401k egg in a nest

How To Make Changes to Your 401(k) Contributions

Whether you just set up your 401(k) plan or you established one long ago, you may want to change the amount of your contributions — or even how they’re invested. Fortunately, it’s usually a fairly straightforward process to change 401(k) contributions.

How often can you change your 401(k) contributions? You may be able to make changes at any time, depending on your plan. After all, the point of a 401(k) plan is to help you save for your retirement. So it’s important to keep an eye on your account and your investments within the account, to make sure that you’re saving and investing according to your goals.

Learn how to maximize your 401(k), change your 401(k) contributions, and save for retirement.

Purpose of a 401(k)

A 401(k) is a retirement account that a company may offer to its employees. In some cases, enrollment in the employer’s 401(k) is automatic; in other cases it’s not. Be sure to check, so that you can take advantage of this savings opportunity.

Employees may contribute a portion of their paycheck to their 401(k) account, and employers might also contribute to each employee’s account (again, depending on the plan).

The employer’s portion is called the company’s “match” or matching funds. Typically, an employer might match up to a certain percentage of what the employee saves. One common matching plan is when a company matches 50 cents for every dollar saved, up to 6% of the employee’s total contributions. Terms vary, so it’s best to ask your Human Resources representative what the match is.

The money a participant contributes to their 401(k) plan is technically called an “elective salary deferral” because it’s optional, not required, and those deductions are not included in an employee’s taxable income. That’s why 401(k) and similar accounts (like a 403(b) and most IRAs) are often called tax-deferred accounts: You don’t pay taxes on the money you’ve saved until you withdraw the money in retirement.

This tax benefit can be significant. Every dollar you save reduces your taxable income, which may result in a lower tax bill in some cases.

💡 Quick Tip: The advantage of opening an IRA, like a Roth IRA, and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

Can You Change Your 401(k) Contribution at Any Time?

While the opportunity to make changes to some employee benefits, like health insurance, are generally only offered once a year during so-called open enrollment periods, many 401(k) plans allow participants to change the amount of their 401(k) contributions at any point. According to Department of Labor guidelines, an employer must allow plan participants to change investments at least quarterly (sometimes more often, if company stock or other high-risk investments are offered by the plan).

These are some of the reasons you may want to change 401(k) contribution amounts.

The Ability to Save More

You may have gotten a raise, or experienced a change in your financial circumstances, and wish to increase the percentage of your savings. Contributions to these plans are typically expressed as a percentage of your annual salary. For example, if you earn $75,000 per year, and your contribution rate is 10%, you would save a total of $7,500 per year. If you got a raise to $80,000 and now wish to contribute 12%, you would save a total of $9,600 per year.

To Get the Match

As discussed above, some 401(k) plans offer a savings match from the employer. In most cases, the match is a set percentage of the employee’s contribution. If you started your 401(k) at a point when you couldn’t get the full match, you may want to increase your contributions to get the full employer match.

Rebalancing Your Asset Allocation

If you’ve held the account for a while, say a year or more, the original allocation of your investments — i.e. the balance between equities, cash, and fixed income investments — may have shifted. Restoring the original balance of your investments may be a priority, if your strategy and risk tolerance haven’t changed.

Changing Your Asset Allocation

You also might want to shift the asset allocation because your financial strategy has become more aggressive (i.e. tilting toward stocks) or more conservative (tilting toward cash and fixed income).

Setting Up Automatic Increases

Some plans offer participants the option of automatically increasing their contribution rate every year, typically up to a certain percentage (e.g. 15%), and not to exceed the maximum contribution levels. The IRS contribution limit for 401(k) plans for 2024 is $23,000 for participants under age 50. Those 50 and older can save an extra $7,500 in “catch-up contributions”, for a total of $30,500. For 2023, the contribution limit is $22,500 for participants under age 50. Those 50 and older can save an extra $7,500 in “catch-up contributions”, for a total of $30,000.

Setting up automatic increases allows you to save more in your 401(k) each year without having to think about it; this can be beneficial for overcoming the inertia common among some savers.

How to Change 401(k) Contributions: 3 Steps

Again, the 401(k) plan provider will be able to advise participants on how often they can make changes to their contributions, and what the process will look like. For employees unsure of who the plan provider is, the company’s human resource department can point them in the right direction.

In some cases, participants can change their contributions directly through their plan provider’s website. Generally, the process of making changes to a 401(k) looks like this:

Step 1:

The employee contacts their 401(k) provider to discuss how to change contributions for their particular 401(k) plan.

Step 2:

The employee considers how much of their paycheck they want to contribute to their 401(k) moving forward, taking their company’s 401(k) match into consideration, and ideally contributing at least that much. The employee might also change their asset allocation, depending on plan rules.

Step 3:

The participant fills out any forms (online or via paperwork) to confirm their new contribution.

Often, these steps can take just a few minutes, using your plan sponsor’s website.

Why Contribute to a 401(k)? 3 Good Reasons

Contributing to a 401(k) plan is an important way to save for retirement. The funds in a 401(k) are invested, generally in mutual funds, exchange-traded funds (ETFs), or target date funds — which can offer the potential for growth over time. Typically there are about eight to 12 investment options in most 401(k) plans.

But perhaps the three best reasons to contribute to a 401(k) plan are the opportunity to save automatically via regular payroll deductions; the potentially lower tax bill; and the ability to get “free money” from your employer match, if it’s offered.

