When Can You Withdraw From Your 401(k)?

You’ve been diligently contributing to your 401(k), receiving matching contributions from your employer, but now you may be wondering when you can withdraw from the account.

Because 401(k) plans are heavily regulated, there are restrictions on when you can start taking money out. We’ve compiled what you might need to know about 401(k) withdrawal and how to decide if and when it could be a good idea for you.

What Are 401(k) Plans?

At its most simple, a 401(k) plan is an employer-sponsored retirement savings account to which both you and your employer can contribute. Usually, you designate a certain amount from each paycheck to be transferred directly into your 401(k) account before it is taxed.

Many employers offer a matching contribution, which means that they will also contribute to your 401(k) retirement plan up to a certain amount (usually a percentage of your income).

This might give you an incentive to save for retirement because the only way to get the matching funds from your employer is to put in your own contribution. When you save with a 401(k) plan, your money is only taxed when you withdraw it from your account.

When Can I Withdraw From a 401(k)?

Because 401(k) accounts are intended to help you save for retirement, there are restrictions on when you can withdraw money. Generally, you can start to withdraw money from your 401(k) without penalties when you reach the age of 59½.

If you need to withdraw money from your 401(k) before you reach the age limit, you may face penalty fees for taking your money out early. However, there are limited circumstances in which you can reach into your 401(k) account before 59½.

Your specific 401(k) plan description should state clearly when your plan allows disbursements and if the plan allows 401(k) loans, hardship distributions, or cashing out your 401(k).

401(k) Loans

Some, but not all, 401(k) plans offer loans paid out from the money you have saved in your retirement account. If you fulfill the terms of the loan and pay the money back into your 401(k) account, the money won’t be subject to additional taxes.

The IRS caps the amount you can borrow from an eligible plan at either $50,000 or half of the amount you have saved in your 401(k), whichever is less. This means that you won’t be able to borrow all the money you’ve saved for retirement with a 401(k) loan.

One important thing to know about 401(k) loans is that you’ll likely have to pay an interest rate that’s one or two points higher than the prime rate—you won’t get a great interest rate just because you’re borrowing from your own retirement money.

Additionally, almost all 401(k) loans only have a five-year repayment plan, but if you use your 401(k) loan to buy a primary residence, you may be allowed more time to repay the loan.

401(k) Hardship Withdrawals

In addition to 401(k) loans, some plans allow for hardship withdrawals or distributions. If your 401(k) plan offers hardship distributions, it must clearly lay out the specific criteria required for borrowers to make a withdrawal.

Generally, a hardship distribution must be on account of an “immediate and heavy financial need” of the employee owning the 401(k) plan or that person’s spouse or dependents. The amount disbursed can only be what is necessary to meet the need.

The IRS has designated certain situations that qualify, including some medical expenses, buying a principal residence, tuition and educational expenses, preventing eviction or foreclosure on your primary residence, funeral costs, and some expenses related to repairing damage to a principal place of residence.

Although the IRS has found these circumstances to constitute “immediate and heavy financial need,” specific 401(k) plans may not allow hardship distributions in all of those situations.

Plans may limit their hardship distributions to only medical expenses or to prevent eviction or foreclosure. And of course, if you have other ways to meet your financial need, you may not qualify for a hardship distribution.

Generally, hardship distributions can’t be more than the elective contributions you’ve made to your 401(k) account minus any previous distributions you may have received. The specific amounts that are eligible for hardship distributions will be governed by the terms of your plan.

If you take a hardship distribution, you may be barred from putting contributions back into your 401(k) account for six months .

Additionally, hardship distributions may be included in your gross income at tax time, which could affect your tax bill. And if you’re taking a hardship distribution because you’re not yet 59½, your distribution may be subject to an additional 10% tax penalty based on early withdrawal.

Finally, unlike 401(k) loans, you don’t pay hardship withdrawals back. This means that your retirement funds are permanently reduced by the amount you withdraw.

