Mar
26
2025
Relative Strength Index (RSI) Explained

Relative Strength Index (RSI) Explained

By | Growing Wealth, invest, Investing | Comments Off on Relative Strength Index (RSI) Explained

Relative Strength Index, or RSI, is a momentum indicator used to measure a stock’s price relative to itself and its past performance. Developed by technical analyst J. Welles Wilder, the Relative Strength Index focuses purely on individual stock price movements to identify trading trends for a specific security, based on the speed and direction of those price changes.

RSI allows swing investors to compare the price of something to itself, without factoring in the performance of other stocks or the market as a whole. Investors use RSI to pinpoint positive or negative divergences in price for a security or to determine whether a stock is overbought or oversold.

The RSI indicator is useful in technical analysis, which revolves around finding trends in stock movements to determine optimal entry and exit points. Understanding what the Relative Strength Index measures and how it works is central to a technical trading strategy.

What Is RSI in Stocks?

The Relative Strength Index is a rate of change or momentum oscillator that tracks stock price movements. You can visualize it as a line graph that moves up or down, based on a stock’s price at any given time. The Relative Strength Index operates on a scale from 0-100. Where the RSI indicator is within this range can suggest whether a stock has reached an overbought level or if it’s oversold.

RSI is not the same thing as Relative Strength analysis. When using a Relative Strength Comparison (RSC), you’re comparing two securities or market indexes to one another to measure their relative performance.


💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

How Does the RSI Indicator Work?

The Relative Strength Index operates on a range from 0-100. As stock prices fluctuate over time, the index can move up or down accordingly. Traders typically use the RSI to track price movements over 14 periods (i.e. trading days), though some may use shorter or longer windows of time.

When the RSI indicator reaches 70 or above, it could mean the underlying asset being measured is overbought. An RSI reading of 30 or below, on the other hand, suggests that the asset is oversold. The length of time a stock remains in overbought or oversold territory depends largely on the strength of the underlying trend that’s driving price movements.

The Relative Strength Index can throw off different patterns, depending on whether stocks are in a bull market or bear market. Investors compare the movements of the RSI indicator with actual price movements to determine whether a defined pricing trend actually exists and, if so, in which direction it might be heading. Analyzing moving averages for the stock can help determine the presence of a clear pricing trend.

Recommended: 5 Bullish Indicators for a Stock

RSI Formula

Here’s what the Relative Strength Index formula looks like:

RSI = 100 – (100 / (1 + RS))

In this formula, RS represents the ratio of the moving average of the tracking period’s gains divided by the absolute value of the moving average of the tracking period’s losses.

Here’s another way you might see the Relative Strength Index formula displayed:

RSI = 100 – [100 / ( 1 + (Average of Upward Price Change / Average of Downward Price Change ) ) ]

The RSI formula assumes that you’re able to follow a stock’s pricing changes over your desired tracking period. More importantly than that, however, is knowing how to make sense of Relative Strength Index calculations, which investors often display via a stock oscillator.

Interpreting RSI Results

Reading the Relative Strength Index isn’t that difficult when you understand how the different ranges work. Depending on where the RSI indicator is for a particular stock or market index, it can tell you whether the market is bullish or bearish. You can also use the RSI, along with other technical analysis indicators, to determine the best time to buy or sell.

Above 70

An RSI reading of 70 or higher could indicate that a stock is overbought and that its price might move back down. This could happen through a reversal of the current price movement trend or as part of a broader correction. It’s not unusual for stocks to have an RSI in this range during bull market environments when prices are rising. If you believe that the stock’s price has reached or is approaching an unsustainable level, an RSI of 70 or higher could suggest it’s time to exit.

Below 30

When a stock’s RSI reading is 30 or below, it typically means that it’s oversold or undervalued by the broader market. This could signal a buying opportunity for value investors but it could also indicate the market is turning bearish. It’s more common to see RSI readings of 30 or below during downtrends when stock prices may be in decline across the board.

40 to 90 Range

During bull markets, it’s not uncommon to see the Relative Strength Index for a stock linger somewhere in the 40 to 90 range. It’s less common to see the RSI dip to 30 or below when prices are steadily moving up. An RSI reading of 40 to 50, roughly the middle of the 0-100 scale can indicate support for an upward trend.

