Preparing for Retirement Archives | Page 10 of 29

Apr

2023

401(k) Hardship Withdrawals: What Are They and When Should You Use them?

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

A hardship withdrawal is the removal of funds from your 401(k) in response to a pressing and significant financial need. For people who find themselves in a financial bind where they need a large sum of money but don’t expect to be able to pay it back, a 401(k) hardship withdrawal may be an appropriate option.

But before making a withdrawal from a 401(k) retirement account, it’s important to understand the rules and potential drawbacks of this financial decision.

Who Is Eligible for a Hardship Withdrawal?

According to the IRS, an individual can make a hardship withdrawal if they have an “immediate and heavy financial need.”

However, not all 401(k) plans offer hardship withdrawals, so if you’re considering this option talk to your plan administrator — usually someone in an employer’s human resources or benefits department. Another way to get clarity on a particular 401(k) account is to call the number on a recent 401(k) statement and ask for help.

If a retirement plan does allow hardship withdrawals, typically you’ll be expected to present your case to your plan administrator, who will decide if it meets the criteria for hardship. If it does, the amount you are able to withdraw will be limited to the amount necessary to cover your immediate financial need.

In general, a hardship withdrawal should be considered a last resort. To qualify, a person must not have any other way to cover their immediate need, such as by getting reimbursement through insurance, liquidating assets, taking out a commercial loan, or stopping contributions to their retirement plan and redirecting that money.

What Qualifies as a Hardship?

You may be qualified for a hardship withdrawal if you need cash to meet one of the following conditions:

• Medical care expenses for you, your spouse, or your dependents.

• Costs related to the purchase of a primary residence, excluding mortgage payments. (Buying a second home or an investment property is not a valid reason for withdrawal.)

• Tuition and other related expenses, including educational fees and room and board for the next 12 months of postsecondary education. This rule applies to the individual, their spouse, and their children and other dependents.

• Payments needed to prevent eviction from a primary residence, or foreclosure on the mortgage of a primary residence.

• Certain expenses to repair damage to a principal residence.

• Funeral and burial expenses.

• In certain cases, damage to property or loss of income due to natural disasters.

How Do You Prove Hardship?

A 401(k) provider may need to see proof of hardship before they can determine eligibility for a hardship withdrawal.

Typically, they do not need to take a look at financial status and will accept a written statement representing your financial need. That said, an employer cannot rely on an employee’s representation of their need if the employer knows for a fact that the employee has other resources at their disposal that can cover the need. In this case, the employer may deny the hardship withdrawal.

It’s important to note that employees do not have to use alternative sources if doing so would increase the amount of their financial need. For example, say an employee is buying a primary residence. They do not need to take on loans if doing so would hinder their ability to acquire other financing necessary to purchase the house.

How Much Can You Withdraw?

The amount a person can withdraw from their 401(k) due to financial hardship is limited to the amount that is necessary to cover the immediate financial need. The total can include money to cover the taxes and any penalties on the withdrawal.

In the past, hardship distributions were limited by the amount of elective deferrals that employees had contributed to their 401(k). In other words, employees couldn’t withdraw money that had come from their employer, and they couldn’t withdraw earnings.

However, under recent reforms, employers may allow employees to withdraw elective deferrals, employer contributions, and earnings. Employers are not required to follow these rules though, so it’s important to ask your provider which money in your 401(k) you can draw on.

What Are the Penalties of 401(k) Hardship Withdrawals?

Taking a hardship withdrawal can be a costly endeavor. You will owe income tax on the amount you withdraw, unless you are withdrawing Roth contributions.

Since you’re in your working years, your income tax bill may be considerably more than if you were to withdraw the same money after you retire. In addition, anyone under the age of 59 ½ will also likely pay a 10% early withdrawal penalty.

The IRS provides a list of criteria that can exempt you from the 10% penalty, including if you are disabled or if you’re younger than 65 and the amount of your unreimbursed medical debt exceeds 10 % of your adjusted gross income.

It’s important to know that a hardship withdrawal cannot be repaid to the plan. That means that whatever money you remove from your retirement account online is gone forever — no longer earning returns or subject to the benefits of tax-advantaged growth. The withdrawn amount will not be available to you in your retirement years.

Should You Consider a 401(k) Loan Instead?

Borrowing from your 401(k) may be an alternative to a hardship withdrawal. The IRS limits the amount that an individual can borrow to 50% of their vested account balance or $50,000, whichever is less.

However, if your vested account balance is less than $10,000, you may borrow up to that amount. There’s a reason for this: Your vested balance is the amount of money that already belongs to you. Some employers require you to stay with them for a set period of time before making their contributions available to you.

A person typically has five years to repay a 401(k) loan and usually must make payments each quarter through a payroll deduction. If repayments are not made quarterly, the remaining balance may be treated as a distribution, subject to income tax and a 10% early-withdrawal penalty.

While you do have to pay interest on a 401(k) loan, the good news is you pay it to yourself.

There are some drawbacks to taking out a 401(k) loan. The money you take out of your account is no longer earning returns, and even though it will get repaid over time, it can set back your retirement savings. Loans that aren’t paid back on time are considered distributions and are subject to taxes and early withdrawal penalties for people younger than 59 ½.

The Takeaway

A 401(k) hardship withdrawal can be an important tool for individuals who have exhausted all other options to solve their financial problem. Before deciding to make a hardship withdrawal, it’s a good idea to carefully consider the potential drawbacks, including taxes, penalties, and the permanent hit to a retirement savings account.

