InvestGen Archives

Feb

2026

Roth 401(k) vs Traditional 401(k): Which Is Best for You?

By AJ Smith | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A traditional 401(k) and a Roth 401(k) are tax-advantaged retirement plans that can help you save for retirement. While both types of accounts follow similar rules — they have the same contribution limits, for example — the impact of a Roth 401(k) vs. traditional 401(k) on your tax situation, now and in the future, may be quite different.

In brief: The contributions you make to a traditional 401(k) are deducted from your gross income, and thus may help lower your tax bill. But you’ll owe taxes on the money you withdraw later for retirement.

Conversely, you contribute after-tax funds to a Roth 401(k) and can typically withdraw the money tax free in retirement — but you don’t get a tax break now.

To help choose between a Roth 401(k) vs. a traditional 401(k) — or whether it might make sense to invest in both, if your employer offers that option — it helps to know what these accounts are all about.

Key Points

• Traditional 401(k) contributions are made with pre-tax dollars, reducing taxable income for the year of contribution.

• Roth 401(k) contributions are made with after-tax dollars, offering tax-free withdrawals in retirement.

• Withdrawals from traditional 401(k)s are taxed as income, whereas Roth 401(k) withdrawals are tax-free if rules are followed.

• Early withdrawals from both accounts may incur taxes and penalties, though Roth contributions can be withdrawn tax-free.

• Starting January 2024, Roth 401(k)s are not subject to required minimum distributions, unlike traditional 401(k)s.

5 Key Differences Between Roth 401(k) vs Traditional 401(k)

Before deciding on a Roth 401(k) or traditional 401(k), it’s important to understand the differences between each account, and to consider the tax benefits of each in light of your own financial plan. The timing of the tax advantages of each type of account is also important to weigh.

1. How Each Account is Funded

• A traditional 401(k) allows individuals to make pre-tax contributions. These contributions are typically made through elective salary deferrals that come directly from an employee’s paycheck and are deducted from their gross income.

• Employees contribute to a Roth 401(k) also generally via elective salary deferrals, but they are using after-tax dollars. So the money the employee contributes to a Roth 401(k) cannot be deducted from their current income.

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

2. Tax Treatment of Contributions

• The contributions to a traditional 401(k) are tax-deductible, which means they can reduce your taxable income now, and they grow tax-deferred (but you’ll owe taxes later).

• By contrast, since you’ve already paid taxes on the money you contribute to a Roth 401(k), the money you contribute isn’t deductible from your gross income, and withdrawals are generally tax free (some exceptions below).

3. Withdrawal Rules

• You can begin taking qualified withdrawals from a traditional 401(k) starting at age 59 ½, and the money you withdraw is taxed at ordinary income rates.

• To withdraw contributions + earnings tax free from a Roth 401(k) you must be 59 ½ and have held the account for at least five years (often called the 5-year rule). If you open a Roth 401(k) when you’re 57, you cannot take tax-free withdrawals at 59 ½, as you would with a traditional 401(k). You’d have to wait until five years had passed, and start tax-free withdrawals at age 62.

4. Early Withdrawal Rules

• Early withdrawals from a 401(k) before age 59 ½ are subject to tax and a 10% penalty in most cases, but there are some exceptions where early withdrawals are not penalized, including certain medical expenses; a down payment on a first home; qualified education expenses.

You may also be able to take a hardship withdrawal penalty-free, but you need to meet the criteria, and you would still owe taxes on the money you withdrew.

• Early withdrawals from a Roth 401(k) are more complicated. You can withdraw your contributions at any time, but you’ll owe tax proportional to your earnings, which are taxable when you withdraw before age 59 ½.

For example: If you have $100,000 in a Roth 401(k), including $90,000 in contributions and $10,000 in taxable gains, the gains represent a 10% of the account. Therefore, if you took a $20,000 early withdrawal, you’d owe taxes on 10% to account for the gains, or $2,000.

5. Required Minimum Distribution (RMD) Rules

With a traditional 401(k), individuals must take required minimum distributions starting at age 73, or face potential penalties. While Roth 401(k)s used to have RMDs, as of January 2024, they no longer do. That means you are not required to withdraw RMDs from a Roth 401(k) account.

