You don’t have to pay capital gains tax on investment profits while they are held in a traditional or a Roth IRA account. In most cases, the question of taxes comes into play when you withdraw money from a traditional or Roth IRA.
Each type of IRA is subject to a different set of tax rules, and it’s essential to know how these accounts work, as the tax implications are significant now as well as in the future.
IRAs, Explained
An Individual Retirement Account (IRA) is a tax-advantaged account typically used for retirement savings. There are two main types of IRAs — traditional IRAs and Roth IRAs — and the tax advantages of each are quite distinct.
Generally speaking, all IRAs are subject to contribution limits and withdrawal rules, but Roth IRAs have strict income caps as well as other restrictions.
Contribution Limits
For tax year 2025, the annual contribution limit for both Roth and traditional IRAs is $7,000, and $8,000 for those 50 or older. For tax year 2026, the annual IRA contribution limit is $7,500, and $8,600 for those 50 or older.
It’s important to know that you can only contribute earned income to an IRA; earned income refers to taxable income like wages, tips, commissions. If you earn less than the contribution limit, you can only deposit up to the amount of money you made that year.
One exception is in the case of a spousal IRA, where the working spouse can contribute to an IRA on behalf of a spouse who doesn’t have earned income. Like ordinary IRAs, spousal IRAs can be traditional or Roth in style.
Traditional IRAs
All IRAs are tax advantaged in some way. When you invest in a traditional IRA, you may be able to take a tax deduction for the amount you contribute in the tax year that you make the contribution.
The contributions you make may be fully or partially tax-deductible, depending on whether you or your spouse are covered by a workplace retirement plan. If you’re not sure, you may want to check IRS.gov for details.
The money inside the account grows tax-deferred, meaning any capital appreciation of those funds is not subject to investment taxes, i.e. capital gains tax, while held in the account over time. But starting at age 59 ½ , qualified withdrawals are taxed at regular income tax rates.
If you think about it, this makes sense because you make contributions to a traditional IRA on a pre-tax basis. When you take withdrawals, you then owe income tax on the contributions and any earnings.
With some exceptions, early withdrawals from a traditional IRA prior to age 59 ½ are subject to income tax and a 10% penalty.
Roth IRAs follow a different set of rules. You contribute to a Roth IRA with after-tax money. That means you won’t get a tax deduction for contributions you make in the year that you contribute.
Your contributions grow inside your Roth IRA tax-free, along with any earnings. When you reach retirement age and start to make withdrawals, you won’t owe income tax on money you withdraw because you already paid tax on the principal (i.e. your original contribution amounts) — and the earnings are not taxed on qualified withdrawals.
What Are Capital Gains Taxes?
Capital gains refer to investment profits. In a taxable investment account you would owe capital gains tax on the profits you made from selling investments: e.g., stocks, bonds, real estate, and so on.
You don’t owe capital gains tax just for owning these assets — it only applies if you profit from selling them. Depending on how long you held an investment before you sold it, you would owe short- or long-term capital gains.
Retirement accounts, however, are subject to their own set of tax rules, and traditional and Roth IRAs each handle capital gains taxes differently.
Are Gains Taxed in Traditional IRAs?
Traditional IRA plans, as noted above, are tax-deferred, which essentially means that investment profits are not subject to capital gains tax while they remain in the account. Given this, the sale of individual investments like stocks inside an IRA is not considered a taxable event.
However, with tax-deferred accounts like traditional IRAs, you do have to pay ordinary income tax on withdrawals (meaning, you’re taxed at your marginal income rate).
So when you take withdrawals from a traditional IRA, you will owe income tax on the amount you withdraw, including any investment gains (i.e., earnings) in the account.
Are Gains Taxed in Roth IRAs?
The same principle applies to Roth IRAs, even though these are after-tax accounts: You don’t have to pay taxes on investment income or any assets that you buy or sell inside your Roth IRA.
Because you contribute to a Roth IRA with after-tax money, your money grows tax-free inside your IRA. Also, the earnings in the account grow tax-free over time and those gains are not taxed within the account.
In addition, qualified withdrawals of contributions and earnings from a Roth IRA are tax free. But remember: early or non-qualified withdrawal of earnings from a Roth IRA would be subject to taxes and a penalty (with some exceptions; for details see IRS.gov).
Roth IRA Penalties
Because you contribute to a Roth IRA with after-tax money, you can always withdraw your contributions (meaning your principal) without paying any tax or penalties.
If you wait to withdraw money from your Roth IRA until you reach age 59 ½, you can also withdraw your earnings without tax or penalties — as long as you’ve had the account for at least five years.
If you withdraw Roth IRA earnings before age 59 ½ or before you’ve held the account for five years, you may be charged a 10% early withdrawal penalty, though there are IRA withdrawal rules that may help you avoid the penalty in certain situations.
Are Gains Taxed in 401(k)s?
An IRA and a 401(k) work in a similar way when it comes to capital gains tax. Just as there are traditional and Roth IRAs, there are also traditional and “designated” Roth 401(k) plans, and they work similarly to their corresponding IRA equivalents.
So, generally speaking, you do not owe any capital gains tax on the sale of any investments held inside either type of 401(k) account.
Opening an IRA With SoFi
Most people are familiar with the basic tax advantages of using an IRA to save for retirement. Traditional IRAs are tax-deferred accounts and may provide a tax deduction in the years you make contributions. Roth IRAs are after-tax accounts that can provide tax-free income in retirement.
But the fact that you don’t have to pay capital gains tax is also worth noting. With both a traditional IRA and a Roth IRA, buying and selling stocks or other investments is not considered a taxable event. That means that you will not owe capital gains tax when you sell investments inside your IRA.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Help grow your nest egg with a SoFi IRA.
FAQ
Are Roth IRAs subject to capital gains tax?
No, buying and selling stocks or other investments inside a Roth IRA is not considered a taxable event. This means that you will not owe capital gains tax for buying or selling investments inside your Roth IRA. And because contributions to Roth IRAs are made with after-tax money, you also won’t owe income tax on qualified withdrawals.
Do you have to pay taxes if you sell stocks in a Roth IRA?
