Investing Archives | Page 32 of 221

Jan

2024

Can You Have Multiple IRAs?

By Rebecca Lake | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

In theory, there’s no limit to how many individual retirement accounts (IRAs) one person can have. A retirement saver could potentially maintain more than one traditional IRA, Roth IRA, rollover IRA, or simplified employee pension (SEP) IRA in order to gain certain tax advantages now, and potentially down the road.

That said, the rules governing these different IRA accounts vary considerably, and combining many IRAs — without running afoul of contribution limits or creating tax issues — can be difficult.

How Many Roth and Traditional IRAs Can You Have?

As mentioned above, you may open any number of individual retirement accounts (IRAs). The Internal Revenue Service (IRS) does not limit the number of IRAs you can have and will not penalize you for having multiple IRAs in your name, as long as you follow the rules and contribution limits for each account.

One or more IRAs could work in tandem with a 401(k) workplace retirement plan. For instance, you might put part of each paycheck into a 401(k) plan at work while also maxing out your traditional IRA contributions every year. There might be restrictions, though, about the amount you can deduct.

An individual’s annual contribution limit — for traditional and Roth IRAs combined — is $7,000 for the 2024 tax year and $6,500 for the 2023 tax year. The limit is $7,500 for savers age 50 or older.

Recommended: What is an IRA?

Types of IRA

The two main account types are the traditional IRA and the Roth IRA. Again, your traditional IRA withdrawals are taxed at your ordinary income tax rate in retirement while Roth IRA money can be withdrawn tax-free.

With a traditional IRA, contributions can provide tax deductions when the money is deposited. Qualified distributions are taxed as ordinary income in retirement. Funds distributed before the account holder reaches age 59 ½ are usually subject to an added 10% tax.

Roth IRA contributions do not qualify for a deduction when deposited. However, when the account holder reaches age 59 ½, the money may be withdrawn tax-free. As with traditional IRAs, you can have multiple Roth IRAs.

There is a third type of IRA, the SEP IRA. These IRAs have higher contribution limits: up to $69,000 for tax year 2024 and $66,000 for tax year 2023, or 25% of compensation, whichever is less. But because these are employer-funded plans, they follow a different set of rules.

If you are self-employed and contributing to a SEP IRA on your own behalf, or if you work for a company with a SEP plan, you may or may not have the option of making traditional IRA contributions — but you could likely contribute to a Roth in addition to the SEP.

You may want to consult with a professional so you don’t over-contribute — or contribute less than you could have — or miss out on any of the potential tax benefits.

Advantages and Disadvantages of Multiple IRAs

Whether it makes sense for you to have multiple IRAs can depend on many factors, including your investment goals, financial situation, marital status, and career plans.

Advantages

Here are some of the chief advantages of maintaining more than one IRA:

• Tax management. Traditional IRAs and Roth IRAs are taxed differently, as mentioned above. Also, traditional IRAs are subject to required minimum distributions (RMDs), which can increase your taxable income in retirement, while Roth IRAs are not. Having money in both types of IRA could make your retirement investing more tax-efficient.

• Diversification. Diversification can help manage investment risk. Holding money in multiple IRAs, each with a different investment strategy, could help you create a diversified portfolio.

Diversification may also benefit you from a tax perspective if you keep less tax-efficient investments in a traditional IRA and more tax-efficient ones in a Roth IRA.

• Access. Traditional IRAs do not permit early withdrawals before age 59 ½ without triggering a tax penalty. You can, however, withdraw your original contributions from a Roth IRA at any time without owing income tax or penalties on those distributions. Having one IRA of each type could make it less expensive for you to withdraw money early if needed. This is possible whether investing online or not.

• Avoiding RMDs. Traditional IRAs are subject to RMD rules, which dictate that you must begin taking minimum IRA distributions at age 72. If you don’t, the IRS can levy a steep tax penalty. Roth IRAs aren’t subject to RMD rules, so they could help you hang on to more assets as you age.

Disadvantages

Opening and funding multiple IRAs isn’t always an optimal strategy. Here are some disadvantages that may make you reconsider having several IRAs:

• Contribution limits. The IRS caps the amount you can contribute in a given year. For 2024, your total contributions to all your IRAs cannot exceed $7,000 (or $8,000 if you’re 50 or older). For 2023, your total contributions to all your IRAs cannot exceed $6,500 (or $7,500 if you’re 50 or older). So having multiple IRAs doesn’t give you an edge in saving up for retirement.

• Overweighting. When a significant share of your asset allocation is dedicated to a single stock, security, or sector, your portfolio is overweight. This overexposure can heighten your risk profile, such that a downturn in that investment could drag down your entire portfolio. Having multiple IRAs may put you at risk of being overweight if you’re not careful about reviewing the holdings in each account.

• Fees. Brokerages often charge various fees to maintain IRAs. Plus, within each IRA, you may have to pay additional fees for specific investments. For example, a mutual fund has an annual ownership cost signified by its expense ratio. If you’re not paying attention to each IRA’s fees, it’s possible that you could overpay and shrink your investment returns.

• Organization. Having multiple IRAs could present an organizational burden in the form of additional paperwork or, if you manage your IRAs online, logging in to multiple brokerages or robo-advisor platforms. You may also worry about increased risk for cybercrime.

Reasons You Might Want More Than One IRA

Evaluating your investment goals can help you decide if having more than one IRA makes sense for you. But you may need extra accounts if you’re:

• Rolling over a 401(k). When separating from your employer, you could leave your 401(k) money where it is or roll it into a traditional IRA instead. If you open a rollover IRA and already have a Roth account too, you may end up with multiple IRAs.

• Planning a backdoor Roth. Roth IRAs offer tax-free distributions but there’s a catch: To fund one, you have to meet eligibility requirements pertaining to your income and filing status. People who are over the income limit sometimes work around it by setting up a traditional IRA and later transferring some of that money to a Roth IRA. Taxes are levied on the transferred amount. This arrangement is known as a Roth conversion or backdoor Roth.

• Married and the sole income-earner. The IRS allows married couples who file a joint tax return to each contribute to IRAs, even when one spouse does not have taxable compensation. So if you’re the breadwinner in your relationship, you could set up an IRA for yourself and open a spousal IRA to make contributions on behalf of your spouse.