For a quick side-by-side comparison, here are the key differences of a Roth 401(k) vs. traditional 401(k):

Traditional 401(k)	Roth 401(k)
Funded with pre-tax dollars.	Funded with after-tax dollars.
Contributions are deducted from gross income and may lower your tax bill.	Contributions are not deductible.
All withdrawals taxed as income.	Withdrawals of contributions + earnings are tax free after 59 ½, if you’ve had the account for at least 5 years. (However, matching contributions from an employer made with pre-tax dollars are subject to tax.)
Early withdrawals before age 59 ½ are taxed as income and are typically subject to a 10% penalty, with some exceptions.	Early withdrawals of contributions are not taxed, but earnings may be taxed and subject to a 10% penalty.
Account subject to RMD rules starting at age 73.	No longer subject to RMD rules as of January 2024.

Bear in mind that a traditional 401(k) and Roth 401(k) also share many features in common:

• The annual contribution limits are the same for a 401(k) and a Roth 401(k). For 2025, the total amount you can contribute to these employer-sponsored accounts is $23,500; if you’re 50 and older you can save an additional $7,500 for a total of $31,000. The 2026 limit is capped at $24,500; $32,500 if you’re 50 and older. Those aged 60 to 63 may contribute a total of $34,750 in 2025 and $35,750 in 2026, thanks to SECURE 2.0.

Be aware that under a new law regarding catch-up contributions that went into effect on January 1, 2026, individuals aged 50 and older whose FICA wages exceeded $150,000 in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make eligible withdrawals tax-free in retirement.

• For both accounts, employers may contribute matching funds up to a certain percentage of an employee’s salary.

• In 2025, total contributions from employer and employee cannot exceed $70,000 ($77,500 for those 50 and up, and $81,250 for those 60 to 63). In 2026, total contributions from employer and employee cannot exceed $72,000 ($80,000 for those 50 and up, and $83,250 for those 60 to 63).

• Employees may take out a loan from either type of account, subject to IRS restrictions and plan rules.

Because there are certain overlaps between the two accounts, as well as many points of contrast, it’s wise to consult with a professional when making a tax-related plan.

How to Choose Between a Roth and a Traditional 401(k)

In some cases it might make sense to contribute to both types of accounts (more on that below), but in other cases you may want to choose either a traditional 401(k) or a Roth 401(k) to maximize the specific advantages of one account over another. Here are some considerations.

When to Pay Taxes

Traditional 401(k) withdrawals are taxed at an individual’s ordinary income tax rate, typically in retirement. As a result these plans can be most tax efficient for those who will have a lower marginal rate after they retire than they did while they were working.

In other words, a traditional 401(k) may help you save on taxes now, if you’re in a higher tax bracket — and then pay lower taxes in retirement, when you’re ideally in a lower tax bracket.

On the other hand, an investor might look into the Roth 401(k) option if they feel that they pay lower taxes now than they will in retirement. In that case, you’d potentially pay lower taxes on your contributions now, and none on your withdrawals in retirement.

Your Age

Often, younger taxpayers may be in a lower tax bracket. If that’s the case, contributing to a Roth 401(k) may make more sense for the same reason above: because you’ll pay a lower rate on your contributions now, but then they’re completely tax free in retirement.

If you’re older, perhaps mid-career, and in a higher tax bracket, a traditional 401(k) might help lower your tax burden now (and if your tax rate is lower when you retire, even better, as you’d pay taxes on withdrawals but at a lower rate).

Where You Live

The tax rates where you live, or where you plan to live when you retire, are also a big factor to consider. Of course your location some years from now, or decades from now, can be difficult to predict (to say the least). But if you expect that you might be living in an area with lower taxes than you are now, e.g. a state with no state taxes, it might make sense to contribute to a traditional 401(k) and take the tax break now, since your withdrawals may be taxed at a lower rate.

The Benefits of Investing in Both a Roth 401(k) and Traditional 401(k)

If an employer offers both a traditional and Roth 401(k) options, employees might have the option of contributing to both, thus taking advantage of the pros of each type of account. In many respects, this could be a wise choice.

