Feb
05
2026
What Is a SIMPLE IRA? How Does it Work?

The Ultimate Guide to SIMPLE IRAs for Employees and Small Businesses

By | Growing Wealth, invest, Investing | Comments Off on The Ultimate Guide to SIMPLE IRAs for Employees and Small Businesses

SIMPLE IRA is a tax-advantaged retirement account that can help self-employed individuals and small business owners save and invest for the future.

You may already be familiar with traditional individual retirement accounts (IRAs). A SIMPLE IRA, or Saving Incentive Match Plan for Employees, is similar to a traditional IRA in that it’s also a tax-deferred account. But the contribution limits for SIMPLE IRAs are higher, and the tax treatment of these plans is slightly different.

Also, SIMPLE IRAs require employers to provide a matching contribution.

What Is a SIMPLE IRA?

SIMPLE IRA plans are employer-sponsored retirement accounts for businesses with 100 or fewer employees. They are also retirement accounts for the self-employed and sole proprietors. If you’re your own boss, and thus self-employed, you can set up a SIMPLE IRA for yourself.

For small business owners and the self-employed, SIMPLE IRAs are an easy-to-manage, low-cost way to contribute to their own retirement — while at the same time helping employees to contribute to their savings as well, both through tax-deferred, elective contributions, and a required employer match.

SIMPLE IRAs offer higher contribution limits than traditional IRAs (see below), but employers and employees still benefit from tax advantages like tax-deferred growth and contributions that are either deductible (for the employer) or reduce taxable income (for the employee).

How Does a SIMPLE IRA Work?

A SIMPLE IRA is one of many different types of retirement plans available, but it can be appealing for small business owners and those who are self-employed owing to the lower administrative burden.

That’s because, unlike a 401(k) plan (which requires a plan sponsor and a plan administrator, as well as a custodian for employee assets), a SIMPLE IRA basically enables the employer to set up IRA accounts at a financial institution for eligible employees — or allow employees to do so at the financial institution of their choice.

Once the plan is set up and contributions are made, the employee is fully vested (i.e., they have ownership of all SIMPLE IRA funds, per IRS rules), which is helpful when saving for retirement.

Employee Eligibility

In order for an employee to participate in a SIMPLE IRA, they must have earned at least $5,000 in compensation over the course of any two years prior to the current calendar year, and they must expect to make $5,000 in the current calendar year.

It’s possible for employers to set less restrictive rules for SIMPLE IRA eligibility. For example, they could lower the amount employees are required to have made in a previous two-year time. However, they cannot make participation rules more restrictive.

Employers can exclude certain types of employees from the plan, including union members who have already bargained for retirement benefits and nonresident aliens who don’t receive their compensation from the employer.

Employee Contribution Limits

Those who have a SIMPLE IRA can contribute up to $16,500 in 2025 (plus an extra $3,500 in catch-up contributions for those 50 and older). In 2026, they can contribute up to $17,000 (plus an extra $4,000 in catch-up contributions for those 50 and older). In both 2025 and 2026, those aged 60 to 63 can contribute $5,250 (instead of $3,500 and $4,000 respectively), thanks to SECURE 2.0.

Contributions reduce employees’ taxable income, which lowers their income taxes in the year they contribute. Contributions can be invested inside the account, and may grow tax-deferred until an employee makes withdrawals when they retire.

IRA withdrawal rules are particularly important to pay attention to as they can be a bit complicated. Withdrawals made after age 59 ½ are subject to income tax. If you make withdrawals before then, you may be subject to an additional 10%, with some exceptions, or 25% penalty (if you’ve had the account for less than two years).

Account holders must make required minimum distributions, or RMDs, from their accounts when they reach age 73 (as long as they turn 72 after December 31, 2022).

Matching Contributions

An employer is required to provide a matching contribution to employees in one of two ways. They can match up to 3% of employees’ compensation. Or they can make a non-elective contribution of 2% of employees’ compensation.

If an employee doesn’t participate in the SIMPLE IRA plan, they would still receive an employer contribution of 2% of their compensation, up to the annual compensation limit, which is $350,000 for 2025, and $360,000 for 2026.

This two-tiered structure allows employers to choose whatever matching structure suits them.

SIMPLE IRA vs Traditional IRA

When it comes to a SIMPLE IRA vs. a traditional IRA, the two plans are similar, but there are some key differences between the two. A SIMPLE IRA is for small business owners and their employees. A traditional IRA is for anyone with earned income.

To be eligible for a SIMPLE IRA, an employee generally must have earned at least $5,000 in compensation over the course of two years prior — and expect to make $5,000 in the current calendar year. With a traditional IRA, an individual must have earned income in the past year.

Contribution Limits

One of the biggest differences between the two plans is the contribution limit amount.

While individuals can contribute $7,000 in 2025 to a traditional IRA (or $8,000 if they are 50 or older), and $7,500 in 2026 (or $8,600 if they are 50 or older), those who have a SIMPLE IRA can contribute $16,500 in 2025, plus an extra $3,500 in catch-up contributions for those 50 and older, for a total of $20,000, and they can contribute $17,000 in 2026 plus an extra $4,000 in catch-up contributions, for a total of $21,000. Those aged 60 to 63 can contribute a catch-up of $5,250 for both 2025 and 2026 (instead of $3,500 and $4,000), for a total of $21,750 in 2025, and $22,250 in 2026.

Tax Treatment

And while both types of IRAs are considered tax deferred, SIMPLE IRAs use two different tax treatments.
For example: a traditional IRA generally allows individuals to make tax-deductible contributions. With a SIMPLE IRA, the employer or sole proprietor can make tax-deductible contributions to a SIMPLE IRA — while employees benefit from having their elective contributions withheld from their taxable income.

Both methods can help lower taxable income, potentially providing a tax benefit. But withdrawals are taxed as income, as they are with a traditional IRA.

Dive deeper: SIMPLE IRA vs Traditional IRA

SIMPLE IRA vs 401(k)

SIMPLE IRAs have some similarity to employer-sponsored 401(k) plans. Contributions made to both are made with pre-tax dollars, and the money in the accounts grows tax-deferred.

But while a 401(k) gives an employer the option of providing matching contributions to employees’ plans, a SIMPLE IRA requires matching contributions by the employer, as noted above.

Another major difference between the two plans is that individuals can contribute much more to a 401(k) than they can to a SIMPLE IRA.

•   In 2025, they can contribute $23,500 to their 401(k) and an additional $7,500 if they’re 50 or older. Those aged 60 to 63 can contribute $11,250 instead of $7,500 to their 401(k), thanks to SECURE 2.0. In 2026, they can contribute $24,500 and an additional $8,000 if they are 50 or older. Those aged 60 to 63 can again contribute $11,250 instead of $8,000.

Under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

•   In comparison, individuals can contribute $16,500 to a SIMPLE IRA in 2025, plus an additional $3,500 if they are 50 or older, and in 2026, they can contribute $17,000, plus an additional $4,000 if they are 50 or older. Those aged 60 to 63 can contribute $5,250 (instead of $3,500 and $4,000) in 2025 and 2026, thanks to SECURE 2.0.

How to Run a SIMPLE IRA Plan

SIMPLE IRAs are relatively easy to put in place, since they have no filing requirements for employers. Employers cannot offer another retirement plan in addition to offering a SIMPLE IRA.

If you’re interested in setting up a SIMPLE IRA, banks and brokerages may have a plan, known as a prototype plan, that’s already been approved by the IRS.

Otherwise you’ll need to fill out one of two forms to set up your plan:

•   Form 5304-SIMPLE allows employees to choose the financial institutions that will receive their SIMPLE IRA contributions.

•   You can also fill out Form 5305-SIMPLE, which means employees will deposit SIMPLE IRA contributions at a single financial institution chosen by the employer.

Once you have established the SIMPLE IRA, an account must be set up by or for each employee, and employers and employees can start to make contributions.

Notice Requirements for Employees

There are minimal paperwork requirements for a SIMPLE IRA. Once the employer opens and establishes the plan through a financial institution, they need to notify employees about it. This should be done by October 1 of the year the plan is intended to begin. Employees have 60 days to make their elections.

Eligible employees need to be notified about the plan annually. Any changes or new terms to the plan must be disclosed. At the beginning of each annual election period, employers must notify their employees of the following:

•   Opportunities to make or change salary reductions.

•   The ability to choose a financial institution to receive SIMPLE IRA contribution, if applicable.

•   Employer’s decisions to make nonelective or matching contributions.

•   A summary description provided by the financial institution that acts as trustee of SIMPLE IRA fund, and notice that employees can transfer their balance without cost of penalty if the employer is using a designated financial institution.

Participant Loans and Withdrawals

Participants cannot take loans from a SIMPLE IRA. Withdrawals made before age 59 ½ are typically subject to a 10% penalty, or 25% if the account is less than two years old, in addition to any income tax due on the withdrawal amount.

