what it cost to create that product or service. In other words, it’s based on the item’s added value.

Here’s one big difference between a sales tax and a VAT tax:

•   Sales tax is charged at the final part of the sales transaction.

•   VAT, on the other hand, is calculated throughout each supply chain step and then built into the final purchase price.

This leads to another difference. Sales taxes are added onto the purchase price that’s listed; VAT contains those fees within the price and so nothing extra is added onto the price tag that a buyer would see.

Sales Tax

Ka-ching! You are probably used to sales tax being added to many of your purchases. It’s a method that governments use to collect revenue from citizens, and in America, it can vary by state and local area.

Funds collected via sales tax are frequently used for local and state budget items. These might include school, road, and fire department expenses.

Excise Tax

An excise tax is one that is applied to a specific item or activity. Some common examples are the taxes added to alcoholic beverages, amusement/betting pursuits, cigarettes (yes, the “sin taxes,” as they are sometimes called, gasoline, and insurance premiums.

These taxes are primarily paid by businesses but are sometimes passed along to consumers, who may or may not be aware that these taxes can be rolled into retail prices. Some excise taxes, however, are paid directly by consumers, such as property taxes and certain taxes on retirement accounts.

Luxury Tax

Luxury tax is just what it sounds like: tax on purchases that aren’t necessities but are pricey purchases. It can be paid by a business and possibly passed along to the consumer. Typical examples of items that are subject to a luxury tax include expensive boats, airplanes, cars, and jewelry.

The revenue that’s raised by these taxes may fund an array of government programs designed to benefit U.S. citizens.

Corporate Tax

Here’s another tax with a name that tells the story. Corporate tax is, quite simply, a tax on a corporation’s profits, or taxable income. This is based on a business’ revenue once a variety of expenses are subtracted, such as administrative expenses, the cost of any goods sold, marketing and selling costs, research and development expenses, and other related and operating costs.

Corporate taxes are specific to each country, with some having higher rates than others, and there are a variety of ways to lower them via loopholes, subsidies, and deductions.

Tariffs

Tariffs represent a protectionist tool that governments may use. That is, they are taxes levied on imported goods at the border. The idea is typically that this will help boost the cost of imports and hopefully nudge consumers to buy items made on home soil.

Surtax

A surtax is an additional tax levied by the government in addition to other taxes. It is typically paid by consumers when the government needs to raise funds for a specific program. For instance, a 10% surtax was levied on individual and corporate income by the Johnson administration in 1968. The funds were collected to help fund the war effort in Vietnam.

Tax Filing Ideas

Now that you know what the different types of taxes are, consider the event that makes many of us contemplate this topic: filing taxes. It’s an annual ritual that may trigger anxiety for many, but if you spend a little time educating yourself about the process, it’s not so scary. Here, a few ways to help make preparing for tax season easier:

•   Consider how you’d like to file. Choose the method that best suits your needs and comfort level. You might want to work with a professional tax preparer to assist you, or perhaps use tax software to help you through the process. (Some taxpayers will qualify for the IRS Free File service, which is a free guided software tool.)

Another option is to fill out either the IRS form 1040 or 1040-SR by hand and mail it in, but given how this can open you up to human error and handwriting or typing mistakes, it’s not recommended.

•   Gather all your paperwork. Being organized can be half the battle here. Develop a system that works for you (you might want to use a tax-preparation checklist) to collect such items as:

◦   Your W-2s and/or 1099 forms reflecting your income

◦   Proof of any mortgage interest paid or property taxes

◦   Retirement account contributions

◦   Interest earned on investments or money held in bank accounts

◦   State and local taxes paid

◦   Donations to charities

◦   Educational expenses

◦   Medical bills that were not reimbursed

•   Even if you are lower-income and don’t need to file, consider doing so. It may be to your financial benefit. For instance, you might qualify for certain tax breaks, such as the earned income tax credit (EITC) or, if you’re a parent, the child credit.

•   Whether you owe money or are getting a refund, know how to settle your account with the IRS. If you’ll be receiving a tax refund, you may want to request that it be sent via direct deposit to make the process as seamless and speedy as possible. If, on the other hand, you owe money, there are an array of ways to send funds, including payment plans. Do a little research to see what suits you best.

