Dec
19
2025
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5 Investment Strategies for Beginners

By | Growing Wealth, invest, Investing | Comments Off on 5 Investment Strategies for Beginners

There are a ton of investment strategies and ideas out there, and it can be difficult to figure out which one might be right for you. Simple strategies, particularly for beginners, include utilizing asset allocation, diversification, rebalancing, and buy-and-hold tactics.

With that in mind, investing is a powerful tool that allows you to put your money to work to help you reach future financial goals. But if you’re new to investing, you may be asking yourself what investment strategies should you pursue? Here are some strategies to help you get started.

Key Points

•   Asset allocation is a strategy that involves choosing how to balance potential risk and reward within a portfolio.

•   Diversification refers to managing risk with a mix of different investment types.

•   Rebalancing includes shifting asset allocation and diversification mixes over regular periods of time.

•   Buy-and-hold strategies involve buying investments and hanging on to them for long periods of time.

•   Dollar-cost averaging is a strategy that involves investing a fixed amount at regular intervals.

There are many investment strategies for beginners to consider. Here are some that can help you get started.

1. Asset Allocation

Asset allocation refers to proportioning out different types of investments across your portfolio.

Once you’ve opened an investment account and you begin to build your portfolio, asset allocation is an important strategy to consider to help you balance potential risk and rewards. A typical portfolio might divide its assets among three main asset classes: stocks, bonds, and cash. Each asset class has its own risk and return profile, behaving a little bit differently under different market circumstances.

For example, stocks tend to offer higher gains, but they are also more volatile, presenting increased potential for losses. Bonds are generally considered to be less risky than stocks, while cash is typically more stable.

The proportion of each asset class you hold will depend on your goals, time horizon, and risk tolerance. Your goal is how much you aim to save. Your time horizon is the length of time you have before reaching your goals. And your risk tolerance is how much risk you’re willing to take to achieve your goals.

Your asset allocation can shift over time. For example, someone in their 30s saving for retirement has a long time horizon and may have a higher risk tolerance. As a result their portfolio may contain mostly stocks. As that person grows older and nears retirement, their portfolio may shift to contain more bonds and cash, which are typically less risky and less likely to lose value in the short-term.

2. Diversification

Another way to help manage risk in your portfolio is through diversification, which is building a portfolio with a mix of investments across assets to avoid putting all your eggs in one basket.

Here’s how it works: Imagine you had a portfolio consisting of stock from one company. If that stock does poorly your entire portfolio suffers.

Now imagine a portfolio consisting of many stocks, from companies of all sizes and sectors. Not only that, it also holds other investments, including bonds. If one stock suffers, it will have a much smaller effect on your overall portfolio, spreading out the risk of holding any one investment.

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, alternative investments, IRAs, and more. Get started in just a few minutes.

*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.

3. Rebalancing

Rebalancing involves shifting around your portfolio’s holdings to make sure it aligns with your broader strategy and goals.

Your portfolio can change over time, shifting your assets allocation and diversification. For example, if there is a bull market and stocks outperform, you may discover that you now hold a greater portion of your portfolio in stocks than you had intended.

At this point, investors typically rebalance their portfolio to bring it back in line with their goals, time horizon, and risk tolerance. In the example above, an investor may decide to sell some stock or buy more bonds, for instance.

4. Buy-and-hold Strategy for Investing

Market fluctuations are a natural part of the market cycle. However, investors may get nervous and be tempted to sell when prices drop. When they do, investors might lock in their losses and miss out on subsequent market rebounds.

Investors practicing buy-and-hold strategies tend to buy investments and hang on to them over the long term, regardless of short-term movements in the market. Doing so may help curb the tendency to panic sell, and it might also help minimize fees associated with trading.

Buy and hold might also affect an investor’s taxes. Holding a long-term investment vs. short-term one can make a big difference in terms of how much an individual pays in taxes.

If you profit from an investment after owning it for at least a year, it’s a long-term capital gain. Less than that is short-term. Capital gains tax rates can change, but generally, longer-term investments are taxed at a lower rate than short-term ones.

💡 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.

5. Dollar-Cost Averaging

Dollar-cost averaging is a strategy in which individuals invest on a regular basis by making fixed investments on a regular schedule regardless of market prices.

For example, say an investor wants to invest $1,000 every quarter in an exchange-traded fund (ETF) that tracks the S&P 500. Each quarter, the price of that fund will likely vary — sometimes it will be up, sometimes it will be down. The amount of money the individual invests remains the same, so they are buying fewer shares when prices are high, and more shares when prices are low.

This strategy may help individuals avoid emotional investing. It’s also straightforward and can help investors stick to a plan, rather than trying to time the market.

The Takeaway

There are many different strategies and tactics that investors can use, and some are likely more beginner-friendly than others. Those could include asset allocation, diversification, rebalancing, and buying-and-holding strategies.

Investing is an ongoing process. Your life, goals, and financial needs will all change as your circumstances do. For example, may you get a raise at work, get married and have a child, or decide to retire early. Factors like these will change how much money you need to save and how you invest. Monitor your portfolio and make adjustments as needed.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.


Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹

FAQ

Is rebalancing the same as diversification?

Rebalancing and diversification are not the same, though they’re similar. They can be used in tandem to manage investment risk, but the main difference is that rebalancing involves periodically adjusting investments to align them with your goals, while diversification involves spreading investment across asset types to manage risk.

What does a buy-and-hold strategy entail?

A buy-and-hold strategy is more or less what it sounds like: Buying investments, and holding onto them for a long period of time, despite short-term ups and downs in the market.

What is dollar-cost averaging?

Dollar-cost averaging is an investment strategy in which individuals invest a fixed amount on a regular schedule, regardless of market prices. This can help investors avoid timing the market, and over time can enable them to buy more investment shares when prices are low and fewer when prices are high.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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.


¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
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.

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.

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.

Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.

SOIN-Q425-033

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Dec
19
2025
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What Are the Different Types of Stocks?

By | Growing Wealth, invest, Investing | Comments Off on What Are the Different Types of Stocks?

There are numerous types of stocks, categorized by company characteristics, size, region, sector, and more. Equipped with an understanding of different stock types, an investor can start building a diversified portfolio. Though all stocks can experience volatility and potentially lose value, holding a mix of different types of shares can mitigate the risk of being too heavily invested in any one category.

Key Points

•   Stocks represent ownership in publicly traded companies and have the potential to generate returns, such as through capital appreciation or dividend payments, or result in losses.

•   Different stock categories include value stocks, growth stocks, common stock, preferred stocks, and various classifications based on market capitalization and sector.

•   Stocks can be classified by market capitalization into categories, such as micro-cap, small-cap, mid-cap, large-cap, and mega-cap.

•   Various stock sectors exist, including industrials, materials, consumer discretionary, health care, and financials, allowing for diversified portfolio creation.

•   Investors can also consider international stocks, including those from developed regions like EAFE or emerging markets, to further diversify their portfolios.

An Overview Of Stocks

A stock represents a percentage of ownership in a publicly traded company. So essentially, investors can own small pieces or “shares” of companies.

Generating returns via the stock market can usually happen in one of two ways. First, the value of the stock can increase over time, something known as capital appreciation. The second is through dividend payments, where companies make cash payouts periodically to all owners of that company’s stock. Some people make investments based on a company’s ability to pay consistent dividends, or “income.” Utility and telephone companies often fit into this bucket.

