SoFi

Deciding whether to go to college is a major life choice with long-lasting consequences — financially, socially, and personally. For decades, a college degree has been seen as a clear pathway to better jobs and higher earnings. But rising costs, record levels of student debt, and changing workforce demands have made this choice more complex.

Below we break down the advantages and disadvantages of going to college, examine how earning potential varies by major, and explore alternative options. Understanding both sides of the equation can help you and your family make a more informed and intentional decision.

On the Fence About Going to College?

If you’re unsure whether college is worth it, you’re not alone. Surveys of college graduates show growing skepticism about the return on investment (ROI) of a four-year degree, particularly among younger workers.

In a March 2025 Harris/Indeed poll of graduates who were working or looking for work, roughly half of Gen Z respondents said they were skeptical about the value of their degree. Similarly, an August 2025 Gallup poll found that just 35% of American adults viewed college as very important, down from 70% in 2013.

Many students today weigh concerns about debt, job prospects, and the time commitment against potential long-term benefits such as higher income, career flexibility, and personal growth.

💡 Quick Tip: SoFi offers competitive fixed- or variable-interest rates. So you can get a private student loan that fits your budget.

Pros of Going to College

Going to college offers numerous benefits, from personal development to expanded career opportunities. Here’s a look at some key advantages.

Higher Earning Potential

Higher education does not guarantee wealth, but statistically, it increases access to higher-paying roles and long-term earning growth, particularly in professional and technical fields.

Data from the Bureau of Labor Statistics (BLS) show that, on average, workers with bachelor’s degrees earn 66% more per week than those with only a high school diploma. Additional education can widen this gap further: Individuals with professional degrees make, on average, 53% more than those with bachelor’s degrees.

Access to More Jobs

Many occupations list a bachelor’s degree as a minimum requirement, even when the daily tasks may not strictly require one. Holding a degree allows you to qualify for a broader range of roles and provides greater flexibility when choosing where you want to work.

According to a Georgetown University report, by 2031, 72% of all U.S. jobs are expected to require some form of postsecondary education or training. Roughly 42% of jobs will require at least a bachelor’s degree, while about 28% will be available to workers with a high school diploma or less.

Value of Learning

College provides more than job-specific training. Students develop transferable skills such as critical thinking, analytical reasoning, written and verbal communication, collaboration, and adaptability. These skills are valuable across industries and remain relevant even for those entering technical fields.

In an economy shaped by automation and rapid technological change, the ability to learn, analyze, and adapt may be just as important as specialized knowledge.

Networking

Going to college offers built-in networking environments that are difficult to replicate elsewhere. Students interact with professors, advisors, classmates, alumni, and visiting professionals. Internships, research projects, student organizations, and career fairs provide early exposure to industries and employers.

The connections you form in college can play a significant role in securing your first job after graduation and advancing throughout your career, especially in competitive fields where referrals and recommendations matter.

Lower Unemployment

BLS data consistently show that unemployment rates decline as education levels rise. For workers aged 25 and over, those with less than a high school diploma typically face the highest unemployment rates, while those with advanced degrees experience the lowest.

While no credential guarantees job security, higher education can provide insulation during economic downturns and improve reemployment prospects.

Lower Poverty

Educational attainment is strongly correlated with lower poverty levels. According to the U.S. Census, roughly 4% of Americans with a bachelor’s degree or higher were living below the poverty line in 2025, compared with approximately 23% of those without a high school diploma.

Higher earnings, steadier employment, and access to employer-provided benefits all contribute to this outcome.

Recommended: Colleges With Free Tuition

Healthier

Numerous studies show that people with higher education levels report better overall health. College graduates are more likely to have employer-sponsored health insurance, engage in preventative care, and maintain healthier lifestyles.

Education is also associated with improved mental health outcomes, partially due to increased financial stability and access to resources.

Better Educated Children

Parents with college degrees are generally more likely to emphasize academic achievement and educational attainment for their children. This can create long-term benefits across generations, including higher graduation rates and greater economic mobility.

