Which Retirement Account Is Best for You: Roth IRA, Traditional IRA, or SEP?

You might not believe it, but when it comes to retirement, Uncle Sam has your back. The proof is in the tax advantages you get by contributing to individual retirement accounts (IRAs).

Understanding how IRAs can help grow your retirement nest egg—and benefit you on tax day—is a smart money move. Even if you’re paying off student loans and have other debt obligations, allocating some money toward retirement during your early working years is crucial. The earlier you start, the longer your money has to grow. Your sixty-year-old self will definitely thank you for investing as much as you can now.

You can still make a contribution for the 2016 tax year, but you must open an account and contribute by tax day, which is April 18, 2017. Deadlines can be daunting, but don’t worry. We’ve got you covered.

Here’s a comparison of Traditional, Roth, and SEP IRAs to help you find the best fit for your income level and financial goals. Before we start, tally your total earnings for 2016 to determine if and how much you’re eligible to contribute to various IRAs. You should receive the necessary tax documents from your employers (W-2 forms) and/or clients (1099s) by mid-February.

Traditional IRA: Instant Tax Gratification

With a traditional IRA, you reap the tax benefits right away since your contributions are generally tax deductible. But, because you get an up-front tax advantage, you have to pay taxes on the money you withdraw in retirement.

Best For: This type of IRA is good if you think you’ll earn less in your retirement years and will be taxed at a lower rate than you are today.

Contribution limits for 2016: Under age 50: $5,500; ages 50-70½: $6,500

Income limits:  If neither you nor your spouse are eligible to participate in a company-sponsored retirement plan, like a 401(k), you can deduct the full amount of your traditional IRA contribution regardless of your income. However, The IRS only considers eligibility for a company plan, so whether or not you actually participate is irrelevant.

Here’s where things get complex. If you or your spouse are eligible for a company retirement plan, you can still contribute, but you might not be able to deduct the contribution if your income exceeds certain limits. Use our IRA Calculator to see if you qualify for a deduction, or talk to your tax preparer.

Early Withdrawal: Should you make an early withdrawal (before age 59½), you’ll generally pay a 10% penalty unless an exception such as death or disability applies.

Roth IRA: Flexibility Now, Tax Perks Later

If you’re looking for a tax break in your working years, you won’t get one by making Roth IRA contributions. That’s because Roth contributions are not tax deductible. However, when you withdraw funds in retirement, your withdrawals will be tax-free.

What’s really attractive about a Roth is that you are allowed to withdraw your contributions at any time without taxes or penalties. Investment earnings will have to stay put until the later of age 59½ or at least 5 years from your first contribution. Withdraw early and that 10% penalty happens.

As with a regular IRA, certain exceptions apply. For instance buying your first home, you can withdraw up to $10,000 of your earnings.

Best For: Many young people just starting out are in a lower tax bracket than they will be in when they retire. They can also use the flexibility of withdrawing contributions. If you want to start saving, but fear commitment, the Roth IRA could be a good choice for you. Prepare for retirement with a online Roth IRA from SoFi Invest.

Contribution limits for 2016:  Under age 50: $5,500; age 50 or older: $6,500

Income limits: If you earned below $117,000 as a single filer or $184,000 as a married joint filer, you should be in the clear to make the full contribution. If not, it’s complicated, so we listed the Roth income rules in a chart. You might want to check our calculator or speak with a tax professional for clarity.

How to decide which IRA chart

Simplified Employee Pension (SEP) IRA: A Freelancer’s Best Friend

If you are self-employed as a contractor, a sole proprietor with no employees, or if you earn side income in addition to a regular job, a SEP IRA is a solid option for your retirement savings. The big advantage is much higher contribution levels than other IRAs.

Like a traditional IRA, SEP contributions are tax deductible, but don’t plan on withdrawing money before age 59½, or you’ll face that 10% tax penalty. Contributing to a SEP does not prevent you from contributing to a Roth IRA. Contributing to your employer’s 401(k) (or your spouse doing so) does not prevent you from contributing to a SEP from your freelance income. This is just one of the many retirement options for the self-employed

Best For: Entrepreneurs, contractors, and people who have a side gig, the high contribution allowance makes this option a game changer. You can also open a SEP if you are a small business owner with employees—but you’ll need to contribute for your employees and there might be better pension plan choices. Ask your accountant for help.  

Contribution limit for 2016: You can contribute 18.6% of your net profits up to $53,000—a lot more than with other IRAs. Since the contribution limit is based on those profits, most people wait until after the year ends to fully fund their SEP. You may need the assistance of an accountant to figure out your maximum contribution amount. One final note: If you file an extension for your business taxes, you can make contributions until October 16.

With April 18 looming, don’t delay.

Get started today online investing with SoFi Invest® or schedule time with a financial planner to learn more about opening one of these accounts and investing for your future.

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.
Disclaimer: This information and the IRA Contribution Calculator are intended to serve for educational purposes only. The results generated by the calculator are hypothetical. Those results and this information should not be considered a substitute for personalized investment, planning, tax or legal advice. Individual circumstances are unique and we recommend that you consult with a qualified tax advisor for your specific needs.
SoFi can’t guarantee future financial performance. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.


