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A fair credit score falls in the mid-lower range of the credit-scoring spectrum. With the FICO® scoring model, which ranges from 300 to 850, a fair score is 580 to 669.

Fair credit is better than poor credit but below the average credit score. While you’ll likely be able to get a credit card or loan with fair credit, you probably won’t qualify for the most favorable rates and terms.

Read on to learn how fair credit compares with other credit score ranges, the difference having good credit can make, and what you can do to build your credit.

What Is Fair Credit?

What “fair credit” means will depend on the scoring model. With FICO, the most widely used credit scores by lenders in the U.S., fair credit is a score between 580 and 669. With VantageScore®, another popular scoring model, fair credit is a score of 601 to 660.

The fair credit range is above poor credit but below good credit, and is considered to be in the subprime score range.

Credit scores are calculated using information found in your credit reports (you have three, one from each of the major consumer credit bureaus). People typically have multiple, not just one, credit score, and these scores can vary depending on the scoring model and which of your three credit reports the scoring system analyzes. While each score may be slightly different, they typically fall into similar ranges and scoring categories, such as poor, fair, good, and excellent/exceptional.


💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

Is Fair Credit Good or Bad?

As the name “fair” implies, this score is okay, but not great. A fair credit score isn’t the lowest category on the FICO chart — that’s the poor credit category, which runs from 300-579. But it’s definitely not the highest either. Above fair credit, there is good credit (670-739), very good credit (740-799), and exceptional credit (800-850).

With a fair credit score, lenders will likely see you as an above-average risk and, as a result, charge you more upfront fees and higher interest rates. They may also approve you for a lower loan amount or credit limit.

With fair credit, you might also have difficulty getting approved for certain financial products. For example, you might need a higher credit score to get the best rewards cards or certain types of mortgages. Landlords and property managers may also have credit score requirements. You might have to pay a larger security deposit if you have a fair credit score.

Is a 620 Credit Score Fair?

Yes, 620 is within the 580-669 range for a fair FICO score and, thus, would be considered a fair credit score. A 620 is also in the VantageScore range for fair (580 to 669).

Recommended: 8 Reasons Why Good Credit Is So Important

Why Do I Need to Know My Credit Scores?

A credit score is a three-digit number designed to represent someone’s credit risk (the likelihood you’ll pay your bills on time). Lenders use your credit scores — along with the information in your credit reports — to help determine whether to approve you for a loan or credit line and, if so, at what rates and terms. Many landlords, utility companies, insurance companies, cell phone providers, and employers also look at credit scores.

Knowing your credit scores can help you understand your current credit position. It also provides a baseline from which you can implement change. With time and effort, you may be able to build your credit and gradually move your credit score into a higher category, possibly all the way up to exceptional.

Recommended: How Often Does Your Credit Score Update?

Using Credit Bureaus to Find Credit Scores

It’s a good idea to periodically review your credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) to make sure all of the information is accurate, since errors can bring down your scores. You can get free weekly copies of your reports at AnnualCreditReport.com .

However, your credit reports will not contain your credit scores.

Fortunately, there are easy ways to get your credit scores, often for free. Many credit card companies, banks, and loan companies have started providing credit scores for their customers. It may be on your statement, or you can access it online by logging into your account.

You can also purchase credit scores directly from one of the three major credit bureaus or other provider, such as FICO. Some credit score services and credit scoring sites provide a free credit score to users. Others may provide credit scores to credit monitoring customers paying a monthly subscription fee.

Recommended: How to Check Your Credit Score for Free

Reasons Your Credit Score Might Be Fair

Your credit scores are based on information in your credit reports, and different things can help or hurt your scores. FICO scores are based on the following five factors.

1. Payment History

This looks at whether you’ve made your debt payments on time every month and is the most important factor in computing your FICO credit score. Even one payment made 30 days late can significantly harm your score. An account sent to collections, a foreclosure, or a bankruptcy can have even more significant and lasting consequences.