By getting ahead of tax filing deadlines in these ways, you can likely make this annual ritual a little less intimidating and time-consuming.

Recommended: Guide to Filing Taxes for the First Time

The Takeaway

Understanding the different kinds of taxes can help you boost your financial literacy and your ability to budget well. You’ll know a bit more about why you pay federal and any state and local taxes and also be aware of other charges like luxury taxes and sales taxes.

Here’s another way to help your finances along: by partnering with a bank that puts you first.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What are the most common taxes people use?

The most common taxes that Americans pay are income tax on their earnings, sales tax on purchases, and property tax on their homes.

How many categories of taxes are there?

There are easily more than a dozen kinds of taxes levied in the U.S. Which ones you are liable for will depend on a variety of factors, such as whether you are an individual or represent a business, whether you purchase luxury items, and so forth.

Will I use all of these forms of taxes?

Which forms of taxes you will be liable for will likely depend upon the specifics of your situation. For example, among the most common taxes are income, property, and sales taxes, but if you rent rather than own your home, you won’t owe property taxes. If you purchase a boat, you might pay a luxury tax; if you like to frequent casinos, you could be paying excise taxes.

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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 the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, 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 the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

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Saving up for a down payment is a common challenge for many prospective homebuyers. FHA loans allow qualifying borrowers to put as little as 3.5% down on a property, helping lower the barriers to homeownership for many.

With an FHA loan, borrowers may also be eligible for down payment assistance. But there are other out-of-pocket expenses to keep in mind when considering an FHA loan. Let’s take a closer look at FHA loan down payment requirements and how much money you’ll need to get to the closing table.

What Is an FHA Loan?

An FHA loan is a type of mortgage that’s issued by a lender, such as a bank or credit union, but insured by the Federal Housing Administration (FHA). The purpose of the FHA mortgage program is to make homeownership more affordable for low- to moderate-income buyers.

Since FHA loans are government-insured, they offer more flexible eligibility requirements for borrowers who might not qualify for a conventional home loan. FHA loans have lower minimum down payment and credit score requirements, making them popular with first-time homebuyers and applicants with limited savings or poor credit. Compared to conventional mortgages, FHA loan interest rates are typically lower, but will vary depending on the lender and on the borrower’s credit score and finances.


💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you through the process.

FHA Loan Income Requirements

There aren’t any minimum or maximum income requirements to qualify for an FHA loan. However, there may be income limits for borrowers receiving down payment assistance through a state or local program.

In any case, lenders will look at an applicant’s ability to manage monthly mortgage payments and ultimately repay the FHA loan. Besides savings and assets, lenders assess an applicant’s debt-to-income (DTI) ratio, which measures the percentage of monthly income that goes toward debt payments. A lower DTI ratio is typically viewed as favorable. Depending on the lender, borrowers can get an FHA loan with a DTI ratio of up to 50%. In comparison, conventional loans typically require a DTI ratio of 43% or less.

Recommended: How Much is a Down Payment?

What Is the Down Payment Required for an FHA Loan?

Down payments are calculated as a percentage of the home purchase price. Historically, lenders looked for buyers to put down one-fifth of a home’s purchase price upfront. But you no longer always need to put down 20% on a house. The minimum down payment percentage for FHA loans depends on a borrower’s credit score.

The average down payment on a house in the U.S. was 13% in 2022. But with an FHA loan, borrowers with a credit score of 580 or more may qualify for a down payment of 3.5% of the home purchase price. Those with credit scores between 500 and 579 will need to put 10% of the home price towards a down payment. For a $400,000 house, this translates to $14,000 for a 3.5% down payment and $40,000 for a 10% down payment.


💡 Quick Tip: Generally, the lower your debt-to-income ratio, the better loan terms you’ll be offered. One way to improve your ratio is to increase your income (hello, side hustle!). Another way is to consolidate your debt and lower your monthly debt payments.

What Other Cash Will I Need to Close?

Besides the down payment, the remaining amount you need to close on a house will depend mainly on the home’s purchase price. Taking out an FHA loan requires paying an upfront mortgage insurance premium (MIP) of 1.75% of the loan total. It may be possible to roll this cost into the loan, which would increase the loan principal and monthly payment amount.

