Am I Responsible for My Spouse's Debt?

Am I Responsible for My Spouse’s Debt?

Marriage is a huge step for most people. It signifies some major life changes — including to your finances. Even as you celebrate, you might have some questions about exactly what marriage means for your financial future. Is their debt now yours? What is your liability when it comes to student loans, credit cards, and other forms of debt? What happens to your credit score?

These issues can get complicated. The short answer is that, among other factors, it depends on where you live. Divorce, death, joint accounts, and court proceedings can all make a huge difference in your liability when it comes to your spouse’s debt. Let’s take a look at the complexities of sharing assets and debt with a spouse.

Credit Card Debt Liability in Common Law States

Most U.S. states are common law states. That simply means the property you acquire belongs to you — even if you’re married. Unless the property is in both people’s names, it belongs to one person. Forty-one states are common law states, so it’s likely this policy applies to you.

When it comes to money and marriage, common law provides that one spouse owns a particular asset unless you both put your names on it. That includes property like houses, automobiles, and even credit cards. If your spouse has a credit card with their name on it, it’s theirs alone. Therefore, the credit card debt liability also falls entirely on their shoulders.

You would need to become a joint account holder in order to own any part of that debt. However, you could also be on the hook for that debt if you co-signed on the account. If your spouse made you an authorized user, though, that still leaves the credit card entirely in their name and not yours, meaning you hold no responsibility for paying any associated debts.

Spouse’s Liability in Community Law States

There are nine states that are community property states rather than common law states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, any assets acquired during a marriage belong to both partners. It doesn’t matter who owns the account or property; the assets belong to both of you. There are, of course, some exceptions to this rule. These include if:

•   A purchase was made solely by one spouse and the property is listed only in their name;

•   The property was gifted to just one spouse;

•   The property was inherited by just one spouse during the marriage;

•   Property was acquired by just one spouse through a will or trust fund;

•   The property was acquired before the marriage began;

•   The property was acquired while the spouses were legally separated and living separately.

In a common law state, your partner’s credit card belongs only to them. But in a community property state, if they get a credit card while you’re married, that debt now belongs to both of you. Both partners are liable, regardless of who might have opened the account or accrued the debt, though there is an exception: If you and your spouse are separated before they begin racking up the debt in question, you may not be held responsible. Each situation is different, however, and the state could hold you responsible for the debt in question should it be proved the debt was incurred for the benefit of the marriage.

It’s good to keep in mind that if you have debts from before the marriage, such as a car loan, those will belong only to you. However, if you get another car loan after getting married, that is now a communal debt that you and your partner share.

Ready for a Better Banking Experience?

Open a SoFi Checking and Savings Account and start earning 1% APY on your cash!


Will My Partner’s Debt Affect My Credit Score?

You can breathe easy here. Even in a community property state, your partner’s debt won’t affect your credit score. If one person has some ups and downs in their credit history, that remains their credit history alone.

However, things change if you open any sort of joint account after getting married. Because that account is partially yours, it will appear in your credit history, so it’s a good idea to make sure you’re feeling confident in your spouse’s financial standing (and responsibility) before opening that joint bank account. You can always keep your financial accounts separate to protect your credit score, if you have concerns. When it comes to things like checking and savings accounts, though, even common law states may end up viewing these as joint property in the case of a divorce, and community property states almost definitely will.

What Happens If We Separate Or Divorce?

While one of the first questions may be ‘how much will a divorce cost me,’ it is very quickly followed by, ‘what happens to our debt?’ Again, it depends. Debt isn’t as simple as dividing things in half. For example, if you have a credit card that is only in your name, that debt remains entirely with you. However, if you have a joint credit card, most states will see that as joint debt if you separate or divorce, meaning you’ll both be responsible for that debt. It doesn’t matter who was making payments or running up bills; the law will see it as a shared burden.

But there’s a lot more than credit card debt to consider during a divorce. If you have a house, you may want to consider selling it off and splitting the money. Trying to untangle a mortgage debt if one of you will be moving out can get dicey. The partner who’s staying in the home may need to buy out the partner who’s leaving, for instance.