2. Amounts Owed

This notes the total amount you’ve borrowed, including how much of your available credit you’re currently using (called your credit utilization rate). If you’re tapping a sizable percentage of your available credit on your credit cards (such as 30% or more), for example, that can have a negative impact on your score.

3. Length of Credit History

Experience with credit accounts generally makes people better at managing debt (research bears this out). As a result, lenders generally see borrowers with a longer credit history (i.e., older accounts) more favorably than those that are new to credit. All things being equal, the longer your credit history, the higher your credit score is likely to be.

4. Credit Mix

This looks at how many different types of debt you are managing, such as revolving debt (e.g., credit cards and credit lines) and installment debt (such as personal loans, auto loans, and mortgages). The ability to successfully manage multiple debts and different credit types tends to benefit your credit scores.

5. New Credit

Research shows that taking on new debt increases a person’s risk of falling behind on their old debts. As a result, credit scoring systems can lower your score a small amount after a hard credit inquiry (which occurs when you apply for a new loan or credit card). The decrease is small, typically less than five points per inquiry, and temporary — it generally only lasts a few months.

Steps That Can Help Improve Fair Credit

While you may still be able to qualify for loans with fair credit, building your credit can help you get better rates and terms. Here are some moves that may help.

•   Pay your bills on time. Having a long track record of on-time payments on your credit card and loan balances can help build a positive payment history. Do your best to never miss a payment, since this can result in a negative mark on your credit reports.

•   Pay down credit card balances. If you’re carrying a large balance on one or more credit cards, it can be helpful to pay down that balance. This will lower your credit utilization rate.

•   Consider a secured credit card. If you’re new to credit or have a fair or low credit score, you may be able to build your credit by opening a secured credit card. These cards require you to pay a security deposit up front, which makes them easier to qualify for. Using a secured card responsibly can add positive payment information into your credit reports.

•   Monitor your credit. It’s a good idea to closely examine the information in your three credit reports to make sure it’s all accurate. Any errors can drag down your score. If you see any inaccuracies, you’ll want to reach out to the lender reporting the information. You can also dispute errors on your credit report with the credit bureaus.

•   Limit hard credit inquiries. Opening too many new credit accounts within a short period of time could hurt your scores because credit scoring formulas take recent credit inquiries into account. When shopping rates, be sure that a lender will only run a soft credit check (which won’t impact your scores).

Reasons to Improve Your Credit Score

Building your credit takes time and diligence, but can be well worth the effort, since our scores impact so many different parts of our lives.

Loans

Credit scores are used by lenders to gauge each consumer’s creditworthiness and determine whether to approve their applications for loans. A higher score makes you more likely to qualify for mortgages, auto loans, and different types of personal loans. It also helps you qualify for more favorable lending rates and terms.

Credit Cards

Credit card issuers typically reserve cards with lower annual percentage rates (APRs), more enticing rewards, and higher credit limits for applicants who have higher credit scores. A fair credit score may qualify you for a credit card with a high APR and little or no perks. Improving your credit score could potentially give you the boost you need to qualify for a better credit card.

Security Deposits

Just found your dream apartment? A fair credit score could mean a higher security deposit than if you had a good or better credit score. With a poor or fair credit score, you may also be asked to pay security deposits for cell phones or basic utilities like electricity.

Housing Options

A fair or poor credit score can even limit which housing options are available to you in the first place. Some landlords and property management companies require renters to clear a minimum credit bar to qualify.

Recommended: Typical Personal Loan Requirements Needed for Approval

Can You Get Personal Loans With Fair Credit?

It’s possible to get a personal loan with fair credit (or a FICO score between 580 and 669) but your choices will likely be limited.

Personal loan lenders use credit scores to gauge the risk of default, and a fair credit score often indicates you’ve had some issues with credit in the past. In many cases, borrowers with fair credit may be offered personal loans with higher rates, steeper fees, shorter repayment periods, and lower loan limits than those offered to borrowers with good to exceptional credit.

Although some lenders offer fair credit loans, you’ll likely need to do some searching to find a lender that will give you competitive rates and terms.


💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

The Takeaway

Having a fair credit score is better than having a poor credit score and doesn’t necessarily mean you won’t qualify for any type of credit. However, the rates and terms you’ll be offered may not be as favorable as those someone with good or better scores can get. With time and effort, however, you can move up the credit scoring ladder. If you work on building your credit score until you have good or better credit, you’ll gain access to credit cards and loans with lower interest rates and more perks.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

Is fair credit good or bad?

A fair credit score is neither good nor bad, it’s just okay. FICO credit scores range from 300 to 850 and a fair score is 580 to 669. It’s better than a poor credit score but below the average credit score.

What’s considered a fair credit score?

According to the FICO scoring model, which ranges from 300 to 850, a fair credit score is one that falls between 580 and 669. It’s one step up from a poor credit rating but below good, very good, and exceptional.

Is a 620 credit score fair?

Yes, a 620 credit score is considered to be in the fair range. According to the FICO scoring model, which ranges from 300 to 850, a fair credit score is one that falls between 580 and 669.

Photo credit: iStock/Ivan Pantic

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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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Getting a personal loan is typically a simple process but many lenders require at least a good credit rating and a stable income for approval. Banks tend to have stricter qualification requirements than private lenders. The type of personal loan you get — secured or unsecured — can also have an impact on how hard the loan is to get.

Once approved, a personal loan offers a lot of flexibility — you can use the funds for a wide variety of expenses, from planned home repairs to unexpected medical bills. Unlike loans with a specified purpose, like an auto loan or mortgage, personal loan funds can be used for virtually any type of expenditure.

Here’s what you need to know about personal loans and how to increase the chances that you’ll qualify.

Types of Personal Loans

A personal loan is essentially a lump sum of money borrowed from a bank, credit union or online lender that you pay back in fixed monthly payments, or installments. Lenders typically offer loans from $1,000 to $50,000, and this money can be used for virtually any purpose. Repayment terms can range from two to seven years.

While there are many different types of personal loans, they can be broken down into two main categories: secured and unsecured. Here’s how the two types of personal loans work:

•   Secured personal loans are backed by collateral owned by the borrower such as a savings account or a physical asset of value. If the loan goes into default, the lender has the right to seize the collateral, which lessens the lender’s risk.

•   Unsecured personal loans do not require collateral. The lender advances the money based simply on an applicant’s creditworthiness and promise to repay. Because unsecured personal loans are riskier for the lender, they tend to come with higher interest rates and more stringent eligibility requirements.


💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. One question can save you many dollars.

Getting a Personal Loan From a Bank

In addition to the type of personal loan you choose, the lender you borrow from can have an effect on how hard the loan is to get. For many borrowers, their bank is an obvious first choice when the time comes to take out a personal loan.

Banks sometimes offer lower interest rates than other lenders, particularly if you’re already an account holder at that bank. However, they may also have steeper eligibility requirements, such as a higher minimum credit score. Compared to an online lender, banks tend to have a more time-consuming application process, and the loan may take longer to disburse.

Still, the convenience of utilizing the bank you’re already familiar with and the comfort of in-person customer service may be worth the trade-off for qualified borrowers.

Getting a Personal Loan From a Private Lender

A private online lender is a non-institutional lender that is not tied to any major bank or corporation. Online lenders are less regulated than banks, allowing faster application processes and more lenient eligibility requirements. However, some online lenders will have higher interest rates and fees compared to traditional banks, so it’s key to shop around. One of the biggest advantages of a private online lender is convenience. You can complete the entire process online and funding is typically available within the week.

Recommended: What Are Personal Loans & How Do They Work?

Is It Harder to Get a Personal Loan From a Bank or Private Lender?

Generally speaking, it may be more difficult to get a personal loan from a bank than a private lender — but your best bet is to shop around and compare a variety of personal loan options, then see where you’ll get the best interest rate.

Here are the basic differences between getting a personal loan from a bank versus a private lender at a glance:

Is It Easier to Get a Small Personal Loan?