When you own a stock, you hold equity (or ownership) in that company. That’s why stocks are sometimes referred to as equities. Each individual share represents an equal proportion of ownership. Owners of stocks are often referred to as stockholders or shareholders.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Categories of Stocks

There are several ways that different stocks are categorized, which is important to know if you’re brushing up on the stock market basics. Stocks are also sometimes classified by styles of investing. These categories often have to do with how that company makes money and how the stock is valued. You may often hear this associated when discussing value vs. growth stocks.

Value Stocks

Value stocks are stocks that are considered to be trading below their actual worth, and are a key component in value investing. Investors hope that by buying companies that are priced below their “true” value, they can profit as the gap narrows over time.

Growth Stocks

Growth stocks are companies that are growing at a fast pace or those that are expected to continue growing at a faster rate than other stocks or competitors. Investors can encounter higher valuations in growth investing.

Common Stock

Common stock represents shares of ownership in a corporation. When an investor receives common shares, they are typically also granted voting rights to the company and can participate in shareholder voting processes — usually one vote for each share. For investors, it can be helpful to understand the differences between common versus preferred stock.

Preferred Stocks

Preferred stocks make regular dividend payments, but holders of preferred shares often have zero or limited voting rights. If a company becomes financially insolvent however, preferred stockholders have a claim on assets before common shareholders do.

Exchange-traded Funds (ETFs)

Exchange-traded funds, or ETFs, group multiple securities into a single share. For instance, a stock ETF will hold numerous companies, while a bond ETF can hold many individual bonds, whether it’s a collection of Treasurys or high-yield debt. ETFs are popular because of the cheap, instant diversification they offer.

There are many types of ETFs, too, including low-cost ETFs, and ETFs with their holdings concentrated in certain sectors.

Initial Public Offerings (IPOs)

An initial public offering (IPO) is the process of a private company listing and debuting on a public stock exchange. Investors can buy IPO shares on their first day of trading.

Special Purpose Acquisition Companies (SPACs)

SPACs are shell companies that go public on the stock exchange, and then try to find a private operating business to purchase.

Real Estate Investment Trusts (REITs)

REITs are companies that own and operate real estate, usually focusing on one type of property, such as warehouses, hotels or office buildings. There are pros & cons to investing in REITs. For example, one pro is that they tend to pay consistent dividends. Cons include sensitivity to interest rates, and taxed dividends.

Blue Chip Stocks

Blue chip stocks are stocks that large, well-established companies issue and usually have a long-standing history of growth. They’re generally considered to be financially sound, and may be considered lower-risk than other stocks.

Cyclical and Noncyclical Stocks

Cyclical investing concerns making stock selections surrounding economic changes, and cyclical stocks are those that may see their performance closely align with larger economic shifts. Noncyclical stocks, on the other hand, do not see their performance tied to larger economic changes.

Defensive Stocks

Defensive stocks may be used as a part of a defensive investing strategy, and usually involves investing in stocks that may be seen as lower-risk. This can include blue-chip stocks, or stocks from sectors like utilities and consumer staples.

Penny Stocks

Penny stocks are low-priced stocks that generally trade for less than $5 per share, and many trade for less than $1. They’re usually risky, and highly-speculative stocks.

Income Stocks

Income stocks are a category of stocks that tend to offer regular, steady income to investors. That income generally comes in the form of dividends.

Environmental, Social, and Corporate Governance (ESG)

ESG stocks are those that may have certain non-financial criteria that appeal to certain investors. ESG stocks are shares of companies that are socially and environmentally responsible, though there is no universally-shared or accepted set of ESG criteria.

Different Market Caps

The sizes of stocks are classified by the market capitalization of the company’s publicly traded stock. Market cap is calculated by multiplying the stock price by the total number of outstanding shares.

Generally speaking, larger companies tend to be older, more established, and have greater international exposure, so a higher percentage of a large-cap company’s revenue comes from overseas. Meanwhile, smaller-cap stocks tend to be newer, less established and more domestically oriented. Smaller-cap companies can be riskier but also offer more growth potential.

Similarly, if you’re interested in buying mid-cap stocks, that generally means you’re investing in mid-sized companies.

stock market caps

While the market-caps that determine which companies are small or large can shift, here’s a breakdown that gives some rough parameters.

Micro-Cap: $50 million to $300 million

Small-Cap: $300 million to $2 billion

Mid-Cap: $2 billion to $10 billion

Large-Cap: $10 billion or higher

Mega-Cap: $200 billion or higher

Types of Stock Classes

There are also stock classes that investors should be aware of, and those generally involve Class A, Class B, and Class C shares, which all may be issued by the same company. The specifics of each category will vary from company to company, too.

For some rough guidelines, though, Class A shares tend to have more voting power and higher priority for dividends. Class B shares may have lesser voting power than Class A shares, but no preferential treatment for dividends. Class C shares are often given to employees as a part of a compensation package, and may have associated trading restrictions.

💡 Quick Tip: What makes a robo advisor effective? Typically these automated investing services offer automatic deposits, a diversified portfolio of low-cost ETFs, and automatic rebalancing — all of which are designed to help you reach a specific goal. They can be less flexible and cost more than some other options, however.

Stocks By Sector

stock sectors

Additionally, stocks are often grouped by the industry that that company works within. According to the Global Industry Classification Standard (GICS), there are 11 recognized sectors, with numerous industries within those sectors. They include (but are not limited to):

Energy: Energy equipment and services, oil, gas, and consumable fuels. If you want to invest in energy stocks, this is the category to look at.

Materials: Chemicals, construction materials, containers and packaging, metals and mining

Industrials: Aerospace and defense, building products, machinery, construction and engineering, electrical equipment, industrial conglomerates

Consumer Discretionary: Automobiles, automobile components, household durables, leisure products

Consumer Staples: Food products, beverage, tobacco, household products

Health Care: Health care equipment and services, pharmaceuticals, biotechnology, life sciences

Financials: Banks, insurance, consumer finance, capital markets, financial services

Information Technology: IT services, software, communications equipment

Communication Services: Diversified telecommunication services, media, entertainment

Utilities: Electric utilities, gas utilities, water utilities, independent power and renewable electricity producers

Real Estate: Real estate management and development, various REITs (retail, residential, office, etc.)

Again, these categories can be helpful to investors looking to diversify their portfolios. If you want to add some real estate stocks, or even invest in tech stocks, sector investing may be something to research further.

Note, too, that there may be other categories or sectors of stocks not listed above, such as retail stocks.

Stocks by Country

Different overseas stocks can be classified by the country or region in which they’re headquartered, even if the company’s operations are global. Individuals looking to invest in international stocks have found that they can do so easily with ETFs, which hold numerous foreign companies within a single share.

Regions that are commonly used in the world of stock investing are:

EAFE is an acronym which stands for Europe, Australasia, and the Far East. Investors may see this used when making investment choices, as the MSCI EAFE is a common index used for international stock funds. These countries are all “developed” nations, which means they have established financial markets, stable political climates, and mature economies.

Emerging-market stocks, which stocks with companies based out of countries whose economies are described as developing. Brazil, Russia, Mexico, China, and India are just a few emerging markets. Emerging markets may be riskier to invest in but may pose an opportunity for high rates of growth.