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Where Your Money Is Really Going: How to Minimize Fees

Chances are you’re working hard, doing pretty well financially, and have some money saved up. Maybe it’s a few hundred bucks, or even a couple thousand, or more. While it’s tempting to put it toward something awesome and immediately gratifying, like an epic road trip or relaxing beach vacation, you know you need to get your feet wet in investing. It’s a big part of adulting, after all.

But the thought of investing might be intimidating. Not only is there confusing jargon to wrap your head around, but you also need to figure out what to look for in a quality (read: trustworthy) advisor and how to decipher the fee structures to figure out what you’re paying for. In youmr quest to invest, the last thing you want when you’re trying to save money is to waste it on unnecessary (or worse, hidden) fees.

And that’s where we come in.

At SoFi, we know more than just a thing or two about investing, and we’re here to make it easy to understand. We’re on your side as you take your first step, and behind you to pat you on the back when you reap the rewards.

So, let’s do this.

Choosing a Financial Advisor that Best Fits You

You want an advisor who always has your best interests in mind and genuinely wants to help you increase your money. That’s a given. But as you look at the different options for advisors, you’ll find that there are two main types—traditional, human advisors and online robo-advisors (automated investment managers)—and you’ll need to decide which is right for you.

For you, the perfect advisor might be a living, breathing human being, who calls you on a regular basis and takes your calls, and who might even want to meet for coffee to discuss your investments.

This personal hand holding typically costs more and most of these advisors are not interested if you don’t have much money to invest. But, if you have less money, need less attention, or just prefer to pay less, you might want a robo-advisor. Today, both options are easily accessible, and there are pros and cons to each.

With a traditional financial advisor, you can work in-person, over the phone, or Skype to determine your specific needs and long-term investing goals. This advisor will work hand-in-hand with you to recommend a portfolio of securities (a fancy term for a mix of investments) to help you reach those goals.

Related: Isn’t It Time We Made Investing a Rich Experience?

A robo-advisor, on the other hand, will offer you a passively managed, predetermined portfolio, without the personal touch. Based on your answers to an initial series of questions, such as how comfortable you are with risk and your time frame to meet your investment goals, the robo-advisor will use algorithms, which are usually based on Modern Portfolio Theory , to choose a mix of investments for you. Robo advisors typically have much lower minimum investments and fees.

While “robo-advisor” sounds ultra-modern and cool, you might miss the one-on-one attention a real, experienced person can provide, so choose wisely. Robo-advisors offer a choice of pre-defined portfolios. They don’t create a tailored mix of specific securities.

And that has its limitations; it’s sort of like buying a suit off the rack instead of going to a tailor, who will custom-make one that fits you perfectly. That approach might work well for many people, but probably not for people with complex financial situations.

How Wealth Advisor Fees and Structures Work

While wealth management firms will help you allocate your assets and products to meet your goals, the costs can often add up like crazy. Plus, advisor fees for handling your portfolio and offering advice vary. For example, most traditional financial advisors require a minimum investment amount before even consider working with you.

While the basic service of a robo-advisor means nobody to talk with and lower fees for you, some may give you an option to consult with a human advisor, but usually only after you’ve invested a huge chunk of money—sometimes as much as $500,000.

Like so many of life’s journeys and new endeavors, in your mission to increase your money for the future, advice is not free. And in the world of financial advisors, there are, for the most part, three broad types of fee structures and advisory services to the wealth game:


The old-school stockbrokers (many of whom now call themselves investment advisors) make their money on commissions they earn from selling you securities. In some cases, this is a charge for online stock trading and making a trade to buy or sell a stock or Exchange-traded funds (ETF).

It could also be a percentage of the money you invest in a mutual fund or other managed investment. These rates vary, but it’s a pretty simple model: in return for their advice they get a percentage of the fees you pay and commission on the products and services you purchase. Usually, they make recommendations and you make the decision to act on their advice or not.


Fee-only advisors don’t get paid by investment companies for selling you stuff. Instead, they are paid by you for making your management decisions and choosing what they feel are the right investments for you. You turn over the investment decisions to them and grant them the authority to trade for you. This creates what is called a fiduciary relationship with the advisor.

It means they are legally obligated to put your interest above theirs. They might charge by the hour, a flat annual fee, or an asset management fee. The asset management fee is usually a percentage of the assets under management or AUM. This percentage can be over 2%, but most fees fall within the 1% to 1.5% range.

It works like this: If you invest $2,000 and the AUM rate is 2%, you’ll be charged $40 a year. While that may not seem like a big deal, when your investments grow to, say, $200,000—and they very well might—you’ll pony up a cool $4,000 a year in management fees alone. Not only is that a lot of money, but it’s also cash that isn’t being put to work for you.

An AUM fee can also be calculated on a tiered percentage rate, whereby the more money you invest, the lower the fee percentage. For instance, you might be charged 1.45% for the first $50,000 invested, but only 1.30% when you invest $50,000 to $100,000. While you’ll get a discount for investing more, you’ll still pay a boatload in fees.