Generally, yes. Loan size is another important factor that goes into how hard it is to get a personal loan. It’s much less risky for a lender to offer $1,000 than $50,000, so the eligibility requirements may be less stringent — and interest rates may be lower — for a smaller loan than for a larger loan.

That said, there are exceptions to this rule. Payday loans are a perfect example. Payday lenders offer small loans with a very short repayment timeline, yet often have interest rates as high as 400% APR (annual percentage rate). Even for a smaller personal loan, it’s generally less expensive to look for an installment loan that’s paid back on a monthly basis over a longer term.

Recommended: How Much of a Personal Loan Can I Get?

What Disqualifies You From Getting a Personal Loan?

There are some financial markers that can disqualify you from getting a personal loan, even with the most lenient lenders. Here are a few to watch out for.

Bad Credit

While the minimum required credit score for each lender will vary, many personal loan lenders require at least a good credit score — particularly for an unsecured personal loan. If you have very poor credit, or no credit whatsoever, you may find yourself ineligible to borrow.

Lack of Stable Income

Another important factor lenders look at is your cash flow. Without a regular source of cash inflow, the lender has no reason to think you’ll be able to repay your loan — and so a lack of consistent income can disqualify you from borrowing.

Not a US Resident

If you’re applying for personal loans in the U.S., you’ll need to be able to prove residency in order to qualify.

Lack of Documentation

Finally, all of these factors will need to be proven and accounted for with paperwork, so a lack of official documentation could also disqualify you.

How to Get a Personal Loan With Bad Credit

If you’re finding it hard to get a personal loan, there are some steps you can take to improve your chances of approval. Here are some to consider.

Prequalify With Multiple Lenders

Every lender has different eligibility requirements. As a result, it’s worth shopping around and comparing as many lenders as you can through prequalification. Prequalification allows you to check your chances of eligibility and predicted rates without impacting your credit (lenders only do a soft credit check).

Consider Adding a Cosigner

If, through the prequalification process, you find that you don’t meet most lender’s requirements, or you’re seeing exorbitantly high rates, you might check to see if cosigners are accepted.

Cosigners are family members or friends with strong credit who sign the loan agreement along with you and agree to pay back the loan if you’re unable to. This lowers the risk to the lender and could help you get approved and/or qualify a better rate.

Include All Sources of Income

Many lenders allow you to include non-employment income sources on your personal loan application, such as alimony, child support, retirement, and Social Security payments. Lenders are looking for borrowers who can comfortably make loan payments, so a higher income can make it easier to get approved for a personal loan.

Add Collateral

Some lenders offer secured personal loans, which can be easier to get with less-than-ideal credit. A secured loan can also help you qualify for a lower rate. Banks and credit unions typically let borrowers use investment or bank accounts as collateral; online lenders tend to offer personal loans secured by cars.

Just keep in mind: If you fail to repay a secured loan, the lender can take your collateral. On top of that, your credit will be adversely affected. You’ll want to weigh the benefits of getting the loan against the risk of losing the account or vehicle.


💡 Quick Tip: If you’ve got high-interest credit card debt, a personal loan is one way to get control of it. But you’ll want to make sure the loan’s interest rate is much lower than the credit cards’ rates — and that you can make the monthly payments.

The Takeaway

You can use a personal loan for a range of purposes, such as to cover emergency expenses, to pay for a large expense or vacation, or to consolidate high-interest debt. Personal loans aren’t hard to get but you usually need good credit and a reliable source of income to qualify. The better your financial situation, generally the lower the interest rate will be.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

Is it hard to get a personal loan?

Personal loans aren’t necessarily hard to get but you typically need good credit and reliable income to qualify. Secured personal loans (which require pledging something you own like a savings account or vehicle) are generally easier to qualify for than unsecured personal loans

Is it hard to get a personal loan from a bank?

Banks tend to have more stringent qualification requirements for personal loans than private online lenders. Getting a personal loan from a bank can be a good move if you have good to excellent credit, an existing relationship with a bank, and time for a longer approval process.

What disqualifies you from getting a personal loan?

