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Dec

2025

Roth IRA Conversion: Rules and Examples

By SoFi Editors | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A Roth IRA is a retirement savings account that offers tax-free withdrawals during retirement. You can convert a traditional IRA or a qualified distribution from a previous employer-sponsored plan, such as a 401(k), into a Roth IRA. This is known as a Roth IRA conversion.

A Roth IRA conversion may be worth considering for the potential tax benefits. Along with tax-free qualified withdrawals in retirement, the money in a Roth IRA has the potential to grow tax-free. Read on to learn how a conversion works, the Roth IRA conversion rules, and whether a Roth IRA conversion may make sense for you.

What Is a Roth IRA Conversion?

With a Roth IRA conversion, an individual moves the funds from another retirement plan into a Roth IRA. You pay taxes on the money in your existing account in order to move it to a Roth IRA.

Many retirement plans, such as 401(k)s and traditional IRAs are tax-deferred. The money is contributed to your account with pre-tax dollars. In retirement, you would pay taxes on your withdrawals. But by doing a Roth conversion, you pay taxes on the money you convert to a Roth IRA, and the money can then potentially grow tax-free. In retirement, you can make qualified withdrawals from the Roth IRA tax-free.

You can convert all or part of your money to a Roth IRA.

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How Does a Roth IRA Conversion Work?

As mentioned, when converting to a Roth IRA, an individual must pay taxes on the contributions and gains in their current retirement plan because only after-tax contributions are allowed to a Roth IRA. They can typically convert their funds to a Roth IRA in one of three ways:

• An indirect rollover: With this method, 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 IRA rollover: The 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.

• A same-trustee transfer: This is used when a traditional IRA is housed in the same financial institution as the new Roth IRA. The owner of the account alerts the institution to transfer an amount from the traditional IRA to the Roth IRA.

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Roth IRA Conversion Rules

There are a number of rules that govern a Roth IRA conversion. Before you proceed with a conversion, it’s important to understand what;’s involved. Roth IRA conversion rules include:

Taxes

You’ll pay taxes on a traditional IRA or 401(k) before you convert it to a Roth IRA. This includes the tax-deductible contributions you’ve made to the account as well as the tax-deferred earnings. They will be taxed as ordinary income in the year that you make the conversion. Because they’re considered additional income, they could put you into a higher marginal tax bracket. You’ll also need to make sure you have the money on hand to pay the taxes.

Limits

There are two types of limits to be aware of with a Roth IRA conversion. First, there is no limit to the number or size of Roth IRA conversions you can make. You might want to convert smaller amounts of money into a Roth IRA over a period of several years to help manage the amount of taxes you’ll need to pay in one year.

Second, Roth IRAs have contribution limits. For instance, in 2025 you can contribute up to $7,000, or up to $8,000 if you’re 50 or older. In 2026, you can contribute up to $7,500 or $8,600 if you’re 50 or older.

Withdrawals

The withdrawals you make from a Roth IRA are tax-free. However, with a Roth IRA conversion, if you are under age 59 ½, you will need to wait at least five years before withdrawing the money or you’ll be subject to a 10% early withdrawal penalty (more on that below).

Backdoor Roth IRAs

A Roth IRA conversion may be an option to consider if you earn too much money to otherwise be eligible for a Roth IRA. Roth IRAs have contribution phase-out ranges, and individuals whose income exceeds those limits cannot contribute to a Roth fully or at all.

• For 2025, the income limits begin to phase out at $236,000 for those who are married and filing jointly, and $150,000 for those who are single.

• For 2026, the income limits phase-out begins at $242,000 for those who are married and filing jointly, and $153,000 for single filers.

However, if you have a traditional IRA and convert it to a Roth IRA — a process known as a backdoor Roth IRA — those income phase-out rules don’t apply. You can use a backdoor IRA as long as you pay taxes on any contributions to the traditional IRA that you deducted from your taxes, as well as any profits you earned.

5-Year Rule

According to the 5-year rule, if you are under age 59 ½, the funds that you convert to a Roth IRA must remain in your account for at least five years or you could be subject to a 10% early withdrawal penalty.

The five years starts at the beginning of the calendar year in which you do the conversion. So even if you don’t do the conversion until, say, December 2024, the five years still begins in January 2024. That means you could withdraw your funds in January 2029.

Also, if you complete separate Roth IRA conversions in different years, the 5-year rule would apply to each of them, so keep this in mind.

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Is Converting to a Roth IRA Right for You?

Doing a Roth IRA conversion means paying taxes now on the funds you are converting in order to withdraw money tax-free in retirement. Here’s how to decide if converting a Roth IRA may be right for you

Reasons For

If you anticipate being in a higher tax bracket in retirement than you’re in now, a Roth IRA conversion may make sense for you. That’s because you’ll pay taxes on the money now at a lower rate, rather than paying them when you retire, when you expect your tax rate will be higher.

In addition, with a Roth IRA, you won’t have to take required minimum distributions (RMDs) every year after the age of 73 as you would with a traditional IRA. Instead, the money can stay right in the account — where it may continue to grow — until it’s actually needed.

If your income is too high for you to be eligible for a Roth IRA, a Roth IRA conversion might be beneficial through a backdoor IRA. You will just need to put your funds into a traditional IRA first and pay the taxes on them.

Finally, if you won’t need the funds in your Roth IRA for at least five years, a conversion may also be worth considering.

Reasons Against

A Roth IRA conversion may not be the best fit for those who are nearing retirement and need their retirement savings to live on. In this case, you might not be able to recoup the taxes you’d need to pay for doing the conversion.

Additionally, if you receive Social Security or Medicare benefits, a Roth IRA conversion would increase your taxable income, which could increase the taxes you pay on Social Security. The cost of your Medicare benefits might also increase.

Those who don’t have the money readily available to pay the taxes required by the conversion should also think twice about an IRA conversion.

And if you expect to be in a lower tax bracket in retirement, a conversion also likely doesn’t make sense for you.

Finally, if you think you might need to withdraw funds from your account within five years, and you’re under age 59 ½, you could be subject to an early withdrawal penalty if you convert to a Roth IRA.

The Takeaway

A Roth IRA conversion may help individuals save on taxes because they can make qualified withdrawals tax-free withdrawals in retirement. For those who expect to be in a higher tax bracket in retirement, a Roth IRA may be worth considering.

It’s important to be aware of the tradeoffs involved, especially the amount of taxes you might have to pay in order to do the conversion. Making the right decisions now can help you reach your financial goals as you plan and save for retirement.

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FAQ

How much tax do you pay on a Roth IRA conversion?

You pay tax on the money you convert, but the specific amount of tax you’ll pay depends on the marginal tax rate you’re in. Before doing a Roth IRA conversion, you may want to calculate to see if the funds you’re converting will put you into a higher tax bracket.

How many Roth iRA conversions are allowed per year?

There is no limit to the number of Roth conversions you can do in one year.

When is the deadline for Roth IRA conversions?

The deadline for a Roth IRA conversion is December 31 of the year you’re doing the conversion.

Is there a loophole for Roth IRA conversions?