More Likely to Save for Retirement

College graduates are more likely to work in jobs that offer retirement plans such as 401(k)s. Higher earnings also make it easier to contribute consistently to long-term savings, which can help improve financial security later in life. An April 2025 Gallup poll found that 81% of college graduates had retirement savings, compared with 39% of adults without any college education

Increased Job Stability and Benefits

Beyond wages, college degree holders are more likely to receive benefits such as paid leave, health insurance, disability coverage, and employer retirement contributions. These benefits can significantly influence quality of life and long-term financial security, even when base salaries appear similar.

Cons of Going to College

Despite its advantages, college also involves real costs and risks. Here’s a look at some of the drawbacks of going to college.

Cost of College

The rising price of higher education is one of the most substantial barriers for students today.

Cost of Tuition

According to the College Board’s 2025-26 “Trends in College Pricing” report, the average published tuition and fees for full-time students are $11,950 at public four-year in-state institutions and $45,000 at private nonprofit four-year universities. When housing, food, books, and other expenses are included, the total annual cost of attendance averages $30,990 for in-state students at public schools and $65,470 for private colleges.

Opportunity Cost of Time Spent Not Working

College requires a substantial time commitment. Full-time students typically delay full-time employment for four years or more. During that period, noncollege peers may be earning income, gaining work experience, and advancing in their careers.

For individuals confident in alternative career paths, this opportunity cost can be substantial.

High-Paying No-Degree Jobs

Not all high-paying careers require a bachelor’s degree. Skilled trades, certain technology roles, and some health care positions often rely on certifications, apprenticeships, or associate degrees instead.

Examples of relatively high-paying jobs that may not require a college degree include:

•   Wind turbine technician

•   Electrician

•   Flight attendant

•   Hearing aid specialist

•   Plumber

•   Licensed practical nurse

•   Medical records technician

•   Construction worker

These paths often involve lower training costs and faster entry into the workforce.

Underemployed College Graduates

Some graduates struggle to find work that fully utilizes their degree, leading to underemployment. Underemployment refers to recent graduates working in roles that don’t typically require a bachelor’s degree.

Research suggests that as many as 52% of college graduates are underemployed when they first enter the labor market. This can reduce the financial return on a college investment and contribute to dissatisfaction, particularly among those carrying student debt.

Recommended: Student Loan Payment Calculator

Dropping Out

Not all students complete their degrees. National data shows that a substantial share of students who start college do not finish within eight years. For these individuals, the financial and time investment may not deliver the expected return, while student debt often remains.

Student Loan Debt and Long-Term Financial Impact

Student loan debt remains a major concern for many borrowers. According to the Education Data Initiative, the average student borrows more than $30,000 to earn a bachelor’s degree. Professional degrees can raise debt levels considerably: Average law school debt is around $140,000, while average medical school debt approaches $200,000.

While debt is manageable for some graduates, for others, it can become a long-term financial burden that affects major life decisions.

💡 Quick Tip: Would-be borrowers will want to understand the different types of student loans that are available: private student loans, federal Direct Subsidized and Unsubsidized loans, Direct PLUS loans, and more.

Earning Potential of Different Majors for College Graduates

The financial value of a degree is not uniform — outcomes vary widely depending on the chosen field of study.

STEM vs Humanities and Liberal Arts

An October 2025 Georgetown University report found that while a bachelor’s degree generally increases income, your major plays a critical role in determining earning potential. STEM graduates earned the highest median salaries at approximately $98,000, while graduates in arts and humanities majors earned a median salary of about $69,000.

ROI by Field of Study

Return on investment depends on both post-graduate earnings and the cost of education. A September 2024 Bankrate analysis of U.S. Census data found that degrees in engineering, nursing, and technology tend to deliver the strongest financial returns, while bachelor’s degrees in the arts and humanities often take longer to break even due to lower average pay and high tuition costs.

Understanding expected earnings by major is important when evaluating whether college makes financial sense.