The Takeaway

There are numerous types of stocks on the market, and it can be important for investors to understand the differences between them. The stock market can be volatile and prone to dramatic declines, but in order to shield themselves from the risks, investors often create diversified portfolios by stocking their holdings through various different stock types.

Diversification is easier to do if an investor understands the different types of stocks that exist in the U.S. equity market. From mega-cap stocks to ETFs to emerging-market companies, there are a myriad of investing opportunities in the equity market.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest®. You can trade stocks, ETFs, or options through self-directed investing with SoFi Securities, or simply automate your investments with a robo advisor from SoFi Wealth. You'll gain access to alternative investments and upcoming IPOs, and can plan for retirement with a tax-advantaged IRA. With SoFi, you can manage all your investments, all in one place.


Take a step toward reaching your financial goals with SoFi Invest.

FAQ

What are the benefits of investing in different types of stocks?

Investing in different types of stocks can be beneficial to investors as it can diversify their portfolio, which may help reduce investing risk as the market fluctuates.

What is the riskiest type of stock?

Penny stocks are likely the riskiest type of stock, as they are shares of companies that are new, unproven, and highly volatile. While there’s a big potential upside to investing in penny stocks, the risks are significant.

What stocks are best for beginners?

While it’ll depend on the individual investor, beginner investors may want to look at investing in blue chip stocks, ETFs, or other stocks that have either built-in diversification, or a long track record of viability, which can be a sign of lower associated risks.

What are the risks and opportunities of investing in emerging markets?

Emerging markets can be volatile or unstable, and there may be political, monetary, and economic risks that investors are unaware of in those markets.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

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.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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. This should not be considered a recommendation to participate in IPOs 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 more information on the allocation process please visit IPO Allocation Procedures.

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.

SOIN-Q425-036

Read more
Dec
18
2025
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Crypto Staking: A Beginner’s Guide to Earning Passive Income With Crypto

By | Growing Wealth, invest, Investing | Comments Off on Crypto Staking: A Beginner’s Guide to Earning Passive Income With Crypto

Crypto staking is a way to use crypto holdings to generate rewards while helping to validate transactions. While “staking” may be a relatively new addition to the financial lexicon, it’s important for those interested in crypto to understand what it is, how it works, and what cryptocurrencies it can be used to obtain.

Crypto staking may feel like it’s a step beyond simply learning how to buy cryptocurrencies or how a crypto exchange works, but learning about cryptocurrency staking can broaden your knowledge of the crypto ecosystem, making you more informed about your options.

Key Points

•   Crypto staking involves pledging crypto holdings to a blockchain network to earn rewards, while supporting transaction validation on the blockchain.

•   Staking is more energy-efficient and accessible compared to mining.

•   Popular staking coins include Ethereum, EOS, Tezos, and Polkadot.

•   Staking yields can range from approximately 0.40% to 18% annually.[1]

•   Crypto staking can be high risk given the high volatility of crypto assets and potential network security concerns.

🛈 While SoFi members may be able to buy, sell, and hold a selection of cryptocurrencies, such as Bitcoin, Solana, and Ethereum, other cryptocurrencies mentioned may not be offered by SoFi.

What Is Crypto Staking?

Crypto staking is the process of “locking up” crypto holdings on a blockchain network in order to try and obtain rewards. There may be time limits or requirements depending on the specific blockchain network, and rewards can vary significantly, but are typically a percentage of the coins staked.

Cryptocurrencies are built with blockchain technology, in which crypto transactions are verified, and the resulting data is stored on the blockchain. Depending on the types of cryptocurrency you’re working with and its supporting technologies, these validation processes may involve staking, using a “proof-of-stake” consensus mechanism, or mining, using a “proof-of-work” consensus mechanism. Each of these processes help crypto networks achieve consensus, or confirmation that all of the transaction data adds up to what it should.

Crypto is
back at SoFi.

SoFi Crypto is the first and only national chartered bank where retail customers can buy, sell, and hold 25+ cryptocurrencies.

Staking vs Mining: What’s the Difference?

Staking crypto generates rewards and helps a crypto network validate information on the blockchain, using the cryptocurrency stakers locked up on the network. Crypto mining has the same goal, but the consensus needed to verify transactions is achieved in a different way.[2]

Effectively, mining involves using computing power to solve mathematical problems and equations to open up new blocks on a blockchain, for which miners are then rewarded. Mining requires significantly more computing power and resources, but effectively, both staking and mining are trying to achieve the same ends of validating information and producing new “blocks.”

The Role of Proof of Stake (PoS)

Achieving consensus and validating information on a blockchain requires participants. That’s what staking is: individuals who actively hold onto, or lock up their crypto holdings in their crypto wallet, may participate in these networks’ consensus-taking processes. Stakers are, in essence, approving and verifying transactions on the blockchain.

For doing so, the networks reward those individuals. The specific rewards will depend on the network.

It may be helpful to think of crypto staking as similar to depositing cash in a savings account. The depositor earns interest on their money while it’s in the bank, as a reward from the bank, who uses the money for other purposes (lending, etc.). Staking coins is, from that perspective, similar to earning interest. Although cryptocurrency holdings could potentially lose value as the market ebbs and flows, too.

How Does Crypto Staking Work?

Infographic on How Crypto Staking Works

Crypto staking is typically a passive activity, unless you actively run a blockchain validator node. When someone stakes their holdings (typically by locking them in a wallet through a crypto staking platform), the network can use those holdings to forge new blocks on the blockchain.

The more crypto you’re staking, the better the odds are that your holdings will be selected to validate information and new blocks, and a lot of that depends on the specific blockchain network you’re staking on.

Essentially, during a transaction, information is “written” into the new block, and the staker’s holdings are used to validate it. Since coins already have “baked in” data from the blockchain, they can be used as validators. Then, for allowing those holdings to be used as validators, the network rewards the staker.

How to Start Crypto Staking

To start crypto staking, a person needs to decide where and what they want to stake. Here are four simple steps to get started.

1. Choosing a Proof-of-Stake Cryptocurrency

To begin staking cryptocurrency independently, a user would have to decide which coin they want to stake and buy their cryptocurrency of choice.

Ethereum (ETH), for example, requires a minimum of 32 ETH (worth about $123,000 at the time of writing) for users to begin staking.[3]

2. Choosing a Staking Platform

You may be able to stake crypto through an exchange network, through a staking service, or directly through the cryptocurrency itself.

3. Choosing Your Wallet and Hardware

Typically, after choosing a platform, you would then download a crypto wallet in which to store your coins for staking. That may mean going directly to the specific crypto’s main website and downloading its corresponding wallet.

To stake crypto, users need a constant, uninterrupted internet connection. A standard dedicated desktop computer will likely do the job, although a Raspberry Pi might save on electrical costs.

4. Begin Staking

Once the hardware has been selected and the crypto wallet software downloaded, a user can begin staking cryptocurrency.

For those holding the appropriate crypto in an exchange-hosted crypto wallet, the exchange typically handles all the staking on the backend.

Depending on the specific crypto, wallet, or exchange network, that may be all the action a person needs to take. But it’s a good idea to double-check to see if additional steps need to be taken.

What Are the Different Ways to Stake Crypto?

There are also a few different ways to stake crypto.

Staking on an Exchange

Perhaps one of the simplest ways to stake crypto is to do so through your given exchange. Many crypto exchanges give people the option to stake, and in those cases, depending on the exchange, they may simply need to select the option to stake, lock up their holdings, and let the rewards generate.