All of this becomes even more complicated if you did any investing as a couple during your marriage. Investments come with legal and tax obligations, on top of the financial complexity. If you invested together, you may want to think about selling off those investments and dividing the proceeds during a divorce. However, a lot of investments like that come with tax burdens, so keep that in mind if you have to go this route. Backing out of certain investments early, or even getting paid out for investments, could incur fees and taxes that you and your partner will have to sort out.

It is possible to split those kinds of investments. If it was stock, for example, you could divide up the shares between both partners. This can get messy, though, if one partner is a more aggressive investor than the other.

Of course, the courts might answer this question for you. If you decide to divorce and it is contested, the court could determine which partner owns which debt. In that case, it won’t really matter who opened the account. You will likely have to pay off the debt assigned to you or your ex-partner will be able to sue you. And if your partner goes through bankruptcy, you may have to handle some of that debt if the court orders you to, regardless of whether or not the court discharges any of that debt.

Finally, sometimes a spouse, unfortunately, passes away. Again, if you have joint accounts, you will probably be liable for that debt. If you co-signed anything or your name appears on the paperwork, you may have to handle that debt burden on your own now. Sometimes assets and property can help pay off that kind of debt, but that will depend on the state you live in and what kind of assets you and your partner owned.

The Takeaway

Finances can be complicated at the best of times, and marriage can multiply the complication. If you want to be certain of what your state says about property rights for married couples, the first thing you can do is find out if you’re in a common-law state or a community property state.

After that, you may want to consider how intertwined or separate you want to keep your accounts. If you have concerns, you may want to shy away from things like co-signing loans or setting up joint accounts. Instead, you could sign up for a SoFi checking and savings account before you get married as a means of having assets that belong exclusively to you, even during marriage. Having a bit of money you manage on your own could ease some of your financial fears going into a marriage.

Photo credit: iStock/AleksandarNakic


SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi Money® is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member
FINRA / SIPC .
SoFi Securities LLC is an affiliate of SoFi Bank, N.A. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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.
SOMN1121088

Read more
egg broken piggy bank

Explaining 401k Early Withdrawal Penalties

Do you dream about a retirement where you escape away to your cabin in the woods, or one where you’re flying your grandkids to Europe for an epic vacation? Making this dream a reality requires tucking money away for the future. And for many people, the place to do that may be within a 401(k) account.

A 401(k) account is designed for retirement saving. One of the reasons Investors may prefer it over saving and investing in a brokerage account is because it is not subject to federal income taxes until distribution.

You might be trying to keep the money in your 401(k) until retirement, but sometimes, life happens, and there may be situations where you need some extra cash. It is only natural to look at all of the available options, and that may include the option of tapping into your 401(k) funds.

You may want to proceed with caution, though. Because of the special taxation of this account type, the 401(k) has an early withdrawal penalty. Therefore, it may be worth exploring other options.

To answer the question, “what is the penalty for withdrawing from a 401(k)?” it helps to understand how a 401(k) works in the first place. Here’s some good things to know about the 401(k) early withdrawal penalty, along with some ideas on how to access cash without using funds from your 401(k) account.

How Does a 401(k) Work?

A 401(k) is an account designed to hold money and investments for retirement. Why does it have such a funky name? Well, it’s named after a line in the tax code that gives the 401(k) it’s special taxation. It’s a reminder that rules regarding 401(k) accounts are set by the IRS and generally have to do with taxation.

Essentially, the IRS allows investors to stash a certain amount of money away each year for retirement, without having to pay income taxes on those contributions.

In 2022, that contribution maximum amount is $20,500 per year , with additional catch up contributions allowed for those 50 and older. Additionally, the investments within the account are allowed to grow tax-free.

401(k) participants can’t avoid paying income taxes forever, though. When retirees go to pull out money in retirement, they must pay income taxes on the amount withdrawn.

So, while you have to pay income taxes eventually, the idea is that maybe you’ll pay a lower effective tax rate as a retired person than as a working person. (Although, none of this is guaranteed because we can’t predict future tax rates.)