• Self-employed or plan to be. People who are self-employed can use traditional, Roth, or SEP IRAs to save for retirement. You might end up with multiple IRAs if you were an employee who had a traditional or Roth IRA, then later went out on your own as an entrepreneur. You could then open a SEP IRA, which allows for tax-deductible contributions and a higher annual contribution limit ($69,000 in 2024, and $66,000 in 2023).

Reasons You Might Want Your IRAs With Different Companies

Whether you’re planning to open your first IRA or your fifth, it’s important to choose the right place to keep your retirement savings. You can open an IRA with a traditional broker, an online brokerage, or sometimes at your bank or credit union.

So why would you want to have your IRAs in different places? Two big reasons for that center on investment options and insurance.

Setting up IRAs at different brokerages could offer you greater exposure to a wider variety of investments. Every brokerage has its own policies on IRA assets. One brokerage might lean almost exclusively toward investing in exchange-traded funds (ETFs) or index funds, for example, while another might allow you to purchase individual stocks or bonds through your IRA.

You can also benefit from increased insurance coverage. The Securities Investor Protection Corporation (SIPC) insures Roth IRAs and other eligible investment accounts up to $500,000 per person. Under those rules, you could have a traditional IRA at one brokerage and a Roth IRA at another and they’d both be covered up to $500,000.

Note: SIPC coverage only protects you against the possibility of your brokerage failing, not against any financial losses associated with changes in the value of your investments.

How to Transfer an IRA to Another Investment Company

It’s fairly straightforward to move an IRA from one brokerage to another. First you need to set up an IRA at the new brokerage. Then you’d contact your current brokerage to initiate the transfer of some or all of your IRA funds.

You can request a trustee-to-trustee transfer, which allows your current IRA company to move the money to the new IRA on your behalf. No taxes are withheld on the transfer amount and you also avoid the risk of triggering a tax penalty.

The IRS also allows 60-day rollovers, in which you get a distribution from your existing IRA then redeposit it into your new retirement account. Taxes are withheld, so you’ll have to make that amount up when you deposit the money to your new IRA. If you fail to complete the rollover within 60 days, the IRS treats the deal as a taxable distribution.

The Takeaway

Investing in multiple IRAs is perfectly legal and, in theory, you can have an unlimited number of them. The IRS’s annual limits on contributions apply across all your accounts, however. Traditional and Roth IRAs have different tax rules and can sometimes be useful to offset each other. SEP IRAs offer the potential to save more, thanks to their higher contribution limits. Wage earners can often contribute to separate accounts for their non-working spouses, potentially doubling the amount of allowable contributions.

If you have yet to set up an IRA, getting started is easier than you might think. With SoFi Invest, you can open a traditional or Roth IRA. And you may want to consider doing a rollover IRA, where you roll over old 401(k) funds so that you can better manage all your retirement money.

SoFi makes the rollover process seamless and simple, so you don’t have to worry about transferring funds yourself, or potentially incurring a penalty. There are no rollover fees, and you can complete your 401(k) rollover without a lot of time or hassle.

Help grow your nest egg with a SoFi IRA.

FAQ

Does it make sense to have multiple IRAs?

Having more than one IRA could make sense for some people, depending on their investment strategies. When maintaining multiple IRAs, the most important thing to keep in mind are the limits on annual contributions. It’s also helpful to weigh the investment options offered and the fees you might pay to own multiple IRAs.

Can I have both a traditional and a Roth IRA?

Yes, you can have both a traditional IRA and a Roth IRA. However, your total contribution to all your IRAs cannot exceed the annual limits allowed by the IRS.

How many Roth IRAs can I have?

A person can have any number of Roth IRAs. The IRS does, however, set guidelines on who can contribute to a Roth IRA and the maximum amount you can contribute each year.

Photo credit: iStock/Prostock-Studio

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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Jan

2024

Custodial Roth IRA: How to Open a Roth IRA For Kids

By SoFi | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A Roth IRA can be a retirement savings tool for children as well as adults. Funded with after-tax dollars, a Roth IRA grows tax-free, so account holders won’t need to pay taxes when they withdraw money in retirement as long as the account has been open for at least five years. Plus, the money in a Roth IRA will have many decades to grow if you open it when your child is young.

And while a Roth IRA has an early distribution penalty, that penalty is generally waived for certain expenses, such as paying for qualified college expenses, if your child needs to access those funds. That flexibility can make a Roth IRA appealing.

Can you open a Roth IRA for a child? Yes! A Roth IRA for kids, called a Custodial Roth IRA, can be opened by a parent, grandparent, or other adult for a child of any age, as long as the child earns income (more on that later).

Here’s everything you need to know about a Roth IRA for kids.

What Is a Roth IRA for Kids?

A Roth IRA for kids, also known as a custodial Roth IRA, is an IRA opened by an adult (usually a parent), who manages the account until the child gets full control of it, which is at age 18 or 21 in most states.

A custodial Roth IRA for kids generally operates in the same way a Roth IRA for adults does. The account holder contributes after-tax dollars toward their retirement savings and the money grows tax-free in the account.

In order to open and contribute to a Roth IRA, your child must have earned income.

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

Who’s Eligible for a Roth IRA for Kids?

A child of any age can have a Roth IRA for kids. However, to be eligible, a child must have an earned income. Earned income can include the compensation earned from jobs like babysitting, dog walking, or working for an employer.

Custodial Roth IRA Rules

In addition to the standard rules for a Roth IRA, there are specific rules for custodial Roth IRAs. These rules include:

No Minimum Age Limit

A child of any age can have a custodial Roth IRA as long as he or she has earned income.

A Child Must Have Earned Income

In order to open a custodial Roth IRA, a child must have earned income. The IRS generally defines earned income as taxable income, wages, and tips. This can also include self-employment, such as yard work or babysitting. Cash gifts given to a child do not count as earned income.

There Are Contribution Limits

The contribution limit for a Roth IRA is $7,000 for 2024 ($8,000 for those 50 and older), or the total of the individual’s earned income for the year, whichever is less.