Rollovers and Transfers to Other Retirement Accounts

For the first two years of participating in a SIMPLE IRA, participants can only do a tax-free rollover to another SIMPLE IRA. After two years, they may be able to roll over their SIMPLE IRA to a traditional IRA or an employer-sponsored plan such as 401(k).

A rollover to a Roth IRA would require paying taxes on any untaxed contributions and earnings in the accounts.

The Advantages and Drawbacks of a SIMPLE IRA Plan

While SIMPLE IRAs may offer a lot of benefits, including immediate tax benefits, tax-deferred growth, and employer contributions, there are some drawbacks. For example, SIMPLE IRAs don’t allow employees to save as much as other retirement plans such as 401(k)s and Simplified Employee Pension (SEP) IRAs.

In 2025, employees can contribute up to $23,500 to a 401(k), plus an additional $7,500 for those 50 and over. Those aged 60 to 63 can contribute $11,250 instead of $7,500 to their 401(k), thanks to SECURE 2.0.

In 2026, they can contribute $24,500 to a 401(k), plus an additional $8,000 for those 50 or older. Those aged 60 to 63 can contribute $11,250 instead of $8,000 to their 401(k), thanks to SECURE 2.0.

Individuals with a SEP IRA account can contribute up to 25% of their employee compensation, or $70,000, whichever is less, in 2025, and up to 25% of their employee compensation, or $72,000, whichever is less, in 2026.

The good news is, employees with SIMPLE IRAs can make up some of that lost ground. Employers may be wondering about the merits of choosing between a SIMPLE and traditional IRA, but they can actually have both.

Employers and employees can open a traditional or Roth IRA and fund it simultaneously with a SIMPLE IRA. For 2025, total IRA contributions can be up to $7,000, or $8,000 for those 50 and over. In 2026, total IRA contributions can be up to $7,500, or $8,600 for those 50 or older.

Here some pros and cons of starting and funding a SIMPLE IRA at a glance:

Pros of a SIMPLE IRA

 Cons of a SIMPLE IRA
Employers are required to provide a matching contribution for all eligible employees. Lower contribution limits than other plans, such as 401(k)s and SEP IRAs.
Lower cost and less paperwork than other retirement accounts; there are no filing requirements with the IRS. Withdrawals made before age 59 ½ are subject to a possible 10% or 25% penalty, depending on how long the account has been open.
Contributions are tax deductible for employers and pre-tax for employees (both lower taxable income). Participants cannot take out a loan from a SIMPLE IRA.
A SIMPLE IRA may offer more investment options than a 401(k) or other employer plan. There is no Roth option to allow employees to fund a SIMPLE account with after-tax dollars that would translate to tax-free withdrawals in retirement.

Eligibility and Participation in a SIMPLE IRA

As mentioned previously, there are some rules about who can participate in a SIMPLE IRA. Here’s a quick recap.

Who Can Establish and Participate in a SIMPLE IRA?

Small business owners with fewer than 100 employees and self-employed individuals can set up and participate in a SIMPLE IRA, along with any eligible employees.

Employers can’t offer any other type of employer-sponsored plan if they set up a SIMPLE IRA.

Employees’ Eligibility and Participation Criteria

In order for an employee to be eligible to participate, they must have earned at least $5,000 in compensation over the course of any two years prior to the current calendar year, and they must expect to make $5,000 in the current calendar year.

Employees can choose less restrictive requirements if they choose. They may also exclude certain individuals from a SIMPLE IRA, such as those in unions who receive benefits through the union.

Investment Choices and Account Maintenance

Because the employer doesn’t have to set up investment options for the SIMPLE IRA, employees have the advantage of setting up a portfolio from the investments available at the financial institution that holds the SIMPLE IRA.

Investment Choices for a SIMPLE IRA

Typically, there may be more investment choices with a SIMPLE IRA than there with a 401(k) because the SIMPLE IRA account may be held at a financial institution with a wide array of options.

Investment choices can include stocks, bonds, mutual funds, exchange-traded funds (ETFs), target-date funds, and more.

Understanding SIMPLE IRA Distributions

There are particular rules for SIMPLE IRA distributions, as there are with all types of retirement accounts.

Withdrawal Rules and Tax Consequences

As discussed previously, withdrawals made before age 59 ½ are subject to income tax plus a potential 10% or 25% penalty, depending on how long the account has been open.

Withdrawals made after age 59 ½ are subject to income tax only and no penalty. Account holders must make required minimum distributions from their accounts when they reach age 73 (as long as they turn 72 after Dec. 31, 2022).

The 2-Year Rule and Early Withdrawal Penalties

There is a two-year rule for withdrawals from a SIMPLE IRA. If you make a withdrawal within the first two years of participating in the plan, the penalty may be increased from 10% to 25%, with some exceptions (e.g., for a first-time home purchase, for higher education expenses, and more). In addition, all withdrawals are subject to ordinary income tax.

The Takeaway

SIMPLE IRAs are one of the easiest ways that self-employed individuals and small business owners can help themselves and their employees save for retirement, whether they’re experienced retirement investors or they’re opening their first IRA.

These accounts can even be used in conjunction with certain other retirement accounts and investment accounts to help individuals save even more.

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.

Help grow your nest egg with a SoFi IRA.

Photo credit: iStock/shapecharge

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.

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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.

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.

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Feb
05
2026
Solo 401(k) vs SEP IRA: Key Differences and Considerations

Solo 401(k) vs SEP IRA: An In-Depth Comparison for Self-Employed Retirement Planning

By | Growing Wealth, invest, Investing | Comments Off on Solo 401(k) vs SEP IRA: An In-Depth Comparison for Self-Employed Retirement Planning

Self-employment has its perks, but an employer-sponsored retirement plan isn’t one of them. Opening a solo 401(k) or a Simplified Employee Pension Individual Retirement Account (SEP IRA) allows the self-employed to save for retirement while enjoying some tax advantages.

So, which is better for you? The answer can depend largely on whether your business has employees or operates as a sole proprietorship and which plan yields more benefits, in terms of contribution limits and tax breaks.

Weighing the features of a solo 401(k) vs. SEP IRA can make it easier to decide which one is more suited to your retirement savings needs.

Key Points

•   Solo 401(k) allows tax-deductible contributions, employer contributions, employee contributions, and offers the option for Roth contributions and catch-up contributions.

•   SEP IRA allows tax-deductible contributions, employer contributions, but does not allow employee contributions, Roth contributions, catch-up contributions, or loans.

•   Withdrawals from traditional solo 401(k) plans and SEP IRAs are taxed in retirement.

•   Solo 401(k) plans allow loans, while SEP IRAs do not.

•   Solo 401(k) plans offer more flexibility and options compared to SEP IRAs.

Understanding the Basics

A solo 401(k) is similar to a traditional 401(k), in terms of annual contribution limits and tax treatment. A SEP IRA follows the same tax rules as traditional IRAs. SEP IRAs, however, typically allow a higher annual contribution limit than a regular IRA.

What Is a Solo 401(k)?

A solo 401(k) covers a business owner who has no employees or employs only their spouse. Simply, a Solo 401(k) allows you to save money for retirement from your self-employment or business income on a tax-advantaged basis.

These plans follow the same IRS rules and requirements as any other 401(k). There are specific solo 401(k) contribution limits to follow, along with rules regarding withdrawals and taxation. Regulations also govern when you can take a loan from a solo 401(k) plan.

A number of online brokerages offer solo 401(k) plans for self-employed individuals, including those who freelance or perform gig work. You can open a retirement account online and start investing, no employer other than yourself needed.

If you use a solo 401(k) to save for retirement, you’ll also need to follow some reporting requirements. Generally, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if it has $250,000 or more in assets at the end of the year.

What Is a SEP IRA?

A SEP IRA is another option to consider if you’re looking for retirement plans for the self-employed. This tax-advantaged plan is available to any size business, including sole proprietorships with no employees. SEP IRAs work much like traditional IRAs, with regard to the tax treatment of withdrawals. They do, however, allow you to contribute more money toward retirement each year above the standard traditional IRA contribution limit. That means you could enjoy a bigger tax break when it’s time to deduct contributions.

If you have employees, you can make retirement plan contributions to a SEP IRA on their behalf. SEP IRA contribution limits are, for the most part, the same for both employers and employees. If you’re interested in a SEP, you can set up an IRA for yourself or for yourself and your employees through an online brokerage.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Diving Deeper: Pros and Cons of Each Plan

As you debate between a solo 401(k) vs. a SEP IRA as ways to build wealth for retirement, it’s helpful to learn more about how these plans work, including their benefits and drawbacks.

Advantages of Solo 401(k)s

In terms of differences, there are some things that set solo 401(k) plans apart from SEP IRAs.