It’s also important to know that money in a 401(k) account is protected from creditors and bankruptcy. For anyone considering bankruptcy, taking money out of a 401(k) plan might leave it vulnerable to creditors.

Other options may make more sense, such as working with creditors to come up with an affordable payment plan, or taking out a 401(k) loan, which allows an individual to replace the borrowed income so that their retirement savings can continue to grow when the loan is repaid.

Visit SoFi Invest® to learn more about setting and meeting your financial goals for retirement.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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

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Apr

2023

Can a Roth IRA Lose Money?

By Austin Kilham | Growing Wealth, Investing, Preparing for Retirement | Comments Off

It is possible to lose money when you invest in a traditional or Roth IRA (Individual Retirement Account), depending on what investments you choose for your Roth. All investments can lose money — including those within any type of retirement account.

That’s why it’s important to invest your Roth in assets that reflect your risk tolerance. If you invest mostly in stocks, you are at a higher risk for losses in your account. If you invest in less volatile assets (e.g. bond funds), you may be at a lower risk for losses.

Are Roth IRAs safe? No investment account is ever 100% safe, but because retirement accounts are generally long-term investments, they offer the possibility of growth over time. Also, the more years you invest in a traditional or Roth IRA, the more time that retirement account may have to recover from any losses.

Understanding IRAs

An IRA is a type of tax-advantaged account that may help individuals plan and save for retirement. IRAs can offer investors specific tax advantages that could be beneficial when compared with traditional brokerage accounts (which can be taxed as income).

There are also a few types of IRAs, with the most popular or well-known being the traditional IRA and Roth IRA account.

With a traditional IRA your contributions are pre-tax, meaning the amount you deposit in an IRA is deducted from your taxable income and is therefore not taxed until you withdraw the funds.

The key distinction is that contributions to Roth IRAs involve money that’s already been taxed, so it grows tax free, and withdrawals are also tax free. More on the differences between them below.

Can You Lose Money in a Roth IRA?

Now, to the main question: Can a Roth IRA lose money? The answer is yes, it can. This is one of the main differences between a Roth IRA vs. savings: Investing involves risk, whereas parking your money in the bank usually does not (with the exception of inflation risk).

There are several reasons that your Roth IRA may lose money.

Market Fluctuations

Given that the money in retirement accounts, including IRAs, is typically invested, the overall value of the account is subject to the whims of the market. That means that if the market experiences a downturn or correction, your Roth IRA balance is likely to decline as well.

That’s not a certainty, however, as IRAs are generally invested in a range of assets, not all of which may be affected by larger market conditions.

Early Withdrawal Penalties

Your Roth IRA can also lose money if you withdraw funds from it prematurely, and thus, are forced to pay early withdrawal penalties. Roth IRAs are complicated, however, in that your contributions can be withdrawn at any time. But you have to be careful with earnings.

If you withdraw earnings from your Roth IRA before age 59 ½ , you’ll likely be assessed a 10% penalty by the IRS.

Depending on the type of IRA you have, you may also need to pay ordinary income taxes, too.

You may want to consult a tax professional to make sure you understand Roth IRA rules that can trigger penalties.

Investing Late

It’s also possible to “lose money” in the sense that you miss out on market gains over time by investing in your Roth IRA too late. Time is an important factor in investing and saving for retirement, and if you start relatively young, time will work for you as the markets tend to rise over the years.

But if you’re about to hit retirement age and have only been investing in your Roth IRA for, say, a few years, you likely missed out on many years’ of appreciation by investing too late. This is why it’s generally a good idea to start funding an IRA as soon as possible.

Contributing Too Much

It’s possible to contribute too much to your Roth IRA, which may end up costing you. There are limits to how much you can contribute each year. For tax year 2023, the Roth IRA contribution maxes out at $6,500, or $7,500 if you’re over the age of 50. If you blow past that maximum, you must withdraw the excess amount or it can trigger a 6% tax penalty from the IRS.

Note that if your modified adjusted gross income exceeds a certain amount — $138,000 for single filers in tax year 2023, $218,000 for those married and filing jointly — you cannot contribute the maximum amount to a Roth IRA.

Allowable contributions are gradually reduced up to $153,000 in income for single filers, and up to $228,000 for married filing jointly. Above those caps, you cannot contribute to a Roth IRA at all.

Custodial Fees

There are also fees to consider. Someone manages your Roth IRA, and they don’t do it for free. As such, you may incur managerial or custodial fees that can affect your account’s overall balance, in addition to the cost of the investments themselves.

Can You Lose Your Entire Roth IRA?

It’s unlikely that you’d lose your entire Roth IRA’s value. Most fees, penalties, and taxes are levied as a percentage of that value, so they would not be able to fully drain the account. Perhaps the closest you could get to losing all of the money in your Roth IRA is if the market sees an all-out collapse, and most assets see their values reduced to zero.

Again — that’s very unlikely, but not impossible. If it were to happen, too, you’d probably have bigger problems to worry about other than the value of your investments!

With all of this in mind, it’s fair to ask, Are Roth IRAs safe to invest your money in?

The answer is that IRAs in general can provide less risk exposure than, say, day trading, although there are still risks to take into consideration. A Roth IRA that’s 100% invested in equities could be quite risky compared with a Roth invested in other assets (e.g. bonds or bond funds, mutual funds, and so on).

Also, the assets in a Roth IRA are usually long-term investments, which tend to help mitigate the risk of losses over time, as your money may have a chance to recover from any market downturns.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.

Limiting Risk in IRAs

One thing all of the IRAs above have in common is they offer the individuals who hold them a lot of flexibility in investment choices — including mutual funds, property, stocks, bonds, ETFs, annuities, and more. As a result, IRA investors can have a big say in what their retirement portfolio will look like.

