While paying off your credit cards often helps improve your credit, this isn’t always the case. Depending on the strategy you use to wipe away your debt, you could (inadvertently) do some damage to your scores. This could make it harder to get a mortgage, car loan, or even a rental agreement in the future. Here’s what you need to know to pay down your credit obligations while protecting your credit.
What Not to Do: Ignoring Credit Card Debt
When it comes to credit card debt, the consequences of avoidance and procrastination are steep, both to your financial well-being and to your credit scores. Here’s a look at the potential fallout.
• Interest charges will pile up: Generally, the longer you avoid paying down your debt, the more interest will accrue. The average interest rate on credit cards as of September 2024 is 27.64%. This means that even if your debt isn’t growing through new purchases, interest alone can make your balance balloon over time.
• Late fees and credit damage:Credit card issuers usually charge fees if you don’t make the minimum payment by the due date. After 30 days of no payment, your issuer will likely report the missed payment to the credit bureaus, which can do significant damage to your credit scores. Maintaining a balance also keeps your credit utilization (how much of your available credit you’re using) high. Credit utilization plays a large role in your credit rating. As your balance grows, your credit score will generally decline.
• Debt collection and legal consequences: Ignoring credit card debt for too long could lead to the debt being sold to a collection agency, who can be aggressive in pursuing repayment. In extreme cases, your creditors might sue you, potentially leading to wage garnishment or seizure of personal assets.
What You Should Consider: Paying off Credit Card Debt Using a Planned Approach
If you have a significant amount of credit card debt, it may be tempting to bury your head in the sand. But you’ll be far better off coming up with a clear, actionable plan to start whittling down what you owe. The following steps can help you feel more in control over your debt, as well as your overall financial situation.
• Assess your debt. A good place to start is to list out all of your credit card balances, along with their interest rates and minimum payments. This will give you a full picture of what you owe.
• Create a basic budget. You don’t have to come up with a detailed line-item spending plan. Simply go through your last few months of financial statements and assess what’s coming in and going out, on average, each month. Then comb through your discretionary (unnecessary) monthly spending and look for places where you can cut back. Any money you free up can go toward credit card payments.
• Pick a debt payoff strategy. Here’s a look at two popular approaches that can help you gradually pay down your balances.
• Avalanche method: Here, you make extra payments on the credit card with the highest interest rate first, while making minimum payments on the others. Once the highest-rate card is paid off, you funnel those extra funds toward the card with the next-highest rate, and so on. This strategy minimizes the amount of interest you’ll pay over time.
• Snowball method: With this method, you put extra payments toward the card with the smallest balance first, while making minimum payments on the others. When that card is cleared, you focus on paying off the next-smallest balance, and so on. This gives you quick wins and a psychological boost, which can help you stay motivated.
• Take advantage of windfalls: If you get a bonus, tax refund, or any extra income, consider applying it toward your credit card debt. This can help you reduce your balance faster and lower the total amount of interest you’ll pay.
• Automate your payments: It’s a good idea to set up automatic payments for at least the minimum payment due each month. You may be able to pay more, but having this set up in advance helps you avoid missed payments, which can harm your credit score, as well as late fees.
• Keep paid-off accounts open. As you pay off your cards, you may think it’s a good idea to close those accounts — but not so fast. When you close a credit card, you lose that account’s available credit limit. That means any balances remaining on other credit cards will then account for a higher percentage of your total available credit. This increases your credit utilization, which can hurt credit scores.
Negotiating and Settling Credit Card Debt
If you’ve been struggling to make payments on your credit cards, there’s a good chance your credit score has been negatively affected. Before the debt is sent to collections, you may be able to negotiate with the credit card company.
Like any business, the primary goal of a credit card company is to make a profit. When it becomes apparent that a cardholder is unable to pay their bills, companies are sometimes willing to find an arrangement that will enable the customer to make payments based on their situation. Here’s a look at some options a credit company may be able to offer.
• Workout agreement: With this arrangement, the credit card company may agree to lower your interest rate or temporarily waive interest altogether. They may also be willing to take additional steps to make it easier for you to repay your debt, such as waiving past late fees or lowering your minimum payment.
• Debt settlement: In a debt settlement, the credit card company agrees to accept less than the full amount you owe, forgive the rest, and close the account. While this might seem appealing, a debt settlement can negatively affect your credit scores and stay on your credit reports for seven years. As a result, it’s generally considered a last-resort option for those facing severe financial difficulties.
• Hardship agreement: Some card issuers offer a hardship or forbearance program for borrowers who are experiencing a temporary financial setback, such as a job loss, illness, or injury. Under these programs, the company may agree to lower your interest rate, even temporarily suspend payments. However, your credit can be negatively affected, since the issuer may report negative information to the credit bureaus during the forbearance period.
What Is the Statute of Limitations on Credit Card Debt?
The statute of limitations governs how long a creditor or collection agency can sue you for nonpayment of a debt. The statute of limitations on credit card debt varies from state to state, but is typically between three and six years. Once the statute of limitations has passed, debt collectors can’t win a court order for repayment.
Even if your credit card debt is past the statute of limitations, however, it doesn’t magically disappear. Unpaid debts can remain on your credit report for up to seven to 10 years from the date of your last payment. That negative mark can lower your credit scores, making it hard to qualify for new credit cards and loans with attractive rates and terms in the future.
Say Goodbye to Credit Card Debt with a Personal Loan
Consolidating credit card debt with a personal loan (often referred to as a debt consolidation loan) can be an effective way to lower your debt and simplify repayment.
To do this, you essentially take out an unsecured personal loan, ideally with a lower interest rate than you’re paying on your cards, then use it to pay off your balances. Moving forward, you only have one payment (on your new loan). An online personal loan calculator can show you exactly how much interest you could save by paying off your existing credit card (or cards) with a personal loan.
