The 7 Most Common Questions About IRAs

The 7 Most Common Questions About IRAs

An individual retirement account (IRA) can be an important part of retirement investing. But before investors save money in this type of plan, it makes sense to know the basics about who it’s for, how it can help, and which type of IRA is right for you.

This article will cover the seven most common questions people have about IRAs to help you decide whether it’s a good retirement investment vehicle for you.

1. How is an IRA different from a 401(k)?

Both IRAs and 401(k)s are tax-advantaged ways to grow money for retirement, but whereas a 401(k) is an employer-sponsored plan that is offered through a person’s job, an IRA is an account you can open on your own.

Benefits of 401(k)

On the one hand, a 401(k) can be beneficial to people who want to “set it and forget it”—and have money deducted automatically from their paycheck into their retirement account, without worrying about making payments.

Additionally, the maximum allowed yearly contributions to a 401(k) are larger than that of an IRA. For 2021, employees can contribute up to $19,500 to their 401(k), with an additional $6,500 in catch-up contributions if they’re over age 50. Employers can also contribute “matching” funds to your account, for a total of $58,000 (or $64,500 including catch-up contributions) per year.

Benefits of an IRA

For people who may have money that’s currently sitting in a checking, savings, or investment account, an IRA might be a good place for it to grow and help prepare you for your future.

An IRA can also be good for people who are not offered a 401(k) plan through their employer. IRA contribution limits are less—$6,000 per year as of 2021, with an additional $1000 in catch-up contributions for people over age 50.

The bottom line, however, is that you don’t need to choose between these two different retirement plans. If you have access to an employer-sponsored 401(k), it’s often a good idea to contribute as much as possible, then supplement with an IRA if desired.

Recommended: How to save for retirement if you don’t have an employer-sponsored 401(k)

2. Traditional vs. Roth: How do they work?

The two most common types of IRAs are traditional and Roth. (There are other kinds, like SEP and SIMPLE IRAs, but those are geared toward people who are self-employed or running small businesses. If that applies to you, read more about SEP IRAs.)

The biggest difference in a traditional vs. Roth IRA is when your money is taxed. With a traditional IRA, you get a tax deduction when you contribute money—so the money going into your account is tax free, and when you withdraw it in retirement, it will be taxed.

With a Roth IRA, you don’t get a tax deduction when you contribute but your money grows tax-free—meaning that when you withdraw it in retirement, you won’t pay taxes on the withdrawals. While that may be appealing to some people, it’s worth noting that Roth IRAs have restrictions around income when it comes to opening an account. In 2021 individuals must make below $125,000 (people earning more than $125,000 but less than $140,000 can contribute a reduced amount); for married people who file taxes jointly, the limit is $198,000 (or up to $208,000 to contribute a reduced amount).

Recommended: Rolling over your 401(k) is a pain—here’s why it’s still worth doing

3. Which IRA type is best for me?

While everyone’s situation is different, and only you can determine which kind of IRA is best for you, there are a few things to consider. If you have money sitting in a 401(k) from an old job, you might choose to roll that money over into an IRA (some employers will also let you roll over an old 401(k) into your current plan). Even if your employer previously paid the 401(k) fees, many stop doing that and pass them on to you when you leave. Plus, companies can merge or go out of business, and if that happens it may be more difficult to roll over your money.

Since the contribution limits are the same for both a traditional and Roth IRA, neither offers an advantage in that regard. So if you do qualify for both, one way to figure out whether a traditional or a Roth IRA is best for you is to think about your current tax bracket and what tax bracket you’re likely to be in when you retire.

If you don’t expect to earn any passive income in retirement (for example, from investments or rental income) and will thus be in a low tax bracket, you may want to take the tax deduction today and open a traditional IRA. If, on the other hand, you’re currently in a low tax bracket and expect to make more during retirement, you might opt for a Roth IRA.

Recommended: Traditional IRA or Roth IRA: Which one works for you?

4. How much should I put into an IRA?

Your goal generally should be to try to hit that maximum of $6,000 per year—or as close to that as your budget will allow. The important part is to make contributing a habit, and let the power of compound interest take over.

5. When should I make IRA contributions?

One simple way to fund your IRA is to set up an automatic contribution once a month that takes money from your checking or savings account and puts it directly into your IRA. Then, you never have to worry about forgetting to contribute, and you won’t miss (or spend) money that you never see. Use our IRA calculator to help determine which contributions you can make.