Buyers will also be on the hook for FHA loan closing costs, which typically range from 2% to 5% of the home’s purchase price. Borrowers can potentially avoid the upfront expense by rolling closing costs into an FHA loan. By financing closing costs, borrowers will pay a portion of the costs each month, plus interest. Note that financing closing costs can increase a borrower’s DTI ratio and potentially impact their ability to qualify for an FHA loan.

An alternative option to cover closing costs would be to ask for seller concessions. FHA loans allow the seller to contribute up to 6% of the home value for closing costs as a seller concession.

Recommended: What Do You Need to Buy a House?

How to Save for an FHA Loan Down Payment

Understanding how much house you can afford is a useful place to start to determine your housing budget and savings goal. Using an FHA loan mortgage calculator can help crunch the numbers to determine your down payment and monthly payment based on different loan terms. Not sure you will choose an FHA loan? Use a home affordability calculator to determine how much house you can afford.

With a savings goal in mind, calculate how much you can set aside each month after paying for debts and expenses. Consider cutting discretionary spending, such as dining out and travel, to increase monthly savings.

Buyers can also get the money they need for an FHA down payment in the form of a gift from family, friends, employer, charitable organization, or government program. Gifted funds need to be accompanied by a gift letter to show the lender that the money is going toward the down payment and doesn’t need to be repaid.

Is Down Payment Assistance Available for FHA Loans?

Borrowers who can’t afford a down payment on an FHA loan may be eligible for financial assistance. Down payment assistance can come in several forms, including grants and forgivable loans. These programs are available through local, state, and federal government programs, as well as nonprofit organizations.

Most down payment assistance programs are geared towards first-time buyers. They may include additional eligibility requirements, such as income limits and participation in homebuyer education courses. Consult a list of first-time homebuyer programs and loans to see what you might be eligible for. If it has been more than three years since you have owned a home, you may qualify for first-time homebuyer status.

Additional Cost Considerations for FHA Loans

In addition to the upfront costs of a down payment, closing costs, and MIP, there are other expenses to plan for.

The MIP includes an additional annual fee besides the 1.75% that’s required for closing. Annual payments range from 0.15% to 0.75% depending on the loan terms and loan-to-value ratio. The total annual cost is divided by 12 and spread out across the monthly payments in a given year. Note that MIP usually spans the life of the FHA loan unless a borrower refinances.

Depending on the property location, borrowers may also need to pay for flood insurance to get an FHA loan.

Pros and Cons of an FHA Loan

FHA loans are popular for their lower down payment mortgage requirements, but they’re not for everyone. Here are some advantages and drawbacks to consider when comparing home mortgage loan options.

Pros:

•   Smaller down payments

•   More lenient credit score requirements

•   No income limits

•   Can finance closing costs

Cons:

•   Required to pass an inspection and appraisal

•   Must be used for a primary residence.

•   Loan limits of $472,030 to $1,089,300 for a single-family home, depending on the cost of living by state.

•   Can require an inspection and stricter standards for the condition of the property.

The Takeaway

What is the minimum down payment for an FHA loan? Borrowers with credit scores of 580 or more can put just 3.5% down, while those with scores between 500 to 579 need to put 10% toward a down payment. The combination of lower minimum credit score and low down payment make FHA loans one attractive option for first-time homebuyers.

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.

FAQ

What is the lowest down payment for an FHA loan?

The lowest down payment for an FHA loan is 3.5% of the loan amount. Borrowers can explore down payment assistance programs to help cover the cost.

What is the down payment for an FHA loan 2023?

The down payment for an FHA loan in 2023 ranges from 3.5% to 10% depending on the borrower’s credit score.

What will disqualify you from an FHA loan?

Borrowers could be disqualified from an FHA loan based on a high debt-to-income ratio, poor credit, or insufficient funds to pay for the down payment, closing costs, and monthly mortgage payment.

Photo credit: iStock/Edwin Tan

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There once was a time was when retirement meant leaving your job permanently, either when you reached a certain age or you’d accumulated enough wealth to live without working. Today’s retirement definition is changing, and it can vary widely depending on your vision and your individual financial situation.