The IRS classifies 59½ as the age where a person can begin withdrawing from their 401(k). Before this age and without an exception, it is not possible to do a 401(k) withdrawal without penalty.

What is the Penalty for Withdrawing from a 401(k)?

When a 401(k) account holder withdraws money from a 401(k) before age 59½, the IRS may charge a 10% penalty in addition to the ordinary income taxes assessed on the amount.

Unqualified withdrawals from a 401(k) are considered taxable income. Then, the 10% penalty is assessed on top of that. This could result in a hefty penalty.

Is a 401(k) Withdrawal Without Penalty Possible?

There are some exceptions to the 401(k) early withdrawal penalty rule. For example, an exception may be made in the event that a participant has a qualifying event such as a disability or medical expenses, and must use 401(k) assets to make payments under a qualified domestic relations order, has separated from service during or after the year they reached age 55, or that a distribution is made to a beneficiary after the death of the account owner.

Additionally, it may be possible to avoid the 401(k) withdrawal penalty through a method known as the Substantially Equal Periodic Payment (SEPP) rule. These are also called 72(t) distributions.

To do this, the account owner must agree to withdraw money according to a specific schedule as defined by the IRS. The participant must do this for at least five years or until they have reached age 59½.

Under the 72(t) distribution, a participant will systematically withdraw the total balance of their 401(k). While this is technically an option in some instances, it does mean taking money away from retirement. Consider this while making your ultimate decision.

Alternatives to an Early 401(k) Withdrawal

Because of the steep penalty involved, you may feel inclined to shop around for some alternatives to early 401(k) withdrawal.

Participants can consider taking a loan from their active 401(k). The money is removed from the account and charged a rate of interest, which is ultimately paid back into the account. The interest rate is generally one or two points higher than the prime interest rate set by the IRS, but it can vary.

While this loan may come with a competitive interest rate that is repaid to the borrower themself and not a bank, there are some significant downsides. First, taking money from a 401(k) account removes that money from being invested in the market. A participant may miss out on the market’s upside and compound returns.

Though a 401(k) loan might seem like an easy option now, it could put a person’s retirement at risk.

It is easy to imagine a scenario where the loan does not get repaid. If the loan is not repaid, the IRS could levy the 10% penalty on the distributed funds.

Additionally, money that is repaid to a 401(k) is done with post-tax money. The money that is borrowed from the 401(k) would have been pre-tax money, so replacing it with money the borrower has already paid taxes on may make a 401(k) loan more expensive than it initially seems.

In addition, if a person were to leave their company before the loan is repaid, the loan would need to be repaid by the time you file your taxes for that year or penalty and income tax could be due. Participants should proceed down this route with caution.

A second option is to consider withdrawing funds from Roth IRA assets. Under IRS rules , any money that is contributed to a Roth IRA can be removed without penalty or taxes after 5 years .

Unlike with a 401(k), income taxes are paid on money that the account holder contributes to the account. Therefore, these funds aren’t taxed when the money is removed. (This only applies to contributions, not investment profits.)

Again, common advice states that removing money from any retirement account should generally be considered a last-resort option. The average person is already behind in saving for retirement, so even Roth IRA funds should only be considered after all other options are exhausted. If you haven’t started saving for retirement yet, consider opening an ira with SoFi. You will get access to a broad range of investment options, member services, and our robust suite of planning and investment tools.

Another option to consider could be a personal loan. An unsecured personal loan can generally be used for any personal reason

By using a personal loan, the participant is able to avoid a 401(k) early withdrawal penalty and leave all of the money invested within the account to grow uninterrupted.

A personal loan also puts the borrower on an amortized payback schedule that has a defined end-date. Having a defined payback period may be beneficial during debt repayment—it provides a goal, and it is clear how progress is made throughout the life of the loan.

Compare the set amortization of a personal loan to a revolving credit card, where it can be quite tempting to add to the balance, even as the person is attempting to pay it off in full.

When charges are added to a credit card, the end-date can be pushed out further, especially in the event that the borrower is only making minimum payments. This is not the case with a personal loan where a lump sum loan amount is disbursed and paid back within a set timeframe.

