Jan
30
2022
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What Is a SIMPLE 401(k) Plan & How Do You Utilize It?

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on What Is a SIMPLE 401(k) Plan & How Do You Utilize It?

The Savings Incentive Match Plan for Employees 401(k), otherwise called a SIMPLE 401(k), is a simplified version of a traditional 401(k). SIMPLE plans were created so that small businesses could have a cost-efficient way to offer a retirement account to their employees.

SIMPLE 401(k) plans do not require annual nondiscrimination tests, which ensure that a plan is in line with IRS rules. This type of testing usually has to be done by professionals, which can be prohibitively expensive for small employers, preventing them from using other types of 401(k)s.

A SIMPLE 401(k) retirement plan is available to businesses with 100 or fewer employees including sole proprietorships, partnerships, and corporations. It’s also one of a number of retirement options for the self-employed. For small business owners or self-employed individuals, understanding how SIMPLE plans work can help decide whether it makes sense to set one up.

For employees whose employer already offers a SIMPLE 401(k), getting to know the ins and outs of the plan can help to understand the role they play in saving for retirement.

How Does a SIMPLE 401(k) Work?

A SIMPLE 401(k) functions much like a regular 401(k). Employees contribute pre-tax money directly from their paycheck and invest that money in a handful of options offered by the plan administrator.

In 2022, the SIMPLE 401(k) limits are as follows: The maximum for employee elective deferrals is $14,000 ($13,500 in 2021); employees 50 and older could make an additional “catch-up” contribution of $3,000 to boost their savings as they neared retirement.

One significant difference between traditional 401(k) plans and SIMPLE 401(k) plans is that while employer contributions are optional with a 401(k) plan, under a SIMPLE 401(k) plan they are mandatory and clearly defined. Employers must make either a matching contribution of up to 3% of each employee’s pay or make a nonelective contribution (independent of any employee contributions) of 2% of each eligible employee’s pay. The contribution must be the same for all plan participants: For example, an employer couldn’t offer himself a 3% match while offering his employees a 2% nonelective contribution.

There are other limits on how much an employer can contribute. The maximum compensation that could be used to figure out employer contributions and benefits is $305,000 for 2022 ($290,000 for 2021). So if an employer offered a 2% nonelective contribution and an employee made $355,000 a year, the maximum contribution the employer could make would be 2% of $305,000, or $6,100.

As with a regular 401(k), contributions to a SIMPLE plan grow tax-deferred—meaning an employee contributes pre-tax dollars to their plan, and doesn’t pay income tax on that money until they withdraw funds upon retirement. Typically, the tax-deferred growth means that there is more money subject to compounding interest, the returns investments earn on their returns.

Withdrawals made before or during retirement are subject to income tax.

Who Is Eligible for a SIMPLE 401(k)?

To be eligible for a SIMPLE 401(k), employers must have 100 or fewer employees. They cannot already offer these employees another retirement plan, and must offer the plan to all employees 21 years and older.

Employers must also file Form 5500 every year if they establish a plan.

For employees to be eligible, they must have received at least $5,000 in compensation from their employer in the previous calendar year. Employers cannot require that employees complete more than one year of service to qualify for the SIMPLE plan.

What Are the Pros of a SIMPLE 401(k) Plan?

SIMPLE 401(k)s offer a number of benefits that make them attractive to employers and employees.

•  Simplified rules: While large companies may have the money and staff to devote to nondiscrimination testing, smaller companies may not have the same resources. SIMPLE 401(k) do not have these compliance rules, making them more accessible for small employers. What’s more, the straightforward benefit formula is easy for employers to administer.
•  “Free money”: Employees are guaranteed employer contributions to their retirement account, whether via 3% matching contributions or 2% nonelective contributions.
•  Fully-vested contributions: All contributions—those made by employees and their employers—are fully vested immediately. Employees who qualify for distributions can take money out whenever they need it. While this can be good news for employees, for employers it removes the option to incentivize workers to stay in their job longer by having their contributions vest several years into their tenure with the company.
•  Loans and hardship withdrawals: While withdrawals made before age 59 1/2 are subject to tax and a possible 10% early withdrawal penalty, employees can take out loans against their SIMPLE 401(k) just as they can with a traditional 401(k). These options add flexibility for individuals who need money in an emergency. It’s important to note that 401(k) loans come with strict rules for paying them back. Failing to follow these rules may result in stiff penalties.