Selling stocks inside a Roth IRA is not considered a taxable event. So whether you regularly buy and sell stocks inside your Roth IRA, or just have unrealized gains and losses, you won’t need to worry about capital gains tax.
What happens when you sell a stock in your Roth IRA?
Buying and selling stocks inside an IRA is not considered a taxable event. So you won’t owe capital gains tax on stock you sell, but you also won’t be able to offset gains with a loss you capture from a stock sale inside your IRA.
Photo credit: iStock/designer491
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. 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.
For those who earn an income that makes them ineligible to contribute to a Roth IRA, a mega backdoor Roth IRA may be an effective tool to help them save for retirement, and also get a potential tax break in their golden years.
Only a certain type of individual will likely choose to employ a mega backdoor Roth IRA as a part of their financial plans. And there are a number of conditions that have to be met for mega backdoor Roth to be possible.
Read on to learn what mega backdoor Roth IRAs are, how they work, and the important details that investors need to know about them.
Key Points
• A mega backdoor Roth IRA allows high earners to save for retirement with potential tax benefits, despite income limits on traditional Roth IRAs.
• This strategy involves making after-tax contributions to a 401(k) and then transferring these to a Roth IRA.
• Eligibility for a mega backdoor Roth depends on specific 401(k) plan features, including the allowance of after-tax contributions and in-service distributions.
• Contribution limits for 401(k) plans in 2025 and 2026 allow for significant after-tax contributions, enhancing the potential retirement savings.
• The process, while beneficial, can be complex and may require consultation with a financial professional to navigate potential hurdles.
What Is a Mega Backdoor Roth IRA?
The mega backdoor Roth IRA is a retirement savings strategy in which people who have 401(k) plans through their employer — along with the ability to make after-tax contributions to that plan — can roll over the after-tax contributions into a Roth IRA.
But first, it’s important to understand the basics of regular Roth IRAs. A Roth IRA is a retirement account for individuals. For tax year 2025 (filed in 2026), Roth account holders can contribute up to $7,000 (or $8,000 for those 50 and older) of their after-tax earnings. For tax year 2026 (filed in 2027), they can contribute up to $7,500 (or $8,600 for those 50 and older) of their after-tax earnings.
Individuals can withdraw their contributions at any time, without paying taxes or penalties. For that reason, Roth IRAs are attractive and useful savings vehicles for many people.
But Roth IRAs have their limits — and one of them is that people can only contribute to them if their modified adjusted gross income (MAGI) is below a certain threshold.
In 2025, the limit is up to $150,000 for single tax filers (those earning from $150,000 to $165,00 can contribute a reduced amount); for married people who file taxes jointly, the limit is up to $236,000 (those earning from $236,000 to $246,000 can contribute a reduced amount).
In 2026, the limit is up to $153,000 for single tax filers (those earning from $153,000 to $168,000 can contribute a reduced amount); for married people who file taxes jointly, the limit is up to $242,000 (those earning from $242,000 to $252,000 can contribute a reduced amount).
💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.
How Does a Mega Backdoor Roth Work?
When discussing a mega backdoor Roth, it’s helpful to understand how a regular backdoor Roth IRA works. Generally, individuals with income levels above the thresholds mentioned who wish to contribute to a Roth IRA are out of luck. However, there is a workaround: the backdoor Roth IRA, a strategy that allows high-earners to fund a Roth IRA account by converting funds in a traditional IRA (which has no limits on a contributors’ earnings) into a Roth IRA. This could be useful if an individual expects to be in a higher income bracket at retirement than they are currently.
The mega backdoor Roth is a strategy that allows individuals, particularly high-income earners who exceed standard Roth IRA income limits, to make additional, large after-tax contributions to a 401(k) plan and then convert those funds to a Roth IRA for tax-free growth.
The process takes advantage of a loophole in retirement plan contribution rules and typically involves a two-step process: maximizing regular pre-tax 401(k) contributions, making additional after-tax contributions, then converting the after-tax funds into a Roth account.
For example, people who have 401(k) plans through their employer — along with the ability to make after-tax contributions to that plan — can potentially roll over up to $46,500 in 2025, and $47,500 in 2026, in after-tax contributions to a Roth IRA. That mega Roth transfer limit has the potential to boost an individual’s retirement savings.
Example Scenario: How to Pull Off a Mega Backdoor Roth IRA
The mega backdoor Roth IRA process is pretty much the same as that of a backdoor Roth IRA. The key difference is that while the regular backdoor involves converting funds from a traditional IRA into a Roth IRA, the mega backdoor involves converting after-tax funds from a 401(k) into a Roth IRA.
Whether a mega backdoor Roth IRA is even an option will depend on an individual’s specific circumstances. These are the necessary conditions that need to be in place for someone to try a mega backdoor strategy:
• You have a 401(k) plan. People hoping to enact the mega backdoor strategy will need to be enrolled in their employer-sponsored 401(k) plan.
• You can make after-tax contributions to your 401(k). Determine whether an employer will allow for additional, after-tax contributions.
• The 401(k) plan allows for in-service distributions. A final piece of the puzzle is to determine whether a 401(k) plan allows non-hardship distributions to either a Roth IRA or Roth 401(k). If not, that money will remain in the 401(k) account until the owner leaves the company, with no chance of a mega backdoor Roth IRA move.
If these conditions exist, a mega backdoor strategy should be possible. Here’s how the process would work:
Open a Roth IRA — so there’s an account to transfer those additional funds to.
From there, pulling off the mega backdoor Roth IRA strategy may sound deceptively straightforward — max out 401(k) contributions and after-tax 401(k) contributions, and then transfer those after-tax contributions to the Roth IRA.
But be warned: There may be many unforeseen hurdles or expenses that arise during the process, and for that reason, consulting with a financial professional to help navigate may be advisable.
Who Is Eligible for a Mega Backdoor Roth
Whether you might be eligible for a mega backdoor Roth depends on your workplace 401(k) retirement plan. First, the plan would need to allow for after-tax contributions. Then the 401(k) plan must also allow for in-service distributions to a Roth IRA or Roth 401(k). If your 401(k) plan meets both these criteria, you should generally be eligible for a mega backdoor Roth IRA.