Is College Right for You?

If you’re debating whether college is worth it, the following considerations can help guide your decision.

Factors to Consider Based on Career Goals and Finances

Key questions to ask include:

•   Does your intended career require a degree?

•   What is the total cost of attendance, not just tuition?

•   How much debt would you need to take on?

•   What is the expected salary in your chosen field?

Aligning your education decisions with realistic financial projections can help prevent a costly mismatch.

The Role of Passion and Personal Interests

For some students, college is closely tied to intellectual curiosity and personal fulfillment. For others, hands-on work, entrepreneurship, or technical training may be more motivating. While passion alone shouldn’t dictate the decision, it can play a key role in persistence and long-term satisfaction.

Alternatives to College

College is not the only path to success. Several alternatives can offer practical, lower-cost routes into stable careers.

Trade School

Trade schools focus on specific skills such as electrical work, welding, HVAC, and automotive repair. Programs are typically shorter and more affordable than four-year degrees and often lead directly to in-demand jobs.

Community College

Community colleges offer associate degrees and certificates at significantly lower cost than four-year institutions. Many students use them as stepping stones to bachelor’s programs or as direct pathways into technical and health care roles.

They tend to offer flexible schedules, making it easier for students to work or care for family members. About 40% of all undergraduate students in the U.S. are enrolled in community colleges, according to a December 2025 report from Columbia University’s Community College Research Center.

Industry-Specific Education Programs

Bootcamps and short-term training programs in fields like IT, cybersecurity, data analytics, and digital marketing can provide job-ready skills in three to six months rather than years.

Learning on the Job

Some careers prioritize experience over formal credentials. Entry-level roles, internships, and freelance work allow individuals to build skills while earning income, particularly in creative and technical fields. This approach can provide a debt-free alternative to college.

Apprenticeships and Certifications

Apprenticeships combine paid work with structured on-the-job training and classroom instruction. These programs often lead to industry-recognized certifications that validate specific skills and expertise.

Apprenticeships are available in a variety of fields, including manufacturing, construction, IT, health care, energy, transportation, and logistics.

The Takeaway

Going to college can be a powerful investment — but only when it aligns with clear goals, realistic finances, and thoughtful planning. For many careers, higher education opens doors to stability, higher earnings, and long-term benefits. For others, alternative paths may offer faster and more affordable routes to success.

Ultimately, the most important question is not whether college is worth it in general, but whether it’s worth it for you.

When it comes to paying for college, students may rely on a combination of cash savings, scholarships, grants, and federal and private student loans.

If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.

FAQ

What are the biggest reasons for not going to college?

The biggest reasons for not going to college often center on the high cost, which can lead to significant student loan debt and long-term financial burden. Other factors include the opportunity cost of time spent not working, the risk of dropping out without a degree, and the possibility of underemployment (working in a job that doesn’t require a degree). Some individuals find that career-focused alternatives, like trade schools or apprenticeships, offer a faster, more affordable path to a stable, well-paying job.

What are the most important reasons to attend college?

The most important reasons to go to college include:

•   Higher earning potential: College graduates statistically earn significantly more than those with only a high school diploma.

•   Access to more jobs: A degree is often a minimum requirement for professional and technical occupations, offering greater career flexibility.

•   Skill development: College helps develop valuable transferable skills like critical thinking, communication, and adaptability.

•   Lower unemployment: Degree holders consistently have lower rates of unemployment and poverty.

•   Networking: College provides connections with alumni, professors, and professionals that can be important for career advancement.

How does college compare to trade school as far as cost and benefit go?

College typically involves significantly higher costs and takes longer (four years or more), often leading to more student debt. However, a bachelor’s degree statistically offers the highest lifetime earning potential and the greatest flexibility in career path.

Trade schools are generally less expensive, require less time (often six months to two years), and provide faster entry into high-demand, skilled trades. While trade school pay may be lower than a top college degree, the lower cost and time commitment may result in a faster return on investment.

Can you succeed financially without going to college?