In addition, a child (or an adult on behalf of a child) cannot contribute an amount greater than the child’s earned income. So if a child earned $2,000 as a lifeguard at the local swimming pool, for example, the most that can be contributed to the child’s custodial IRA that year, including contributions from parents, is $2,000.

Certain Early Withdrawals Are Allowed

In general, you can withdraw contributions from a Roth IRA at any time without penalty. Earnings typically can’t be withdrawn before age 59 ½ without penalty except in certain circumstances. Allowable exceptions include withdrawals up to certain limits to pay for qualified college expenses, cover certain medical bills, and to buy a first home.

Eventual Conversion to a Regular Roth IRA

When the child reaches the legal age in their state (typically 18 or 21, depending on the state), the custodial Roth IRA will need to be converted to a regular Roth IRA in the child’s name.

How to Open a Custodial Roth IRA for a Kid

A Roth IRA for kids can be opened by any adult, such as a parent or grandparent, for instance. While the child is a minor, the adult will have sole access to the account; once the child comes of age (the timing of which varies by state), the account will transfer over to the child.

As with any Roth IRA, investment options within the account can include stocks, bonds, and mutual funds.

A Roth IRA can be opened through a financial institution or brokerage firm. You can typically open the account online by providing some basic information about yourself and your child. Choosing the right institution and Roth IRA offering depends on the investor and their preferences, so be sure to do some research.

💡 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.

Benefits of Starting a Roth IRA for a Child

Flexibility in how to use the funds can be one benefit of opening a custodial Roth IRA as part of an investment plan for your child. A Roth IRA can provide flexibility not only for potential expenses in early adulthood — such as college expenses or buying a home — but can be an investment vehicle throughout your child’s lifetime.

Another benefit is that a Roth IRA typically gives you more control over investments than an education-focused 529 college savings plan, and it may allow you to create a diversified portfolio of different asset classes.

A Roth IRA is a gift that can keep growing, since investors can potentially maximize compounding returns to get the most out of their investment. Here’s how a Roth IRA may unlock the power of compounding: As an example, let’s say you open a custodial Roth IRA when the child is 10 years old, and contribute $2,000 annually. At a certain point, your child might take over contributing $2,000 annually.

Assuming a 7% rate of return, the account will be worth $928,000 by the time your child is 60 years old — even though the amount you and your child contributed would be $100,000 in total. In comparison, if that same money was put in a taxable savings account over the same time period, the total of the account would be approximately $515,764.

And unlike a traditional IRA, there is no required minimum distribution (RMD) on a Roth IRA once the account owner reaches retirement age. A Roth IRA also allows people to continue contributing throughout their lifetime, as long as they’re earning income.

Alternatives to a Roth IRA for a Kid

If you’re looking for other possible investments for your child, some options to consider include the following.

• Savings account: A parent can open a savings account for a child, as long as the parent is a joint account holder. Savings accounts typically have low interest rates (as of January 2024, the average interest rate for a savings account was 0.47%), so you might want to look for a high-yield savings account instead. These accounts have average interest rates of more than 4% as of early 2024.

• Savings bonds: If your child doesn’t have earned income, you may want to consider savings bonds. However, savings bonds don’t offer the same potential tax advantages a Roth IRA does since you have to pay federal income tax on the bonds when they mature or you cash them. You won’t pay income taxes on Roth IRA earnings unless you take a non-qualified distribution.

• 529 plans: These plans can help you save for your child’s education. You can typically invest the money you contribute to a 529 plan and choose from a wide range of investment options. While these plans aren’t tax deductible at the federal level, your state may offer tax breaks for contributions made to them. And funds can be withdrawn tax-free for qualified education expenses. As of 2024, money left in a 529 may be rolled over to a Roth IRA for your child, although certain conditions and limits may apply.

• UGMA/UTMA accounts: A Uniform Gifts to Minors Act (UGMA) account and a Uniform Transfers to Minors Act (UTMA) account are custodial accounts in which an adult can invest on behalf of a child. These accounts are typically used to invest in stocks, bonds, mutual funds, and so on. There are no contribution or income limits, and gifts below the annual gift threshold do not need to be reported. However, there are no tax benefits when contributions are made, and earnings are made to these accounts, and earnings are subject to taxes. When the child reaches legal age, they take over control of the account.

The Takeaway

For a child with earned income, a custodial Roth IRA may be a good way to help them prepare for their future and get started on the path to investing. A child does need to have an earned income to open a custodial Roth IRA, and contributions cannot exceed their income. If your child qualifies, a Roth IRA for kids could potentially give them years of tax-free growth on their money.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

FAQ

Can you open a Roth IRA for a child if they don’t earn income?

No. A child must have earned income — which the IRS defines as wages, salaries, tips and other taxable employee compensation, as well as net earnings from self-employment — in order to open a custodial Roth IRA.

Can you open a Roth IRA for a baby?

It’s possible to open an IRA for a baby. As long as a baby earns an income — modeling baby clothes, for instance — you can open a custodial Roth IRA for them. There is no minimum age to open a custodial Roth IRA, but the child must have earned income.

Is it a good idea to open a Roth IRA for a child?

It may be a good idea to open a Roth IRA for a child for several reasons. A Roth IRA can help a child save up for and cover certain expenses in early adulthood, such as qualified college expenses. Also, a Roth IRA typically has higher returns than a savings account. And because kids have a low tax rate now, when contributions are made, it makes sense to open a Roth IRA, which is taxed upfront. At retirement, as long as they are at least age 59 ½, they can withdraw the money tax-free.

Can I give my child money for a Roth IRA?

Yes, you can contribute to your child’s IRA. However, annual contributions to the account cannot exceed the child’s annual earned income. Also, per IRS rules, the overall amount you can contribute to a Roth IRA is to $7,000 in 2024 for individuals under age 50, or the total annual earned income, whichever is less.

What is the disadvantage of a Roth IRA for kids?

One potential disadvantage of an IRA for kids is that your child must earn an income in order to open and contribute to an account. In addition, you can only contribute the amount the child earns. So if the child makes $500 for the year babysitting, that is the most you can contribute to their custodial Roth IRA.