Low-stress Saving

For many people, this type of investment is easy because you can choose how much of your salary to contribute each pay period, and deductions happen automatically. You don’t have to think about your savings, your contributions are taken directly from each paycheck, so it helps to build your nest egg over time.

Lower Taxable Income

Another benefit is the potential for savings during tax season. Since the contributions an employee makes to their 401(k) plan over the course of the year aren’t included in their taxable income, that can lower their overall taxable income. This, in turn, may result in an individual falling into a lower tax bracket and paying less income tax for that year.

And in the future, when they might likely be in a lower tax bracket due to retirement, they’ll pay lower taxes when they withdraw the money from their 401(k) account.

Note: Withdrawing money from a 401(k) account before retirement age may lead to early withdrawal penalties.

Another perk of enrolling in a 401(k) plan is the notion of “free money” from one’s employer. Some companies match a portion of their employees’ contributions — often around 50 cents to $1 for each dollar that an employee contributes.

Typically, an employer might set a maximum matching limit, such as 3% to 6% of the employee’s salary.

This matching contribution is often referred to as free money because the contribution effectively increases an employee’s income without increasing their current tax bill. It’s worth noting that an employer’s match generally vests over the course of three or four years — meaning that the employer-contributed money will accrue in the account, but an employee won’t be able to keep it if they switch jobs, unless they remain with the company for that set period of time.

Setting up Recurring Contributions

When it comes to setting up a 401(k), the process varies by workplace. Some companies offer automatic enrollment to employees, automatically reducing the employee’s wages by a certain amount and diverting that money to the employee’s 401(k) plan, unless the employee chooses not to have their wages contributed.

Or, an employee can choose to enroll, but to contribute a custom amount. This type of contribution is referred to as an elective deferral.

In companies that don’t offer automatic enrollment as an option, employees will need to work with their HR department and retirement plan provider to get their 401(k) set up.

Participants need to decide how much they want to contribute and they may need to choose their investments. They can also opt to take advantage of autopilot settings, and can roll over a 401(k) from a past job into their new one.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How Much to Save for Retirement

The Department of Labor (DOL) outlined a few best practices for investing in order to save for retirement.

It estimated that most Americans will need 70% to 90% of their preretirement income saved by retirement, in order to maintain their current standard of living. Doing that math can give plan participants an idea of how much they should be contributing to their 401(k).

Participants might also consider a few basic investment principles, such as diversifying retirement investments to reduce risk and improve return. These investment choices may evolve overtime depending on someone’s age, goals, and financial situation.

The DOL recommends that employees contribute all they can to their employer-sponsored 401(k) plan to take advantage of benefits like lower taxes, company contributions, and tax deferrals.

Adding Alternative Investments to a 401(k)

Some savers may find themselves interested in pursuing alternative investments when saving for retirement. An alternative investment takes place outside of the traditional markets of stocks, fixed-income, and cash. This method may appeal to those looking for portfolio diversification. Popular examples of alternative investments are private equity, venture capital, hedge funds, real estate, and commodities.

Self-directed 401(k)s allow participants to add alternate investments to their 401(k) portfolio. With a self-directed 401(k), the investor chooses a custodian such as a brokerage or investment firm to hold the amount of assets and execute the purchase or sale of investments on the participant’s behalf. If an employer offers a self-directed 401(k), the custodian will likely be the plan administrator.

The Takeaway

For employees looking to change 401(k) contributions, the process is often as simple as reaching out to your plan provider and confirming that you’re allowed to make a change at this time.

Some companies have rules around when and how often employees can make changes to their contributions. Once you have the go-ahead to make the change, and have considered what works best for your current financial situation and your future goals, it’s generally straightforward.

A company-sponsored 401(k) plan offers many benefits, but once you leave your job, many of those benefits — including the employer-matching program — no longer apply. At that point, you may want to consider doing a rollover of your previous 401(k) to an IRA, so you can remain in control of your money.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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


An investor should consider the investment objectives, risks, charges, and expenses of the Fund carefully before investing. This and other important information are contained in the Fund’s prospectus. For a current prospectus, please click the Prospectus link on the Fund’s respective page. The prospectus should be read carefully prior to investing.
Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


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Roth 401(k) vs Traditional 401(k): Which Is Best for You?

A traditional 401(k) and a Roth 401(k) are tax-advantaged retirement plans that can help you save for retirement. While both types of accounts follow similar rules — they have the same contribution limits, for example — the impact of a Roth 401(k) vs. traditional 401(k) on your tax situation, now and in the future, may be quite different.

In brief: The contributions you make to a traditional 401(k) are deducted from your gross income, and thus may help lower your tax bill. But you’ll owe taxes on the money you withdraw later for retirement.

Conversely, you contribute after-tax funds to a Roth 401(k) and can typically withdraw the money tax free in retirement — but you don’t get a tax break now.

To help choose between a Roth 401(k) vs. a traditional 401(k) — or whether it might make sense to invest in both, if your employer offers that option — it helps to know what these accounts are all about.

5 Key Differences Between Roth 401(k) vs Traditional 401(k)

Before deciding on a Roth 401(k) or traditional 401(k), it’s important to understand the differences between each account, and to consider the tax benefits of each in light of your own financial plan. The timing of the tax advantages of each type of account is also important to weigh.

1. How Each Account is Funded

•   A traditional 401(k) allows individuals to make pre-tax contributions. These contributions are typically made through elective salary deferrals that come directly from an employee’s paycheck and are deducted from their gross income.