Yes, absolutely. Financial success does not strictly require a four-year college degree. Many paths lead to high earnings and stability without traditional college, including trade schools, apprenticeships, industry-specific certifications (like those in IT or tech), and entrepreneurial ventures. These alternatives often involve lower debt and faster entry into the workforce.

What are good alternatives to a traditional four-year degree?

Top alternatives to a traditional four-year degree include:

•   Trade school: Focuses on specific skills and offers faster, more affordable training for in-demand jobs like plumbing, electrical work, and automotive technology.

•   Community college: Provides lower-cost associate degrees and certificates, often serving as a stepping stone to a bachelor’s or a direct path to technical roles.

•   Apprenticeships/certifications: Combines paid work with structured training, leading to industry-recognized credentials in fields like IT, health care, and construction.

•   Industry-specific education programs: Short-term bootcamps in tech fields (such as coding or data analytics) for rapid skill acquisition.

•   Learning on the job: Building experience and skills through entry-level roles or internships.

About the author

Julia Califano

Julia Califano is an award-winning journalist who covers banking, small business, personal loans, student loans, and other money issues for SoFi. She has over 20 years of experience writing about personal finance and lifestyle topics. Read full bio.

SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student loans are not a substitute for federal loans, grants, and work-study programs. We encourage you to evaluate all your federal student aid options before you consider any private loans, including ours. Read our FAQs.

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. SoFi Private Student loans are subject to program terms and restrictions, such as completion of a loan application and self-certification form, verification of application information, the student's at least half-time enrollment in a degree program at a SoFi-participating school, and, if applicable, a co-signer. In addition, borrowers must be U.S. citizens or other eligible status, be residing in the U.S., Puerto Rico, U.S. Virgin Islands, or American Samoa, and must meet SoFi’s underwriting requirements, including verification of sufficient income to support your ability to repay. Minimum loan amount is $1,000. See SoFi.com/eligibility for more information. Lowest rates reserved for the most creditworthy borrowers. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change. This information is current as of 4/22/2025 and is subject to change. SoFi Private Student loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

SoFi Bank, N.A. and its lending products are not endorsed by or directly affiliated with any college or university unless otherwise disclosed.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SOISL-Q126-003

The biggest difference between an IRA vs. a 401(k) is the amount you can save. You can save over three times as much in a 401(k) vs. an IRA — $23,500 versus $7,000 for tax year 2025, and $24,500 versus $7,500 for tax year 2026. But not everyone has access to a 401(k), because these are sponsored by an employer, typically for full-time employees.

“A 401(k) is probably one of the most common retirement vehicles,” says Brian Walsh, a CFP® at SoFi. “A 401(k) will be available through work. Your employer is going to choose whether or not to make a 401(k) available to all the employees. Generally speaking, 401(k)s are the most popular retirement plan employers provide.”

Other than that, a traditional IRA and a 401(k) are similar in terms of their basic provisions and tax implications. Both accounts are considered tax deferred, which means you can deduct the amount you contribute each year — unless you have a Roth account, which has a different tax benefit.

Before you decide whether one or all three types of retirement accounts might make sense for you, it helps to know all the similarities and differences between a 401(k) and a traditional IRA and Roth IRA.

How Are IRAs and 401(k)s Different?

The government wants you to prioritize saving for retirement. As a result, they provide tax incentives for IRAs vs. 401(k)s.

In that respect, a traditional IRA and a 401(k) are somewhat similar; both offer tax-deferred contributions, which may lower your taxable income, and tax-deferred investment growth. Also, you owe taxes on the money you withdraw from these accounts in retirement (or beforehand, if you take an early withdrawal).

There is a bigger difference between a Roth IRA and a 401(k). Roth accounts are funded with after-tax contributions — so they aren’t tax deductible. But they provide tax-free withdrawals in retirement.

And while you can’t withdraw the contributions you make to a traditional IRA until age 59 ½ (or incur a penalty), you can withdraw Roth contributions at any time (just not the earning or growth on your principal).