What Are the Cons of a SIMPLE 401(k) Plan?

While there are plenty of positives that come from offering or contributing to a SIMPLE 401(k), there are also some important downsides.

•  Plan limitations: Employers cannot offer employees covered by a SIMPLE 401(k) another retirement plan. So employees and self-employed individuals who want to have both a 401(k) and a personal IRA may be limited by this type of plan.
•  Lower contribution limits: For 2022, a traditional 401(k) plan allows for $20,500 annual maximum 401(k) contributions from employees, with an additional $6,500 catch-up contribution for those 50 and older. These contribution limits are considerably higher than SIMPLE plan limits, which are $14,000 with an additional “catch-up” contribution of $3,000 for employees over age 50. This means an employee could contribute an additional $6,500 in elective deferrals and $3,500 in catch-up contributions with a traditional 401(k).
•  Limited size: SIMPLE Plans are only available to employers with fewer than 100 employees. That means if a business grows beyond that point, they have a two-year grace period to switch from their SIMPLE plan to another option.

SIMPLE 401(k) vs. SIMPLE IRA

Generally speaking, when comparing SIMPLE IRAs and 401(k)s, the rules are similar:

•  They’re only available to businesses with 100 or fewer employees.
•  Employers must either offer a 3% matching contribution or a 2% nonelective contribution.
•  Employers can only make nonelective contributions on up to $305,000 in employee compensation.
•  Employee contribution limits to SIMPLE IRAs are the same as their 401(k) counterparts.
•  Employer and employee contributions are fully vested immediately.

There are a few differences worth mentioning:

•  Whereas all employer contributions are subject to the cap for SIMPLE 401(k)s, only nonelective contributions are subject to the $305,000 compensation cap for SIMPLE IRAs. (This makes it possible that employees making more than $305,000 annually may receive higher matching contributions from a SIMPLE IRA than they would from a SIMPLE 401(k).)
•  If employers make matching contributions of 3%, they may elect to limit their contribution to no less than 1% for two out of every five years.
•  SIMPLE IRAs do not allow employees to take out loans from their account for any reason.
•  There are no minimum age requirements for SIMPLE IRA contributions.

The Takeaway

SIMPLE 401(k) plans can be especially attractive for self-employed individuals or small business owners, as they have many of the same benefits of a traditional 401(k) plan—including tax-deferred contributions and loan options—but without the administrative compliance costs that come with a regular 401(k) plan.

Some of the requirements and rules associated with a SIMPLE 401(k) plan might be unattractive to some employers, however, including the fact that the IRS prohibits employers from offering other types of retirement plans to employees who are covered by a SIMPLE 401(k).

There are many answers to the question of which retirement savings plan is right for you or your business. Beyond traditional 401(k) and SIMPLE (401)k plans, there are traditional, Roth, SIMPLE and SEP IRAs, among other options.

When it comes to setting retirement goals and learning about the best ways to meet them, SoFi Invest® can help. SoFi offers Roth or traditional IRAs, as well as a broad range of investment options, member services, and a robust suite of planning and investment tools

Find out how SoFi Invest can help you plan for your future.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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 to sell, solicitation to buy or a pre-qualification of any loan product offered by SoFi Lending Corp and/or its affiliates.
Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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Jan
30
2022
What Is The Difference Between a Pension and 401(k) Plan?

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

By | Growing Wealth, invest, Preparing for Retirement | Comments Off on What Is the Difference Between a Pension and 401(k) Plan?

A 401(k) plan is a retirement 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 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 plants, there are some significant differences between the two.

