Feb
25
2025
401a vs 401k: What's the Difference?

401(a) vs 401(k) Compared

By | Budgeting & Goals, Growing Wealth, invest, Preparing for Retirement, Terminology | No Comments

A 401(k) plan and a 401(a) plan may sound confusingly similar, but there are some differences between the two retirement accounts.

The biggest differences between 401(k) vs 401(a) plans are in the types of companies that offer them and their contribution requirements. While most private sector companies are eligible to offer 401(k) plans, only certain government and public organizations can offer their employees a 401(a) plan. Employers must contribute to 401(a) plans and can make it mandatory for employees to contribute a pre-set amount as well. By contrast, employers do not have to contribute to 401(k) plans and employees are free to choose whether they want to contribute.

Key Points

•   A 401(a) plan is an employer-sponsored retirement account typically available to government workers and employees at educational institutions and nonprofits. Employer contributions are mandatory, while employee contributions may be voluntary.

•   A 401(k) plan is offered by for-profit employers as part of the employee’s compensation package. Employers are permitted but not required to contribute to a 401(k) plan.

•   For 2024, the annual contribution limit for employer and employee combined is $69,000, $70,000 in 2025, with an additional $7,500 catchup contribution allowed for employees 50 or older. And in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

•   Employee contributions to 401(a) or 401(k) plans in 2024 are $23,000 per year. For those 50 and older it’s $30,500 with the catch-up contribution of $7,500. The limits for 2025 are $23,500 per year, and $31,000 for those 50-plus.

•   You can borrow from either a 401(a) or a 401(k) plan with restrictions. Withdrawals before age 59 1⁄2 may incur penalties. Employees can begin to withdraw money without penalty when they turn 59 1⁄2.

What Is a 401(a) Plan?

A 401(a) plan is an employer-sponsored type of retirement account that typically covers government workers and employees from specific education institutions and nonprofits. It is different from an IRA in that the employer sponsors the plan, determines the investment options that the employees can choose from, and sets the vesting schedule (the amount of time an employee will have had to have worked with the organization before all employer contributions become fully theirs, even if they leave the company).

With IRAs, the individual investor decides how much to contribute and if/when they want to make withdrawals from the account. With a 401(a) plan, employer contributions are mandatory; employee contributions are not. All contributions made to the plan accrue on a tax-deferred basis.

Recommended: IRAs vs 401(k) plans

However, withdrawing from either type of plan may incur penalties for withdrawing money before age 59 ½.

What Is a 401(k) Plan?

A 401(k) plan is a benefit offered by for-profit employers as part of the employee’s compensation package. The employer establishes the plan, along with the investment options the employee can choose from and the vesting schedule. As with 401(a) plans, funds contributed are tax-deferred and help employees save for retirement.

Some employers choose to offer a match program in which the company matches employee contributions up to a specific limit.

401(k) plans are also accessible to entrepreneurs and self-employed business owners.

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Who Contributes to Each Plan?

Under a 401(a) plan, employer contributions are mandatory, though the employer can decide whether they’ll contribute a percentage of the employees’ income or a specific dollar amount. Employers can establish multiple 401(a) accounts for their employees with different eligibility requirements, vesting schedules, and contribution amounts.

Employee participation is voluntary, with contributions capped at 25% of their pre-tax income.

Under a 401(k) plan, employees can voluntarily choose to contribute a percentage of their pre-tax salary. Employees are not required to participate in a 401(k) plan.

Employers are permitted but not required to contribute to a 401(k) plan, and many will match up to a certain amount — say, 3% — of employees’s salaries.

401(a) vs 401(k) Contribution Limits

For 2024, the total annual 401(a) contribution limit — from both employer and employee — is $69,000; for 2025 it’s $70,00. However, employees with 401(a) plans can also contribute to a 403(b) plan and a 457 plan simultaneously (more on those plans in the 401(a) vs Other Retirement Plan Options section).

Employee contributions to 401(k) plans have a $23,000 limit in 2024 and a $23,500 limit in 2025. Employees who are 50 or older may contribute up to an additional $7,500 for a total of $30,500 in 2024 and a total of $31,000 in 2025.

An employee with a 401(k) plan may also fund a Roth or traditional IRA. However, restrictions apply.

401(a) vs 401(k) Investment Options

401(a) vs 401(k) plans often offer various investment options, which may include more conservative investments such as stable value funds to more aggressive investments such as stock funds. Some 401(a) plans may allow employees to simplify diversified portfolios or seek investment advice through the plan’s advisor.

Most 401(k) plans also offer various investment choices ranging from low-risk investments like annuities and municipal bonds to equity funds that invest in stocks and reap higher returns.


💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

401(a) vs 401(k) Tax Rules

The tax rules in a 401(a) plan may be one difference between a 401(k) and 401(a).

With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. Pre-tax means contributions are not taxed at the time of investment, but later upon withdrawal. After-tax means contributions are taxed before being deposited into the account

A 401(k), on the other hand, is a tax-deferred retirement plan, meaning all contributions are pre-tax. The wages employees choose to contribute to their plan are untaxed upon initial investment. Income taxes only kick in when the employee decides to withdraw funds from their account.

Can You Borrow from Each Plan?

You can borrow from either a 401(a) or a 401(k) plan if you have an immediate financial need, but there are some restrictions and it is possible to incur early withdrawal penalties.

An employer can limit the amount borrowed from a 401(a) plan — and may choose not to allow employees to borrow funds. If the employer does allow loans, the maximum amount an employee can borrow is the lesser of:

•   $10,000 or half of the vested account balance, whichever is greater OR

•   $50,000

Because the employee is borrowing money from their account, when the employee pays back the loan’s interest, they are paying it to themselves. However, the IRS requires employees to pay back the entire loan within five years . If they don’t pay the loan back, the IRS will consider the loan balance to be a withdrawal and will require taxation on the remaining loan amount as well as a 10% penalty if the employee is under age 59 ½.

Borrowing from a 401(k) plan is similar. Employees are limited to borrowing $50,000 or half of the vested balance — whichever is less. One big difference between borrowing from a 401(a) vs. a 401(k) plan is employees lose out on a tax break if they borrow from their 401(k) because they are repaying it with after-tax dollars. Because the money is taxed again when withdrawn during retirement, an investor is essentially being taxed twice on that money.

Can You Borrow Money from a 401(a) or 401(k) to Buy a Home?

You may be able to use the funds from a 401(a) or 401(k) account to purchase a home. Remember, with 401(a) plans, the employer ultimately decides if loans are permitted from the 401(k).

If you borrow money from your 401(a) or 401(k) to fund the purchase of a home, you have at least five years to repay what you’ve taken out.

The maximum amount you’re allowed to borrow follows the rules stated above:

•   $50,000 OR

•   The greater between $10,000 or half of what’s vested in your account,

Whichever is less.

When Can You Withdraw From Your Retirement Plan?

Employees can begin to withdraw money from their 401(a) plan without penalty when they turn 59 ½. If they make any withdrawals before 59 ½, they will need to pay a 10% early withdrawal penalty. Once they reach 73, they’re required to make withdrawals if they haven’t already started to. [link to article about RMDs]

With a 401(k) plan, if an employee retires at age 55, they can start withdrawing money without penalty. However, to take advantage of this early-access provision, they need to have kept the money in the 401(k) plan and not have rolled it into a Roth IRA.

Employees also need to have ended their employment no earlier than the year in which they turn 55.

Otherwise, the restrictions are the same as with a 401(a) plan, and they can begin to withdraw money penalty-free once they turn 59 ½.

401(a) vs 401(k) Rollover Rules

Generally, 401(a) and 401(k) accounts have similar rollover rules. When an employee chooses to leave their job, they have the option to roll over funds. The employee can choose to roll the account into another retirement plan or take a lump-sum distribution. Generally, if the employee decides to roll over their plan to another plan, they have to do so within 60 days of moving the funds.