Initially, debt consolidation can negatively impact your credit score. This is because the lender will do a hard pull on your credit, which can decrease your score by a few points. However, this decline is temporary. Making consistent, on-time payments on your personal loan can help boost your credit profile over time. Payment history makes up 35% of your overall FICO® credit score.
If, on the other hand, you make any of your loan payments late, or miss a payment entirely, credit consolidation can end up having a damaging impact on your credit.
Credit card debt can be a major financial burden, but it doesn’t have to ruin your credit or your financial future. By avoiding the temptation to ignore your debt and adopting a planned approach, you can gradually reduce what you owe. Whether you choose to use a paydown strategy (like avalanche or snowball), negotiate with creditors, or explore a consolidation loan, there are various strategies to help you regain control of your finances while protecting — and ultimately building — your credit.
Ready for a personal loan to pay off credit card debt? With low fixed interest rates on loans of $5K to $100K, a SoFi Personal Loan for credit card debt could substantially decrease your monthly bills.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
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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.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
While saving $10,000 in a year may sound like an ambitious goal, it’s often feasible through careful planning and disciplined spending — even if you’re not a high earner.
Whether you’re saving for an emergency fund, a down payment on a home, or just building financial security, these practical tips can help you put aside $10,000 in 12 months (and possibly even sooner).
Key Points
• A successful savings plan typically begins with determining the difference between how much money you need and have available to save each month.
• Saving $10,000 in 12 months may require eliminating unnecessary expenses and reducing necessary ones.
• Sometimes it’s possible for savers to boost income through side hustles, selling unused items, or asking for a raise.
• Automating savings through recurring transfers and taking advantage of high-yield savings accounts can help you steadily increase funds.
• Individuals can take advantage of windfalls like tax refunds or bonuses to boost savings.
Is Saving $10,000 a Year Possible?
Saving $10,000 in a year is generally possible if you have steady earnings. How challenging it will be, however, will depend on your income and monthly expenses. To reach this goal, you need to save approximately $833 per month or about $192 per week. While that may still seem like a lot, there are numerous ways to adjust your spending, increase your income, and build savings over time without drastically affecting your lifestyle.
8 Ways to Save $10k in a Year
There are many practical ways to start saving money, but to reach the $10,000 mark, you’ll likely need to adopt several strategies simultaneously. Here are eight effective methods to help you reach your goal.
1. Assess Your Cash Flow
To come up with a plan to save $10,000 in a year, you’ll need to assess how much money is currently flowing in and out of your bank account each month. To do this, you’ll need to gather the last several months of bank statements, then tally up your average monthly income and average monthly spending. Simply subtract the second number from the first.
If you discover that your monthly earnings exceed your monthly spending by at least $833.33, you’re in great shape. Simply transfer that amount to savings each month and you’ll accumulate $10,000 a year.
If you find that there is less — or very little — wiggle room between what’s coming and going out of your account on a monthly basis, you’ll need to make some tweaks in your spending and, if possible, your earnings (in other words, keep reading).
2. Reduce Unnecessary Expenses
One of the quickest ways to boost your savings is by eliminating or reducing unnecessary expenses. These are often small, daily costs that add up over time without you realizing it. Some areas to target:
• Eating out: If you regularly buy lunch or dine out for dinner, consider preparing more meals at home. You can save hundreds of dollars monthly by cutting down on restaurant visits and takeout.
• Subscriptions: Review your monthly subscriptions, such as streaming services, magazines, or gym memberships, and cancel those you rarely or never use.
• Coffee and snacks: A daily coffee shop visit may seem harmless, but it can cost over $100 a month. Consider brewing coffee at home and keeping grab-and-go breakfast items on hand to reduce the temptation to spend.
Any funds you free up can then be redirected towards your $10,000 savings goal.
While fixed expenses seem like just that — fixed — that’s not always the case. While you may not be able to lower your rent, you may be able to whittle down some of your other recurring monthly bills. Some ideas:
• Shop around for a better deal on your home and auto insurance.
• Look for a cheaper cell phone plan.
• Eliminate your landline.
• Downgrade your television package to a less expensive streaming option.
• Prioritize paying down high-interest credit card debt.
• Consider refinancing your mortgage, auto loan, or student loans if you can qualify for a lower rate.
4. Boost Income
Cutting costs is important, but increasing your income can supercharge your ability to save. By boosting your income, you’ll have more cash flow to funnel into your savings. Here are a few ways to bring in extra cash:
• Start a side hustle: Consider taking on a part-time gig, freelancing, or using a skill like photography, writing, or tutoring to earn extra money.
• Sell items you no longer need. If you have items sitting around your home that you don’t need, you may be able to turn them into cash by posting them online (consider sites like eBay and Facebook Marketplace) or hosting a garage sale.
• Ask for a raise: If you’ve been at your job for a while and have demonstrated value, consider negotiating for a raise. Even a small pay bump can add up over the course of a year.
5. Switch to a High-Yield Account
As you divert more money to savings, you’ll want to send it to an account that helps your money grow. As of September 2024, the national average savings account yield was 0.46% annual percentage yield (APY), according to the FDIC. Fortunately, high-yield savings accounts (particularly those offered by online banks) tend to offer far higher APYs, so it’s worth shopping around. While interest alone won’t get you to $10,000, it can give your savings a nice boost over the year.
6. Automate Saving
Having a portion of your paycheck automatically go into savings (a tactic known as “paying yourself first”) is one of the simplest and most effective ways to build savings consistently. One way to do this is by setting up a recurring transfer from your checking account to your savings account for a set amount on the same day each month (ideally right after you get paid). If you get paid via direct deposit, another option is to ask your employer to make a split deposit — with some of each paycheck going directly into savings, and the rest into checking.
Either method ensures that you’re regularly contributing to your savings without having to think about it, making it easier to stay on track.