Can I open a Roth IRA for my 2 year old?

As long as your 2-year-old earns an income, you can open a custodial Roth IRA for them. There is no minimum age requirement for a Roth IRA for kids.

How do I prove my child’s income for a Roth IRA?

If your child receives a W-2 or 1099 form for work they did for an employer, you can use those documents to prove your child’s income. However, if they are self-employed and do work like babysitting, dog walking or yard work to earn money, you should keep receipts or records of the type of work they did, the amount they earned, when the work was done, and who it was for, as proof of their income.

What happens to a custodial Roth IRA when the child turns 18?

Once a child is of legal age, which is typically 18 or 21, depending on your state, the IRA must be converted to a regular Roth IRA in the child’s name that they then own and manage.

Do children need to file a tax return to fund their Roth IRA?

As long as their income is below the threshold that requires them to file a tax return, children are typically not required to file a tax return just because they have a custodial IRA. However, you may want to consult with a tax professional about your specific situation.

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

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.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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Jan

2024

Understanding a Taxable Brokerage Account vs an IRA

By Michael Flannelly | Growing Wealth, invest, Investing | No Comments

Tax-sheltered accounts like the IRA and 401(k) have long been the go-to investment accounts for retirement planning. These types of accounts offer ways to build up tax-advantaged savings for the future. However, investing in taxable brokerage accounts is another common way to grow wealth for the short or long term.

The most notable difference between an IRA and a taxable brokerage account can be seen around tax season. With taxable brokerage accounts, you typically pay taxes on your capital gains and dividends each year. In contrast, tax-sheltered accounts only involve paying taxes when you make your contribution or withdraw your money, depending on the type of account.

Investors should know the similarities and differences between IRAs and taxable brokerage accounts. Learning the ins and outs of these accounts can help you decide which is right for you to build wealth and meet your financial goals.

What Are Taxable Brokerage Accounts?

Think of taxable brokerage accounts as “traditional” investment accounts — brokerage-offered investment accounts with stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Investors who utilize these accounts invest and trade to build short- or long-term wealth, but not necessarily for retirement.

The investments within a taxable brokerage account are subject to tax on any capital gains, dividends, or interest earned. Brokerage account holders pay taxes each year based on investment income.

It’s also important to note that tax liability can vary based on variables like the types of investments held within the account, the length of time they are held, and an individual’s tax bracket. For example, short-term capital gains, which are gains on investments held for less than a year, are taxed at the same rate as ordinary income. In contrast, long-term capital gains, which are gains on investments held for more than a year, are typically taxed at a lower rate.

💡 Recommended: Capital Gains Tax Guide

What Is an IRA?

An IRA, or individual retirement account, is an investment account designed specifically to save for retirement. Contributions to an IRA may be tax-deductible, and the accounts’ investments can grow tax-free until they are withdrawn at retirement age.

There are several different types of IRAs, including Traditional IRAs, Roth IRAs, and SEP IRAs, which have different rules for contributions, taxes, and withdrawals. An IRA can be a helpful tool for saving for retirement and taking advantage of potential tax benefits.

Taxable Brokerage Accounts vs IRA Accounts

Tax-sheltered, or tax-deferred, investment accounts like IRAs differ from taxable brokerage accounts because they generally offer tax advantages and have restrictions on contributions and withdrawals. The tax advantages make them designed for long-term retirement saving and investing. Besides having money invested for retirement, the most notable benefits of IRAs are no yearly tax burden and, in some cases, tax-deductible contributions.

Here’s a breakdown of what each tax-deferred account may offer compared to a brokerage account.

Traditional IRAs vs Taxable Brokerage Accounts

The traditional IRA has no income limits; as long as someone has a taxable income, they can contribute to a traditional IRA. The gains, dividends, and interest earned in IRAs grow tax-free during contributing years. Contributions to a traditional IRA may be tax-deductible, though the benefits phase out if you have a high enough income.

With a few exceptions, IRA withdrawal rules say account holders will have to pay a 10% early withdrawal penalty if they take a distribution before reaching age 59 ½. Additionally, account holders are required to start making withdrawals the year they turn age 72 that are taxed as income.

These limitations make a traditional IRA different from a taxable brokerage account, as taxable brokerage accounts do not have withdrawal restrictions and penalties.

With a traditional IRA, as with taxable brokerage accounts, account holders will need to manage it independently or with a financial planner’s help.

A traditional IRA might be a good option for investors who think they will be in a lower tax bracket when they retire. In theory, these investors would save money on taxes by paying them in retirement compared to paying taxes now.

For 2024, account holders can contribute up to $7,000 per year (or up to $8,000 if they are over 50 years old). For 2023, the total contributions investors can make to a traditional IRA is up to $6,500 (or up to $7,500 if they are over 50 years old).

💡 Recommended: Important Retirement Contribution Limits

Roth IRAs vs Taxable Brokerage Accounts

Like taxable brokerage accounts, Roth IRA contributions aren’t tax-deductible. Investors contribute with post-tax dollars, but that also means they won’t be subject to taxes when they withdraw funds in retirement.

However, income limits exist for those who can contribute to a Roth IRA account. If you make more than the income limits, then the amount of money you can contribute to a Roth IRA may be reduced; high earners may not be able to contribute to a Roth IRA. For 2024, income limits start at $146,000 per year for single tax filers and $230,000 for married couples filing jointly. For 2023, income limits start at $138,000 per year for single tax filers and $218,000 for married couples filing jointly.

As with brokerage accounts, Roth IRA account holders can contribute to their accounts at any age. Investors who want to make retirement contributions can do so even after they’ve retired.

Rules around Roth IRA withdrawals are less stringent than those for a traditional IRA. Roth account holders can also begin to take the account’s growth starting at age 59 ½ with no penalty as long as the account has been open for five years.

For those eligible to contribute to a Roth IRA, these accounts make the most sense if the account holder thinks they will be in a higher tax bracket in retirement. Since account holders pay taxes on the contributions in the year they were made, it makes the most sense to pay income taxes when in a lower tax bracket.