You don’t have to contribute monthly—the frequency is totally up to you, and many people contribute once annually, after they receive a year-end bonus, for example, or before the annual deadline of when taxes are due in April of the following year. (For tax year 2020, however, the deadline for contributions and filing has been extended to May 17, 2021.)

But consider this: the sooner you put money into the IRA, the more time it has in the market. Of course, investing isn’t without risk, but more time in the market means more time to (hopefully) grow.

6. Does everyone benefit from an IRA?

There are some potential drawbacks of an IRA for high earners. Here’s what to consider for each type of plan.

Traditional IRAs

Anyone earning an income can open a traditional IRA and contribute to it, but in some cases, traditional IRA contributions may not be considered tax-deductible. For instance, if you’re single and you’re covered by a workplace retirement plan like a 401(k), your traditional IRA tax deduction starts to become reduced when your modified adjusted gross income (MAGI)—your gross income minus what you put into your 401(k) and medical premiums—is $66,000 for 2021.

For married couples filing jointly, where the spouse who makes the traditional IRA contribution is covered by a workplace retirement plan, the deduction starts to go away when that person’s MAGI is $105,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction starts to phase out if the couple’s MAGI is $198,000.

Roth IRAs

As mentioned above, you can open a Roth IRA and contribute the maximum to it only if your income is below a certain level. For individuals who make more than $140,000 and married people who file taxes jointly and make more than $208,000, the Roth IRA is not an option.

If you fall into one of these categories, what should you do? If you or your spouse has a 401(k), one option is to start by maxing out that contribution each year.

7. How do I open an IRA?

An IRA can be an important part of an individual’s retirement investment strategy. Between traditional IRAs and Roth IRAs, it’s likely that you will find a plan that works with your timeline and goals.

Like so much else these days, opening an IRA can be done online. Though all the IRA rules are complicated, the process of opening one up with SoFi Invest® takes just a few minutes.

Find out how to get started with your retirement planning, with SoFi Invest.


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 . 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.


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When Can I Retire? This Formula Will Help You Know

Update: The deadline for making IRA contributions for tax year 2020 has been extended to May 17, 2021.

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 66 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.

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.

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.

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, opening an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is sign up, play the claw game, and find out how much you won.

Check out SoFi Invest today.


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 . 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Claw Promotion: For the full terms and conditions of SoFi’s Claw Promotion, click here. Probability of a customer receiving $1,000 is 0.028%.
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.
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When to Start Saving for Retirement

When to Start Saving for Retirement

If you ask any financial advisor when to start saving for retirement, their answer would likely be simple: Now.
It’s certainly not easy prioritizing investing for retirement. If you’re in your 20s or 30s, you might have student loans or other goals that seem more “immediate,” such as a down payment on a house or your kid’s tuition.

But setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age. Retirement may also be the single biggest expense in many peoples’ lives. Think about it: You may be living for 20 or more years with no active income.

Plus, while your parents or grandparents may have had a pension plan that kicked off right at the age of 65, that may not be the case for many workers in younger generations. Instead, the 401(k) model of retirement that’s more common these days requires employees to do their own saving.

To see where you are heading with your savings you could use a simple retirement savings calculator. But here are more basics on how to get started on your retirement savings strategy.

Different Types of Retirement Plans

Here are the most common types of retirement accounts and who can use them. This isn’t a comprehensive list of retirement accounts, so it might be a good idea to discuss retirement planning with a financial planner or accountant.

401(k) or Other Workplace Plans

A 401(k) is a workplace retirement account offered by employers. Typically, you contribute a portion of your paycheck, pre-tax.

One of the benefits of using your workplace’s retirement plan is that your company may offer a “match.” A match is when your company contributes to your account when you do. The current average employer match is 3.5%, according to the Bureau of Labor Statistics.

At the very least, you might want to contribute to take advantage of your match since it’s essentially free money. You don’t have to stop there though—in 2021, the IRS set the maximum 401k contribution limit to $19,500, with an additional $6,500 catch-up contribution allowed for those older than 50.

These accounts are tax-deferred, meaning you pay income taxes when withdrawing the savings in retirement. One of the many benefits of using a 401(k) or similar workplace plan is that it lowers your taxable income. For instance, if you’re making $85,000 and you’re contributing $10,000 annually to your 401(k), then you’ll only be taxed on $75,000 of that income.