How Are 401(k) Plans Different From Pension Plans?

Pension plans and 401(k) plans are both valuable employee retirement benefits. The first step to making the most of an employer retirement plan is understanding the differences between them. The main distinction between a 401(k) and a pension plan is that pension plans are largely employer driven, while 401(k)s are employee driven.

Funding

Employees typically fund 401(k) plans, while employers typically fund pension plans.

Investments

Employees can choose investments (from several options) in their 401(k), while 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, guarantee a set amount of income for life.

What Is a Pension and How Does It Work?

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 become income for the employees once they retire.

There are two common types of pension plans:

•  Defined-benefit pension plans, also known as traditional pension plans, are employer-sponsored retirement investment plans that 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 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 ($245,000 for 2022).

•  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.

Pension Plan Advantages

The main advantage for employees in pension plans is that this is extra 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.

Other advantages of pension plans include:

Tax savings

IRS-qualified pension plans may provide tax benefits to contributors, whether employers or employees. In many instances, contributions occur with pre-tax dollars.

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.

Compound interest

Compound interest is interest earned on the initial investment as well as on subsequent interest, which accumulates over time. The sooner a person starts investing in a pension plan, the more they can benefit from compounding interest.

Decreased market risk

The market risk for a pension vs. 401(k) is significantly lower because a defined-benefit pension plan means a guarantee of lifetime income.

Payroll deduction savings

Much like 401(k) contributions, defined-contribution pension plan contributions are withheld directly from an employee’s pay. This makes it simpler and more straightforward to save money for retirement than manually transferring funds into a separate account.

What Is a 401(k) and How Does It Work?

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 an array of offerings from the employer and include a mixture of stocks and bonds that vary in levels of risk depending on when they plan to retire.

The IRS considers the removal of any 401(k) funds before the age of 59 ½ an “early withdrawal.” The penalty for removing funds before that time is an additional income 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”).

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

401 (k) Contribution Limits

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

•  For 2022, annual employee-only contributions can’t exceed $20,500 for workers under 50, and $27,000 for workers over 50 (this includes a $6,500 catch-up contribution).

•  The total annual contribution paid by employer and employee in 2022 is capped at 100% of compensation or $61,000 for workers under 50, $67,500 for workers over 50, or 100% of employee compensation—whichever is less.

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

Recommended: 5 Ways to Rebuild Your Retirement Savings

401(k) Plan Advantages

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.

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), and non-traditional assets like real estate.

Tax advantages

One of the biggest benefits of participating in a 401(k) plan is the tax savings. Contributions to a 401(k) come from pre-tax dollars through payroll deductions, reducing the gross income of the participant and allowing them to pay less in income taxes overall. Also, 401(k) plan participants don’t pay taxes on their gains, so they can grow even more money over time.

Employer matching

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

Why Did 401(k) Plans Largely Replace Pension Plans?

The percentage of private sector employees whose only retirement account is a defined benefit pension plan is just 3% 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. Upon filing for bankruptcy, these employers forfeited responsibility for their retirement plan obligations and shifted the burden to US taxpayers.

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

401(k) vs. Pension: Which Is Better?

When considering a pension versus a 401k, 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.

Can You Have a Pension Plan and a 401(k) Plan?

Yes. A person can have both a pension plan and a 401(k) plan, but usually not 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 maintain their pension, though the employer will no longer pay into the account. An employee can still access their former retirement account linked to the previous employer in order to use pension funds.

Beyond Employer-Sponsored Plans: The IRA

A traditional Individual Retirement Account, or IRA, is another tax-advantaged investment option you can use to save for retirement. One major benefit of an IRA is that anyone can set up an IRA, whether they’re self-employed, work part time, or already have a 401(k) with an employer and want to save extra retirement funds.

IRAs have a larger investment selection and offer significant tax advantages. In the case of Roth IRAs, there are no penalties for withdrawing funds before the age of 59 ½.