A backdoor IRA might be considered a loophole for a Roth IRA conversion. Roth IRAs have contribution phase-out ranges, and individuals whose income exceeds those limits cannot contribute to a Roth fully or at all. However, a backdoor IRA may be a way to get around the income limits. To do it, you will need to have a traditional IRA that you convert to a Roth IRA.

How do I avoid taxes on Roth conversion?

You cannot avoid paying taxes on a Roth conversion. You must pay taxes on the money you convert.

How do you not lose money in a Roth IRA conversion?

To reduce the tax impact of a Roth IRA conversion, you may want to split the conversion into multiple conversions of smaller amounts over several years. If possible, try to do the conversions in years when your taxable income is lower.

Do you have to pay taxes immediately on Roth conversion?

Taxes on a Roth conversion are not due until the tax deadline of the following year.

Should a 65 year old do a Roth conversion?

It depends on an individual’s specific situation, but a Roth conversion may not make sense for a 65 year old if they need to live off their retirement savings or if they are receiving Social Security or Medicare benefits. A Roth IRA conversion could increase the taxes they pay on Social Security, and the cost of their Medicare benefits might rise.

Does a Roth conversion affect my Social Security?

It might. A Roth IRA conversion increases your taxable income, which could potentially increase the taxes you pay on Social Security.

Does a Roth conversion affect Medicare premiums?

A Roth IRA conversion may affect your Medicare premiums. Because it increases your taxable income, the cost of your Medicare benefits might increase as well.

What is the best Roth conversion strategy?

The best Roth conversion strategy depends on your particular situation, but in general, to help reduce your tax bill, you can aim to make the conversion in a year in which you expect your taxable income to be lower. You may also want to do multiple smaller conversions over several years, rather than one big conversion in one year, to help manage the taxes you owe.

Can you do Roth conversions after age 72?

Yes, you can do Roth conversions at any age. Some individuals may want to consider a Roth IRA conversion at 72 if they prefer to avoid paying the required minimum distributions (RMDs) for traditional IRAs that begin at age 73. If you convert before you turn 73, you will not be required to take RMDs.

How do I calculate my Roth conversion basis?

The concept of basis, or money that you’ve paid taxes on already, might be applicable if you’ve made non-deductible contributions to a tax-deferred retirement account. When you convert the money in that account, in order to calculate the percentage that’s tax-free, you need to divide your total nondeductible contributions by the end-of-year value of your IRA account plus the amount you’ve converting.

Do you have to wait 5 years for each Roth conversion?

No. There is no time limit for doing Roth conversions, and in fact, you can do as many as you like in one year. However, if you’re under age 59 ½, you do have to wait five years after each conversion to be able to withdraw money from the account without being subject to an early withdrawal penalty.

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

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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Dec

2025

Roth IRA vs. Savings Account

By Rebecca Lake | money, Preparing for Retirement, Terminology | Comments Off

Saving is an important part of your financial health and building wealth, but it can be confusing to understand all the different vehicles out there. For instance, if you want to stash cash away for a good long while, should you open a Roth IRA or a savings account?

A Roth Individual Retirement Account (IRA) offers a tax-advantaged way to invest money for retirement. Brokerages and banks can offer Roth IRAs for investors who want to set aside money that they don’t anticipate spending for the near future.

Savings accounts can also be used to hold money you plan to spend at a later date. The main difference between a Roth IRA and savings account, however, lies in what they’re intended to be used for.

If you’re debating whether to keep your money in a Roth IRA or savings account, it’s helpful to understand how they work, their similarities and differences, and the pros and cons of each option.

Key Points

• Roth IRAs are designed for retirement savings, offering tax-free growth and tax-free withdrawals in retirement.

• Savings accounts are ideal for short-term goals and emergency funds, offering more accessibility and flexibility.

• Roth IRAs can potentially yield higher returns through investments, while savings accounts provide safety and liquidity.

• Both account types can be opened with low initial deposits and are insured if held at banks.

• Choosing between them depends on financial goals, with Roth IRAs generally being better for long-term growth.

What Is a Savings Account?

A savings account is a type of deposit account that can be opened at a bank, credit union, or another financial institution. Savings accounts are designed to help you separate money you plan to spend later from money you plan to spend now.

Here’s how a savings account works:

• You open the account and make an initial deposit.

• Money in your account can earn interest over time, at a rate set by the bank.

• When you need to spend the money in your savings account, you can withdraw it.

Previously, savers were limited to making six withdrawals from a savings account per month under Federal Reserve rules. In 2020, the Federal Reserve lifted that restriction, though banks can still impose monthly withdrawal limits on savings accounts. Exceeding the allowed number of withdrawals per month could trigger a fee or could lead to the account being converted to a checking account.

Types of Savings Accounts

Banks can offer more than one kind of savings account. The range of savings accounts available can depend on whether you’re dealing with a traditional bank, an online bank, or a credit union.

Typically, these accounts will be insured up to $250,000 by either the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

Generally, the types of savings accounts you can open include:

• Traditional savings. Traditional savings accounts, also called regular, basic, or standard savings accounts, allow you to deposit money and earn interest. Rates for traditional savings may be on the low side, and you might pay a monthly fee for these accounts at brick-and-mortar banks.

• High-yield savings. The main benefits of high-yield savings accounts include above-average interest rates and low or no monthly fees. For example, online banks may offer high-yield savings accounts with rates that are many times higher than the national average savings rate, with no monthly fee.

• Money market savings. Money market savings accounts, or money market accounts, combine features of both savings accounts and checking accounts. For example, you can earn interest on deposits but have access to your money via paper checks or a debit card.

• Specialty savings. Some types of savings accounts are created with a specific purpose in mind. For example, Christmas Club accounts are designed to help you save money for the holidays. A Health Savings Account (HSA) is a tax-advantaged specialty savings account that’s meant to be used for health care expenses.

You could also add certificates of deposit (CDs) to this list, though a CD works differently than a savings account. CDs are time deposit accounts, meaning that when you put money in the account, you agree to leave it there for a set term. If you take the funds out before then, you will likely be charged a fee.

Once the CD matures, you can withdraw your initial deposit and the interest earned. For that reason, CDs offer less flexibility than other types of savings accounts.

Recommended: Savings Account Calculator

Pros and Cons of Using a Savings Account for Retirement Savings

Savings accounts can be used to save for a variety of financial goals, including retirement. You might be wondering whether it makes a difference if you use, say, a high yield savings account vs. Roth IRA or other retirement account to save, as long as you’re setting money aside consistently.

While savings accounts can offer convenience and earn interest, they’re not necessarily ideal when saving for retirement if your primary goal. Here are some of the advantages and disadvantages of using a savings account to plan for retirement.

Pros	Cons
Savings accounts are easy to open and typically don’t require a large initial deposit.	A savings account does not offer any tax benefits or incentives for use as a retirement account.
Banks and credit unions can pay interest on savings account deposits, allowing you to grow your money over time.	Interest rates for savings accounts can be low and may not outpace inflation.
You can withdraw money as needed and don’t have to reach a specific age in order to use your savings.	Banks can impose fees or even convert your savings account to checking if you’re making frequent withdrawals.
Savings accounts are safe and secure; deposits are protected up to $250,000 when held at an FDIC member bank.	If you’re putting all of your retirement funds into the same savings account, it’s possible that your balance might exceed the insured limit.