And while it is possible that their portfolio may lose money, there are ways to manage that risk. By contrast, 401(k) retirement plans often offer limited investment options, such as a handful of mutual funds or target date funds.

Diversification

Diversification is chief among an investor’s risk management tools. A diversification strategy means spreading money across multiple asset classes, such as stocks and bonds. A portfolio can be further diversified within each asset class. For example, diverse stock holdings might include stocks from companies of different sizes, sectors, and geographical locations.

Diversification helps minimize the effects market risk can have on an investor’s portfolio. There are two main types: market risk, also called systematic risk, and specific or unsystematic risk.

Systematic risk is caused by factors that have a broad impact on the market as a whole, such as inflation or a global pandemic. Unfortunately, there’s not much an investor can do about this sort of risk, unless you’re an active investor familiar with hedging strategies.

The second type of market risk, unsystematic risk, is limited to individual companies, industries, or geographies. For instance, a workers’ strike at a factory could halt production and drag down an automaker’s stock price.

Diversification helps mitigate unsystematic risk. So, if an individual holds stocks in hundreds of different companies, one poorly performing company may have minimal negative impact on their portfolio’s performance. While diversification cannot prevent the risk of loss entirely, it may help individuals’ portfolios less vulnerable to market volatility.

How Safe Are Roth IRAs Considered to Be?

It depends how you define “safe.” If you’re thinking 100% free from loss, there are no safe investments. That said, Roth IRAs, and many other retirement account types, are generally considered to provide investors with lower risk exposure. They’re generally safer than investing in, say, penny stocks or cryptocurrencies, which are usually referred to as “speculative” investments.

Roth IRAs are usually managed and diversified, and as such, have some degrees of safety built into them to keep investors’ money relatively safe. That said, they aren’t completely risk-free. As mentioned, there are things that can lower a Roth IRA’s overall value — some of which investors can attempt to mitigate.

Time Horizon for Investments

Some investors might want to consider their time horizon in an effort to minimize portfolio losses that can occur at inopportune times. A time horizon is the amount of time an investor anticipates holding an investment until they want the money back.

When an investor is young, they may choose to hold riskier investments, such as stocks in their portfolio. Stocks can offer more opportunity for growth, but — on the flip side — stocks can also suffer big drops in value.

Investors who are many years away from a financial goal, such as retirement, may opt to hold more stocks to take advantage of their growth potential. With many years to go before they need to tap their investments, these investors have time to ride out the market’s swings.

The Takeaway

It’s possible to lose money in a Roth IRA, or any retirement or investment account — it really depends what types of investments are in the Roth.

The market may take a dip, for example, which can have an effect on your Roth IRA’s overall value. You can also see some of that value eaten up by custodial fees or penalties, if you decide to withdraw money. In a broader sense, if you start investing too late, you can miss out on market gains over many years — likewise costing you money.

It’s unlikely you would see your entire Roth IRA’s value fall to zero. But it’s also important to remember that retirement accounts are not risk-free investment vehicles. And depending on the type of IRA you have (traditional or Roth, SEP or SIMPLE), there will be different considerations you’ll need to make about how, when, and why you’re investing.

Ready to make an IRA part of your retirement plan? Learn more about opening an IRA with SoFi Invest®. SoFi doesn’t charge commissions (you can read the full fee schedule here), and members have access to complimentary financial advice from a professional.

Help grow your nest egg with a SoFi IRA.

FAQ

What happens to my Roth IRA if the stock market crashes?

It’s likely that you would see the overall value of your Roth IRA diminish in the event of a stock market crash. That doesn’t mean that it would have no value or you’d lose all of your money, but fluctuations in the market do affect the values of the investments in IRAs.

What are the risks of investing in a Roth IRA?

Risks of investing in a Roth IRA involve potentially incurring penalties for early withdrawals, seeing values decline due to market fluctuations, and even the potential of being assessed tax penalties for contributing too much money during a given year, among other things.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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.

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.

SOIN0323010

Mar

2023

Tax-Friendly States That Don’t Tax Pensions or Social Security Income

By Rebecca Lake | Life & Career, Preparing for Retirement, relay | Comments Off

There are a grand total of seven states that don’t tax retirement income, and that’s because those states don’t tax income at all. This can be important for seniors to know, as holding onto as much retirement income as possible can be important — whether it’s coming from pensions, Social Security, a 401(k), or elsewhere.

Equally important to know: As of 2023, there are 14 states that don’t tax pensions, and 37 states that don’t tax Social Security benefits. Paying less in taxes can lower the strain on a retiree’s budget and help their money last longer. That becomes especially important when and if inflation shrinks purchasing power — as it has in recent years.

How Much Can State Taxes Take Out of Retirement Income?

Each state taxes income, including retirement income, differently. So, there are different states that don’t tax pensions, and then there are states that don’t tax Social Security, etc.

Accordingly, how much of a bite state taxes take out of retirement income can depend on several factors, including the applicable tax rate where you live, and your specific tax brackets.

Taxes can be an important consideration when choosing where to retire, and when to retire.

Understanding State Income Tax

As of 2023, 43 states tax individual income. Of those, 41 states levy taxes on wage and salary income, while seven states do not assess individual income tax. The state of New Hampshire exclusively taxes dividend and interest income, while Washington taxes capital gains for certain high-income individuals.

In some states, the same tax rate applies to all taxable income. Other states use a graduated tax system with individual tax brackets, similar to the way the federal tax system works.