With all of the above options, it is recommended to sit down and map out the cost of each. To do this, you may want to consider using a personal loan calculator and/or working with a tax advisor or financial advisor to help identify the best course.Ultimately, it will be up to you to research the best option given your needs.

Thinking about taking out a personal loan? Get your rate from SoFi in as little as two minutes.


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

SOPL19037

Read more
When Can I Retire This Formula Will Help You Know_780x440

When Can I Retire? This Formula Will Help You Know

When it comes to retirement savings, there are a number of factors to consider: Social Security, inflation, and health care costs. But ultimately all these concerns boil down to one question: How much do you need to save to retire?

Thankfully, there’s a formula for calculating these costs, which might help you plan for the future. But first, decide at what age you want to retire and then see how that decision affects your finances.

When Can You Get Full Social Security Benefits?

At what age does the government allow people to retire with full Social Security benefits? And at what age can people start withdrawing from their retirement accounts without facing penalties? For Social Security, the rules are based on your birth year.

The Social Security Administration has a retirement age calculator . For example, people born between 1943 and 1954 could retire with full Social Security benefits at age 66.

Meanwhile, those born in 1955 could retire at age 66 and two months, and those born in 1956 could retire at age 66 and four months. Those born in or after 1960 can retire at age 67 to receive full benefits.

Social Security Early Retirement

A recipient will be penalized if they retire before full retirement age. The earlier a person retires, the less they’ll receive in Social Security.

Let’s use John Doe as an example and say he was born in 1960, so full retirement age is 67. If he retires at age 66, he’ll receive 93.3% of Social Security benefits; age 65 will get John 86.7%. If he retires on his 62nd birthday–the earliest he can receive Social Security–he’ll only receive 70% of earnings.

Here’s a retirement planner table for those born in 1960, which shows how one’s benefits will be reduced.

Source: Social Security Administration

Social Security Late Retirement

If a person wants to keep working until after full retirement age, they could earn greater monthly benefits.

For example, if the magic retirement number is 66 years but retirement is pushed back to 66 and one month, then Social Security benefits rise to 100.7% per month. So if your monthly benefit was supposed to be $1,000, but you wait until 66 years and one month, then your monthly allotment would increase to $1,007.

If retirement is pushed back to age 70, earnings go up to 132% of monthly benefits. But no need to calculate further: Social Security benefits stop increasing once a person reaches age 70. Here is a SSA table on delayed retirement .

When Can You Withdraw From Retirement Accounts?

Now let’s look at retirement accounts. Each type of account has different rules about when money can be taken out.

If a Roth IRA account has existed for at least five years, withdrawals from the account are usually okay after age 59½ without consequences. Taking out money earlier or withdrawing money from a Roth IRA that’s been open for fewer than five years could result in paying penalties and/or taxes.

There is a little wiggle room. Retirement withdrawal rules do have exceptions for issues like disability or educational expenses, and there is an option to withdraw money early and pay taxes or penalties.

If a person is at least 59½ and has a Roth IRA that is less than five years old, taxes will need to be paid upon withdrawal but not penalties. Taxes or penalties might not need to be paid at age 59½ and if the Roth IRA has been open for five years or more.

People with a traditional IRA can make withdrawals from ages 59½ to 72 without being penalized. The government will charge a 10% penalty on withdrawals before age 59.5, and depending on location, a state penalty tax might also be charged.

People with 401(k)s can typically retire by age 55 and make withdrawals without receiving a penalty. People with either a traditional IRA or 401(k) must start making withdrawals by age 72 or face a hefty penalty.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.


How Much to Save for Retirement? Here’s the Formula

Everyone’s situation is different, so it might make perfect sense for one person to retire at age 62 and another at 55. However, waiting until full retirement age or even age 70 not only gives Social Security more time to accrue—it gives a potential retiree more time to accumulate savings in a nest egg.

So is working till the age 70 absolutely necessary to earn enough money to live off of after retirement, or will there be enough in savings by age 67 or 68? This is where the question “How much do you need to save to retire?” comes in.