The rules for a 401(a) rollover dictate that funds can be transferred to another qualified plan like a 401(k) or an individual retirement account (IRA). The rules for 401(k)s are the same.

If the employee decides to take a lump-sum distribution from the account, they will have to pay income taxes on the full amount. If they are under 59 ½, they will also have to pay the 10% penalty.

Recommended: How To Roll Over a 401(k)

What Happens to Your 401(a) or 401(k) If You Quit Your Job?

If you quit your job, you can leave the money in your former employer’s plan, roll it into the plan of your new employer, transfer it to a Rollover IRA, or cash it out. If you are under age 59 ½ and cash out the plan, you will likely need to pay taxes and a 10% penalty.

However, if you quit your job before you are fully invested in the plan, you will not get your employer’s contributions. You will only get what you contributed to the plan.

What Is a 401(a) Profit Sharing Plan?

A 401(a) profit sharing plan is a tax-advantaged account used to save for retirement. Employees and employers contribute to the account based on a set formula determined by the employer. Unlike 401(a) plans, the employer’s contributions are discretionary, and they may not contribute to the plan every year.

All contributions from employees are fully vested. The ownership of the employer contributions may vary depending on the vesting schedule they create.

Like 401(a) plans, 401(a) profit sharing plans allow employees to select their investments and roll over the account to a new plan if the employee leaves the company. If an employee wants to take a distribution before reaching age 59 ½, they are subject to income taxation and a 10% penalty.

Summarizing the Differences Between 401(k) and 401(a) Plans

The main differences between a 401(k) and 401(a) are:

•   401(a) plans are typically offered by the government and nonprofit organizations, while 401(k) plans are offered by private employers.

•   Employees don’t have to participate in a 401(K), but they often must participate in a 401(a).

•   An employer decides how much employees contribute to a 401(a), while 401(k) participants can contribute what they like.

•   With a 401(a), employees make pre-tax or after-tax contributions, depending on how their employer decides to structure the plan. With a 401(k), all contributions are pre-tax.

Summarizing the Similarities Between 401(a) vs 401(k) Plans

A 401(k) vs. a 401(a) has similarities as well. These include:

•   Both types of plans are employer-sponsored retirement accounts.

•   Employees can borrow money from each plan, though certain restrictions apply.

•   There may be a 10% penalty for withdrawing funds before age 59 ½ for both plans.

401(a) vs Other Retirement Plan Options

401(a) vs 403(b)

A 403b is a tax-advantaged retirement plan offered by specific schools and nonprofits. Like 401(a) and 401(k) plans, employees can contribute with pre-tax dollars. Employers can choose to match contributions up to a certain amount. Unlike the 401(a) plan, employers don’t have mandatory contributions.

For 2024, the employee contributions limit is $23,000. For 2025, the employee contributions limit is $23,500. If the plan allows, employees who are 50 or older may contribute a catch-up amount of $7,500. And in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

Generally, 403b plans are either invested in annuities through an insurance company, a custodian account invested in mutual funds, or a retirement income account for church employees.

Additionally, 403b plans allow for rollovers and distributions without a 10% penalty after age 59 ½. Like similar plans, employees may have to pay a 10% penalty if they take a distribution before reaching age 59 ½ unless the distribution meets other qualifying criteria.

401(a) vs 457

457 plans are retirement plans offered by certain employers such as public education institutions, colleges, universities, and some nonprofit organizations. 457 plans share similar features with 401(a) plans, including pre-tax contributions, tax-deferred investment growth, and a choice of investments that employees can select.

Employees can also roll over funds to a new plan or take a lump-sum distribution if they leave their job. However, unlike a 401(a) or 401(k) plan, the withdrawal is not subject to a 10% IRS penalty.

Another option offered through 457 plans is for employees to contribute to their account on either a pre-tax or post-tax basis.

401(a) vs Pension

A 401(a) is a defined contribution plan, where a pension is a defined benefit plan. With a pension, employees receive the benefit of a fixed monthly income in retirement; their employer pays them a fixed amount each month for the rest of their life. The monthly payment can be based on factors like salary and years of employment.

With a 401(a), employees have access to what they and their employer contributed to their 401(a) account. In contrast to a pension plan, retirees aren’t guaranteed a fixed amount and their contributions may not last through the end of their life.

Pros and Cons of 401(k) vs 401(a) Plans

Both 401(k) and 401(a) plans have pros and cons.

Pros of a 401(k):

•   Employers may match a portion of the employee’s contributions.

•   The plan is fairly easy to set up.

•   Employees generally have a wide range of investment options.

Pros of a 401(a):

•   Lower fees

•   Contributions are tax-deferred.

•   Both the employer and employee make monthly contributions.

Cons of a 401(k):

•   Fees may be high.

•   Need to wait until fully vested to keep employer matching contributions.

•   Penalty for withdrawing funds early.

Cons of a 401(a):

•   Investment choices may be limited.

•   Participation may be mandatory.

•   Penalty for withdrawing funds early.

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Other Retirement Account Options

Roth IRAs

Roth IRAs are funded with after-tax contributions, which means they aren’t tax deductible. However, the withdrawals you take in retirement are tax-free.

You can withdraw the amount you contributed to an IRA at any time, without penalty.

The Roth IRA annual contribution limit for 2024 and 2025 is $7,000 ($8,000 if you’re 50 or older).

Traditional IRAs

A traditional IRA is similar to a 401(k): both plans offer tax-deferred contributions that may lower your taxable income. However, in retirement, you will owe taxes on the money you withdraw from both accounts.

Unlike a 401(k), a traditional IRA is not an employer-sponsored plan. Anyone can set up an IRA to save money for retirement. And if you have a 401 k), you can also have a traditional IRA.

The traditional IRA contribution limit for 2024 and 2025 is $7,000 ($8,000 if you’re 50 or older).

HSAs

An HSA, or Health Savings Account, allows you to cover healthcare costs using pre-tax dollars. But you can also use an HSA as a retirement account. At age 65, you can withdraw the money in your HSA and use it for any purpose. However, you will pay taxes on anything you withdraw that’s not used for medical expenses.

In 2024, you can contribute up to $4,150 in an HSA as an individual, or $8,300 for a family. In 2025, you can contribute up to $4,300 as an individual, or $8,550 for a family.

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Investing In Your Retirement

The largest difference between 401(a) and 401(k) plans is the type of employers offering the plans. Whereas 401(a) plans typically cover government workers and employees from specific education institutions and nonprofits, 401(k) plans are offered by for-profit organizations. Thus, a typical employee won’t get to choose which plan to invest in — the decision will be made based on what organization they work for.

Both 401(a) plans and 401(k) plans do have restrictions that might bother some investors. For example, an employee will be at the mercy of their employer’s choice when it comes to investing options.

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FAQ

Is a 401(a) better than a 401(k)?

It’s not necessarily a matter of which plan is “better.” 401(k) plans are offered by private employers, while the government and nonprofits offer 401(a) plans. Both plans allow you to save for retirement in a tax-deferred way.

How are 401(a)s different from 401(k)s?

There are some differences between 401(k) and 401(a) plans. For instance, 401(a) plans are typically offered by the government and nonprofit organizations, while 401(k) plans are offered by private employers. In addition, employees don’t have to participate in a 401(k), but they often must participate in a 401(a). An employer decides how much employees contribute to a 401(a), while 401(k) participants can contribute what they like. And finally, those who have a 401(k) may have more investment options than those who have a 401(a).

Can you roll a 401(a) into a 401(k)?

Yes, you can roll a 401(a) into a 401(k) if you leave your job and then get a new job with a private company that offers a 401(k). You can also roll over a 401(a) into a traditional IRA.