You will be disqualified for a personal loan if you do not meet a lender’s specific eligibility requirements. You may get denied if your credit score is too low, your existing debt load is too high, or your income is not high enough to cover the loan payments.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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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A Roth 401(k) is a type of retirement plan that may be offered by your employer. You contribute money from your paychecks directly to a Roth 401(k) to help save for retirement.

A Roth 401(k) is somewhat similar to a traditional 401(k), but the potential tax benefits are different.

Here’s what you need to know about a Roth 401(k) to help answer the question of what is a Roth 401(k)?, and to decide if it may be the right type of retirement account for you.

Roth 401(k) Definition

What is a Roth 401(k)? The plan combines some of the features of a traditional 401(k) and a Roth IRA.

Like a traditional 401(k), a Roth 401(k) is an employer-sponsored retirement account. Your employer may offer to match some of your Roth 401(k) contributions.

Like a Roth IRA, contributions to a Roth 401(k) are made using after-tax dollars, which means income tax is paid upfront on the money you contribute.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

How a Roth 401(k) Works

Contributions to a Roth 401(k) are typically made directly and automatically from your paycheck. Your employer may match your Roth 401(k) contributions up to a certain amount or percentage, depending on the employer and the plan.

Your contributions to a Roth 401(k) are taxed at the time you contribute them, and you pay income taxes on them. In general, your money grows in the account tax-free and withdrawals in retirement are also tax-free, as long as the account has been open at least five years.

Differences Between a Roth 401(k) and a Traditional 401(k)

While a Roth 401(k) shares some similarities to a traditional 401(k), there are some differences between the two plans that you should be aware of. Here is how a Roth 401(k) differs from a traditional 401(k):

•   Contributions to a Roth 401(k) are made with after-tax dollars and you pay taxes on them upfront. With a traditional 401(k), your contributions are made with pre-tax dollars, and you pay taxes on them later.

•   With a Roth 401(k), your take-home pay is a little less because you’re paying taxes on your contributions now. That typically lowers your tax bill for the year. With a traditional 401(k), your contributions are taken before taxes.

•   Your money generally grows tax-free in a Roth 401(k). And in retirement, you withdraw it tax-free, as long as the account is at least five years old and you are at least 59 ½. With a traditional 401(k), you pay taxes on your withdrawals in retirement at your ordinary income tax rate.

•   You can start withdrawing your Roth 401(k) money at age 59 ½ without penalty or taxes. However, you must have had the account for at least five years. With a traditional 401(k), you can withdraw your money at age 59 ½. There is no 5-year rule for a traditional 401(k).

Roth 401(k) Contribution Limits

A Roth 401(k) and a traditional 401(k) share the same contribution limits. Both plans allow for the same catch-up contributions for those 50 and older.

Here are the contribution limits for each type of plan.

Roth 401(k) Withdrawal Rules

When it comes to withdrawal rules, a Roth 401(k) is subject to the 5-year rule. Under this rule, an individual can start taking tax-free and penalty-free withdrawals from a Roth 401(k) at age 59 ½ only once they’ve had the account for at least five years.

This means that if you open a Roth 401(k) at age 56, you can’t take tax- or penalty-free withdrawals of your earnings at age 59 ½ the way you can with a traditional 401(k). Instead, you’d have to wait until age 61, when your Roth 401(k) is five years old.

Early Withdrawal Rules

It’s possible to take early withdrawals — meaning withdrawals taken before age 59 ½ or from an account that’s less than five years old — from a Roth 401(k), but it’s complicated. Early withdrawals are subject to taxes and a 10% penalty.

However, you may not owe taxes and penalties on the entire amount. Here’s how it typically works: You can withdraw as much as you’ve contributed to a Roth 401(k) without paying taxes or penalties because your contributions were made with after-tax dollars. In other words, you’ve already paid taxes on them. Any earnings you withdraw, though, are subject to taxes and penalties, and you’ll owe tax proportional to your earnings.

For example, if you have $150,000 in a Roth 401(k) and $130,000 of that amount is contributions and $20,000 is earnings, those $20,0000 in earnings are taxable gains, and they represent 13.3% of the account. Therefore, if you took an early withdrawal of $30,000, you would owe taxes on 13.3% of the amount to account for the gains, which is $3,990.