Contribution Limits
If your employer allows for additional, after-tax contributions to your 401(k), you’ll need to figure out what your maximum after-tax contribution is. For 2025, the standard 401(k) contribution limit for employees to a 401(k) is $23,500. Those age 50 to 59 or 64-plus are able to contribute up to $31,000; those 60 to 63 are able to contribute up to $34,750.
For 2026, the standard 401(k) contribution limit for employees to a 401(k) is $24,500. Those age 50 to 59 or 64-plus are able to contribute up to $32,500; those 60 to 63 are able to contribute up to $35,750.
In 2025, the IRS allows up to $70,000 ($77,500 for those 50 and up, and $81,250 for those 60-63) in total contributions, including employer and after-tax contributions, to a 401(k). In 2026, the total limits are $72,000, $80,000, and $83,250, respectively.
So how much can you contribute in after-tax funds? Here’s an example. Say you are under age 50 and you contributed the max of $23,500 to your 401(k) in 2025, and your employer contributed $8,000, for a total of $31,500. That means you can contribute up to $38,500 in after-tax contributions to reach the total contribution level of $70,000. For 2026, you would be able to contribute up to $40,500.
Is a Mega Backdoor Roth Right For Me?
Given that this Roth IRA workaround has so many moving parts, it’s worth thinking carefully about whether a mega backdoor Roth IRA makes sense for you. These are the advantages and disadvantages.
Benefits
The main upside of a mega backdoor Roth is that it allows those who are earning too much to contribute to a Roth IRA a way to potentially take advantage of tax-free growth.
Plus, with a mega backdoor Roth IRA an individual can effectively supercharge retirement savings because more money can be stashed away. It may also offer a way to further diversify retirement savings.
Downsides
The mega backdoor Roth IRA is a complicated process, and there are a lot of factors at play that an individual needs to understand and stay on top of.
In addition, when executing a mega backdoor Roth IRA and converting a traditional IRA to a Roth IRA, it could result in significant taxes, as the IRS will apply income tax to contributions that were previously deducted.
The Future of Mega Backdoor Roths
Mega backdoor Roths are currently permitted as long as you have a 401(k) plan that meets all the criteria to make you eligible.
However, it’s possible that the mega backdoor Roth IRA could go away at some point. In prior years, there was some legislation introduced that would have eliminated the strategy, but that legislation was not enacted.
The Takeaway
Strategies like the mega backdoor Roth IRA may be used by some investors to help achieve their retirement goals — as long as specific conditions are met, including having a 401(k) plan that accepts after-tax contributions.
While retirement may feel like far off, especially if you’re early in your career or still relatively young, it’s generally wise to start thinking about it sooner rather than later.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Help grow your nest egg with a SoFi IRA.
FAQ
Are mega backdoor Roths still allowed in 2025?
Yes, mega backdoor Roths are still permissible in 2025.
Is a mega backdoor Roth worth it?
Whether a mega backdoor Roth is worth it depends on your specific situation. It may be worth it for you if you earn too much to otherwise be eligible for a Roth IRA and if you have a 401(k) plan that allows you to make after-tax contributions.
Is a mega backdoor Roth legal?
Yes, a mega backdoor Roth IRA is currently legal.
Are mega backdoor Roths popular among Fortune 500 companies?
A number of Fortune 500 companies allow the after-tax contributions to a 401(k) that are necessary for executing a mega backdoor Roth IRA.
What is a super backdoor Roth?
A super backdoor Roth IRA is the same thing as a mega backdoor Roth IRA. It is a strategy in which people who have 401(k) plans through their employer — along with the ability to make after-tax contributions to that plan — can roll over the after-tax contributions into a Roth IRA.
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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.
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.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
When a new baby arrives, there’s much to celebrate and so many milestones ahead. It’s not uncommon to want to help secure a child’s future by opening a savings account. That can start Junior off with a little nest egg and hopefully, in time, some good financial habits.
If you’re thinking you might like to open one of these accounts, read on to learn more.
Key Points
• Opening a savings account for a newborn can secure their future and instill good financial habits.
• Compounding interest over time significantly increases the initial savings placed in these accounts.
• Such accounts typically feature low initial deposits, minimal balance requirements, and nominal fees.
• Essential documents for opening an account include the baby’s birth certificate and Social Security number.
• Alternatives like 529 College Savings Accounts or custodial accounts offer different benefits for long-term financial planning.
• At this time, SoFi only allows members 18 years old or above to open a savings account.
🛈 Currently, SoFi does not offer custodial bank accounts and requires members to be 18 years old and above.
Why Open a Savings Account for a Baby?
There are actually some very good reasons to consider opening a bank account for a baby and start saving. You might be wondering why someone would open this kind of account for a newborn. After all, they don’t have any bills or expenses to pay so what would they need to have money in the bank for? Consider how opening an account and saving for a baby can have real benefits:
• Time is on your side. Compounding interest can help you grow your baby’s savings account over time. The younger your child is when you start saving, the longer that money has to earn compound interest.
• Plan for specific goals. Opening a savings account for a baby can make it easier to fund long-term goals. For example, you might want to set aside money to help them buy their first car or pay for college when the time comes.
• Tax advantages. Savings accounts may not be earning a lot of interest right now. Still, the fact that babies usually don’t typically earn enough dough to pay taxes is a bonus.
• Increase financial literacy. Teaching kids about saving from an early age can help them get into the habit. By opening a savings account for them when they’re young, you can help them learn the money skills they’ll need as adults.
Kids’ savings accounts can also be appealing because they tend to have low initial deposit requirements, low minimum-balance requirements, and low fees. So you don’t need a lot of money to start saving on behalf of your newborn — and you may not have to worry about paying a lot of fees to maintain the account as they grow.
How to Open a Savings Account for a Baby
Opening a bank account for a baby isn’t a complicated process. To open a savings account for a newborn, you’ll need the following:
• Information about yourself
• Information about your baby
• Required documentation
• Minimum initial deposit and funding details.
You should be able to open a savings account for a baby either at an online bank or a traditional bank or credit union. You’ll need to fill out the savings account application and provide the deposit via check, money order, cash or ACH transfer if you’re opening an account with an online bank. The minimum deposit may be as little as $1 or even $0, though some banks may require a larger deposit ($25 and up) to open a baby savings account.