Still, other advisors charge based on a loose hybrid of fee-only and commission-based sales. In other words, they charge a management fee, but also make a commission on products they sell you. Look at it this way: If you’re a Netflix subscriber, you pay a flat rate every month to watch any number of movies you’d like.

But if Netflix changed from a fee-only model to a fee-only and a commission model, you could be charged an initiation fee when signing up, plus fees for each movie and episode of Stranger Things you watch.

Additional Wealth Advisor Fees to Expect

Naturally, the perfect choice for you is an advisor who charges the least, but offers the best investment advice while being completely upfront about all management fees. The more you pay in fees, the less money you’ll be able to invest in your portfolio to grow over time, after all. So it’s crucial to keep your fees low and to always keep a watchful eye on how your advisor charges.

These fees below are in addition to any management fees your advisor charges:

Sales Loads and Expenses

Many traditional advisors will recommend securities in the form of mutual funds and annuities. A mutual fund is a diverse pool of investments, which can include stocks, real estate, bonds, or most other legal investments.

Mutual funds have their own fees that fall into two broad categories: loads and annual expenses. Loads are sales charges that are paid to the brokerage firm and advisor that sell the fund. These can be as much as 8% of the amount invested and can be paid up-front or when you redeem your shares. There are many mutual funds that are not sold this way and have no loads. They are called no-load funds.

If a fund has a load or not, it also has expenses that cover accounting, management, legal, and trading costs. These fees are typically very low (0.10% – 0.5%) in index funds, which don’t change their composition often, but can be over 1% for actively managed funds.

In some cases, these fees are shared with the brokerage firm and advisor who sells the fund. ETFs don’t have loads and typically have low expenses, but you might have to pay a brokerage fee when you buy and sell them.

Brokerage Fees

A brokerage fee is charged when you buy or sell a security. That fee might be a percentage of the value of a trade, or a flat rate. Discount stock brokers usually charge a flat fee of a few dollars per trade. Firms with advisors on commission can charge brokerage fees of 1% or more.

Four Important Questions

Some important things to be sure you understand when choosing an advisor:

1. Who pays them, you or the investment firms they recommend?

2. Are they a fiduciary or not? Are your interests their top priority? If not, are their conflicts of interest fully disclosed?

3. What will they invest your money in and what fees are involved? Are there sales loads or commissions? What are the expense fees of any mutual funds or ETFs they use?

4. Do they charge a management fee and, if so, what is it?

Advisors are obliged to disclose all this information, but those disclosures can be confusing. Don’t be shy about asking questions. You’re the customer and it’s your money. Be sure you understand before you invest.

Performance and Fees: Don’t Get Blindsided

When using a financial advisor to help you sock away money for the long haul, you’ll want to pay close attention to their performance before and after fees. Sometimes, when an advisor talks about performance, that amount doesn’t take into account any associated fees.

Even though an advisor might hit your target return, the expenses could gobble up as much as 2% of that total return per year. Ask to see performance “net of fees”.To pick the right advisor, transparency is key. Get a breakdown of all the fees involved and ask your advisor if there are lower-cost options that could yield a comparable return.

Switching out pricier mutual funds with comparable low-cost ETFs might achieve your goals. Many ETFs track an index, such as the S&P 500 or Nasdaq 100, so they’re tax efficient and have low expenses.

If your advisor tries to persuade you do otherwise, ask about the difference in commission between the option being pushed and the one you’re being steered against. If the answer suggests a conflict of interest, move on. It’s your money, after all, so you should not only know exactly where it’s going, but also know why.

How SoFi is Different From Traditional Wealth Advisors

Now that you know the ins and outs of advisor types, structures, and fees, take a look at how SoFi Invest® compares to the rest of pack:

Start Investing With Just $1

We believe everyone should have access to investment management. Start with as little as $1 to open an account.

Live Advisors

From the get-go you’ll have access to our team of experts, who will work with you to come up with a solid, personalized investment game plan. And no – they don’t work on commission.

No Management Fees

Not to mention all other perks which come free to members, including career advice and community events.

Curated Portfolio

We recommend one of our model portfolios, a mix of low-cost index-based ETFs, based on your age, income, and assets, and manage it for you.

Active Management

Our team of experts won’t put you in a portfolio and just leave you hanging. We constantly monitor the markets and adjust them for changing economic conditions.

Getting Started Is the Key to Achieving Your Goals

If you simply stash your hard-earned cash in a savings account, you’re probably not earning much interest. Even if you’re paying down student loan debt, try to put at least a few hundred dollars a month toward building an investment portfolio to help you reach goals like retirement and buying your first home.

The earlier you start, the longer your money has to grow and the easier it will be to succeed. See how you stack up and if you are on track with SoFi’s retirement calculator.

Shop around for an advisor who understands you and your goals, and can help you make a plan to get you there.

If you’re ready to get a jump on generating cash for the long term, learn more about how SoFi can help.

SoFi can’t guarantee future financial performance. This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
SoFi doesn’t provide tax or legal advice. Individual circumstances are unique. Consult with a qualified tax advisor or attorney.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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