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An employee savings plan (ESP) is a valuable financial tool designed to help workers set aside money for future goals, such as retirement or health care expenses. Offered as a workplace benefit, these plans provide structured and often tax-advantaged ways to save regularly through automatic payroll deductions. Some employers may also add to their employees’ savings with matching contributions. A popular ESP offered by U.S. employers is the 401(k) retirement plan.

Below, we take a closer look at how ESPs work, the types available, their benefits and potential drawbacks, and how to make the most of this valuable workplace perk.

What Is an Employee Savings Plan?

Some employers offer an employee savings plan to help employees invest for retirement and other long-term financial goals. Leveraging an employee savings plan is one of the first steps to building a simple savings plan you can stick to.

Typically, each employee chooses how much they want to contribute to the plan each pay period. That amount is then deducted from the employee’s paycheck. The automated process can help make it easier to save, and employees generally have the option to change their contribution amount based on their needs and goals.

Employee savings plan contributions are often made on a pre-tax basis. That means the funds are transferred to your savings plan before taxes are taken from your paycheck. This allows you to save money for future needs while paying taxes on a smaller portion of your salary.

In some cases, your employer may offer a matching contribution to any funds you contribute to your employee savings plan. Usually, there is a match limit equivalent to a certain percentage of your salary.

For instance, imagine your employer matches 100% of your contributions up to 3% of your salary and you earn $75,000 a year. That amounts to $2,250 of essentially “free money” each year. As long as you contribute at least $2,250 to your plan, your employer will give you the same amount, for a total of $4,500 — plus anything over that amount you decide to contribute.

Types of Employee Savings Plans

Employee savings plans most commonly help workers save for retirement and come in two main forms: defined-contribution plans offered by private employers (known as 401(k) plans), and defined-contribution plans offered by public or non-profit organizations (known as 403(b) or 457(b) plans).

Another type of employee savings plan you may see is a health savings account (HSA). Some companies will offer this kind of account to employees with high-deductible health plans (HDHPs ). An HSA lets you save money tax-free to pay for qualified medical costs that aren’t covered by insurance.

A profit-sharing plan is less common, but also helps you save for retirement. With this type of ESP, employees receive an amount from their employer based on company profits. Smaller companies may offer a stand-alone profit-sharing plan, where only employer contributions are permitted. Larger companies, on the other hand, may make contributions based on profits to an employee’s 401(k) plan; they may or may not offer employer-matching contributions as well.

A pension plan is another type of employer-sponsored retirement savings plan. With this plan, employers contribute to a pool of funds for a worker’s future benefit. In some cases, the employee can also contribute to the plan via paycheck deductions. When the employee retires, they receive their pension either as a lump-sum payment or a set monthly payment for life. These days, very few companies offer this type of benefit, instead opting to offer a 401(k) plan or other similar option.

Recommended: Savings Calculator

What Are the Benefits of an Employee Savings Plan?

There are a number of advantages to using an employee savings plan. The first is that contributions are typically made on a pre-tax basis. This gives you a tax break upfront, reducing the amount of taxes you pay on your overall salary. So even though your take-home pay is smaller because of those automatic contributions, your taxable income is also less. Plus you have a growing investment account to help you prepare for retirement or other goals.

Another advantage of participating in an employee savings plan is that your employer could offer a free contribution match as part of their benefits package to retain team members. According to 2024 research by Vanguard, 96% of 401(k) plans have some kind of an employer contribution.

Employer-sponsored retirement saving plans also come with larger annual contribution limits than individual retirement accounts (IRAs). In 2025, the 401(k) contribution limit is $23,500 for employee salary deferrals ($70,000 for combined employee and employer contributions). Those aged 50 to 59 or 64 or older are eligible for an additional $7,500 in catch-up contributions; those aged 60 to 63 can contribute up to $11,250 in catch-up contributions, if their plan allows. A traditional IRA, on the other hand, only allows you to contribute $7,000 ($8,000 for those age 50 or older) for tax year 2025.

In 2026, the 401(k) contribution limit is $24,500 for employee salary deferrals ($72,000 for combined employee and employer contributions). Those aged 50 to 59 or 64 or older are eligible for an additional $8,000 in catch-up contributions; those aged 60 to 63 can contribute up to $11,250 in catch-up contributions, if their plan allows. By comparison, a traditional IRA only allows you to contribute $7,500 ($8,600 for those age 50 or older) for tax year 2026.

