Differences and Similarities Between Personal Lines of Credit and Credit Cards

Differences and Similarities Between Personal Lines of Credit and Credit Cards

Credit cards and personal lines of credit both allow you to borrow money over time until you hit a credit limit. You typically pay back what you owe on a monthly basis, paying interest on your balance.

Each method has its pros and cons (for example, while a line of credit may have a lower interest rate, it likely won’t offer rewards and may be tougher to qualify for). Here, you’ll learn the ins and outs of a personal line of credit vs. a credit card so you can decide which is right for you.

What Is a Personal Line of Credit?

A personal line of credit operates under the same concept as a credit card, with slight differences. It’s a type of revolving credit that allows you to borrow a set amount, which is typically based on your income. Here are details to know:

•   The majority of personal lines of credit are unsecured, meaning there’s no collateral at risk if you default on payments. However, you can obtain a secured personal line of credit at some institutions if you put down a deposit. This deposit will be used to pay your balance due if you default on payments, but it can also help you achieve a lower interest rate. Personal loans secured by a deposit are typically used as a method for building credit.

•   A home equity line of credit (or HELOC) is similar to a secured personal line of credit in that your house acts as the collateral in the loan. You’re borrowing against the equity in your home. If you default on payments, your house could be foreclosed on to make up the difference.



💡 Quick Tip: A low-interest personal loan can consolidate your debts, lower your monthly payments, and help you get out of debt sooner.

How Does a Personal Line of Credit Work?

Get acquainted with how a personal line of credit works:

•   As with any other credit transaction, personal lines of credit are reported to the three major credit bureaus. You will have to provide details about your financial standings in order to qualify for a personal line of credit. Typically, this comes in the form of demonstrating your income, in addition to other requirements.

•   The interest rate for a personal line of credit usually fluctuates with the market conditions, such as the prime rate. You may also have to pay a fee each time you use your personal line of credit.

•   Some banking institutions may require you to have a checking account established with them before offering you a personal line of credit. This is critical for using your personal line of credit, since the money can be transferred to a linked checking account. (In some cases, you might receive funds via a payment card (similar to a debit card) or use special checks to move the funds.

•   Personal lines of credit contain what’s called a “draw period.” During this predetermined amount of time, you can use your available credit as you please, as long as you don’t go over the limit.

•   Once the draw period reaches its end, you may be required to either pay your remaining balance in full or pay it off by a certain date after that.

What Is a Credit Card?

Is a credit card a line of credit? Not exactly. A credit card is a type of unsecured revolving credit that includes a credit limit. This limit is determined by your financial situation, which requires a hard credit check. There are credit cards for practically all types of credit scores, from poor all the way up to excellent.

Many credit cards offer rewards in the form of cash back or travel rewards. You may also receive a bonus for signing up for a new account, either as rewards or as an interest-free, introductory financing period. Also, a credit card can offer cardholder benefits such as purchase protection or travel insurance.

How Does a Credit Card Work?

Your personal bank or other financial institutions may offer their own credit cards, but you don’t have to belong to a particular bank or lender in order to qualify for a credit card. After you’ve applied for a credit card and been approved, the lender will likely set a credit limit.

•   When you make a purchase with a credit card, it constitutes a loan. At the end of each billing cycle you’ll receive a statement. You can usually avoid interest charges by paying your statement balance in full.

•   If you choose to pay a lesser amount, you’ll incur interest charges. Credit cards typically charge high interest, so it’s important to stay on top of the amount you owe, which can increase quickly.

•   If you don’t make a payment by the statement due date, you will likely also incur a late payment fee. Interest charges and fees are added to the account balance, and interest will accrue on this new total.

•   If you miss payments by 60 days typically, you could be assessed a higher penalty APR.

Recommended: Average Personal Loan Rates

Personal Lines of Credit Vs Credit Cards Compared

Now that you know a bit more about each of these options, you know that the answer to “Is a line of credit the same as a credit card?” is no. Now, take a closer look at the difference between a line of credit and a credit card.

Similarities

Both personal lines of credit and credit cards are types of revolving credit. This means you can borrow up to a certain amount as it suits you, as long as you pay the balance back down in order to make room for future purchases.

Both personal lines of credit and credit cards also report your balance and payment history to the three major consumer credit bureaus.

Differences

Here’s a quick summary of the main differences between personal lines of credit and credit cards.