Cashing Out Your 401(k)

If you no longer work at the company that sponsored your 401(k) plan, you may be able to “cash out” all or a portion of your 401(k), but this option can come with some serious consequences.

Cashing out your old 401(k) means you close down the account and keep the funds, essentially converting your retirement savings into immediately usable money. While cashing out your 401(k), especially if you need the money now, might sound appealing, it can have some major downsides.

Perhaps the biggest downside is that cashing out your 401(k) before you reach 59½ is that the money will be subject to extra taxes. Normally, the money you put in a 401(k) is only taxed once, upon withdrawal during your retirement.

But if you pull the money out early, you not only will be subject to the ordinary income taxes that are triggered by the withdrawal, you will also be subject to a 10% penalty tax. That means that a significant portion of your 401(k) would go directly to the IRS.

Rolling Over Your 401(k)

Instead of cashing out your 401(k), you may choose to roll over your 401(k) into a different retirement account. Rolling over a 401(k) means you move the money from one retirement account to another, usually an IRA, which can help you avoid paying the penalty tax that comes with an early cash-out.

Rolling over your 401(k) could help you continue to save for retirement while avoiding fees—and reduce the number of retirement accounts you have open if you’ve left a 401(k) at a previous job.

SoFi Invest is one easy way to rollover your 401(k) into an IRA. Take control and save for retirement with SoFi’s active or automated Traditional, Roth, and SEP IRAs. Plus, you can access real human advisors who can help you decide what to do with that 401(k) from your old job.

Ready to roll over that 401(k)? Learn more about retirement investing with SoFi.


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

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Important Retirement Contribution Limits

By saving and investing for retirement, you are working toward financial freedom—a goal worthy of your time and effort.
As you may know, there are benefits to using an account designed specifically for retirement, such as a 401(k) plan or Roth IRA.

What benefits, you ask? First, some company retirement programs may offer a match program. Second, these accounts are designed to hold investments so that you can earn compound returns.

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

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

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

What Are Retirement Contribution Limits?

Ever heard someone say that they have “maxed out” their retirement account? Maxing out means contributing the total amount allowed by the IRS in a given year. In some cases, you may be able to contribute more than the allowable maximum, but that money will not qualify for the tax advantages of the money within the retirement contribution limit.

Generally, the IRS increases retirement contribution limits every few years as the cost of living increases. The 2019 contribution limits were increased from the previous year.

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

Hopefully this list of the account types along with their contribution limits will help.

Note that if you have any questions about what type of account is best for you, or whether you can use multiple accounts concurrently, you may want to consult a tax professional.

401(k) Contribution Limits

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

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

Employee contribution limit: $19,000

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

Catch-up contribution limit: $6,000 (for a total of $25,000 in employee contributions)

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

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

Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $56,000—if the employee is eligible for catch-up contributions, then it would be $62,000.

403(b) Contribution Limits

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

Employee contribution limit: $19,000

Catch-up contribution limit: $6,000 for employees 50 and older, and potentially another $3,000 for employees of any age who have been in service for 15 or more years. There is a $15,000 lifetime limit for the latter catch-up provision. It may be possible to qualify for both catch-up provisions; if you think you qualify, check with the plan or your CPA to be sure.

Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $56,000—if the employee is eligible for catch-up contributions, then it would be $62,000. It is important to keep in mind that some 403(b) plans have mandatory employee contributions. These mandatory contributions are made by the employee, but since you do not have a choice do not count towards the $19,000 limit described above. If you are part of a plan like this you might actually be able to contribute $19,000 plus the mandatory contributions.

457(b) Contribution Limits

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

Total employer plus employee contribution: $19,000

Catch-up contribution limit: If permitted by the plan, a participant who is within three years of the normal retirement age may contribute the lesser of twice the annual limit ($38,000 in 2019) or the basic annual limit ($19,000) plus the amount of the limit not used in prior years.