What Is a Roth IRA?

A Roth IRA is a type of individual retirement account that works somewhat differently than a traditional IRA. Traditional IRAs are funded with pre-tax dollars and allow for tax-deductible contributions when doing taxes. Once you turn 72, you’re required to begin taking money from this kind of account.

The way a Roth IRA works is that you set aside money using after-tax dollars, up to the annual contribution limit. That means you can’t deduct contributions to a Roth IRA. However, you won’t pay taxes on account earnings and will be able to withdraw funds tax-free in retirement.

You can leave money in your Roth IRA until you need it, which may allow it even more time to grow. Unlike traditional IRAs, there are no required minimum distributions for Roth IRAs. If you don’t use all of the money in your Roth IRA in retirement, you can pass it on to anyone you’d like to name as your beneficiary.

The IRS allows you to make a full contribution to a Roth IRA if you’re within certain income thresholds, based on your tax filing status. The full contribution limit for 2025 is $7,000, or $8,000 for those 50 and up. For 2026, the limit is $7,500, or $8,600 for those 50 and up. You can make a full contribution if your tax status is:

• Married filing jointly or a qualified widow(er) with a modified adjusted gross income of up to $236,000 in 2025 (up to $242,000 in 2026)

• Single, head of household, or married filing separately and did not live with your spouse during the year with a modified adjusted gross income of up to $150,000 in 2025 (up to $153,000 in 2026)

Contributions are reduced once you exceed these income thresholds. They eventually phase out completely for higher earners.

Pros and Cons of Using a Roth IRA for Retirement Savings

Roth IRAs are specifically designed to be used for retirement saving. Again, that’s the chief difference between a Roth IRA and savings account. That doesn’t mean, however, that a Roth IRA is necessarily right for everyone. For example, you may need to weigh whether a Roth IRA or traditional IRA is better, based on your income and tax situation.

Here are some of the advantages and disadvantages associated with choosing a Roth IRA for retirement savings.

Pros	Cons
Money in a Roth IRA can be invested in stocks, mutual funds, and other securities, potentially allowing your money to grow faster.	Investing money in the market is riskier than stashing it in a savings account; there’s no guarantee that you won’t lose money in a Roth IRA.
You may be able to open a Roth IRA with as little as $500 or $1,000, depending on the brokerage or bank you choose.	Brokerages can charge various fees for Roth IRAs. Individual investments may also carry fees of their own.
Earnings grow tax-free and you can withdraw original contributions at any time, without a penalty.	You can’t withdraw earnings tax-free until age 59 ½ and the account is at least 5 years old.
You can save money in a Roth IRA in addition to contributing money to a 401(k) plan at work.	Not everyone is eligible to open a Roth IRA, and there are annual contribution limits.

Similarities Between a Roth IRA and a Savings Account

Roth IRAs and savings accounts do have some things in common. For example:

• Both can be used to save money for the long-term and both can earn interest. So you could use either one or both as part of a retirement savings strategy.

• You can open a Roth IRA or savings account at a bank and initial deposits for either one may be relatively low. Some banks also offer Roth IRA CDs, which are CD accounts that follow Roth IRA tax rules.

• Savings accounts and Roth IRAs held at banks are also FDIC-insured. The FDIC insures certain types of retirement accounts, including Roth IRAs, when those accounts are self-directed and the investment decisions are made by the account owner, not a plan administrator.

• It’s possible to open a savings account for yourself or for a child. Somewhat similarly, you can also open a Roth IRA for a child if they have income of their own but haven’t turned 18 yet.

When comparing the benefits of Roth IRAs vs. savings accounts, however, Roth accounts have an edge for retirement planning. Whether it makes sense to choose something like a high-yield savings account vs. a Roth IRA can depend on what you want to set money aside for.

Roth IRA vs Savings Account: Key Differences

To understand how savings accounts and Roth IRAs compare, it helps to look at some of the key differences between them.

	Roth IRA	Savings Account
Purpose	A Roth IRA is designed to save for retirement.	Savings accounts can fund virtually any short- or long-term goal.
Who Can Open	Taxpayers who are within certain income thresholds can open a Roth IRA.	Adults with valid proof of ID can open a savings account, regardless of income or tax status.
Interest	Money in a Roth IRA earns compounding interest based on the value of underlying investments.	Savings accounts earn interest at a rate set by the bank.
Tax Benefits	Roth IRAs grow tax-free and allow for tax-free qualified distributions, with no required minimum distributions.	Savings accounts don’t offer any tax benefits; interest earned is considered taxable income.
Contribution Limits	Roth IRAs have an annual contribution limit. For 2025, the limit is $7,000 ($8,000 if you’re 50 or older); for 2026, the limit is $7,500 ($8,600 for those 50 and up).	There are no contribution limits, though FDIC protection only applies to the first $250,000 per depositor, per account ownership type, per financial institution.
Withdrawals	Generally, you can’t withdraw earnings without paying a penalty before age 59 ½ (though there are some exceptions). Original contributions can be withdrawn at any time without a penalty.	Banks can limit the number of withdrawals you’re allowed to make from a savings account each month and impose a fee for exceeding that limit.
Risk	Investing money in a Roth IRA can be risky; you may lose money.	Your deposits are protected (up to the insured limit).

How to Decide If a Roth IRA or Savings Account Is Right for You

If you’re unsure whether to open a Roth IRA vs. a high-yield savings account, it’s helpful to consider your goals and what you want to do with your money.

You might decide to open a Roth IRA if you:

• Specifically want to save for retirement and potentially earn a higher rate of return

• Would like to be able to withdraw money tax-free to buy a home or pay higher education expenses (the IRS allows you to avoid a tax penalty for these distributions)

• Want to supplement the money you’re contributing to a 401(k) at work

• Expect to be in a higher tax bracket at retirement and want to be able to withdraw savings tax-free

• Don’t want to be required to make minimum distributions at age 72

On the other hand, you might open a savings account if you:

• Have a short- or medium-term goal you’re saving for

• Want a safe place to keep your money

• Are satisfied with earning a lower rate of return on savings

• Need to be able to keep some of your money liquid and accessible

• Aren’t concerned with getting any type of tax break for your savings

The good news is that you don’t have to choose between a high-interest savings account vs. a Roth IRA. You can open one of each type of account to save for both retirement and other financial goals.

The Takeaway

Opening a retirement account can be a smart move if you’d like to save money for your later years while enjoying some tax breaks. A Roth IRA could be a good fit if you’re eligible to open one and you’d like to be able to make tax-free withdrawals once you retire.

Having a savings account is also a good idea if you’re building an emergency fund, saving for a vacation, or have another money goal that is a few months or years away. Your deposits will earn interest and you’ll be able to easily access your funds (penalty-free) when you need them.

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FAQ

Is it better to put money in savings or a Roth IRA?

A savings account can be better for setting aside cash you know you’ll need in the next few months or years. A Roth IRA, on the other hand, is better suited for saving for retirement, since it has greater growth potential (though returns are not guaranteed), while also providing tax benefits.

Should I use a Roth IRA as a savings account?