What to Look Out For

While there are a number of advantages that come with an employee savings plan, there are also some pitfalls to beware of. Consider these points:

•   Some employers require you to work at the company for a certain number of years (often five) before you are fully vested, meaning you own 100% of your employer’s contributions to your 401(k). If you leave the company (either voluntarily or involuntarily) before that time has elapsed, you may forfeit some or all of the company match. Any contributions you make, however, are 100% owned by you and cannot be forfeited. It’s important to find out these details from the human resources department at your company, especially if you’re thinking about a job change.

•   Another downside to an employer savings plan for retirement is that although your contributions may be tax-free, you typically have to pay federal and state income taxes when you make withdrawals.

•   Another factor to consider is your tax bracket. Some people may expect to be in a higher tax bracket during their prime working years, so the immediate tax deduction may be helpful. Others may end up being in a higher tax bracket after they’ve accumulated wealth over decades and reach retirement age.

•   In addition to paying income taxes on your withdrawals, employee savings plans for retirement also typically come with a 10% early withdrawal penalty if you take out cash before reaching 59 ½ years old. There are some exceptions to this penalty, but be aware of it should you be considering making an early withdrawal.

•   Also remember that your plan contributions are investments that are subject to risk. It’s not like a savings account through a financial institution that offers a yield based on your deposits. You will typically be responsible for crafting your portfolio and managing your investments. The options available to you may vary based on the specific plan offered by your employer.

•   No matter how much you contribute, the value of your plan is impacted by the performance of your investment choices, regardless of how much money you contributed over the years. It is also helpful to review your goals regularly and gauge your risk based on your time horizons.

For instance, investors may opt to invest in riskier investment vehicles when they’re younger because the potential for gains may outweigh the risk. As they get older and approach retirement, they may begin to allocate less money to those higher-risk investments.

•   Finally, be aware of any administrative fees that come with your plan. Fees for 401(k) plans typically range from 0.5% to 2%, but can vary widely depending on the size of the plan, number of participants, and the plan’s provider. You can find the fees in the prospectus you receive when you enroll in the plan

Recommended: Money Management Guide

Borrowing from Your Employee Savings Plan

Many employee savings plans designed to save for retirement allow you to borrow funds from your account if you choose to. Typically, you can borrow up to 50% of your 401(k) account balance for up to five years, up to a maximum of $50,000.

You’ll pay interest just as you would with any other loan, but that money gets paid back into your account. This may be one option to consider if you find yourself in need of cash, but there are several drawbacks to be aware of.

The loan terms only apply while you remain at the job providing the employee savings plan. If you leave your job with a loan balance, you must repay the full amount by the due date of your next federal tax return.

Another consideration is that if you don’t pay the loan back by its due date, it counts as a distribution and you will likely have to pay income taxes and a penalty on the money.

You’ll also miss out on the growth those borrowed funds may have experienced, which could set back your retirement goals. To avoid this scenario, it’s a good idea to build an emergency fund and keep it in an account that pays a competitive rate but allows you to easily access your funds when you need them, such as a high-yield savings account.

The Takeaway

An employee savings plan can be an advantageous way to save towards retirement and other goals. It can be especially beneficial if your employer offers matching contributions, which can help boost your savings.

By starting early and automating the process, you can build an investment account with robust contributions throughout your career.

An employee savings plan can be one part of a well-rounded financial portfolio, but there are other types of savings accounts that can be useful as well. For shorter-term goals, like building an emergency fund or saving for a large purchase or upcoming vacation, it may be worth opening a high-yield savings account.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
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CN-Q425-3236452-36

One of the most popular retirement accounts is an IRA, or Individual Retirement Account. IRAs allow individuals to put money aside over time to save up for retirement, with tax benefits similar to those of other retirement plans.

Two common IRAs are the SIMPLE IRA and the Traditional IRA, both of which have their own benefits, downsides, and rules around who can open an account. For investors trying to decide which IRA to open, it helps to know the differences between SIMPLE IRAs and Traditional IRAs.

SIMPLE IRA vs Traditional IRA: Side-by-Side Comparison

Although there are many similarities between the two accounts, there are some key differences. This chart details the key attributes of each plan:

SIMPLE IRAs Explained

The SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees, is set up to help small-business owners help both themselves and their employees save for retirement. It’s a retirement plan that small businesses with fewer than 100 employees can offer employees who earn at least $5,000 per year.

A SIMPLE IRA is similar to a Traditional IRA, in that a plan participant can make tax-deferred contributions to their account, so that it grows over time with compound interest. When the individual retires and begins withdrawing money, then they must pay income taxes on the funds.