7. Try a No-Spend Challenge
Once you get going, you might want to challenge yourself to save even more with a no-spend challenge. To do this, you simply commit to not spend money on anything other than essential needs (e.g., groceries, bills) for a set period — typically a week or a month. This can bump up your savings in a short period of time. It can also serve as a spending reset — you may discover you can live on a lot less than you previously thought.
8. Take Advantage of Windfalls
If you receive a lump sum of cash — such as tax refund, work bonus, or cash gift — consider putting all (or some) of it directly into your savings account. By directing windfalls toward savings, you can make substantial progress toward your $10,000 goal.
Benefits of Saving $10,000 a Year
Saving $10,000 in a year comes with numerous benefits. Here are some to keep in mind as you work towards your $10k savings goal.
• Financial security: Having a robust savings cushion protects you from unexpected expenses, such as medical bills or car repairs, reducing the need for credit card debt or loans.
• Peace of mind: Knowing you have a significant amount set aside can reduce stress and anxiety related to money and offer more financial freedom.
• Achieving short-term financial goals: Whether you’re saving for a vacation, new car, or down payment on a home, having $10,000 gives you the flexibility to reach these milestones.
• Opportunities for investment: Once you’ve saved $10,000, you might consider investing a portion of it to grow your wealth further through stocks, real estate, or retirement accounts.
The Takeaway
Saving $10,000 in a year is an ambitious yet, often, attainable goal. Depending on your situation, you may be able to achieve it just by making small, strategic changes to your everyday spending and saving habits. These might include cutting unnecessary expenses, automating your savings, boosting income, earning more interest on your money, and leveraging windfalls.
However you do it, saving $10k in a year can give you a sense of accomplishment and put you in a better position to handle life’s financial challenges and opportunities.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with 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.
Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.
FAQ
Is saving $10,000 a year good?
Yes, saving $10,000 a year is a solid financial goal. It provides a significant cushion for unexpected expenses and can also help you work towards financial goals, like paying off credit card debt, buying a home, and saving for retirement. Saving $10,000 also offers peace of mind by improving your financial stability and security.
Is $10,000 a lot to save in a year?
For many people, saving $10,000 in a year is a substantial amount. It equates to roughly $833 per month or about $192 per week. For some, that’s a modest target, while for others, it may require budgeting, cutting unnecessary expenses, and potentially increasing income. Regardless of the circumstances, saving this amount can help you meet your short- and long-term financial goals.
How much do you need to earn to be able to save $10K a year?
How much you have to earn to save $10K a year will depend on your expenses. A common rule of thumb is to save at least 10% to 20% of your income. Based on this formula, you’d need to earn $50,000 to $100,000 to comfortably save $10,000. That said, people earning less may still be able to save this amount with disciplined budgeting, cutting unnecessary expenses, and/or finding ways to supplement their regular income.
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
This content is provided for informational and educational purposes only and should not be construed as financial advice.
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.
Maxing out your 401(k) involves contributing the maximum allowable to your workplace retirement account to increase the benefit of compounding and appreciating assets over time.
All retirement plans come with contribution caps, and when you hit that limit it means you’ve maxed out that particular account.
There are a lot of things to consider when figuring out how to max out your 401(k) account. And if you’re a step ahead, you may also wonder what to do after you max out your 401(k).
Key Points
• Maxing out your 401(k) contributions can help you save more for retirement and take advantage of tax benefits.
• If you want to max out your 401(k), strategies include contributing enough to get the full employer match, increasing contributions over time, utilizing catch-up contributions if eligible, automating contributions, and adjusting your budget to help free up funds for additional 401(k) contributions.
• Diversifying your investments within your 401(k) and regularly reviewing and rebalancing your portfolio can optimize your returns.
• Seeking professional advice and staying informed about changes in contribution limits and regulations can help you make the most of your 401(k).
What Exactly Does It Mean to ‘Max Out Your 401(k)?’
Maxing out your 401(k) means that you contribute the maximum amount allowed by law in a given year, as specified by the established 401(k) contribution limits. But it can also mean that you’re maxing out your contributions up to an employer’s percentage match, too.
If you want to max out your 401(k) in 2024, you’ll need to contribute $23,000 annually. If you’re 50 or older, you can contribute an additional $7,500, for an annual total of $30,500. If you want to max out your 401(k) in 2023, you’ll need to contribute $22,500 annually. If you’re 50 or older, you can contribute an additional $7,500, for an annual total of $30,000.
Should You Max Out Your 401(k)?
Generally speaking, yes, it’s a good thing to max out your 401(k) so long as you’re not sacrificing your overall financial stability to do it. Saving for retirement is important, which is why many financial experts would likely suggest maxing out any employer match contributions first.
But while you may want to take full advantage of any tax and employer benefits that come with your 401(k), you also want to consider any other financial goals and obligations you have before maxing out your 401(k).
That doesn’t mean you should put other goals first, and not contribute to your retirement plan at all. That’s not wise. Maintaining a baseline contribution rate for your future is crucial, even as you continue to save for shorter-term aims or put money toward debt repayment.
Other goals could include:
• Is all high-interest debt paid off? High-interest debt like credit card debt should be paid off first, so it doesn’t accrue additional interest and fees.
• Do you have an emergency fund? Life can throw curveballs—it’s smart to be prepared for job loss or other emergency expenses.
• Is there enough money in your budget for other expenses? You should have plenty of funds to ensure you can pay for additional bills, like student loans, health insurance, and rent.
• Are there other big-ticket expenses to save for? If you’re saving for a large purchase, such as a home or going back to school, you may want to put extra money toward this saving goal rather than completely maxing out your 401(k), at least for the time being.
Once you can comfortably say that you’re meeting your spending and savings goals, it might be time to explore maxing out your 401(k). There are many reasons to do so — it’s a way to take advantage of tax-deferred savings, employer matching (often referred to as “free money”), and it’s a relatively easy and automatic way to invest and save, since the money gets deducted from your paycheck once you’ve set up your contribution amount.