While you could use a Roth IRA as a savings account, you generally can’t access earnings on the account until age 59 ½ without paying a penalty. Another downside of using a Roth IRA as a savings account is that funds are typically invested for long-term growth. If you withdraw money in the short-term, you could lose money due to fluctuations in the value of your assets.

What is the downside of a Roth IRA?

One of the main disadvantages to a Roth IRA is that contributions are made with after-tax money, which means you don’t get a tax deduction in the years you contribute. Another drawback is that not everyone can take advantage of a Roth IRA, since there are income limits on contributions.

Also keep in mind that the maximum annual contribution to Roth IRA is relatively low compared with a 401(k). As a result, you will likely need other accounts to adequately save for retirement.

Can I move money from savings to a Roth IRA?

You can link a savings account to a Roth IRA to transfer funds. If you’d like to move money from savings to your Roth account, you’d just log into your brokerage account and schedule the transfer. Keep in mind that Roth IRAs do have annual limits on how much you can contribute.

Are Roth IRAs Insured?

Yes, Roth IRAs can be insured, but coverage depends on the type of investments within the account. Generally, if your IRA holds cash in a bank, it is protected by the Federal Deposit Insurance Corporation (FDIC), up to certain limits. If your IRA is invested in securities at a brokerage, it is protected by the Securities Investor Protection Corporation (SIPC), up to certain limits, from brokerage failure. SIPC does not protect against a decline in the market value of your investments.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

Photo credit: iStock/dima_sidelnikov

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Dec

2025

Solo 401(k) vs SEP IRA: Key Differences and Considerations

Solo 401(k) vs SEP IRA: An In-Depth Comparison for Self-Employed Retirement Planning

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Self-employment has its perks, but an employer-sponsored retirement plan isn’t one of them. Opening a solo 401(k) or a Simplified Employee Pension Individual Retirement Account (SEP IRA) allows the self-employed to save for retirement while enjoying some tax advantages.

So, which is better for you? The answer can depend largely on whether your business has employees or operates as a sole proprietorship and which plan yields more benefits, in terms of contribution limits and tax breaks.

Weighing the features of a solo 401(k) vs. SEP IRA can make it easier to decide which one is more suited to your retirement savings needs.

Key Points

• Solo 401(k) allows tax-deductible contributions, employer contributions, employee contributions, and offers the option for Roth contributions and catch-up contributions.

• SEP IRA allows tax-deductible contributions, employer contributions, but does not allow employee contributions, Roth contributions, catch-up contributions, or loans.

• Withdrawals from traditional solo 401(k) plans and SEP IRAs are taxed in retirement.

• Solo 401(k) plans allow loans, while SEP IRAs do not.

• Solo 401(k) plans offer more flexibility and options compared to SEP IRAs.

Understanding the Basics

A solo 401(k) is similar to a traditional 401(k), in terms of annual contribution limits and tax treatment. A SEP IRA follows the same tax rules as traditional IRAs. SEP IRAs, however, typically allow a higher annual contribution limit than a regular IRA.

What Is a Solo 401(k)?

A solo 401(k) covers a business owner who has no employees or employs only their spouse. Simply, a Solo 401(k) allows you to save money for retirement from your self-employment or business income on a tax-advantaged basis.

These plans follow the same IRS rules and requirements as any other 401(k). There are specific solo 401(k) contribution limits to follow, along with rules regarding withdrawals and taxation. Regulations also govern when you can take a loan from a solo 401(k) plan.

A number of online brokerages offer solo 401(k) plans for self-employed individuals, including those who freelance or perform gig work. You can open a retirement account online and start investing, no employer other than yourself needed.

If you use a solo 401(k) to save for retirement, you’ll also need to follow some reporting requirements. Generally, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if it has $250,000 or more in assets at the end of the year.

What Is a SEP IRA?

A SEP IRA is another option to consider if you’re looking for retirement plans for the self-employed. This tax-advantaged plan is available to any size business, including sole proprietorships with no employees. SEP IRAs work much like traditional IRAs, with regard to the tax treatment of withdrawals. They do, however, allow you to contribute more money toward retirement each year above the standard traditional IRA contribution limit. That means you could enjoy a bigger tax break when it’s time to deduct contributions.

If you have employees, you can make retirement plan contributions to a SEP IRA on their behalf. SEP IRA contribution limits are, for the most part, the same for both employers and employees. If you’re interested in a SEP, you can set up an IRA for yourself or for yourself and your employees through an online brokerage.

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

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

Diving Deeper: Pros and Cons of Each Plan

As you debate between a solo 401(k) vs. a SEP IRA as ways to build wealth for retirement, it’s helpful to learn more about how these plans work, including their benefits and drawbacks.

Advantages of Solo 401(k)s

In terms of differences, there are some things that set solo 401(k) plans apart from SEP IRAs.

With a solo 401(k), you can choose a traditional or Roth. You can deduct your contributions in the year you make them with a traditional solo 401(k), but you’ll pay taxes on your distributions in retirement. With a Roth solo 401(k) you pay taxes on your contributions in the year you make them, and in retirement, your distributions are tax free. You can choose the plan that gives you the best tax advantage.

Another benefit of a solo 401(k) is that those age 50 and older can make catch-up contributions to this plan. In addition, you may be able to take a loan from a solo 401(k) if the plan permits it.

Advantages of SEP IRAs

One of the benefits of a SEP IRA is that contributions are tax deductible and you can make them at any time until your taxes are due in mid-April of the following year.

The plan is also easy to set up and maintain.

If you have employees, you can establish a SEP IRA for yourself as well as your eligible employees. You can then make retirement plan contributions to a SEP IRA on your employees’ behalf. (All contributions to a SEP are made by the employer only, though employees own their accounts.)

SEP IRA contribution limits are, for the most part, the same for both employers and employees. This means that you need to make the same percentage of contribution for each employee that you make for yourself. That means if you contribute 15% of your compensation for yourself, you must contribute 15% of each employee’s compensation (subject to contribution limits).

A SEP IRA also offers flexibility. You don’t have to contribute to it every year.

However, under SEP IRA rules, no catch-up contributions are allowed. There’s no Roth option with a SEP IRA either.

Eligibility and Contribution Limits

Here’s what you need to know about who is eligible for a SEP IRA vs. a Solo 401(k), along with the contribution limits for both plans for 2024 and 2025.

Who Qualifies for a Solo 401(k) or SEP IRA?

Self-employed individuals and business owners with no employees (aside from their spouse) can open and contribute to a solo 401(k). There are no income restrictions on these plans.

SEP IRAs are available to self-employed individuals or business owners with employees. A SEP IRA might be best for those with just a few employees because IRS rules dictate that if you have one of these plans, you must contribute to a SEP IRA on behalf of your eligible employees (to be eligible, the employees must be 21 or older, they must have worked for you for three of the past five years, and they must have earned at least $750 in the tax year).

Plus, the amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

Contribution Comparison

With a solo 401(k), there are rules regarding contributions, including contribution limits. For 2025, you can contribute up to $70,000, plus an additional catch-up contribution of $7,500 for those age 50 and older. In 2026, you can contribute up to $72,000, plus an extra catch-up contribution of $8,000 for those age 50 and older. Also, in 2025 and 2026, those aged 60 to 63 may contribute an additional catch-up of $11,250 instead of $7,500 and $8,000 respectively, thanks to SECURE 2.0.