10 to 60 Range

In bear markets, or those filled with fear, uncertainty, and doubt, it’s more common to see the Relative Strength Index hover somewhere in the 10 to 60 range. It’s not unusual for stocks to reach 30 or below when the market is already in a downward trend. The middle point of the RSI can act as a support point, though the range shifts slightly to between 50 and 60.

Common RSI Indicators

Relative Strength Index indicators can help investors spot pricing trends. That includes identifying up and down trends, as well as sideways trends when pricing levels consolidate. The reliability of these indicators often hinges on the current phase of a stock or the market as a whole. When reading RSI indicators, it’s important to understand divergence and swing rejections.

Divergence

A divergence represents a variation or disagreement between the movement of the RSI indicator and the price movements on a stock chart. For example, a bullish divergence means the indicator is making higher lows while the price movement is establishing lower lows. This type of divergence can hint at increasing bullish momentum with a particular stock or the greater market.

A bearish divergence, on the other hand, happens when the indicator is making lower highs while prices are establishing higher highs. This could indicate that investor sentiment is becoming less bullish.

Swing Rejections

A swing rejection is a specific trading technique that involves analyzing RSI movements when pushing above 30 or below 70. Swing rejections can be bullish in nature or bearish.

For example, a bullish swing rejection has four parts or steps:

•   RSI is at an oversold level

•   RSI moves above 30

•   A dip is recorded without rating as oversold

•   RSI passes its recent high

Meanwhile, a bearish swing rejection also has four parts or steps:

•   RSI reaches an overbought level

•   RSI drops below 70

•   RSI hits new highs without dropping back to overbought levels

•   RSI passes recent lows

Swing rejections make it possible to utilize divergence indicators to spot bullish or bearish trends in their earliest stages.


💡 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.

Is RSI a Good Indicator to Use?

Yes, in certain circumstances. Relative Strength Index can be a good indicator to use in technical analysis, as it can make it easier to detect when a stock or the broader market is overbought or oversold. Understanding how to interpret RSI and its correlation to price movements could help you spot buy or sell signals and detect bull market or bear market trends.

That said, RSI also has some limitations. For example, the RSI can produce false positives or false negatives when bullish or bearish trends don’t align with the way a stock’s price is moving. Like other technical analysis indicators, it’s not an exact way to gauge the market’s momentum. So if stocks are hovering somewhere in the 40 to 60 range, it may be difficult to decipher whether the mood is bearish or bullish.

When using RSI, it’s helpful to incorporate other technical analysis indicators to create a comprehensive picture of the market. Exponential moving average (EMA), for example, is a type of moving average that uses the weighted average of recent pricing data to draw conclusions about the market.

Traders often use RSI in conjunction with other trend indicators, such as the Moving Average Convergence Divergence, the Stochastic Oscillator, or the Volume-Weighted Average Price.

RSI vs MACD

Moving Average Convergence Divergence (MACD) is a technical analysis indicator that investors may use alongside RSI. This indicator can help them determine when to buy or sell, based on the correlation between two moving averages for the same security.

Specifically, it requires looking at a 12-period moving average and a 26-period moving average. To find the MACD line, you’d subtract the 26-period from the 12-period, resulting in a main line. The next step is creating a trigger line, which is the nine-period exponential moving average of the main line. The interactions between these two lines can generate trading signals.

For example, when prices are strongly trending in a similar direction the main line and trigger line tend to move further apart. When prices are consolidating, the lines move closer together. If the main line crosses the trigger line from below, that can produce a buy signal. If the main line crosses the trigger line from above, that can be construed as a signal to sell.

While RSI and MACD are both trend indicators, there are some differences. Relative Strength Index measures the distance between pricing highs and lows. So you’re looking at the average gain or loss for a security over time, which again usually means 14 periods. The MACD, on the other hand, focuses on the relationship between moving averages for a security. It’s a trend-following signal that, like RSI, can indicate momentum.