Fidelity’s research shows that if a 30-year retirement is planned and annual spending is expected to be 4% to 5% of savings, adjusting for inflation, there is about a 90% chance of not running out of money.

The exact percentage can depend on the age of retirement and life expectancy. That number changes if a person retires at age 60 and plans a 35-year retirement—about 4.3% could be withdrawn per year to retain that 90% likelihood of financial security.

To break it down, $1 million in savings is a fair number to get through the retirement years.

Source: Fidelity

How Much Money Is Needed Each Year to Live On?

The rule of thumb was once 80% of current income. But that assumes the mortgage is paid off and taxes will be lower. Many people will still have mortgages.

Since a large part of a retirement income comes from withdrawals from retirement plans that give taxable income, the tax rate might not go down much. Plus, many people might want to travel or spend money on hobbies in the early years of retirement, and many might need expensive health care as they live into their 90s and beyond. That means more than a current income might be necessary.

A retiree may be living off money from both Social Security and a retirement account. If Social Security is an option, and if it’s still around at retirement, that could reduce the amount that needs to be withdrawn from a retirement account each year.

Here’s the Retirement Savings Formula: Start with current income, subtract estimated Social Security benefits, and divide by 0.04. That’s the target number in today’s dollars.

The Takeaway

Nobody knows what the future holds—tax rates, inflation, health care reform, and Social Security are all outside our control. But the amount saved and invested is not.

With SoFi Invest®, you can track investments and choose exactly how active you are in the process. SoFi offers an Active Investing platform, where investors can buy 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.

Check out SoFi Invest today.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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.
WM17136

Read more

How Does a Roth 401k Work?

Good retirement planning? No big deal. All it takes is serious option weighing, laser-beam-like consideration, a flexible strategy that lets you change your play at a moment’s notice and a Nostradamus-like ability to see the future.

You’ll often have to predict where the economy, your career, and your money may be decades from now, and how you’ll want to spend (and spend money in) your retirement. Sound like a plan? Actually, though, there is a way to say “I got this” and really mean it.

If your employer gives you individual retirement account (IRA) options, you could be well on your way to nailing down your financial future without excessive hand-wringing. Even better, choosing between a traditional IRA and a Roth 401(k) may not even be a choice you have to make—you could benefit from both. Both investments can serve different purposes and give you different benefits.

A Roth 401(k), for instance, gives you years — possibly even decades, depending on your age — of investment growth, tax free. Ultimately, the difference between a traditional Roth IRA and a Roth 401(k) is when you pay taxes on them.

Traditional 401(k) vs. Roth 401(k)

Here’s the shortcut (and more about this soon). Memorize this and you could be halfway there:

•   Traditional 401(k): Pre-tax retirement account. Your contributions are not yet taxed, lowering your taxable income.
•   Roth 401(k): Post-tax retirement account. Your contributions will already be taxed before you contribute the money.

Traditional Roth IRA vs Roth 401(k)

It’s easy to confuse the two, but it’s also easy to distinguish between them. Let’s break it down:

Traditional Roth IRA

•   No early withdrawal penalty. If you need the money for an emergency, you can withdraw contributions without a penalty from the IRS. However, you may have to pay taxes and penalties on earnings in your Roth IRA if you withdraw money from a Roth IRA you’ve had for less than five years.
•   No minimum distributions. Starting in 2020, after age 72, you are not required to withdraw a certain amount of money periodically. (In 2019, the age was 70½). You can let your savings sit in the account and only tap into it when you need it.
•   You can continue to contribute to the account. Even after age 72, you can continue to contribute to your Roth IRA. A traditional IRA does not allow contributions after you reach that age.

Related Content: What is an IRA?

Roth 401(k)

•   Allows for a company match.
•   You won’t be taxed when you withdraw your money (if you’ve held the account for at least five years) because you already paid your taxes on this fund.
•   Distribution is required after age 72 unless you’re still working.

Keep in mind, though, not to treat any type of 401(k) like an ATM. The money in an IRA is meant for your retirement, and you might want to fight off any temptation to dip your beak into the fund too early.