Thrift Savings Plan (TSP) Contribution Limits

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

Employee contribution limit: $19,000

Tax-free combat zone contributions: Military members serving in tax-free combat zones are allowed to make the full $56,000 in employee contributions.

Catch-up contribution limit: $6,000 (for a total of $25,000 in employee contributions)

Total employer plus employee contribution: The lesser of 100% of the employee’s compensation or $56,000—if the employee is eligible for catch-up contributions, then it would be $62,000.

Traditional IRA Contribution Limits

The traditional IRA is a tax-deferred account that is set up by the individual. IRA stands for individual retirement account. Unlike workplace retirement plans, IRA accounts tend to have lower contribution limits. These contribution limits are combined totals for both your traditional and Roth IRAs.

Contribution limit: $6,000

Catch-up contribution limit: $1,000 (for a total of $7,000) for those age 50 or over

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

Prepare for retirement with a Traditional,
Roth, or SEP IRA managed by SoFi.


Roth IRA Contribution Limits

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

Unlike tax-deferred retirement accounts, Roth IRA contributions are not tax deductible. The trade-off is that you will not need to pay income taxes on qualified withdrawals. Again, these contribution limits are combined totals for both your traditional and Roth IRAs.

Contribution limit: $6,000

Catch-up contribution limit: $1,000 (for a total of $7,000)

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

Single-filer income limit: $122,000 phasing out until $137,000

Married, filing jointly income limit: $193,000 phasing out until $203,000

SEP IRA Contribution Limits

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

Contribution limit: For 2019, contributions an employer can make to employee’s SEP IRA can’t exceed the lesser of 25% of the employee’s compensation or $56,000.

Catch-up contributions are not permitted in SEP plans.

SIMPLE IRA

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

Employee contribution limit: $13,000

Catch-up contribution limit: $3,000 for savers age 50 and older

Employer contribution limit: The employer is generally required to make a 100% match for each employee’s contributions up to 3% of the employee’s compensation. In certain circumstances, an employer may choose to make a matching contribution of less than 3%.

Maxing Out Your Retirement Contributions

Now that you know how much you can contribute to an account, you may be wondering how one actually goes about contributing the full amount.

For some people, it may help to understand the monthly dollar figure necessary to max out your annual retirement plan contributions. If you have a 401(k), you would need to contribute $1,583.33 each month to reach the $19,000 limit. With IRAs, that number is $500 per month to reach the annual $6,000 contribution limit.

A bit of good news: When you are making pre-tax contributions to a tax-deferred account such as a 401(k), the money is entering into the account before income tax deductions. Therefore, the difference in your post-tax paycheck might not be as drastic as you think.

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

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

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

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

Opening Your Own Retirement Account

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

Ease of use shouldn’t be discounted; the most important characteristic of a retirement plan is that you actually use it.

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

Another way to save for retirement is through a general investment account, like SoFi Invest. With SoFi Invest, you can either make trades on your own through active investing or you can use an automated investing service which invests your money on your behalf using your goals as a guide.

No matter which path you take, you can be assured that there are no hidden fees and no transaction costs for buying and selling stocks and exchange-traded funds.

And all SoFi Invest® members have access to financial advisors who can help answer your questions. However, for tax-specific questions, such as whether you can use multiple retirement accounts at once, you may want to consult a certified tax professional.

Get started with SoFi Invest.


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.

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The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

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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”).

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How to Become a Millionaire

Do you often find yourself dreaming about what you would do if you were a millionaire? Maybe you fantasize about retiring early and traveling the world. Or maybe what excites you is being able to donate to a bunch of causes you care about.

No matter how you would spend your dough if you joined the ranks of young millionaires, you might suspect the only way you’ll ever be that rich is if you win the lottery.