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Feb
25
2025
457 vs. 401(k): A Detailed Comparison

457 vs 401(k): A Detailed Comparison

By | invest, Investing, Preparing for Retirement | Comments Off on 457 vs 401(k): A Detailed Comparison

Depending on where you work, you may be able to save for retirement in a 457 plan or a 401(k). While any employer can offer a 401(k), a 457 plan is commonly associated with state and local governments and certain eligible nonprofits.

Both offer tax advantages, though they aren’t exactly the same when it comes to retirement saving. Understanding the differences between a 457 retirement plan vs. 401(k) plans can help you decide which one is best for you.

And you may not have to choose: Your employer could offer a 401(k) plan and a 457 plan as retirement savings options. If you’re able to make contributions to both plans simultaneously, you could do so up to the maximum annual contribution limits — a terrific savings advantage for individuals in organizations that offer both plans.

Key Points

•   A 457 plan and a 401(k) are retirement savings options with tax advantages.

•   Both plans have contribution limits and may offer employer matching contributions.

•   A 401(k) is governed by ERISA, while a 457 plan is not.

•   457 plans allow penalty-free withdrawals before age 59 ½ if you retire, unlike 401(k) plans.

•   457 plans have special catch-up provisions for those nearing retirement.

401(k) Plans

A 401(k) is a tax-advantaged, defined contribution plan. Specifically, it’s a type of retirement plan that’s recognized or qualified under the Employee Retirement Income Security Act (ERISA).

With a 401(k) plan, the amount of benefits you can withdraw in retirement depends on how much you contribute during your working years and how much those contributions grow over time.

Understanding 401(k) Contributions

A 401(k) plan is funded with pre-tax dollars, meaning that contributions reduce your taxable income in the year you make them. And withdrawals are taxed at your ordinary income tax rate in retirement.

Some employers may offer a Roth 401(k) option, which would enable you to deposit after-tax funds, and withdraw money tax-free in retirement.

401(k) Contribution Limits

The IRS determines how much you can contribute to a 401(k) each year. For 2024, the annual contribution limit is $23,000; for 2025, it’s $23,500. Workers aged 50 or older can contribute an additional $7,500 in catch-up contributions in 2024 and 2025. And in 2025, those 60 to 63 may contribute an additional catch-up of $11,250 instead of $7,500, thanks to SECURE 2.0.

Employers can elect to make matching contributions to a 401(k) plan, though they’re not required to. If an employer does offer a match, it may be limited to a certain amount. For example, your employer might match 50% of contributions, up to the first 6% of your income.

401(k) Investment Options

Money you contribute to a 401(k) can be invested in such assets as mutual funds, index funds, target-date funds, and exchange-traded funds (ETFs). Your investment options are determined by the plan administrator. Each investment can carry different fees, and there may be additional fees charged by the plan itself.

Traditional 401(k)s are subject to required minimum distribution (RMD) rules beginning at age 73 (for those who turned 72 after December 31, 2022). However, as of 2024, Roth 401(k)s no longer require RMDs. That’s something to consider when you’re thinking about your income strategy in retirement.

Recommended: 5 Steps to Investing in Your 401k Savings Account

Vesting in a 401(k) Retirement Plan

A 401(k) plan is subject to IRS vesting rules. Vesting determines when the funds in the account belong to you. If you’re 100% vested in your account, then all of the money in it is yours.

Employee contributions to a 401(k) are always 100% vested. The amount of employer matching contributions you get to keep can depend on where you are on the company’s vesting schedule. Amounts that aren’t vested can be forfeited if you decide to leave your job — at which point you may decide to open an IRA and roll over your 401(k) into it.

Employers may use a cliff vesting approach in which your percentage of ownership is determined by year. For instance, in year one and two, your ownership claim is 0%. Once you reach year three and beyond, you’re 100% vested.

With graded vesting, the percentage increases gradually over time. So, you might be 20% vested after year two and 100% vested after year six.

All employees in the plan must be 100% vested by the time they reach their full retirement age, which may or may not be the same as their date of retirement. The IRS also mandates 100% vesting when a 401(k) plan is terminated.

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457 Plans

A 457 plan is a deferred compensation plan that can be offered to state and local government employees, as well as employees of certain tax-exempt organizations. The most common version is the 457(b); the 457(f) is a deferred compensation plan for highly paid executives. In certain ways, a 457 is very similar to a 401(k), such as:

•   Employees can defer part of their salary into a 457 plan and those contributions are tax-deferred. Earnings on contributions are also tax-deferred.

•   A 457 plan can allow for designated Roth contributions. If you take the traditional 457 route, qualified withdrawals would be taxed at your ordinary income tax rate when you retire.

•   Traditional 457 accounts are subject to RMDs once you turn 73; Roth-designated 457 accounts are not.

•   For 2024, the annual contribution limit is $23,000, and $7,500 for the catch-up amount for workers who are 50 or older. For 2025, the annual contribution limit is $23,500 with $7,500 in catch-up contributions for those aged 50 and up. Also in 2025, those 60 to 63 may contribute an additional $11,250 instead of $7,500 to a 457 plan, thanks to SECURE 2.0.

One big difference with 457 plans is that these limits are cumulative, meaning they include both employee and employer contributions rather than allowing for separate matching contributions the way a 401(k) does.

Another interesting point of distinction for older savers: If permitted, workers can also make special catch-up contributions if they are in the three-year window leading up to retirement.

They can contribute the lesser of the annual contribution limit, plus the amount of the limit not used in any prior years. The second calculation is only allowed if the employee is not making regular catch-up contributions.

Vesting in a 457 Retirement Plan

Vesting for a 457 plan is similar to vesting for a 401(k). You’re always 100% vested in any contributions you make to the plan. The plan can define the vesting schedule for employer contributions. For example, your job may base vesting on your years of service or your age.

As with a 401(k), any unvested amounts in a 457 retirement plan are forfeited if you separate from your employer for any reason. So if you’re planning to change jobs or retire early, you’d need to calculate how much of your retirement savings you’d be entitled to walk away with, based on the plan’s vesting schedule.

457 vs 401(k): Comparing the Pros

When comparing a 457 plan vs. 401(k), it’s important to look at how each one can benefit you when saving for retirement. The main advantages of using a 457 plan or a 401(k) to save include:

•   Both offer tax-deferred growth

•   Contributions reduce taxable income

•   Employers may match contributions, giving you free money for retirement

•   Both offer generous contribution limits, with room for catch-up contributions

•   Both may offer loans and/or hardship withdrawals

Specific 457 Plan Advantages

A 457 plan offers a few more advantages over a 401(k).

Unlike 401(k) plans, which require employees to wait until age 59 ½ before making qualified withdrawals, 457 plans allow withdrawals at whatever age the employee retires. And the IRS doesn’t impose a 10% early withdrawal penalty on withdrawals made before age 59 ½ if you retire (or take a hardship distribution).

Also, independent contractors can participate in an organization’s 457 plan.

And, as noted above, 457 plans have that special catch-up provision option, for those within three years of retirement.

457 vs 401(k): Comparing the Cons

Any time you’re trying to select a retirement plan, you also have to factor in the potential downsides. In terms of the disadvantages associated with a 457 retirement plan vs. 401(k) plans, they aren’t that different. Here are some of the main cons of both of these retirement plans:

•   Vesting of employer contributions can take several years, and plans vary

•   Employer matching contributions are optional, and not every plan offers them

•   Both plans are subject to RMD rules, unless they are Roth 401(k)s or Roth-designated 457 plans

•   Loans and hardship withdrawals are optional

•   Both can carry high plan fees and investment options may be limited

Perhaps the biggest drawback to 457 plans is that employer and employee contributions are combined when applying the annual IRS limit. A 401(k) plan doesn’t have that same requirement so you could make the full annual contribution and enjoy an employer match on top of it.