How the Roth 401(k) Came to Be

The Roth 401(k) began in 2006 as a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 . It was based on the already-existing Roth IRA, allowing investors to stash their after-tax money in a safe place, for later use.

Contribute to a Roth 401(k) and you won’t be able to claim it as a tax deduction, but you also won’t owe any taxes on any qualified distributions. If you participate in a 403(b) plan, you’re also eligible to participate in a Roth fund.

Roth 401(k) Benefits

Pay today so you don’t have to pay tomorrow. Roth 401(k) contributions are made after you’ve already paid taxes on that money.

When you are able to withdraw your Roth 401(k) money at age 59½, your money is tax free and will remain so going forward, throughout your retirement. The IRS likes this deal too, because they get their taxes now instead of waiting years or even decades.

Roth 401(k) Contribution Limits

The traditional Roth IRA has limits and restrictions on how much income you’re allowed to receive from it. Not so for the Roth 401(k).

However, you’re still limited to how much money you can contribute to your Roth 401(k) each year. In fact, it’s the same for any 401(k) account. Let’s break it down:

•   In 2022, if you’re age 50 or younger, you cannot contribute more than $20,500 to your Roth 401(k) account in one year.
•   In 2022, if you’re age 50 or older, you cannot contribute more than $27,000 to your Roth 401(k) within one year.

Which Plan Should You Choose: Traditional Roth IRA or Roth 401(k)?

It all depends on your financial situation and ultimate financial goals. A good indicator for choosing the Roth 401(k) is if you expect to be in a higher tax bracket toward your retirement age. It might make sense to pay taxes on the account now, while you are making less money and in a lower tax bracket.

Determining Your Tax Bracket

Note that a tax bracket is the taxpayer group you’re assigned to, according to how much income you generate. Your taxes are calculated based on your group, or bracket. This is usually done by a percentage , to keep it fair (presumably). Your tax bracket is calculated for both state and federal taxes.

The trick (which is perfectly legal) is to consider deductions that could lower your taxable income, thereby lowering your tax bracket.

Of course, any deduction you claim (child support or business expenses, for example) must be approved by the IRS. You could check with your tax expert before claiming any deduction to make sure that the deduction you make is legal and acceptable.

The IRS has a specific calculation for figuring out your tax bracket.

Why a Roth 401(k) May Be a Good Move Now Rather Than Later

You never know what new tax laws may bring in the future—it’s pretty unpredictable. It may be better to pay up now, before a law comes along that is not friendly to your financial plan.

Considerations When Weighing Your Roth Options

Minimum distributions. With a traditional IRA, once you turn age 72, you will be required to take a minimum distribution, whether you want or need it. If you want to avoid this requirement, simply roll over your fund to a traditional Roth IRA.

What If You Change Jobs?

You can leave your Roth 401(k) plan with whomever is sponsoring it, even after you change jobs or retire. This means that even after you go to a new job, you can still contribute to the Roth 401(k) from your old job.

However, you’ll be working with the plan sponsor (and the plan sponsor’s rules) and not your former employer. You could also roll it over to a new employer plan or into an individual Roth IRA. You might even request a cash distribution.

Why a Roth 401(k) Is a Great Retirement Option

It’s all about the taxes, or, more specifically, not having to pay them. When you’re retired, you might want to use your money without having to pay taxes on it.

Also, the more income you have, the higher your tax bracket. This could affect how your Social Security benefits are taxed. The goal is to keep your taxable income low and avoid being placed in a higher tax bracket.

How SoFi Can Help You

Need a little help with the navigation? Don’t fret—most people do. It’s not an easy decision, and sometimes you have to hash it out, out loud, with someone who lives and breathes this stuff. You could talk with a SoFi Financial Planner and get free, no-obligation, personalized advice on how you can maximize your Roth 401(k) benefits.

With a SoFi Invest account, you can easily open an IRA. How easy? It takes about five minutes or less, and you can choose automated or active investing. The choice is yours.

Open a retirement account with SoFi today.