401(k)s vs Taxable Brokerage Accounts

Similar to an IRA, 401(k) accounts are one of the most common tax-sheltered accounts. The big difference between an IRA and a 401(k) account is that the 401(k) is employer-sponsored, and employees and employers can contribute to the account.

Employees can contribute to their 401(k) up to $23,000 per year in 2024 and up to $22,500 in 2023. Employees over 50 can make additional catch-up contributions of $7,500 annually in both 2024 and 2023. Many employers offer employees 401(k) plans, some even matching contributions up to a certain percentage.

The 401(k) is one of the most common ways to grow a retirement nest egg because the contributions are automatic and come out of the employee’s paycheck, so employees may not even notice the money is gone.

Tax Advantages of an IRA vs Taxable Brokerage Account

As noted above, IRAs offer several tax advantages compared to taxable brokerage accounts. Investors generally use IRAs for tax efficient investing.

Here are some of the main differences:

• Contributions to traditional IRAs may be tax-deductible: Contributions to a traditional IRA may be tax-deductible, depending on your income and whether a retirement plan at work covers you or your spouse. This means that the money you contribute to a traditional IRA can be deducted from your taxable income, reducing the amount of tax you owe.

• Earnings in an IRA grow tax-free: The money you earn in an IRA, including interest, dividends, and capital gains, grows tax-free until you withdraw it in retirement. In a taxable brokerage account, you would have to pay taxes on any capital gains and dividends you earn each year.

• Withdrawals from traditional IRAs may be taxed at a lower rate: When you withdraw money from a traditional IRA in retirement, it is taxed as ordinary income at your marginal tax rate. However, if you are in a lower tax bracket in retirement than when you made the contributions, your withdrawals may be taxed at a lower rate.

• Contributions to a Roth IRA are not tax-deductible: Contributions to a Roth IRA are not tax-deductible, but the money you withdraw in retirement is tax-free, provided you meet specific requirements. This can be a good option if you expect to be in a higher tax bracket in retirement than you are now.

Which Type of Account Is Best for Me?

Brian Walsh, Certified Financial Planner™ at SoFi, says ultimately, you’ll have a mixture of accounts. However, what’s right for you depends on your situation. “It depends if you have access to a 401(k) and an employer match … it depends on what you’re eligible for.” Here are a few considerations that can help you assess your situation.

Think About Investing in a Traditional IRA If…

• You want to take advantage of tax-deferred contributions.

• You expect to be in a lower tax bracket in retirement.

• You’ve maxed out your 401(k) contributions and make too much to contribute to a Roth account.

Think About Investing in a Roth IRA If…

• You expect to be in a higher tax bracket in retirement.

• You want the option to pass on the account easily to your heirs.

• You’ve maxed out your traditional 401(k) and want to offset some of your future tax burden with a Roth IRA.

Think About Investing in a 401(k) If…

• Your employer offers a plan with a match program.

• You’re uncertain about your future tax liability, and your employer allows you to split contributions between a traditional 401(k) and a Roth 401(k).

• You prefer a hands-off approach to investing.

Think About Investing in a Taxable Brokerage Account If…

• You’ve maxed out all contribution limits to your 401(k) and IRAs.

• You want to invest in investments not offered in your 401(k) or IRA, like options or cryptocurrency.

• You want more control over your investments with the opportunity to withdraw funds at your leisure.

Pros and Cons of Taxable Brokerage Accounts

Here are some of advantages and disadvantages of taxable brokerage accounts:

Pros of Taxable Accounts

• Flexibility: Taxable brokerage accounts allow you to invest in a wide range of assets, such as stocks and bonds, as well as derivatives. This allows you to create a diversified portfolio that meets your investment goals.

• Growth potential: Taxable brokerage accounts offer the potential for significant growth, as you can earn capital gains on your investments if they increase in value.

• No contribution limits: Unlike tax-advantaged accounts, taxable brokerage accounts have no contribution limits. This means you can contribute as much as you want to your account, subject to income limits or restrictions.

Cons of Taxable Accounts

• Taxes: One of the main disadvantages of taxable brokerage accounts is that you will be required to pay taxes on your investment income and capital gains. This can significantly reduce your overall returns.

• Lack of tax benefits: Taxable brokerage accounts do not offer the same tax benefits as tax-advantaged accounts. For example, 401(k)s and IRA contributions may be tax-deductible, while investments in taxable brokerage accounts are not.

• Potential for loss: As with any investment, there is a risk of loss in a taxable brokerage account. If your investments decline in value, you could lose some or all of your initial investment.

Is it Smart to Have Both an IRA and a Taxable Brokerage Account?

It may be a consideration to have both an IRA and a taxable brokerage account, as each type has its specific benefits and drawbacks.

An IRA can be a good option if you are looking to save for retirement and want the potential tax benefits of an IRA. On the other hand, a taxable brokerage account can be a good choice if you are looking to invest for goals other than retirement or if you are not eligible for a tax deduction on your contributions to an IRA.

Having both an IRA and a taxable brokerage account can give you more flexibility and diversification in your investments, which can help you manage risk and improve your overall financial situation.

The Takeaway

Every account — from taxable brokerage accounts to IRAs — has advantages and disadvantages, which is why some investors choose to invest in a few. The old cliche, “don’t put all your eggs in one basket,” is a solid philosophy for financial planning. Investing in several different “baskets” is one way to ensure that your money is working hard for you.

Fortunately, SoFi Invest® offers several accounts that can help you save and invest for retirement or whatever financial goals you have. With SoFi, you can open a retirement account, either a traditional or Roth IRA. For individuals who want to build their own portfolio, SoFi also offers an online brokerage account where investors can trade stocks, ETFs, fractional shares, and more with no commissions.

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

FAQ

What is the difference between an IRA and a taxable brokerage account?

An IRA is designed specifically to save for retirement. Unlike a taxable brokerage account, which is used for general investing, contributions to an IRA may be tax-deductible, and the investments within the account can grow tax-free until they are withdrawn at retirement age. There are several different types of IRAs, including Traditional IRAs and Roth IRAs, which have different rules for contributions, taxes, and withdrawals.

Is it better to contribute to an IRA or a taxable brokerage account?