457 vs 401(k): The Differences

The most obvious difference between a 401(k) vs. 457 account is who they’re meant for. If you work for a state or local government agency or an eligible nonprofit, then your employer can offer a 457 plan for retirement savings. All other employers can offer a 401(k) instead.

Aside from that, 457 plans are not governed by ERISA since they’re not qualified plans. A 457 plan also varies from a 401(k) with regard to early withdrawal penalties and the special catch-up contributions allowed for employees who are nearing retirement. Additionally, a 457 plan may require employees to prove an unforeseeable emergency in order to take a hardship distribution.

A 457 plan and a 401(k) can offer a different range of investments as well. The investments offered are determined by the plan administrator.

457 vs 401(k): The Similarities

Both 457 and 401(k) plans are subject to the same annual contribution limits, though again, the way the limit is applied to employer and employee contributions is different. With traditional 401(k) and 457 plans, contributions reduce your taxable income and withdrawals are taxed at your ordinary income tax rate. When you reach age 73, unless you have the Roth version of these plans, you’ll need to take RMDs unless you’re still working.

Either plan may allow you to take a loan, which you’d repay through salary deferrals. Both have vesting schedules you’d need to follow before you could claim ownership of employer matching contributions. With either type of plan you may have access to professional financial advice, which is a plus if you need help making investment decisions.

457 vs 401(k): Which Is Better?

A 457 plan isn’t necessarily better than a 401(k) and vice versa. If you have access to either of these plans at work, both could help you to get closer to your retirement savings goals.

A 401(k) has an edge when it comes to regular contributions, since employer matches don’t count against your annual contribution limit. But if you have a 457 plan, you could benefit from the special catch-up contribution provision which you don’t get with a 401(k).

If you’re planning an early retirement, a 457 plan could be better since there’s no early withdrawal penalty if you take money out before age 59 ½. But if you want to be able to stash as much money as possible in your plan, including both your contributions and employer matching contributions, a 401(k) could be better suited to the task.

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Investing in Retirement With SoFi

If you’re lucky enough to work for an organization that offers both a 457 plan and a 401(k) plan, you could double up on your savings and contribute the maximum to both plans. Or, you may want to choose between them, in which case it helps to know the main points of distinction between these two, very similar plans.

Basically, a 401(k) has more stringent withdrawal rules compared with a 457, and a 457 has more flexible catch-up provisions. But a 457 can have effectively lower contribution limits, owing to the inclusion of any employer contributions in the overall plan limits.

The main benefit of both plans is the tax-advantaged opportunity to save for retirement. The money you contribute reduces your taxable income, and grows tax free (you only pay taxes when you take money out).

Another strategy that can help you manage your retirement savings: Consider rolling over an old 401(k) account so you can keep track of your money in one place. SoFi makes setting up a rollover IRA pretty straightforward, and there are no rollover fees or taxes.

Help grow your nest egg with a SoFi IRA.

FAQ

What similarities do 457 and 401(k) retirement plans have?

A 457 and a 401(k) plan are both tax-advantaged, with contributions that reduce your taxable income and grow tax-deferred. Both have the same annual contribution limit and regular catch-up contribution limit for savers who are 50 or older, plus an additional catch-up contribution in 2025 for those 60 to 63. Either plan may allow for loans or hardship distributions. Both may offer designated Roth accounts.

What differences do 457 and 401(k) retirement plans have?

A 457 plan includes employer matching contributions in the annual contribution limit, whereas a 401(k) plan does not. You can withdraw money early from a 457 plan with no penalty if you’ve separated from your employer. A 457 plan may be offered to employees of state and local governments or certain nonprofits while private employers can offer 401(k) plans to employees.

Is a 457 better than a 401(k) retirement plan?

A 457 plan may be better for retirement if you plan to retire early. You can make special catch-up contributions in the three years prior to retirement and you can withdraw money early with no penalty if you leave your employer. A 401(k) plan, meanwhile, could be better if you’re hoping to maximize regular contributions and employer matching contributions.

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.

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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25
2025
What Happens to a 401k When You Leave Your Job?

What Happens to Your 401(k) When You Leave Your Job?

By | invest, Investing, Money & Life, Preparing for Retirement | Comments Off on What Happens to Your 401(k) When You Leave Your Job?

There are many important decisions to make when starting a new job, including what to do with your old 401(k) account. Depending on the balance of the old account and the benefits offered at your new job, you may have several options, including keeping it where it is, rolling it over into a brand new account, or cashing it out.

A 401(k) may be an excellent way for employees to save for retirement, as it allows them to save for retirement on a tax-advantaged basis, and also many employers offer matching contributions. Here are a few things to know about keeping track of your 401(k) accounts as you change jobs and move through your career

Key Points

•   When leaving a job, you have options for your 401(k) account, including leaving it with your former employer, rolling it over into a new account, or cashing it out.

•   If your 401(k) balance is less than $5,000, your former employer may cash out the funds or roll them into another retirement account.

•   If you have more than $5,000 in your 401(k), your former employer cannot force you to cash out or roll over the funds without your permission.

•   If you quit or are fired, you may lose employer contributions that are not fully vested.

•   It is important to consider the tax implications, penalties, and long-term financial security before making decisions about your 401(k) when leaving a job.

Quick 401(k) Overview

A 401(k) is a type of retirement savings plan many employers offer that allows employees to save and invest with tax advantages. With a 401(k) plan, an employer will automatically deduct workers’ contributions to the account from their paychecks before taxes are taken out. In 2025, employees can contribute up to $23,500 a year in their 401(k)s, up from $23,000 in 2024. Employees aged 50 and older can make catch-up contributions of $7,500 a year for a total of $31,000 in 2025, up from $30,500 in 2024. Also in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for an annual total of $34,750.

Employees will invest the funds in a 401(k) account in several investment options, depending on what the employer and their 401(k) administrator offer, such as stocks, bonds, mutual funds, and target date funds.

The money in a 401(k) account grows tax-free until the employee withdraws it, typically after reaching age 59 ½. At that point, the employees must pay taxes on the money withdrawn. However, if the employee withdraws money before reaching 59 ½, they will typically have to pay 401(k) withdrawal taxes and penalties.

Some employers also offer matching contributions, which are additional contributions to an employee’s account based on a certain percentage of the employee’s own contributions. Employers may use 401(k) vesting schedules to determine when employees can access these contributions.

The more you can save in a 401(k), the better. If you can’t max out your 401(k) contributions, start by contributing at least enough money to qualify for your employer’s 401(k) match if they offer one.

What Happens to Your 401(k) When You Quit?

When you quit your job, you generally have several options for your 401(k) account. You can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, move it over to an IRA rollover, or cash it out.

However, if your 401(k) account has less than $5,000, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer may cash out the funds and send them to you via check. If there is between $1,000 and $5,000 in the account, your employer may roll it into another retirement account in your name, such as an IRA. You may also suggest a specific IRA for the rollover.

If you have more than $5,000 in your account, your former employer can only force you to cash out or roll over into another account with your permission. Your funds can usually remain in the account indefinitely.

Also, if you quit your job and you are not fully vested, you forfeit your employer’s contributions to your 401(k). But you do get to keep your vested contributions.

Is There Any Difference if You’re Fired?

If you are fired from your job, your 401(k) account options are similar to those if you quit your job. As noted above, you can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, roll it over into an IRA, or cash it out. The same account limits mentioned above apply as well.

Additionally, if you are fired from your job, you may be eligible for a severance package, which may include a lump sum payment or continuation of benefits, including a 401(k) plan. But these benefits depend on your company and the circumstances surrounding your termination. And, like with quitting your job, you do not get to keep any employer contributions that are not fully vested.