One of the downsides to a 401(k) is that withdrawing these funds early could trigger a 10% tax penalty in addition to income taxes. Other workplace plans include SIMPLE IRAs, 403(b)s, 457 plans, and Thrift Savings Plans. If you’re self-employed, you could consider opening a Solo 401(k) or SEP IRA.

Recommended: SEP IRA vs. Simple IRA

Traditional IRAs

An Individual Retirement Account or IRA is another account you may use to save for retirement. Like a 401(k), a traditional IRA is tax-deferred and provides a place for your investments to grow free from capital gains tax.

Again, tax-deferred means that the money is taxed upon withdrawal at retirement. Therefore, a traditional IRA also carries a penalty for early withdrawal. An IRA is an investment account that is not tied to your workplace. That makes a traditional IRA an option for those that are self-employed or freelancers.

Unfortunately, traditional IRA accounts have a much lower contribution limit: $6,000 in 2021 if you’re younger than 50. Those 50 and older can contribute $7,000 annually.

Recommended: What is an IRA?

Roth IRAs

Like a traditional IRA, a Roth IRA is an account that you would open on your own, separate from your workplace. It’s also possible to contribute up to $6,000 into a Roth IRA each year, although how much is tied to your income. Here are the IRS rules for 2021: Roth IRA Contributions .

Both those covered by workplace retirement plans and those who are self-employed can contribute to a Roth IRA, although there are income limitations. In 2021, a single person earning under $140,000 can contribute to a Roth IRA. For married couples filing jointly, the modified adjusted gross income must be under $208,000.

Unlike a Traditional IRA and a 401(k), which are tax-deferred, a Roth IRA is tax-exempt. You pay income taxes on the money that is contributed to the account, but not when you withdraw the money. Even so, it should be a financial last resort to withdraw from a Roth IRA account.

Like all retirement accounts, Roth IRAs are also free of capital gains taxes, or the levies charged on money you earn from profitable investments.

Recommended: What Is the Current Capital Gains Tax Rate?

What Is a Wealth Management Account?

Like a 401(k) or an IRA, a wealth account is also an investment vehicle. But unlike an account designed specifically for retirement, these accounts do not have the same tax benefits.

You might consider using a wealth account if you want to invest for a goal other than retirement, or you’ve “maxed out” (contributed the maximum allowable amount to) your retirement accounts.

Because a wealth account does not have the tax benefits of a 401(k) or IRA, it also doesn’t come with the same early withdrawal penalties. Wealth accounts are often called “after-tax accounts” because you contribute and invest money you’ve already paid income taxes on—and you pay taxes on the capital gains when you withdraw your cash.

Just like checking and savings accounts at banks, these accounts can also have maintenance fees.

Investing for Retirement

Once money has been contributed to a retirement account, it’s time to invest that money. To say “saving for retirement” is a bit misleading—really, it can be considered to be “investing for retirement.” And you can invest within any of the above-mentioned accounts.

If you have a workplace plan, you may be given a list of mutual funds to choose from. To choose a fund, you might want to determine whether the underlying investment is appropriate given your goals and risk tolerance. The categories are usually stocks, bonds, domestic equities, foreign equities, or emerging-market stocks and bonds.

You may also want to consider the management fees of the fund, called the expense ratio. This is usually expressed as a percentage which is subtracted from the amount invested each year.

For those without a workplace plan, you might want to open a retirement account, fund the account with cash, and then invest the money. Investors can do this by signing up for a traditional brokerage account if they want to pick and choose investments themselves. They might also consider a robo-advisor, or computer generated investing services.

Recommended: Are Robo-Advisors Worth It?

The Takeaway

Investing in retirement and wealth accounts is a great way to jump-start saving and investing for your golden years, whether you invest $10,000 or just $100 to get started.

The first step is to open an account or use the one that’s already open. You could also increase your contribution. If you’re opening an account, you may want to consider one without fees, which cut directly into your bottom line.

SoFi Invest® offers retirement and wealth management accounts. You can also decide how you’d like to invest the money within the account. If you are comfortable picking out your own stocks and funds, SoFi Active Investing may be the service for you. The platform charges no commissions for trading stocks, ETFs or fractional shares.

For those looking for a more hands-off approach, SoFi Automated Investing will consider your goals, investing timeline, and risk tolerance to build you a diversified portfolio.