Whether to contribute to an IRA or a taxable brokerage account depends on your circumstances and financial goals. In general, an IRA can be a good option if you are looking to save for retirement and want the potential tax benefits of an IRA. However, if you are not eligible for a tax deduction on your contributions or looking to invest for goals other than retirement, a taxable brokerage account may be a better choice.

How is a taxable brokerage account taxed?

The investments held within a taxable brokerage account may be subject to tax on any capital gains, dividends, or interest earned. Short-term capital gains, which are gains on investments held for less than a year, are taxed at the same rate as ordinary income. Long-term capital gains, which are gains on investments held for more than a year, are typically taxed at a lower rate. Dividends and interest income earned are also subject to tax.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

SOIN1222027

Jan

2024

Roth IRA Conversion: Rules and Examples

By SoFi | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A Roth IRA is a retirement savings account that offers tax-free withdrawals during retirement. You can convert a traditional IRA or a qualified distribution from a previous employer-sponsored plan, such as a 401(k), into a Roth IRA. This is known as a Roth IRA conversion.

A Roth IRA conversion may be worth considering for the potential tax benefits. Along with tax-free qualified withdrawals in retirement, the money in a Roth IRA has the potential to grow tax-free. Read on to learn how a conversion works, the Roth IRA conversion rules, and whether a Roth IRA conversion may make sense for you.

What Is a Roth IRA Conversion?

With a Roth IRA conversion, an individual moves the funds from another retirement plan into a Roth IRA. You pay taxes on the money in your existing account in order to move it to a Roth IRA.

Many retirement plans, such as 401(k)s and traditional IRAs are tax-deferred. The money is contributed to your account with pre-tax dollars. In retirement, you would pay taxes on your withdrawals. But by doing a Roth conversion, you pay taxes on the money you convert to a Roth IRA, and the money can then potentially grow tax-free. In retirement, you can make qualified withdrawals from the Roth IRA tax-free.

You can convert all or part of your money to a Roth IRA.

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

How Does a Roth IRA Conversion Work?

As mentioned, when converting to a Roth IRA, an individual must pay taxes on the contributions and gains in their current retirement plan because only after-tax contributions are allowed to a Roth IRA. They can typically convert their funds to a Roth IRA in one of three ways:

• An indirect rollover: With this method, the owner of the account receives a distribution from a traditional IRA and can then contribute it to a Roth IRA within 60 days.

• A trustee-to-trustee, or direct IRA rollover: The account owner tells the financial institution currently holding the traditional IRA assets to transfer an amount directly to the trustee of a new Roth IRA account at a different financial institution.

• A same-trustee transfer: This is used when a traditional IRA is housed in the same financial institution as the new Roth IRA. The owner of the account alerts the institution to transfer an amount from the traditional IRA to the Roth IRA.

Roth IRA Conversion Rules

There are a number of rules that govern a Roth IRA conversion. Before you proceed with a conversion, it’s important to understand what;’s involved. Roth IRA conversion rules include:

Taxes

You’ll pay taxes on a traditional IRA or 401(k) before you convert it to a Roth IRA. This includes the tax-deductible contributions you’ve made to the account as well as the tax-deferred earnings. They will be taxed as ordinary income in the year that you make the conversion. Because they’re considered additional income, they could put you into a higher marginal tax bracket. You’ll also need to make sure you have the money on hand to pay the taxes.

Limits

There are two types of limits to be aware of with a Roth IRA conversion. First, there is no limit to the number or size of Roth IRA conversions you can make. You might want to convert smaller amounts of money into a Roth IRA over a period of several years to help manage the amount of taxes you’ll need to pay in one year.

Second, Roth IRAs have contribution limits. For instance, in 2024, you can typically contribute up to $7,000, or up to $8,000 if you’re 50 or older.

Withdrawals

The withdrawals you make from a Roth IRA are tax-free. However, with a Roth IRA conversion, if you are under age 59 ½, you will need to wait at least five years before withdrawing the money or you’ll be subject to a 10% early withdrawal penalty (more on that below).

Backdoor Roth IRAs

A Roth IRA conversion may be an option to consider if you earn too much money to otherwise be eligible for a Roth IRA. Roth IRAs have contribution phase-out ranges, and individuals whose income exceeds those limits cannot contribute to a Roth fully or at all. For 2024, the income limits begin to phase out at $230,000 for those who are married and filing jointly, and $146,000 for those who are single.

However, if you have a traditional IRA and convert it to a Roth IRA — a process known as a backdoor Roth IRA — those income phase-out rules don’t apply. You can use a backdoor IRA as long as you pay taxes on any contributions to the traditional IRA that you deducted from your taxes, as well as any profits you earned.

5-Year Rule

According to the 5-year rule, if you are under age 59 ½, the funds that you convert to a Roth IRA must remain in your account for at least five years or you could be subject to a 10% early withdrawal penalty.

The five years starts at the beginning of the calendar year in which you do the conversion. So even if you don’t do the conversion until, say, December 2024, the five years still begins in January 2024. That means you could withdraw your funds in January 2029.

Also, if you complete separate Roth IRA conversions in different years, the 5-year rule would apply to each of them, so keep this in mind.

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

Is Converting to a Roth IRA Right for You?

Doing a Roth IRA conversion means paying taxes now on the funds you are converting in order to withdraw money tax-free in retirement. Here’s how to decide if converting a Roth IRA may be right for you

Reasons For

If you anticipate being in a higher tax bracket in retirement than you’re in now, a Roth IRA conversion may make sense for you. That’s because you’ll pay taxes on the money now at a lower rate, rather than paying them when you retire, when you expect your tax rate will be higher.

In addition, with a Roth IRA, you won’t have to take required minimum distributions (RMDs) every year after the age of 73 as you would with a traditional IRA. Instead, the money can stay right in the account — where it may continue to grow — until it’s actually needed.

If your income is too high for you to be eligible for a Roth IRA, a Roth IRA conversion might be beneficial through a backdoor IRA. You will just need to put your funds into a traditional IRA first and pay the taxes on them.

Finally, if you won’t need the funds in your Roth IRA for at least five years, a conversion may also be worth considering.