With a solo 401(k), you can choose a traditional or Roth. You can deduct your contributions in the year you make them with a traditional solo 401(k), but you’ll pay taxes on your distributions in retirement. With a Roth solo 401(k) you pay taxes on your contributions in the year you make them, and in retirement, your distributions are tax free. You can choose the plan that gives you the best tax advantage.

Another benefit of a solo 401(k) is that those age 50 and older can make catch-up contributions to this plan. In addition, you may be able to take a loan from a solo 401(k) if the plan permits it.

Advantages of SEP IRAs

One of the benefits of a SEP IRA is that contributions are tax deductible and you can make them at any time until your taxes are due in mid-April of the following year.

The plan is also easy to set up and maintain.

If you have employees, you can establish a SEP IRA for yourself as well as your eligible employees. You can then make retirement plan contributions to a SEP IRA on your employees’ behalf. (All contributions to a SEP are made by the employer only, though employees own their accounts.)

SEP IRA contribution limits are, for the most part, the same for both employers and employees. This means that you need to make the same percentage of contribution for each employee that you make for yourself. That means if you contribute 15% of your compensation for yourself, you must contribute 15% of each employee’s compensation (subject to contribution limits).

A SEP IRA also offers flexibility. You don’t have to contribute to it every year.

However, under SEP IRA rules, no catch-up contributions are allowed. There’s no Roth option with a SEP IRA either.

Eligibility and Contribution Limits

Here’s what you need to know about who is eligible for a SEP IRA vs. a Solo 401(k), along with the contribution limits for both plans for 2024 and 2025.

Who Qualifies for a Solo 401(k) or SEP IRA?

Self-employed individuals and business owners with no employees (aside from their spouse) can open and contribute to a solo 401(k). There are no income restrictions on these plans.

SEP IRAs are available to self-employed individuals or business owners with employees. A SEP IRA might be best for those with just a few employees because IRS rules dictate that if you have one of these plans, you must contribute to a SEP IRA on behalf of your eligible employees (to be eligible, the employees must be 21 or older, they must have worked for you for three of the past five years, and they must have earned at least $750 in the tax year).

Plus, the amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

Contribution Comparison

With a solo 401(k), there are rules regarding contributions, including contribution limits. For 2025, you can contribute up to $70,000, plus an additional catch-up contribution of $7,500 for those age 50 and older. In 2026, you can contribute up to $72,000, plus an extra catch-up contribution of $8,000 for those age 50 and older. Also, in 2025 and 2026, those aged 60 to 63 may contribute an additional catch-up of $11,250 instead of $7,500 and $8,000 respectively, thanks to SECURE 2.0.

Under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make eligible withdrawals tax-free in retirement.

For the purposes of a solo 401(k) you play two roles — employer and employee. As an employee, you can contribute the lesser of 100% of your compensation or up to $23,500 in 2025 and up to $24,500 in 2026. If you’re 50 or older, you can contribute the $7,500 catch-up contribution in 2025, and $8,000 in 2026. And if you’re aged 60 to 63, in 2025 and 2026, you may contribute an additional $11,250 instead of $7,500 (in 2025) or $8,000 (in 2026). Again, under the new law regarding catch-up contributions, if you are aged 50 and older with FICA wages exceeding $150,000 in 2025, you are required to put your catch-up contributions into a Roth 401(k) account. As an employer, you can make an additional contribution of 25% of your compensation (up to $350,000 in 2025, and up to $360,000 in 2026) or net self-employment income.

The contribution limits for a SEP IRA are the lesser of 25% of your compensation or $70,000 in 2025 and $72,000 in 2026. As mentioned earlier, there are no catch-up contributions with this plan.

And remember, per the IRS, if you have a SEP IRA, you must contribute to the plan on behalf of your eligible employees. The amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

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

Key Differences That Could Influence Your Decision

When you’re deciding between a solo 401(k) vs. a SEP IRA, consider the differences between the two plans carefully. These differences include:

Roth Options and Tax Benefits

With a solo 401(k), you can choose between a traditional and Roth solo 401(k), depending on which option’s tax benefits make the most sense for you. If you expect to be in a higher tax bracket when you retire, a Roth may be more advantageous since you can pay taxes on your contributions upfront and get distributions tax-free in retirement.

On the other hand, if you anticipate being in a lower tax bracket at retirement, a traditional solo 401(k) that lets you take deductions on your contributions now and pay tax on distributions in retirement could be your best option.

Loan Options and Investment Flexibility

You may also be able to take a loan from a solo 401(k) if your plan permits it. Solo 401(k) loans follow the same rules as traditional 401(k) loans.

If you need to take money from a SEP IRA before age 59 ½, however, you may pay an early withdrawal penalty and owe income tax on the withdrawal.

Both solo 401(k)s and SEP IRA offer more investment options than workplace 401(k)s. So you can choose the investment options that best suit your needs.

The Impact of Having Employees

Whether you have employees or not will help determine which type of plan is best for you.

A solo 401(k) is designed for business owners with no employees except for a spouse.

A SEP IRA is for those who are self-employed or small business owners. A SEP IRA may be best for those who have just a few employees since, as discussed above, you must contribute to a SEP IRA on behalf of all eligible employees and you must contribute the same percentage of compensation as you contribute for yourself.

The Financial Implications for Your Business

The plan you choose, solo 401(k) vs. SEP IRA, does have financial and tax implications that you’ll want to consider carefully. Here’s a quick comparison of the two plans.

Solo 401(k) vs SEP IRA at a Glance

Both solo 401(k) plans and SEP IRAs make it possible to save for retirement as a self-employed person or business owner when you don’t have access to an employer’s 401(k). And both can potentially offer a tax break if you’re able to deduct contributions each year.

Here’s a rundown of the main differences between a 401(k) vs. SEP IRA.

Solo 401(k)

 SEP IRA
Tax-Deductible Contributions Yes, for traditional solo 401(k) plans Yes
Employer Contributions Allowed Yes Yes
Employee Contributions Allowed Yes No
Withdrawals Taxed in Retirement Yes, for traditional solo 401(k) plans Yes
Roth Contributions Allowed Yes No
Catch-Up Contributions Allowed Yes No
Loans Allowed Yes No

How These Plans Affect Your Bottom Line

Both solo 401(k)s and SEP IRAs are tax-advantaged accounts that can help you save for retirement. With a SEP IRA, contributions are tax deductible, including contributions made on employees’ behalf, which offers a tax advantage. Solo 401(k)s give you the option of choosing a traditional or Roth option so that you can pay tax on your contributions upfront and not in retirement (traditional), or defer them until you retire (Roth).

Making the Choice Between SEP IRA and Solo 401(k): Which Is Right for You?

An important part of planning for your retirement is understanding your long-term goals. Whether you choose to open a solo 401(k) or make SEP IRA contributions can depend on how your business is structured, how much you want to save for retirement, and what kind of tax advantages you hope to enjoy along the way.

When to Choose a Solo 401(k)

If you’re self-employed and have no employees (or if your only employee is your spouse), you may want to consider a solo 401(k). A solo 401(k) could allow you to save more for retirement on a tax-advantaged basis compared to a SEP IRA. A solo 401(k) allows catch-up contributions if you are 50 or older, and you can also take loans from a solo 401(k).

Just be aware that a solo 401(k) can be more work to set up and maintain than a SEP IRA.

When to Choose a SEP IRA

If you’re looking for a plan that’s easy to set up and maintain, a SEP IRA may be right for you. And if you have a few employees, a SEP IRA can be used to cover them as well as your spouse. However, you will need to cover the same percentage of contribution for your employees as you do for yourself.

Remember that a SEP IRA does not allow catch-up contributions, nor can you take loans from it.

Step-by-Step Guide to Opening Your Account

You can typically set up a SEP IRA with any financial institution that offers other retirement plans, including an online bank or brokerage. The institution you choose will guide you through the set-up process and it’s generally quick and easy.

Once you establish and fund your account, you can choose the investment options that best suit your needs and those of any eligible employees you may have. You will need to set up an account for each of these employees.

To open a Solo 401(k), you’ll need an Employee Identification Number (EIN). You can get an EIN through the IRS website. Once you have an EIN, you can choose the financial institution you want to work with, typically a brokerage or online brokerage. Next, you’ll fill out the necessary paperwork, and once the account is open you’ll fund it. You can do this through direct deposit or a check. Then you can set up your contributions.

Additional Considerations for Retirement Planning

Besides choosing a SEP IRA or a solo 401(k), there are a few other factors to consider when planning for retirement. They include:

Rollover Process

At some point, you may want to roll over whichever retirement plan you choose — or roll assets from another retirement plan into your current plan. A SEP IRA allows for either option. You can generally roll a SEP IRA into another IRA or other qualified plan, although there may be some restrictions depending on the type of plan it is. You can also roll assets from another retirement plan you have into your SEP.