These days, you may be able to fund a Roth 401(k), if your company offers it.

Other Key Differences Between IRAs and 401(k)s

As with anything that involves finance and the tax code, these accounts can be complicated. Because there can be stiff penalties when you don’t follow the rules, it’s wise to know what you’re doing.

Who Can Set Up a 401(k)?

As noted above, a key difference between an IRA and a 401(k) is that 401(k)s are qualified employer-sponsored retirement plans. You typically only have access to these plans through an employer who offers them as part of a full-time compensation package.

In addition, your employer may choose to provide matching 401(k) funds as part of your compensation, which is typically a percentage of the amount you contribute (e.g. an employer might match 3%, dollar for dollar).

Not everyone is a full-time employee. You may be self-employed or work part-time, leaving you without access to a traditional 401(k). Fortunately, there are other options available to you, including solo 401(k) plans and opening an IRA online (individual retirement accounts).

Who Can Set Up an IRA?

Anyone can set up an individual retirement account (IRA) as long as they’re earning income. (And if you’re a non-working spouse of someone with earned income, they can set up a spousal IRA on your behalf.)

If you already have a 401(k), you can still open an IRA and contribute to both accounts. But if you or your spouse (if you’re married) are covered by a retirement plan at work, you may not be able to deduct the full amount of your IRA contributions.

Understanding RMDs

Starting at age 73 (for those who turn 72 after December 31, 2022), you must take required minimum distributions (RMDs) from your tax-deferred accounts, including: traditional IRAs, SEP and SIMPLE IRAs, and 401(k)s. Be sure to determine your minimum distribution amount, and the proper timing, so that you’re not hit with a penalty for skipping it.

It’s worth noting, though, that RMD rules don’t apply to Roth IRAs. If you have a Roth IRA, or inherit one from your spouse, the money is yours to withdraw whenever you choose. The rules change if you inherit a Roth from someone who isn’t your spouse, so consult with a professional as needed.

However, RMD rules do apply when it comes to a Roth 401(k), similar to a traditional 401(k). The main difference here, of course, is that the Roth structure still applies and withdrawals are tax free.

A Closer Look at IRAs

An IRA is an individual retirement account that has a much lower contribution limit than a 401(k) (see chart below). Anyone with earned income can open an IRA, and there are two main types of IRAs to choose from: traditional and Roth accounts.

Self-employed people can also consider opening a SEP-IRA or a SIMPLE IRA, which are tax-deferred accounts that have higher contribution limits.

Traditional IRA

Like a 401(k), contributions to a traditional IRA are tax deductible and may help lower your tax bill. In 2025, IRA contribution limits are $7,000, or $8,000 for those ages 50 or older. In 2026, IRA contribution limits are $7,500, or $8,600 for those 50 or older.

With a traditional IRA, investments inside the account grow tax-deferred. And unlike 401(k)s where an employer might offer limited options, IRAs are more flexible because they are classified as self-directed and you typically set up an IRA through a brokerage firm of your choice.

Thus it’s possible to invest in a wider range of investments in your IRA, including stocks, bonds, mutual funds, exchange-traded funds, and even real estate.

When making withdrawals at age 59 ½, you will owe income tax. As with 401(k)s, any withdrawals before then may be subject to both income tax and the 10% early withdrawal penalty.

What Are Roth Accounts?

So far, we’ve discussed traditional 401(k) and IRA accounts. But each type of retirement account also comes in a different flavor — known as a Roth.

The main difference between traditional and Roth IRAs lies in when your contributions are taxed.

•   Traditional accounts are funded with pre-tax dollars. The contributions are tax deductible and may provide an immediate tax benefit by lowering your taxable income and, as a result, your tax bill.

•   Money inside these accounts grows tax-deferred, and you owe income tax when you make withdrawals, typically when you’ve reached the age of 59 ½.

Roth accounts, on the other hand, are funded with after-tax dollars, so your deposits aren’t tax deductible. However, investments inside Roth accounts also grow tax-free, and they are not subject to income tax when withdrawals are made at or after age 59 ½.