For the purposes of a solo 401(k) you play two roles — employer and employee. As an employee, you can contribute the lesser of 100% of your compensation or up to $23,500 in 2025 and up to $24,500 in 2026. If you’re 50 or older, you can contribute the $7,500 catch-up contribution in 2025, and $8,000 in 2026. And if you’re aged 60 to 63, in 2025 and 2026, you may contribute an additional $11,250 instead of $7,500 (in 2025) or $8,000 (in 2026). As an employer, you can make an additional contribution of 25% of your compensation (up to $350,000 in 2025, and up to $360,000 in 2026) or net self-employment income.

The contribution limits for a SEP IRA are the lesser of 25% of your compensation or $70,000 in 2025 and $72,000 in 2026. As mentioned earlier, there are no catch-up contributions with this plan.

And remember, per the IRS, if you have a SEP IRA, you must contribute to the plan on behalf of your eligible employees. The amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

Key Differences That Could Influence Your Decision

When you’re deciding between a solo 401(k) vs. a SEP IRA, consider the differences between the two plans carefully. These differences include:

Roth Options and Tax Benefits

With a solo 401(k), you can choose between a traditional and Roth solo 401(k), depending on which option’s tax benefits make the most sense for you. If you expect to be in a higher tax bracket when you retire, a Roth may be more advantageous since you can pay taxes on your contributions upfront and get distributions tax-free in retirement.

On the other hand, if you anticipate being in a lower tax bracket at retirement, a traditional solo 401(k) that lets you take deductions on your contributions now and pay tax on distributions in retirement could be your best option.

Loan Options and Investment Flexibility

You may also be able to take a loan from a solo 401(k) if your plan permits it. Solo 401(k) loans follow the same rules as traditional 401(k) loans.

If you need to take money from a SEP IRA before age 59 ½, however, you may pay an early withdrawal penalty and owe income tax on the withdrawal.

Both solo 401(k)s and SEP IRA offer more investment options than workplace 401(k)s. So you can choose the investment options that best suit your needs.

The Impact of Having Employees

Whether you have employees or not will help determine which type of plan is best for you.

A solo 401(k) is designed for business owners with no employees except for a spouse.

A SEP IRA is for those who are self-employed or small business owners. A SEP IRA may be best for those who have just a few employees since, as discussed above, you must contribute to a SEP IRA on behalf of all eligible employees and you must contribute the same percentage of compensation as you contribute for yourself.

The Financial Implications for Your Business

The plan you choose, solo 401(k) vs. SEP IRA, does have financial and tax implications that you’ll want to consider carefully. Here’s a quick comparison of the two plans.

Solo 401(k) vs SEP IRA at a Glance

Both solo 401(k) plans and SEP IRAs make it possible to save for retirement as a self-employed person or business owner when you don’t have access to an employer’s 401(k). And both can potentially offer a tax break if you’re able to deduct contributions each year.

Here’s a rundown of the main differences between a 401(k) vs. SEP IRA.

	Solo 401(k)	SEP IRA
Tax-Deductible Contributions	Yes, for traditional solo 401(k) plans	Yes
Employer Contributions Allowed	Yes	Yes
Employee Contributions Allowed	Yes	No
Withdrawals Taxed in Retirement	Yes, for traditional solo 401(k) plans	Yes
Roth Contributions Allowed	Yes	No
Catch-Up Contributions Allowed	Yes	No
Loans Allowed	Yes	No

How These Plans Affect Your Bottom Line

Both solo 401(k)s and SEP IRAs are tax-advantaged accounts that can help you save for retirement. With a SEP IRA, contributions are tax deductible, including contributions made on employees’ behalf, which offers a tax advantage. Solo 401(k)s give you the option of choosing a traditional or Roth option so that you can pay tax on your contributions upfront and not in retirement (traditional), or defer them until you retire (Roth).

Making the Choice Between SEP IRA and Solo 401(k): Which Is Right for You?

An important part of planning for your retirement is understanding your long-term goals. Whether you choose to open a solo 401(k) or make SEP IRA contributions can depend on how your business is structured, how much you want to save for retirement, and what kind of tax advantages you hope to enjoy along the way.

When to Choose a Solo 401(k)

If you’re self-employed and have no employees (or if your only employee is your spouse), you may want to consider a solo 401(k). A solo 401(k) could allow you to save more for retirement on a tax-advantaged basis compared to a SEP IRA. A solo 401(k) allows catch-up contributions if you are 50 or older, and you can also take loans from a solo 401(k).

Just be aware that a solo 401(k) can be more work to set up and maintain than a SEP IRA.

When to Choose a SEP IRA

If you’re looking for a plan that’s easy to set up and maintain, a SEP IRA may be right for you. And if you have a few employees, a SEP IRA can be used to cover them as well as your spouse. However, you will need to cover the same percentage of contribution for your employees as you do for yourself.

Remember that a SEP IRA does not allow catch-up contributions, nor can you take loans from it.

Step-by-Step Guide to Opening Your Account

You can typically set up a SEP IRA with any financial institution that offers other retirement plans, including an online bank or brokerage. The institution you choose will guide you through the set-up process and it’s generally quick and easy.

Once you establish and fund your account, you can choose the investment options that best suit your needs and those of any eligible employees you may have. You will need to set up an account for each of these employees.

To open a Solo 401(k), you’ll need an Employee Identification Number (EIN). You can get an EIN through the IRS website. Once you have an EIN, you can choose the financial institution you want to work with, typically a brokerage or online brokerage. Next, you’ll fill out the necessary paperwork, and once the account is open you’ll fund it. You can do this through direct deposit or a check. Then you can set up your contributions.

Additional Considerations for Retirement Planning

Besides choosing a SEP IRA or a solo 401(k), there are a few other factors to consider when planning for retirement. They include:

Rollover Process

At some point, you may want to roll over whichever retirement plan you choose — or roll assets from another retirement plan into your current plan. A SEP IRA allows for either option. You can generally roll a SEP IRA into another IRA or other qualified plan, although there may be some restrictions depending on the type of plan it is. You can also roll assets from another retirement plan you have into your SEP.

A solo 401(k) can also be set up to allow rollovers. You can roll other retirement accounts, including a traditional 401(k) or a SEP IRA, into your solo 401(k). You can also roll a solo 401(k) into a traditional 401(k), as long as that plan allows rollovers.

Can You have Both a SEP IRA and a Solo 401(k)?

It is possible to have both a SEP IRA and a solo 401(k). However, how much you can contribute to them depends on certain factors, including how your SEP was set up. In general, when you contribute to both plans at the same time, there is a limit to how much you can contribute. Generally, your total contributions to both are aggregated and cannot exceed more than $70,000 in 2025 and $72,000 in 2026.

Preparing for Retirement Beyond Plans

Choosing retirement plans is just one important step in laying the groundwork for your future. You should also figure out at what age you can retire, how much money you’ll need for retirement, and the typical retirement expenses you should be ready for.