Reasons Against

A Roth IRA conversion may not be the best fit for those who are nearing retirement and need their retirement savings to live on. In this case, you might not be able to recoup the taxes you’d need to pay for doing the conversion.

Additionally, if you receive Social Security or Medicare benefits, a Roth IRA conversion would increase your taxable income, which could increase the taxes you pay on Social Security. The cost of your Medicare benefits might also increase.

Those who don’t have the money readily available to pay the taxes required by the conversion should also think twice about an IRA conversion.

And if you expect to be in a lower tax bracket in retirement, a conversion also likely doesn’t make sense for you.

Finally, if you think you might need to withdraw funds from your account within five years, and you’re under age 59 ½, you could be subject to an early withdrawal penalty if you convert to a Roth IRA.

The Takeaway

A Roth IRA conversion may help individuals save on taxes because they can make qualified withdrawals tax-free withdrawals in retirement. For those who expect to be in a higher tax bracket in retirement, a Roth IRA may be worth considering.

It’s important to be aware of the tradeoffs involved, especially the amount of taxes you might have to pay in order to do the conversion. Making the right decisions now can help you reach your financial goals as you plan and save for retirement.

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

FAQ

How much tax do you pay on a Roth IRA conversion?

You pay tax on the money you convert, but the specific amount of tax you’ll pay depends on the marginal tax rate you’re in. Before doing a Roth IRA conversion, you may want to calculate to see if the funds you’re converting will put you into a higher tax bracket.

How many Roth iRA conversions are allowed per year?

There is no limit to the number of Roth conversions you can do in one year.

When is the deadline for Roth IRA conversions?

The deadline for a Roth IRA conversion is December 31 of the year you’re doing the conversion.

Is there a loophole for Roth IRA conversions?

A backdoor IRA might be considered a loophole for a Roth IRA conversion. Roth IRAs have contribution phase-out ranges, and individuals whose income exceeds those limits cannot contribute to a Roth fully or at all. However, a backdoor IRA may be a way to get around the income limits. To do it, you will need to have a traditional IRA that you convert to a Roth IRA.

How do I avoid taxes on Roth conversion?

You cannot avoid paying taxes on a Roth conversion. You must pay taxes on the money you convert.

How do you not lose money in a Roth IRA conversion?

To reduce the tax impact of a Roth IRA conversion, you may want to split the conversion into multiple conversions of smaller amounts over several years. If possible, try to do the conversions in years when your taxable income is lower.

Do you have to pay taxes immediately on Roth conversion?

Taxes on a Roth conversion are not due until the tax deadline of the following year.

Should a 65 year old do a Roth conversion?

It depends on an individual’s specific situation, but a Roth conversion may not make sense for a 65 year old if they need to live off their retirement savings or if they are receiving Social Security or Medicare benefits. A Roth IRA conversion could increase the taxes they pay on Social Security, and the cost of their Medicare benefits might rise.

Does a Roth conversion affect my Social Security?

It might. A Roth IRA conversion increases your taxable income, which could potentially increase the taxes you pay on Social Security.

Does a Roth conversion affect Medicare premiums?

A Roth IRA conversion may affect your Medicare premiums. Because it increases your taxable income, the cost of your Medicare benefits might increase as well.

What is the best Roth conversion strategy?

The best Roth conversion strategy depends on your particular situation, but in general, to help reduce your tax bill, you can aim to make the conversion in a year in which you expect your taxable income to be lower. You may also want to do multiple smaller conversions over several years, rather than one big conversion in one year, to help manage the taxes you owe.

Can you do Roth conversions after age 72?

Yes, you can do Roth conversions at any age. Some individuals may want to consider a Roth IRA conversion at 72 if they prefer to avoid paying the required minimum distributions (RMDs) for traditional IRAs that begin at age 73. If you convert before you turn 73, you will not be required to take RMDs.

How do I calculate my Roth conversion basis?

The concept of basis, or money that you’ve paid taxes on already, might be applicable if you’ve made non-deductible contributions to a tax-deferred retirement account. When you convert the money in that account, in order to calculate the percentage that’s tax-free, you need to divide your total nondeductible contributions by the end-of-year value of your IRA account plus the amount you’ve converting.

Do you have to wait 5 years for each Roth conversion?

No. There is no time limit for doing Roth conversions, and in fact, you can do as many as you like in one year. However, if you’re under age 59 ½, you do have to wait five years after each conversion to be able to withdraw money from the account without being subject to an early withdrawal penalty.

Jan

2024

401(k) Catch-Up Contributions: What Are They & How Do They Work?

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

Retirement savers age 50 and older get to put extra tax-advantaged money into their 401(k) accounts beyond the standard annual contribution limits. Those additional savings are known as “catch-up contributions.”

If you have a 401(k) at work, taking advantage of catch-up contributions is key to making the most of your plan, especially as retirement approaches. Here’s a closer look at how 401(k) catch-up limits work.

What Is 401(k) Catch-Up?

A 401(k) is a type of defined contribution plan. This means the amount you can withdraw in retirement depends on how much you contribute during your working years, along with any employer matching contributions you may receive, as well as how those funds grow over time.

There are limits on how much employees can contribute to their 401(k) plan each year as well as limits on the total amount that employers can contribute. The regular employee contribution limit is $22,500 for 2023 and $23,000 for 2024. This is the maximum amount you can defer from your paychecks into your plan — unless you’re eligible to make catch-up contributions.

Under Internal Revenue Code Section 414(v), a catch-up contribution is defined as a contribution in excess of the annual elective salary deferral limit. For 2023 and 2024, the 401(k) catch-up contribution limit is $7,500.

That means if you’re eligible to make these contributions, you would need to put a total of $30,000 in your 401(k) in 2023 to max out the account and $30,500 in 2024. That doesn’t include anything your employer matches.

Congress authorized catch-up contributions for retirement plans as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The legislation aimed to help older savers “catch up” and avoid falling short of their retirement goals, so they can better cover typical retirement expenses and enjoy their golden years.

Originally created as a temporary measure, catch-up contributions became a permanent feature of 401(k) and other retirement plans following the passage of the Pension Protection Act in 2006.