But the road to wealth isn’t that narrow—there are many ways to become a millionaire. Sure, winning the lottery would make it simpler, but some middle-class workers retire with over a million dollars in savings because they made good financial decisions and have luck on their side.

Others may have started businesses that brought them success, advanced their careers so that they made enough to save seven figures, or made smart and successful investments.

Though there are no guarantees, here are some ideas that could help put you on the path toward becoming a millionaire:

Getting a Good Job and Increasing Your Income

You can’t join the ranks of the young millionaires if you’re not bringing in more money than you need for your basic necessities. But getting a good job and increasing your income isn’t always as easy as it sounds.

If you haven’t gone to college yet, going could increase your potential income. You could also go back to college for a master’s degree or even a doctorate to up your earning potential, or take on a side hustle.

If you don’t want to get more schooling or spend your nights and weekends hustling, you could look at people who have your degree who have become very successful.

Maybe they’ve figured out how to use it in unexpected ways or maybe they’re great at chasing opportunities for professional advancement. You could invite them out for coffee to learn from them!

Another way to potentially increase your income could be to start your own business. While starting a business is risky , since 20% of businesses fail in their first year and 50% fail by their fifth year, if you’re able to find the right product for your market, then you could potentially make a lot of money.

That’s how some young millionaires made their first millions—people like Grant Sabatier, who made his money by founding Millennial Money , said in an interview with Money Magazine that you need to keep searching until you find something to do that, “you like the most that makes you the most money.”

Eliminating Debt

One thing that could be holding you back from becoming a millionaire is debt—especially if that debt is “bad debt,” a term often used for high-interest debt. Eliminating your debt could be key because it’s difficult to build wealth if you’re paying a significant portion of your income toward interest.

That’s what billionaire Mark Cuban does. He’s said in the past that, “if you’ve got $25,000, $50,000, $100,000, you’re better off paying off any debt you have because that’s a guaranteed return.”

Paying off debt could help free up money to invest and help you build wealth. One way to pay off debt is the debt avalanche method, which suggests paying off the debts with the highest interest rates first and then focusing on debts with the next highest interest rates (while still making minimum payments on all of the debt, of course). A financial tracking program is just one method that could help you plan ways to pay off debt.

Eliminating debt isn’t just about paying off existing debt, it’s also about reducing the chances of going into debt in the future. Part of a debt payoff strategy could involve reducing spending so that, for example, you don’t need to rely on credit—or by setting a strict budget and paying with cash whenever possible.

You also might want to create an emergency fund by setting aside a certain amount every month so that if you have a financial setback, you don’t have to go into credit card debt.

Get started investing with as
little as $1 with SoFi Invest®.


Cutting Overspending and Saving Your Money

Getting control of your spending is critical to building wealth. One way to potentially become a millionaire is to save aggressively.

That doesn’t mean that you have to cut back on everything that gives you pleasure, but you could consider the happiness return on investment you get from the money that you spend. How big of an apartment or home do you truly need to be happy? What kind of car do you need? Do you need to buy a coffee every morning?

You could find ways to cut back on the things that don’t matter so much, but not skimping to the point that you miss out on things you love. For example, maybe you need your morning latte, but you can do without spin classes.

Or maybe coffee shop beverages can fall to the wayside, but you can’t get by without the fun of weekly Zumba. Also, you could focus on cutting back on big expenses instead of those that won’t have a huge impact on your budget.

For example, dining out only once a month, adjusting your thermostat higher or lower depending on the season, or finding a cheaper, smaller home to save a significant amount of money.

While cutting back can be hard, Sebatier told Money Magazine that it’s all about how you look at it. “You have to cut back, but you should view saving as an opportunity, not a sacrifice.”

One way to stay on top of managing your money is to create a debt reduction plan.

Making Smart Investments

When it comes to how to become a millionaire, getting your money to work for you is a common refrain. But investing is not a get rich quick scheme. Just as billionaire and investing wunderkind Warren Buffett says, “Successful investing takes time, discipline, and patience.”