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.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

SOIN18154

Read more
woman holding laptop

Retirement Options For the Self-Employed

Being your own boss is great. You get flexibility and the ability to pursue the things you care about. But as the boss, you also have to deal with all the administrative and financial details an employer might typically take care of—like choosing the right retirement plan.

Though it may require a little more action on your part, there are different kinds of self-employed retirement plans to explore. In fact, some self-employed retirement plans actually have high contribution limits and tax benefits.

And it’s a good thing too, since more people than ever are self-employed or starting their own businesses. According to Fresh Books third annual self-employment report annual self-employment report, 27 million Americans are expected to leave the traditional workforce for self-employment in the next two years.

So what does retirement for self-employed people look like? Well, a little like retirement for the traditionally employed. The general rules of thumb still apply: You can calculate how much you’ll need to save for retirement based on your current age and when you plan to retire.

No matter what your age, it’s a good idea to do the math now, so you can hypothetically see how much money you could be contributing to your retirement and whether you’re on track for your age and retirement goals.

Self-Employed Retirement Plans

In some ways, self-employed retirement plans aren’t too different from regular retirement plans. Certainly, the principles of retirement are the same: set aside money now to use in retirement—ideally providing an income when it’s time to retire.

The most common retirement savings plan, though, is a 401(k), but a 401(k) is, by definition, an employer-sponsored retirement account. For those who are self-employed that’s not an option.

The IRS breaks down a number of retirement plans for the self-employed or for those who run their own businesses, but we’ll lay out the basics here for you to start thinking about.

Traditional or Roth IRA

One of the most popular self-employed retirement plans is an IRA—or an individual retirement account. Anyone can open an IRA either with an online brokerage firm or at a traditional financial institution. And if you’re leaving a regular job where you had an employer-sponsored 401(k), then you can roll it over into an IRA.

If you meet eligibility requirements, you can contribute up to $6,000 annually to an IRA, with an additional $1,000 catch-up contribution allowed for people over 50 years old. (These limits are for 2022—the IRS does adjust them from time to time.)

The main difference between a traditional vs. Roth IRA is when the taxes are paid. In a traditional IRA, the contributions you make to your retirement account are tax-deductible when you make them, and the withdrawals during retirement are taxed at ordinary income rates. With a Roth IRA, there are no tax breaks for your contributions, but you’re not taxed when you withdraw.

Choosing which IRA makes sense for you can depend on a few factors, including what you’re earning now vs. what you expect to be earning when you retire. Additionally, you can only contribute to a Roth IRA if your income is below a certain limit : For 2022, that’s less than $214,000 adjusted gross income (AGI) for a person who is married filing jointly, and less than $144,000 for a person who is filing as single.

Solo 401(k)

A solo 401(k) is a self-employed retirement plan that the IRS also refers to as one-participant 401(k) plans . It works a bit like a regular employer-backed 401(k), except that in this instance you’re the employer and the employee.

For 2022, you can contribute $20,500 (or $27,000 if age 50 or over) in salary deferrals as you would normally contribute to a standard 401(k). Then, as the “employer”, you can also contribute up to 25% of your net earnings, with additional rules for single-member LLCs or sole proprietors. Total contributions cannot exceed a total of $61,000.

From there, it works more or less like a regular 401(k): the contributions are made pre-tax and any withdrawals or distributions after age 59.5 are taxed at the regular rate. You can also set up the plan to allow for potential hardship distributions under specific circumstances, like a medical emergency.

You can not use a solo 401(k) if you have any employees, though you can hire your spouse so they can also contribute to the plan (as an employee; you can match their contributions as the employer). 401(k) contribution limits are per person, not per plan, so if either you or your spouse are enrolled in another 401(k) plan, then the $61,000 limit per person would include contributions to that other 401(k) plan.

A solo 401(k) makes the most sense if you have a highly profitable business and want to save a lot for retirement, or if you want to save a lot some years and less others. You can set up a solo 401(k) with most wealth management firms.

Simplified Employee Pension (or a SEP IRA)

A SEP IRA is an IRA with a simplified and streamlined way for an employer (in this case, you) to make contributions to their employees’ and to their own retirement.