The only catch, of course, is that with an IRA there is no employer to offer matching contributions. In addition, the contribution limits are lower than 401(k) limits. For 2021 & 2022, contributions to traditional IRA plans are capped at $6,000 for individuals under age 50, and $7,000 (using catch-up contributions) for people over age 50.

Recommended: IRA vs 401(k)–What Is the Difference?

The Takeaway

Pension plans are employer-sponsored, employer-funded retirement plans that 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 30 years ago, 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 your company long enough for your benefits to vest.

Some people have both pensions and 401(k) plans, but there are 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.

An online retirement account with SoFi Invest® puts you in the driver’s seat by helping you set your goals, diversify your portfolio, and get solid advice every step of the way. You can use the account to open an IRA and start investing in stocks, exchange-traded funds, and other types of investments.

Find out how SoFi Invest® can help with your personal retirement goals.

Photo credit: iStock/Sam Edwards


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SoFi Invest refers to the two 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 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, including state licensure of SoFi Digital Assets, LLC, 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. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Bank, N.A.

Advisory services are offered through SoFi Wealth LLC, an SEC-registered investment adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at adviserinfo.sec.gov .

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Jan
30
2022
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Roth IRA Conversion Rules

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on Roth IRA Conversion Rules

Individuals choosing a retirement plan have several options: a 401(k), an Individual Retirement Account (IRA), or Roth IRA.

While a 401(k) is typically offered by an employer, the IRA options allow for more user control and personalization when it comes to investing.

There are important differences for investors to know between a traditional IRA and a Roth IRA, especially when it comes to converting from the former to the latter.

Here are some things to know potential tax implications, who it may be right for, and when it may be a good time to convert investments in a traditional IRA to a Roth IRA.

What is a Roth IRA Conversion?

A person may already have the aforementioned traditional IRA and want to convert it into a Roth IRA instead for tax purposes (which we’ll get into in a second). Deciding to convert a traditional IRA to a Roth IRA comes down to a few factors, all of which are personal to each individual investor, making it important to weigh the pros and cons and to discuss any decision with a financial advisor.

That said, to convert into a Roth IRA a person must first put money into a traditional IRA account. If you don’t already have one you will need to open one and put funds in it.

Next, a person must pay taxes on their IRA contributions as well as on gains. That is because, again, only post-tax contributions are allowed in a Roth IRA. Then a person can convert the account to a Roth IRA. This will mean opening a new account during the conversion with a Roth IRA provider.

This IRA rollover can happen a few ways: via an indirect rollover, where the owner of the account receives a distribution from a traditional IRA and can then contribute it to a Roth IRA within 60 days; a trustee-to-trustee, or direct rollover, where an account owner tells the financial institution currently holding the traditional IRA assets to transfer an amount directly to the trustee of a new Roth IRA account at a different financial institution; and a same trustee transfer, used when a traditional IRA is housed in the same financial institution of the new Roth IRA. The owner of the account alerts the institution to transfer an amount from the traditional IRA to the Roth IRA.

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. Offer ends 12/31/23.

What Are the Advantages of Converting to a Roth IRA?

One of the biggest advantages to a Roth IRA may be the ability to withdraw tax-free funds in retirement. Because remember, with a Roth IRA all contributions are already taxed, meaning the money in retirement is fair game. The only thing a person will have to pay taxes on is the money the investments earned (along with any contributions a person originally deducted on their taxes).

A Roth IRA also allows users to invest for a longer period of time. A traditional IRA forces users to take out the required minimum distributions every year after the age of 72 ( or at the age 70½ if the person reached the age 70½ before 2020 ). This means a person must withdraw funds even if they do not need them. However, a Roth IRA has no required minimum distributions so the money can stay right in the account—and continue to grow—until it’s actually needed. This could help someone increase their wealth for an even longer period of time before having to pull from and live off of retirement funds.

When Would Someone Convert to a Roth IRA?

Timing a conversion can be tricky, and again it’s important to discuss all plans and potentials with a personal advisor who can go over individual risk factors vs. benefits to help people make a decision for themselves. But, in general, there are times that may be more opportune than others to convert.