A solo 401(k) can also be set up to allow rollovers. You can roll other retirement accounts, including a traditional 401(k) or a SEP IRA, into your solo 401(k). You can also roll a solo 401(k) into a traditional 401(k), as long as that plan allows rollovers.

Can You have Both a SEP IRA and a Solo 401(k)?

It is possible to have both a SEP IRA and a solo 401(k). However, how much you can contribute to them depends on certain factors, including how your SEP was set up. In general, when you contribute to both plans at the same time, there is a limit to how much you can contribute. Generally, your total contributions to both are aggregated and cannot exceed more than $70,000 in 2025 and $72,000 in 2026.

Preparing for Retirement Beyond Plans

Choosing retirement plans is just one important step in laying the groundwork for your future. You should also figure out at what age you can retire, how much money you’ll need for retirement, and the typical retirement expenses you should be ready for.

Working on building your retirement savings is an important goal. In addition to opening and contributing to retirement plans, other smart strategies include creating a budget and sticking to it, paying down any debt you have, and simplifying your lifestyle and cutting unnecessary spending. You may even want to consider getting a side hustle to bring in extra income.

The Takeaway

Saving for retirement is something that you can’t afford to put off. And the sooner you start, the better so that your money has time to grow. Whether you choose a solo 401(k), SEP IRA, or another savings plan, it’s important to take the first step toward building retirement wealth.

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.

Help grow your nest egg with a SoFi IRA.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


Photo credit: iStock/1001Love

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.

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.

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Important Retirement Contribution Limits

By | Growing Wealth, Investing, Preparing for Retirement | No Comments

By saving and investing for retirement, you are working toward financial freedom — a goal worthy of your time and effort.

As you may know, there are benefits to using an account designed specifically for retirement, such as a 401(k) plan or Roth IRA.

For instance, some company retirement programs may offer an employer match. Second, these accounts are designed to hold investments over time so that investors can potentially earn compound returns.

Retirement accounts also have tax advantages. Because these accounts have special tax treatment, there’s a limit to how much money the IRS allows individuals to contribute to each of them in a given year.

These retirement contribution limits vary depending on the type of account you have. For example, 401(k) contribution limits are different from IRA contribution limits.

To build a successful long-term financial plan, you’ll likely want a solid understanding of your retirement plan options. Below is a summary of some different types of retirement accounts and their respective annual retirement contribution limits.

Key Points

•   Retirement accounts have specific annual contribution limits set by the IRS due to their special tax treatment.

•   Employee contributions to 401(k) plans are capped at $23,500 in 2025 and $24,500 in 2026.

•   Individuals aged 50 and over can make additional catch-up contributions to 401(k)s of $7,500 in 2025 and $8,000 in 2026.

•   Traditional and Roth IRA contributions are limited to $7,000 in 2025, with an extra $1,000 catch-up for those 50 and older, and $7,500 in 2026, with an extra $1,100 for those 50 and older.

•   Employer contributions to SEP IRAs are capped at the lesser of 25% of compensation or $70,000 in 2025, and $72,00 in 2026, with no catch-up options.

What Are Retirement Contribution Limits?

Ever heard someone say that they have “maxed out” their retirement account? Maxing out means contributing the total amount allowed by the IRS in a given year.

Generally, the IRS increases retirement contribution limits every few years as the cost of living increases. Many of the 2025 and 2026 contribution limits were increased from the previous year.

There are a lot of different types of retirement accounts, and each comes with its own nuances, which can make it hard to keep them straight.

This list of the account types, along with their contribution limits, will help you keep track.


401(k) Contribution Limits

A 401(k) plan is a tax-deferred retirement account that is typically offered through a person’s employer, usually as part of a benefits package. With a 401(k) plan, the employee can opt to have a certain percentage of their salary withheld from their paycheck on a pretax basis.

Individual 401(k) plans — also known as solo 401(k) plans — are available to people who are self-employed and have an employee identification number (EIN).

2025 Employee contribution limit: $23,500

2026 Employee contribution limit: $24,500

Plans may allow for catch-up contributions for employees ages 50 and over.

2025 Catch-up contribution limit: $7,500

2026 Catch-up contribution limit: $8,000

In 2025 and 2026, those aged 60 to 63 may contribute up to an additional $11,250 instead of $7,500 and $8,000, thanks to SECURE 2.0.

Under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, individuals pay taxes on contributions upfront, but can make eligible withdrawals tax-free in retirement.

Some employers may offer a company match in their 401(k) plans. A typical match would see employers match around 3% of an employee’s salary when that employee contributes 6% to the plan. The company match plan is determined by the employer.

Employer contributions to a 401(k) do not count toward the employee’s contribution limits. But instead of putting a cap on how much the employer alone can contribute, there’s a total contribution limit that includes both the employer and employee contributions.

2025 Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $70,000 — if the employee is eligible for the catch-up contribution, then it would be $77,500. (If the employee is eligible for the Secure 2.0 catch-up contribution, then it would be $81,250.)

2026 Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $72,000 — if the employee is eligible for the catch-up contribution, then it would be $80,000. (If the employee is eligible for the Secure 2.0 catch-up contribution, then it would be $83,250.)

403(b) Contribution Limits

A 403(b) plan is similar to a 401(k) but is offered to employees of public schools, nonprofit hospital workers, tax-exempt organizations, and certain ministers.

2025 Employee contribution limit: $23,500

2026 Employee contribution limit: $24,500

2025 Catch-up contribution limit: $7,500

2026 Catch-up contribution limit: $8,000

Catch-up contributions are for employees aged 50 and older. In 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500 and $8,000, thanks to SECURE 2.0.

As mentioned with 401(k) plans, as of January 1, 2026, individuals aged 50 and older with FICA wages above $150,000 in 2025 are required to put their 403(b) catch-up contributions into a Roth account.

Employees of any age who have been in service for 15 or more years with the same eligible 403(b) employer can potentially contribute another $3,000. There is a $15,000 lifetime limit for the latter catch-up provision. It may be possible to qualify for both catch-up provisions; if you think you qualify, check with the plan or your CPA to be sure.

2025 Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $70,000 — if the employee is eligible for the catch-up contribution, then it would be $77,500. (If the employee is eligible for the Secure 2.0 catch-up contribution, then it would be $81,250.)

2026 Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $72,000 — if the employee is eligible for the catch-up contribution, then it would be $80,000. (If the employee is eligible for the Secure 2.0 catch-up contribution, then it would be $83,250.)

It is important to keep in mind that some 403(b) plans have mandatory employee contributions. These mandatory contributions are made by the employee, but since you do not have a choice they do not count towards the employee contribution limit. If you are part of a plan like this you might actually be able to contribute your annual contribution maximum plus the mandatory contributions.

457(b) Contribution Limits

A 457(b) plan is similar to a 401(k) plan but for governmental and certain nonprofit employees. Unlike a 401(k), there is only one contribution limit for both employer and employee.

2025 Total employer plus employee contribution: $23,500

2026 Total employer plus employee contribution: $24,500

Those in government plans who are 50 or older, may be able to make a catch-up contribution of up to $7,500 in 2025 and $8,000 in 2026; those ages 60 to 63 may be able to take the special SECURE 2.0 contribution of up to $11,250 for those years instead. As with 401(k) and 403(b) plans, under the new law that went into effect in 2026, individuals aged 50 and older with FICA wages above $150,000 in 2025 are required to put their 457(b) catch-up contributions into a Roth account. (Those in non-governmental plans do not have the option of catch-up contributions.)

If permitted by the plan, a participant who is within three years of the normal retirement age may contribute the lesser of twice the annual limit or the standard annual limit plus the amount of the limit not used in prior years.

Thrift Savings Plan (TSP) Contribution Limits

A TSP is similar to a 401(k), but for federal employees and members of the military.

2025 Employee contribution limit: $23,500

2026 Employee contribution limit: $24,500

Tax-free combat zone contributions: Military members serving in tax-free combat zones are allowed to make the full $70,000 in employee contributions for 2025, and $72,000 in 2026.

2025 Catch-up contribution limit: $7,500 (or a SECURE 2.0 contribution limit of $11,250 for those ages 60 to 63)

2026 Catch-up contribution limit: $8,000 (or a SECURE 2.0 contribution limit of $11,250 for those ages 60 to 63)

According to the “spillover” method for TSP catch-up contributions, for those eligible to make catch-up contributions, any contributions made that exceed the annual employee contribution limit will automatically count toward the catch-up contribution limit of $7,500 in 2025 and $8,000 in 2026.

Traditional IRA Contribution Limits

The traditional IRA (individual retirement account is a tax-deferred account that is set up by the individual. Unlike workplace retirement plans, IRA accounts tend to have lower contribution limits. These contribution limits are combined totals for all the traditional or Roth IRAs an individual may have .