California has the highest marginal tax rate, at 13.30%. Other states with double-digit tax rates include Hawaii (11%), New York (10.90%), New Jersey (10.75%), and Washington, D.C. (10.75%). Aside from the states that have no income tax, the lowest marginal tax rate belongs to North Dakota, which has an income tax rate of 2.90%.

Further, if you were to look at the average retirement savings by state, it may help provide some more insight into where many retirees live — and why.

💡 Learn more about income tax and how it works.

14 States That Don’t Tax Pensions

Altogether, there are 14 states that don’t tax federal or private pension plans. Some of these are states that have no income tax at all; others have provisions in state law that make them states with no pension tax. Here are which states don’t tax pensions:

State	Pension Tax Policy
Alabama	Pension income excluded from state income tax
Alaska	No state income tax
Florida	No state income tax
Hawaii	Pension income excluded from state tax
Illinois	Pension income excluded from state tax
Mississippi	Pension income excluded from state tax
Nevada	No state income tax
New Hampshire	Only taxes interest and dividend income
Pennsylvania	Pension income excluded from state tax
South Dakota	No state income tax
Tennessee	No state income tax
Texas	No state income tax
Washington	Only taxes capital gains for high income earners
Wyoming	No state income tax

Keep in mind that state or local government employee pension benefits may be treated differently. New York, for example, specifically excludes pension benefits paid by state or local government agencies from state income tax. If you move to another state, however, that state could tax your New York pension benefits.

37 States That Don’t Tax Social Security

Understandably, many people have questions about Social Security, including whether the program will remain solvent in the future. Another big one: How will taxes affect your benefit amount? That’s why it’s important to know which states don’t tax Social Security.

The good news is that 37 states and the District of Columbia do not tax Social Security benefits. So if you’ve chosen to retire, or at least are thinking about choosing a retirement date (which can affect your total Social Security payouts), you don’t need to worry about it. Similar to the states that don’t tax pensions, these states either have no income tax at all, offer exemptions, or have elected to exclude Social Security benefits from taxable income calculations.

State	Social Security Tax Policy	State	Social Security Tax Policy
Alabama	Not included in income tax calculations	Nevada	No state income tax
Alaska	No state income tax	New Hampshire	Only taxes interest and dividend income
Arizona	Not included in income tax calculations	New Jersey	Not included in income tax calculations
Arkansas	Not included in income tax calculations	New York	Not included in income tax calculations
California	Not included in income tax calculations	North Carolina	Not included in income tax calculations
Delaware	Not included in income tax calculations	North Dakota	Exempt from taxation
Florida	No state income tax	Ohio	Not included in income tax calculations
Georgia	Not included in income tax calculations	Oklahoma	Not included in income tax calculations
Hawaii	Not included in income tax calculations	Oregon	Not included in income tax calculations
Idaho	Not included in income tax calculations	Pennsylvania	Not included in income tax calculations
Illinois	Not included in income tax calculations	South Carolina	Not included in income tax calculations
Indiana	Not included in income tax calculations	South Dakota	No state income tax
Iowa	Not included in income tax calculations	Tennessee	No state income tax
Kentucky	Not included in income tax calculations	Texas	No state income tax
Louisiana	Not included in income tax calculations	Virginia	Not included in income tax calculations
Maine	Not included in income tax calculations	Washington	Only taxes capital gains for high-income earners
Maryland	Not included in income tax calculations	Washington, D.C.	Not included in income tax calculations
Massachusetts	Not included in income tax calculations	Wisconsin	Not included in income tax calculations
Mississippi	Not included in income tax calculations	Wyoming	No state income tax

Montana and New Mexico do tax Social Security benefits, but with modifications and exceptions. Montana will also see a change to its tax rate structure in 2024, and Social Security benefits will be taxed the same as they are at the federal tax level.

8 States That Don’t Tax Capital Gains

Federal capital gains tax applies when an investment or asset is sold for more than its original purchase price. The short-term capital gains tax rate applies to investments held for less than one year. Investments held for longer than one year are subject to the long-term capital gains tax.

States can also tax capital gains, though not all of them do. The states that do not tax capital gains are the same states that do not have income tax or have special tax rules on which income is taxable. They include:

• Alaska

• Florida

• Nevada

• New Hampshire

• South Dakota

• Tennessee

• Texas

• Wyoming

As far as how much capital gains are taxed at the state level, the tax rate you’ll pay will depend on where you live. Some states offer more favorable tax treatment than others for capital gains.

12 States That Don’t Tax 401(k), TSP, or IRA Income

Yet another potential area where states can generate tax revenue is by taxing retirement accounts such as 401(k) plans, individual retirement accounts (IRAs), and Thrift Savings Plans (TSPs). In all, there are 12 states that don’t levy taxes on retirement income derived from these sources:

• Alaska

• Florida

• Illinois

• Mississippi

• New Hampshire

• Nevada

• New Hampshire

• Pennsylvania

• South Dakota

• Tennessee

• Texas

• Wyoming

31 States That Don’t Tax Retirement Income From the Military

There are certain states that tax military retirement income, but most do not. In all, 31 states don’t tax military retirement income, including those that don’t have income taxes, and others that have specifically carved out exceptions for military retirement income.