Working on building your retirement savings is an important goal. In addition to opening and contributing to retirement plans, other smart strategies include creating a budget and sticking to it, paying down any debt you have, and simplifying your lifestyle and cutting unnecessary spending. You may even want to consider getting a side hustle to bring in extra income.

The Takeaway

Saving for retirement is something that you can’t afford to put off. And the sooner you start, the better so that your money has time to grow. Whether you choose a solo 401(k), SEP IRA, or another savings plan, it’s important to take the first step toward building retirement wealth.

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

Help grow your nest egg with a SoFi IRA.

About the author

Rebecca Lake

Photo credit: iStock/1001Love

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Dec

2025

Custodial Roth IRA: How to Open a Roth IRA For Kids

By SoFi Editors | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A Roth IRA can be a retirement savings tool for children as well as adults. Funded with after-tax dollars, a Roth IRA grows tax-free, so account holders won’t need to pay taxes when they withdraw money in retirement as long as the account has been open for at least five years. Plus, the money in a Roth IRA will have many decades to grow if you open it when your child is young.

And while a Roth IRA has an early distribution penalty, that penalty is generally waived for certain expenses, such as paying for qualified college expenses, if your child needs to access those funds. That flexibility can make a Roth IRA appealing.

Can you open a Roth IRA for a child? Yes! A Roth IRA for kids, called a Custodial Roth IRA, can be opened by a parent, grandparent, or other adult for a child of any age, as long as the child earns income (more on that later).

Here’s everything you need to know about a Roth IRA for kids.

🛈 Currently, SoFi does not offer custodial banking or investment products.

What Is a Roth IRA for Kids?

A Roth IRA for kids, also known as a custodial Roth IRA, is an IRA opened by an adult (usually a parent), who manages the account until the child gets full control of it, which is at age 18 or 21 in most states.

A custodial Roth IRA for kids generally operates in the same way a Roth IRA for adults does. The account holder contributes after-tax dollars toward their retirement savings and the money grows tax-free in the account.

In order to open and contribute to a Roth IRA, your child must have earned income.

Who’s Eligible for a Roth IRA for Kids?

A child of any age can have a Roth IRA for kids. However, to be eligible, a child must have an earned income. Earned income can include the compensation earned from jobs like babysitting, dog walking, or working for an employer.

Custodial Roth IRA Rules

In addition to the standard rules for a Roth IRA, there are specific rules for custodial Roth IRAs. These rules include:

No Minimum Age Limit

A child of any age can have a custodial Roth IRA as long as he or she has earned income.

A Child Must Have Earned Income

In order to open a custodial Roth IRA, a child must have earned income. The IRS generally defines earned income as taxable income, wages, and tips. This can also include self-employment, such as yard work or babysitting. Cash gifts given to a child do not count as earned income.

There Are Contribution Limits

The 2025 contribution limit for a Roth IRA is $7,000 ($8,000 for those 50 and older). For 2026, the contribution limit is $7,500 ($8,600 for those 50-plus). You may also be limited by your Modified Adjusted Gross Income (MAGI) depending on your filing status.

In addition, a child (or an adult on behalf of a child) cannot contribute an amount greater than the child’s earned income. So if a child earned $2,000 as a lifeguard at the local swimming pool, for example, the most that can be contributed to the child’s custodial IRA that year, including contributions from parents, is $2,000.

Certain Early Withdrawals Are Allowed

In general, you can withdraw contributions from a Roth IRA at any time without penalty. Earnings typically can’t be withdrawn before age 59 ½ without penalty except in certain circumstances. Allowable exceptions include withdrawals up to certain limits to pay for qualified college expenses, cover certain medical bills, and to buy a first home.

Eventual Conversion to a Regular Roth IRA

When the child reaches the legal age in their state (typically 18 or 21, depending on the state), the custodial Roth IRA will need to be converted to a regular Roth IRA in the child’s name.

How to Open a Custodial Roth IRA for a Kid

A Roth IRA for kids can be opened by any adult, such as a parent or grandparent, for instance. While the child is a minor, the adult will have sole access to the account; once the child comes of age (the timing of which varies by state), the account will transfer over to the child.

As with any Roth IRA, investment options within the account can include stocks, bonds, and mutual funds.

A Roth IRA can be opened through a financial institution or brokerage firm. You can typically open the account online by providing some basic information about yourself and your child. Choosing the right institution and Roth IRA offering depends on the investor and their preferences, so be sure to do some research.

Benefits of Starting a Roth IRA for a Child

Flexibility in how to use the funds can be one benefit of opening a custodial Roth IRA as part of an investment plan for your child. A Roth IRA can provide flexibility not only for potential expenses in early adulthood — such as college expenses or buying a home — but can be an investment vehicle throughout your child’s lifetime.

Another benefit is that a Roth IRA typically gives you more control over investments than an education-focused 529 college savings plan, and it may allow you to create a diversified portfolio of different asset classes.

A Roth IRA is a gift that can keep growing, since investors can potentially maximize compounding returns to get the most out of their investment. Here’s how a Roth IRA may unlock the power of compounding: As an example, let’s say you open a custodial Roth IRA when the child is 10 years old, and contribute $2,000 annually. At a certain point, your child might take over contributing $2,000 annually.

Assuming a 7% rate of return, the account will be worth $928,000 by the time your child is 60 years old — even though the amount you and your child contributed would be $100,000 in total. In comparison, if that same money was put in a taxable savings account over the same time period, the total of the account would be approximately $515,764.

And unlike a traditional IRA, there is no required minimum distribution (RMD) on a Roth IRA once the account owner reaches retirement age. A Roth IRA also allows people to continue contributing throughout their lifetime, as long as they’re earning income.

Alternatives to a Roth IRA for a Kid

If you’re looking for other possible investments for your child, some options to consider include the following.

• Savings account: A parent can open a savings account for a child, as long as the parent is a joint account holder. Savings accounts typically have low interest rates (the average rate for a savings account is 0.42% APY as of December 16, 2024), so you might want to look for a high-yield savings account instead. These accounts may have average rates of more than 3.00% APY.

• Savings bonds: If your child doesn’t have earned income, you may want to consider savings bonds. However, savings bonds don’t offer the same potential tax advantages a Roth IRA does since you have to pay federal income tax on the bonds when they mature or you cash them. You won’t pay income taxes on Roth IRA earnings unless you take a non-qualified distribution.

• 529 plans: These plans can help you save for your child’s education. You can typically invest the money you contribute to a 529 plan and choose from a wide range of investment options. While these plans aren’t tax deductible at the federal level, your state may offer tax breaks for contributions made to them. And funds can be withdrawn tax-free for qualified education expenses. Also, money left in a 529 may be rolled over to a Roth IRA for your child, although certain conditions and limits may apply.

• UGMA/UTMA accounts: A Uniform Gifts to Minors Act (UGMA) account and a Uniform Transfers to Minors Act (UTMA) account are custodial accounts in which an adult can invest on behalf of a child. These accounts are typically used to invest in stocks, bonds, mutual funds, and so on. There are no contribution or income limits, and gifts below the annual gift threshold do not need to be reported. However, there are no tax benefits when contributions are made, and earnings are made to these accounts, and earnings are subject to taxes. When the child reaches legal age, they take over control of the account.