2025 Contribution limit: $7,000

2026 Contribution limit: $7,500

2025 Catch-up contribution limit: $1,000 (for a total of $8,000 for those age 50 or over)

2026 Catch-up contribution limit: $1,100 (for a total of $8,600 for those age 50 or older)

Additionally, there are income limits for tax deductions on contributions that vary based on whether or not you are covered by a retirement plan at work.

Calculate your IRA contributions.

Use SoFi’s IRA contribution calculator to determine how much you can contribute to an IRA in 2024.

money management guide for beginners

Roth IRA Contribution Limits

Similar to a traditional IRA, a Roth IRA is set up by the individual.

Unlike tax-deferred retirement accounts, Roth IRA contributions are not tax deductible. However, you will not need to pay income taxes on qualified withdrawals. Again, these contribution limits are combined totals for the traditional and Roth IRAs an individual may have.

2025 Contribution limit: $7,000

2026 Contribution limit: $7,500

2025 Catch-up contribution limit: $1,000 (for a total of $8,000 for those age 50 or over)

2026 Catch-up contribution limit: $1,100 (for a total of $8,600 for those age 50 or older)

There are income limitations for who is able to use a Roth IRA. These limits exist on a phase-out schedule and ability to use a plan slowly tapers off until the final income cap.

Single-filer income limit: Under $165,000 for tax year 2025, and under $168,000 for tax year 2026.

Married, filing jointly income limit: under $246,000 for tax year 2025, and under $252,000 for tax year 2026.

💡 Quick Tip: Did you know that you can choose the investments in a self-directed IRA? Once you open a new IRA online and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

SEP IRA Contribution Limits

A simplified employee pension simplified employee pension (SEP) IRA is a tax-deferred retirement account for employers and self-employed individuals.

2025 Contribution limit: An employer’s contributions to an employee’s SEP IRA can’t exceed the lesser of 25% of the employee’s compensation or $70,000.

2026 Contribution limit: An employer’s contributions to an employee’s SEP IRA can’t exceed the lesser of 25% of the employee’s compensation or $72,000.

Catch-up contributions are not permitted in SEP plans.

SIMPLE IRA

A savings incentive match plan for employees [SIMPLE) IRA is a retirement savings plan for small businesses with 100 or fewer employees.

2025 Employee contribution limit: $16,500

2026 Employee contribution limit: $17,000

2025 Catch-up contribution limit: $3,500 for those age 50 and older

2026 Catch-up contribution limit: $4,000 for those age 50 and older

In 2025, those aged 60 to 63 may contribute up to an additional $5,250 instead of $3,500, due to SECURE 2.0. And in 2026, those aged 60 to 63 may contribute up to an additional $5,250 instead of $4,000.

Employer contribution limit: The employer is generally required to make up to 3% of employee contribution, or 2% of employee compensation up to $350,000 in 2025 and up to $360,000 in 2026.

Also, under a SECURE Act 2.0 provision, an employer can make an additional non-elective contribution which is the lesser of 10% of compensation or $5,000 per employee.

Maxing Out Your Retirement Contributions

If you have a 401(k), you would need to contribute $1,958.33 each month to reach the $23,500 limit for 2025 and $2,041.66 each month to reach the $24,500 limit for 2026. With IRAs, that number is $583.33 per month to reach the annual $7,000 contribution limit for 2025 and $625 each month to reach the annual contribution limit of $7,500 in 2026.

When you make pre-tax contributions to a tax-deferred account such as a 401(k), the money is entering into the account before taxes. Therefore, the difference in your post-tax paycheck might not be as drastic as you may think.

There are several tactics you can take when working to increase how much you’re contributing to your retirement plan.

But whether you increase your contribution each month, quarter, or year, you may want to consider automating the saving process. Automation removes human emotion from the equation, which may help you save.

You may also want to try to avoid massive lifestyle creep as your income increases over the years. It’s a balance to take care of both your current situation and your future situation. When you get raises or bonuses, consider allocating those funds to your retirement instead of a material purchase.

The most successful savers will likely have a strategy that focuses on earning more and cutting costs.

Opening Your Own Retirement Account

If you have a retirement account through work, contributions are taken directly from your paycheck and you can take advantage of a company match program if it’s offered.

For those without a workplace retirement plan, getting set up with an account may take slightly more initiative. Luckily, opening an account doesn’t have to be hard. An account like a traditional IRA, Roth IRA, SEP IRA, or Solo 401(k), or a general investment account, can be set up at a brokerage firm of your choosing.

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.

🛈 While SoFi does not offer 401(k), 403(b), 457(b), TSP, or SIMPLE IRA plans at this time. However, we do offer Individual Retirement Accounts (IRAs).

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.

Mutual Funds (MFs): 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 clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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.

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

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

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How to Max Out Your 401(k) and Should You Do It?

By | Budgeting & Goals, Growing Wealth, invest, Investing | No Comments

Maxing out your 401(k) involves contributing the maximum allowable amount to your workplace retirement account to increase the benefit of compounding and appreciating assets over time.

All retirement plans come with contribution caps, and when you hit that limit it means you’ve maxed out that particular account.

There are a lot of things to consider when figuring out how to max out your 401(k) account, including whether maxing out your account is a good idea in the first place. Read on to learn about the pros and cons of maxing out your 401(k).

Key Points

•   Maxing out your 401(k) contributions can help you save more for retirement and take advantage of tax benefits.

•   If you want to max out your 401(k), strategies include contributing enough to get the full employer match, increasing contributions over time, utilizing catch-up contributions if eligible, automating contributions, and adjusting your budget to help free up funds for additional 401(k) contributions.

•   Diversifying your investments within your 401(k) and regularly reviewing and rebalancing your portfolio can optimize your returns.

•   Seeking professional advice and staying informed about changes in contribution limits and regulations can help you make the most of your 401(k).

What Exactly Does It Mean to ‘Max Out Your 401(k)?’

Maxing out your 401(k) means that you contribute the maximum amount allowed in a given year, as specified by the established 401(k) contribution limits. But it can also mean that you’re maxing out your contributions up to an employer’s percentage match.

If you want to max out your 401(k) in 2025, you’ll need to contribute $23,500. If you’re 50 or older, you can contribute an additional $7,500, for an annual total of $31,000. In addition, in 2025, those aged 60 to 63 may contribute up to an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for an annual total of $34,750.

To max out your 401(k) in 2026, you would need to contribute $24,500. If you’re 50 or older, you can contribute an additional catch-up contribution of $8,000, for a total for the year of $32,500. Also in 2026, those aged 60 to 63 may contribute up to an additional $11,250 SECURE 2.0 catch-up instead of $8,000, for an annual total of $35,750.

Should You Max Out Your 401(k)?

4 Goals to Meet Before Maxing Out Your 401(k)

Generally speaking, yes, it’s a good thing to max out your 401(k) so long as you’re not sacrificing your overall financial stability to do it. Saving for retirement is important, which is why many financial experts would likely suggest maxing out any employer match contributions first.

But while you may want to take full advantage of any tax and employer benefits that come with your 401(k), you also want to consider any other financial goals and obligations you have before maxing out your 401(k).

That doesn’t mean you should put other goals first, and not contribute to your retirement plan at all. That’s not wise. Maintaining a baseline contribution rate for your future is crucial, even as you continue to save for shorter-term aims or put money toward debt repayment.

Other goals might include:

•   Is all high-interest debt paid off? High-interest debt like credit card debt should be paid off first, so it doesn’t accrue additional interest and fees.

•   Do you have an emergency fund? Life can throw curveballs — it’s smart to be prepared for job loss or other emergency expenses.

•   Is there enough money in your budget for other expenses? You should have plenty of funds to ensure you can pay for additional bills, like student loans, health insurance, and rent.

•   Are there other big-ticket expenses to save for? If you’re saving for a large purchase, such as a home or going back to school, you may want to put extra money toward this saving goal rather than completely maxing out your 401(k), at least for the time being.

Once you can comfortably say that you’re meeting your spending and savings goals, it might be time to explore maxing out your 401(k). There are many reasons to do so — it’s a way to take advantage of tax-deferred savings, employer matching (often referred to as “free money”), and it’s a relatively easy and automatic way to invest and save, since the money gets deducted from your paycheck once you’ve set up your contribution amount.

How to Max Out Your 401(k)

Only a relatively small percentage of people max out their 401(k)s, but that doesn’t mean you can’t be one of them. Here are some strategies for how to max out your 401(k).

1. Max Out 401(k) Employer Contributions

Your employer may offer matching contributions, and if so, there are typically rules you will need to follow to take advantage of their match.

An employer may require a minimum contribution from you before they’ll match it, or they might match only up to a certain amount. They might even stipulate a combination of those two requirements. Each company will have its own rules for matching contributions, so review your company’s policy for specifics.