Delegated Staking and Staking Pools

Aside from an exchange, stakers may be able to delegate their crypto holdings to pools, which will allow them to generate rewards, too. This can’t be done for every cryptocurrency, but for those that do have delegated staking and pooling built into their networks, it can be a way to stake directly to a validator or delegate.

Running Your Own Validator Node

If you’re really feeling up for it and want to get more deeply involved on a specific blockchain network, you could look at running your own validator node, also referred to as solo staking. Note, however, that doing so likely requires some significant background knowledge, and there’s the potential of making mistakes. It could also require some hardware that could cost hundreds or thousands of dollars.

The Pros and Cons of Crypto Staking

There are some pros and cons to staking crypto.

Crypto Staking Advantages Crypto Staking Disadvantages
Low energy usage Different security measures
Easier to earn rewards Potential for takeover
No special hardware needed Increased centralization

The Benefits of Staking

Here are a few of the potential benefits of staking:

•   Less energy-intensive. PoS networks use less energy than PoW platforms. Each mining machine requires a constant supply of electricity and consumes much more power than a regular computer. But it’s possible to run validator nodes on an average computer, eating up fewer resources, to power your staking activity

•   Easier to earn rewards. Crypto staking and mining rewards can be very different. Almost anyone can stake a small amount of crypto on a crypto exchange and earn some kind of yield. To become a miner, however, often requires a much bigger commitment. First, you’d need to acquire the proper computer, which can be costly; then you’d need to learn to use it, which can be time-consuming.

•   No special equipment required. Anyone can become a validator using a regular computer, assuming they have enough money and can keep the node running constantly. By contrast, mining requires specialized hardware.

The Risks of Staking

Conversely, there are some risks of staking that individuals should know about.

•   Different security measures. PoS is relatively new compared to PoW. It’s not necessarily unsafe, but it’s also not inherently more secure than PoW, either. There are different security measures in place, and a lot of that depends on the specific network as well.

•   Potential for takeover. Crypto blockchain networks may be controlled by those who hold the majority (or 51%) of tokens. While attacking a PoW network would involve acquiring large amounts of computing power, in many cases, attacking a PoS network could only require funding (again, depending on the specific network). Smaller blockchain networks are generally more vulnerable to a PoS “51% attack,” where attackers may try to manipulate transactions to their own advantage. However, PoS networks may also provide some inherent protection against these attacks. For example, attackers attempting such an attack risk losing the entire amount that’s staked.

•   Increased centralization. The creator(s) of blockchain technology intended for blockchains to be decentralized. But in some cases, PoS networks can wind up becoming more centralized because becoming a validator can be more expensive than becoming a miner. Ethereum (ETH), for example, plans to change from PoW to PoS. To become an ETH validator would require 32 ETH (or around $123,000 as of summer 2025). Many centralized exchanges have chosen to become validators of PoS coins to share staking rewards with their customers.

How to Choose the Best Coins for Staking in 2025

Just a few years ago, the entire concept of proof-of-stake consensus was still relatively new, and options for staking coins were few and far between. But a growing number of projects are utilizing PoS and some exchanges are making it easier than ever for users to passively earn crypto by staking their coins.

With that in mind, the list of potential cryptos to stake, and the ones offering the highest potential yields, is always changing. But here are some of the cryptos out there that are viewed as more established.

•   Ethereum (ETH): Ethereum (ETH) is one of the most popular cryptocurrencies on the market — although it is not exactly a cryptocurrency itself. Staking Ethereum on your own will require a minimum of 32 ETH. Rewards vary, too.

•   EOS (EOS): EOS is similar to Ethereum in that it’s used to support decentralized blockchain systems and projects. EOS tokens are native to the EOS blockchain, and like other cryptos, can be staked to earn rewards.

•   Tezos (XTZ): Like EOS and Ethereum, Tezos (XTZ) is an open-source blockchain network with its own native currency, with a symbol of XTZ. And it, too, can be staked on certain platforms and networks.

•   Polkadot (DOT): Polkadot is a newer cryptocurrency, created in August 2020. Polkadot is both a cryptocurrency and a protocol designed to support “parachains,” which allow different blockchains created by different developers to share information securely.

•   Avalanche (AVAX): Avalanche was created in 2020, and is one of the highest yield-producing cryptos out there for staking.

It’s important to research your options to understand whether staking a certain cryptocurrency would be right for you. Also be aware, as mentioned earlier, that SoFi does not currently offer staking services. While members will soon be able to buy, sell, and hold certain cryptocurrencies, such as Ethereum, other cryptocurrencies listed above may not be offered.

Factors to Consider

As with any financial transaction, it’s always important to consider the potential risks of crypto staking. As outlined, there are multiple risks to weigh, and when it comes to staking specifically, you’ll want to think about the potential staking rewards you could earn versus how your holdings could otherwise be used to generate returns.

There can be numerous things to take into account, but when it comes to staking, consider the reliability of a given crypto network, volatility, security, and opportunity costs.

Is Crypto Staking Worth It?

Anyone can earn crypto by staking cryptocurrency. But unless someone is sitting on a huge stash of proof-of-stake coins, they’re not likely to get rich from staking.

Staking rewards, as mentioned above, are in some ways similar to earning interest on funds held in a savings account. Both are a form of passive income (with the possible exception of solo staking). They don’t require a user to do anything other than holding the right assets in the right place for a given length of time. The longer a user stakes their coins, the greater potential for generating bigger rewards.

But unlike savings accounts, there are a few variables particular to proof-of-stake coins that influence how much of a staking reward users are likely to receive. Users would do well to research these factors and more when searching for the most profitable staking coins:

•   Potential reward size

•   The size of the staking pool

•   The size of holdings locked, or required to stake

Additionally, the fiat currency value of the coin being staked must also be taken into account. Assuming this value remains steady or rises, staking could potentially be profitable. But if the price of the coin falls, profits could diminish quickly.

The Takeaway

Staking is a way to use your crypto holdings or coins to earn additional rewards. It can be helpful to think of it as along the lines of funds generating interest in a savings account over time.

Essentially, coin holders allow their crypto to be used as a part of the blockchain validation process, and are rewarded by the network for the use of their assets. While there are risks to be aware of, such as the value of the cryptocurrency itself falling, staking may open up another potential avenue for generating returns.

SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.


Learn more about crypto trading with SoFi.

FAQ

How much can you earn from crypto staking?

How much you could potentially earn from crypto staking depends on the specific crypto and given return rates associated with it. Rewards can range wildly.

Is staking crypto safe?

Staking crypto comes with risk, including the risk that the cryptocurrency loses value while it’s locked, but some staking set ups may be riskier than others. As always, do some research to try and get a sense of how risky staking a specific crypto could be, as there can be some significant risks associated with certain assets.

Can you lose money by staking crypto?

It is possible to lose money by staking crypto since holdings are locked up and values can change, or there may be penalties and vulnerabilities on a given platform or within a specific blockchain network.

What is the difference between crypto staking and lending?

Staking involves earning rewards (typically in the form of cryptocurrency) by locking up your crypto holdings with a blockchain network to help it validate transactions. Lending involves lending cryptocurrency holdings to a borrower in order to earn interest. Note that crypto lending can come with the risk of the borrower not returning the borrowed holdings.

Do you have to pay taxes on staking rewards?