Get started with SoFi Invest today.


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 . 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
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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 2021—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 2021, that’s less than $208,000 adjusted gross income (AGI) for a person who is married filing jointly, and less than $140,000 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 2021, you can contribute $19,500 (or $26,000 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 $58,000.

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 $58,000 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 2021, the SEP IRA rules and limits are as follows: you can contribute up to $58,000 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 $290,000 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 $13,500 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 $19,500 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 $230,000 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. 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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.
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5 Steps to Investing in Your 401k Savings Account

Investing for retirement might seem daunting. With so many retirement plan options, and even more jargon that comes with the territory, it’s no wonder some people feel anxious when figuring out how to properly invest in their 401(k). Luckily, the first step is easy—signing up for a 401(k) retirement account through your employer is often as simple as filling out a form.

As for the rest? Investing in your 401(k) doesn’t have to be complicated. From understanding your investment options and choosing your portfolio, to common mistakes to avoid, this article breaks down how and when to invest for retirement.

What Is a 401(k) Plan?

A 401(k) is a type of tax-deferred retirement account sponsored by your employer. If you work for a non-profit, a school district, or the government instead of a company, your retirement plan might be a 403(b) or a 457(b) plan. All of these plans are employer-sponsored, meaning they pick the plan—and most of the information here applies to all three types of accounts.

You and your employer can both contribute to a 401(k). Many employers match employee contributions to some degree, and some may even contribute a portion of company profits to employees’ accounts (that’s known as a 401(k) profit-sharing plan).

Contributions are capped by the IRS : For 2021, the maximum amount an individual might contribute to a 401(k) is $19,500, with an additional $6,500 in catch-up contributions allowed for people over age 50. The total amount that might be contributed to a 401(k), including matching funds and other contributions from an employer, is $58,000 (or $64,500 for people over age 50).

5 Steps to Setting Up Your 401(k)

1. Set Up Your Contribution

Contributing is easy—just tell your payroll department how much to withhold from each paycheck. Traditional 401(k) contributions are not included in your taxable income when you put the money in; you will get taxed once you take that money out in retirement.

Some companies also offer a Roth 401(k) option, which is taxed in the opposite way—contributions are made with after-tax dollars, but plan holders don’t get taxed when they withdraw funds in retirement.

How Much Should You Contribute to Your 401(k)?

The more you save for retirement and the earlier your start saving, the better off you’ll likely be in retirement. If you’re lucky enough to have an employer that matches your contributions, at a minimum you’ll probably want to take full advantage of your employer match. (Different employers have different vesting schedules—meaning the length of time you need to work at the company in order to receive the full employer contributions. That’s information your plan administrator or HR representative should have available.)

Maximizing your 401(k) benefits you in the long run. 401(k) employer contributions vary, so it makes sense to find out how matching works at your company, and then contribute at least enough to get that “free money.”

2. Choose Roth or Traditional 401(k)

If your employer offers a Roth option (and some do not), one big question that will help you decide is: Do you want to be taxed now or taxed later?

With traditional 401(k)s, the money is taxed when you withdraw it in retirement. With a Roth, the money is taxed before you contribute it. So you’ll really want to consider whether you’ll likely be in a higher tax bracket when you retire than you are now.

If you’re early in your career trajectory with reasonable expectations that your salary will increase over time, you might want to consider a Roth, because the money will be taxed at the bracket you are now, not at the (presumably) much higher one you’ll be in when you retire.

On the other hand, if you’re in a high tax bracket now and have few deductions, but expect to have lower income in your later years, a tax-deferred contribution is one way to turn money you’d pay in taxes now into retirement savings.

3. Pick What to Invest In

A company’s plan dictates the investment choices available to employees. Most 401(k) plans offer a selection of mutual funds—but some offer only a few choices, while others may offer hundreds. Some also have the option of a stock brokerage account in which you might buy stocks, bonds, and exchange traded funds (ETFs), and there are even a few employers out there that allow you to buy company stock in your 401(k).

In considering how to invest your retirement money, it makes sense to ask yourself if you’re willing to take time to research investment options, monitor how your portfolio is performing, and make adjustments as economic and market conditions change. The answers to those questions will help you decide whether to be hands-on with your account, or to have your money managed either by a money manager or by investing in a target-date fund.