Investing your money can seem complicated since there are so many ways you could invest your cash, but there are a few rules to know that could help you improve your chances of becoming a millionaire.

First, compound interest can make all the difference. Compound interest is what happens when the interest you earn on your investments starts earning interest.

The more time your money has to compound, the more it will grow. That’s why some save aggressively starting when they’re young.

Saving $100,000 by the time you’re 30 might not be possible for everyone, but the more you save when you’re young, the greater impact it could have on your net worth.

There are other ways to become a millionaire. Another option to help you on the road to $1 million could be to reduce the amount you spend on investment fees. High investment fees can have a big impact on your returns, so you might want to look into low-fee investments. If you’re new to investing a robo-advisor might be the right fit for you and could cost you no management fees.

Finally, you might want to make sure that you invest in a way that’s right for you throughout your life—which could mean investing more aggressively when you’re younger and gradually becoming more conservative in your investments as you age.

Ready to Get Started Investing?

Everyone might dream of becoming a millionaire, but that doesn’t mean it’s always possible. Becoming a young millionaire might involve a lot of sacrifices and luck—especially if you aren’t getting help from family members with deep pockets.

But becoming wealthy is still possible if you didn’t grow up with a silver spoon. You could start with these tips and see how far they take you on your path to being a young millionaire.

You can start investing your money with SoFi Invest. You can do it yourself by choosing stocks, ETFs, and crypto, or let SoFi build a portfolio for you with automated investing.

Ready to get started? Start with as little as $1!


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

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How to Save for Retirement if You Don’t Have a 401(k)

Many people start saving for retirement when they have access to a plan through an employer, such as a 401(k) or 403(b). It’s recommended to take advantage of that opportunity, especially because these accounts offer serious tax benefits that can boost your ability to save, and your company may offer to match a share of contributions, which is essentially free money.

But what if you don’t have access to those benefits? Perhaps your employer doesn’t offer them, you don’t qualify based on part-time or contract status, or you’re self-employed.

Guess what? That’s no excuse to not save for retirement. Understandably, it can seem daunting to figure out which retirement account may best suit your needs on your own. But there are great options out there for you—including traditional, Roth, and SEP IRAs—and they’re not as hard to use as you might think.
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What Is an Employer-Sponsored Retirement Account?

Employer-sponsored retirement accounts, such as 401(k)s and 403(b)s, are retirement savings vehicles. Employers usually offer them to full-time employees as part of a compensation package. Among private sector employees, 401(k)s are the most common options, whereas only public employees and certain nonprofit employees receive 403(b)s.

Employees can make elective contributions to these accounts, and can potentially save a lot of money each year. For example, in 2020 , employees can contribute up to $19,500 each year to their 401(k), and employers may provide matching contributions. Overall contributions cannot exceed $57,000.

Contributions to 401(k)s are made with pre-tax dollars, which can lower your taxable income and income tax bill. Those contributions then grow tax-deferred inside the account, and you pay income tax when you make withdrawals.

Employer-sponsored accounts like these are powerful tools for savings. But here’s the rub: Not everyone has access to them. However, that doesn’t mean you can’t or shouldn’t save in a retirement account anyway.

Saving for Retirement Even If You Don’t Have a 401(K)

Planning for retirement is critical, especially as the Social Security system stands on precarious footing and pensions are becoming extinct in many fields. And building your nest egg is likely to be the most ambitious financial goal of your life. That’s why it’s helpful to start saving as soon as you can and to find ways to boost your savings.

In many cases, it’s a good idea to make sure your retirement savings are on track before saving for your children’s college education, or even aggressively paying down your own student debt depending on the terms. After all, while you can borrow money to pay for education, you likely cannot borrow to pay for your retirement.

A key reason to start early is the power of compounding. Your investment returns can be reinvested and start earning returns, which may help your savings grow much faster than they otherwise could. The sooner you start investing, the longer you have to take advantage of compounding growth.