Keep in mind that some banks may require you to have an account of your own before you can open a savings account for a child. That could influence where you decide to set up a savings account for a newborn.
Also look into any account maintenance fees that may be assessed monthly. You don’t want fees eating up the principal and interest in the account. Let’s look at this a little more closely next.
Can You Withdraw Money from Your Baby’s Savings Account?
Because a child cannot legally open or hold a bank account, an adult is a required presence. The parent or custodian who opens the account holds it jointly with the child and can indeed withdraw funds. It’s similar to a joint account that couples may have. However, there may be limits regarding whether your child can make withdrawals as they age and for how much.
If you were to open what’s called a custodial account (which becomes property of the child at adulthood; more on these accounts below), you may withdraw funds, but the intention is that they only be used for the kid’s benefit.
Types of Savings Account for Newborns
The best savings accounts for newborns are ones that allow you to save regularly, earn interest, and avoid high fees. You might look to your current bank first to open a savings account for the baby. Consider what type of features or benefits are offered. If you have to pay a monthly service fee, for example, you may be better off considering a savings account for a newborn at an online bank instead.
Online banks can offer the dual advantages of higher annual percentage yields, or APYs, on savings and lower fees. You won’t have branch banking access but that may not be important if you prefer to deposit money via mobile deposit or ACH transfer anyway. And once your child gets a little bigger, you can introduce them to the world of mobile banking and how to manage it on their own.
Also, consider how well a newborn savings account can grow with your kid’s needs. Some questions you might ask: Can you switch the account to a teen savings account or teen checking account down the line? Could you add a prepaid debit card for teens into the mix at some point? Asking these kinds of questions can help you pinpoint the best savings account for a newborn, based on your child’s needs now and in the future.
For some people, it can be a benefit to know that the bank has figured out ways to help accounts grow with their youngest customers and coach them along their journey to financial literacy.
Requirements for Opening a Savings Account for a Baby
The requirements for opening a bank account for a newborn are a little different from opening a bank account for yourself. That’s because the bank needs to be able to verify your identity as well as the baby’s.
Generally, the list of things you’ll be required to provide to open a savings account for baby include:
• Your name and your baby’s name
• Dates of birth for yourself and the baby
• A copy of your government-issued photo ID
• The baby’s birth certificate
• Your address, phone number, email address, and Social Security number.
The bank may ask for the baby’s Social Security number though it’s possible you may not have this yet at the newborn stage. And if you don’t have a Social Security number of your own, you may have to provide a substitute federal ID.
Alternatives to Newborn Savings Accounts
A savings account at a bank or credit union isn’t the only way to set aside money for a newborn. While these accounts can earn interest, there are other types of savings you might use to fund different goals for your child. Here are some of the other options you might consider when saving money for a baby.
529 College Savings Accounts
Many parents — even brand-new ones! — wonder how to start saving for college. A 529 college savings account is a type of tax-advantaged plan that’s designed to help you save for education expenses. These accounts can be opened by the parent but anyone can make contributions, including grandparents, aunts and uncles, or family friends.
Nearly all states offer at least one 529 plan, and you can open any state’s plan, regardless of which state you live in. Contributions are subject to annual gift tax exclusion limits, which are $19,000 for individuals and $38,000 for married couples in 2025 and 2026.
With a 529 plan, you’re investing money rather than saving it. You can invest the money you contribute in a variety of mutual funds, including index funds and target-date funds. This money grows tax-deferred, and withdrawals are tax-free when used for qualified education expenses, such as tuition and fees, books and room and board.
Coverdell Education Savings Accounts
There are other ways to save for a child’s college tuition. A Coverdell Education Savings Account (ESA) is a type of custodial account that can be set up to save for education expenses. This account grows tax-deferred just like a 529 plan and qualified withdrawals are tax-free. But there are some key differences:
• Annual contributions are capped at $2,000 and are not tax-deductible
• Contributions must end once the child reaches age 18 (an exception is made for special-needs beneficiaries)
• All funds must be distributed by the time the child reaches age 30.
If you leave money in a Coverdell ESA past the child’s 30th birthday, the IRS can impose a tax penalty. Any withdrawals of ESA funds that aren’t used for qualified education expenses are subject to income tax.
Custodial Accounts
Custodial accounts are savings accounts that allow minors to hold assets other than savings, such as stocks or other securities. You can set up a custodial account with a brokerage on behalf of your child. As the custodian, you maintain ownership of the account and its assets until your child reaches the age of majority, typically either 18 or 21. At that point, all the money in the account becomes theirs.
Opening a custodial account could make sense if you want to make irrevocable financial gifts to your kids. This could be one of the best strategies for building an investment plan for your child. The biggest drawback, however, is that once they turn 18 (or 21) you no longer have control over the account or how the money inside of it is used. For some parents, relinquishing that control can be hard, but remember: There’s lots of financial literacy that can be gained between your child’s birth and officially entering adulthood.
FAQ
Can I start a savings account for my baby?
Yes, opening a savings account for a baby is something you can do even if they’re still a newborn. Traditional banks, credit unions, and online banks can offer savings account options for babies and kids. You can also explore savings account alternatives, such as 529 college savings plans or custodial accounts.
What type of savings account should I open for my newborn?
The type of savings account you open for a baby can depend on your financial goals. If you just want to get them started saving early, a basic savings account might work best. On the other hand, you might consider creating an investment plan for your child that includes a 529 savings account if you’re interested in putting aside money for future college expenses.
What are the typical requirements for opening a bank account for a newborn baby?
You’ll likely need to provide your name, address, and phone number, plus your email address, Social Security number, and government-issued photo ID. You’ll probably be asked for the baby’s birth certificate and an opening deposit as well, which may be as little as $1 or even zero.
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/michellegibson
Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet
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Retirement is supposed to be a time for enjoying life after decades of work. Yet many women are in a financially precarious situation when it comes to the so-called “golden years.” In a 2023 SoFi survey, 57% of women said they aren’t saving for retirement. Similarly, 50% have no personal retirement savings according to a 2022 Census Bureau Report.