Divvying up contributions between both types of accounts allows for greater flexibility in tax planning down the road. Upon retirement, an individual can choose whether to withdraw money from their tax-free 401(k) account or the traditional, taxable 401(k) account each year, to help manage their taxable income.

It is important to note that the $23,000 contribution limit ($30,500 for those 50 and older) for 2024 is a total limit on both accounts.

So, for instance, you might choose to save $13,500 in a traditional 401(k) and $9,500 in a Roth 401(k) for the year. You are not permitted to save $23,000 in each account.

What’s the Best Split Between Roth and Traditional 401(k)?

The best split between a Roth 401(k) and a traditional 401(k) depends on your individual financial situation and what might work best for you from a tax perspective. You may want to do an even split of the $23,500 limit you can contribute in 2025 or the $24,500 you can contribute in 2026. Or, if you’re in a higher tax bracket now than you expect to be in retirement, you might decide that it makes more sense for you to put more into your traditional 401(k) to help lower your taxable income now. But if you expect to be in a higher income tax bracket in retirement, you may want to put more into your Roth 401(k).

Consider all the possibilities and implications before you decide. You may also want to consult a tax professional.

The Takeaway

Employer-sponsored Roth and traditional 401(k) plans offer investors many options when it comes to their financial goals. Because a traditional 401(k) can help lower your tax bill now, and a Roth 401(k) generally offers a tax-free income stream later — it’s important for investors to consider the tax advantages of both, the timing of those tax benefits, and whether these accounts have to be mutually exclusive or if it might benefit you to have both.

When it comes to retirement plans, investors don’t necessarily have to decide between a Roth or traditional 401(k). Some might choose one of these investment accounts, while others might find a combination of plans suits their goals. After all, it can be difficult to predict your financial circumstances with complete accuracy — especially when it comes to tax planning — so you may decide to hedge your bets and contribute to both types of accounts, if your employer offers that option.

Another step to consider is a 401(k) rollover, where you move funds from an old 401(k) into an IRA. When you do a 401(k) rollover it can help you manage your retirement funds.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is it better to contribute to 401(k) or Roth 401(k)?

Whether it’s better to contribute to a traditional 401(k) or Roth 401(k) depends on your particular financial situation. In general, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) may make more sense for you since you’ll be able to deduct your contributions when you make them, which can lower your taxable income, and then pay taxes on the money in retirement, when you’re in a lower income tax bracket.

But if you’re in a lower tax bracket now than you think you will be later, a Roth 401(k) might be the preferred option for you because you’ll generally withdraw the money tax-free in retirement.

Can I max out both 401(k) and Roth 401(k)?

No, you cannot max out both accounts. Per IRS rules, the annual 401(k) limits apply across all your 401(k) accounts combined. So for 2025, you can contribute a combined amount up to $23,500 ($31,000 if you’re 50 or older, or $34,750 if you’re 60 to 63), to your Roth 401(k) and your traditional 401(k) accounts. For 2026, you can contribute $24,500 ($32,500 if you’re 50 or older, or $35,750 if you’re 60 to 63) to both 401(k) accounts.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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

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

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Feb

2026

A couple and their young daughter sit together on a couch watching TV and smiling; the man has the remote in his hand

How Can Consolidating Student Loans Affect Your Credit?

By Jennifer Calonia | Family Finances, Student Loans, student_loan | Comments Off

Consolidating federal student loans can help you manage and streamline your payments. However, it also means that the new loan account shows up on your credit report. You may be concerned then about whether student loan consolidation hurts your credit. The short answer is that it can indirectly affect your credit in both positive and negative ways.

To help you understand exactly how your credit could change — and how student loan consolidation may affect your credit score — read on. You’ll learn the pros and cons to help decide whether consolidating your student loans is the right financial move to make.

Table of Contents

Can Student Loan Consolidation Have a Positive Impact on Your Credit Score?
Can Student Loan Consolidation Hurt Your Credit Score?
Federal vs Private Student Loan Consolidation and Credit Score
Alternatives to Student Loan Consolidation
How Credit Score Factors Are Affected by Consolidation
When to Consider Consolidation vs Refinancing
FAQ

Key Points

• Consolidating student loans can simplify repayment by combining multiple loans into one, reducing the likelihood of missed payments and possibly improving credit scores indirectly.