What’s more, if you save inside of a tax-advantaged account, such as an IRA, returns inside the account aren’t subject to taxes and can grow even faster. Anything you put in now has the opportunity to grow over time, just keep in mind that all investing comes with risk of loss.

Why Open a Retirement Account?

Before we get into the types of retirement accounts to consider, you may be wondering: Why open a retirement account in the first place? Maybe you’re already saving for retirement, but you’re keeping the money in a checking or savings account instead.

You’ve got the right idea by putting money away. But, if you’re leaving your savings in cash, that money is likely barely keeping up with inflation—or worse, losing relative value over time. It could be challenging to reach your retirement goals without investing the funds, which does come with risk but can possibly provide much higher returns over time.

You may also be saving in a brokerage account, which allows you to invest and potentially grow your savings faster than in a bank account. However, the government really wants you to save for retirement.

So they sweeten the deal by allowing retirement accounts that provide the potential benefits of investing while offering some tax advantages. If someone’s only saving through a brokerage account or bank accounts, they’re losing out on these valuable tax benefits.

Funding a Traditional IRA

An Individual Retirement Account, or IRA, is a savings tool that provides individuals with tax-advantaged savings opportunities. There are a few different types of IRAs.

The first one you may consider is a traditional IRA. These accounts allow you to contribute up to $6,000 a year in 2020, or $7,000 if you’re age 50 or older.

You make contributions with pre-tax dollars. The contributions are tax-deductible and may lower your taxable income for the year they are applied.. Once inside the account, your contributions can be invested in a variety of ways and grow tax-deferred.

This is where compounding interest potentially really starts to shine. You don’t pay any taxes on your earnings until you withdraw them from the account.

You can make withdrawals starting at age 59 1/2. Any withdrawals you make before then may be subject to income taxes and an additional 10% early withdrawal penalty.

Traditional IRAs require that you take distributions, known as required minimum distributions (RMDs) by age 70 1/2.

Funding a Roth IRA

Another common IRA you may encounter is the Roth IRA. Some of its features overlap with the traditional IRA, but the key difference lies in when your contributions are taxed.

As with a traditional IRA, in 2020, you can contribute up to $6,000 a year in a Roth with an additional $1,000 a year in catch-up contributions if you’re age 50 or older. Unlike traditional IRAs, you must fall within certain income limits to make contributions to a Roth. If you make too much money, the amount you are allowed to contribute begins to phase out.

Contributions to Roths are made with after-tax dollars. They are not deductible so they don’t lower your taxable income in the year you make the contribution. Once invested inside the account, your investments can grow tax-free.

However, if you withdraw earnings, you can only do so penalty free at age 59 1/2. Additionally, distributions (earnings) may be subject to a 10% penalty if you withdraw them before five years have passed (based on the first taxable year the contribution was made). This is known as the 5-Year Rule.

Roth IRAs are not subject to required minimum distributions (RMDs).

Funding a SEP IRA

If you’re self-employed, you may want to consider a Simplified Employee Pension, or SEP IRA. This type of account potentially allows you to sock away much more money than a traditional or Roth IRA. In a way, SEPs are the self-employed person’s answer to the savings power of the 401(k) due to their higher contribution limits.

SEPs essentially allow you to treat yourself as your own employer. You can make contributions of up to 25% of your net earnings from self-employed work up to $57,000 a year in 2019.

A SEP IRA is a type of traditional IRA, so aside from the different contribution limits, it otherwise follows the same investment and distribution rules. Contributions are tax deductible, they grow inside the account tax deferred. You only pay income tax when you make withdrawals from the account, and early withdrawals before age 59 1/2 are subject to income tax and a 10% penalty.

Additionally, it’s important to keep in mind that the 5-Year Rule applies here as well.

What Type of Account Is Right for You?

The type of retirement account you choose to open will depend largely on your needs.