•   Employees contribute to a Roth 401(k) also generally via elective salary deferrals, but they are using after-tax dollars. So the money the employee contributes to a Roth 401(k) cannot be deducted from their current income.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA account and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

2. Tax Treatment of Contributions

•   The contributions to a traditional 401(k) are tax-deductible, which means they can reduce your taxable income now, and they grow tax-deferred (but you’ll owe taxes later).

•   By contrast, since you’ve already paid taxes on the money you contribute to a Roth 401(k), the money you contribute isn’t deductible from your gross income, and withdrawals are generally tax free (some exceptions below).

3. Withdrawal Rules

•   You can begin taking qualified withdrawals from a traditional 401(k) starting at age 59 ½, and the money you withdraw is taxed at ordinary income rates.

•   To withdraw contributions + earnings tax free from a Roth 401(k) you must be 59 ½ and have held the account for at least five years (often called the 5-year rule). If you open a Roth 401(k) when you’re 57, you cannot take tax-free withdrawals at 59 ½, as you would with a traditional 401(k). You’d have to wait until five years had passed, and start tax-free withdrawals at age 62.

4. Early Withdrawal Rules

•   Early withdrawals from a 401(k) before age 59 ½ are subject to tax and a 10% penalty in most cases, but there are some exceptions where early withdrawals are not penalized, including certain medical expenses; a down payment on a first home; qualified education expenses.

You may also be able to take a hardship withdrawal penalty-free, but you need to meet the criteria, and you would still owe taxes on the money you withdrew.

•   Early withdrawals from a Roth 401(k) are more complicated. You can withdraw your contributions at any time, but you’ll owe tax proportional to your earnings, which are taxable when you withdraw before age 59 ½.

For example: If you have $100,000 in a Roth 401(k), including $90,000 in contributions and $10,000 in taxable gains, the gains represent a 10% of the account. Therefore, if you took a $20,000 early withdrawal, you’d owe taxes on 10% to account for the gains, or $2,000.

5. Required Minimum Distribution (RMD) Rules

With a traditional 401(k), individuals must take required minimum distributions starting at age 73, or face potential penalties. While Roth 401(k)s used to have RMDs, as of January 2024, they no longer do. That means you are not required to withdraw RMDs from a Roth 401(k) account.

For a quick side-by-side comparison, here are the key differences of a Roth 401(k) vs. traditional 401(k):

Traditional 401(k)

Roth 401(k)

Funded with pre-tax dollars. Funded with after-tax dollars.
Contributions are deducted from gross income and may lower your tax bill. Contributions are not deductible.
All withdrawals taxed as income. Withdrawals of contributions + earnings are tax free after 59 ½, if you’ve had the account for at least 5 years. (However, matching contributions from an employer made with pre-tax dollars are subject to tax.)
Early withdrawals before age 59 ½ are taxed as income and are typically subject to a 10% penalty, with some exceptions. Early withdrawals of contributions are not taxed, but earnings may be taxed and subject to a 10% penalty.
Account subject to RMD rules starting at age 73. No longer subject to RMD rules as of January 2024.

Bear in mind that a traditional 401(k) and Roth 401(k) also share many features in common:

•   The annual contribution limits are the same for a 401(k) and a Roth 401(k). For 2024, the total amount you can contribute to these employer-sponsored accounts is $23,000; if you’re 50 and older you can save an additional $7,500 for a total of $30,500. This is an increase over the 2023 limit, which was capped at $22,500 ($30,000 if you’re 50 and older).

•   For both accounts, employers may contribute matching funds up to a certain percentage of an employee’s salary.

•   In 2024, total contributions from employer and employee cannot exceed $69,000 ($76,500 for those 50 and up). In 2023, total contributions from employer and employee cannot exceed $66,000 ($73,500 for those 50 and up).

•   Employees may take out a loan from either type of account, subject to IRS restrictions and plan rules.

Because there are certain overlaps between the two accounts, as well as many points of contrast, it’s wise to consult with a professional when making a tax-related plan.

Recommended: Different Types of Retirement Plans, Explained

How to Choose Between a Roth and a Traditional 401(k)

In some cases it might make sense to contribute to both types of accounts (more on that below), but in other cases you may want to choose either a traditional 401(k) or a Roth 401(k) to maximize the specific advantages of one account over another. Here are some considerations.

When to Pay Taxes

Traditional 401(k) withdrawals are taxed at an individual’s ordinary income tax rate, typically in retirement. As a result these plans can be most tax efficient for those who will have a lower marginal rate after they retire than they did while they were working.

In other words, a traditional 401(k) may help you save on taxes now, if you’re in a higher tax bracket — and then pay lower taxes in retirement, when you’re ideally in a lower tax bracket.

On the other hand, an investor might look into the Roth 401(k) option if they feel that they pay lower taxes now than they will in retirement. In that case, you’d potentially pay lower taxes on your contributions now, and none on your withdrawals in retirement.

Your Age

Often, younger taxpayers may be in a lower tax bracket. If that’s the case, contributing to a Roth 401(k) may make more sense for the same reason above: because you’ll pay a lower rate on your contributions now, but then they’re completely tax free in retirement.

If you’re older, perhaps mid-career, and in a higher tax bracket, a traditional 401(k) might help lower your tax burden now (and if your tax rate is lower when you retire, even better, as you’d pay taxes on withdrawals but at a lower rate).