Features

Personal Line of Credit

Credit Card

Interest rate Typically lower than credit cards Typically higher than personal lines of credit
Borrowing limit Often up to $50,000 or more Typically, $28,000 but varies
Rewards None Many cards offer cash back or travel rewards
Fees Annual fee, late payment fees, fees for drawing on account Annual fees, balance transfer fees, late payment fees and penalty APRs, overdraft fees
Application process Can be lengthy Usually very simple
Grace period No Yes
Other benefits Good for emergency and/or unexpected expenses Many cards offer travel insurance, purchase protection, and other benefits.



💡 Quick Tip: Swap high-interest debt for a lower-interest loan, and save money on your monthly payments. Find out why credit card consolidation loans are so popular.

Pros and Cons of Personal Lines of Credit

There are times when a personal line of credit can make life much simpler. However, you may have to accept certain tradeoffs.

Pros

Cons

Lower fees for a cash advance Potential fees for usage
High borrowing limits Preset credit lifespan
Lowwe interest rates No spending rewards or perks
Funds can be used at your discretion No interest-free grace period
You only pay interest on what you borrow Annual fee

Pros and Cons of Credit Cards

Credit cards are a powerful financial tool you can use to wisely manage your spending. Knowing the terms of the game, however, is just as important as learning how to be responsible with credit cards.

Pros

Cons

Many cards offer rewards for spending Some cards have annual fees
Can be used for retail purchases Typically high interest rates
One for practically every credit score Hefty fees for cash advances
Useful tool in establishing and/or rebuilding credit Balance transfer fees

Recommended: Credit Score vs. FICO® Score

Alternatives to Revolving Credit

Besides personal lines of credit and credit cards, there are a few other types of financial products you can use to access credit.

Personal Loans

It may be easy to get personal loans vs. lines of credit confused, but it’s crucial to know the difference. For example, a personal line of credit is a potential amount that can be borrowed. Personal loans, however, are a lump sum of money that you receive shortly after your approval. Here’s how this kind of loan typically:

•   Obtaining either a secured or unsecured personal loan requires a credit check. The potential amount you may be able to borrow ranges from $1,000 all the way up to $40,000 or more.

•   Some personal loans are taken out for a specific purpose, such as a home renovation, a personal line of credit can often be used for whatever reason crops up. For example, you may want to go with a personal loan instead of a line of credit if you need to make home renovations.

•   A personal loan rate calculator can be used to see what terms you may be able to expect. While these calculators may not give you the exact terms you’ll receive if you do obtain a personal loan, they can be a great starting place.

Auto Loan

Many people don’t have thousands of dollars sitting around to help pay towards a new car, so they use auto loans. An auto loan is a kind of personal loan that’s secured by the title of the vehicle.

If the borrower fails to pay the loan, the vehicle can be repossessed. And the name of the lender typically appears on the title of the car, so the loan must be paid off before the car can be sold.

Mortgage

A mortgage, or home loan, is a loan that’s secured by a real estate property. Because of the inherent value of real estate, a home mortgage can often have a lower interest rate than other types of secured loans. Most home mortgages are installment loans that have a fixed repayment period, such as 30 years or 15 years.

A home equity loan or a home equity line of credit is a second mortgage taken out against the existing equity in a property. Because of their low interest rates these are sometimes used instead of unsecured personal loans.

Student Loans

Student loans can allow students to fund their education; you may not need to start paying those loans off until you’ve graduated.

Federal student aid can help pay for college-related costs as well. The Free Application for Federal Student Aid (FAFSA®) is one way to determine how much and what type of federal student aid students and parents might qualify for. Some individual colleges also use the FAFSA in determining eligibility for their own financial aid programs.

Private student loans are another option, both for loans and to refinance federal loans. In terms of the latter, however, there are two important considerations:

•   If you refinance federal student loans with private loans, you forfeit the federal benefits and protections, such as forgiveness.

•   If you refinance for an extended term, you may pay more interest over the life of the loan.

•   For these reasons, think carefully about whether private student loans suit your situation.

The Takeaway

Personal lines of credit are similar to credit cards in that they are both generally unsecured loans issued based on your personal creditworthiness. By understanding how a credit card differs from a personal line of credit, you can choose the loan that best fits your needs or decide to access cash through an alternative method.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2023 winner for Best Online Personal Loan overall.