Yes, rewards earned from crypto staking (or crypto mining) are taxed as ordinary income. Taxpayers are required to report the fair market value of the cryptocurrency rewards in U.S. dollars at the date and time those rewards are made available to them.

The same cryptocurrency holdings may also be subject to capital gains taxes when they’re sold, exchanged for another cryptocurrency, or disposed of in another way. Capital gains and losses from those transactions must be reported to the IRS.

About the author

Samuel Becker

Samuel Becker

Sam Becker is a freelance writer and journalist based near New York City. He is a native of the Pacific Northwest, and a graduate of Washington State University, and his work has appeared in and on Fortune, CNBC, Time, and more. Read full bio.

Article Sources
  1. Bitcompare. Crypto Staking Rewards Comparison.
  2. Cornell Law School. consensus mechanism.
  3. Ethereum.org. Earn rewards while securing Ethereum.

Photo credit: iStock/FreshSplash


CRYPTOCURRENCY AND OTHER DIGITAL ASSETS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE


Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

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.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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18
2025
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403(b) vs Roth IRA: Key Differences and How to Choose

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on 403(b) vs Roth IRA: Key Differences and How to Choose

What’s the Difference Between a 403(b) and a Roth IRA?

A 403(b) and a Roth IRA account are both tax-advantaged retirement plans, but they are quite different — especially regarding the amount you can contribute annually, and the tax implications for each.

Generally speaking, a 403(b) allows you to save more, and your taxable income is reduced by the amount you contribute to the plan (potentially lowering your tax bill). A Roth IRA has much lower contribution limits, but because you’re saving after-tax money, it grows tax free — and you don’t pay taxes on the withdrawals.

In some cases, you may not need to choose between a Roth IRA vs. a 403(b) — the best choice may be to contribute to both types of accounts. In order to decide, it’s important to consider how these accounts are structured and what the rules are for each.

Comparing How a 403(b) and a Roth IRA Work

When it comes to a 403(b) vs Roth IRA, the two are very different.

A 403(b) account is quite similar to a 401(k), as both are tax-deferred types of retirement plans and have similar contribution limits. A Roth IRA, though, follows a very different set of rules.

403(b) Overview

Similar to a 401(k), a 403(b) retirement plan is a tax-deferred account sponsored by an individual’s employer. An individual may contribute a portion of their salary and also receive matching contributions from their employer.

An employee’s contributions are deducted — this is known as a salary reduction contribution and deposited in the 403(b) pre-tax, where they grow tax-free, until retirement (which is why these accounts are called “tax deferred”). Individuals then withdraw the funds, and pay ordinary income tax at their current rate.

Although 403(b) accounts share some features with 401(k)s, there are some distinctions.

Eligibility

The main difference between 403(b) and 401(k) accounts is that 401(k)s are offered by for-profit businesses and 403(b)s are only available to employees of:

•   Public schools, including public colleges and universities

•   Churches or associations of churches

•   Tax-exempt 501(c)(3) charitable organizations

Early Withdrawals

Typically, individuals face a 10% penalty if they withdraw their money before age 59 ½. Exceptions apply in some circumstances. Be sure to consult with your plan sponsor about the rules.

Contribution Limits and Rules

There are also some different contribution rules for 403(b) accounts. The cap for a 403(b) is the same as it is for a 401(k): $23,500 in 2025 and $24,500 in 2026. And if you’re 50 or older you can also make an additional catch-up contribution of up to $7,500 in 2025 and $8,000 in 2026. (In 2025 and 2026, those aged 60 to 63 can contribute an extra $11,250, instead of $7,500 in 2025 and $8,000 in 2026.)

In the case of a 403(b), though, if it’s permitted by the 403(b) plan, participants with at least 15 years of service with their employer can make another catch-up contribution above the annual limit, as long as it’s the lesser of the following options:

•   $15,000, reduced by the amount of employee contributions made in prior years because of this rule

•   $5,000, times the number of years of service, minus the employee’s total contributions from previous years

•   $3,000

The wrinkle here is that if you’re over 50, and you have at least 15 years of service, you must do the 15-year catch-up contribution first, before you can take advantage of the 50-plus catch-up contribution of up to $7,500 in 2025 and $8,000 in 2026.

Roth IRA Overview

Roth IRAs are different from tax-deferred accounts like 403(b)s, 401(k)s, and other types of retirement accounts. With all types of Roth accounts — including a Roth 401(k) and a Roth 403(b) — you contribute after-tax money. And when you withdraw the money in retirement, it’s tax free.

Eligibility

Unlike employer-sponsored retirement plans, Roth IRAs fall under the IRS category of “Individual Retirement Arrangements,” and thus are set up and managed by the individual. Thus, anyone with earned income can open a Roth IRA through a bank, brokerage account, or other financial institution that offers them.

Contribution Limits and Rules

Your ability to contribute to a Roth, however, is limited by your income level.

•   For 2025, if you’re married filing jointly, you can contribute the maximum to a Roth if your modified adjusted gross income (MAGI) is less than $236,000. If your income is between $236,000 and $246,000 you can contribute a reduced amount.

•   For single filers in 2025, your income must be less than $150,000 to contribute the maximum to a Roth, with reduced contributions up to $165,000.

•   For 2026, if you’re married filing jointly, you can contribute the maximum to a Roth if your modified adjusted gross income (MAGI) is less than $242,000. If your income is between $242,000 and $252,000 you can contribute a reduced amount.

•   For single filers in 2026, your income must be less than $153,000 to contribute the maximum to a Roth, with reduced contributions up to $168,000.

Roth 403(b) vs Roth IRA: Are They the Same?

No. A Roth 403(b) does adhere to the familiar Roth structure — the individual makes after-tax contributions, and withdraws their money tax free in retirement — but otherwise these accounts are similar to regular 403(b)s.

•   The annual contribution limits are the same: $23,500 with a catch-up contribution of $7,500 for those 50 and older for 2025; $24,500 with a catch-up contribution of $8,000 for those 50 and older for 2026 ($11,250 instead of $7,500, in 2025 and 2026, for those aged 60 to 63).

•   There are no income limits for Roth 403(b) accounts.

Also, a Roth 403(b) is like a Roth 401(k) in that both these accounts are subject to required minimum distribution rules (RMDs), whereas a regular Roth IRA does not have RMDs.

One possible workaround: You may be able to rollover a Roth 403(b)/401(k) to a Roth IRA — similar to the process of rolling over a regular 401(k) to a traditional IRA when you leave your job or retire.

That way, your nest egg wouldn’t be subject to 401(k) RMD rules.

Finally, another similarity between Roth 403(b) and 401(k) accounts: Even though the money you deposit is after tax, any employer matching contributions are not; they’re typically made on a pre-tax basis. So, you must pay taxes on those matching contributions and earnings when taking retirement withdrawals. (It sounds like a headache, but your employer deposits those contributions in a separate account, so it’s relatively straightforward to know which withdrawals are tax free and which require you to pay taxes.)


💡 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.

Which Is Better, a 403(b) or Roth IRA?

It’s not a matter of which is “better” — as discussed above, the accounts are quite different. Deciding which one to use, or whether to combine both as part of your plan, boils down to your tax and withdrawal strategies for your retirement.

To make an informed decision about which retirement plan is right for you, it can be helpful to conduct a side-by-side comparison of both plans. This chart breaks down some of the main differences, giving you a better understanding of these types of retirement plans, so that you can weigh the pros and cons of a Roth IRA vs. 403(b).