How to Max Out Your 401(k)
Only a relatively small percentage of people actually do max out their 401(k)s, however. Here are some strategies for how to max out your 401(k).
1. Max Out 401(k) Employer Contributions
Your employer may offer matching contributions, and if so, there are typically rules you will need to follow to take advantage of their match.
An employer may require a minimum contribution from you before they’ll match it, or they might match only up to a certain amount. They might even stipulate a combination of those two requirements. Each company will have its own rules for matching contributions, so review your company’s policy for specifics.
For example, suppose your employer will match your contribution up to 3%. So, if you contribute 3% to your 401(k), your employer will contribute 3% as well. Therefore, instead of only saving 3% of your salary, you’re now saving 6%. With the employer match, your contribution just doubled. Note that employer contributions can range from nothing at all to upwards of 15%. It depends.
Since saving for retirement is one of the best investments you can make, it’s wise to take advantage of your employer’s match. Every penny helps when saving for retirement, and you don’t want to miss out on this “free money” from your employer.
If you’re not already maxing out the matching contribution and wish to, you can speak with your employer (or HR department, or plan administrator) to increase your contribution amount, you may be able to do it yourself online.
2. Max Out Salary-Deferred Contributions
While it’s smart to make sure you’re not leaving free money on the table, maxing out your employer match on a 401(k) is only part of the equation.
In order to make sure you’re setting aside an adequate amount for retirement, consider contributing as much as your budget will allow. Again, individuals younger than age 50 can contribute up to $22,500 in salary deferrals per year — and if you’re over age 50, you can max out at $30,000 in 2023.
It’s called a “salary deferral” because you aren’t losing any of the money you earn; you’re putting it in the 401(k) account and deferring it until later in life.
Those contributions aren’t just an investment in your future lifestyle in retirement. Because they are made with pre-tax dollars, they lower your taxable income for the year in which you contribute. For some, the immediate tax benefit is as appealing as the future savings benefit.
3. Take Advantage of Catch-Up Contributions
As mentioned, 401(k) catch-up contributions allow investors over age 50 to increase their retirement savings — which is especially helpful if they’re behind in reaching their retirement goals. Individuals over age 50 can contribute an additional $7,500 for a total of $30,000 for the year. Putting all of that money toward retirement savings can help you truly max out your 401(k).
As you draw closer to retirement, catch-up contributions can make a difference, especially as you start to calculate when you can retire. Whether you have been saving your entire career or just started, this benefit is available to everyone who qualifies.
And of course, this extra contribution will lower taxable income even more than regular contributions. Although using catch-up contributions may not push everyone to a lower tax bracket, it will certainly minimize the tax burden during the next filing season.
4. Reset Your Automatic 401(k) Contributions
When was the last time you reviewed your 401(k)? It may be time to check in and make sure your retirement savings goals are still on track. Is the amount you originally set to contribute each paycheck still the correct amount to help you reach those goals?
With the increase in contribution limits most years, it may be worth reviewing your budget to see if you can up your contribution amount to max out your 401(k). If you don’t have automatic payroll contributions set up, you could set them up.
It’s generally easier to save money when it’s automatically deducted; a person is less likely to spend the cash (or miss it) when it never hits their checking account in the first place.
If you’re able to max out the full 401(k) limit, but fear the sting of a large decrease in take-home pay, consider a gradual, annual increase such as 1% — how often you increase it will depend on your plan rules as well as your budget.
5. Put Bonus Money Toward Retirement
Unless your employer allows you to make a change, your 401(k) contribution will likely be deducted from any bonus you might receive at work. Many employers allow you to determine a certain percentage of your bonus check to contribute to your 401(k).
Consider possibly redirecting a large portion of a bonus to 401k contributions, or into another retirement account, like an individual retirement account (IRA). Because this money might not have been expected, you won’t miss it if you contribute most of it toward your retirement.
You could also do the same thing with a raise. If your employer gives you a raise, consider putting it directly toward your 401(k). Putting this money directly toward your retirement can help you inch closer to maxing out your 401(k) contributions.
6. Maximize Your 401(k) Returns and Fees
Many people may not know what they’re paying in investment fees or management fees for their 401(k) plans. By some estimates, the average fees for 401(k) plans are between 1% and 2%, but some plans can have up to 3.5%.
Fees add up — even if your employer is paying the fees now, you’ll have to pay them if you leave the job and keep the 401(k).
Essentially, if an investor has $100,000 in a 401(k) and pays $1,000 or 1% (or more) in fees per year, the fees could add up to thousands of dollars over time. Any fees you have to pay can chip away at your retirement savings and reduce your returns.
It’s important to ensure you’re getting the most for your money in order to maximize your retirement savings. If you are currently working for the company, you could discuss high fees with your HR team. One of the easiest ways to lower your costs is to find more affordable investment options. Typically, the biggest bargains can be index funds, which often charge lower fees than other investments.
If your employer’s plan offers an assortment of low-cost index funds or institutional funds, you can invest in these funds to build a diversified portfolio.
If you have a 401(k) account from a previous employer, you might consider moving your old 401(k) into a lower-fee plan. It’s also worth examining what kind of funds you’re invested in and if it’s meeting your financial goals and risk tolerance.
What Happens If You Contribute Too Much to Your 401(k)?
After you’ve maxed out your 401(k) for the year — meaning you’ve hit the contribution limit corresponding to your age range — then you’ll need to stop making contributions or risk paying additional taxes on your overcontributions.
In the event that you do make an overcontribution, you’ll need to take some additional steps such as letting your plan manager or administrator know, and perhaps withdrawing the excess amount. If you leave the excess in the account, it’ll be taxed twice — once when it was contributed initially, and again when you take it out.
Get a 1% IRA match on rollovers and contributions.
Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.1
1Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.
What to Do After Maxing Out a 401(k)?
If you max out your 401(k) this year, pat yourself on the back. Maxing out your 401(k) is a financial accomplishment. But now you might be wondering, what’s next? Here are some additional retirement savings options to consider if you have already maxed out your 401(k).