FAQ

Here’s a list of the most common questions associated with personal lines of credit and credit cards.

Is a personal line of credit the same as a credit card?

Personal lines of credit and credit cards are similar but not the same. A credit card is a form of payment accepted by merchants and a kind of revolving loan. A personal line of credit is a revolving loan, and the funds are typically transferred to the borrower’s personal bank account before they are used for purchases. Credit cards can also have numerous benefits not offered by a personal line of credit but the interest rate may be higher.

Are there additional risks to lines of credit vs credit cards?

Both personal lines of credit and credit cards require you to pay back what you owe, whether it’s on a monthly basis or at the end of the draw period, in the case of a line of credit. Making late payments or missing payments can negatively affect your credit score and incur fees.

Do personal lines of credit affect your credit score?

Yes, personal lines of credit, just like credit cards, are subject to reporting to the major credit bureaus. If you make late payments or miss payments, your credit score can be negatively affected. However, personal lines of credit can also be used to build your credit if you make your payments on time and use your credit responsibly.


Photo credit: iStock/Deepak Sethi

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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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

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Top Four 401(k) Alternatives to Consider

When it comes to money planning, most people know saving for retirement is a good idea—but there’s less certainty as to how to get there. While employer-sponsored 401(k) savings programs are a popular option, they’re not available to everyone and may not suit the needs of every individual.

There are a number of 401(k) alternatives for individuals looking to save for retirement. Just like 401(k) plans, each alternative has specific pros and cons that may seal the deal or break the deal for different investors.

The more information an investor has about each of these options, the more likely they are to make a decision that aligns with their goals.

A Quick 401(K) Overview

A 401(k) is an employer-sponsored retirement fund. Contributions are determined by an employee and then drawn directly from their paycheck and deposited into a dedicated fund.

Income tax on 401(k) contributions is deferred until the time that it is withdrawn—usually after retirement—at which point it is taxed as income.

During the time that an employee contributes pre-tax dollars to their 401(k) plan, the contributions are deducted from their taxable income for the year, potentially lowering the amount of income tax they might own. For example, if a person earned a $60,000 annual salary but contributed $6,000 to their 401(k) in a calendar year, they would only pay income tax on $54,000 in earnings.

But there are annual limits on contributions—an individual can’t put away their entire year’s paychecks, for example, and declare an income of $0. The ceilings on contributions change annually, so it’s important to check with a plan administrator or the IRS. In 2024, the deferral limit for traditional 401(k)s is $23,000—a $500 increase over the 2023 limit (individuals older than 50 can contribute an additional $7,500 in catch-up contributions). If a person participates in multiple 401(k) plans for several employers, they still need to abide by this limit, so it’s a good idea to add up all contributions across plans.

Pros of a 401(k)

A 401(k) can be a helpful savings tool for a variety of reasons.

•  It makes saving money automatic. Because withdrawals are set up in advance, and automatically deducted from an individual’s paycheck, it essentially puts retirement savings on “auto-pilot.” An individual doesn’t need to remember to put money aside regularly for retirement or earmark funds from their take-home pay.
•  An employee can take advantage of “free money.” Some companies pay into employees’ 401(k)s, whether through matching programs—in which employers contribute an equal amount to the employee’s paycheck deduction, up to a limit—or through non-elective contributions, which occur whether or not the employee makes contributions.

Cons of a 401(k)

There are some drawbacks to the plan that individuals should be aware of.

•  Penalties for early withdrawals. When an individual puts money into a 401(k), their ability to use it before retirement is somewhat restricted. Though it may be possible to withdraw money from a 401(k) or take out a 401(k) loan, under most circumstances there is a financial penalty.
•  Mandatory fees. Not all 401(k) participants are aware they’re being charged fees on their 401(k) plans. Costs can include plan administration and service fees, as well as investment fees such as sales and management charges. Even small differences in fee percentages can result in a big bite of the amount an individual will have at retirement. As such, it’s helpful to brush up on all the costs associated with an employer’s 401(k) and look into other 401(k) alternatives if it makes sense.

Top 4 Alternatives to Investing in a 401(k)

Traditional IRA

A Traditional IRA (Individual Retirement Account) is similar to a 401(k) in that contributions aren’t included in an individual’s taxable annual income, but are taxed later on when the money is withdrawn.