• Alabama

• Alaska

• Arizona

• Arkansas

• Connecticut

• Florida

• Hawaii

• Illinois

• Iowa

• Kansas

• Louisiana

• Maine

• Massachusetts

• Michigan

• Minnesota

• Mississippi

• Missouri

• Nevada

• New Hampshire

• New Jersey

• New York

• North Dakota

• Ohio

• Pennsylvania

• South Dakota

• Tennessee

• Texas

• Washington

• West Virginia

• Wisconsin

• Wyoming

7 States That Don’t Tax Retirement Income

As covered, there are a lot of different tax levels and tax types — some include different types of retirement income, some just involve plain old income tax itself. As such, it’s not really easy to determine which states don’t tax retirement income whatsoever. But if you were to boil it down to a list that accurately answers the question “which states don’t tax retirement income,” it would mirror the short list of states that don’t tax income at all.

• Alaska

• Florida

• Nevada

• South Dakota

• Tennessee

• Texas

• Wyoming

In addition, as mentioned above, while New Hampshire and Washington state do tax certain types of income, they don’t really tax most forms of retirement income. So if you live in these states, your Social Security benefits and pension benefits can go further when it comes to covering your retirement expenses.

8 States With Low Retirement Income Taxes

Taking everything into account — taxes on income, pensions, Social Security, military retirement income, and more — there are several states that offer retirees relatively low retirement income taxes. Aside from the seven that don’t tax income at all, these states may be a good option for seniors, as they offer low retirement income taxes in one form or another:

• Alabama

• Hawaii

• Illinois

• Iowa

• Mississippi

• New Hampshire

• Pennsylvania

• Washington

Which States Have the Lowest Overall Tax Burden on Retirees?

Again, there is a lot to consider when trying to determine an overall tax burden, especially on retirees. But if you were to whittle down a list of a handful of states in which the tax burden is the absolute least on retirees? It would come down to the states with the overall smallest income tax burden, and a few other factors.

Delaware

Delaware hasn’t been discussed much, and though it does have state income taxes, a few other factors make it particularly appealing for retirees. Specifically, its state income tax rate tends to be relatively low (2.2% – 6.6%), and it has low property taxes, no sales taxes, and no applicable estate taxes.

Nevada

Nevada is a state with no state income taxes — a big win for retirees — and that also has relatively low property taxes, and no estate taxes. It also doesn’t tax income from most retirement accounts, or military retirement income.

Wyoming

Wyoming is similar to Nevada in that it has no state income taxes, low property taxes, and no estate taxes. There are applicable sales taxes, however, but it’s a drop in the bucket compared to the overall tax burdens seen in other states.

Can You Have Dual State Residency?

Generally, most people are residents of just one state. It is possible, however, to have dual residency in two different states. This can happen if you live in each state for part of the year to attend school, or to work.

For example, the state of Virginia distinguishes between residents who maintain a home in the state for 183 days or more during the year and domiciliary residents who claim Virginia as their legal state of residence. Under state law, it’s possible to be a resident of Virginia and a domiciliary resident of another state.

For instance, a college student from California who lives in Virginia during the school year would be a dual resident. However, you can have only one domicile — in this example, it would be California.

If you live and earn taxable income in two different states during the year, you may have to file tax returns in both those states unless a reciprocity agreement exists. Reciprocity agreements protect taxpayers who work in states other than the one in which they’re legal residents from being hit with double taxation.

What to Consider Before Moving to a Tax-Friendly State

Moving to a state that doesn’t tax pensions and Social Security could yield income tax savings, but it’s important to consider the bigger financial picture. Paying no or fewer income taxes on retirement benefits may not be much of a bargain if you’re stuck paying higher property taxes, or your heirs are left with steep inheritance taxes, for instance.

Also, consider the overall cost of living. If everyday essentials such as housing, food, and gas are higher in a state that has no income tax, then your retirement benefits may have less purchasing power overall. If costs end up being higher than you anticipated, you might end up working after retirement to fill any retirement income shortfalls.

The Takeaway

There are a number of states that tend to be more tax-friendly for retirees, and those generally include the states that don’t levy any income taxes. That list comprises states such as Alaska, Nevada, Texas, Florida, and Tennessee. But there are other potential taxes to take into consideration, and states all have different tax rules in regards to pensions, retirement accounts, capital gains, and more.

As such, if you’re hoping to save on taxes during retirement, you’ll need to do a little digging into the specifics to see what might affect you, given your unique financial picture. It’s wise to take into account other tax types as well (property taxes, etc.), and overall cost of living. Doing a thorough cost-benefit analysis before making a decision to move could be beneficial.

If you’re wondering about other ways to help make your retirement savings tax efficient, SoFi can help. With SoFi Invest, you can open a traditional or Roth IRA, and you can build, or add to your investment portfolio right from your smartphone or other device. SoFi doesn’t charge commissions (you can read the full fee schedule here), and SoFi members have access to complimentary advice from professionals.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What is the most tax-friendly state to retire in?

The most tax-friendly states for retirees are states that don’t tax pensions and Social Security, and have a low tax-profile overall for sales and property tax. Some of the best states for retirees who want to avoid high taxes include Alabama, the District of Columbia, Nevada, and Tennessee.

Which states have no 401(k) tax?

States that do not tax 401(k) distributions are generally the same states that don’t tax income. Those states include Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. New Hampshire and Washington don’t tax 401(k) distributions either.

Which states do not tax pensions?

States that do not tax pensions include the seven states that have no income tax — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming — as well as New Hampshire and Washington. Additionally, five states — Alabama, Hawaii, Illinois, Mississippi, and Pennsylvania — exclude pension income from state taxation.

How can I avoid paying taxes on retirement income?

The simplest way to avoid paying taxes on retirement income is to move to a state that has the smallest applicable tax burden on retirement income sources. That would include the short list of seven states that don’t have any sorts of state income tax. You can also consult a professional.

Which states are tax-free for Social Security?