Given that women now outlive men by approximately six years, according to a recent study in JAMA, they need to save for an even longer retirement than their male counterparts. That makes the fact that they have fewer funds earmarked for retirement even more troubling.
Why aren’t women saving for the future? And how can they start financially preparing for retirement? Read on to learn about the retirement gender divide, why it exists, and some possible solutions for overcoming it.
A Look at Retirement Trends for Women and Men
There has long been a disparity in retirement savings for men and women. According to the U.S. Department of Labor, as women get older, their chances of living in poverty increase, a trend that has persisted for at least 50 years, when such data collection started.
Consider the current retirement savings divide between women and men today, as reported by respondents to the SoFi 2023 Ambitions Survey:
Retirement Savings for Women and Men in US
According to the survey of Americans ages 18 to 75, men have a median retirement savings that’s about $40,000 to $60,000 higher than women’s savings. In addition, 11% more women than men aren’t saving for retirement, and likewise 11% more women don’t know how much is in their retirement savings. In fact, 33% of women have less than $5,000 in retirement savings, the survey found.
Men
Women
Median Retirement Savings
$70,001-$80,000
$20,001-$30,000
% Not Saving for Retirement
46%
57%
% Who Don’t Know What Their Retirement Savings Is
45%
56%
*Source: SoFi Ambition Survey, 2023
This savings disparity typically begins early in adult life and accumulates over time. Employment, marriage, and motherhood all play a role.
How Marriage and Children Impact Retirement
Women aged 55 to 66 who have been married once tend to have more retirement savings than women who have never been married, or those who have been married two or more times. According to a recent income survey from the U.S. Census Bureau, close to 37% of women married once have no retirement savings, compared to 41% of women married two or more times and 55% who never married.
Women, Marriage and Retirement Savings*
Women Married Once
Women Married Two or More Times
Women Who Never Married
36.7% have no retirement savings
40.9% have no retirement savings
54.5% have no retirement savings
11.8% have $1 to $24,999
11.8% have $1 to $24,999
11.7% have $1 to $24,999
14.9% have $25,000 to $99,999
13.6% have $25,000 to $99,999
13.6% have $25,000 to $99,999
36.6% have $100,000 or more
33.7% have $100,000 or more
20.2% have $100,000 or more
*Source: U.S. Census Bureau, Survey of Income and Program Participation
In a divorce, some couples may be required to split their retirement savings or one may need to transfer some of their retirement funds to the other, which could be one of the reasons why the percentage of those without retirement savings is lower among women married two or more times than those who never married.
Motherhood and Money
When women have children, they often take time off from the workforce and/or may work part-time, which can have an impact on their earnings. According to an analysis by the Pew Research Center, among people 35 to 44, 94% of fathers are active in the workforce while 75% of mothers are.
Motherhood is also a time when the wage gap comes into play. In 2022, mothers 25 to 34 earned 85% of what fathers the same age did, while women without children at home earned 97% of what fathers earned, the Pew analysis found. The less money women make, the less they have to save for retirement.
Earnings for Mothers 25-34
85% of what fathers earned
Earnings for Women 25-34 Without Children at Home
97% of what fathers earned
*Source: Pew Research Center, 2023
Earning less also affects the Social Security benefits women get in retirement. While men got $1,838 a month on average in Social Security in 2022, women received on average $1,484, according to the Social Security Administration.
Retirement Is a Top Priority for Women and a Bigger Concern
While saving for retirement is the top goal for women, they are also focused on, and perhaps feeling stress about, paying off credit card and student loan debt, according to the SoFi Ambitions Survey.
Overall, women tend to perceive financial goals and success quite differently than men do. Two-thirds of female survey respondents said their marker of success is being able to feed their families. By comparison, one-third of men said their marker of success is being seen as successful, while another one-third say it’s reaching a certain income bracket.
That divergence may help explain why men are far more likely than women to consider investing a top financial goal, which could help them build retirement savings. For women, investing is at the bottom of the list of their financial priorities, perhaps out of necessity.
Women’s Financial Goals vs. Men’s Financial Goals
Women’s Financial Goals
Men’s Financial Goals
Saving for retirement: 45%
Paying down credit card debt: 41%
Paying down student loans: 39%
Continue Investing: 33%
Continue Investing: 52%
Saving for retirement: 49%
Paying down credit card debt: 33%
Paying down student loans: 27%
*Source: SoFi Ambition Survey, 2023
Retirement is women’s number-one goal and it’s also one of their greatest worries. One in five female respondents to SoFi’s survey said they may not be able to retire.
Those Who Worry They Won’t Be Able to Retire
Women
Men
20%
15%
*Source: SoFi Ambition Survey, 2023
That means women are 33% more likely than men to believe that retirement may not happen for them.
Even if they can retire, there is no guarantee women’s savings will cover their expenses. In fact, women are approximately 10% more likely than men to say they are concerned about outliving their assets and having enough savings, according to a report from McKinsey Insights.
In addition to the financial impact of marriage, motherhood, and lower earnings, women also experience some additional barriers to retirement saving.
For instance, a report from the Global Financial Literacy Excellence Center found that women tend to score lower in financial literacy than men do. And women with lower financial literacy are less likely to save and plan for retirement, according to the research.
Women also lack confidence when it comes to investing. Only 33% see themselves as investors, according to a 2022 SoFi Women and Investing Insights analysis, and 71% of their assets are in cash, rather than in investments or a retirement account, where their funds might have the potential to grow.
Minding and Mending the Gap
So how can women and society at large move forward and start closing the retirement gap?
The first step is for everyone, across all genders and ages, to build confidence in their financial skills by learning about money, saving, and investing. Knowledge helps create strength and belief in oneself, and it’s never too early or too late to start learning.
There are numerous good resources on retirement planning, to help individuals determine how much they may need to save for retirement and strategies that could help them get there. They can also sign up for financial classes and courses, and they might even want to consult a financial advisor.
At work, employees can participate in their employer’s 401(k) plan or any other retirement savings plan offered. Because money is automatically deducted from their paychecks and placed in their 401(k) account, saving may be easier to accomplish.
How to Start Saving for Retirement
No matter what your age, the time to kick off your retirement savings is now. Here’s how to begin.
Figure out your retirement budget.