Those times typically include attempting to convert early in the tax year to give a person more time to pay any applicable taxes on the conversion. More opportune times to look into a Traditional IRA to a Roth IRA conversion also include during any personal economic downturns. Usually, this includes If a person falls into a lower tax rate than normal by switching jobs or experiencing a lengthy unemployment period.

During both of these situations, a person may be able to avoid higher tax penalties on conversion due to finding themselves in a lower-tiered tax bracket. This also applies to when a traditional IRA account balance is down. If the larger market takes a downturn and a personal IRA also takes a hit, it may be a good time to convert to again avoid high tax fees.

What Are the Downsides to Converting to a Roth IRA?

A Roth IRA conversion may not be the best fit for everyone such as those who are nearing retirement, as it’s likely they will have to pay taxes on the funds while converting. Again, think about the future, discuss options with a financial advisor, and consider converting when potential tax implications are low.

The Takeaway

A Roth IRA conversion may help individuals save on taxes. It can help you have tax-free withdrawals in retirement. However, the timing of your conversion may be important.

If you’re ready to take your retirement financial knowledge to the next level it’s time to speak to a specialist. Opening a SoFi Invest® account allows users access to a team of credentialed financial advisors.

With the help of SoFi financial advisors, you can determine your financial goals and establish a plan to help you get to where you want to be today, tomorrow, and far into the future.

Ready to start saving for retirement? See how a SoFi retirement investment account can help you meet those retirement goals.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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.

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

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

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Jan
30
2022
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Should You Have a Joint Retirement Account?

By | invest, Investing, Preparing for Retirement | No Comments

No matter what stage of life you’re in—tackling student loan debt or buying a house—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, 50% 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 have probably heard of joint checking accounts, but what about joint retirement accounts? While some retirement plans do not allow for multiple owners, there are ways couples can plan their retirement savings together.

How Couples Can Plan Together for Retirement

Joint retirement accounts may not be straightforward, but there is a way to work on retirement plans as a couple. Prepare your golden years with a few tips to combine retirement forces.

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 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, SoFi’s Retirement Calculator should help give you an estimate: Start with 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, you can figure out what you can safely withdraw from to make your retirement last as long as you do.

Determine When Both of You Will Retire

Do you know when you and your partner will retire? Remember, retirement plans like 401(k)s and IRAs cannot be withdrawn penalty-free until you reach age 59½.

If you or your partner do plan to retire earlier than 59½, 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 to name your spouse as a beneficiary in your retirement account, or as your power of attorney. 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. Offer ends 12/31/23.

Joint Retirement Account Options

Not sure which retirement plan is right for you? Avoid over-complicating your retirement plans and retirement plan types. Having several accounts that aren’t maxed out might not work in your favor.

Focus on one type of retirement account first and work on maxing it out before moving on to a different retirement vehicle. In this way, you get the maximum benefit of the account for retirement.

There are a number of ways you can make the most of individual accounts and view them as joint retirement accounts. Here are specific advantages and strategies for each plan—from a 401(k) retirement account to a Roth IRA.

401(k) plans

401(k) plans are retirement plans sponsored by your employer, so only you, the employee, can enroll in one. To include your spouse, you can designate them as a beneficiary, but they won’t be able to contribute to the plan.
You can defer taxes as a couple by maxing out your respective 401(k) plans. Because 401(k) contributions are made before tax, you won’t be taxed on that money until you retire and start withdrawing from the account.

Roth IRAs and Traditional IRAs

There are benefits on both sides of the traditional IRA vs Roth IRA debate, but one thing is universally true: Traditional or Roth IRAs are individual retirement accounts—there can only be one owner. But while you can’t have a joint IRA account, you can designate your partner as a beneficiary, so that in case anything were to happen to you, your partner would receive the funds.

Can married couples combine IRAs? No. But for couples who want to maximize the use of IRAs, each one of you can open an IRA and contribute up to $6,000 per year individually, for a combined $12,000 annually.