403(b)

 Roth IRA
Who can participate? Employees of the following types of organizations:

•   Public school systems, if involved in day-to-day operations

•   Public schools operated by Indian tribal governments

•   Cooperative hospitals and

•   Civilian employees of the Uniformed Services University of the Health Sciences

•   Certain ministers and chaplains

•   Tax-exempt charities established under IRC Section 501(c)(3)

Individuals earning less than the following amounts:

•   Single filers earning less than $150,000 for 2025 (those earning $150,000 or more but less than $165,000 may contribute a reduced amount)

•   Married joint filers earning less than $236,000 for 2025 (those earning $236,000 or more but less than $246,000 may contribute a reduced amount)

•   Single filers earning less than $153,000 for 2026 (those earning $153,000 or more but less than $168,000 may contribute a reduced amount)

•   Married joint filers earning less than $242,000 for 2026 (those earning $242,000 or more but less than $252,000 may contribute a reduced amount)

Are contributions tax deductible? Yes No
Are qualified distributions taxed? Yes No (if not qualified, distribution may be taxable in part)
Annual individual contribution limit $23,500 for 2025 (plus catch-up contributions of $7,500 for those 50 and older; $11,250 instead of $7,500 for those aged 60 to 63)

$24,500 for 2026 (plus catch-up contributions up to $8,000 for those age 50 and older; $11,250 instead of $8,000 for those aged 60 to 63)

 $7,000 for 2025 (individuals 50 and older may contribute $8,000)

$7,500 for 2026 (individuals 50 and older may contribute $8,600)

Are early withdrawals allowed? Depends on individual plan terms and may be subject to a 10% penalty Yes, though account earnings may be subject to a 10% penalty if funds are withdrawn before account owner is 59 ½
Plan administered by Employer The individual’s chosen financial institution
Investment options Employee chooses based on investments available through the plan Up to the individual, though certain types of investments (collectibles, life insurance) are prohibited
Fees Varies depending on plan terms and investments Varies depending on financial institution and investments
Portability As with other employee-sponsored plans, individuals must roll their account into another fund or cash out when switching employers Yes
Subject to RMD rules Yes No

Pros and Cons of a 403(b) and a Roth IRA

There are positives to both a 403(b) and a Roth IRA — and because it’s possible for qualified individuals to open a Roth IRA and a 403(b), some people may decide that their best strategy is to use both. Here’s a side-by-side comparison of a 403(b) vs. a Roth IRA:

403(b)

 Roth IRA
Pros

•   Contributions are automatically deducted from your paycheck

•   Earning less during retirement may mean an individual pays less in taxes

•   Employer may offer matching contributions

•   Higher annual contribution limit than a Roth IRA

•   More investment options to choose from

•   Withdrawal of contributions are not taxed; withdrawal of earnings are not taxed under certain conditions and/or after age 59 ½

•   Account belongs to the owner

Cons

•   May have limited investment options

•   May charge high fees

•   There may be a 10% penalty on funds withdrawn before age 59 ½

•   Has an income limit

•   Maximum contribution amount is low

•   Contributions aren’t tax deductible

Pros of 403(b)

•   Contributions are automatically deducted by an employer from the individual’s paycheck, which can make it easier to save.

•   If an individual earns less money annually in retirement than during their working years, deferring taxes may mean they ultimately pay less in taxes.

•   Some employers offer matching contributions, meaning for every dollar an employee contributes, the employer may match some or all of it, up to a certain percentage.

•   Higher annual contribution limit than a Roth IRA.

Pros of Roth IRAs

•   Individuals can invest with any financial institution and thus will likely have many more investment options when opening up their Roth IRA.

•   Withdrawal of contributions are not taxed; withdrawal of earnings are not taxed under certain conditions and/or after age 59 ½.

•   Account belongs to the owner and is not affected if the individual changes jobs.

There are also some disadvantages to both types of accounts, however.


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

Cons of 403(b)s

•   There are limited investment options with 403(b)s.

•   Some 403(b) plans charge high fees.

•   Individuals typically pay a 10% penalty on funds withdrawn before age 59 ½. However, there may be some exceptions under the rule of 55 for retirement.

Cons of Roth IRAs

•   There’s an income limit to a Roth IRA, as discussed above.

•   The maximum contribution amount is fairly low.

•   Contributions are not tax deductible.

Choosing Between a Roth IRA and 403(b)

When considering whether to fund a 403(b) account or a Roth IRA, there’s no right choice, per se — the correct answer boils down to which approach works for you. You might prefer the automatic payroll deductions, the ability to save more, and, if it applies, the employer match of a 403(b).

Or you might gravitate toward the more independent setup of your own Roth IRA, where you have a wider array of investment options and greater flexibility around withdrawals (Roth contributions can be withdrawn at any time, although earnings can’t).

Or it might come down to your tax strategy: It may be more important for you to save in a 403(b), and reduce your taxable income in the present. Conversely, you may want to contribute to a Roth IRA, despite the lower contribution limit, because withdrawals are tax free in retirement.

Really, though, it’s possible to have the best of both worlds by investing in both types of accounts, as long as you don’t exceed the annual contribution limits.

Investing With SoFi

Because 403(b)s and Roth IRAs are complementary in some ways (one being tax-deferred, the other not), it’s possible to fund both a 403(b) and a Roth IRA.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Easily manage your retirement savings with a SoFi IRA.

FAQ

Which is better: a 403(b) or a Roth IRA?

Neither plan is necessarily better. A 403(b) and a Roth IRA are very different types of accounts. A 403(b) has automatic payroll deductions, the possibility of an employer match, and your contributions are tax deductible. A Roth IRA gives you more control, a greater choice of investment options, and the ability to withdraw contributions (but not earnings) now, plus tax free withdrawals in retirement. It can actually be beneficial to have both types of accounts, as long as you don’t exceed the annual contribution limits.

Should you open a Roth IRA if you have a 403(b)?

You can open a Roth IRA if you have a 403(b). In fact it may make sense to have both, since each plan has different advantages. You may get an employer match with a 403(b), for instance, and your contributions are tax deductible. A Roth IRA gives you more investment options to choose from and tax-free withdrawals in retirement. In the end, it really depends on your personal financial situation and preference. Be sure to weigh all the pros and cons of each plan.

When should you convert your 403(b) to a Roth IRA?

If you are leaving your job or you’re at least 59 ½ years old, you may want to convert your 403(b) to a Roth IRA to avoid taking the required minimum distributions (RMDs) that come with pre-tax plans starting at age 73. However, because you are moving pre-tax dollars to a post-tax account, you’ll be required to pay taxes on the money. Speak to a financial advisor to determine whether converting to a Roth IRA makes sense for you and ways you may be able to minimize your tax bill.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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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17
2025
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What Is a HELOC and How Does It Work?

By | Credit, Home Ownership, mortgage, personal_loan, Terminology | No Comments

If you own a home, you may be interested in tapping into your available home equity. One popular way to do that is with a home equity line of credit (HELOC). What is a HELOC? Well, for starters, it’s different from a home equity loan. But like a home equity loan, it can help you finance a major renovation or cover other expenses.

Homeowners sitting on at least 20% equity — the home’s market value minus what is owed — may be able to secure a HELOC. Let’s take a look at how a HELOC works, the pros and cons, and what alternatives to HELOC might be.