Open an IRA
An individual retirement account (IRA) can be a good complement to your employer’s retirement plans. The pre-tax guidelines of this plan are pretty straightforward.
You can save up to $7,000 pre-tax dollars in an IRA if you meet individual IRS requirements for tax year 2024, and $6,500 for tax year 2023. If you’re 50 or older, you can contribute an extra $1,000, totaling $8,000 for 2024 and $7,500 for 2023, to an IRA.
You may also choose to consider a Roth IRA. Roth IRA accounts have income limits, but if you’re eligible, you can contribute with after-tax dollars, which means you won’t have to pay taxes on earnings withdrawals in retirement as you do with traditional IRAs.
You can open an IRA at a brokerage, mutual fund company, or other financial institution. If you ever leave your job, you can roll your employer’s 401(k) into your IRA without facing any tax consequences as long as they are both traditional accounts and it’s a direct rollover – where funds are transferred directly from one plan to the other. Doing a rollover may allow you to invest in a broader range of investments with lower fees.
Boost an Emergency Fund
Experts often advise establishing an emergency fund with at least six months of living expenses before contributing to a retirement savings plan. Perhaps you’ve already done that — but haven’t updated that account in a while. As your living expenses increase, it’s a good idea to make sure your emergency fund grows, too. This will cover you financially in case of life’s little curveballs: new brake pads, a new roof, or unforeseen medical expenses.
The money in an emergency fund should be accessible at a moment’s notice, which means it needs to comprise liquid assets such as cash. You’ll also want to make sure the account is FDIC insured, so that your money is protected if something happens to the bank or financial institution.
Save for Health Care Costs
Contributing to a health savings account (HSA) can reduce out-of-pocket costs for expected and unexpected health care expenses. For tax year 2023, eligible individuals can contribute up to $3,850 pre-tax dollars for an individual plan or up to $7,750 for a family plan.
The money in this account can be used for qualified out-of-pocket medical expenses such as copays for doctor visits and prescriptions. Another option is to leave the money in the account and let it grow for retirement. Once you reach age 65, you can take out money from your HSA without a penalty for any purpose. However, to be exempt from taxes, the money must be used for a qualified medical expense. Any other reasons for withdrawing the funds will be subject to regular income taxes.
Increase College Savings
If you’re feeling good about maxing out your 401(k), consider increasing contributions to your child’s 529 college savings plan (a tax-advantaged account meant specifically for education costs, sponsored by states and educational institutions).
College costs continue to creep up every year. Helping your children pay for college helps minimize the burden of college expenses, so they hopefully don’t have to take on many student loans.
Open a Brokerage Account
After you max out your 401(k), you may also consider opening a brokerage account. Brokerage firms offer various types of investment account brokerage accounts, each with different services and fees. A full-service brokerage firm may provide different financial services, which include allowing you to trade securities.
Many brokerage firms require you to have a certain amount of cash to open their accounts and have enough funds to account for trading fees and commissions. While there are no limits on how much you can contribute to the account, earned dividends are taxable in the year they are received. Therefore, if you earn a profit or sell an asset, you must pay a capital gains tax. On the other hand, if you sell a stock at a loss, that becomes a capital loss. This means that the transaction may yield a tax break by lowering your taxable income.
Pros and Cons of Maxing Out Your 401(k)
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Pros:
• Increased Savings and Growth: Your retirement savings account will be bigger, which can lead to more growth over time.
• Simplified Saving and Investing: Can also make your saving and investing relatively easy, as long as you’re taking a no-lift approach to setting your money aside thanks to automatic contributions.
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Cons:
• Affordability: Maxing out a 401(k) may not be financially feasible for everyone. May be challenging due to existing debt or other savings goals.
• Opportunity Costs: Money invested in retirement plans could be used for other purposes. During strong stock market years, non-retirement investments may offer more immediate access to funds.
The Takeaway
Maxing out your 401(k) involves matching your employer’s maximum contribution match, and also, contributing as much as legally allowed to your retirement plan in a given year. For 2024, that limit is $23,000, or $30,500 if you’re over age 50. For 2023, that limit is $22,500, or $30,000 if you’re over age 50. If you have the flexibility in your budget to do so, maxing out a 401(k) can be an effective way to build retirement savings.
And once you max out your 401(k)? There are other smart ways to direct your money. You can open an IRA, contribute more to an HSA, or to a child’s 529 plan. If you’re looking to roll over an old 401(k) into an IRA, or open a new one, SoFi Invest® can help. SoFi doesn’t charge commissions (the full fee schedule is here), and you can access complimentary professional advice.
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
What happens if I max out my 401(k) every year?
Assuming you don’t overcontribute, you may see your retirement savings increase if you max out your 401(k) every year, and hopefully, be able to reach your retirement and savings goals sooner.
Will You Have Enough to Retire After Maxing Out 401(k)?
There are many factors that need to be considered, however, start by getting a sense of how much you’ll need to retire by using a retirement expense calculator. Then you can decide whether maxing out your 401(k) for many years will be enough to get you there, even assuming an average stock market return and compounding built in.
First and foremost, you’ll need to consider your lifestyle and where you plan on living after retirement. If you want to spend a lot in your later years, you’ll need more money. As such, a 401(k) may not be enough to get you through retirement all on its own, and you may need additional savings and investments to make sure you’ll have enough.
About the author
Ashley Kilroy
Ashley Kilroy is a personal finance writer and content creator with a passion for providing millennials and young professionals the tools and resources they need to better manage their finances. Read full bio.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.
• A brokerage account is an investment account that allows individuals to buy, sell, or trade various financial securities, including stocks and bonds.
• Different types of brokerage firms offer varying levels of service, including full-service, discount, and online brokers, each with distinct fees and features.
• Investing through a brokerage account has no contribution limits or withdrawal restrictions, but capital gains from profits are subject to taxation.