For 2022, the SEP IRA rules and limits are as follows: you can contribute up to $61,000 or 25% of your net earnings, whichever is less. As is the case with a number of these retirement for self-employed options, there is a cap of $305,000 on the compensation that can be used to calculate that cap. You can deduct your contributions from your taxes, and your withdrawals in retirement will be taxed as income.

A key difference in a SEP vs. other self-employment retirement plans is this is designed for those who run a business with employees. You have to contribute an equal percentage of salary for every employee (and you are counted as an employee). That means you can not contribute more to your retirement account than to your employees’ accounts, as a percentage not in absolute dollars. On the plus side, it’s slightly simpler than a solo 401(k) to manage in terms of paperwork and annual reporting.

SIMPLE IRA

A SIMPLE IRA (which stands for Savings Incentive Match Plan for Employees ) is like a SEP IRA except it’s designed for larger businesses. Unlike the SEP plan, the employer isn’t responsible for the whole amount of an employee’s contribution. Individual employees can also contribute to their own retirement as salary deferrals out of their paycheck.

You, as the employer, have to simply match contributions up to 3% or contribute a fixed 2%. This sounds complicated, but the point is it’s designed for larger companies, so that you can manage the contributions to your employees’ retirement plans as well as your own. The trade-off, however, is that the maximum contribution limit is lower.

You can contribute up to $14,000 to your SIMPLE IRA, plus a catch-up contribution of $3,000 if you’re 50 or over. And your total contributions, if you have another retirement employer plan, maxes out at $20,500 annually.

There are a few other restrictions: If you make an early withdrawal before the age of 59 ½ , you’ll likely incur a 10% penalty much like a regular 401(k); do so within the first two years of setting up the SIMPLE account and the penalty jumps to 25%. (There is also a SIMPLE 401(k) that does allow for loan withdrawals, but requires more set-up administrative oversight on the front end.)

Defined Benefit Retirement Plan

Another retirement option you’ve probably heard a lot about is the defined benefit plan, or pension plan. Typically, a defined benefit plan pays out set annual benefits upon retirement, usually based on salary and years of service.

For the self-employed, your defined benefit has to be calculated by an actuary based on the benefit you set, your age, and expected returns. The maximum annual benefit you can set is currently the lesser of $245,000 or 100% of the participant’s average compensation for his or her highest three consecutive calendar years, according to the IRS.
Contributions are tax-deductible and your withdrawals during retirement will be taxed as income. And, if you have employees, then you typically must also offer the plan to them.

Defined benefit plans guarantee you a steady stream of income in retirement and with no set maximum contribution limit, if you’re earning a lot (and expect to keep earning a lot through retirement), they may be a good way to save up money.

These self-employed retirement plans can, however, be complicated and expensive to set up and require ongoing annual administrative work. Not every financial institution even offers defined benefit plans as an option for an individual. You’ll also have to be committed to funding the plan to a certain level each year in order to achieve that defined benefit—and if you have to change or lower the benefit, there may also be fees.

Other Retirement Options for the Self-Employed

While these are the most common self-employed retirement account options and the ones that offer tax benefits for your retirement savings, there are other options self-employed individuals might consider, like a profit-sharing plan if you own your own business.

Plus, don’t forget: You also have Social Security funds in retirement. Full retirement age for Social Security is considered 67 years old.

The IRS does offer what it calls annual check-ups to check on your retirement account and to go through a checklist of potential issues or fixes. However, you may want some additional human guidance, especially if you have specific questions.

The Takeaway

When you’re an entrepreneur or self-employed it can feel like your options are limited in terms of retirement plans, but in fact there are a number of options open, including various IRAs and a solo 401(k).

Looking to open a new retirement account? SoFi Invest® offers traditional, Roth, and SEP IRAs. Plus, you’ll get access to a broad range of investment options, member services, and our robust suite of planning and investment tools.

Find out how to save for retirement with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.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. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
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.
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.
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.
SOIN18132

Read more
TLS 1.2 Encrypted
Equal Housing Lender