Some couples may not qualify for a full tax deduction for their traditional IRA, depending on their income and if they are covered by a retirement plan at work. If both are covered and file jointly, the deduction is reduced if their modified adjusted gross income is more than $109,000; the deduction phases out at a modified AGI of $129,000.

If only one is covered by a retirement plan, the deduction is reduced if their modified AGI is more than $198,000; the deduction phases out at a modified AGI of $208,000.

Spousal IRAs

If you have a partner who is not working or makes a low income, your spouse could qualify for a spousal independent retirement arrangement (IRA). This isn’t a special type of IRA, rather it’s a traditional or Roth IRA that allows a non-working spouse to use as a retirement vehicle.

Spousal IRAs are not technically a joint retirement account, but you do need to be married and filing a joint tax return in order to apply for one. The maximum annual contribution for a spousal IRA is $6,000 per year, and you can name your spouse as a beneficiary to the account.

Brokerage Accounts

Brokerage accounts aren’t technically retirement-only vehicles, but you can certainly use one (or several) as joint retirement accounts.

Brokerage accounts can be made up of the same funds that you would use in a 401(k) or IRA. While these accounts don’t offer tax advantages—your investment earnings are taxed in the current year, not upon withdrawal in retirement—you can access or withdraw the money at any time without any additional penalty.

When you have a joint brokerage account, both you and your partner can be equal owners of the account. With some accounts, that means that any money that is moved or funds that are bought or sold must also be approved by the other owner. Other accounts are set up so that one account holder can make a decision without “approval” by the other.

Common Joint Retirement Account Questions

Can both spouses contribute to 401(k)?

No—only one spouse can contribute to a 401(k) account. 401(k)’s are tied to employment at a company that offers the plan to employees.

However, a 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)?

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 2022 is $20,500, with so-called “catch-up” contributions of $6,500 allowed for those over 50. With those figures in mind, if each partner has their own 401(k) plan, a married couple can each contribute $20,500 for a combined $41,000 a year.

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 limit — the total contributions to both 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 contribution limit is $6,000, so the total limit is $12,000. Those over age 50 can contribute an additional “catch-up” amount of $1000.

Can my non-working spouse have a Roth IRA?

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

The Takeaway

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

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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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FINRA / SIPC . SoFi Securities LLC is an affiliate of SoFi Bank, N.A. SoFi Money Debit Card issued by The Bancorp Bank.
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Jan
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2022
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Roth IRA 5-Year Rule, Explained

By | Growing Wealth, Investing, Preparing for Retirement | Comments Off on Roth IRA 5-Year Rule, Explained

The Roth IRA 5-year rule is one of the rules that governs what an investor can and can’t do with funds in a Roth IRA. The Roth IRA 5-year rule comes into play when a person withdraws funds from the account; rolls a traditional IRA account into a Roth; or inherits a Roth IRA account.

Quick Review of Roth IRAs

Numerous financial institutions offer Roth IRAs, including SoFi. Once the account is open, the investor can contribute funds to it each year, up to annual caps, to build a nest egg for retirement years.

For 2021 & 2022, the maximum IRS contribution limit for Roth IRAs is $6,000 annually. Investors over age 50 are allowed to contribute an extra $1000 a year in catch-up contributions, for a total of $7,000. There is no upper age limit for contributing to a Roth IRA, though the IRS does limit contributions for certain filing statuses and income thresholds. Employees who contribute to their company-sponsored retirement plan can also contribute to a Roth IRA.

Contributions to a Roth IRA are made with after-tax income and are not tax deductible. Taxes are paid on an investor’s current income, not on the potentially higher income the investor may be earning at retirement time when they begin taking distributions.

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Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included. Offer ends 12/31/23.

How does the Roth IRA 5-Year Rule Work?

Roth IRA contributions can be withdrawn at any time without tax or penalty, for any reason at any age. Investment earnings on those contributions can typically be withdrawn, tax-free and without penalty, once the investor reaches the age of 59½, as long as the account has been open for at least a five-year period.