How Long Do You Have to Move Your 401(k)?

If you leave your job, you don’t necessarily have to move your 401(k). Depending on the amount you have in the 401(k), you can usually keep it with your previous employer’s 401(k) administrator.

But if you do choose to roll over your 401(k) and it is an indirect rollover, you typically have 60 days from the date of distribution to roll over your 401(k) account balance into an IRA or another employer’s 401(k) plan. If you fail to roll over the funds within 60 days, the distribution will be subject to taxes and penalties, and if you are under 59 ½ years old, an additional 10% early withdrawal 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.

Next Steps for Your 401(k) After Leaving a Job

As you decide what to do with your funds, you have several options, from cashing out to rolling over your 401(k)s to expanding your investment opportunities.

Cash Out Your 401(k)

You can cash out some or all of your 401(k), but in most cases, there are better choices than this from a personal finance perspective. As noted above, if you are younger than 59 ½, you may be slammed with income taxes and a 10% early withdrawal penalty, which can set you back in your ability to save for your future.

If you are age 55 or older, you may be able to draw down your 401(k) penalty-free thanks to the Rule of 55. But remember, when you remove money from your retirement account, you no longer benefit from tax-advantaged growth and reduce your future nest egg.

Roll Over Your 401(k) Into a New Account

Your new employer may offer a 401(k). If this is the case and you are eligible to participate, you may consider rolling over the funds from your old account. This process is relatively simple. You can ask your old 401(k) administrator to move the funds from one account directly to the other in what is known as a direct transfer.

Doing this as a direct transfer rather than taking the money out yourself is important to avoid triggering early withdrawal fees. A rollover into a new 401(k) has the advantage of consolidating your retirement savings into one place; there is only one account to monitor.

Keep Your 401(k) With Your Previous Employer

If you like your previous employer’s 401(k) administrator, its fees, and investment options, you can always keep your 401(k) where it is rather than roll it over to an IRA or your new employer’s 401(k).

However, keeping your 401(k) with your previous employer may make it harder to keep track of your retirement investments because you’ll end up with several accounts. It’s common for people to lose track of old 401(k) accounts.

Moreover, you may end up paying higher fees if you keep your 401(k) with your previous employer. Usually, employers cover 401(k) fees, but if you leave the company, they may shift the cost onto you without you realizing it. High fees may end up eating into your returns, making it harder to save for retirement.

Does Employer Match Stop After You Leave?

Once you leave a job, whether you quit or are fired, you will no longer receive the matching employer contributions.

Recommended: How an Employer 401(k) Match Works

Look for New Investment Options

If you don’t love the investment options or fees in your new 401(k), you may roll the funds over into an IRA account instead. Rolling assets into a traditional IRA is relatively simple and can be done with a direct transfer from your 401(k) plan administrator. You also may be allowed to roll a 401(k) into a Roth IRA, but you’ll have to pay taxes on the amount you convert.

The advantage of rolling funds into an IRA is that it may offer a more comprehensive array of investment options. For example, a 401(k) might offer a handful of mutual or target-date funds. In an IRA, you may have access to individual securities like stocks and bonds and a wide variety of mutual funds, index funds, and exchange-traded funds.

Recommended: ​​What To Invest In Besides Your 401(k)

Test your understanding of what you just read.

The Takeaway

Changing jobs is an exciting time, whether or not you’re moving, and it can be a great opportunity to reevaluate what to do with your retirement savings. Depending on your financial situation, you could leave the funds where they are or roll them over into your new 401(k) or an IRA. You can also cash out the account, but that may harm your long-term financial security because of taxes, penalties, and loss of a tax-advantaged investment account.

If you have an old 401(k) you’d like to roll over to an online IRA, SoFi Invest® can help. With a SoFi Roth or Traditional IRA, investors can investment options, member services, and our robust suite of planning and investment tools. And SoFi makes the 401(k) rollover process seamless and straightforward — with no need to watch the mail for your 401(k) check. There are no rollover fees, and you can complete your 401(k) rollover quickly and easily.

Help grow your nest egg with a SoFi IRA.

FAQ

How long can a company hold your 401(k) after you leave?

A company can hold onto an employee’s 401(k) account indefinitely after they leave, but they are required to distribute the funds if the employee requests it or if the account balance is less than $5,000.

Can I cash out my 401(k) if I quit my job?

You can cash out your 401(k) if you quit your job. However, experts generally do not advise cashing out a 401(k), as doing so will trigger taxes and penalties on the withdrawn amount. Instead, it is usually better to either leave the funds in the account or roll them over into a new employer’s plan or an IRA.

What happens if I don’t rollover my 401(k)?

If you don’t roll over your 401(k) when you leave a job, the funds will typically remain in the account and be subject to the rules and regulations of the plan. If the account balance is less than $5,000, the employer may roll over the account into an IRA or cash out the account. If the balance is more than $5,000, the employer may offer options such as leaving the funds in the account or rolling them into an IRA.

Photo credit: iStock/chengyuzheng

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.

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Feb
25
2025
woman with bubbles

15 Creative Ways to Save Money

By | Budgeting & Goals, Financial Independence, money | No Comments

You may not think of saving money as being a creative pursuit, but with a little effort, you can find fresh (and even fun) ways to help you stash away some cash. This can make the process more engaging and motivating.

Whether your goal is to save for the down payment on a house, build up your kid’s college fund, or simply take a great vacation next year, these clever ways to save money can help you get there — without feeling bored or deprived. Get set to save more.

Key Points

•   Set clear, specific savings goals to stay motivated and focused.

•   Automate savings by setting up monthly transfers and using round-up apps.

•   Reduce expenses by negotiating bills and switching to a bank that charges low or no fees.

•   Make savings fun with challenges, milestones, and a savings buddy.

•   Increase income through side gigs, freelancing, and selling unused items.

15 Creative Ideas to Save Money

You’re probably familiar with some of the usual strategies for saving money, such as comparison shopping and clipping coupons. If you’re ready to mix things up and try some less common tactics, consider the following 15 quirky but effective ideas.

1. Identify Your Saving Goals

Not sure how to make saving money fun or prioritize it? You could start by identifying your goals, a target savings amount, and a timeline for achieving them. For example, if you’re saving up to purchase a car in one year, determine how much you’ll need, then divide that amount by 12 to come up with a monthly savings goal. You might even open up a separate savings account earmarked for a new car. Seeing your “car” account grow over time can motivate you to keep going, even throw in some extra cash whenever you can.

2. Find a Saving Buddy

With the right company, even the most mundane tasks can be enjoyable. You might talk about your savings goals with your friends and family members to potentially identify a saving buddy with similar objectives.

An ideal saving buddy will be supportive of your financial goals, offer good advice, and have a positive money mindset.

Checking in with your buddy regularly could help keep you both stay on track and you can celebrate each other’s accomplishments. This person might also be able to talk you down if you’re on the verge of making a big impulse buy. If you’re stressed about how to make saving money fun, you could brainstorm creative tactics with your saving buddy and implement them together.

3. Seek Out Free Activities

Saving money does not have to be synonymous with missing out. There are likely a number of free activities offered in your area. Perhaps your local park offers free theater performances or concerts in the summer, or your area bookstore hosts interesting literary panels and author discussions with no attendance fee. This can be a great alternative to pricey movie or concert tickets.

Also think about the resources provided by your local library, such as book clubs, language exchange programs, craft nights, and movie screenings. You might also find a way to save money on streaming services: Many libraries offer services like Hoopla or Kanopy at no cost to card holders.