There are a grand total of 37 states that don’t tax Social Security benefits, and that list includes the seven states that don’t tax income at all. Aside from those states, 29 others (and Washington, D.C.) do not, specifically, tax Social Security benefits.

Photo credit: iStock/RapidEye

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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.

Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Mar

2023

What Is the Best Age to Retire for Longevity and Health?

By Caroline Banton | Preparing for Retirement, relay | Comments Off

Most people would like to retire when they are still healthy and active but financially secure enough to continue an energetic lifestyle. The younger the better, for most of us. However, the best age to retire for longevity is different for everyone. It depends on many factors, such as your finances, your health, and what you want to do in retirement. Some workers may want to continue in their careers for as long as they can.

Here’s a look at how age affects your retirement — and things to consider when planning your retirement timeline.

How Your Age at Retirement Affects Retirement Savings Income

So you’re looking ahead to retirement and expect to have a significant nest egg. If you retire at 65, your retirement could last 25 years or more. But what if you retire earlier — say, at 55? Your savings will have to last that much longer, but you’ll also have less time to save up. Unless you plan ahead, even a decent sized nest egg might not stretch 35 years.

The age at which you decide to retire also affects your Social Security benefit. If you retire at 62, the earliest possible Social Security retirement age, your benefit will be significantly lower than if you wait: 30% lower than if you claim benefits at your full retirement age of 67.

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The Average Retirement Age in America

The original rules for Social Security benefits assumed 65 as the common age for retirement. In 2022, the full retirement age was raised to 66 for those born between 1943 and 1959, and 67 for anyone born in 1960 or later.

The actual average age for retirement for men is 64.6, and for women 62.3. Sixty-two is the earliest someone can receive Social Security, but the longer you wait, the greater your benefit will be (more on that below).

Recommended: Is $1 Million Enough to Retire at 55?

Factors Involved in the Ideal Retirement Age

The best time to stop working depends on your retirement savings, health benefits, and Social Security — factors that vary with age.

Savings

The best way to save for retirement is with a diversified portfolio that can average out your risk over time. Your strategy will depend on your risk tolerance, how long you have to save, and how much of your income you can afford to put away. A budgeting and spending app can help you monitor your income and expenses each month so that you know how much you should set aside.

The goal is to have enough saved up so you can stop working at your desired retirement age and have enough of a nest egg to fund the lifestyle you desire.

One rule of thumb recommends saving around 10 times your pre-retirement salary and living on 80 percent of your pre-retirement income. So if you earn $150,000 before you retire, you will need $120,000 a year to cover typical retirement expenses once you leave the workforce.

Most people have a pension plan or IRA as part of their portfolio. Here’s how age affects these savings vehicles.

Pension Plans and IRAs

Most pension plans impose an IRS penalty for withdrawing retirement funds “early,” which means before age 59 ½. You can delay your retirement as long as you like, but you must start required minimum distributions (RMDs) from retirement plans at a certain age as mandated by law, whether or not you’re retired.

In 2023, the starting age for RMDs was raised to 73 years. The exception is Roth IRAs: In 2024, holders of designated Roth 401(k) accounts will no longer be required to take RMDs during their lifetime.

Social Security

Social Security is another vital source of income for retirees. You can start to claim benefits at age 62, but at a reduced amount. People who retire at age 66 or 67 will receive full Social Security benefits. If you delay until age 70, you’ll receive even more.

A lot rides on your definition of retirement, too. You can semi-retire at age 65 (or earlier), work part-time, and collect Social Security benefits. However, if you earn more than the yearly earnings limit, your benefits will be reduced. If you are under full retirement age, the Social Security Administration will deduct $1 from your benefit payments for every $2 you earn above the annual limit. That limit was $21,240 in 2023.

Medicare

Individuals are eligible for Medicare, a government-sponsored health plan, at age 65. If you retire earlier, you will have to factor in the cost of out-of-pocket health insurance, which is expensive. The average national cost of health insurance is $456 per month, whereas the Medicare Part B premium is around $165 per month.

Health Benefits

The best age to retire for health is debatable. Going to work provides us with social connections, and mental and physical stimulation, all of which keep us healthy. Many people feel they lose their purpose and identity when they retire and even fall into depression. A recent paper published in the Journal of Economic Behavior & Organization found that early retirement may even accelerate cognitive decline in late adulthood.

What Is the Best Age to Retire?

Considering these factors, the ideal age to retire is different for everyone. It depends on your health, your finances, whether your home state taxes retirement income, and what you want to do in your retirement. Also, as people age, the decision of when to retire can change with their circumstances.

For now, choose a retirement date and start saving. The earlier you start, the more options and bigger nest egg you will have when the time comes.

What If You Don’t Have Enough Money by the Ideal Retirement Age?

Some guidelines recommend having 10 times your annual salary saved by age 67, the age at which people born after 1960 can retire with full Social Security benefits. But what if you fall behind these savings benchmarks?

If your savings fall short, you’ll have to play catch up. Make sure you are maximizing your 401(k) contributions and your employer match. Contribute to an IRA or a Roth IRA, too. And if you receive any windfalls, such as tax refunds or bonuses, put those funds toward your retirement.

Another strategy is to free up more cash for retirement savings by examining your budget and reducing expenses. Can you eat out less? Downsize your home, or sell other assets?

You could also continue working for a few additional years to increase your Social Security benefits. You may work part-time, accept a less demanding position with less pay, or do some consulting work.

The Takeaway

Just about everyone wants to retire when they are still healthy so they can enjoy their later years. When deciding what age to retire, consider what it will take to maintain the lifestyle that you want. Possible income streams include withdrawals from a health savings plan and retirement accounts, Social Security benefits, and revenue from investment assets, such as rental property. Working part-time might be an option until you are ready to fully retire.