Where You Live

The tax rates where you live, or where you plan to live when you retire, are also a big factor to consider. Of course your location some years from now, or decades from now, can be difficult to predict (to say the least). But if you expect that you might be living in an area with lower taxes than you are now, e.g. a state with no state taxes, it might make sense to contribute to a traditional 401(k) and take the tax break now, since your withdrawals may be taxed at a lower rate.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

The Benefits of Investing in Both a Roth 401(k) and Traditional 401(k)

If an employer offers both a traditional and Roth 401(k) options, employees might have the option of contributing to both, thus taking advantage of the pros of each type of account. In many respects, this could be a wise choice.

Divvying up contributions between both types of accounts allows for greater flexibility in tax planning down the road. Upon retirement, an individual can choose whether to withdraw money from their tax-free 401(k) account or the traditional, taxable 401(k) account each year, to help manage their taxable income.

It is important to note that the $23,000 contribution limit ($30,500 for those 50 and older) for 2024 is a total limit on both accounts.

So, for instance, you might choose to save $13,500 in a traditional 401(k) and $9,500 in a Roth 401(k) for the year. You are not permitted to save $23,000 in each account.

What’s the Best Split Between Roth and Traditional 401(k)?

The best split between a Roth 401(k) and a traditional 401(k) depends on your individual financial situation and what might work best for you from a tax perspective. You may want to do an even split of the $23,000 limit you can contribute in 2024. Or, if you’re in a higher tax bracket now than you expect to be in retirement, you might decide that it makes more sense for you to put more into your traditional 401(k) to help lower your taxable income now. But if you expect to be in a higher income tax bracket in retirement, you may want to put more into your Roth 401(k).

Consider all the possibilities and implications before you decide. You may also want to consult a tax professional.

The Takeaway

Employer-sponsored Roth and traditional 401(k) plans offer investors many options when it comes to their financial goals. Because a traditional 401(k) can help lower your tax bill now, and a Roth 401(k) generally offers a tax-free income stream later — it’s important for investors to consider the tax advantages of both, the timing of those tax benefits, and whether these accounts have to be mutually exclusive or if it might benefit you to have both.

When it comes to retirement plans, investors don’t necessarily have to decide between a Roth or traditional 401(k). Some might choose one of these investment accounts, while others might find a combination of plans suits their goals. After all, it can be difficult to predict your financial circumstances with complete accuracy — especially when it comes to tax planning — so you may decide to hedge your bets and contribute to both types of accounts, if your employer offers that option.

Another step to consider is a 401(k) rollover, where you move funds from an old 401(k) into an IRA. When you do a 401(k) rollover it can help you manage your retirement funds.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is it better to contribute to 401(k) or Roth 401(k)?

Whether it’s better to contribute to a traditional 401(k) or Roth 401(k) depends on your particular financial situation. In general, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) may make more sense for you since you’ll be able to deduct your contributions when you make them, which can lower your taxable income, and then pay taxes on the money in retirement, when you’re in a lower income tax bracket.

But if you’re in a lower tax bracket now than you think you will be later, a Roth 401(k) might be the preferred option for you because you’ll generally withdraw the money tax-free in retirement.

Can I max out both 401(k) and Roth 401(k)?

No, you cannot max out both accounts. Per IRS rules, the annual 401(k) limits apply across all your 401(k) accounts combined. So for 2024, you can contribute a combined amount up to $23,000 (or $30,500 if you’re 50 or older) to your Roth 401(k) and your traditional 401(k) accounts.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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

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What Is The Difference Between a Pension and 401(k) Plan?

401(k) vs Pension Plan: Differences and Which is Better For You

A 401(k) plan is a retirement savings plan in which employees contribute to a tax-deferred account via paycheck deductions (and often with an employer match). A pension plan is a different kind of retirement savings plan in which a company sets money aside to give to future retirees.

Over the past few decades, defined-contribution plans like the 401(k) have steadily replaced pension plans as the private-sector, employer-sponsored retirement plan of choice. While both a 401(k) plan and a pension plan are employer-sponsored retirement plans, there are some significant differences between the two.

Here’s what you need to know about a 401(k) vs. pension.

What Is the Difference Between a Pension and a 401(k)?

The main distinction between a 401(k) vs. a pension plan is that pension plans are largely employer driven, while 401(k)s are employee driven.

These are some of the key differences between the two plans.

Pension

401(k)

Funding Typically funded by employers Funded mainly by the employee; employer may offer a partial matching contribution
Contributions No more than $275,000 in 2024 or 100% of employee’s average compensation for the highest 3 consecutive years $23,000 ($30,500 for those 50 and up) for 2024. Contributions from employee and employer cannot exceed $69,000 (or $76,500 for those 50 and up) in 2024
Investments Employers choose the investments for the plan Employees choose the investments from a list of options
Value of the Plan Set amount designed to be guaranteed for life Determined by how much the employee contributes, the investments they make, and the performance of the investments

Funding

Employees typically fund 401(k) plans through regular contributions from their paychecks to help save for retirement, while employers typically fund pension plans.

Investments

Employees can choose investments (from several options) in their 401(k). Employers choose the investments that fund a pension plan.

Value

The value of a 401(k) plan at retirement depends on how much the employee has saved, in addition to the performance of the investments over time. Pensions, on the other hand, are designed to guarantee an employee a set amount of income for life.


💡 Quick Tip: The advantage of opening an IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

Pension Plan Overview

A pension plan is a type of retirement savings plan where an employer contributes funds to an investment account on behalf of their employees. The earnings are paid out to the employees once they retire.