Generally speaking, if you owe a lot of taxes now and want to lower your taxable income, you may choose a traditional IRA. You may also choose a traditional IRA if you think your taxes will be higher now than they will be when you retire.

You might go with a Roth IRA if you already tend to owe very little in taxes and you think that you might owe more in taxes when you retire than you do now. For example, if you’re just starting your career and you’re in a low tax bracket, you might consider funding a Roth assuming that when you’re older you’ll be better established financially and in a higher tax bracket. It is recommended that you consult with your tax advisor.

If you’re a freelancer, have an independent side hustle, or otherwise work for yourself, you can open a SEP IRA. Like a traditional IRA, a SEP IRA can help you reduce what you owe in taxes today.

Maintaining a Mix of Retirement Accounts

You aren’t limited to only one type of retirement account. To a certain extent you can mix and match them, which can even be a beneficial strategy to take.

You can fund both a traditional and Roth IRA, though combined contributions cannot exceed the $6,000 contribution limit, or $7,000 for those age 50 and older. Funding both types of account can give you some flexibility in terms of the taxability of your retirement income.

You can also have an IRA at the same time you have a 401(k). If you already have a 401(k) left over from a previous job you can open an IRA. Sometimes an older 401(k) can stick you with higher maintenance fees or limit your investment options. In that case, you may consider a rollover of your 401(k) into an IRA of your own choice.

If you get a job that offers you an employer-sponsored plan, you can keep your IRA(s) and start funding your workplace plan at the same time, allowing you to save even more for your retirement. Contribution limits for IRAs do not have an effect on contribution limits for your 401(k).

Ways to Open a Retirement Account

Once you’ve decided which retirement account is right for you (which you can do with the help of SoFi’s IRA calculator, opening one is relatively easy. Brick and mortar banks, brokerage firms, and online financial institutions may all offer IRAs. It’s worth doing your research to make a decision on the best fit.

After setting up an IRA account, you’ll make your first contribution. From there, if you have a lot of time before retiring, you might choose to invest your contributions and take advantage of growth.

Overall, although it may seem intimidating at first, setting up an IRA is relatively easy—and saving for retirement isn’t only for those with access to a 401(k).

SoFi Invest® makes opening an IRA easy. Sign up for an investment account online, in less than five minutes. We can help you pick an appropriate mix based on your age and retirement goals. And if you have any questions or want personalized advice, you can set up a complimentary call with a SoFi Invest advisor.


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

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Estate Planning 101: The Basics of Estate Planning

Before we begin, we just wanted to let you know that the following article is meant for general informational purposes. For questions regarding estate planning and any related topics, please consult a legal professional.

You may have heard the old expression, “you can’t take it with you.” The “it” that you’d most likely like to leave behind requires a plan. When you pass, you can’t bring along your bank accounts, property, and investments.

So who gets your wealth? Have you thought about who will receive your assets and how your loved ones will be taken care of when you are gone? The process of putting together these specific directions is called estate planning.

Immediate Advantages of Estate Planning

Many younger people assume that estate planning is only for the old and the rich, but estate planning can be addressed at any time and in any tax bracket.

In fact, estate planning is not only about passing on your assets when you die, rather it includes what directions you would want to provide to loved ones, or who would take care of your children if you are a parent.

You can make changes to your estate plan along the way, as your life situation changes.

Even more important, estate planning is a way to start thinking through these decisions and put them down in writing to communicate to others. Rather than simply assuming that your loved ones would know what you want, you have the opportunity to get rid of potential ambiguity and arguments by defining your wishes.

What Is an Estate?

In the simplest terms, an estate is everything you own—money and assets, including your home and your car—at the time of your death. When you decide, in advance and in writing, who will get your assets and money, that’s estate planning.

Your heirs are the people who will receive your money and assets after you’re gone. The act of giving these things to your heirs is called asset distribution.