RSI vs Stochastic Oscillator

The stochastic oscillator is a momentum indicator for technical analysis that shows where a stock’s closing price is relative to its high/low pricing range over a set period of time. The stochastic oscillator can also be used to track pricing for a market index.

Central to the use of the stochastic oscillator is the idea that as a stock’s price increases, the closing price inches closer to the highest point over time. When the stock’s price decreases, the closing price lands closer to the lowest low. Investors use this indicator to determine entry and exit points when making trades.

However, investors interpret RSI and stochastic oscillator readings differently. For example, with a stochastic oscillator, a reading of 20 or below generally means a stock is oversold, versus the 30 or below range for RSI readings. When used together, Relative Strength Index and stochastic oscillators can help with timing trades to maximize profit potential while minimizing the risk of losses.

Can You Use RSI to Time the Crypto Market?

Stocks are not the only asset class for which investors use the RSI. Investors also use the Relative Strength Index to assess conditions in the crypto markets and whether it’s time to sell or continue to HODL.

Cryptocurrency traders may use RSI to gauge momentum for individual currencies. Again, they’re looking at the highs and lows to get a sense of which way prices are moving at any given time. The RSI indicator can help with choosing when to buy or sell, based on previous price movements.

The same rules apply to crypto that apply to stocks: An RSI reading of 70 or above means overbought while a reading of 30 or below means oversold. Likewise, a reading above 50 signals a bullish trend while a reading below 50 can signal a bearish trend. Investors can also use a bearish divergence or bullish divergence to spot a pullback or an upward push.

As with stocks, however, it’s important to remember that RSI is not 100% accurate.

Recommended: Crypto Technical Analysis: What It Is & How to Do One

The Takeaway

RSI can be used to pinpoint positive or negative divergences in price for a stock or to determine whether it’s overbought or oversold. If you’re interested in technical analysis and trending trading, RSI can be a useful metric for making investment decisions.

The RSI is just one tool that you can use to devise a strategy for your portfolio. There are other less technical tools you can use as well when you’re starting to build a portfolio.

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).


Invest with as little as $5 with a SoFi Active Investing account.

About the author

Rebecca Lake

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.


SoFi Invest®

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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Mar
26
2025

Roth TSP vs. Roth IRA: How They Compare

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Roth TSP vs. Roth IRA: How They Compare

Both Thrift Savings Plans (TSPs) and Individual Retirement Accounts (IRAs) come in traditional and Roth versions. One of the main differences between a Roth TSP vs. Roth IRA is who can contribute. Federal employees and members of the military can save in a Roth TSP. Anyone with earned income that’s within IRS income thresholds can contribute to a Roth IRA.

In either case, your contributions are not tax-deductible, but you can make tax-free qualified withdrawals when you retire.

Key Points

•   Roth TSPs are available to federal employees and military members, while Roth IRAs are accessible to anyone with earned income within IRS income thresholds.

•   Contributions to both Roth TSPs and Roth IRAs are made with after-tax dollars, allowing for tax-free qualified withdrawals in retirement.

•   Roth TSPs have higher annual contribution limits and allow for employer matching contributions, unlike Roth IRAs.

•   Roth IRAs typically offer a broader choice of investment options than Roth TSPs.

•   Choosing between a Roth TSP and Roth IRA depends on employment status, contribution capacity, and retirement goals.

What Are Roth Thrift Savings Plans (TSP)?

The Thrift Savings Plan is a retirement plan that’s designed specifically for federal employees. You’re generally eligible to contribute to a TSP if you’re covered by the Federal Employees’ Retirement System (FERS) or the Civil Service Retirement System (CSRS). Members of the military can also save for retirement in a TSP.

A Roth TSP allows you to contribute after-tax dollars. When you make qualified withdrawals in retirement, those withdrawals are not taxed. Earnings are considered qualified if:

•   At least 5 years have passed since January 1 of the first year in which you began making contributions, and

•   You’re 59 ½ or older, permanently disabled, or deceased.

Contributions are made through elective salary deferrals, similar to a 401(k) plan. Catch-up contributions are allowed for workers aged 50 or older. Under the SECURE 2.0 Act, a higher catch-up contribution limit applies in 2025 for those ages 60 to 63. The IRS determines how much you can save in a Roth TSP each year. Here are the contribution limits for 2024 and 2025.