Types of Pension Plans

There are two common types of pension plans:

•   Defined-benefit pension plans, also known as traditional pension plans, are the most common type of pension plans. These employer-sponsored retirement investment plans are designed to guarantee the employee will receive a set benefit amount upon retirement (usually calculated with set parameters, i.e. employee earnings and years of service). Regardless of how the investment pool performs, the employer guarantees pension payments to the retired employee. If the plan assets aren’t enough to pay out to the employee, the employer is typically on the hook for the rest of the money.

According to the IRS, contributions to a defined-benefit pension plan cannot exceed 100% of the employee’s average compensation for the highest three consecutive calendar years of their employment or $265,000 for tax year 2023 and $275,000 for 2024.

•   Defined-contribution pension plans are employer-sponsored retirement plans to which employers make plan contributions on their employee’s behalf and the benefit the employee receives is based solely on the performance of the investment pool. Meaning: There is no guarantee of a set monthly payout.

Like 401(k) plans, employees can contribute to these plans, and in some cases, employers match the contribution made by the employee. Unlike defined-benefit pension plans, however, the employee is not guaranteed a certain amount of money upon retirement. Instead, the employee receives a payout based on the performance of the investments in the fund.

Recommended: What Is a Money Purchase Pension Plan (MPPP)?

When it comes to pension plan withdrawals, employees who take out funds before the age of 59 ½ must pay a 10% early withdrawal penalty as well as standard income taxes. This is similar to the penalties and taxes associated with early withdrawal from a traditional 401(k) plan.

Pros and Cons

There are benefits to and drawbacks of pension plans. It’s important to understand both in order to maximize your participation in the plan.

Advantages of a pension plan include:

Funded by employers

For employees, a pension plan is retirement income from your employer. In most cases, an employee does not need to contribute to a defined-benefit pension plan in order to get consistent payouts upon retirement.

Higher contribution limits

When compared to 401(k)s, defined-contribution pension plans have significantly higher contribution limits and, as such, present an opportunity to set aside more money for retirement.

A set amount in retirement

A pension plan typically provides employees with regular fixed payments in retirement,usually for life.

Disadvantages of a pension plan include:

Lack of control

Employees can’t choose how the money in a pension plan is invested. If the investments don’t pan out, the plan could struggle to pay out the funds.

Vesting

Employees may need to work for the employer for a set number of years to become fully vested in the plan. If you leave the company before then, you might end up forfeiting the pension funds. Find out what the vesting schedule is for your pension plan.

Earnings and years employed

How much an employee gets in retirement with a pension plan generally depends on their salary and how long they work for the employer.

401(k) Overview

A traditional 401(k) plan is a tax-advantaged defined-contribution plan where workers contribute pre-tax dollars to the investment account via automatic payroll deductions. These contributions are sometimes fully or partially matched by their employers, and withdrawals are taxed at the participant’s marginal tax rate.

With a 401(k), employees and employers may both make contributions to the account (up to a certain IRS-established limit), but employees are responsible for selecting the specific investments. They can typically choose from offerings from the employer, which may include a mixture of stocks and bonds that vary in levels of risk depending on when they plan to retire.

Recommended: 401(a) vs 401(k): What’s the Difference?

Contribution Limits and Withdrawals

To account for inflation, the IRS periodically adjusts the maximum amount an employer or employee can contribute to a 401(k) plan.

•   For 2024, annual employee contributions can’t exceed $23,000 for workers under 50, and $30,500 for workers 50 and older (this includes a $7,500 catch-up contribution). The total annual contribution by employer and employee in 2024 is capped at $69,000 for workers under 50, and $76,500 for workers 50 and over.

•   For 2023, annual employee contributions can’t exceed $22,500 for workers under 50, and $30,000 for workers 50 and older (this includes a $7,500 catch-up contribution). The total annual contribution paid by employer and employee in 2023 is capped at $66,000 for workers under 50, and $73,500 for workers 50 and over.

Some plans allow employees to make additional after-tax contributions to their 401(k) plan, within the contribution limits outlined above.

•   Money can be withdrawn from a 401(k) in retirement without penalties. But taxes will be owed on the funds withdrawn. The IRS considers the removal of 401(k) funds before the age of 59 ½ an “early withdrawal.” The penalty for removing funds before that time is an additional tax of 10% of the withdrawal amount (there are exceptions, notably a hardship distribution, where plan participants can withdraw funds early to cover “immediate and heavy financial need”).

Pros and Cons

While a 401(k) plan might not offer as clearly-defined a retirement savings picture as a pension plan, it still comes with a number of upsides for participants who want a more active role in their retirement investments.

Advantages of a 401(k) include:

Self-directed investment opportunities

Unlike employer-directed pension plans, in which the employee has no say in the investment strategy, 401(k) plans offer participants more control over how much they invest and where the money goes (within parameters set by their employer). Plans typically offer a selection of investment options, including mutual funds, individual stocks and bonds, exchange traded funds (ETFs).

Tax advantages

Contributions to a 401(k) come from pre-tax dollars through payroll deductions, reducing the gross income of the participant, which may allow them to pay less in income taxes. Also, 401(k) contributions and earnings in the plan may grow tax-deferred.

Employer matching

Many 401(k) plan participants are eligible for an employer match up to a certain amount, which essentially means free money.

Disadvantages of a 401(k) include:

No guaranteed amount in retirement

How much you have in your 401(k) by retirement depends on how much you contributed to the plan, whether your employer offered matching funds, and how the investments you chose fared.