With a SIMPLE IRA, both the employer and the employee contribute to the employee’s account. Employers are required to contribute in one of two ways: either by matching employee contributions up to 3% of their salary, or by contributing a flat rate of 2% of the employee’s salary, even if the employee doesn’t contribute. With the matching option, the employee must contribute money first.

There are yearly employee contribution limits to a SIMPLE IRA: In 2025, the annual limit is $16,500, with an additional $3,500 in catch-up contributions permitted for people age 50 and older, and an additional $5,250 for those ages 60 to 63, thanks to SECURE 2.0.

In 2026 the annual limit is $17,000, with an additional $4,000 in catch-up contributions permitted for people age 50 and older, and an additional $5,250 for those ages 60 to 63.

Benefits and Drawbacks of SIMPLE IRAs

It’s important to understand both the benefits and downsides of the SIMPLE IRA to make an informed decision about retirement plans.

SIMPLE IRA Benefits

There are several benefits — for both employers and employees — to choosing a SIMPLE IRA:

•   For employers, it’s easy to set up and manage, with online set-up available through most banks.

•   For employers, management costs are low compared to other retirement plans.

•   For employees, taxes on contributions are deferred until the money is withdrawn.

•   Employers can take tax deductions on contributions. Sole proprietors can deduct both salary and matching contributions.

•   For employees, there is an allowable catch-up contribution for those over 50.

•   For employers, the IRA plan providers send tax information to the IRS, so there is no need to do any reporting.

•   Employers and employees can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.

SIMPLE IRA Drawbacks

Although there are multiple benefits to a SIMPLE IRA, there are some downsides as well:

•   Employers must follow strict rules set by the IRS.

•   Other employer-sponsored retirement accounts have higher limits, such as the 401(k), which allows for $23,500 per year in 2025 and $24,500 in 2026. (Check out our IRA calculator to see what you can contribute to each type of IRA.)

•   If account holders withdraw money before they reach age 59 ½, they must pay a 10% fee and income taxes on the withdrawal. That penalty jumps to 25% if money is withdrawn within two years of an employer making a deposit.

•   There is no option for a Roth contribution to a SIMPLE IRA, which would allow account holders to contribute post-tax money and avoid paying taxes later.

What Is a Traditional IRA?

The Traditional IRA is set up by an individual to contribute to their own retirement. Employers are not involved in Traditional IRAs in any way. The main requirements to open an IRA are that the account holder must have earned some income within the past year, and they must be younger than 70 ½ years old at the end of the year.

Pros and Cons of Traditional IRAs

When it comes to benefits and downsides, there’s not too much of a difference between Traditional vs. SIMPLE IRAs, given what an IRA is. That being said, there are a few that are unique to this type of plan.

Traditional IRA Pros

Some of the upsides of a Traditional IRA include:

•   It allows for catch-up contributions for those over age 50.

•   One can choose how the money in the account gets invested based on what the plan offers. Options may include mutual funds aimed toward growth or income, international mutual funds, or other assets.

•   Contributions are tax-deferred, so taxes aren’t paid until funds are withdrawn. If you’re hoping to pay taxes now instead of later, you might weigh a Traditional vs. Roth IRA.

Traditional IRA Cons

Meanwhile, downsides to a Traditional IRA include:

•   They have much lower contribution limits than a 401(k) or a SIMPLE IRA, at $ $7,000 in 2025, and $7,500 in 2026.

•   Penalties for early withdrawal are also the same: if you withdraw money before age 59 ½, you’ll pay a 10% fee plus income taxes on the withdrawal.

Is a SIMPLE IRA or Traditional IRA Right for You?

The SIMPLE IRA and Traditional IRA are both individual retirement accounts, but the SIMPLE is set up through one’s employer — typically a small business of 100 people or less. The Traditional IRA is set up by an individual. In other words, whether a SIMPLE IRA is an option for you will depend on if you have an employer that offers it.

There are many similarities in the attributes of the plans, if you’re choosing between a SIMPLE IRA vs. Traditional IRA. However, two major distinctions are that the SIMPLE IRA requires employer contributions (though not necessarily employee contributions) and allows for a higher amount of employee contributions per year.

Can I Have Both a SIMPLE IRA and a Traditional IRA?

Yes, it is possible for an individual to have both a SIMPLE IRA through their employer and also a Traditional IRA on their own — though they may not be able to deduct all of their Traditional IRA contributions. The IRS sets a cap on deductions per calendar year.