For example, suppose your employer will match your contribution up to 3%. So, if you contribute 3% to your 401(k), your employer will contribute 3% as well. Therefore, instead of only saving 3% of your salary, you’re now saving 6%. With the employer match, your contribution just doubled. Note that employer contributions can range from nothing at all up to a certain limit. It depends on the employer and the plan.

Since saving for retirement is one of the best investments you can make, it’s wise to take advantage of your employer’s match. Every penny helps when saving for retirement, and you don’t want to miss out on this “free money” from your employer.

If you’re not already maxing out the matching contribution and wish to, you can speak with your employer (or HR department, or plan administrator) to increase your contribution amount, you may be able to do it yourself online.

2. Max Out Salary-Deferred Contributions

While it’s smart to make sure you’re not leaving free money on the table, maxing out your employer match on a 401(k) is only part of the equation.

In order to make sure you’re setting aside an adequate amount for retirement, consider contributing as much as your budget will allow. As noted earlier, individuals younger than age 50 can contribute up to $23,500 in 2025, and up to $24,500 in 2026.

Those contributions aren’t just an investment in your future lifestyle in retirement. Because they are made with pre-tax dollars, they lower your taxable income for the year in which you contribute. For some, the immediate tax benefit is as appealing as the future savings benefit.

3. Take Advantage of Catch-Up Contributions

As mentioned, 401(k) catch-up contributions allow investors aged 50 and over to increase their retirement savings — which is especially helpful if they’re behind in reaching their retirement goals.

Individuals 50 and over can contribute an additional $7,500 for a total of $31,000 in 2025. And in 2026, those 50 and older can contribute an extra $8,000 for a total of $32,500. And in both 2025 and 2026, those aged 60 to 63 can contribute up to an additional $11,250, instead of $7,500 in 2025 and $8,000 in 2026, for a total of $34,750 and $35,750 respectively. Putting all of that money toward retirement savings can help you truly max out your 401(k).

As you draw closer to retirement, catch-up contributions can make a difference, especially as you start to calculate when you can retire. Whether you have been saving your entire career or just started, this benefit is available to everyone who qualifies.

And of course, in many cases, this extra contribution will lower taxable income even more than regular contributions. Although using catch-up contributions may not push everyone to a lower tax bracket, it will certainly minimize the tax burden during the next filing season for many filers — with an important exception.

Under a new law regarding catch-up contributions that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older whose FICA wages exceeded $150,000 in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, and make eligible withdrawals tax-free in retirement. This means their taxable income will not be lowered; they could even potentially move into higher tax bracket. Those impacted by the new law should check with their employer or plan administrator to find out how to proceed.

4. Reset Your Automatic 401(k) Contributions

When was the last time you reviewed your 401(k)? It may be time to check in and make sure your retirement savings goals are still on track. Is the amount you originally set to contribute each paycheck still the correct amount to help you reach those goals?

With the increase in contribution limits most years, it may be worth reviewing your budget to see if you can up your contribution amount to max out your 401(k). If you don’t have automatic payroll contributions set up, you could set them up.

It’s generally easier to save money when it’s automatically deducted; a person is less likely to spend the cash (or miss it) when it never hits their checking account in the first place.

If you’re able to max out the full 401(k) limit, but fear the sting of a large decrease in take-home pay, consider a gradual, annual increase such as 1% — how often you increase it will depend on your plan rules as well as your budget.

5. Put Bonus Money Toward Retirement

Unless your employer allows you to make a change, your 401(k) contribution may be deducted from any bonus you might receive at work. Some employers allow you to determine a certain percentage of your bonus to contribute to your 401(k).

Consider possibly redirecting a large portion of a bonus to 401k contributions, or into another retirement account, such as an individual retirement account (IRA). Because this money might not have been expected, you won’t miss it if you contribute most of it toward your retirement.

You could also do the same thing with a raise. If your employer gives you a raise, consider putting it directly toward your 401(k). Putting this money directly toward your retirement can help you inch closer to maxing out your 401(k) contributions.

6. Maximize Your 401(k) Returns and Fees

Many people may not know what they’re paying in investment fees or management fees for their 401(k) plans. By some estimates, the average fees for 401(k) plans are between 0.5% and 2%, but some plans may have higher fees.

Fees add up — even if your employer is paying the fees now, you’ll have to pay them if you leave the job and keep the 401(k).

Essentially, if an investor has $100,000 in a 401(k) and pays $1,000 or 1% (or more) in fees per year, the fees could add up to thousands of dollars over time. Any fees you have to pay can chip away at your retirement savings and reduce your returns.

It’s important to ensure you’re getting the most for your money in order to maximize your retirement savings. If you are currently working for the company, you could discuss high fees with your HR team.

One way to potentially lower your costs is to find more affordable investment options. Generally speaking, index funds often charge lower fees than other investments. If an employer’s plan offers an assortment of low-cost index funds, may consider investing in these funds to save some money and help build a diversified portfolio.

What Happens If You Contribute Too Much to Your 401(k)?

After an individual maxes out their 401(k) for the year — meaning they’ve hit the contribution limit corresponding to their age range — if they don’t stop making contributions they will risk paying additional taxes on their overcontributions.

In the event that an individual makes an overcontribution, they might let their plan manager or administrator know, and withdraw the excess amount. If they leave the excess in the account, it’ll be taxed twice — once when it was contributed initially, and again when they take it out.

What to Do After Maxing Out a 401(k)?

If you max out your 401(k) this year, pat yourself on the back. Maxing out your 401(k) is a financial accomplishment. But now you might be wondering, what’s next? Here are some additional retirement savings options to consider if you have already maxed out your 401(k).

Open an IRA

An individual retirement account (IRA) can be an option to complement an employer’s retirement plans. With a traditional IRA, you can contribute pre-tax dollars up to the annual limit, which is $7,000 in 2025. If you’re 50 or older, you can contribute an extra $1,000, for an annual total of $8,000 in 2025. In 2026, you can contribute up to $7,500, while those 50 and older can contribute an additional $1,100, for a total of $8,600 for 2026.

You may also choose to consider a Roth IRA. As with a traditional IRA, the annual contribution limit for a Roth IRA in 2025 is $7,000, and $8,000 for those 50 or older. And in 2026, the annual Roth IRA contribution limit is $7,500, and $8,600 for those age 50 and up.

Roth IRA accounts have income limits, but if you’re eligible, you can contribute with after-tax dollars, which means you won’t have to pay taxes on earnings withdrawals in retirement as you do with traditional IRAs.

It’s possible to open an IRA at a brokerage, mutual fund company, or other financial institution. If you ever leave your job, you can typically roll your employer’s 401(k) into your IRA without facing tax consequences as long as both accounts are similarly taxed, such as rolling funds from a traditional 401(k) to a traditional IRA, and funds are transferred directly from one plan to the other. Doing a 401(k) to IRA rollover may allow you to invest in a broader range of investments with lower fees.

Boost an Emergency Fund

Experts often advise establishing an emergency fund with at least three to six months of living expenses before contributing to a retirement savings plan. Perhaps you’ve already done that — but haven’t updated that account in a while. As your living expenses increase, it’s a good idea to make sure your emergency fund grows, too. This will cover you financially in case of life’s little curveballs: new brake pads, a new roof, or unforeseen medical expenses.

Save for Health Care Costs

Contributing to a health savings account (HSA) can reduce out-of-pocket costs for expected and unexpected health care expenses, though you can only open and contribute to an HSA if you are enrolled in a high-deductible health plan (HDHP).

For tax year 2025, those eligible can contribute up to $4,300 pre-tax dollars for an individual plan or up to $8,550 for a family plan. Those 55 or older who are not enrolled in Medicare can make an additional catch-up contribution of $1,000 per year.

For tax year 2026, those who are eligible can contribute up to $4,400 for an individual plan or up to $8,750 for a family plan. Those 55 or older who are not enrolled in Medicare can again make an additional catch-up of $1,000.

The money in this account can be used for qualified out-of-pocket medical expenses such as copays for doctor visits and prescriptions. Another option is to leave the money in the account and let it grow for retirement. Once you reach age 65, you can take out money from your HSA without a penalty for any purpose. However, to be exempt from taxes, the money must be used for a qualified medical expense. Any other reasons for withdrawing the funds will be subject to regular income taxes.

Increase College Savings

If you’re feeling good about maxing out your 401(k), consider increasing contributions to your child’s 529 college savings plan (a tax-advantaged account meant specifically for education costs, sponsored by states and educational institutions).

College costs continue to creep up every year. Helping your children pay for college helps minimize the burden of college expenses, so they hopefully don’t have to take on many student loans.

Open a Brokerage Account

After maxing out a 401(k), individuals might also consider opening a brokerage account. Brokerage firms offer various types of investment accounts, each with different services and fees. A full-service brokerage firm may provide different financial services, which include allowing investors to trade securities.