Contributions are capped

The amount you can contribute to a 401(k) annually is capped by the IRS, as described above.

Less stability

How the market performs generally affects the performance of 401(k) investments. That could make it difficult to know how much money you’ll have for retirement, which could complicate retirement planning.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Which Is Better, a 401(k) or a Pension Plan?

When considering a 401(k) vs. pension, most people prefer the certainty that comes with a pension plan.

But for those who seek more control over their retirement savings and more investment vehicles to choose from, a 401(k) plan could be the more advantageous option.

In the case of the 401(k), it really depends on how well the investments perform over time. Without the safety net of guaranteed income that comes with a pension plan, a poorly performing 401(k) plan has a direct effect on a retiree’s nest egg.

Did 401(k)s Replace Pension Plans?

The percentage of private sector employees whose only retirement account is a defined benefit pension plan is just 4% today, versus 60% in the early 1980s. The majority of private sector companies stopped funding traditional pension plans in the last few decades, freezing the plans and shifting to defined-contribution plans like 401(k)s.

When a pension fund isn’t full enough to distribute promised payouts, the company still needs to distribute that money to plan participants. In several instances in recent decades, pension fund deficits for large enterprises like airlines and steel makers were so enormous they required government bailouts.

To avoid situations like this, many of today’s employers have shifted the burden of retirement funding to their workers.

What Happens to a 401(k) or Pension Plan If You Leave Your Job?

With a 401(k), if you leave your job, you can take your 401(k) with you by rolling it over to your new employer’s 401(k) plan or into an IRA. The process is fairly easy to do.

If you leave your job and you have a pension plan, however, the plan generally stays with your employer. You’ll need to keep track of it through the years and then apply in retirement to begin receiving your money.

The Takeaway

Pension plans are employer-sponsored, employer-funded retirement plans that are designed to guarantee a set income to participants for life. On the other hand, 401(k) accounts are employer-sponsored retirement plans through which employees make their own investment decisions and, in some cases, receive an employer match in funds. The post-retirement payout varies depending on market fluctuations.

While pension plans are far more rare today than they were in the past, if you have worked at a company that offers one, that money will still come to you after retirement even if you change jobs, as long as you stayed with the company long enough for your benefits to vest.

Some people have both pensions and 401(k) plans, but there are also other ways to take an active role in saving for retirement. An IRA is an alternative to 401(k) and pension plans that allows anyone to open a retirement savings account. IRAs have lower contribution limits but a larger selection of investments to choose from. And it’s possible to have an IRA in addition to a 401(k) or pension plan.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can you have both a 401(k) and a pension plan?

Yes. An individual can have both a pension plan and a 401(k) plan, though the two plans may not be from the same employer. If an employee leaves a company after becoming eligible for a pension and opens a 401(k) with a new employer, their previous employer will still typically maintain their pension. An employee can access the pension funds by applying for them in retirement.

How much should I put in my 401k if I have a pension?

If you have both a pension and a 401(k), it’s wise to contribute as much as you can to your 401(k) up to the annual contribution limit. While a pension can help supplement your retirement income, it may not be enough to cover all your retirement expenses, so contributing to your 401(k) can help fill the gap. One rule of thumb says to contribute at least 10% of your salary to a 401(k) if possible to help ensure that you’ll have enough savings for retirement.


Photo credit: iStock/Sam Edwards

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.


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How Much Should I Contribute to My 401(k)?

Once you set up your retirement plan at work, the next natural question is: How much to contribute to a 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you, such as the tax implications, your employer match (if there is one), the stage of your career, your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401(k).

401(k) Contribution Limits for 2024

Like most tax-advantaged retirement plans, 401(k) plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401(k); plus there is a cap on total employee-plus-employer contributions.

For tax year 2024, the contribution limit is $23,000, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,500. The combined employer-plus-employee contribution limit for 2024 is $69,000 ($76,500 with the catch-up amount).

Those limits are up from tax year 2023. The 401(k) contribution limit in 2023 is $22,500, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,000. The combined employer-plus-employee contribution limit for 2023 is $66,000 ($73,500 with the catch-up amount).

401(k) Contribution Limits 2024 vs 2023

2024

2023

Basic contribution $23,000 $22,500
Catch-up contribution $7,500 $7,500
Total + catch-up $30,500 $30,000
Employer + Employee maximum contribution $69,000 $66,000
Employer + employee max + catch-up $76,500 $73,500



💡 Quick Tip: How much does it cost to set up an IRA account? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

How Much Should You Put Toward a 401(k)?

Next you may be thinking, now I know the retirement contribution limits, but how much should I contribute to my 401(k)? Here are some guidelines to keep in mind as you’re deciding on your contribution amount.

When You’re Starting Out in Your Career

At this stage, you may be starting out with a lower salary and you also likely have commitments to pay for, like rent, food, and maybe student loans. So you may decide to contribute a smaller amount to your 401(k). If you can, however, contribute enough to get the employer match, if your employer offers one.

Here’s how it works: Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401(k) account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say your salary is $100,000 and your employer matches 50% of the first 6% you contribute to your 401(k). If you contribute up to the matching amount, you get the full employer contribution. It’s essentially “free” money, as they say.

To give an example, if you contribute 6% of your $100,000 salary to your 401(k), that’s $6,000 per year. Your employer’s match of 50% of that first 6%, or $6,000, comes to $3,000 for a total of $9,000.