As noted above, Roths have an additional advantage in that you can withdraw your principal at any time (but you cannot withdraw principal + earnings until you’ve had the account for at least five years, and/or you’re 59 ½ or older — often called the five-year rule).

Roth accounts may be beneficial if you anticipate being in a higher tax bracket when you retire versus the one you’re in currently. Then tax-free withdrawals may be even more valuable.

It’s possible to hold both traditional and Roth IRAs at the same time, though combined contribution limits are the same as those for traditional accounts. And those limits can’t be exceeded.

Additionally, the ability to fund a Roth IRA is subject to certain income limits: above a certain limit you can’t contribute to a Roth. There are no income limits for a designated Roth 401(k), however.

A Closer Look at a 401(k)

Contributions to your 401(k) are made with pre-tax dollars. This makes them tax-deductible, meaning the amount you save each year can lower your taxable income in the year you contribute, possibly resulting in a smaller tax bill.

In 2025, you can contribute up to $23,500 to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $31,000. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for a total of $34,750.

In 2026, you can contribute up to $24,500 to your 401(k), or up to $32,500 (including $8,000 extra in catch-up contributions). And again in 2026, individuals aged 60 to 63 can contribute an additional $11,250 instead of $8,000, for a total of $35,750.

Also, under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, you pay taxes on contributions upfront, but can make eligible withdrawals tax-free in retirement. Those impacted by the new law should check with their employer or plan administrator to find out how to proceed.

401(k) catch-up contributions allow people nearing retirement to boost their savings. In addition to the contributions made, an employer can also match their employee’s contribution, up to a combined employer and employee limit of $70,000 in 2025 and $72,000 in 2026.

An employer may offer a handful of investment options to choose from, such as exchange-traded funds (ETFs), mutual funds, and target date mutual funds. Money invested in these options grows tax-deferred, which can help retirement investments grow faster.

When someone begins taking withdrawals from their 401(k) account at age 59 ½ (the earliest age at which you can start taking penalty-free withdrawals), those funds are subject to income tax. Any withdrawals made before 59 ½ may be subject to a 10% early withdrawal penalty, on top of the tax you owe.

When Should You Use a 401(k)?

If your employer offers a 401(k), it may be worth taking advantage of the opportunity to start contributing to your retirement savings. After all, 401(k)s have some of the highest contribution limits of any retirement plans, which means you might end up saving a lot. Here are some other instances when it may be a good idea:

1. If your employer matches your contributions

If your company matches any part of your contribution, you may want to consider at least contributing enough to get the maximum employer match. After all, this match is tantamount to free money, and it can add up over time.

2. You can afford to contribute more than you can to an IRA

For tax year 2025, you can put up to $7,000 in an IRA, but up to $23,500 in a 401(k) — if you’re 50 or over, those amounts increase to $8,000 for an IRA and $31,000 for a 401(k). And those aged 60 to 63 can contribute up to $34,750 to a 401(k), thanks to SECURE 2.0.

For tax year 2026, you can put up to $7,500 in an IRA, but up to $24,500 in a 401(k) — if you’re 50 or older, those amounts increase to $8,600 for an IRA and $32,500 for a 401(k). And again, if you’re aged 60 to 63, you can contribute up to $35,750 to a 401(k). If you’re in a position to save more than the IRA limit, that’s a good reason to take advantage of the higher limits offered by a 401(k).

3. When your income is too high

Above certain income levels, you can’t contribute to a Roth IRA. How much income is that? That’s a complicated question that is best answered by our Roth IRA calculator.

And if you or your spouse are covered by a workplace retirement plan, you may not be able to deduct IRA contributions.

If you can no longer fund a Roth, and can’t get tax deductions from a traditional IRA, it might be worth throwing your full savings power behind your 401(k).

When Should You Use an IRA?