Who Is Eligible for 401(k) Catch-Up?

To make catch-up contributions to a 401(k), you must be age 50 or older and enrolled in a plan that allows catch-up contributions, such as a 401(k).

The clock starts ticking the year you turn 50. So even if you don’t turn 50 until December 31, you could still make 401(k) catch-up contributions for that year, assuming your plan follows a standard calendar year.

Making Catch-Up Contributions

If you know that you’re eligible to make 401(k) catch-up contributions, the next step is coordinating those contributions. This is something with which your plan administrator, benefits coordinator, or human resources director can help.

Assuming you’ve maxed out your 401(k) regular contribution limit, you’d have to decide how much more you want to add for catch-up contributions and adjust your elective salary deferrals accordingly. Remember, the regular deadline for making 401(k) contributions each year is December 31.

It’s possible to make catch-up contributions whether you have a traditional 401(k) or a Roth 401(k), as long as your plan allows them. The main difference between these types of plans is tax treatment.

• You fund a traditional 401(k) with pre-tax dollars, including anything you save through catch-up contributions. That means you’ll pay ordinary income tax on earnings when you withdraw money in retirement.

• With a Roth 401(k), regular contributions and catch-up contributions use after-tax dollars. This allows you to withdraw earnings tax-free in retirement, which is a valuable benefit if you anticipate being in a higher tax bracket when you retire.

You can also make catch-up contributions to a solo 401(k), a type of 401(k) used by sole proprietorships or business owners who only employ their spouse. This type of plan observes the same annual contribution limits and catch-up contribution limits as employer-sponsored 401(k) plans. You can choose whether your solo 401(k) follows traditional 401(k) rules or Roth 401(k) rules for tax purposes.

401(k) Catch-Up Contribution Limits

Those aged 50 and older can make catch-up contributions not only to their 401(k) accounts, but also to other types of retirement accounts, including 403(b) plans, 457 plans, SIMPLE IRAs, and traditional or Roth IRAs.

The IRS determines how much to allow for elective salary deferrals, catch-up contributions, and aggregate employer and employee contributions to retirement accounts, periodically adjusting those amounts for inflation. Here’s how the IRS retirement plan contribution limits for 2023 add up:

Retirement Plan Contribution Limits in 2023
	Annual Contribution	Catch Up Contribution	Total Contribution for 50 and older
Traditional, Roth and solo 401(k) plans; 403(b) and 457 plans	$22,500	$7,500	$30,000
Defined Contribution Maximum, including employer contributions	$66,000	$7,500	$73,500
SIMPLE IRA	$15,000	$3,500	$18,500
Traditional and Roth IRA	$6,500	$1,000	$7,500

These amounts only include what you contribute to your plan or, in the case of the defined contribution maximum, what your employer contributes as a match. Any earnings realized from your plan investments don’t count toward your annual or catch-up contribution limits.

Also keep in mind that employer contributions may be subject to your company’s vesting schedule, meaning you don’t own them until you’ve reached certain employment milestones.

💡 Recommended: How to Open Your First IRA

Tax Benefits of Making Catch-Up Contributions

Catch-up contributions to 401(k) retirement savings allow you to save more money in a tax-advantaged way. The additional money you can set aside to “catch up” on your 401(k) progress enables you to save on taxes now, as you won’t pay taxes on the amount you contribute until you withdraw it in retirement. These savings can add up if you’re currently in a high tax bracket, offsetting some of the work of saving extra.

The amount you contribute will also grow tax-deferred, and making catch-up contributions can result in a sizable difference in the size of your 401(k) by the time you retire. Let’s say you start maxing out your 401(k) plus catch-up contributions as soon as you turn 50, continuing that until you retire at age 65. That would be 15 years of thousands of extra dollars saved annually.

Those extra savings, thanks to catch-up contributions, could easily cross into six figures of added retirement savings and help compensate for any earlier lags in saving, such as if you were far off from hitting the suggested 401(k) amount by 30.

Roth 401(k) Catch-Up Contributions

The maximum amount you can contribute to a Roth 401(k) is the same as it is for a traditional 401(k): $22,500 and, if you’re 50 or older, $7,500 in catch-up contributions, as of 2023. For 2024, it is $23,000 and, if you’re 50 or older, $7,500 in catch-up contributions. This means that if you’re age 50 and up, you are able to contribute a total of $30,000 to your Roth 401(k) in 2023 and $30,500 in 2024.

If your employer offers both traditional and Roth 401(k) plans, you may be able to contribute to both, and some may even match Roth 401(k) contributions. Taking advantage of both types of accounts can allow you to diversify your retirement savings, giving you some money that you can withdraw tax-free and another account that’s grown tax-deferred.

However, if you have both types of 401(k) plans, keep in mind while managing your 401(k) that the contribution limit applies across both accounts. In other words, you can’t the maximum amount to each 401(k) — rather, they’d share that limit.

The Takeaway

Putting money into a 401(k) account through payroll deductions is one of the easiest and most effective ways to save money for your retirement. To determine how much you need to put into that account, it helps to know how much you need to save for retirement. If you start early, you may not need to make catch-up contributions. But if you’re 50 or older, taking advantage of 401(k) catch-up contributions is a great way to turbocharge your tax-advantaged retirement savings.

Of course, you can also add to your retirement savings with an IRA. While a 401(k) has its advantages, including automatic savings and a potential employer match, it’s not the only way to grow retirement wealth. If you’re interested in a traditional, Roth, or SEP IRA, you can easily open an IRA account on the SoFi Invest® brokerage platform. If you’re age 50 or older, those accounts will also provide an opportunity for catch-up contributions.

Help grow your nest egg with a SoFi IRA.

FAQ

How does the 401(k) catch-up work?

401(k) catch-up contributions allow you to increase the amount you are allowed to contribute to your 401(k) plan on an annual basis. Available to those aged 50 and older who are enrolled in an eligible plan, these catch-contributions are intended to help older savers meet their retirement goals.

What is the 401(k) catch-up amount in 2023?

For 2023, the 401(k) catch-up contribution limit is $7,500.

Photo credit: iStock/1001Love

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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.

SOIN0323014