2024

 2025
Elective Deferrals $23,000 $23,500
Catch-Up Contributions $7,500 $7,500
$11,250 for those ages 60-63
Annual Additions Limit $69,000 $70,000

The annual additions limit is the total amount you can contribute in a calendar year. It includes employee contributions, as well as automatic and matching contributions made by your employing agency. Catch-up contributions do not count in this total.

🛈 While SoFi does not offer a Roth TSP, we do offer a Roth IRA to help members save for retirement.

What Are Roth IRAs?

A Roth IRA retirement account is an individual retirement account that allows you to contribute after-tax dollars, then make qualified withdrawals tax-free. Roth IRAs are available to individuals through brokerages, banks, and other financial institutions, rather than through employers.

You’ll need to have earned income to contribute to a Roth IRA. The IRS sets the maximum annual contribution limit. Catch-up contributions are allowed if you’re 50 or older. Here’s how the limits compare for 2024 and 2025.

2024

 2025
Annual Contributions $7,000 $7,000
Catch-Up Contributions $1,000 $1,000

The annual limit does not apply to rollover or reservist contributions. How much you can contribute to a Roth IRA is based on your income and tax filing status.

You can make the full contribution in 2024 if:

•   You file single or head of household and your modified adjusted gross income (MAGI) is less than $146,000

•   You’re married, file separately, did not live with your spouse during the year and your MAGI is less than $146,000

•   You’re married and file jointly or are a qualifying widow(er) and your MAGI is less than $230,000

You can make a full contribution in 2025 if:

•   You file single or head of household and your MAGI is less than $150,000

•   You’re married, file separately, did not live with your spouse during the year, and your MAGI is less than $150,000

•   You’re married and file jointly or are a qualifying widow(er) and you’re MAGI is less than $236,000

There are no required minimum distributions for Roth IRAs, so you can leave money in your account until you need it. You can also withdraw original contributions at any time, without a tax penalty.

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.

Similarities Between Roth TSP vs. Roth IRA

It’s important to open a retirement account that fits your needs. In terms of what’s similar between a Roth IRA vs. Roth TSP, they both allow you to contribute money on an after-tax basis. In other words, you pay taxes on the money that goes into the plan upfront so you can withdraw it tax-free later.

Once you reach age 59 ½, you can begin taking distributions without triggering any tax consequences. In terms of early withdrawals from a TSP vs. Roth IRA, there’s no difference. The IRS can assess a 10% early withdrawal penalty when taking money out of either account prematurely.

Both Roth IRAs and Roth TSPs are subject to the five-year rule mentioned earlier. Again, that rule dictates that at least five years must have passed since making your first contribution in order to avoid a tax penalty when making withdrawals.

TSP Roth vs. Roth IRA Similarities
Funded with… After-tax dollars
Contributions are… Not tax-deductible
Qualified withdrawals are… Tax-free

Differences Between Roth TSP vs. Roth IRA

While they do have some things in common, there are some notable differences between a Roth IRA vs. TSP.

First, the TSP is an employer-sponsored plan, while an IRA is not. If you don’t work for the federal government you wouldn’t have access to a Roth TSP, but you could still open a Roth IRA and contribute to it.

Next, Roth TSPs have much higher annual contribution limits and catch-up contribution limits. They also allow for employer matching contributions, something you won’t get with a Roth IRA. Your ability to contribute to a TSP is not limited by your income either.

While Roth IRAs allow you to withdraw original contributions at anytime without a tax penalty, that’s not the case for Roth TSPs.

TSP Roth vs. Roth IRA Differences
Contribution limits… Are higher for Roth TSPs
Matching contributions… Only apply for Roth TSPs
Contribution withdrawals… Only Roth IRAs allow you to withdraw original contributions at anytime without a tax penalty

Roth TSP vs. Roth IRA: The Pros

There are several types of retirement plans that can offer tax advantages, including both Roth TSP and Roth IRA accounts. In terms of the pros, the main benefits of choosing either of these accounts lies in the ability to withdraw money when you retire tax-free.