To determine the amount you’ll need for retirement, think about what you want your life after work to look like. Do you want to move to a smaller, less expensive home? Do you hope to travel as much as possible? Having a clear picture of your goals can help you calculate how much you might need.
You can also consider the 4% rule, which suggests withdrawing 4% of your retirement savings each year of retirement so that you don’t outlive your savings. That could give you a ballpark to aim for.
Cut back on current expenses.
Take an honest look at what you’re spending right now on everything from rent or your mortgage to car payments, groceries, clothing, and entertainment. Find things to cut or trim — for example, do you really need three streaming services? — and put that money into your retirement savings instead.
Some savvy belt tightening now could help give you a more financially secure future.
Contribute as much as you can to your 401(k).
If you can max out your 401(k), go for it. You’re allowed (per IRS rules) to contribute up to $23,500 in 2025 and up to $24,500 in 2026 if you’re under age 50. (Those 50 and up can contribute up to $31,000 in 2025 and up to $32,500 in 2026. And those ages 60 to 63 can contribute up to $34,750 in 2025 and up to $35,750 in 2026, thanks to SECURE 2.0.) If that much isn’t possible, contribute at least enough to get your employer’s matching contribution. That’s essentially “free money” that can help build your retirement savings.
Consider opening an IRA.
If you’ve contributed the max to your workplace retirement plan, opening an IRA online could help you save even more for retirement. In tax year 2025, you can contribute up to $7,000 in an IRA, or $8,000 if you’re 50 or older. In tax year 2026, you can contribute up to $7,500 in an IRA, or $8,600 if you’re 50 or older.
IRAs offer certain tax advantages that may help you save money as well by lowering your taxable income the year you contribute (traditional IRA), or allowing you to withdraw your money tax-free in retirement (Roth IRA).
Whatever type of retirement account you have, including a brokerage account, diversifying your portfolio — which means investing your money across a variety of different asset classes — may help mitigate (though not eliminate) risk, rather than concentrating your funds all in one area.
Just make sure that the way you allocate your assets matches your retirement goals and your risk tolerance.
The Takeaway
Women are far behind men when it comes to retirement savings, due to a number of factors, including earning lower wages, and motherhood, which can mean time away from work, costing them in lost earnings. There’s also an emotional component involved: Women are less confident about investing overall.
However, building financial strength, and educating themselves about retirement planning is a good way for women to start saving for their future. Cutting expenses and directing that money into savings instead, participating in their workplace retirement plan, and opening an IRA or investment account are some of the ways women can take charge of their finances and help position themselves for a happy and secure retirement.
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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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. 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.
Saving steadily for retirement is important, but how you invest that money also matters. These days, you can choose from DIY investing options like a portfolio of stocks and bonds or other securities you select yourself. You can invest in mutual funds or exchange-traded funds (ETFs). There are also types of pre-set retirement funds and automated platforms like robo advisors that use technology to help manage a portfolio.
It’s wise to understand how the different strategies work to help decide which ones are best suited to your financial goals and personality. Below, you’ll learn about some popular retirement investment options.
This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.
This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.
Key Points
• Opening a retirement savings earlier than later allows for the possibility of compounding returns and recovery from market volatility.
• In general, younger investors might choose more aggressive high-risk, potentially high-reward investments like stocks, while those nearing retirement are likely to opt for more conservative options.
• Investment options include DIY investing, in which the investor is in control of their portfolio; index funds that track a specific market index; automated investments; and working with a financial advisor.
• Employer-sponsored plans like 401(k)s and IRAs provide savings automatically deducted from paychecks, certain tax benefits, and potential employer matches.
• Regularly reviewing your portfolio and rebalancing when necessary may help manage risk and align with retirement goals.
The Importance of Investing for Retirement
Retirement may be a long way off or a short way down the road, depending on your age and stage of life. Either way, developing an investment strategy that can help your savings grow is essential. For many people, retirement might last 20 or 30 years — or even longer. A solid long-term investment strategy can help you build the amount you need for the years where you’re no longer in the workforce.
Benefits of Starting Retirement Investing Early
The earlier you start saving for retirement, the more time your money has to grow. One reason for this is the potential for compounding returns. Compounding means that if your money sees a return from investments, and that profit is reinvested, you’re earning money not only on your original investment, but also on your returns. In other words, over time, both your savings and your earnings could see gains.
In addition, the longer your time horizon, the more time you may have to recover from market volatility. If you have a time horizon of 30 or 40 years before you retire, you might be able to afford to weather some short-term losses, knowing that your investment returns could balance themselves out over time.
Understanding Retirement Accounts
The type of retirement accounts you have is important. Different types of accounts have different contribution limits and tax implications. Since both the amount you can save and how it will be taxed can have an impact on your nest egg, be sure to spend time strategizing about which types of accounts make the most sense for you.
For instance, you may have a workplace retirement account like a 401(k) or 403(b). In addition, you might decide to set up an Individual Retirement Account (IRA), like a traditional IRA or a Roth IRA that you manage yourself, to save even more for retirement.
Choosing Between Roth and Traditional IRAs
There are many types of IRAs, but two of the main options to choose from are a traditional and Roth IRA. Both can be helpful for saving for retirement, and you can contribute the same amount to each — up to $7,000 annually in 2025, with a catch-up contribution of $1,000 a year if you are age 50 or older, and up to $7,500 annually in 2026, with a catch-up contribution of $1,100 a year if you are 50 or older.
However, there are some key differences between a Roth and traditional IRA, especially when it comes to taxes. With a traditional IRA you contribute pre-tax dollars, and you get an upfront deduction on your taxes. But you’ll pay taxes on the money when you withdraw it in retirement.
A Roth IRA allows you to contribute after-tax dollars. In other words, you pay the taxes on the money upfront, and you’ll withdraw your savings tax-free in retirement.
Another difference between the two types of IRAs: With a traditional IRA you will need to take required minimum distributions (RMDs) starting at age 73 (assuming you turned 72 after December 31, 2022). A Roth IRA does not have RMDs.
If you’d like to open an IRA, think about which type makes the most sense for you. If you expect to be in a lower tax bracket in retirement, a traditional IRA might be a good choice. But if you think you’ll be in a higher tax bracket, a Roth IRA may be a better option.