Many brokerage firms require individuals to have a certain amount of cash to open accounts and have enough funds for trading fees and commissions. While there are no limits on how much can be contributed to the account, earned dividends are taxable in the year they are received. Therefore, if you earn a profit or sell an asset, you must pay a capital gains tax. On the other hand, if you sell a stock at a loss, that becomes a capital loss. This means that the transaction may yield a tax break by lowering your taxable income.

Pros and Cons of Maxing Out Your 401(k)

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Pros:

•   Increased Savings: More contributions added to a retirement savings plan could lead to more growth over time.

•   Simplified Saving and Investing: Maxing out your 401(k) can also make your saving and investing relatively easy, as long as you’re taking a no-lift approach to setting your money aside thanks to automatic contributions.

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Cons:

•   Affordability: Maxing out a 401(k) may not be financially feasible for everyone. It may be challenging due to existing debt or other savings goals.

•   Risk: Like all investments, there is the risk of loss.

•   Opportunity Costs: Money invested in retirement plans could be used for other purposes. During strong stock market years, non-retirement investments may offer more immediate access to funds.

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The Takeaway

Maxing out your 401(k) involves matching your employer’s maximum contribution match, and also, contributing as much as legally allowed to your retirement plan in a given year. If you have the flexibility in your budget to do so, maxing out a 401(k) can be an effective way to build retirement savings.

And once a 401(k) is maxed out? There are other ways an individual might direct their money, including opening an IRA, or contributing more to an HSA or to a child’s 529 plan.

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.

Help build your nest egg with a SoFi IRA.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of Individual Retirement Accounts (IRAs).

FAQ

What happens if I max out my 401(k) every year?

Assuming you don’t overcontribute, you may see your retirement savings increase if you max out your 401(k) every year, and hopefully, be able to reach your retirement and savings goals sooner.

Will you have enough to retire after maxing out a 401(k)?

There are many factors that need to be considered to determine if you’ll have enough money to retire if you max out your 401(k). Start by getting a sense of how much you’ll need to retire by using a retirement expense calculator. Then you can decide whether maxing out your 401(k) for many years will be enough to get you there, assuming an average stock market return and compounding built in.

First and foremost, you’ll need to consider your lifestyle and where you plan on living after retirement. If you want to spend a lot in your later years, you’ll need more money. As such, a 401(k) may not be enough to get you through retirement all on its own, and you may need additional savings and investments to make sure you’ll have enough.

What is the best way to max out a 401(k)?

Some effective ways to max out a 401(k) include contributing up to the allowable amount for the year (for 2025, that’s $23,500 for those under age 50, and for 2026, it’s $24,500); using catch-up contributions if you’re aged 50 or older ($7,500 in 2025, and $8,000 in 2026, or $11,250 if you’re ages 60 to 63 in 2025 and 2026); contributing enough to get your employer’s matching contributions if offered; automating your contributions and increasing them yearly, if possible; and directing a percentage of any bonus you receive into your 401(k).

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.

Mutual Funds (MFs): 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 clicking the prospectus link on the fund's respective page at sofi.com. You may also contact customer service at: 1.855.456.7634. Please read the prospectus carefully prior to investing.Mutual Funds must be bought and sold at NAV (Net Asset Value); unless otherwise noted in the prospectus, trades are only done once per day after the markets close. Investment returns are subject to risk, include the risk of loss. Shares may be worth more or less their original value when redeemed. The diversification of a mutual fund will not protect against loss. A mutual fund may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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

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 Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

This article is not intended to be legal advice. Please consult an attorney for advice.

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IRA vs 401(k): What Is the Difference?

IRA vs 401(k): What Is the Difference?

By | Growing Wealth, invest, Investing, Preparing for Retirement, Terminology | No Comments

The biggest difference between an IRA vs. a 401(k) is the amount you can save. You can save over three times as much in a 401(k) vs. an IRA — $23,500 versus $7,000 for tax year 2025, and $24,500 versus $7,500 for tax year 2026. But not everyone has access to a 401(k), because these are sponsored by an employer, typically for full-time employees.

“A 401(k) is probably one of the most common retirement vehicles,” says Brian Walsh, a CFP® at SoFi. “A 401(k) will be available through work. Your employer is going to choose whether or not to make a 401(k) available to all the employees. Generally speaking, 401(k)s are the most popular retirement plan employers provide.”

Other than that, a traditional IRA and a 401(k) are similar in terms of their basic provisions and tax implications. Both accounts are considered tax deferred, which means you can deduct the amount you contribute each year — unless you have a Roth account, which has a different tax benefit.

Before you decide whether one or all three types of retirement accounts might make sense for you, it helps to know all the similarities and differences between a 401(k) and a traditional IRA and Roth IRA.

Key Points

•   An IRA (Individual Retirement Account) and a 401(k) are both retirement savings accounts, but they have different features and eligibility requirements.

•   IRAs are typically opened by individuals, while 401(k)s are offered by employers to their employees.

•   IRAs offer more investment options and flexibility, while 401(k)s may have employer matching contributions and higher contribution limits.

•   Both accounts offer tax advantages, but the timing of tax benefits differs: IRAs provide tax benefits during retirement, while 401(k)s offer tax benefits upfront.

•   Choosing between an IRA and a 401(k) depends on factors like employment status, employer contributions, investment options, and personal financial goals.

How Are IRAs and 401(k)s Different?

The government wants you to prioritize saving for retirement. As a result, they provide tax incentives for IRAs vs. 401(k)s.

In that respect, a traditional IRA and a 401(k) are somewhat similar; both offer tax-deferred contributions, which may lower your taxable income, and tax-deferred investment growth. Also, you owe taxes on the money you withdraw from these accounts in retirement (or beforehand, if you take an early withdrawal).

There is a bigger difference between a Roth IRA and a 401(k). Roth accounts are funded with after-tax contributions — so they aren’t tax deductible. But they provide tax-free withdrawals in retirement.

And while you can’t withdraw the contributions you make to a traditional IRA until age 59 ½ (or incur a penalty), you can withdraw Roth contributions at any time (just not the earning or growth on your principal).

These days, you may be able to fund a Roth 401(k), if your company offers it.

Other Key Differences Between IRAs and 401(k)s

As with anything that involves finance and the tax code, these accounts can be complicated. Because there can be stiff penalties when you don’t follow the rules, it’s wise to know what you’re doing.

Who Can Set Up a 401(k)?

As noted above, a key difference between an IRA and a 401(k) is that 401(k)s are qualified employer-sponsored retirement plans. You typically only have access to these plans through an employer who offers them as part of a full-time compensation package.

In addition, your employer may choose to provide matching 401(k) funds as part of your compensation, which is typically a percentage of the amount you contribute (e.g. an employer might match 3%, dollar for dollar).

Not everyone is a full-time employee. You may be self-employed or work part-time, leaving you without access to a traditional 401(k). Fortunately, there are other options available to you, including solo 401(k) plans and opening an IRA online (individual retirement accounts).

Who Can Set Up an IRA?

Anyone can set up an individual retirement account (IRA) as long as they’re earning income. (And if you’re a non-working spouse of someone with earned income, they can set up a spousal IRA on your behalf.)

If you already have a 401(k), you can still open an IRA and contribute to both accounts. But if you or your spouse (if you’re married) are covered by a retirement plan at work, you may not be able to deduct the full amount of your IRA contributions.

Understanding RMDs

Starting at age 73 (for those who turn 72 after December 31, 2022), you must take required minimum distributions (RMDs) from your tax-deferred accounts, including: traditional IRAs, SEP and SIMPLE IRAs, and 401(k)s. Be sure to determine your minimum distribution amount, and the proper timing, so that you’re not hit with a penalty for skipping it.

It’s worth noting, though, that RMD rules don’t apply to Roth IRAs. If you have a Roth IRA, or inherit one from your spouse, the money is yours to withdraw whenever you choose. The rules change if you inherit a Roth from someone who isn’t your spouse, so consult with a professional as needed.

However, RMD rules do apply when it comes to a Roth 401(k), similar to a traditional 401(k). The main difference here, of course, is that the Roth structure still applies and withdrawals are tax free.

A Closer Look at IRAs

An IRA is an individual retirement account that has a much lower contribution limit than a 401(k) (see chart below). Anyone with earned income can open an IRA, and there are two main types of IRAs to choose from: traditional and Roth accounts.

Self-employed people can also consider opening a SEP-IRA or a SIMPLE IRA, which are tax-deferred accounts that have higher contribution limits.

Traditional IRA

Like a 401(k), contributions to a traditional IRA are tax deductible and may help lower your tax bill. In 2025, IRA contribution limits are $7,000, or $8,000 for those ages 50 or older. In 2026, IRA contribution limits are $7,500, or $8,600 for those 50 or older.

With a traditional IRA, investments inside the account grow tax-deferred. And unlike 401(k)s where an employer might offer limited options, IRAs are more flexible because they are classified as self-directed and you typically set up an IRA through a brokerage firm of your choice.