• Four main types of brokerage accounts include cash accounts, margin accounts, joint accounts, and discretionary accounts, each serving different investment needs.
• Opening a brokerage account typically requires personal information, an initial deposit, and agreement to specific terms, with options for funding through various methods.
What Is a Brokerage Account?
A brokerage account is a type of investment account typically opened with a brokerage firm. Brokerage accounts allow owners to invest their money, and buy, sell, or trade stocks, bonds, and other types of financial securities. There are different types of brokerage accounts, and they’re offered by a range of financial firms.
For prospective investors, knowing what a brokerage account is and how they work is important. For seasoned investors, learning even more about them can help deepen their knowledge, too.
What is a Brokerage Account Used For?
As noted, brokerage accounts allow owners to invest in stocks and other financial securities. They’re offered by different types of financial firms, too. In fact, there are many brokerage firms that investors can choose from. While all offer brokerage accounts, they usually come with different fees and services:
• A full-service brokerage firm usually provides a variety of financial services, including allowing you to trade securities. Full-service firms will sometimes provide financial advice and automated investing to customers.
• A discount brokerage firm doesn’t usually provide any additional financial consulting or planning services. Thanks to their pared down services, a discount brokerage firm often offers lower fees than a full-service firm.
• Online brokerage firms provide brokerage accounts via the internet, although some also have brick and mortar locations. Online brokers often offer the lowest fees and give investors freedom to trade online with ease. They also tend to make information and research available to consumers.
Opening a brokerage account generally starts out as a similar experience to opening any other type of cash account. Consumers can simply start an account either online or in person.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.
*Probability of Member receiving $1,000 is a probability of 0.028%.
Some brokerage firms require investors to use cash to open their accounts and to have enough funding in their account to cover the cost of stocks or bonds, as well as any commission fees. There are some however, that don’t require any initial deposit.
In order to make their first investment however, consumers usually need to deposit money. They can do this by moving money from another account, such as from their checking or savings accounts. From then on, the brokerage firm can help individuals execute buy or sell orders on stocks, exchange-traded funds (ETFs), bonds, or mutual funds.
Unlike a retirement account, there are generally no restrictions on how much money a consumer can put in. There are also typically no restrictions on when individuals can withdraw their cash from brokerage accounts. Investors do need to claim any profits — or “capital gains” — as taxable income.
Here’s a closer look at how brokerage firms differ from other types of money accounts.
Brokerage Accounts vs Retirement Accounts
The primary difference between a retirement account and a brokerage account is if there’s any tax advantage at play.
For stocks, bonds, exchange traded funds, mutual funds, options etc, brokerage account holders are liable to pay capital gains taxes on most of their profits from trading these securities. That’s why brokerage accounts are also known in the industry as “taxable accounts.”
Retirement accounts are set up with money that has some kind of tax advantage and can be used to buy securities. For example, 401(k)s are set up by an employer and funded with money that comes from an employee’s paycheck before taxes and can be matched by an employer.
These accounts, which also include traditional and Roth IRAs, have specific rules about the amount that can be contributed and when money can be withdrawn. Meanwhile, with brokerage accounts, there are few limits on funding or withdrawals.
Brokerage Accounts vs Checking Accounts
Brokerage accounts and checking accounts have one important thing in common: they can both have cash in them. Sometimes brokerage accounts will “sweep” your cash into a money market fund managed by that same brokerage, allowing you to earn interest. Meanwhile, in a traditional bank checking account, you don’t earn any interest but you do have easy access to your cash.
An important distinction between brokerage and checking accounts is the level of protection you get from them. A checking account offered by a bank will typically have insurance provided by the Federal Deposit Insurance Corporation (FDIC), which protects the first $250,000 deposited at a bank that has a charter from the FDIC. This means that $250,000 deposited can be withdrawn even if the bank itself goes out of business.
Brokerage accounts, on the other hand, typically have insurance provided by the Securities Investors Protection Corporation (SPIC), which unlike the FDIC, is not a government agency. What SIPC insurance does is protect the custody of stocks, bonds, and other securities as well as cash in a brokerage account, not their value.
This means that if a brokerage fails, the SIPC insurance will protect cash deposited in a brokerage account up to $250,000 and securities and cash combined up to $500,000.
This simply means you get your cash deposited in the account and the securities back, not that you have insurance from the value of those securities going down.
Pros and Cons of Opening a Brokerage Account
Brokerage accounts can be powerful financial tools, but they can have their advantages and drawbacks, too.
Pros and Cons of Brokerage Accounts
Pros
Cons
Ability to trade securities
Can’t be used for transactions
High liquidity
Slow transaction times
No limits on contributions and withdrawals
No tax advantages
Pros of Brokerage Accounts
The most obvious advantage of a brokerage account is that it allows its owner to trade financial securities and invest their money. They tend to have a high degree of liquidity, too, meaning that it’s relatively easy to buy and sell securities. There are also no general requirements for contributions or withdrawals.
Cons of Brokerage Accounts
Cons of brokerage accounts include the fact that they can’t be used for traditional transactions, like, say, a checking account. While your account may have a cash balance, you can’t use it to purchase a soda from the corner store.
Further, getting your money in and out of a brokerage account may take some time. There are often fraud checks and other elements at play when transacting a cash balance in or out of an account, and it may take a couple of days. There are also no tax advantages — something that may be present for certain retirement accounts.
A couple of other things that may be worth considering, especially if you’re interested in investing for beginners.
Before you consider opening a brokerage account, make sure you have sufficient money set aside for an emergency fund. Common financial advice recommends setting aside three to 12 times your streamlined monthly expenses. It’s also good practice to contribute to your 401(k) or IRA before opening a brokerage account.
If you have an emergency fund stashed away and are making regular contributions to a retirement account, think about what types of assets you plan on investing in. A brokerage account would only be required if you plan to buy stocks, bonds, or other securities. If you only plan on investing in mutual funds, you might not need a brokerage account.