If you expect to be in a higher tax bracket when you retire, Roth TSP or Roth IRA withdrawals won’t increase your tax liabilities. That’s a good thing if the value of your investments within either account has risen significantly since you first begin making contributions.

Roth TSPs may help you save a decent amount of money for retirement if you’re able to max out your plan each year. The addition of employer matching contributions is another benefit, since that’s essentially “free” money. You don’t get that with Roth IRAs, but these accounts can still be a good way to save if you don’t have access to a retirement plan at work.

Roth TSP Pros Roth IRA Pros

•   Contribute money on an after-tax basis

•   Contributions grow tax-free

•   Qualified withdrawals are tax-free

•   High annual contribution and catch-up contribution limits

•   Employer matching contributions may help your savings grow faster

•   Eligibility to contribute is not tied to your income

•   Contribute money on an after-tax basis

•   Contributions grow tax-free

•   Qualified withdrawals and withdrawals of original contributions are tax-free

•   Save for retirement even if you don’t have a workplace retirement plan

Roth TSP vs. Roth IRA: The Cons

While there are some advantages to saving in a Roth TSP or Roth IRA, there are also some potential downsides. For one thing, you’ll need to have a federal job (that is, work for the federal government is some capacity) in order to contribute to a Roth TSP. With a Roth IRA, your ability to make a contribution hinges on your income and filing status.

Roth TSPs are also known for offering a narrower range of investment options. If you make an in-service withdrawal from your account and you’re not age 59 ½ yet, you should be prepared to pay a tax penalty.

A Roth IRA doesn’t offer matching contributions, nor can you borrow from it. Any early withdrawals that are not qualified or don’t otherwise meet the five-year rule could be subject to tax penalties. While you might have more investment options to choose from, it’s important to be mindful of the fees you may pay.

Roth TSP Cons Roth IRA Cons

•   Must be an eligible federal employee to contribute

•   Investment selection may be limited

•   In-service withdrawals only allowed for financial hardship

•   Early withdrawal penalty may apply

•   Must be within the IRS threshold guidelines to contribute

•   How much you can contribute is tied to income and filing status

•   No option to take loans

•   No employer matching contributions

•   Early withdrawal penalty may apply

Roth TSP vs. Roth IRA: Which Is Better for Your Retirement Goals?

Selecting a retirement plan is an important decision as you want to choose an option that aligns with your needs, goals, risk tolerance, and objectives. Contributing to a Roth TSP could be wise if you’re a federal employee, since you can take advantage of higher contribution limits and employer matching contributions.

A Roth IRA, meanwhile, could make sense if you don’t have access to a retirement plan at work or you want to supplement your employer’s plan. Contributing to a retirement plan at work doesn’t bar you from also contributing to a Roth IRA, as long as you’re within the income limits set by the IRS.

The one that’s better for you may depend on where you work, how much money you’re able to contribute to retirement savings each year, and when you plan to retire. When comparing investment options for a Roth TSP vs. Roth IRA, consider the overall track record of those investments as well as the fees you might pay.

The Takeaway

Whether you choose a Roth IRA vs. Roth TSP or something else, it’s important to save for retirement early and often. Even if you can only afford to contribute small amounts to a retirement account, they can add up over time as long as you remain consistent.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Should I max out my TSP or Roth IRA?

If you can afford to max out your TSP, it might make sense to do so before maxing out a Roth IRA. The simple reason for that is TSPs have higher annual contribution limits and you can also get a matching contribution from your employer. If you only have a Roth IRA, then maxing it out each year can help you save the most money possible toward your retirement goals.

Is a Roth IRA better for retirement or a Roth TSP?

A Roth IRA is a good retirement savings option if you want to be able to make tax-free withdrawals later. However, a Roth TSP allows you to contribute a larger amount of money each year and your employer can also make matching contributions on your behalf.

Does a Roth TSP reduce taxable income?

Roth TSP contributions are made using after-tax dollars, so they do not reduce your taxable income for the year. You can, however, manage your tax liability by taking advantage of any deductions and credits you might be eligible for.