For example, say an investor who contributes $5,000 into a Roth IRA during 2019 earns $400 in interest and wants to withdraw a portion of their money. Since this retirement account is less than five years old, only the $5,000 contribution could be withdrawn. If part or all of the $400 investment earnings is withdrawn sooner than five years after opening the account, this money may be subject to a 10% tax.

Special Circumstances and Exceptions to the Five-Year Rule

According to the IRS , a Roth IRA account holder who takes a withdrawal before the account is five years old may not have to pay the 10% additional tax in the following situations:

•  You have reached age 59½.

•  You are totally and permanently disabled.

•  You are the beneficiary of a deceased IRA owner.

•  You use the distribution to buy, build, or rebuild a first home.

•  The distributions are part of a series of substantially equal payments.

•  You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income for the year.

•  You are paying medical insurance premiums during a period of unemployment.

•  The distributions aren’t more than your qualified higher education expenses.

•  The distribution is due to an IRS levy of the qualified plan.

•  The distribution is a qualified reservist distribution.

How to Shorten the 5-Year Waiting Period

To shorten the five-year waiting period, an investor could open a Roth IRA online and make a contribution on the day before income taxes are due and have it applied to the previous year. For example, if one were to make the contribution in April 2017, that contribution could be considered as being made in the 2016 tax year. As long as this doesn’t cause problems with annual contribution caps, the five-year window would effectively expire in 2021 rather than 2022.

If the same investor opens a second Roth IRA—say in 2018—the five-year window still expires (in this example) in 2021. The initial Roth IRA opened by an investor determines the beginning of the five-year waiting period for all subsequently opened Roth IRAs.

Roth IRA Conversion 5-Year Rule

Some investors who have traditional IRAs may consider rolling them over into a Roth IRA. Typically, the money converted from the traditional IRA to a Roth is taxed as income, so it may make sense to talk to a financial advisor before making this move.

If this conversion is made, then the question becomes how the five-year rule applies to this Roth IRA. The key date for this part of the five-year rule is the tax year in which it happened. So, if an investor converted a traditional IRA to a Roth IRA on September 15, 2018, the five-year period would start on January 1, 2018. If the conversion took place on March 10, 2019, the five-year period would start on January 1, 2019. So, unless the conversion took place on January 1 of a certain year, which is unlikely, then the 5-year rule doesn’t literally equate to five full calendar years.

If an investor makes multiple conversions from a traditional IRA to a Roth IRA, perhaps one in 2018 and one in 2019, then each conversion has its own unique five-year window for the rule.

Inherited Roth IRA 5-Year Rule

When the owner of a Roth IRA dies, the balance of the account may be inherited by beneficiaries. These beneficiaries can withdraw money without penalty, whether the money they take is from the principal (contributions made by the original account holder) or from investment earnings. If the original account holder had the Roth IRA for fewer than five tax years, however, the earnings portion of the beneficiary withdrawals is subject to taxation until the five-year anniversary is reached.

People who inherit Roth IRAs, unlike the original account holders, must take required minimum distributions. They can do so by withdrawing funds by December 31 of the fifth year after the original holder died, or have the withdrawals taken out based upon their own life expectancy. If the five-year withdrawal plan is chosen, the funds can be taken out in partial distributions or in a lump sum. If the account is not emptied by December 31 of that fifth year, the consequence may be a 50% penalty on remaining funds.

The Takeaway

For Roth IRA account holders, five is the magic number. After the account has been opened for five years, an account holder who is 59 1/2 or older can withdraw investment earnings without incurring taxes or penalties. While there are exceptions to this so-called 5-year rule, for anyone who has a Roth IRA account, this is important information to know about.

Some people choose a Roth IRA as part of their retirement planning because the account is funded now with after-tax dollars, and qualified withdrawals can be made tax-free. SoFi Invest® offers Roth IRAs as well as traditional and SEP IRAs.

Find out how to start saving for retirement with SoFi Invest.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
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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