Top 3 Types of Brokerage Accounts Explained
There are also a few distinct types of brokerage accounts, though they all work in a similar fashion — trading securities, after all, is what brokers do. They are cash brokerage accounts, margin accounts, joint brokerage accounts, and discretionary accounts.
1. Cash Brokerage Accounts
A cash brokerage account is the “vanilla” option. If you open a cash brokerage account, you deposit money and start trading securities.
2. Margin Brokerage Accounts
A margin brokerage account may require approval from a brokerage. These types of accounts let owners use “margin” when trading. That means that they can effectively borrow money to trade with from the brokerage. These obviously come with a higher degree of risk, too.
3. Joint Brokerage Accounts
Joint brokerage accounts are more or less cash brokerage accounts that are opened by more than one person. It’s like a joint bank account, in many respects.
💡 Quick Tip: Are self directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).
Investing with SoFi
Brokerage accounts allow owners to buy and sell investments and financial securities. They are offered by a number of financial institutions, and come in a few different types. By and large, though, they’re a very popular choice for investors looking to get their money in the markets.
They do have their pros and cons and associated risks, however. It may be beneficial to speak with a financial professional to learn more about how you can use a brokerage account to your advantage in pursuit of your financial goals.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
How do I open a brokerage account?
Most brokerage firms allow prospective customers to open an account online or in person. Opening a brokerage account generally requires some personal information related to identity and financials, and some money to make an initial deposit.
Is there a minimum deposit to open a brokerage account?
Different brokerage firms will have different rules regarding minimum deposits, but there are many that don’t require a minimum deposit. Again, it’ll depend on the specific firm.
Do brokerage accounts have fees?
Yes, most brokerage accounts have some sort of associated fees. There may be commission fees involved, though they’re less common today than they once were, but there can be other types of fees to be aware of, too.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Spot Bitcoin ETPs are a type of investment vehicle that seeks to track the spot price of Bitcoin. ETPs, or exchange-traded products, are a broader basket of investments that include both exchange-traded funds (ETFs) and exchange-traded notes (ETNs), and are listed on an exchange, and can be purchased or sold much like a stock.
But what’s critical to know is that generally, ETFs are regulated by the Investment Company Act of 1940 (the “1940 Act”). While the most common type of ETPs are structured as ETFs, not all are, and spot Bitcoin ETPs are a specific type of ETP that are not registered under the 1940 Act. As such, these ETPs are not subjected to the 1940 Act’s rules, and investors holding shares of Bitcoin ETPs do not have the same protections as those that are regulated by the 1940 Act, which means these investments have relatively higher associated risks.
What Is a Bitcoin ETP?
As noted, Bitcoin ETPs are a type of exchange-traded fund or product that allow investors to gain exposure to Bitcoin without directly owning it. These seek to track the price of Bitcoin. That means when the price of Bitcoin in U.S. dollars goes up, a spot Bitcoin ETP, trading on the stock exchange should also see its share values go up, and vice versa.
But it’s critical to note that Bitcoin ETPs have a much narrower focus than most other exchange-traded products, which started out with the aim of giving investors broad exposure to the stock market. But, like all investments, they have various risks associated with them. In fact, it’s possible that an investor could lose the entirety of their investment.
An Introduction to Bitcoin ETPs
Bitcoin ETPs are exchange-traded products that, effectively, allow investors to gain exposure to the crypto markets as easily as they would buy or sell a stock, as discussed. Again, a Bitcoin ETP seeks to track the price or value of Bitcoin, and so the value of a Bitcoin ETP share is designed to rise or fall in relation to the change in value of the underlying cryptocurrency.
It also means that investors don’t necessarily need to directly own Bitcoin to gain exposure to the market in their portfolio — they can invest in a security, the ETP, that seeks to track it, instead. Note, too, that all ETPs have related fees and expenses, which vary.
💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.
Get up to $1,000 in stock when you fund a new Active Invest account.*
Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.
*Probability of Member receiving $1,000 is a probability of 0.028%.
What Are Spot Bitcoin ETPs?
Spot Bitcoin ETPs are investment vehicles that trade at “spot” value. “Spot” value, in this case, refers to the price of the underlying asset at any given time. So, if a buyer and seller come together to make a trade, they would do so at the spot price. There are spot markets for all sorts of commodities.
Where Can Investors Buy Spot Bitcoin ETP Shares?
Investors can buy spot Bitcoin ETP shares via numerous exchanges and platforms. While previously, investors interested in Bitcoin or other cryptocurrencies would need to trade on platforms that supported cryptocurrencies, since Bitcoin ETPs are exchange-traded vehicles, investors are likely to find them available on many other platforms — that includes SoFi, which allows investors to buy spot Bitcoin ETP shares as well.
Are There Other Spot Crypto ETPs?
Spot Bitcoin ETPs seek to track the price of a fund’s Bitcoin holdings, and other spot crypto ETPs, if and when they are approved and hit exchanges, will do the same.
Spot Bitcoin ETPs were first approved for trading by regulators in early 2024. There are ETPs that seek to track Bitcoin-exposed or Bitcoin-adjacent companies, too, as well as Bitcoin futures. Spot Ethereum ETPs – or Ether ETPs, as they would actually track Ether (ETH), the Ethereum blockchain’s native cryptocurrency – could be similar vehicles to to spot Bitcoin ETPs, in that they would seek to track the price of Ether, and allow investors to gain exposure to Ether in their portfolios without owning it directly.
What Are Bitcoin Futures ETPs?
Bitcoin futures ETPs are another type of ETP that give investors exposure to the price movements of Bitcoin via futures contracts. Futures are a type of contract that dictates the terms of a trade at a future date, and typically have underlying assets such as precious metals or other commodities — including crypto.