The decision of when to retire can change with your circumstances. The best plan is to set goals as soon as you can and start saving for retirement early. That way, you will have more options and a bigger nest egg when the time comes.

Take control of your finances with SoFi’s money tracker app, available with SoFi Insights. Connect all of your accounts on one mobile dashboard to get a bird’s-eye view of your balances on the go. Set monthly spending targets, and review your top spending categories. You can even talk one-on-one with a financial planner to set ambitious goals for your money and your life.

SoFi Insights makes it easy to know where you stand, what you spend, and how to hit your financial goals — all in one app.

FAQ

What is the best age to retire for your health?

Some people thrive in retirement, and some people find themselves at a loss. Work provides social interaction and mental and physical stimulation, so retiring early may not be healthier if the result is a more sedentary and lonely lifestyle.

What is the best age to retire for Social Security benefits?

Retiring at age 70 would give you maximum Social Security benefits. According to the Social Security Administration, if you retire in 2023 at full retirement age, your maximum monthly benefit is about $3,627. However, if you retire early at age 62, your maximum benefit is just $2,572. And if you put off retirement until age 70, your maximum benefit rises to $4,555.

What is the most popular age to take Social Security?

According to U.S. News & World Report, full retirement age has become the most popular age to claim payments. For many people, that is age 66. Those with a full retirement age of 67 will get a 6.7% pay cut if they sign up for payments at age 66.

Photo credit: iStock/Vladimir Vladimirov

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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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Mar

2023

Is a SIMPLE IRA the Same as a Traditional IRA?

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

One of the most popular retirement accounts is an IRA, or Individual Retirement Account. IRAs allow individuals to put money aside over time to save up for retirement, with tax benefits similar to those of other retirement plans.

Two common IRAs are the SIMPLE IRA and the Traditional IRA, both of which have their own benefits, downsides, and rules around who can open an account. For investors trying to decide which IRA to open, it helps to know the differences between SIMPLE IRAs and Traditional IRAs.

SIMPLE IRA vs Traditional IRA: Side-by-Side Comparison

Although there are many similarities between the two accounts, there are some key differences. This chart details the key attributes of each plan:

	SIMPLE IRA	Traditional IRA
Offered by employers	Yes	No
Who it’s for	Small-business owners and their employees	Individuals
Eligibility	Earn at least $5,000 per year	Under 70 ½ years old and earned income in the past year
Tax deferred	Yes	Yes
Tax deductible contributions	Yes, for employers and sole proprietors only	Yes
Employer contribution	Required	No
Fee for early withdrawal	10% plus income tax, or 25% if money is withdrawn within two years of an employer making a deposit	10% plus income tax
Contribution limits	$15,500 in 2023	$6,500 in 2023
Catch-up contribution	$3,500 additional per year for people 50 and over	$1,000 additional per year for people 50 and over

SIMPLE IRAs Explained

The SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is set up to help small-business owners help both themselves and their employees save for retirement. It’s a retirement plan that small businesses with fewer than 100 employees can offer employees who earn at least $5,000 per year.

A SIMPLE IRA is similar to a Traditional IRA, in that a plan participant can make tax-deferred contributions to their account, so that it grows over time with compound interest. When the individual retires and begins withdrawing money, then they must pay income taxes on the funds.

With a SIMPLE IRA, both the employer and the employee contribute to the employee’s account. Employers are required to contribute in one of two ways: either by matching employee contributions up to 3% of their salary, or by contributing a flat rate of 2% of the employee’s salary, even if the employee doesn’t contribute. With the matching option, the employee must contribute money first.

There are yearly employee contribution limits to a SIMPLE IRA: in 2023, the annual limit is $15,500, with an additional $3,500 in catch-up contributions permitted for people over age 50.

Benefits and Drawbacks of SIMPLE IRAs

It’s important to understand both the benefits and downsides of the SIMPLE IRA to make an informed decision about retirement plans.

SIMPLE IRA Benefits

There are several benefits — for both employers and employees — to choosing a SIMPLE IRA:

• For employers, it’s easy to set up and manage, with online set-up available through most banks.

• For employers, management costs are low compared to other retirement plans.

• For employees, taxes on contributions are deferred until the money is withdrawn.

• Employers can take tax deductions on contributions. Sole proprietors can deduct both salary and matching contributions.

• For employees, there is an allowable catch-up contribution for those over 50.

• For employers, the IRA plan providers send tax information to the IRS, so there is no need to do any reporting.

• Employers and employees can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.

SIMPLE IRA Drawbacks

Although there are multiple benefits to a SIMPLE IRA, there are some downsides as well:

• Employers must follow strict rules set by the IRS.

• Other employer-sponsored retirement accounts have higher limits, such as the 401(k), which allows for $22,500 per year, as of 2023. (Check out our IRA calculator to see what you can contribute to each type of IRA.)

• If account holders withdraw money before they reach age 59 ½, they must pay a 10% fee and income taxes on the withdrawal. That penalty jumps to 25% if money is withdrawn within two years of an employer making a deposit.

• There is no option for a Roth contribution to a SIMPLE IRA, which would allow account holders to contribute post-tax money and avoid paying taxes later.

What Is a Traditional IRA?

The Traditional IRA is set up by an individual to contribute to their own retirement. Employers are not involved in Traditional IRAs in any way. The main requirements to open an IRA are that the account holder must have earned some income within the past year, and they must be younger than 70 ½ years old at the end of the year.