It’s important for each person to develop their own retirement definition. That can help you establish a roadmap for getting from point A to point B, with the money you have, and in the time frame you’re expecting.

Retirement Definition

Retirement’s meaning may shift from person to person, but the bottom line is that retirement has a financial side and a personal or lifestyle side. It’s important to consider both in your definition of retirement.

Retirement and Your Finances

Being retired or living in retirement generally means that you rely on your accumulated savings and investments to cover your expenses rather than counting on a paycheck or salary from employment. Depending upon your retirement age, your income may also include federal retirement benefits, such as Social Security and other options.

Retiring doesn’t necessarily mean you stop working completely. You might have a part-time job or side hustle. You may choose to start a small business once you retire from your career. But the majority of your income may still come from savings or federal benefits.

Retirement and Your Lifestyle

Some people embark on a new life or a new career in retirement, complete with new goals, a new focus, sometimes in a brand-new location. But retirement doesn’t have to be a period of reinvention. It depends on how you view the purpose and meaning of retirement. Many people enjoy this period as a time to slow down and enjoy hobbies or priorities that they couldn’t focus on before.

Consider the notion of moving in retirement. While strolling on sandy, sunlit beaches is depicted as a retirement ideal, many people don’t want to move to get there. In fact, 53% of retirees opt to remain in the house where they were already living, according to a 2022 study by the Center for Retirement Research.

Qualified Retirement Plan Definition

A qualified retirement plan provides you with money to pay for future expenses once you decide to retire from your job. The Employment Retirement Security Act (ERISA) recognizes two types of retirement plans:

Defined Contribution Plans

In a defined contribution plan, the amount of money you’re able to withdraw in retirement is determined by how much you contribute during your working years, and how much that money grows as it’s invested. A 401(k) plan is the most common type of defined contribution plan that employers can offer to employees.

There are other kinds of retirement plans that fall under the defined contribution umbrella. For example, if you run a small business, you might establish a Simplified Employee Pension (SEP) plan for yourself and your employees. Profit sharing plans, stock bonus plans, and employee stock ownership (ESOP) plans are also defined contribution plans.

A 457 plan is another defined contribution option. They work similar to 401(k) plans, in that you decide how much to contribute, and your employer can make matching contributions. The main difference between 457 and 401(k) retirement accounts is who they’re designed for. Private employers can offer 401(k) plans, while 457 plans are reserved for state and local government employees.

Defined Benefit Plans

A defined benefit plan (typically a pension) pays you a fixed amount in retirement that’s determined by your years of service, your retirement age, and your highest earning years. Cash balance plans are another type of defined benefit plan.

Generally speaking, defined benefit plans have been on the wane in the last couple of decades, with more of the responsibility for saving falling to workers, who must contribute to defined contribution plans.

Retirement Statistics

Retirement statistics can offer some insight into how Americans typically save for the future and when they retire. Here are some key retirement facts and figures to know, according to the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2021 – May 2022:

•   27% of adults considered themselves to be retired in 2021, though some were still working in some capacity.

•   49% of adults said they retired to do something else, while 45% said they’d reached their normal retirement age.

•   78% of retirees relied on Social Security for income, increasing to 92% among retirees age 65 or older.

•   55% of non-retired adults had savings in a defined contribution plan, while just 22% had a defined benefit plan.

•   40% of non-retirees felt that they were on track with their retirement savings efforts.

So, how much does the typical household have saved for retirement? According to the Transamerica Center for Retirement Studies, the estimated median retirement savings among American workers is $54,000. Just 27% of adults who are traditionally employed and 24% of self-employed individuals have saved $250,000 or more for retirement.

Saving for Retirement

Saving for retirement is an important financial goal. While Social Security may provide you with some income, it’s not likely to be enough to cover all of your expenses in retirement — particularly if you end up needing extensive medical care or long-term care. In 2022, according to the Social Security Administration, the average monthly benefit amount was $1,542.22.

Financial experts often recommend saving 15% of your income for retirement but your personal savings target may be higher or lower, depending on your goals. The longer you have to save for retirement, the longer you have to take advantage of compounding interest. That’s the interest you earn on your interest and it’s one of the keys to building wealth.