4. Get Creative and DIY

Another clever way to save money is to think about what you could create rather than buy new. For example, you may be able to make your own household cleaning products with items you already own (like vinegar and baking soda) or whip up a facial mask using fresh ingredients like avocado, tea, honey, and oatmeal. Out of wrapping paper? You don’t necessarily need to run to the store. Consider using old newspapers, maps, magazines, brown paper bags, or scraps of fabric. It’s free – and kinder to the earth.

5. Gamify Savings

To break up the monotony of saving, consider incorporating games and challenges into your overall savings plan. For example, you might try a “no-spend week,” where you refrain from spending money on anything other than necessities for seven days. If you succeed at that, you might want to ramp up to a 30-day no-spend challenge.

If a full no-spend challenge feels like too much, you could simply challenge yourself to not spend in a certain category for one month, like clothing, shoes, or take-out. You might choose something else the next month to keep the savings going.

6. Swap Goods and Trade Skills

Getting serious about money management doesn’t mean you need to give up on “luxuries” like exercise classes or new clothes. Rather than pay cash, you might explore trading skills or goods for pricey things or experiences on your wish list. For example, you could see if your favorite yoga studio offers a work-trade program where you can do administrative duties in exchange for classes. Or if your wardrobe needs a refresh, consider setting up a clothing swap with friends to score finds — and have fun — at no cost.

You might also consider an informal exchange with skilled friends. For example, if you’ve been eyeing an original painting from your artist pal but don’t have the funds to pay her, you could offer your website design services (or some other helpful skills) for the painting.

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7. Increase Income

Sometimes, cutting down on expenses might not be the most effective way to reach a savings goal. It might be easier, in some cases, to look for ways to make more money rather than reduce costs.

If a salary raise isn’t in the offing, you might consider your particular skills and/or hobbies to see if there is a way to translate one of them into an income stream. For example, if you love to knit, you might start an online store for your yarn creations. Or if you’re a wordsmith, you could potentially offer your writing or editing services in a freelance capacity. A successful low-cost side hustle could help bring additional money into your bank account and even add more fun and enjoyment in your life.

8. Switch Your Bank

If your financial institution seems to be charging you endless fees and offers little interest on your savings account, consider switching banks.

You might shop around and see what online banks and local credit unions are offering. Online-only institutions don’t have brick-and-mortar locations to fund and can pass those savings along to customers in the form of lower or no fees and higher interest rates. Credit unions, on the other hand, are run as financial co-ops, meaning each member has a stake in business. As nonprofits, they are designed to serve their members, typically paying higher interest rates on deposits and charging lower fees.

9. Split Your Direct Deposit into Checking and Savings

If you have regular paychecks, one of the easiest ways to start saving more is to have some of each paycheck go directly into a savings account, where you’ll be less tempted to spend it. Many employers will allow you to do a split direct deposit, where some of your pay goes into your checking account and some goes into your savings account. Evening saving off 5% or 10% of your paycheck each pay period can add up to a serious sum over time. If you choose a high yield account, you can help your savings grow faster.

If you don’t have the option to split up your paycheck or would prefer not to, another way to automate savings is to set up a recurring monthly transfer from checking to savings for the same day each month, perhaps the day after you get paid. You won’t have to remember to make the transfer or give saving a second thought.

10. Change Your Due Dates for Bills

If you frequently overdraft your checking account or have to pull money from savings to cover bills, consider this unique way to save money: Changing some of your billing due dates.

Moving due dates for large payments — like credit card bills or student loans — away from the due date for your rent or mortgage, could help you avoid getting hit with overdraft or non-sufficient fund (NSF) fees. It can also keep you from transferring money from savings to checking to cover a temporary shortfall, and then never transferring it back.

11. Save Every $5 Bill

This is a classic adult remix of the piggy bank you had as a kid. Only this time, instead of squirreling away pocket change, you take every $5 you get and put it in an envelope tucked into the back of a drawer.

Once you get into the habit of identifying $5’s as “no spend” bills, you’ll find it can really be a creative way to save money. You likely won’t miss the money (it’s just $5) but at the end of the year, it could easily add up to enough cash to help with holiday shopping, a loan payment, or even a nice charity donation, without having to touch your savings in the bank.

Recommended: 39 Passive Income Ideas to Build Wealth

12. Take Advantage of Cash Back Credit Cards

Need another clever way to save money? Look for a credit card that offers a good rewards program like SoFi Plus. Depending on the card, you may be able to redeem cash back rewards as statement credits, checks, or direct deposits. Just keep in mind that a cash back credit card isn’t a good saving solution if you tend to carry a balance — the money you’ll pay in interest is likely to be significantly higher than your rewards rate.

13. Round Up Your Purchases Automatically

There are plenty of apps available that will round up your purchase to the nearest dollar and then save the change for you. Your bank may offer this kind of savings tool, which can be an easy way to save money automatically.

The amount these apps save for you is small, so you aren’t likely to notice 25 or 80 cents here and there when the round-up transfers, but it can potentially add up to hundreds saved per year.

14. Consolidate Credit Card Debt with a Personal Loan

If credit card debt is preventing you from saving as much as you would like, you might use a personal loan as a creative way to save some extra money every month.

If you can qualify for a personal loan with a significantly lower interest rate than you’re paying on your credit card balances, you could use it to pay off your credit cards. While you’ll still be paying off the personal loan, you could save on interest. You might also be able to pay off your debt faster. Once your loan is paid off, you can redirect those monthly payments to your savings account.

15. Take Advantage of an Employer’s 401(k) Match

If your employer offers a match on your 401(k) savings, it’s wise to take full advantage — this is essentially free money. For example, if your employer matches 50% of employee contributions up to 5% of your salary, consider putting at least 5% of your paycheck into your retirement account each month. Otherwise you’ll be leaving money on the table.

Creative Savings Challenges to Try

Saving money can feel like a chore, but making it a fun challenge can turn it into an exciting goal. Here are some ways to keep things interesting.

•   52-Week Savings Challenge: This challenge encourages you to save a small, increasing amount each week. Start with $1 in the first week, $2 in the second, and so on until you reach $52 in the final week. By the end of the year, you’ll have saved $1,378.

•   Receipt Challenge: Love to shop sales or use coupons? Collect your receipts that show your purchase savings in a drawer. Once a month, add up your savings, then transfer that amount into your savings account.

•   100 Envelope Challenge: Label 100 envelopes with numbers from 1 to 100. Each day (or week), pick an envelope randomly and place the corresponding amount inside. If you complete all envelopes, you’ll save $5,050!

•   Vacation Savings Challenge: A year before you want to go away, set a savings goal that will cover all of your vacation costs (including airfare, lodging, and spending money). Divide that total by 12, and transfer that amount into a savings account each month.

How To Stay Motivated to Save Money

Staying motivated to save money requires setting clear goals and making saving a rewarding habit. A good place to start is by defining a specific reason for saving, whether it’s for an emergency fund, a vacation, or a major purchase. Next, break your savings into small, manageable milestones to make it feel achievable.

Tracking your progress with a savings app or chart, and sprinkling in fun challenges (like a $5 or no-spend challenge), can also help you stay motivated. In addition, you might reward yourself for reaching savings milestones with a low-cost treat, like going out for ice cream or a fancy coffee.

Why Is Making Saving Money Fun Important?

Trying tactics like the ones above can help make saving money feel less like deprivation and more like fun. That’s important for a couple of reasons. Shaking up your savings routine can make socking away cash seem fresh and more engaging, meaning you are more likely to get the job done. Basically, it can rev up your motivation to save money.

Also, when you find a technique that is fun, such as a spending challenge, it can help encode the new savings behavior in your routine. If it’s enjoyable, you are more likely to keep up the good work.

How Can You Make the Most of the Money You Save?

When you save money, you likely want it to grow over time, not just sit there. One good way to do that is to stash your money in an interest-earning account. This can be especially effective if the financial institution charges low or no banking fees.