Key Points

•   A HELOC provides borrowers with cash via a revolving credit line, typically with variable interest rates.

•   The draw period of a HELOC is 10 years, followed by repayment of principal plus interest.

•   Funds can be used for home renovations, personal expenses, debt consolidation, and more.

•   Alternatives to a HELOC include cash-out refinancing and home equity loans.

•   HELOCs offer flexibility, but remember that variable interest rates may result in increased monthly payments, and a borrower who doesn’t repay the HELOC could find their home at risk.

How Does a HELOC Work?

The purpose of a HELOC is to tap your home equity to get some cash to use on a variety of expenses. Home equity lines of credit offer what’s known as a revolving line of credit, similar to a credit card, and usually have low or no closing costs. The interest rate is likely to be variable (more on that in a minute), and the amount available is typically up to 90% of your home’s value, minus whatever you may still owe on your mortgage. (You can roughly calculate home equity before you apply for a HELOC by using online property estimates; ultimately your lender will likely do an appraisal.)

Once you secure a HELOC with a lender, you can draw against your approved credit line as needed until your draw period ends, which is usually 10 years. You then repay the balance over another 10 or 20 years, or refinance to a new loan. Worth noting: Payments may be low during the draw period; you might be paying interest only. You would then face steeper monthly payments during the repayment phase. Carefully review the details when applying.

Here’s a look at what is a HELOC good for:

•   HELOCs can be used for anything but are commonly used to cover big home expenses, like a home remodeling costs or building an addition. The average cost of a bathroom remodel topped $12,000 in 2025 according to Angi, while a kitchen remodel was, on average, almost $27,000.

•   Personal spending: If, for example, you are laid off, you could tap your HELOC for cash to pay bills. Or you might dip into the line of credit to pay for a wedding (you only pay interest on the funds you are using, not the approved limit).

•   A HELOC can also be used to consolidate high-interest debt. Whatever homeowners use a home equity credit line for — investing in a new business, taking a dream vacation, funding a college education — they need to remember that they are using their home as collateral. That means if they can’t keep up with payments, the lender may force the sale of the home to satisfy the debt.

HELOC Options

Most HELOCs offer a variable interest rate, but you may have a choice. Here are the two main options:

•   Fixed Rate: With a fixed-rate home equity line of credit, the interest rate is set and does not change. That means your monthly payments won’t vary either. You can use a HELOC interest calculator to see what your payments would look like based on your interest rate, how much of the credit line you use, and the repayment term.

•   Variable Rate: Most HELOCs have a variable rate, which is frequently tied to the prime rate, a benchmark index that closely follows the economy. Even if your rate starts out low, it could go up (or down). A margin is added to the index to determine the interest you are charged. In some cases, you may be able to lock a variable-rate HELOC into a fixed rate.

•   Hybrid fixed-rate HELOCs are not the norm but have gained attention. They allow a borrower to withdraw money from the credit line and convert it to a fixed rate.

Note: SoFi does not offer hybrid fixed-rate HELOCs at this time.

HELOC Requirements

Now that you know what a HELOC is, and the basics of how does a HELOC work, think about what is involved in getting one. If you do decide to apply for a home equity line of credit, you will likely be evaluated on the basis of these criteria:

•   Home equity percentage: Lenders typically look for at least 15% or more commonly 20%.

•   A good credit score: Usually, a score of 680 will help you qualify, though many lenders prefer 700+. If you have a credit score between 621 and 679, you may be approved by some lenders.

•   Low debt-to-income (DTI) ratio: Here, a lender will see how your total housing costs and other debt (say, student loans) compare to your income. The lower your DTI percentage, the better you look to a lender. Your DTI will be calculated by your total debt divided by your monthly gross income. A lender might look for a figure in which debt accounts for anywhere between 36% to 50% of your total monthly income.

Other angles that lenders may look for is a specific income level that makes them feel comfortable that you can repay the debt, as well as a solid, dependable payment history. These are aspects of the factors mentioned above, but some lenders look more closely at these as independent factors.

Example of a HELOC

Here’s an example of how a HELOC might work. Let’s say your home is worth $300,000, and you currently have a mortgage of $200,000. If you seek a HELOC, the lender might allow you to borrow up to 80% of your home’s value:

   $300,000 x 0.8 = $240,000

Next, you would subtract the amount you owe on your mortgage ($200,000) from the qualifying amount noted above ($240,000) to find how big a HELOC you qualify for:

   $240,000 – $200,000 = $40,000.

One other aspect to note is a HELOC will be repaid in two distinct phases:

•   The first part is the draw period, which typically lasts 10 years. At this time, you can borrow money from your line of credit. Your minimum payment may be interest-only, though you can pay down the principal as well, if you like.

•   The next part of the HELOC is known as the repayment period, which is often also 10 years, but may vary. At this point, you will no longer be able to draw funds from the line of credit, and you will likely have monthly payments due that include both principal and interest. For this reason, the amount you pay is likely to rise considerably.

Recommended: What Are the Different Types of Home Equity Loans?

How to Get a Home Equity Line of Credit

If you’re ready to apply for a home equity line of credit, follow these steps:

•   First, it’s wise to shop around with different lenders to reveal minimum credit score ranges required for HELOC approval. You can also check and compare terms, such as periodic and lifetime rate caps. You might also look into which index is used to determine rates, and how often and by how much it can change.

•   Then, you can get specific offers from a few lenders to see the best option for you. Banks (online and traditional) as well as credit unions often offer HELOCs.

•   When you’ve selected the offer you want to go with, you can submit your application. This usually is similar to a mortgage application. It will involve gathering documentation that reflects your home’s value, your income, your assets, and your credit score. You may or may not need a home appraisal.

•   Lastly, you’ll hopefully hear that you are approved from your lender. After that, it can take approximately 30 to 60 days for the funds to become available. Usually, the money will be accessible via a credit card or a checkbook.

How Much Can You Borrow With a HELOC?

Depending on your creditworthiness and debt-to-income ratio, you may be able to borrow up to 90% of the value of your home (or, in some cases, even more), less the amount owed on your first mortgage.

Thought of another way, most lenders require your combined loan-to-value ratio (CLTV) to be 90% or less for a home equity line of credit.

Here’s an example. Say your home is worth $500,000, you owe $300,000 on your mortgage, and you hope to tap $120,000 of home equity.

Combined loan balance (mortgage plus HELOC, $420,000) ÷ current appraised value ($500,000) = CLTV (0.84)

Convert this to a percentage, and you arrive at 84%, just under many lenders’ CLTV threshold for approval.

In this example, the liens on your home would be a first mortgage with its existing terms at $300,000, and a second mortgage (the HELOC) with its own terms at $120,000.

How Do Payments On a HELOC Work?

A HELOC is distinguished from other types of loans by its two-phase payment structure. During the first stage of your HELOC (the draw period), you can borrow against your credit line, up to the approved ceiling, but you may be required to make only minimum payments. These are often interest-only payments. (Of course, if you choose to repay all that you owe, you can then borrow against the entire credit line again, and again, up to the end of the draw period.)

Once the draw period ends, your regular HELOC repayment period begins, when payments must be made toward both the interest and the principal.