Selecting a retirement plan is the first step to getting on track with your financial goals. When saving for retirement, you can start with a defined benefit or defined contribution plan if your employer offers either one. Defined contribution plans can be advantageous because your employer may match a percentage of what you save. That’s free money you can use for retirement.

If you don’t have a 401(k) or a similar plan at work, or you do but you want to supplement your retirement savings, you could open a retirement investment account, otherwise known as an individual retirement account (IRA).

Retirement Investment Accounts

A retirement investment account is an account that enables you to save money for the future, but it isn’t considered a federally qualified retirement plan, like a 401(k). IRAs are tax-advantaged investment accounts that you can use to purchase mutual funds, exchange-traded funds (ETFs), and other securities.

There are two main types of IRAs you can open: traditional and Roth IRAs. A traditional IRA allows for tax-deductible contributions in the year that you make them. Once you retire and begin withdrawing money, those withdrawals are taxed at your ordinary income tax rate.

Roth IRAs don’t offer a deduction for contributions because you contribute after-tax dollars. You can, however, make 100% tax-free qualified withdrawals in retirement. This might be preferable if you think you’ll be in a higher tax bracket once you retire.

For tax year 2024, individuals can contribute up to $7,000 in a Roth and traditional IRA. Those aged 50 and up can contribute up to $8,000, which includes $1,000 of catch-up contributions. For tax year 2025, individuals can contribute up to $7,000 in a Roth IRA and traditional IRA, and those 50 and over can contribute up to $8,000.

You can open an IRA online, or at a brokerage, alongside a taxable investment account for a comprehensive retirement savings picture.

Pros of Retirement Investment Accounts

Opening an IRA could make sense if you’d like to save for retirement while enjoying certain tax benefits.

•   If you’re in a higher income bracket during your working years, being able to deduct traditional IRA contributions could reduce your tax liability.

•   And not having to pay tax on Roth IRA withdrawals in retirement can ease your tax burden as well if you have income from other sources.

•   IRA accounts often give you more flexibility in terms of your investment choices.

Cons of Retirement Investment Accounts

While IRAs can be good savings vehicles for retirement, there are some downsides.

•   Both types of accounts have much lower contribution limits compared to a 401(k) or 457 plan. Annual contribution limits for a 401(k) are $23,000 in 2024 and $23,500 in 2025 for those under age 50. Those aged 50 and over can make an additional catch-up contribution of $7,500, per year, to a 401(k) for 2024 and 2025. And in 2025, those aged 60 to 63 only may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

•   With traditional IRAs, you must begin taking required distributions (RMDs) based on your account balance and life expectancy starting at age 73 (401(k)s have a similar rule). If you fail to do so, you could incur a hefty tax penalty.

•   Roth IRAs don’t have RMDs, but your ability to contribute to a Roth may be limited based on your income and tax filing status.

Investing for Retirement With SoFi

However you choose to define your retirement, making a financial roadmap will help you get the retirement you want.

SoFi Invest offers traditional and Roth investment accounts to help you build the future you envision. You can also open a SEP IRA if you’re self-employed and want to get a jump on retirement savings. Another way to keep track your retirement savings is to roll over your old accounts to a rollover IRA, so you can manage your money in one place.

SoFi makes the rollover process seamless and straightforward. There are no rollover fees, and you can complete your 401(k) rollover without a lot of time or hassle.

FAQ

What is the meaning of retirement?

Retirement generally means leaving your job or the workforce, and living off your savings and investments, but that definition is changing for some. Some people may choose to continue working in retirement, though it may not be their primary source of income. Others may shift their work to focus more on lifestyle changes.

How common is retirement?

According to the Federal Reserve, about 27% of adults considered themselves to be retired in 2021, though some were still working in some capacity. Of these, 49% said they had retired to do something else, while 45% said they’d reached their normal retirement age.

How does retirement work?

When someone retires, they stop working at their job. Or, in the case of a business owner, they hand the business over to someone else. At that point, it’s up to them to decide how they want to spend their retirement, which might include taking care of family, traveling, working part-time, or exploring new hobbies. Their sources of income might include savings, investments, a pension, and Social Security benefits.

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.