You might look for a high-interest or high-yield savings account. These can pay a significantly higher rate than standard savings accounts, and your money will be accessible and likely insured (up to certain limits) by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).

Optimizing Your Savings

Beyond the creative ways listed above, there are other important ways to optimize your savings.

•   Assess your cash flow. Coming up with a basic monthly budget can help you better understand your personal finances and get a grip on your earnings, spending, and savings. When you see where your money goes, you can tweak your spending to help funnel more towards savings.

•   Negotiate your bills. You may be able to reduce some of your recurring bills (such as cable, car insurance, and cell phone) by negotiating a lower rate or switching to another service provider. Even a small reduction in a monthly bill can save significant cash by the end of the year.

•   Lower your living costs. If you’re living well beyond your means, one dramatic shift that can help you save more is to move to an area that has a lower cost of living. Whether that means moving across town or across the country, it could make a major difference in your finances.

The Takeaway

Putting away money for your short- and long-term goals doesn’t have to be a boring task — there are countless fun ways to save money that can be customized to your specific financial needs and wants. From finding a savings buddy to gamifying the saving process, creative tactics can help enhance your motivation and your ability to put away cash.

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 3.80% APY on SoFi Checking and Savings.

FAQ

What is a clever way to save money?

There are several clever ways to save money. Automating savings so you don’t have to remember to transfer funds is one good tactic; so is giving yourself a “no-spend” challenge, finding free activities, and doing a skills swap (i.e., bartering your expertise/skills to receive a service or product in return for free).

How can you save $1000 in 30 days?

To save $1,000 in 30 days, you might try a “no spend” challenge. This involves putting a freeze on all non-essential spending for a full month. You might also try selling items you no longer want online, taking on a side gig or freelance project, cancelling unnecessary subscriptions (like streaming channels you rarely watch or a gym membership you don’t use), and meal-prepping to save money on food.

What is the 50-30-20 rule?

The 50-30-20 rule is a budgeting method that divides your income into three categories: 50% for needs (rent, utilities, groceries, minimum debt payments), 30% for wants (entertainment, dining out, hobbies), and 20% for savings and extra debt payments. This structure can provide a starting framework for money management, but you may need to adjust the formula based on your monthly living expenses and savings goals.

How can I use automated tools to help save money?

One of the easiest ways to automate saving is to set up a recurring monthly transfer from your checking account to your savings account on the day after you get paid. Or, if your employer offers split direct deposit, you could have most of your paycheck go into checking, and a small portion go directly into savings.

You might also try a “round-up” app: Each time you make a purchase, the app will automatically round it up to the nearest dollar and deposit the difference into savings.

What is the best method to start a savings habit?

One of the best ways to start a savings habit is by making it automatic. You can do this by setting up a recurring transfer from your checking to your savings account for a set amount on the same day each month, perhaps the day after you get paid. It’s fine to start small, even just $5 a week, and gradually increase the amount over time.

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SoFi members with direct deposit activity can earn 3.80% 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 3.80% 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 3.80% 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.

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Separately, SoFi members who enroll in SoFi Plus by paying the SoFi Plus Subscription Fee every 30 days can also earn 3.80% APY on savings balances (including Vaults) and 0.50% APY on checking balances. For additional details, see the SoFi Plus Terms and Conditions at https://www.sofi.com/terms-of-use/#plus.

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Feb
25
2025
What Is the IPO Process?

What Is the IPO Process?

By | Growing Wealth, invest, Investing | Comments Off on What Is the IPO Process?

Before a private company can make its shares available to the public for investment, it must go through the initial public offering (IPO) process. The IPO process is time-consuming, expensive, and it can take months or even years for a privately held company to reach the stage where it can be listed and traded on a public exchange.

An IPO marks the first time individuals other than angel investors or venture capitalists can make investments in a company. Once the initial public offering process is complete, traders can buy or sell shares in the company through a public exchange like the New York Stock Exchange or Nasdaq.

There are different reasons a company may choose to do an IPO, but it’s often used as a means of raising capital. The initial public offer process can also help raise visibility around a particular company’s brand, helping to fuel growth. It means that ownership of the company is transitioning from founders and a few early investors to a much larger group of individuals and organizations.

From an investor standpoint, getting in on the ground floor of a new initial public offering might be appealing if the company you think has the potential to take off. If you’re interested in how to buy IPO stock, this primer explains how the IPO process works step by step.

Key Points

•   An initial public offering (IPO) is the process a private company goes through to make its shares available to the public for investment.

•   Companies may choose to do an IPO to raise capital and increase visibility around their brand.

•   Prior to an IPO, a company must select an underwriter to conduct due diligence and sign necessary contracts.

•   The SEC must review and approve all documents before the company can launch its IPO.

•   After the launch, the underwriter may take direct action to stabilize the share price during the 25-day “quiet period”.

A Quick Refresher on IPOs

Again, IPO stands for initial public offering. If a company launches an IPO, it means that it’s only had private investors, such as angel investors, up to that point but it’s now ready to let other investors purchase shares. Under federal securities laws, this can’t happen until the company is properly registered with the Securities and Exchange Commission (SEC).

An IPO can help companies raise capital as an alternative to other methods, such as crowdfunding, which also involves raising funds from a pool of investors. But unlike an IPO, it doesn’t involve the buying or selling of shares in a company.

💡 Quick Tip: Access to IPO shares before they trade on public exchanges has usually been available only to large institutional investors. That’s changing now, and some brokerages offer pre-listing IPO investing to qualified investors.

How Does the IPO Process Work?

At a glance, the initial public offering process seems relatively simple: A private company makes its shares available to the public for the first time, hence why it’s often referred to as “going public.”

But the initial public offering process is more detailed and complex than that. There are specific steps that have to take place to ensure that an IPO is completed in accordance with SEC regulations. The company, either on its own or while working with analysts and investors, must value the company and set an initial public offer.

After completing due diligence, the company can move forward with an IPO announcement and choose an IPO launch date. Investors can then review the IPO prospectus to determine whether they want to invest or not.

The entire IPO process can take six months to a year or even longer to complete. Aside from being time-consuming, it can also be costly, so companies must have some degree of certainty that the IPO will succeed before undertaking it.

7 Steps of the IPO Process

The IPO process takes time, and it’s important for all parties involved that the appropriate steps be followed. If something is missed or overlooked, that could put the success of a company’s initial public offering in jeopardy. Here are the steps they must go through:

1. Choosing an Underwriter

Before starting any of the other IPO process steps, a company first has to connect with a reputable IPO underwriter or group of underwriters. Again, these are investment banks that are registered with the SEC to offer underwriting services.

When choosing an underwriter, companies can consider a variety of factors, including:

•   Reputation

•   IPO track record

•   Research quality

•   Industry expertise

•   Distribution (i.e. what type of investors the bank will be able to distribute the initial public offering to)

Companies may also weigh any prior relationship they have with a particular investment bank or banks when deciding which one(s) to use for underwriting.

2. Due Diligence

During the due diligence phase, the IPO underwriting team will conduct background research into the company and its upper management. This ensures that there are no surprises prior to or during the IPO launch that could affect share pricing.

At this step in the IPO process, the underwriter and the company will sign necessary contracts specifying the scope of services provided. The contract can take several structures:

•   Firm Commitment: In this type of arrangement, the underwriter agrees to purchase the IPO and resell shares to the public. This guarantees that the company receives an agreed-upon amount of money.

•   Best Efforts: With this type of agreement, the underwriter assents to selling shares to the best of its ability, though there’s no guarantee that all shares will sell.

•   All or None: In an all or none or agreement, all shares of the IPO must be sold or the offering is canceled.

In some cases, a group or syndicate of underwriters can come together to oversee the IPO process and manage risk. Each bank in the syndicate can sign a contract with the company to sell part of the IPO.