💡 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.

Roth 401(k) RMDs

Previously, individuals with a Roth 401(k) had to take required minimum distributions (RMDs) starting at age 73. However, in 2024, as a stipulation of the SECURE 2.0 Act, RMDs will be eliminated for Roth accounts in employer retirement plans.

By comparison, traditional 401(k)s still require you to take RMDs starting at age 73.

Pros and Cons of a Roth 401(k)

A Roth 401(k) has advantages, but there are drawbacks to the plan as well. Here are some pros and cons to consider:

Pros

You can make tax-free withdrawals in retirement with a Roth 401(k).
This can be an advantage if you expect to be in a higher tax bracket when you retire, since you’ll pay taxes on your Roth 401(k) contributions upfront when you’re in a lower tax bracket. Your money grows tax-free in the account.

Your current taxable income is reduced when you have a Roth 401(k).
Because Roth 401(k) contributions are made after taxes, your paycheck will typically be reduced. That lowers your tax bill for the year.

There are no longer RMDs for a Roth 401(k).
Because of the SECURE 2.0 Act, required minimum distributions will no longer be required for Roth 401(k)s as of 2024. With a traditional 401(k), you must take RMDs starting at age 73.

Early withdrawals of contributions in a Roth 401(k) are not taxed.
Because you’ve already paid taxes on your contributions, you can withdraw those contributions early without paying a penalty or taxes. However, if you withdraw earnings before age 59 ½, you will be subject to taxes on them.

Cons

Your Roth 401(k) account must be open for at least five years for penalty-free withdrawals.
Otherwise you may be subject to taxes and a 10% penalty on any earnings you withdraw if the account is less than five years old. This is something to consider if you are an older investor.

A Roth 401(k) will reduce your paycheck now.
Your take home pay will be smaller because you pay taxes on your contributions to a Roth 401(k) upfront. This could be problematic if you have many financial obligations or you’re struggling to pay your bills.

Is a Roth 401(k) Right for You?

If you expect to be in a higher tax bracket when you retire, a Roth 401(k) may be right for you. It might make sense to pay taxes on the account now, while you are making less money and in a lower tax bracket.

However, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) might be a better choice since you’ll pay the taxes on withdrawals in retirement.

Your age can play a role as well. A Roth 401(k) might make sense for a younger investor, since they are likely to be earning less now than they may be later in their careers. That’s something to keep in mind as you choose a retirement plan to help reach your future financial goals.

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

FAQ

How is a Roth 401(k) taken out of a paycheck?

Contributions to a Roth 401(k) are automatically deducted from your paycheck. Because contributions are made with after-tax dollars, meaning you pay taxes on them upfront, your paycheck will be lower.

What is the 5-year rule for a Roth 401(k)?

According to the 5-year rule for a Roth 401(k), the account must have been open for at least five years in order for an investor to take withdrawals of their Roth 401(k) earnings at age 59 ½ without being subject to taxes and a 10% penalty.

What happens to a Roth 401(k) when you quit?

When you quit a job, you can either keep your Roth 401(k) with your former employer, transfer it to a new Roth 401(k) with your new employer, or roll it over into a Roth IRA.

There are some factors to consider when choosing which option to take. For instance, if you leave the plan with your former employer, you can no longer contribute to it. If you are able to transfer your Roth 401(k) to a plan offered by your new employer, your money will be folded into the new plan and you will choose from the investment options offered by that plan. If you roll over your Roth 401(k) into a Roth IRA, you will be in charge of choosing and making investments with your money.

Do I need to report a Roth 401(k) on my taxes?

Because your contributions to a Roth 401(k) are made with after tax dollars and aren’t considered tax deductible, you generally don’t need to report them on your taxes. And when you take qualified distributions from a Roth 401(k) they are not considered taxable income and do not need to be reported on your taxes. However, it’s best to consult with a tax professional about your particular situation.

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.

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.

SoFi Invest®