Understanding Employer-Sponsored Accounts
Retirement accounts such as 401(k)s, 403(b)s, and 457 plans are examples of employer-sponsored plans.
401(k)s are one of the most common types of employer-sponsored plans. An employee signs up for the plan at work and their contributions are automatically deducted from their paychecks. Employees choose how to invest their 401(k) funds, and employers may match the employees’ contribution up to a certain amount, depending on the plan.
Your employer may offer a Roth 401(k) in addition to a traditional 401(k). With a traditional 401(k), contributions are taken from your paycheck before taxes, lowering your taxable income for the year, and you pay taxes on your withdrawals in retirement. With a Roth 401(k), contributions are taken after taxes, and your withdrawals in retirement are tax-free.
Other employer-sponsored plans like 403(b)s are for those who work in education, health-care, and other tax-exempt organizations, and the way they work is similar to a 401(k). Another type of employer sponsored plan, a 457 plan, is offered to some government employees and those who work for certain tax-exempt organizations.
All of these employer-sponsored plans have the same annual employee contribution limits: up to $23,500 in 2025 and $24,500 in 2026 for those under age 50. For 2025, individuals age 50 and up can contribute an additional $7,500 in catch-up contributions, and in 2026, they can contribute an additional catch-up contribution of $8,000. (In both 2025 and 2026, those ages 60 to 63 can contribute up to an additional $11,250 instead of $7,500 in 2025 and $8,000 in 2026, thanks to SECURE 2.0.)
Total contributions limits (including employer contributions) are $70,000 in 2025, and $77,500 for the standard catch-up, and $81,250 with the SECURE 2.0 catch-up. In 2026, the total contribution limit is $72,000, and $80,000 with the standard catch-up, and $83,250 with the SECURE 2.0 catch-up.
Investment Options
While investing for retirement can seem overwhelming, it doesn’t have to be. There are various retirement strategies suited to different personality types and risk-tolerance levels, as well as a number of investment options, so you can choose methods and plans that are the best fit for you.
Here are a few options for retirement investing to consider:
DIY Investing
For investors who feel confident in managing their own retirement portfolio, taking a DIY approach may be an option.
You can open an investment account and purchase stocks, bonds, commodities, mutual funds, or any other types of securities for your long-term portfolio. While the term “active investing” brings to mind day traders, active investing can also mean taking a hands-on approach to managing your own portfolio.
This strategy isn’t for everyone. It’s time and energy intensive, and it requires a certain amount of expertise. For instance, anyone interested in something like IPO investing, which can be risky and speculative, according to the Securities and Exchange Commission (SEC), should be a very experienced investor.
In addition, if you go the DIY route, bear in mind that the same rules apply to all long-term investors.
• Be mindful of the contribution limits and tax implications of the retirement account you choose.
• Consider the cost of your investments, as fees can reduce your earnings over time.
• Consider using a strategy that includes some portfolio diversification, as this may, over time, help mitigate unsystematic risk, which is the type of risk unique to a particular company or industry (something that’s due to the management of a specific company, say). But remember, risk is inherent in all investing.
Index Funds
An index fund is a type of fund that tracks a broad market index. One of the most popular types of index funds tracks the S&P 500 index, for example, which mirrors the performance of the 500 largest U.S. companies.
There are hundreds of indexes, and many have corresponding funds that track different sectors of the market, such as smaller companies, technology companies, sustainable or green companies, various types of bonds, and more. Most are index funds.
Index funds don’t rely on a live team of portfolio managers, so they tend to be less expensive than actively managed funds. However, they have a downside which is that your money is pegged to the securities in that sector.
Mutual Funds
Mutual funds are a type of pooled investment. Mutual funds may include stocks, bonds, commodities, and other securities that are in what you might think of as a basket. An investor buys shares or fractional shares of a mutual fund, which gives them exposure to a variety of different companies or assets and may help with portfolio diversification. Unlike stocks and ETFs, mutual funds trade just once a day, at the end of the day.
Mutual funds were designed to get people started with investing. Buying even just a few shares of a mutual fund invests an individual in all the individual securities the fund holds.
Mutual funds may be actively or passively managed. Passively managed funds track an index, while actively managed funds attempt to beat the performance of an index with careful investment selection. Actively managed funds typically cost more than passively managed funds, so you’ll want to watch for transaction and operating fees.
Automated Options
In the world of investing there isn’t a truly automated “set it and forget it” strategy that will work on its own, without any input, for decades. But there are some options that are more hands-off than others.
• Target Date Funds
One such option is a target date fund. A target date fund is designed to be an all-inclusive portfolio option for people that are looking to retire on or near a certain date. For example, a 2050 target date fund is intended for people that will be ready for retirement in 2050.
Target date funds use a set of calculations to adjust a portfolio’s asset allocation over time. When a target date fund is decades away from the specified date, it might invest 80% in equities and 20% in fixed income or cash/cash equivalents, for instance. As the date draws nearer, it will automatically move more of its investments away from equities towards bonds, cash, or other investments with lower risk. This automatic readjustment is referred to as the glide path.
• Robo Advisors
Another option is automated investing, commonly known as a robo advisor (although these services are not robots, and don’t typically offer advice).
A robo advisor platform offers a questionnaire for investors to gauge their time horizon (years to retirement or another financial goal), their risk level, and so forth.
The platform then uses sophisticated technology to recommend a portfolio of low-cost index and exchange-traded funds (ETFs).
While automated options do offer the convenience of managing a portfolio on your behalf, they also have some drawbacks. The cost can be higher than other types of investment options. And there is limited flexibility. Investors typically have less control to adjust the securities in these funds.
Hire an Advisor
If you don’t feel comfortable investing for retirement on your own, you may want to consider using a financial advisor. Talk with your trusted friends or family members to get a recommendation.
Because an advisor introduces a new level of cost, be sure to ask how the person is compensated. Some advisors charge a flat fee or an hourly rate, and some earn commissions — or combinations of the above.