As with 401(k)s, early withdrawals from an IRA may be subject to an added 10% penalty (plus income tax on the distribution). However the main difference between an IRA vs. 401(k) is that IRAs give individuals more control than company-sponsored plans—an individual can decide for themselves where to open an IRA account and can exert more control in determining their investment strategy.

Learning how to open an IRA is relatively simple—such accounts are available with a variety of financial services providers, including online banks and brokerages. This flexibility allows individuals to comparison shop, evaluating providers based on criteria such as account fees and other costs.

Once an individual opens an account, they may make contributions up to an annual limit at any time prior to the tax filing deadline. In 2024, the ceiling is $7,000 ($8,000 for individuals older than 50). In 2023, the ceiling is $6,500 ($7,500 for individuals older than 50).

Roth IRA

There are a few key differences when it comes to a traditional IRA vs. a Roth IRA. To begin with, not everyone qualifies to contribute to a Roth IRA. The upper earnings limit for 2024 is $146,000 for singles, and $230,000 for married joint filers. The upper earnings limit for 2023 is $138,000 for singles, and $218,000 for married joint filers.

Another thing that distinguishes Roth IRAs is that they’re funded with after-tax dollars—meaning that while contributions are not income tax deductible, qualified distributions (typically after retirement) are tax-free. Additionally, while an IRA has required minimum distributions (RMD) rules that state investors must start taking distributions upon turning 72, there are no minimum withdrawals required on Roth IRAs.

Like a Traditional IRA, Roth IRAs carry an annual contribution limit of $7,000 for 2024 and $6,500 for 2023. Roth IRAs also offer similar flexibility to Traditional IRAs in that individuals can open online IRA accounts with a provider that best suits their needs—whether that means an account that offers more hands-on investing support or one with cheaper fees.

Self-directed IRAs

A self-directed IRA can be either a Traditional or Roth IRA. But whereas IRA accounts typically allow for investment in approved stocks, bonds, mutual funds and CDs, self-directed IRAs allow for a much broader set of holdings, including things like real estate, promissory notes, tax lien certificates, and private placement securities. Some self-directed IRAs also permit investment in digital assets such as crypto trading and initial coin offerings.

While having the freedom to make alternative investments may be appealing to some individuals, the Security and Exchange Commission cautions that such ventures may be more vulnerable to fraud than traditional investing products.

The SEC cautions that individuals considering a self-directed IRA should do their homework before investing, taking steps to confirm both the investments and the person or firm selling them are registered. They also advise investors to be cautious of unsolicited offers and any promises of guaranteed returns.

Simplified Employee Pension (SEP) IRA

A SEP (Simplified Employee Pension) IRA follows the same rules as traditional IRAs with one key difference: They are employer-sponsored and allow companies to make contributions on workers’ behalf, up to 25% of the employee’s salary.

Though the proceeds of SEP IRAs are 100% vested with the employee, only the employer contributes to this type of retirement account. To be eligible, the employee must have worked for the company for three out of the last five years.

Because people who are self-employed or own their own companies are eligible to set up SEP IRAs—and can contribute up to a quarter of their salary—this type of account can be an attractive option for those individuals who would like to put away more each year than Traditional or Roth IRAs allow.

The Takeaway

With a number of alternatives to 401(k)s to choose from, it’s clear there’s no one right way to save for retirement. There are numerous factors for an investor to consider, including current income, investment interests, and whether it makes sense to invest pre- or after-tax dollars.

Ultimately, the important thing is to identify a good account for one’s individual needs, and then contribute to it regularly.

SoFi Invest® offers a variety of active and automated IRAs with a broad range of investment options, member services, and a robust suite of planning and investment tools.

Find out how SoFi Invest can help members plan for retirement.


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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.

Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“SoFi Securities”).
Active Investing—The Active Investing platform is owned by SoFi Securities LLC. 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 https://www.sofi.com/legal/.
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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401(k) Catch-Up Contributions: What Are They & How Do They Work?

401(k) Catch-Up Contributions: What Are They & How Do They Work?

Retirement savers age 50 and older get to put extra tax-advantaged money into their 401(k) accounts beyond the standard annual contribution limits. Those additional savings are known as “catch-up contributions.”

If you have a 401(k) at work, taking advantage of catch-up contributions is key to making the most of your plan, especially as retirement approaches. Here’s a closer look at how 401(k) catch-up limits work.

What Is 401(k) Catch-Up?