About the author

Rebecca Lake

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/nortonrsx

SoFi Invest®

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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

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Mar
26
2025

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

By | invest, Investing, Preparing for Retirement | Comments Off on Guide to Rolling Over a 403(b) Into an IRA

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

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

Key Points

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

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

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

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

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

What Is a 403(b)?

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

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

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

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

How a 403(b) Works

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

•   Public schools, including public colleges and universities

•   Churches

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

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

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

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

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

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

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

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 Is an IRA?

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

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

Types of IRAs

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

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

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

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

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

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

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

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

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

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

Recommended: How to Open an IRA in 5 Steps

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

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

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

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

Investment Options

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

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

Rollover Methods

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

•   Direct rollovers

•   Indirect rollovers

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

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

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

Withholding

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

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

Other Retirement Plans

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

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

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

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

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

Roth Rollovers

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

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

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

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

Pros of a 403(b) Rollover

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

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

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

Cons of a 403(b) Rollover

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

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

Deciding Which Retirement Account Is Right for You

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

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

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

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

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

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

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

•   Am I comfortable taking required minimum distributions?

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

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

The Takeaway

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

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

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

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

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

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

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

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

About the author

Rebecca Lake

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/FreshSplash

SoFi Invest®

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

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


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

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Mar
26
2025

Guide to Rolling Over a Pension Into an IRA

By | invest, Investing, Preparing for Retirement | Comments Off on Guide to Rolling Over a Pension Into an IRA

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

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

Key Points

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

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

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

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

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

What Is a Pension Plan?

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

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

What Is an IRA?

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

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

There are two main types of IRAs:

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

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

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

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

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.

Can You Roll Over a Pension Into an IRA?

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

•   Traditional IRA

•   Roth IRA

•   SIMPLE IRA

•   SEP IRA

•   457(b) plan

•   403(b) plan

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

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

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

Reasons You May Want to Roll Over a Pension

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

Reason #1: You Want More Control Over Your Investments

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

Reason #2: You’d Like to Avoid RMDs

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

Reason #3: Your Pension Is Small

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

Reason #4: You’re Worried About Losing Benefits

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

Reason #5: You Want Convenient Access

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

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

How Do You Roll a Pension Into an IRA?

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

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

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

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

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

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


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

Pros and Cons of Rolling a Pension Into an IRA

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

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

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

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Pros:

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

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

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

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Cons:

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

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

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

Taxes on Pensions vs. IRAs

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

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

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

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

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

The Takeaway

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

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

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

Help build your nest egg with a SoFi IRA.

FAQ

Can I roll my pension into an IRA?

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

Is a pension better than an IRA?

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

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

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

About the author

Rebecca Lake

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/Andrii Zastrozhnov

SoFi Invest®

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

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

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


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

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Mar
26
2025

REITs vs Real Estate Crowdfunding

By | Growing Wealth, invest, Investing | Comments Off on REITs vs Real Estate Crowdfunding

As a type of alternative investment, real estate can add diversification to a portfolio and act as a hedge against inflation. Real estate investment trusts (REITs) and real estate crowdfunding offer two unique entry points to this alternative asset class.

Both allow you to invest in real estate without being required to own property directly. Comparing the pros and cons of real estate crowdfunding vs. REIT investing can help you decide which one makes the most sense for your portfolio.

Understanding Real Estate Investment Trusts (REITs)

Real estate investment trusts are legal entities that own or finance income-producing properties or invest in mortgage-backed securities. The types of properties a REIT may invest in can include:

•   Hotels and resorts

•   Office space

•   Warehouses

•   Storage space

•   Multifamily apartment buildings

•   Data centers

•   Medical facilities

•   Retail shopping centers

•   Single-family homes

The primary attraction of REITs is the ability to enjoy the benefits of property investment — namely, dividend income — without purchasing real estate directly.

REITs are also considered a type of alternative investment. As with many alternative investments, real estate-based assets don’t tend to move in sync with the stock market. For this reason, investing in REITs may provide portfolio diversification.

REITs may be publicly traded, meaning they trade on an exchange like a stock. REITs must pay out 90% of their taxable income to shareholders as dividends, though some may pay as much as 100%.