Your debts are also part of your estate—anything you owe on credit cards and loans may have to be paid off first by your estate before any further money or assets are distributed to your heirs.

Estate planning is not entirely about money. It may also leave instructions for how your incapacitation or death may be handled. For instance, you may not want to be kept on a life-support system if you were in a coma. You may want to be cremated instead of buried. These instructions can be included in your estate planning.

Creating an Estate Plan

Many people struggle with the idea of where to start, or simply do not think they need to have a plan. The simple fact is that estate planning will be different depending on your lifestage. Here is a rough idea of what you might want to explore based on your lifestage (don’t worry if you are not familiar with the documents listed, we will explain those later):

•   Are you single without any dependents? You may want to explore a durable power of attorney, letter of instruction, and defining beneficiary designations on your accounts.

•   Are you married without any dependents? You may want to explore a durable power of attorney, letter of instruction, living will, healthcare power of attorney, and defining beneficiary designations.

•   Do you have dependents? You may want to explore a durable power of attorney, letter of instruction, living will, healthcare power of attorney, will, and defining beneficiary designations.

Now that we’ve talked about what you might want to consider when developing your estate plan, let’s summarize what each of those documents does:

•   A durable power of attorney: This is a legal document in which you name another person to act on your behalf if you are unable to do so. You can grant limited or broad power to that person. Some examples include being able to pay your bills or make decisions about your investments.

•   A letter of instruction: This is a document that can help organize the logistics of your estate plan and give you an opportunity to provide a personalized message to your loved ones. This document could be used by your loved one to understand your wishes and easily access everything you own and owe.

•   A living will: This is a document that expresses your intentions regarding life-sustaining measures. It is important to understand that this expresses what you want but does not give anyone the authority to speak for you, which is why it’s normally accompanied by a healthcare power of attorney.

•   A healthcare power of attorney: This is a document that authorizes someone to make medical decisions for you in the event that you are unable to make them for yourself.

•   A will: This is a document that provides instructions for distributing your assets upon your death. There are additional provisions that could be added and details your attorney can work through, but for parents, this is also where they might designate a guardian.

•   Beneficiary designations: Beneficiary designations are made on accounts and insurance policies to establish who gets the account when you pass away. You may want to review these and make sure they align with your overall intentions and are updated as your life changes.

Asking Yourself the Following Questions Before Estate Planning

•   Who is the executor? Be sure it’s someone you can trust with your life. Literally.
•   Who will receive my assets? In most cases it’s children or next of kin, but you can leave your assets to anyone or anything, including charities.
•   Who gains custody of my children? Basically, who are your children’s godparents? Who is responsible for and worthy of raising your children if you are no longer there?

Partnering Up With an Attorney or Tax Professional

You might want to educate yourself all you can and make sure a professional has your back and can help you navigate the choppy waters of estate planning. A professional might help you create the documents that can make your estate official and advise you on how taxes may affect your plan.

Ultimately, you will have the final say on how you want your estate to be managed and executed, but a professional could help you arrive at educated, rational, and sensible decisions. They could also help communicate your objectives so that mistakes and miscommunications can be avoided.

They may even be able to help you plan your estate so that you can pay taxes correctly and possible pay even less in taxes than you may have done on your own.

An estate professional will more than likely charge you a fee, but the cost of having expert help may ultimately save you thousands of dollars in costs, legal and otherwise, if you make a mistake.

Getting Started on Your Estate Planning

Need some more tips to hash this out? That’s not uncommon. Estate planning is not as basic as it looks.

And if you’re just starting out, it may help to figure out a way to grow your assets so that when you do leave something behind, it could be significant and useful. Maybe even life-changing.

You could talk to a SoFi financial planner about how to get started on your financial journey. A professional can walk you through some of the initial steps of starting a financial plan, with your future goals in mind.

Work with SoFi Financial Planners to help create an effective plan for the long term.


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.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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.

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