A 401(k) is a type of defined contribution plan. This means the amount you can withdraw in retirement depends on how much you contribute during your working years, along with any employer matching contributions you may receive, as well as how those funds grow over time.

There are limits on how much employees can contribute to their 401(k) plan each year as well as limits on the total amount that employers can contribute. The regular employee contribution limit is $22,500 for 2023 and $23,000 for 2024. This is the maximum amount you can defer from your paychecks into your plan — unless you’re eligible to make catch-up contributions.

Under Internal Revenue Code Section 414(v), a catch-up contribution is defined as a contribution in excess of the annual elective salary deferral limit. For 2023 and 2024, the 401(k) catch-up contribution limit is $7,500.

That means if you’re eligible to make these contributions, you would need to put a total of $30,000 in your 401(k) in 2023 to max out the account and $30,500 in 2024. That doesn’t include anything your employer matches.

Congress authorized catch-up contributions for retirement plans as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The legislation aimed to help older savers “catch up” and avoid falling short of their retirement goals, so they can better cover typical retirement expenses and enjoy their golden years.

Originally created as a temporary measure, catch-up contributions became a permanent feature of 401(k) and other retirement plans following the passage of the Pension Protection Act in 2006.

Who Is Eligible for 401(k) Catch-Up?

To make catch-up contributions to a 401(k), you must be age 50 or older and enrolled in a plan that allows catch-up contributions, such as a 401(k).

The clock starts ticking the year you turn 50. So even if you don’t turn 50 until December 31, you could still make 401(k) catch-up contributions for that year, assuming your plan follows a standard calendar year.

Making Catch-Up Contributions

If you know that you’re eligible to make 401(k) catch-up contributions, the next step is coordinating those contributions. This is something with which your plan administrator, benefits coordinator, or human resources director can help.

Assuming you’ve maxed out your 401(k) regular contribution limit, you’d have to decide how much more you want to add for catch-up contributions and adjust your elective salary deferrals accordingly. Remember, the regular deadline for making 401(k) contributions each year is December 31.

It’s possible to make catch-up contributions whether you have a traditional 401(k) or a Roth 401(k), as long as your plan allows them. The main difference between these types of plans is tax treatment.

•   You fund a traditional 401(k) with pre-tax dollars, including anything you save through catch-up contributions. That means you’ll pay ordinary income tax on earnings when you withdraw money in retirement.

•   With a Roth 401(k), regular contributions and catch-up contributions use after-tax dollars. This allows you to withdraw earnings tax-free in retirement, which is a valuable benefit if you anticipate being in a higher tax bracket when you retire.

You can also make catch-up contributions to a solo 401(k), a type of 401(k) used by sole proprietorships or business owners who only employ their spouse. This type of plan observes the same annual contribution limits and catch-up contribution limits as employer-sponsored 401(k) plans. You can choose whether your solo 401(k) follows traditional 401(k) rules or Roth 401(k) rules for tax purposes.

401(k) Catch-Up Contribution Limits

Those aged 50 and older can make catch-up contributions not only to their 401(k) accounts, but also to other types of retirement accounts, including 403(b) plans, 457 plans, SIMPLE IRAs, and traditional or Roth IRAs.

The IRS determines how much to allow for elective salary deferrals, catch-up contributions, and aggregate employer and employee contributions to retirement accounts, periodically adjusting those amounts for inflation. Here’s how the IRS retirement plan contribution limits for 2023 add up:

Retirement Plan Contribution Limits in 2023

Annual Contribution Catch Up Contribution Total Contribution for 50 and older
Traditional, Roth and solo 401(k) plans; 403(b) and 457 plans $22,500 $7,500 $30,000
Defined Contribution Maximum, including employer contributions $66,000 $7,500 $73,500
SIMPLE IRA $15,000 $3,500 $18,500
Traditional and Roth IRA $6,500 $1,000 $7,500

These amounts only include what you contribute to your plan or, in the case of the defined contribution maximum, what your employer contributes as a match. Any earnings realized from your plan investments don’t count toward your annual or catch-up contribution limits.

Also keep in mind that employer contributions may be subject to your company’s vesting schedule, meaning you don’t own them until you’ve reached certain employment milestones.