The underwriters will also initiate the registration process with the SEC and complete supporting documents for the IPO. These might include:

•   Engagement Letter: An engagement letter typically includes a clause stating what expenses the company will reimburse to the underwriter as well as the spread that’s used to pay the underwriter’s fees, typically 7% of proceeds.

•   Letter of Intent: This letter outlines the underwriter’s commitment or obligations to the issuing company, the company’s statement of commitment to cooperate with the underwriter and an agreement to provide the underwriter with a 15% over allotment option.

•   Underwriting Agreement: The underwriting agreement binds the underwriter to purchase shares from the issuing company at a specified price.

•   Red Herring Document: A red herring document contains some of the same information about the IPO that’s included in the IPO prospectus, excluding the price and number of shares being offered.

•   S-1 Registration Statement: This is the document that’s submitted to the SEC to register the IPO and it must include relevant information about the company that must be included in the prospectus, as well as additional details that are not made available to the public.

3. SEC Review and Road Show

At this stage of the initial public offering process, the SEC will review all of the documents submitted for the registration. Meanwhile, the company and its underwriting team will prepare for the road show.

This road show is effectively a marketing strategy in which the underwriters attempt to gauge interest in the IPO from institutional investors. This can help underwriters to set the IPO price and determine what number of shares to offer.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

4. IPO Pricing

Once the SEC has approved the IPO, the next critical step is choosing an initial share price. In terms of how an IPO price is set, this can depend on a number of factors, including:

•   Company valuation

•   Anticipated demand for shares among investors

•   Road show outcomes

•   Market conditions

•   How much capital the company hopes to raise

•   The company’s reputation

Pricing is important because it can determine the success or failure of an IPO. Price an initial public offer too high and it may scare off investors; price it too low and the company may not reach its target goal for capital raised once shares go on the market.

5. Launch

Once an IPO has the SEC’s approval and the number and price of shares has been set, all that’s left to do is launch. The company or underwriters typically announce ahead of time when an IPO is set to list so interested investors can ready themselves to buy shares on that date.

6. Stabilization

Stabilization refers to the underwriter taking direct action to stabilize share prices once the IPO launches. This is something underwriters can do during the 25-day window after an initial public offering hits the market, otherwise known as the quiet period.

In essence, the underwriter can execute trades during this period in an effort to influence pricing in favor of the company. Any SEC restrictions against price manipulation are temporarily suspended during this time.

SEC rules do, however, still apply to investors who owned shares before the company went public. Specifically, they’re required to observe the IPO lock-up period rule. This rule prevents them from selling any shares they own in the company for a set time period after the IPO, typically 90 to 180 days. This keeps those investors from dumping their shares prematurely which could affect share prices.

7. Transition to Market Competition

After the initial 25-day period following an IPO launch, the underwriters take their hands off the wheel. Rather than relying on the prospectus to determine valuations, shareholders turn their attention to market movements instead. The underwriter can continue acting in an advisory role but at this point, they can no longer do anything to influence pricing.

What Parties Participate in the IPO Process?

It takes a team to successfully launch an IPO, and each member has a distinct role in the initial public offer process. The company is the star player around which the team revolves around, with senior management typically taking the lead.

But an IPO also requires assistance from other professionals. Understanding who is involved and what they do can help with navigating the steps of the IPO process.

Investment Banks

One role of an investment banker, also called underwriters, is to effectively oversee and manage the initial public offer process. The underwriting team is responsible for performing some of the most important IPO steps, including:

•   Preparing IPO documentation

•   Conducting necessary due diligence

•   Preparing marketing materials for distribution to investors

•   Overseeing the sale of company stock through the IPO

The investment banks serving as underwriters can also help with determining the appropriate valuation of a business as part of the IPO process.

Securities and Exchange Commission (SEC)

Companies must register with the SEC before launching an initial public offering. The SEC must review and accept all documentation the company submits in reference to the IPO prior to shares being sold to the public.

Attorneys and Accountants

Attorneys and accountants work alongside underwriters during the initial public offer process to prepare the required documentation. Legal counsel may draft documents and manage the SEC filing, while accountants may prepare the financial statements that accompany the SEC registration paperwork.

Stock Exchange

Going public with an IPO means choosing an exchange through which traders can buy and sell stock. In the United States, this typically means the New York Stock Exchange (NYSE) or the Nasdaq.

Recommended: What Are the Different Stock Exchanges?

Investors

These include both those who put money into the company prior to its going public, such as venture capitalists, and those who anticipate trading shares once the IPO launches.

Both institutional investors, such as hedge funds or mutual funds, and individual retail investors who are interested in owning shares, may participate in an IPO.

Buying IPO shares may seem desirable, and there has been a lot of hype in the media about IPO stock. But it’s important to remember that IPO stocks are typically high risk, and investors can also lose money. That’s why many brokerages require that investors meet certain standards in order to be qualified to trade IPO shares.

Test your understanding of what you just read.

The Takeaway

The process of taking a company public can be exciting, but it’s also a rigorous transition that requires a fledgling company to meet a series of criteria and pass through several stages before actually making its debut on a public exchange.

This process helps to ensure that the company has sound fundamentals, and is ready for public shareholder investment. Investing in IPOs has gotten a reputation as a way to make money quickly; it’s also a way investors can rapidly lose their investment, as IPOs are traditionally volatile. In addition, not all investors may qualify to trade IPO shares; check with your brokerage.

Whether you’re curious about exploring IPOs, or interested in traditional stocks and exchange-traded funds (ETFs), you can get started by opening an account on the SoFi Invest® brokerage platform. On SoFi Invest, eligible SoFi members have the opportunity to trade IPO shares, and there are no account minimums for those with an Active Investing account. As with any investment, it's wise to consider your overall portfolio goals in order to assess whether IPO investing is right for you, given the risks of volatility and loss.

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.

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.

Explore the IPO Series:

What Is an Initial Public Offering (IPO)?

What Are IPO Proceeds?

IPO vs Acquisition: Advantages and Disadvantages

How Are IPO Prices Set?

What Is an IPO Underwriter and What Do They Do?

What Is an IPO Roadshow?

How Many Companies IPO Per Year? 2023 Trends

What Is a Quiet Period?

What Is IPO Subscription Status?

Navigating the IPO Lock-up Period

What Is IPO Due Diligence?

How to Find Upcoming IPO Stocks Before Listing Day

What Is an IPO Pop?

What to Do With Company Stock If Your Company Goes Public

IPO Book-Building Process Explained

Hot Issues (IPOs): What You Need to Know

What Is Pre-IPO Placement?

Do IPOs Offer Dividends?

Testing the Waters: What It Means in an IPO

Testing the Waters: What It Means in an IPO

Shorting an IPO: When Can You Do It?

Guide to the Dual-Track Process for IPOs

What Is Gross Spread?

IPO Oversubscription: Definition & Examples

A Guide to Tech IPOs

History of IPOs That Failed

Photo credit: iStock/TimArbaev

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Investing in an Initial Public Offering (IPO) involves substantial risk, including the risk of loss. Further, there are a variety of risk factors to consider when investing in an IPO, including but not limited to, unproven management, significant debt, and lack of operating history. For a comprehensive discussion of these risks please refer to SoFi Securities’ IPO Risk Disclosure Statement. IPOs offered through SoFi Securities are not a recommendation and investors should carefully read the offering prospectus to determine whether an offering is consistent with their investment objectives, risk tolerance, and financial situation.

New offerings generally have high demand and there are a limited number of shares available for distribution to participants. Many customers may not be allocated shares and share allocations may be significantly smaller than the shares requested in the customer’s initial offer (Indication of Interest). For SoFi’s allocation procedures please refer to IPO Allocation Procedures.

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.

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