The Takeaway

For a child with earned income, a custodial Roth IRA may be a good way to help them prepare for their future and get started on the path to investing. A child does need to have an earned income to open a custodial Roth IRA, and contributions cannot exceed their income. If your child qualifies, a Roth IRA for kids could potentially give them years of tax-free growth on their money.

FAQ

Can you open a Roth IRA for a child if they don’t earn income?

No. A child must have earned income — which the IRS defines as wages, salaries, tips and other taxable employee compensation, as well as net earnings from self-employment — in order to open a custodial Roth IRA.

Can you open a Roth IRA for a baby?

It’s possible to open an IRA for a baby. As long as a baby earns an income — modeling baby clothes, for instance — you can open a custodial Roth IRA for them. There is no minimum age to open a custodial Roth IRA, but the child must have earned income.

Is it a good idea to open a Roth IRA for a child?

It may be a good idea to open a Roth IRA for a child for several reasons. A Roth IRA can help a child save up for and cover certain expenses in early adulthood, such as qualified college expenses. Also, a Roth IRA typically has higher returns than a savings account. And because kids have a low tax rate now, when contributions are made, it makes sense to open a Roth IRA, which is taxed upfront. At retirement, as long as they are at least age 59 ½, they can withdraw the money tax-free.

Can I give my child money for a Roth IRA?

Yes, you can contribute to your child’s IRA. However, annual contributions to the account cannot exceed the child’s annual earned income. Also, per IRS rules, the overall amount you can contribute to a Roth IRA is to $7,000 in 2025 ($7,500 in 2026) for individuals under age 50, or the total annual earned income, whichever is less.

What is the disadvantage of a Roth IRA for kids?

One potential disadvantage of an IRA for kids is that your child must earn an income in order to open and contribute to an account. In addition, you can only contribute the amount the child earns. So if the child makes $500 for the year babysitting, that is the most you can contribute to their custodial Roth IRA.

Can I open a Roth IRA for my 2 year old?

As long as your 2-year-old earns an income, you can open a custodial Roth IRA for them. There is no minimum age requirement for a Roth IRA for kids.

How do I prove my child’s income for a Roth IRA?

If your child receives a W-2 or 1099 form for work they did for an employer, you can use those documents to prove your child’s income. However, if they are self-employed and do work like babysitting, dog walking or yard work to earn money, you should keep receipts or records of the type of work they did, the amount they earned, when the work was done, and who it was for, as proof of their income.

What happens to a custodial Roth IRA when the child turns 18?

Once a child is of legal age, which is typically 18 or 21, depending on your state, the IRA must be converted to a regular Roth IRA in the child’s name that they then own and manage.

Do children need to file a tax return to fund their Roth IRA?

As long as their income is below the threshold that requires them to file a tax return, children are typically not required to file a tax return just because they have a custodial IRA. However, you may want to consult with a tax professional about your specific situation.

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Dec

2025

Individual Retirement Account (IRA) vs Thrift Savings Plan (TSP)

By Dan Miller | invest, Investing, Preparing for Retirement | Comments Off

Although an IRA and a TSP are both types of retirement accounts, they are governed by different sets of rules, starting with the fact that anyone with earned income can open an IRA, but only employees of the U.S. government or the armed forces can fund a thrift savings plan.

A TSP effectively functions more like the government version of a 401(k) plan, with similar rules and contribution limits to these private company-sponsored plans.

When considering the advantages of an IRA vs. a TSP, remember that in many cases it’s possible to fund both types of accounts, as long as you understand the rules and restrictions that apply to each.

What Is an IRA?

You may already be familiar with what IRAs are: These are individual retirement accounts that are tax advantaged in different ways. Anyone with earned income can open an IRA, as long as they meet certain criteria.

Retirement savers can generally choose between traditional and Roth IRAs, with some exceptions owing to Roth eligibility rules (more on that below).

Traditional IRAs allow for pre-tax contributions, while Roth IRAs involve after-tax contributions and permit qualified tax-free withdrawals in retirement.

For tax year 2025, the maximum annual amount you can contribute to either type of IRA is $7,000; $8,000 if you’re 50 or older. For tax year 2026, the maximum amount you can contribute to either type of IRA for the year is $7,500; $8,600 if you’re 50 or older. These amounts are the total annual contribution amounts allowed across all ordinary IRA accounts.

So, if you contribute $3,000 to a Roth IRA in 2025 and you’re under age 50, then you can only contribute up to $4,000 in another IRA for that year. And if you contribute $3,000 to a Roth IRA in 2026 and you’re under age 50, you can only contribute up to $4,500 in another IRA for the year.

Calculate your IRA contributions.

Use SoFi’s IRA contribution calculator to determine how much you can contribute to an IRA in 2024.

What Is a TSP?

The Thrift Savings Plan (TSP) is an employer-sponsored plan that is open to members of the military and civilian employees of the federal government. TSPs are tax-advantaged plans that share many similarities to 401(k) plans offered by private employers.

Like 401(k) plans, you can contribute to a traditional TSP or a designated Roth TSP, both of which come with the types of tax advantages that are similar to traditional and Roth IRAs, as described above. In other words, many different types of retirement accounts may also offer a Roth-style option, for after-tax contributions. Be sure to check the rules and restrictions on contributing to both sides of a plan.

Perhaps the biggest difference with a TSP vs. an IRA is the annual contribution limit. You can contribute up to $23,500 for tax year 2025; for those 50 and older there is also an annual catch-up contribution of up to $7,500 per year, for a total of $30,500. Also, in 2025, those aged 60 to 63 may contribute a catch-up of up to $11,250 (instead of $7,500) for a total of $34,750, thanks to SECURE 2.0.

For 2026, you can contribute up to $24,500, and there is a catch-up contribution of up to $8,000 for those age 50 and up for a total of $32,500. Also, in 2025, those aged 60 to 63 may again contribute a catch-up of up to $11,250 (instead of $8,000) for a total of $35,750.

But contribution limits for IRAs are $7,000 for tax year 2025 ($8,000 for those 50 and up), and $7,500 for tax year 2026 ($8,600 for those 50 and older).

¹Terms and conditions apply. Roll over a minimum of $20K to receive the 1% match offer. Matches on contributions are made up to the annual limits.

TSP vs. IRA

In addition, there are other similarities and differences between a TSP and an IRA.

Similarities

Both the TSP and IRAs provide tax-advantaged ways to save for retirement. With both TSPs and IRAs you can choose between a traditional (tax-deferred) account or a Roth (tax-free) account.

• With a traditional-style TSP or IRA, funds are deposited pre-tax, and you owe ordinary income tax on the withdrawals.

• With a Roth-style TSP or IRA, you deposit after-tax money, and qualified withdrawals are tax-free starting at age 59 ½, as long as you’ve held the account for at least five years.

• With both types of accounts, you may face tax consequences and/or a penalty if you withdraw your funds before age 59 ½.

Differences

There are far more differences between TSPs and IRAs, as you’ll see in the table below.