Interest-Only vs. Principal and Interest Payments

After the draw period ends and the repayment period begins, you’ll begin making monthly payments that, similar to a home mortgage loan, include both principal and interest. For some borrowers, the end of the interest-only period can be a bit of a shock to the budget, so make sure you are prepared and know when the draw period is ending (often at the 10-year mark). A HELOC repayment calculator can help you understand what your payments might be based on how much you borrow.

Remember that if you have a variable-rate HELOC, your monthly payment will fluctuate over time. And it’s important to check the terms so you know whether you’ll be expected to make one final balloon payment at the end of the repayment period.

Pros of Taking Out a HELOC

Here are some of the benefits of a HELOC:

1. Initial Interest Rate and Acquisition Cost

A HELOC, secured by your home, may have a lower interest rate than unsecured loans and lines of credit. What is the interest rate on a HELOC? The average rate for a $100,000 HELOC in March 2025 was 7.61%.

Lenders often offer a low introductory rate, or teaser rate. After that period ends, your rate (and payments) increase to the true market level (the index plus the margin). Lenders normally place periodic and lifetime rate caps on HELOCs.

The closing costs may be lower than those of a home equity loan. Some lenders waive HELOC closing costs entirely if you meet a minimum credit line and keep the line open for a few years.

2. Taking Out Money as You Need It

Instead of receiving a lump-sum loan, a HELOC gives you the option to draw on the money over time as needed. That way, you don’t borrow more than you actually use, and you don’t have to go back to the lender to apply for more loans if you end up requiring additional money.

3. Only Paying Interest on the Amount You’ve Withdrawn

Paying interest only on the amount plucked from the credit line is beneficial when you are not sure how much will be needed for a project or if you need to pay in intervals.

Also, you can pay the line off and let it sit open at a zero balance during the draw period in case you need to pull from it again later.

Cons of Taking Out a HELOC

Now, here are some downsides of HELOCs to consider:

1. Variable Interest Rate

Even though your initial interest rate may be low, if it’s variable and tied to the prime rate, it will likely go up and down with the federal funds rate. This means that over time, your monthly payment may fluctuate and become less affordable (or more!).

Variable-rate HELOCs come with annual and lifetime rate caps, so check the details to know just how high your interest rate might go.

2. Potential Cost

Taking out a HELOC is placing a second mortgage lien on your home. You may have to deal with closing costs on the loan amount, though some HELOCs come with low or zero fees. Sometimes loans with no or low fees have an early closure fee.

3. Your Home Is on the Line

If you aren’t able to make payments and go into loan default, the lender could foreclose on your home. And if the HELOC is in second lien position, the lender could work with the first lienholder on your property to recover the borrowed money.

Adjustable-rate loans like HELOCs can be riskier than others because fluctuating rates can change your expected repayment amount.

4. It Could Affect Your Ability to Take On Other Debt

Just like other liabilities, adding on to your debt with a HELOC could affect your ability to take out other loans in the future. That’s because lenders consider your existing debt load before agreeing to offer you more.

Lenders will qualify borrowers based on the full line of credit draw even if the line has a zero balance. This may be something to consider if you expect to take on another home mortgage loan, a car loan, or other debts in the near future.

Alternatives to HELOCs

If you’re looking to access cash, here are HELOC alternatives.

1. Cash-Out Refi

With a cash-out refinance, you replace your existing mortgage with a new mortgage based on your home’s current value, with a goal of a lower interest rate, and cash out some of the equity that you have in the home. So if your current mortgage is $150,000 on a $250,000 value home, you might aim for a cash-out refinance that is $175,000 and use the $25,000 additional funds as needed.

Lenders typically require you to maintain at least 20% equity in your home (although there are exceptions). Be prepared to pay closing costs.

Generally, cash-out refinance guidelines may require more equity in the home vs. a HELOC.

Recommended: Cash Out Refi vs. Home Equity Line of Credit: Key Differences to Know

2. Home Equity Loan

HELOCs and home equity loans are often confused. Both are second mortgages (assuming you still have your first mortgage) that allow you to borrow against your home equity. The key difference in the HELOC vs. home equity loan comparison: With a home equity loan, you get a lump sum all at once and begin repaying what you owe (principal plus interest) immediately. A HELOC, as noted above, works more like a credit card. You borrow what you need in increments before you reach your repayment term.

Another difference: Home equity loans almost always come with a fixed interest rate, which allows for consistent monthly payments. HELOCs typically have a variable rate.

3. Personal Loan

If you’re looking to finance a big-but-not-that-big project for personal reasons, and you have a good estimate of how much money you’ll need, a low-rate personal loan that is not secured by your home could be a better fit.

With possibly few to zero upfront costs and minimal paperwork, a fixed-rate personal loan could be a quick way to access the money you need. Just know that an unsecured loan usually has a higher interest rate than a secured loan.

A personal loan might also be a better alternative to a HELOC if you bought your home recently and don’t have much equity built up yet.

4. Reverse Mortgage

If you are 62 or older, a reverse mortgage could allow you to turn part of your home equity into cash. Funds can be paid out as a lump sum, a monthly payment, or available as a line of credit, and are repaid when the home is sold. Borrowers who want a reverse mortgage usually turn to a home equity conversion mortgage, or HECM, which has fairly rigid standards. All owners must be at least age 62, and the home must be paid off or largely paid for.

Note: SoFi does not offer home equity conversion mortgages (HECMs) at this time.

5. Bridge Loan

A short-term bridge loan lets owners use the equity in their existing home to help pay for a home they’re ready to purchase. A bridge loan is secured by the first home and typically issued by a lender who will be the lender on their new mortgage. If you’re buying and selling a home at the same time, a bridge loan might be an appropriate way to help cover costs in the transitional period, such as when closing dates on the two properties don’t align.

Note: SoFi does not currently offer bridge loans for home financing.

The Takeaway

If you are looking to tap the equity of your home, a HELOC can give you money as needed, up to an approved limit, during a typical 10-year draw period. The interest rate is usually variable. Sometimes closing costs are waived. It can be an affordable way to get cash to use on anything from a home renovation to college costs.

SoFi now partners with Spring EQ to offer flexible HELOCs. Our HELOC options allow you to access up to 90% of your home’s value, or $500,000, at competitively lower rates. And the application process is quick and convenient.

Unlock your home’s value with a home equity line of credit from SoFi, brokered through Spring EQ.

FAQ

What can you use a HELOC for?

It’s up to you what you want to use the cash from a HELOC for. You could use it for a home renovation or addition, or for other expenses, such as college costs or a wedding.

How can you find out how much you can borrow?

Lenders typically require 20% equity in your home and then offer up to 90% or even more of your home’s value, minus the amount owed on your mortgage. There are online tools you can use to determine the exact amount, or contact your bank or credit union.

How long do you have to pay back a HELOC?

Typically, home equity lines of credit have 20-year terms. The first 10 years are considered the draw period, and the second 10 years are the repayment phase.

How much does a HELOC cost?

When evaluating HELOC offers, check interest rates, the interest-rate cap, closing costs (which may or may not be billed), and other fees to see just how much you would be paying.

Can you sell your house if you have a HELOC?

Yes, you can sell a house if you have a HELOC. The home equity line of credit balance will typically be repaid from the proceeds of the sales when you close, after any mortgage principal is paid off.

Does a HELOC hurt your credit?

A HELOC can hurt your credit score for a short period of time. Applying for a home equity line can temporarily lower your credit score because a hard credit pull is part of the process when you seek funding. This typically takes your score down a bit.

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.


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