If you can swing it, it may not hurt to fund an IRA. This is especially true if you don’t have access to a 401(k). But even if you do, IRAs can be important tools. For example:

1. When you leave your company

When you leave a job, you can rollover an old 401(k) into an IRA — and it’s generally wise to do so. It’s easy to lose track of old plans, and companies can merge or even go out of business. Then it can become a real hassle to find your money and get it out.

You can also roll the funds into your new company’s retirement plan (or stick with an IRA rollover, which may give you more control over your investment choices).

Recommended: How to Roll Over Your 401(k)

2. If your 401(k) investment choices are limited

If you have a good mix of mutual funds in your 401(k), or even some target date funds and low-fee index funds, your plan is probably fine. But, some plans have very limited investment options, or are so confusing that people can’t make a decision and end up in the default investment — a low interest money market fund.

If this is the case, you might want to limit your contributions to the amount needed to get your full employer match and put the rest in an IRA.

3. When you’re between jobs

Not every company has a 401(k), and people are not always employed. There may be times in your life when your IRA is the only option. If you have self-employment income, you can make higher contributions to a SEP IRA or a Solo 401(k) you set up for yourself.

4. If you can “double dip.”

If you have a 401(k), are eligible for a Roth IRA, or can deduct contributions to a traditional IRA, and you can afford it — it may be worth investing in both. After all, saving more now means more money — and financial security — down the line. Once again, you can check our IRA calculator to see if you can double dip. Just remember that the IRA contribution limit is for the total contributed to both a Roth and traditional IRA.

The real question is not: IRA vs. 401(k), but rather — which of these is the best place to put each year’s contributions? Both are powerful tools to help you save, and many people will use different types of accounts over their working lives.

When Should You Use Both an IRA and 401(k)?

Using an IRA and a 401(k) at the same time may be a good way to save for your retirement goals. Funding a traditional or Roth IRA and 401(k) at once can allow you to save more than you would otherwise be able to in just one account.

Bear in mind that if you or your spouse participate in a workplace retirement plan, you may not be able to deduct all of your traditional IRA contributions, depending on how high your income is.

Having both types of accounts can also provide you some flexibility in terms of drawing income when you retire. For example, you might find a 401(k) as a source of pre-tax retirement income. At the same time you might fund a Roth IRA to provide a source of after-tax income when you retire.

That way, depending on your financial and tax situation each year, you may be able to strategically make withdrawals from each account to help minimize your tax liability.

The Takeaway

Roth accounts — whether a Roth IRA or a Roth 401(k) — have a different tax treatment. You deposit after-tax funds in these types of accounts. And then you don’t pay any tax on your withdrawals in retirement.

Another difference is that a 401(k) is generally sponsored by your employer, so you’re beholden to the investment choices of the firm managing the company’s plan, and the fees they charge. By contrast, you set up an IRA yourself, so the investment options are greater — and the fees can be lower.

Generally, you can have an IRA as well as a 401(k). The rules around contribution limits, and how much you can deduct may come into play, however.

If you’re ready to open an IRA, it’s easy when you set up an Active Invest account with SoFi Invest.

Not sure what the right strategy is for you? SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

FAQ

Is a 401(k) considered an IRA for tax purposes?

No. A 401(k) is a completely separate account than an IRA because it’s sponsored by your employer.

Is it better to have a 401(k) or an IRA?

You can save more in a 401(k), and your employer may also offer matching contributions. But an IRA often has a much wider range of investment options. It’s wise to weigh the differences, and decide which suits your situation best.

Can you roll a 401(k) Into an IRA penalty-free?

Yes. If you leave your job and want to roll over your 401(k) account into an IRA, you can do so penalty free within 60 days. If you transfer the funds and hold onto them for longer than 60 days, you will owe taxes and a penalty if you’re under 59 ½.

Can you lose money in an IRA?

Yes. You invest all the money you deposit in an IRA in different securities (i.e. stocks, bonds, mutual funds, ETFs). Ideally you’ll see some growth, but you could also see losses. There are no guarantees.

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.