As You Move Up in Your Career

At this stage of life you likely have a lot of financial obligations such as a mortgage, car payments, and possibly child care. It may be tough to also save for retirement, but it’s important not to fall behind. Try to contribute a little more to your 401(k) each year if you can — even 1% more annually can make a difference.

That means if you’re contributing 6% this year, next year contribute 7%. And the year after that bump up your contribution to 8%, and so on until you reach the maximum amount you can contribute. Some 401(k) plans have an auto escalation option that will automate the extra savings for you, to make the process even easier and more seamless. Check your plan to see if it has such a feature.

As You Get Closer to Retirement

Once you reach age 50, you’ll likely want to figure out how much you might need for retirement so you have a specific goal to aim for. To help reach your goal, consider maxing out your 401(k) at this time and also make catch-up contributions if necessary.

Maxing out your 401(k) means contributing the full amount allowed. For 2024, that’s $23,000 for those 49 and under. If, at 50, you haven’t been contributing as much as you wish you had in previous years, you can also contribute the catch-up contribution of $7,500. So you’d be saving $30,500 for retirement in your 401(k) in 2024. With the potential of compounding returns, maxing out your 401(k) until you reach full retirement age of 67 could go a long way to helping you achieve financial security in retirement.

The Impact of Contributing More Over Time

The earlier you start saving for retirement, the more time your money will potentially have to grow, thanks to the power of compounding returns, as mentioned above.

In addition, by increasing your 401(k) contributions each year, even by just 1% annually, the savings could really add up. For instance, consider a 35-year-old making $60,000 who contributes 1% more each year until their full retirement age of 67. Assuming a 5.5% annual return and a modest regular increase in salary, they could potentially save more than an additional $85,000 for retirement.

That’s just an example, but you get the idea. Increasing your savings even by a modest amount over the years may be a powerful tool in helping you realize your retirement goals.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Factors That May Impact Your Decision

In addition to the general ideas above for the different stages of your life and career, it’s also wise to think about taxes, your employer contribution, your own goals, and more when deciding how much to contribute to your 401(k).

1. The Tax Effect

The key fact to remember about 401(k) plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $100,000 per year, and you’re able to save the full $23,000 allowed by the IRS for 2024. Your taxable income would be reduced from $100,000 to $77,000, thus putting you in a lower tax bracket.

2. Your Earning Situation

One rule-of-thumb is to save at least 10% of your annual income for retirement. So if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and you may want to aim for more than that to make sure your savings will last given the cost of living longer.

For instance, consider the following:

•   Are you the sole or primary household earner?

•   Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?

•   When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

The Takeaway

Many people wonder how much to contribute to a 401(k). There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS. In 2024, the maximum contribution you can make to your 401(k) is $23,000, plus an additional $7,500 catch-up contribution if you’re 50 and up.

While few people can start their 401(k) journey by saving quite that much, it’s wise, if possible, to contribute enough to get your employer’s match early in your career, then bump up your contribution amounts at the midpoint of your career, and max out your contributions as you draw closer to retirement, if you can.

Another option is follow a common guideline and save 10% of your income beginning as soon as you can swing it. From there, you can work up to saving the max. And remember, you don’t have to limit your savings to your 401(k). You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Of course, a main determination of the amount you need to save is what your goals are for the future. By contemplating what you want and need to spend money on now, and the quality of life you’d like when you’re older, you can make the decisions that are best for you.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Help grow your nest egg with a SoFi IRA.

FAQ

How much should I contribute to my 401(k) per paycheck?

If you can, try to contribute at least enough of each paycheck to get your employer’s matching funds, if they offer a match. So if your employer matches 6% of your contributions, aim to contribute at least 6% of each paycheck.

What percent should I put in my 401(k)?

A common rule of thumb is to contribute at least 10% of your income to your 401(k) to help reach your retirement goals. Just keep in mind the annual 401(k) contribution limits so you don’t exceed them. For 2024, those limits are $23,000, plus an additional $7,500 for those 50 and up

Is 10% too much to contribute to 401(k)? What about 20%?

Contributing at least 10% to your 401(k) is a common rule of thumb to help save for retirement. If you are able to contribute 20%, it can make sense to do so. Just be sure not to exceed the annual 401(k) contribution limits of $23,000, plus an additional $7,500 for those 50 and older for 2024. The contribution limits may change each year, so be sure to check annually.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit 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.

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

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Can You Have a Joint Retirement Account?

No matter what stage of life you’re in, it’s likely that planning for retirement may be looming in the back of your mind. And that’s a good thing: According to the Center for Retirement Research, 39% of households are at risk for not having enough to maintain their living standards in retirement.

One way to start your retirement savings plan is to work shoulder-to-shoulder with your partner. You’ve no doubt heard of joint checking accounts, but what about joint retirement accounts – is there such a thing? Unfortunately, no. But while retirement plans like a 401(k) or IRA do not allow for multiple owners, there are ways couples can plan their retirement savings together.

How Couples Can Plan Together for Retirement

Although there are no joint retirement account options, you can prepare for your golden years together by combining retirement forces. Here’s how.

Review Your Retirement Goals as a Couple

Talking openly and honestly about your finances is one of the keys to building a healthy financial plan. A good first step is to have a productive conversation about your plans and goals for retirement with your significant other. Do you plan on staying in the same home during your retirement years? Perhaps you want to travel internationally once per year or buy a camper and travel across the country.

Determine the amount of money you want in retirement, too. While of course each couple’s retirement number is dependent upon their standard of living, you can calculate an estimate: Start with your current income, subtract estimated Social Security benefits, and divide by 0.04 to get your target number in today’s dollars.