In 2025, single people covered by an employer-sponsored retirement plan at work who have a MAGI (modified adjusted gross income) of more than $79,000 are restricted to a partial deduction; those with a MAGI of $89,000 or more may not take a deduction at all. Those with an employer-sponsored plan at work who are married filing jointly with an MAGI of more than $126,000 but less than $146,000 may take a partial deduction; those with a MAGI of $146,000 or more may not take a deduction at all.

In 2026, single people covered by an employer-sponsored retirement plan at work who have a MAGI of more than $81,000 and less than $91,000 are restricted to a partial deduction; those with a MAGI of $91,000 or more may not take a deduction at all. Those who are covered by an employer-sponsored retirement plan at work and are married filing jointly with a MAGI of more than $129,000 and less than $149,000 may take a partial deduction; those with a MAGI of $149,000 or more may not take a deduction at all.

Can You Convert a SIMPLE IRA to a Traditional IRA?

If you’re hoping to convert a SIMPLE IRA to a Traditional IRA, you’re in luck — you can roll over a SIMPLE IRA into a Traditional IRA. However, you can’t roll over the funds from a SIMPLE IRA to a Traditional IRA within the first two years of opening a SIMPLE IRA. Otherwise, you’ll get hit with a 25% penalty in addition to the regular income tax you must pay on your withdrawal.

Once that two-year period is up, however, you can roll over the money from your SIMPLE IRA — even if you’re still working for that employer. Just note that you can only roll over money from a SIMPLE IRA one time within a 12-month period.

Can You Max Out a Traditional and SIMPLE IRA the Same Year?

While you cannot max out a SIMPLE IRA and another employer-sponsored retirement plan like a 401(k), you can max out both a Traditional IRA and a SIMPLE IRA.

The maximum contribution for a SIMPLE IRA in 2025 is $16,500 (plus $3,500 in catch-up contributions), while the maximum for a Traditional IRA is $7,000 (plus $1,000 in catch-up contributions). This means that you could contribute a total of $23,500 across both plans in a year — or $28,000 if you’re 50 or older.

The maximum contribution for a SIMPLE IRA in 2026 is $17,000 (plus $4,000 in catch-up contributions), while the maximum for a Traditional IRA is $7,500 (plus $1,100 in catch-up contributions). This means that you could contribute a total of $24,500 across both plans for the year — or $29,600 if you’re 50 or older.

Are SIMPLE IRAs Most Similar to 401(k) Plans?

There are a lot of similarities between SIMPLE IRAs and 401(k) plans given that they are both employer-sponsored retirement plans. However, while any employer with one or more employees can offer a 401(k), SIMPLE IRAs are reserved for employers with 100 or fewer employees. Additionally, contribution limits are lower with SIMPLE IRAs than with 401(k) plans.

Another key difference between the two is that while employers can opt whether or not to make contributions to employee 401(k), employer contributions are mandatory with SIMPLE IRAs. On the employer side, SIMPLE IRAs generally have fewer account fees and annual tax filing requirements.

Opening an IRA With SoFi

Understanding the differences between retirement accounts like the SIMPLE and Traditional IRA is one more step in creating a personalized retirement plan that works for you and your goals. While a SIMPLE IRA is only an option if your employer offers it, you’ll want to weigh the pros and cons of a SIMPLE IRA vs. Traditional IRA if both are on the table for you. As we’ve covered, the two types of IRAs share many similarities, but a SIMPLE IRA is not the same as a Traditional IRA.

If you’re looking to start saving for retirement now, or add to your investments for the future, SoFi Invest® online retirement accounts offer both Traditional and Roth IRAs that are simple to set up and manage. By opening an IRA with SoFi, you’ll gain access to a broad range of investment options, member services, and a robust suite of planning and investment tools.

FAQ

Do you pay taxes on SIMPLE IRA?

Yes, you will pay taxes on a SIMPLE IRA, but not until you withdraw your funds in retirement. You’ll generally have to pay income tax on any amount you withdraw from your SIMPLE IRA in retirement. However, if you make a withdrawal prior to age 59 ½, or if money is withdrawn within two years of an employer making a deposit, you’ll have to pay income taxes then, alongside an additional tax penalty.

Is a SIMPLE IRA better than a Traditional IRA?

When comparing a SIMPLE IRA vs. traditional IRA, it’s important to understand that each has its pros and cons. If your employer offers a SIMPLE IRA, they require employer contributions, and they have higher contributions. At the end of the day, though, both allow you to save for retirement through tax-deferred contributions.