Thus it’s possible to invest in a wider range of investments in your IRA, including stocks, bonds, mutual funds, exchange-traded funds, and even real estate.

When making withdrawals at age 59 ½, you will owe income tax. As with 401(k)s, any withdrawals before then may be subject to both income tax and the 10% early withdrawal penalty.

What Are Roth Accounts?

So far, we’ve discussed traditional 401(k) and IRA accounts. But each type of retirement account also comes in a different flavor — known as a Roth.

The main difference between traditional and Roth IRAs lies in when your contributions are taxed.

•   Traditional accounts are funded with pre-tax dollars. The contributions are tax deductible and may provide an immediate tax benefit by lowering your taxable income and, as a result, your tax bill.

•   Money inside these accounts grows tax-deferred, and you owe income tax when you make withdrawals, typically when you’ve reached the age of 59 ½.

Roth accounts, on the other hand, are funded with after-tax dollars, so your deposits aren’t tax deductible. However, investments inside Roth accounts also grow tax-free, and they are not subject to income tax when withdrawals are made at or after age 59 ½.

As noted above, Roths have an additional advantage in that you can withdraw your principal at any time (but you cannot withdraw principal + earnings until you’ve had the account for at least five years, and/or you’re 59 ½ or older — often called the five-year rule).

Roth accounts may be beneficial if you anticipate being in a higher tax bracket when you retire versus the one you’re in currently. Then tax-free withdrawals may be even more valuable.

It’s possible to hold both traditional and Roth IRAs at the same time, though combined contribution limits are the same as those for traditional accounts. And those limits can’t be exceeded.

Additionally, the ability to fund a Roth IRA is subject to certain income limits: above a certain limit you can’t contribute to a Roth. There are no income limits for a designated Roth 401(k), however.

A Closer Look at a 401(k)

Contributions to your 401(k) are made with pre-tax dollars. This makes them tax-deductible, meaning the amount you save each year can lower your taxable income in the year you contribute, possibly resulting in a smaller tax bill.

In 2025, you can contribute up to $23,500 to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $31,000. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for a total of $34,750.

In 2026, you can contribute up to $24,500 to your 401(k), or up to $32,500 (including $8,000 extra in catch-up contributions). And again in 2026, individuals aged 60 to 63 can contribute an additional $11,250 instead of $8,000, for a total of $35,750.

Also, under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, you pay taxes on contributions upfront, but can make eligible withdrawals tax-free in retirement. Those impacted by the new law should check with their employer or plan administrator to find out how to proceed.

401(k) catch-up contributions allow people nearing retirement to boost their savings. In addition to the contributions made, an employer can also match their employee’s contribution, up to a combined employer and employee limit of $70,000 in 2025 and $72,000 in 2026.

An employer may offer a handful of investment options to choose from, such as exchange-traded funds (ETFs), mutual funds, and target date mutual funds. Money invested in these options grows tax-deferred, which can help retirement investments grow faster.

When someone begins taking withdrawals from their 401(k) account at age 59 ½ (the earliest age at which you can start taking penalty-free withdrawals), those funds are subject to income tax. Any withdrawals made before 59 ½ may be subject to a 10% early withdrawal penalty, on top of the tax you owe.

When Should You Use a 401(k)?

If your employer offers a 401(k), it may be worth taking advantage of the opportunity to start contributing to your retirement savings. After all, 401(k)s have some of the highest contribution limits of any retirement plans, which means you might end up saving a lot. Here are some other instances when it may be a good idea:

1. If your employer matches your contributions

If your company matches any part of your contribution, you may want to consider at least contributing enough to get the maximum employer match. After all, this match is tantamount to free money, and it can add up over time.

2. You can afford to contribute more than you can to an IRA

For tax year 2025, you can put up to $7,000 in an IRA, but up to $23,500 in a 401(k) — if you’re 50 or over, those amounts increase to $8,000 for an IRA and $31,000 for a 401(k). And those aged 60 to 63 can contribute up to $34,750 to a 401(k), thanks to SECURE 2.0.

For tax year 2026, you can put up to $7,500 in an IRA, but up to $24,500 in a 401(k) — if you’re 50 or older, those amounts increase to $8,600 for an IRA and $32,500 for a 401(k). And again, if you’re aged 60 to 63, you can contribute up to $35,750 to a 401(k). If you’re in a position to save more than the IRA limit, that’s a good reason to take advantage of the higher limits offered by a 401(k).

3. When your income is too high

Above certain income levels, you can’t contribute to a Roth IRA. How much income is that? That’s a complicated question that is best answered by our Roth IRA calculator.

And if you or your spouse are covered by a workplace retirement plan, you may not be able to deduct IRA contributions.

If you can no longer fund a Roth, and can’t get tax deductions from a traditional IRA, it might be worth throwing your full savings power behind your 401(k).

When Should You Use an IRA?

If you can swing it, it may not hurt to fund an IRA. This is especially true if you don’t have access to a 401(k). But even if you do, IRAs can be important tools. For example:

1. When you leave your company

When you leave a job, you can rollover an old 401(k) into an IRA — and it’s generally wise to do so. It’s easy to lose track of old plans, and companies can merge or even go out of business. Then it can become a real hassle to find your money and get it out.

You can also roll the funds into your new company’s retirement plan (or stick with an IRA rollover, which may give you more control over your investment choices).

Recommended: How to Roll Over Your 401(k)

2. If your 401(k) investment choices are limited

If you have a good mix of mutual funds in your 401(k), or even some target date funds and low-fee index funds, your plan is probably fine. But, some plans have very limited investment options, or are so confusing that people can’t make a decision and end up in the default investment — a low interest money market fund.

If this is the case, you might want to limit your contributions to the amount needed to get your full employer match and put the rest in an IRA.

3. When you’re between jobs

Not every company has a 401(k), and people are not always employed. There may be times in your life when your IRA is the only option. If you have self-employment income, you can make higher contributions to a SEP IRA or a Solo 401(k) you set up for yourself.

4. If you can “double dip.”

If you have a 401(k), are eligible for a Roth IRA, or can deduct contributions to a traditional IRA, and you can afford it — it may be worth investing in both. After all, saving more now means more money — and financial security — down the line. Once again, you can check our IRA calculator to see if you can double dip. Just remember that the IRA contribution limit is for the total contributed to both a Roth and traditional IRA.

The real question is not: IRA vs. 401(k), but rather — which of these is the best place to put each year’s contributions? Both are powerful tools to help you save, and many people will use different types of accounts over their working lives.

When Should You Use Both an IRA and 401(k)?

Using an IRA and a 401(k) at the same time may be a good way to save for your retirement goals. Funding a traditional or Roth IRA and 401(k) at once can allow you to save more than you would otherwise be able to in just one account.

Bear in mind that if you or your spouse participate in a workplace retirement plan, you may not be able to deduct all of your traditional IRA contributions, depending on how high your income is.

Having both types of accounts can also provide you some flexibility in terms of drawing income when you retire. For example, you might find a 401(k) as a source of pre-tax retirement income. At the same time you might fund a Roth IRA to provide a source of after-tax income when you retire.

That way, depending on your financial and tax situation each year, you may be able to strategically make withdrawals from each account to help minimize your tax liability.

The Takeaway

Roth accounts — whether a Roth IRA or a Roth 401(k) — have a different tax treatment. You deposit after-tax funds in these types of accounts. And then you don’t pay any tax on your withdrawals in retirement.

Another difference is that a 401(k) is generally sponsored by your employer, so you’re beholden to the investment choices of the firm managing the company’s plan, and the fees they charge. By contrast, you set up an IRA yourself, so the investment options are greater — and the fees can be lower.

Generally, you can have an IRA as well as a 401(k). The rules around contribution limits, and how much you can deduct may come into play, however.

If you’re ready to open an IRA, it’s easy when you set up an Active Invest account with SoFi Invest.

Not sure what the right strategy is for you? SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

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 a 401(k) considered an IRA for tax purposes?

No. A 401(k) is a completely separate account than an IRA because it’s sponsored by your employer.

Is it better to have a 401(k) or an IRA?

You can save more in a 401(k), and your employer may also offer matching contributions. But an IRA often has a much wider range of investment options. It’s wise to weigh the differences, and decide which suits your situation best.

Can you roll a 401(k) Into an IRA penalty-free?

Yes. If you leave your job and want to roll over your 401(k) account into an IRA, you can do so penalty free within 60 days. If you transfer the funds and hold onto them for longer than 60 days, you will owe taxes and a penalty if you’re under 59 ½.

Can you lose money in an IRA?

Yes. You invest all the money you deposit in an IRA in different securities (i.e. stocks, bonds, mutual funds, ETFs). Ideally you’ll see some growth, but you could also see losses. There are no guarantees.

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.

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.


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.

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