Once you’ve put the numbers together and have a sense of how much you need to retire, you can figure out what you can safely withdraw to make your retirement last as long as you do.

💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open an IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.

Determine When Both of You Will Retire

Do you know when you will retire? How about your partner? Remember, retirement plans like 401(k)s and IRAs generally cannot be withdrawn from penalty-free until you reach age 59 ½.

If you or your partner do plan to retire earlier than 59 ½, it might make sense to put some of your retirement funds into a taxable brokerage account that you can access at any time.

Name Your Spouse as a Beneficiary

While there are many ways to start saving for retirement, unfortunately, there aren’t any options that operate as a joint retirement account by default. A work-around to this is for each of you to name your spouse as a beneficiary in your retirement account. If something were to happen to one of you, the other person would still have access to your accounts and the money in it.

Boost your retirement contributions with a 1% match.

SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.


Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.

Your Top Questions About Joint Retirement, Answered

These are some of the biggest questions couples have when it comes to joint retirement.

Can both spouses contribute to a 401(k)?

No — only one spouse can contribute to a 401(k) account. 401(k)s are employer-sponsored plans. So just the spouse who works at the company offering the plan can participate in it and contribute to it.

However, the other spouse can be a beneficiary of the plan. This means that if the original planholder dies, the spouse gets the inherited 401(k) and can then roll it into their own 401(k) or into an IRA.

How much can a married couple contribute to a 401(k)?

As noted above, 401(k) plans are individual, with only one person contributing to each account (along with their employer, in some cases). The maximum 401(k) contribution allowed in 2024 is $23,000, with an additional catch-up contribution of $7,500 for those 50 and older. With those figures in mind, if each partner has their own 401(k) plan, a married couple could each contribute $23,000 for a combined $46,000 a year.

The maximum 401(k) contribution allowed in 2023 is $22,500, with an additional catch-up contribution of $7,500 allowed for those 50 and older. That means if each partner has their own 401(k) plan, a married couple can each contribute $22,500 for a combined $45,000 a year in 2023.

How many IRAs can a married couple have?

If a couple is married and files their taxes jointly, each partner in the marriage can contribute to their own IRAs. There is a contribution limit, however — the total contributions to the IRAs “may not exceed your joint taxable income or the annual contribution limit on IRAs times two, whichever is less,” according to the IRS. The annual IRA contribution limit is $7,000, so the total limit is $14,000, for 2024. Those 50 and older can contribute an additional catch-up amount of $1,000.

For 2023, the IRA contribution limit is $6,500, so the total limit is $13,000. Those 50 and older can contribute an additional catch-up amount of $1,000.

Recommended: How Many IRAs Can You Have?

Can my wife contribute to an IRA if she doesn’t work?

Yes, a non-working spouse can open and contribute to an IRA (called a spousal IRA) as long as the other spouse is working and the couple files a joint federal income tax return. The spouse who doesn’t work can contribute up to the IRA limit of $7,000 in 2024, plus $1,000 additional in catch-up contributions if she is 50 or older.

What is a spousal Roth IRA?

A spousal IRA is a Roth or traditional IRA for a spouse who doesn’t work. A couple must file their taxes as married filing jointly to be eligible for a spousal IRA. The spouse who doesn’t work can contribute up to the IRA limit of $7,000 in 2024, plus $1,000 additional in catch-up contributions if she is 50 or older.

Can a husband and wife both have a Roth IRA?

A husband and wife can each have their own separate Roth IRAs. Your total contributions to both IRAs must not exceed your joint taxable income or the annual contribution limit to the IRAs times two. For 2024, you can each contribute $7,000 to your separate Roth IRAs, making the total contribution limit $14,000 for those under age 40. Those 50 and up can each contribute an extra $1,000 if they choose.

Can my non-working spouse have a Roth IRA?

Yes. Spousal IRAs can be traditional or Roth IRAs. In a Roth IRA, the money put into it is not tax deductible. Instead the money comes from taxable income but may grow tax free, so that an individual typically doesn’t have to pay taxes on the money that’s taken out of the account when they retire. While the contribution limits vary according to your tax filing and income status, typically the limit of contributions is the same as it is for traditional IRAs.

What is the maximum Roth contribution for a married couple?

In 2024, the annual limit for an IRA contribution is 7,000 per person, or $8,000 for those 50 and older. However, a Roth IRA has income limits. In 2024, a couple that is married filing jointly cannot contribute to a Roth IRA if their modified adjusted gross income (MAGI) is more than $240,000. Those with a MAGI between $230,000 and $240,000 can contribute a partial amount, and those whose income is less than $230,000 can contribute the full amount.

Should a married couple have two Roth IRAs?

Whether you should have two Roth IRAs is a personal decision. One consideration: Since a married couple cannot have a joint retirement account like a joint Roth IRA, if you each have a Roth IRA, you may be able to save more for retirement if you both contribute the full amount allowed to your separate IRAs. For 2024, that amount is $7,000 for those under age 50, and $8,000 for those 50 and up. However, your total contributions to both IRAs must not exceed your joint taxable income

The Takeaway

While no specific retirement savings plans — such as 401(k)s or IRAs — offer joint retirement accounts, there are ways for couples to plan and save for retirement together. One way is to each have your own separate IRAs that you contribute to. Another easy way to make sure you’re both taken care of in retirement is to make each other the beneficiaries on your individual accounts.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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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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