Pros and Cons of Traditional IRAs

When it comes to benefits and downsides, there’s not too much of a difference between Traditional vs. SIMPLE IRAs, given what an IRA is. That being said, there are a few that are unique to this type of plan.

Traditional IRA Pros

Some of the upsides of a Traditional IRA include:

• It allows for catch-up contributions for those over age 50.

• One can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.

• Contributions are tax-deferred, so taxes aren’t paid until funds are withdrawn. If you’re hoping to pay taxes now instead of later, you might weigh a Traditional vs. Roth IRA.

Traditional IRA Cons

Meanwhile, downsides to a Traditional IRA include:

• They have much lower contribution limits than a 401(k) or a SIMPLE IRA, at $6,500 per year as of 2023.

• Penalties for early withdrawal are also the same: if you withdraw money before age 59 ½, you’ll pay a 10% fee plus income taxes on the withdrawal.

Is a SIMPLE IRA or Traditional IRA Right for You?

The SIMPLE IRA and Traditional IRA are both individual retirement accounts, but the SIMPLE is set up through one’s employer — typically a small business of 100 people or less. The Traditional IRA is set up by an individual. In other words, whether a SIMPLE IRA is an option for you will depend on if you have an employer that offers it.

There are many similarities in the attributes of the plans, if you’re choosing between a SIMPLE IRA vs. Traditional IRA. However, two major distinctions are that the SIMPLE IRA requires employer contributions (though not necessarily employee contributions) and allows for a higher amount of employee contributions per year.

Is your retirement piggy bank feeling light?

Start saving today with a Roth or Traditional IRA.

Can I Have Both a SIMPLE IRA and a Traditional IRA?

Yes, it is possible for an individual to have both a SIMPLE IRA through their employer and also a Traditional IRA on their own — though they may not be able to deduct all of their Traditional IRA contributions. The IRS sets a cap on deductions per calendar year.

Single people with an AGI (adjusted gross income) of more than $73,000 are restricted to a partial deduction; those with AGI above $83,000 may not take a deduction at all. Married couples filing jointly with an AGI of $116,000 to 136,000 may take a partial deduction; those with AGI above $136,000 may not take a deduction at all.

Can You Convert a SIMPLE IRA to a Traditional IRA?

If you’re hoping to convert a SIMPLE IRA to a Traditional IRA, you’re in luck — you can roll over a SIMPLE IRA into a Traditional IRA. However, you can’t roll over the funds from a SIMPLE IRA to a Traditional IRA within the first two years of opening a SIMPLE IRA. Otherwise, you’ll get hit with a 25% penalty in addition to the regular income tax you must pay on your withdrawal.

Once that two-year period is up, however, you can roll over the money from your SIMPLE IRA — even if you’re still working for that employer. Just note that you can only roll over money from a SIMPLE IRA one time within a 12-month period.

Can You Max Out a Traditional and SIMPLE IRA the Same Year?

While you cannot max out a SIMPLE IRA and another employer-sponsored retirement plan like a 401(k), you can max out both a Traditional IRA and a SIMPLE IRA.

The maximum contribution for a SIMPLE IRA in 2023 is $15,500 (plus $6,500 in catch-up contributions), while the maximum for a Traditional IRA is $3,500 (plus $1,000 in catch-up contributions). This means that you could contribute a total of $19,000 across both plans in a year — or $26,500 if you’re 50 or older.

Are SIMPLE IRAs Most Similar to 401(k) Plans?

There are a lot of similarities between SIMPLE IRAs and 401(k) plans given that they are both employer-sponsored retirement plans. However, while any employer with one or more employees can offer a 401(k), SIMPLE IRAs are reserved for employers with 100 or fewer employees. Additionally, contribution limits are lower with SIMPLE IRAs than with 401(k) plans.

Another key difference between the two is that while employers can opt whether or not to make contributions to employee 401(k), employer contributions are mandatory with SIMPLE IRAs. On the employer side, SIMPLE IRAs generally have fewer account fees and annual tax filing requirements.

Opening an IRA With SoFi

Understanding the differences between retirement accounts like the SIMPLE and Traditional IRA is one more step in creating a personalized retirement plan that works for you and your goals. While a SIMPLE IRA is only an option if your employer offers it, you’ll want to weigh the pros and cons of a SIMPLE IRA vs. Traditional IRA if both are on the table for you. As we’ve covered, the two types of IRAs share many similarities, but a SIMPLE IRA is not the same as a Traditional IRA.

If you’re looking to start saving for retirement now, or add to your investments for the future, SoFi Invest® online retirement accounts offer both Traditional and Roth IRAs that are simple to set up and manage. By opening an IRA with SoFi, you’ll gain access to a broad range of investment options, member services, and a robust suite of planning and investment tools.

Find out how to further your retirement savings goals with SoFi Invest.

FAQ

Do you pay taxes on SIMPLE IRA?

Yes, you will pay taxes on a SIMPLE IRA, but not until you withdraw your funds in retirement. You’ll generally have to pay income tax on any amount you withdraw from your SIMPLE IRA in retirement. However, if you make a withdrawal prior to age 59 ½, or if money is withdrawn within two years of an employer making a deposit, you’ll have to pay income taxes then, alongside an additional tax penalty.

Is a SIMPLE IRA better than a Traditional IRA?

When comparing a SIMPLE IRA vs. traditional IRA, it’s important to understand that each has its pros and cons. If your employer offers a SIMPLE IRA, they require employer contributions, and they have higher contributions. At the end of the day, though, both allow you to save for retirement through tax-deferred contributions.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.

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

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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