If you compare REITs vs. real estate mutual funds, dividends aren’t always required with the latter. Real estate mutual funds can invest in REITs, mortgage-backed securities, or individual properties. While you may have access to a broader range of properties, you may enjoy less liquidity with real estate funds.

Recommended: SoFi’s Alt Investment Guide for Beginners

Alternative investments,
now for the rest of us.

Start trading funds that include commodities, private credit, real estate, venture capital, and more.

💡 Quick Tip: While investing directly in alternative assets often requires high minimum amounts, investing in alts through a mutual fund or ETF generally involves a low minimum requirement, making them accessible to retail investors.

Overview of Real Estate Crowdfunding

What is real estate crowdfunding? It’s a strategy that allows multiple investors to pool funds for property investment. In return, investors share in the profits generated by the investments. Regulation crowdfunding makes real estate crowdfunding possible, as entities can raise capital from investors without registering with the SEC, as long as they offer or sell less than $5 million in securities.

In terms of how it works, real estate crowdfunding platforms seek out investment opportunities and fully vet them before making them available to investors. Individual investors can then choose which properties they’d like to invest in.

Depending on the nature of the investment, you may collect interest payments, rental income, or dividends. Real estate crowdfunding can offer access to a variety of property types, including:

•   Multifamily housing

•   Industrial space

•   Build-for-rent projects

The minimum investment varies by platform — it is commonly upwards of $5,000, but may be $500 or even lower in some cases. Some real estate crowdfunding platforms require investors to be accredited, meaning they must:

•   have an income exceeding $200,000 (or $300,000 with a spouse or spousal equivalent) in each of the two prior years, with an expectation of the same income for the current year, OR

•   have a net worth exceeding $1 million, alone or with a spouse/spousal equivalent, excluding the value of their primary residence, OR

•   hold a Series 7, Series 65, or Series 82 license in good standing

Comparing REITs and Real Estate Crowdfunding

When choosing between a REIT vs. crowdfunding, it’s helpful to understand each option’s potential advantages and disadvantages.

Pros and Cons of REITs

Here are the main benefits of investing in REITs vs. crowdfunding.

•   Risk management. Alternative investments like real estate may help you balance risk in your portfolio. REITs and real estate in general have a lower correlation with the stock market.

•   Accessibility. Purchasing an actual investment property usually requires getting a loan and raising capital for down payments and closing costs. REITs can offer a much lower barrier to entry for investors.

•   Dividends. REITs must pay dividends to investors, which may be attractive if you want to generate passive income with investments.

•   Liquidity. Publicly traded REITs offer liquidity since you can buy and sell shares as needed, similar to a stock.

•   Returns. REITs can potentially generate significant returns in a portfolio compared to stocks or other investments.

Now, here are some of the drawbacks of REIT investing.

•   Fees. You’ll typically pay management fees to invest in REITs, as with any investment, but some may charge more than others. Paying attention to investment costs is key, as the more fees you pay, the less of your investment returns you keep.

•   Overweighting. You can choose which REITs to invest in, but you don’t have a say in the underlying properties. Investing in REITs that own similar properties could overweight your portfolio in a single sector (e.g., malls or office buildings) and thus increase your risk profile.

•   Interest rate risk. Changing interest rates can affect the value of REITs, which can influence the yield you might get. When rates rise, REIT values can decline, requiring you to adjust your expectations for a profit.

•   Taxes. REIT dividends are typically taxed as ordinary income, up to 37% (plus a 3.8% investment surtax). But investors may also see a short- or long-term profit from the REIT, which would be taxed as capital gains. There is also the potential for return on capital, which can be complicated. It may be wise to consult a professional.

Pros and Cons of Real Estate Crowdfunding

Here are the main pros of crowdfunding real estate investments.

•   Diversification. As with REITs, real estate crowdfunding allows you to diversify beyond traditional stocks and bonds.

•   Low minimums. Some, though not all, real estate crowdfunding platforms allow you to get started with as little as a few hundred dollars. That can make entering this alternative asset class or spreading your investment dollars out over multiple property types easier.

•   Geographic diversification. Real estate crowdfunding platforms can offer investors exposure to markets across the country. That can make it easier to target a specific region if you’re looking for the next “hot” market.