Tips When Investing for Retirement
As you start investing for retirement, here are a few things that you’ll want to keep in mind:
Ask About Fees
Many investments come with fees that are charged by the advisor or company that manages the investment. These investment fees may be explicitly charged to your account, or they may be captured as part of the investment’s returns. Make sure to check any fees that are charged before you invest. There are many low-cost mutual funds that offer investment fees under 0.1% as compared to a financial advisor who may charge 1% or more. Even a small difference in the fees charged can make a huge difference on your returns when compounded over decades.
Plan for Taxes
You’ll also want to account for how your retirement investments will be taxed.
• Tax-Deferred Accounts
If you contribute to a traditional 401(k) or IRA, you may be eligible for a tax deduction in the tax year that you make the contribution (meaning a contribution for tax year 2025 can typically be deducted on your 2025 taxes).
These accounts are called tax-deferred because you will owe taxes on your withdrawals.
• After-Tax Accounts
If you contribute to a Roth 401(k) or Roth IRA, you won’t get a tax deduction when you contribute because you deposit after-tax dollars. Instead, your qualified withdrawals will be tax-free.
There are other differences between tax-deferred and after-tax accounts that can impact your nest egg. For example, once you reach the age of 73, you’re required to take RMDs from a traditional IRA or 401(k) every year. That doesn’t apply to Roth accounts.
• Taxable Investment Accounts
If you invest for retirement in a non-retirement or taxable account, such as a brokerage account, you’ll owe income taxes on your gains whenever you sell those securities, which will affect your portfolio’s overall performance.
Setting a Retirement Goal
Setting a retirement goal can help you establish a road map for your future and get you to the place you want to be financially and personally.
To get started, decide at what age you’d like to retire. Next, determine what you’d like to do in retirement. Travel? Visit family frequently? Move to a new city? Think about what suits you best. Then figure out how much money you’ll need for a comfortable retirement based on what you want to do in your after-work years, the costs associated with the goal, and your life expectancy.
Setting goals can motivate you to take action and step up your retirement savings. Revisit your goals periodically to make you’re on track to reach them.
Rebalancing Your Portfolio Over Time
It’s generally considered a good idea to periodically adjust your investments by rebalancing your portfolio. Portfolio rebalancing is a way to adjust the mix of your investments. It means realigning the assets of a portfolio’s holdings to match your desired asset allocation.
How Often Should I Adjust My Investments?
Investors who are managing their investments themselves can rebalance when they like, based on their personal preferences. Some choose to do it at certain points, such as quarterly or annually. Others do it when their target asset allocation changes.
If you have a robo advisor or investment advisor, they likely have you set up with a specific target of different types of investments. Over time, the advisor will typically rebalance your portfolio to keep it in line with your target percentages. Check in periodically and review what’s going on to make sure everything is on track.
Signs It’s Time to Rebalance Your Portfolio
There is no one answer for when to rebalance your portfolio —it is up to each investor and what they are comfortable with. However, there are certain situations that indicate it might be time to consider a portfolio rebalance. These typically include:
• Major life changes that affect your financial goals or risk tolerance. For instance, perhaps you lost your job or got divorced. Or on a happier note, maybe you inherited some money or had a baby.
• Market volatility has caused your asset allocations to stray from your target goals.
• You’re concerned your portfolio isn’t diversified enough.
Strategies for Adjusting Investments with Age
The mix of assets in your portfolio will likely shift with age. When you’re younger and you have a longer time horizon until retirement, you may want to have more assets that are considered riskier with more potential for growth, like stocks, because you have more time to ride out any market volatility.
As you get older and closer to retirement, however, you will likely want to shift your allocation to have fewer riskier assets and more assets considered less risky, such as bonds, to help protect your money from any drops in the market.
Each investor’s financial situation is different, so individuals’ asset allocation will vary. Every investor needs to determine the best allocation for their age and circumstances.
The Takeaway
Investing for retirement is important as part of an overall financial plan. And with some research, picking the right investment options doesn’t have to be overwhelming.
You can learn about different types of retirement plans, including employer-sponsored plans and IRAs, and investment options. Then, you can weigh the pros and cons and pick those that suit your financial situation, risk tolerance, and goals. Make sure you are aware of any fees involved, along with tax implications.
If you don’t feel comfortable managing your own portfolio, you might want to consider such alternatives as working with an advisor or using an automated portfolio. Whatever you do, start saving as soon as you can so that you’ll have more time to work toward your retirement goals.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Easily manage your retirement savings with a SoFi IRA.
FAQ
Can I invest for retirement if I have limited funds?
It is possible to invest for retirement if you have limited funds. In fact, if you have limited funds, that may be one reason it’s even more important to invest for retirement as soon as you can. Especially if you are younger and have a long time before retirement, even a small amount can potentially grow to be a sizable nest egg when investment returns are compounded over many decades.
Should I adjust my investment strategy as I approach retirement?
How you choose to invest will depend on a number of factors, one of which is how close you are to retirement. One common strategy is to be more aggressive with your investment strategy when you are years or decades away from retirement. This type of higher-risk, potentially higher-rewards strategy can possibly lead to higher overall returns while you have a long time to weather the ups and downs of the market. Then, as you get closer to retirement, you’ll likely want to be more conservative with your investments in an attempt to better preserve capital.
What investment options are suitable for conservative investors?
Choosing your investment options will depend on your overall financial situation and tolerance for risk. Some examples of more conservative investments include bonds, cash, CDs, and Treasury bills. As you get closer to retirement, it likely makes sense to choose more conservative investments. You may give up some possible returns, but you may also be better insulated against large losses.
How much should I save monthly to reach my retirement goal?
How much you should save monthly to reach your retirement goal depends on what your goal is, your time frame for reaching it, and your financial situation. One guideline is to put 15% to 20% of your income toward your retirement, and aim for specific targets based on your age, such as having 1 times your salary saved by age 30, 3 times your salary by age 40, and 10 times your salary saved by the time you are 67. Those are just rough guidelines, but they can give you a point of reference.
Is it safe to rely on Social Security for retirement?
Typically, Social Security doesn’t provide enough of a retirement income for most people. For instance, in 2023, retirees received about $1,900 per month, on average. That’s why it’s a good idea to start saving for retirement as early as possible, through an employer-sponsored retirement plan or an IRA, or both, and not rely on Social Security as the main source of your retirement income.
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