Accordingly, Bitcoin futures ETPs are crypto futures ETPs that specifically seek to track Bitcoin futures contracts. Regulators approved Bitcoin futures contracts in 2021, but again, investors should know that they don’t seek to track the price or value of the underlying asset exactly — which differentiates them from spot Bitcoin ETPs.
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
Are There US-listed Spot Bitcoin ETPs?
There are U.S.-listed spot Bitcoin ETPs. When the Securities and Exchange Commission (SEC) first granted their approval in January 2024, it opened the door to several Bitcoin ETPs hitting the market. As a result, investors were able to start buying and selling them via the stock market.
The SEC’s approval led to new spot Bitcoin ETPs being listed on a few different exchanges. Here’s a list of the first 11 spot Bitcoin ETPs that gained approval from the SEC:
Note, too, that it’s anticipated that additional spot cryptocurrency ETPs will become available.
How Are Bitcoin ETPs Regulated?
Bitcoin ETPs are regulated by the SEC, which sets out guidance in terms of legality. Regulation in the crypto space is and has been murky — it’s been largely unregulated for the entirety of the crypto space’s existence. But the advent of crypto ETPs is likely to change that to some degree, as spot Bitcoin ETPs’ underlying asset is and can be Bitcoin itself, rather than Bitcoin derivatives.
Remember, too, that Bitcoin ETPs are not regulated under the Investment Company Act of 1940, as discussed. That differentiates them from most ETFs on the market.
That’s another important distinction investors should note: Spot and futures Bitcoin ETPs may be regulated under slightly different terms, as futures are derivatives. Investors should pay attention to the space and to any SEC guidance released regarding crypto regulation, as it may impact the value of their holdings in crypto ETPs, too.
Pros & Cons of Bitcoin ETPs
Like all investments, there are pros and cons of ETFs and ETPs — including Bitcoin ETPs.
Benefits of Bitcoin ETPs
Proponents of Bitcoin ETPs appreciate that they can give investors exposure to the complicated and volatile cryptocurrency market, without the need to personally hold actual crypto.
Convenience and Ease
Buying a spot Bitcoin ETP requires little tech know-how beyond knowing how to use a computer, open a brokerage account, and place a buy order.
ETPs provide a way for investors to indirectly add exposure to certain assets — like Bitcoin, in this case — to their portfolio. That may result in a return on investment, or a possible loss of principal. On the other hand, holding actual Bitcoin may require a somewhat advanced level of technical expertise.
Secure Storage Options
Some cryptocurrency exchanges might be trustworthy, but some users have also had a controversial history of being hacked, stolen from, or defrauded. Even reliable exchanges open investors up to risk.
Securely storing cryptocurrencies — for example, storing the private keys to a Bitcoin wallet — is most often done by using either a paper wallet that has the keys written in the form of a QR code and a long string of random characters, or by using an external piece of hardware called a hardware wallet.
Risks of Bitcoin ETPs
First and foremost, investors should be aware that it’s possible that they could lose the entirety of their investment when investing in Bitcoin ETPs. There are, of course, other risks to consider as well, including volatility, costs, and the unpredictable and still largely-unregulated nature of the crypto market.
Volatility
The volatility comes from the occasional wild swings experienced in the price of Bitcoin and Bitcoin futures against most other currencies. This could scare investors that have a lower risk tolerance, enticing them to panic and sell.
Fees
One of the risks that comes from holding an ETP of any kind involves its expense ratio. This number refers to the amount of money a fund’s management charges in exchange for providing the opportunity for investors to invest in their fund.
If a fund comes with an expense ratio of 2%, for example, the fund management would take $2 out of a $100 investment each year. This figure is usually calculated after profits have been factored in, cutting into investors’ gains. In other words, some Bitcoin ETPs could be relatively expensive for investors to hold, but it’ll depend on the specific fund.
There can be other various types of fees that may apply to an investment in ETPs as well. While the specific fees will vary from ETP to ETP, investors will likely encounter one or a combination of commissions, account maintenance fees, exchange fees, and wrap fees (a type of management fee). Again, investors will want to look at an ETP’s prospectus or related documents to get a better sense of the costs associated with a specific ETP.
Fraud and Market Manipulation
Regulators have cited fraud and market manipulation as reasons for why they were cautious about approving a spot market Bitcoin ETP. It’s unclear how the SEC’s approval of spot Bitcoin ETPs may affect fraud and market manipulation in the crypto space, but it’s something investors should be aware of.
The Takeaway
Spot Bitcoin ETPs were approved for trading by the SEC in early 2024, and as a result, it’s likely that many more crypto ETPs will also hit markets and exchanges in the future — though nothing is guaranteed. Investors may use them to gain exposure to the crypto markets. For investors curious about the cryptocurrency market but not yet ready to invest in crypto itself, a Bitcoin ETP may represent another option. It may be best to speak with a financial professional before investing, too.
If you’re ready to bring crypto into your portfolio, you can invest in a Bitcoin ETP with SoFi. Along with many other types of investments, SoFi’s platform offers investors access to the crypto space through spot Bitcoin ETPs.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
FAQ
What are the options for Bitcoin ETPs?
There are Bitcoin futures ETPs and spot Bitcoin ETPs listed in the U.S., which investors can buy. Given the SEC’s approval of Bitcoin ETPs for trading in early 2024, there may soon be additional spot crypto ETPs available to investors in the future.
Are there US-listed Bitcoin ETPs?
As of July 2024, there are U.S.-listed spot Bitcoin ETPs after the SEC approved an initial batch of them, and it’s likely there will be more in the subsequent months and years.
Where can Bitcoin ETP shares be purchased?
Crypto ETPs can be purchased and traded on the stock market, alongside other ETPs.
Photo credit: iStock/JuSun
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below:
Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.
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.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences. Fund Fees
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.
SoFi Invest may waive all, or part of any of these fees, permanently or for a period of time, at its sole discretion for any reason. Fees are subject to change at any time. The current fee schedule will always be available in your Account Documents section of SoFi Invest.
Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