•   Returns. Crowdfunded real estate may generate above-average returns, or exceed the returns you could get with REITs.

•   Passive income. Owning a rental property can be time-intensive if you’re managing the property yourself. Real estate crowdfunding allows you to reap the benefits of rental income, without the typical headaches that go along with being a property owner.

And now, here are the cons.

•   Fees. Just like REITs, real estate crowdfunding platforms can charge fees. Fee structures can sometimes be complex, making it difficult to assess what you’ll pay to invest.

•   Illiquidity. Liquidity in the stock market is one thing, but when it comes to real estate crowdfunding, it’s an even bigger consideration owing to the length of time your capital may be locked into an investment. Once you invest in a property, you’re essentially committed to owning it for the duration of the holding period. It’s not unusual for real estate crowdfunding platforms to offer investments with holding periods of five years or more, making them highly illiquid.

•   Accreditation requirements. Some crowdfunding platforms only accept accredited investors. If you don’t meet the standards, you won’t be able to invest through those platforms.

•   Taxes. Income from crowdfunded real estate investments is taxable, though not always in the same way. You may be subject to different tax rates based on how dividends and interest are paid out to you. You may want to consult with a professional.

Which Investment Strategy Is Riskier?

It’s difficult to pinpoint which is riskier when comparing a REIT vs. real estate crowdfunding, as each one has different risk factors.

With REITs, the biggest risks may include:

•   Liquidity risk, which could make it difficult to sell your shares if you’re ready to leave an investment.

•   Changing market conditions or rising and falling trends, either of which could directly impact real estate values.

•   Interest rate sensitivity, which can influence REIT values.

The main real estate crowdfunding risks may include:

•   Platform risk, or the risk that the marketplace you’re using to invest could shut down before you’re able to withdraw your capital.

•   Poor vetting, which may allow unsuitable investments to make it onto the platform.

•   Changing regulations, which may affect the real estate crowdfunding space as a whole.

Whether you choose a REIT vs. crowdfunding, lack of education or understanding is also a risk factor. If you don’t understand the basics of how either type of investment vehicle works, you could be putting yourself in a position to lose money.

Due Diligence Considerations

REITs and real estate crowdfunding platforms should perform due diligence in vetting investments to make sure they’re suitable. However, it’s wise to do your own research to understand what you’re investing in, who you’re investing with, and the potential risks.

As you compare REITs or real estate crowdfunding platforms, keep the following in mind:

•   Minimum requirements to start investing, including accredited investor status

•   Range of investment options

•   Transparency concerning fees and investment selection

•   Holding periods

•   Performance track record

•   Overall reputation

Talking to other investors who have used a particular crowdfunding platform or invested in a certain REIT can offer perspective on the good and bad.

The Takeaway

Real estate can be an addition to your portfolio if you already have some experience in the market, and have an affinity for real estate. As a type of alternative asset class, investing in real estate can add diversification to your portfolio, and potentially act as a hedge against inflation. Both REITs and real estate crowdfunding enable you to invest in real estate without the hassle of actual property ownership and maintenance, but come with different risk factors than you’d find with traditional securities.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

What are the main advantages and disadvantages of investing in REITs?

Investing in REITs can offer the benefits of dividend income and portfolio diversification, without requiring you to own property directly. The disadvantages of REITs can include interest rate risk and market risk, both of which can affect the value of your investments.

How does real estate crowdfunding differ from traditional REIT investments?

Real estate crowdfunding allows investors to pool funds together to invest in property and collect interest, dividends, and/or rental income. REITs own and operate investment properties and pay dividends to investors. REITs and real estate crowdfunding can differ concerning the types of properties you can invest in, the minimum investment required, and the fees you’ll pay.

How are taxes treated for REITs and real estate crowdfunding?

REIT dividends are primarily treated as ordinary income for tax purposes (although you may face capital gains on any profits). Real estate crowdfunding returns may be subject to capital gains tax and/or ordinary income tax rates, depending on how they’re structured. Because the tax treatment of these two entities can be complicated, it’s probably wise to consult a professional.

About the author

Rebecca Lake

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/kate_sept2004

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