💡 Recommended: How to Open Your First IRA

Tax Benefits of Making Catch-Up Contributions

Catch-up contributions to 401(k) retirement savings allow you to save more money in a tax-advantaged way. The additional money you can set aside to “catch up” on your 401(k) progress enables you to save on taxes now, as you won’t pay taxes on the amount you contribute until you withdraw it in retirement. These savings can add up if you’re currently in a high tax bracket, offsetting some of the work of saving extra.

The amount you contribute will also grow tax-deferred, and making catch-up contributions can result in a sizable difference in the size of your 401(k) by the time you retire. Let’s say you start maxing out your 401(k) plus catch-up contributions as soon as you turn 50, continuing that until you retire at age 65. That would be 15 years of thousands of extra dollars saved annually.

Those extra savings, thanks to catch-up contributions, could easily cross into six figures of added retirement savings and help compensate for any earlier lags in saving, such as if you were far off from hitting the suggested 401(k) amount by 30.

Roth 401(k) Catch-Up Contributions

The maximum amount you can contribute to a Roth 401(k) is the same as it is for a traditional 401(k): $22,500 and, if you’re 50 or older, $7,500 in catch-up contributions, as of 2023. For 2024, it is $23,000 and, if you’re 50 or older, $7,500 in catch-up contributions. This means that if you’re age 50 and up, you are able to contribute a total of $30,000 to your Roth 401(k) in 2023 and $30,500 in 2024.

If your employer offers both traditional and Roth 401(k) plans, you may be able to contribute to both, and some may even match Roth 401(k) contributions. Taking advantage of both types of accounts can allow you to diversify your retirement savings, giving you some money that you can withdraw tax-free and another account that’s grown tax-deferred.

However, if you have both types of 401(k) plans, keep in mind while managing your 401(k) that the contribution limit applies across both accounts. In other words, you can’t the maximum amount to each 401(k) — rather, they’d share that limit.

The Takeaway

Putting money into a 401(k) account through payroll deductions is one of the easiest and most effective ways to save money for your retirement. To determine how much you need to put into that account, it helps to know how much you need to save for retirement. If you start early, you may not need to make catch-up contributions. But if you’re 50 or older, taking advantage of 401(k) catch-up contributions is a great way to turbocharge your tax-advantaged retirement savings.

Of course, you can also add to your retirement savings with an IRA. While a 401(k) has its advantages, including automatic savings and a potential employer match, it’s not the only way to grow retirement wealth. If you’re interested in a traditional, Roth, or SEP IRA, you can easily open a retirement account on the SoFi Invest® brokerage platform. If you’re age 50 or older, those accounts will also provide an opportunity for catch-up contributions.

Help grow your nest egg with a SoFi IRA.

FAQ

How does the 401(k) catch-up work?

401(k) catch-up contributions allow you to increase the amount you are allowed to contribute to your 401(k) plan on an annual basis. Available to those aged 50 and older who are enrolled in an eligible plan, these catch-contributions are intended to help older savers meet their retirement goals.

What is the 401(k) catch-up amount in 2023?

For 2023, the 401(k) catch-up contribution limit is $7,500.


Photo credit: iStock/1001Love

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.

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

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

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Should You Have a Joint Retirement Account?

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.

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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 $7,000 per year individually, for a combined $14,000 annually in 2024, and $6,500 per year individually, for a combined $13,000 annually in 2023.

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 $123,000 in 2024; the deduction phases out at a modified AGI of $143,000 or more. If both are covered and file jointly, the deduction is reduced if their modified adjusted gross income is more than $116,000 in 2023; the deduction phases out at a modified AGI of $136,000 or more.

If only one is covered by a retirement plan, for 2024 the deduction is reduced if their modified AGI is more than $230,000; the deduction phases out at a modified AGI of $240,000 or more. For 2023, the deduction is reduced if their modified AGI is more than $218,000; the deduction phases out at a modified AGI of $228,000 or more.

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 $7,000 per year in 2024 and $6,500 in 2023, 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 2024 is $23,000, with so-called “catch-up” contributions of $7,500 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 $23,000 for a combined $46,000 a year. The maximum 401(k) contribution allowed in 2023 is $22,500, with so-called “catch-up” contributions of $7,500 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 $22,500 for a combined $45,000 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 $7,000, so the total limit is $14,000, for 2024. For 2023, the contribution limit is $6,500, so the total limit is $13,000. Those over age 50 can contribute an additional “catch-up” amount of $1,000.

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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