IRAs	TSP
Anyone with earned income can open an IRA	Only members of the military and government employees are eligible
Annual contribution limits for 2025 are $7,000 and $8,000 with the catch-up provision; annual contribution limits for 2026 are $7,500 and $8,600 with the catch-up.	Annual contribution limits for 2025 are $23,500; $31,000 with the catch-up provision and $34,750 for those aged 60 to 63; annual contribution limits for 2026 are $24,500; $32,500 with the catch-up provision and $35,750 for those aged 60 to 63.
A wide range of investment choices	Investment choices are limited to the funds the TSP provides
You have some control over the investment fees you pay, so be sure to check your all-in costs.	You have little control over the investment fees you pay, though TSP account and investment fees tend to be low.
You cannot take a loan from your IRA	TSP loans may be available
You are solely responsible for contributions	The government typically provides matching contributions of up to 5%
Traditional IRAs are subject to RMD rules; Roth IRAs are not	RMD rules apply to TSPs, but there are different distribution options: e.g. an installment plan or a lifetime annuity, among other choices

Pros and Cons of IRAs

As the name suggests, an IRA is an account that you manage individually. As such, it comes with its own set of advantages and disadvantages.

Pros

• You can open an IRA at most brokerage firms, and manage it yourself, as long as you have earned income.

• An IRA account typically offers access to a wide range of investment options.

• Traditional and Roth IRAs offer different tax treatments; you can choose whatever works best for your financial plan.

Cons

• Annual contribution limits are lower than many other types of retirement plans.

• Eligibility rules for Roth IRAs are complicated and can be limiting.

• Only you can fund an IRA; there is no employer match for a traditional IRA or Roth.

• You cannot take a loan from any type of IRA (but you may be able to take early withdrawals under some circumstances without owing a penalty; see IRS.gov).

Pros and Cons of TSPs

Remember that you can only participate in a TSP if you are an employee of the federal government or a member of the armed forces. Here are some other considerations.

Pros

• The annual contribution limits are higher than IRAs, and the same as 401(k) plans.

• TSPs include an employer match up to 5%.

• When setting up your income plan in retirement, TSPs offer a range of options for taking withdrawals, including fixed installments and a lifetime annuity option.

• You can take a loan from a TSP.

• TSP accounts have lower fees, generally, than IRA accounts

Cons

• Investment options within a TSP can be limited.

• If you leave your government job, you can no longer contribute to your TSP.

• TSP plan participants have less control, and cannot opt for lower-fee or investment options.

Can You Roll a TSP Into an IRA?

Yes, you can rollover your TSP funds into a qualified trust or eligible retirement plan. Eligible retirement plans include IRAs as well as qualified employer-sponsored plans.

Keep in mind that generally you generally need to rollover funds from a traditional TSP account into a traditional IRA and funds from a Roth TSP account into a Roth IRA in order to avoid taxes on the amount you rollover.

You may want to consult with a professional.

The Takeaway

The Thrift Savings Plan (TSP) is a government program intended to help government employees and members of the military save for retirement. It is an employer-sponsored plan similar to a 401(k). An individual retirement account (IRA) is also a way to save for retirement, but is an account you open and manage yourself.

While there are advantages and disadvantages to each, a TSP allows you to invest more of your savings over time; contribution limits are lower for traditional and Roth IRAs.

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

Help grow your nest egg with a SoFi IRA.

FAQ

Is a TSP or IRA better?

A TSP and an IRA are two different ways to save for retirement, and may suit different people for different reasons. Contributing to an IRA may provide you with more investment options, while you can save more in a TSP and the government may match some of your contributions — but not everyone has access to a TSP.

Should you move your TSP to an IRA?

If you leave government service, you can’t contribute to your TSP anymore — but you may be able to open an IRA and rollover the TSP funds. Doing a TSP-to-IRA rollover within the standard 60-day window can help ensure that you don’t have to pay any taxes or penalties, and this may help your retirement plan.

Is a TSP the same as an IRA?

No, a TSP is not the same as an IRA. A TSP is for employees of the government or the armed forces, and it’s comparable to an employer-sponsored plan like a 401(k) or 403(b). By contrast, anyone can open an IRA, as long as they have earned income and qualify.

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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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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Roth IRA Conversion: Rules and Examples

What Is a Roth IRA Conversion?

How Does a Roth IRA Conversion Work?

Get a 1% IRA match on rollovers and contributions.

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Roth IRA Conversion Rules

Taxes

Limits

Withdrawals

Backdoor Roth IRAs

5-Year Rule

Is Converting to a Roth IRA Right for You?

Reasons For

Reasons Against

The Takeaway

FAQ

How much tax do you pay on a Roth IRA conversion?

How many Roth iRA conversions are allowed per year?

When is the deadline for Roth IRA conversions?

Is there a loophole for Roth IRA conversions?

How do I avoid taxes on Roth conversion?

How do you not lose money in a Roth IRA conversion?

Do you have to pay taxes immediately on Roth conversion?

Should a 65 year old do a Roth conversion?

Does a Roth conversion affect my Social Security?

Does a Roth conversion affect Medicare premiums?

What is the best Roth conversion strategy?

Can you do Roth conversions after age 72?

How do I calculate my Roth conversion basis?

Do you have to wait 5 years for each Roth conversion?

Roth IRA vs. Savings Account

What Is a Savings Account?

Types of Savings Accounts

Pros and Cons of Using a Savings Account for Retirement Savings

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What Is a Roth IRA?

Pros and Cons of Using a Roth IRA for Retirement Savings

Similarities Between a Roth IRA and a Savings Account

Roth IRA vs Savings Account: Key Differences

How to Decide If a Roth IRA or Savings Account Is Right for You

The Takeaway

FAQ

Is it better to put money in savings or a Roth IRA?

Should I use a Roth IRA as a savings account?

What is the downside of a Roth IRA?

Can I move money from savings to a Roth IRA?

Are Roth IRAs Insured?

Solo 401(k) vs SEP IRA: An In-Depth Comparison for Self-Employed Retirement Planning

Understanding the Basics

What Is a Solo 401(k)?

What Is a SEP IRA?

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Diving Deeper: Pros and Cons of Each Plan

Advantages of Solo 401(k)s

Advantages of SEP IRAs

Eligibility and Contribution Limits

Who Qualifies for a Solo 401(k) or SEP IRA?

Contribution Comparison

Key Differences That Could Influence Your Decision

Roth Options and Tax Benefits

Loan Options and Investment Flexibility

The Impact of Having Employees

The Financial Implications for Your Business

Solo 401(k) vs SEP IRA at a Glance

How These Plans Affect Your Bottom Line

Making the Choice Between SEP IRA and Solo 401(k): Which Is Right for You?

When to Choose a Solo 401(k)

When to Choose a SEP IRA

Step-by-Step Guide to Opening Your Account

Additional Considerations for Retirement Planning

Rollover Process

Can You have Both a SEP IRA and a Solo 401(k)?

Preparing for Retirement Beyond Plans

The Takeaway

Custodial Roth IRA: How to Open a Roth IRA For Kids

What Is a Roth IRA for Kids?

Who’s Eligible for a Roth IRA for Kids?

Custodial Roth IRA Rules

No Minimum Age Limit

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Increase your savings
with a limited-time APY boost.*

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

Double down on your retirement goals with a 1% match on every dollar you roll over and contribute to a SoFi IRA.¹

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