Self-Investing

If you’re willing to do the investing homework and don’t want to just stick your retirement savings in a fund and forget about it, then self-investing may be an option. Not all 401(k) plans offer this option, but some do let you buy individual stocks rather than mutual funds.

If you’re not sure how to get started with making your investments, consider looking at a target-date fund that matches your target retirement date. Then you might use their asset allocation strategy as a jumping off point for your own investments. After that, you might make up your own mix of assets from the plan’s available choices.

Managed-Money Investments

A money manager will charge you something for their service, usually a percentage of the amount they are managing. They will decide the right mix of funds based on your age and risk preferences. The exact cost and methodology varies from firm to firm, but for some people it is worth the cost.

Target-Date Funds

A target-date fund is a mutual fund with a passive mix of investments aimed at a “target” retirement date. The mix of assets (stocks and bonds) typically becomes more conservative as your target retirement date nears. For people who prefer a hands-off approach, these funds might be a good investment option.

Something to keep in mind is that you don’t necessarily have to pick the target date based on when you actually plan to retire. If you feel the mix of assets is too aggressive, you might choose to select an earlier retirement year to take less risk.

4. Determine Your Risk Tolerance

Every investment comes with risk. The key is assessing your comfort level with risk now, and going forward. Whether you’re picking a target date fund or making your own mix of investments, you’ll want to allocate your money based on your needs and risk tolerance.

One rule of thumb when it comes to retirement investments is that the younger you are, the more risk you might be able to handle. The thinking goes that you will have more time to recover from market drops to allow riskier investments to pay off.

On the other hand, people closer to retirement may choose to adjust their investments. There, the goal would be to minimize risk, so that the savings they will soon need would not be overly impacted by a market downturn.

5. Integrate Retirement Savings into Your Overall Investment Portfolio

Once you’re an experienced saver and have been investing for a while, it might be helpful to look across all your investment accounts, rather than thinking of your 401(k) in isolation. When you look at the full picture, you might balance your asset allocation across your whole portfolio and consider both the tax shelter a 401(k) provides and the investment choices available to you.

You may also choose to utilize the best fund choices in the plan that fit your asset allocation, and then flesh out the rest of your portfolio in non-401(k) accounts where you have more flexibility.

For example, even if an employer provides very limited choices, a typical 401(k) plan probably has an S&P 500 index fund. It’s also likely that your overall asset allocation calls for some portion in US Stocks. If that’s the best fund available, you might decide to use it as part of your US Stocks allocation.

To see if you are on track for retirement, use our retirement calculator.

3 Common 401(k) Investing Mistakes to Avoid

People tend to make two common mistakes with their 401(k)—and both have to do with diversification.

Investing Exclusively in Company Stock

Putting all your money in company stock, while also working at the company, is a potentially risky move. Worst case scenario, the company could go out of business—putting you out of a job and decimating your retirement savings. It’s widely considered to be too many eggs in one basket.

Even if you love your company and really believe in it, a safer idea may be to consider putting no more than five or 10% of your total assets in any company’s stock.

Putting Everything into a Money Market Fund

A money market fund is a mutual fund made up of relatively low-risk, short-term securities. It’s a tempting move, because it feels like you don’t risk losing money.

But inflation in the US is currently about 1.4% , and according to Business Insider , the national average yield for money market funds is about 0.07%. This means that any money invested in a money market fund is likely losing value after inflation. Your retirement savings need to grow, while there are no guarantees in stock or bond funds, with these return rates, money funds are likely not the answer.

Leaving Old 401(k)s Open

When you leave your current employer, it’s often a good idea to roll over your 401(k) into a traditional or Roth IRA. Most 401(k) accounts have fees associated with them. While typically an employer will pay those fees while you work for them, once you’re no longer with the company, many will stop paying them for you.

By moving your money into an account of your choosing, you have more control over the fees you pay. You’ll also generally have a broader range of investment choices.

The Takeaway

Investing in a 401(k) retirement savings account is fairly simple, especially since you can set it up through your employer. Whether you are typically a hands-on investor or prefer a hands-off approach, you can get your 401(k) contributions up and running—and start saving money for your future.

Some people choose to save for retirement in more than one investment vehicle. SoFi Invest® offers both traditional and Roth IRAs, which might help supplement your 401(k) retirement savings.

Find out more about saving for retirement with SoFi Invest.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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 . 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 pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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