• Closing older accounts through consolidation may negatively affect the length of credit history, which could result in a temporary decrease in credit scores.

• Federal Direct Consolidation does not require a credit check and can be beneficial for managing federal student loans, while student loan refinancing requires a credit check and makes federal loans ineligible for federal benefits.

• Alternatives to consolidation include income-driven repayment plans and deferment options, which can provide temporary relief without altering the credit score significantly.

• Weighing the pros and cons of consolidation is crucial, as it might lead to a more manageable payment structure while potentially impacting credit history and future loan options.

Can Student Loan Consolidation Have a Positive Impact on Your Credit Score?

Consolidating federal student loans does have an indirect impact on your credit. And your borrowing and payment habits can potentially affect your credit score in a positive way.

One of the biggest indirect effects that student loan consolidation has on your credit score is making your payments simpler. Here’s why:

• Thirty-five percent of your FICO Score® is based on your payment history. Making consistent and full monthly payments can have the most dramatic impact on your credit score.

• Your federal student debt might be spread across multiple loans taken out during your years of education. Each of these loans has its own payment amount and due date, which could make it difficult to manage.

• A Direct Consolidation Loan can cut through the clutter. By combining your federal loans into one new loan, it streamlines the repayment process, which may mean you are less likely to miss a due date or forget a payment altogether. Consolidation could help set you up for a positive payment history, which is an indirect way that you may see a credit score increase after you consolidate your student loans.

• Also, a federal consolidation loan does not involve a hard credit inquiry, which usually lowers your credit score slightly for a short period of time.

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Can Student Loan Consolidation Hurt Your Credit Score?

Consolidating student loans can also indirectly affect your credit score in a negative way. Consider these points.

• Fifteen percent of your FICO credit score calculation is determined by the length of your credit history. This metric considers the age of your oldest credit account, like the first student loan you borrowed during your freshman year of school, and the age of your newest account. It also determines the average age of all of your open accounts.

• Having open accounts that you’re actively repaying helps you build credit over time. Consolidating your original student loans closes those older accounts.

• This altered length of credit history and lower average credit age could result in a less favorable treatment for your score. The impact on your score, however, is lessened over time as you make timely payments toward your consolidated loan.

Recommended: The Average Cost of College Tuition

Federal vs Private Student Loan Consolidation and Credit Score

Only federal student loans, including Direct subsidized and unsubsidized loans, are eligible for Direct Loan Consolidation. The only way private student loans can be consolidated is through student loan refinancing.

Key Differences in Credit Reporting and Impact

Federal Direct Consolidation is exclusively a repayment option offered by the Education Department. This process does not have a direct impact on your credit score, mainly because it does not require a credit check, as noted above.

However, there could be a positive indirect impact to your credit if consolidating your loans helps you make consistent on-time monthly payments, since payment history accounts for 35% of your credit score. Conversely, closing your existing loans and opening a new loan lowers the average age of your credit, which is one of the factors in your credit score.

Student loan refinancing, which is essentially the only way to consolidate private student loans, can have more of a direct impact on your credit.

When you refinance student loans, you replace your existing loans with a new loan from a private lender. Ideally, the new loan will have lower rates and more favorable terms, if you qualify for them.

Student loan refinancing involves a hard credit inquiry. This typically causes an individual’s credit score to temporarily drop a few points. And just like federal Direct Consolidation, closing your existing loan accounts and opening a new loan can lower the average age of your credit, which is a factor in your credit score.

But if having just one refinance loan to pay each month — potentially with a lower interest rate and lower monthly payments — makes it easier for you to consistently pay your loans on time, that could eventually have a positive impact on your score.

Pros and Cons of Each Consolidation Option:

As you’re considering federal Direct Consolidation and student loan refinancing, it’s important to understand the possible advantages and disadvantages of each option.

Pros of Direct Consolidation:

• Easier to manage: Consolidating combines multiple loans into one, simplifying and streamlining payment.

• Longer repayment term: Consolidation resets your repayment timeline with loan terms that range from 10 to 30 years.

• Possibly lower monthly payments: The longer repayment period can lower your monthly payment amount.

Cons of Direct Consolidation:

• Unpaid interest capitalizes: When loans are consolidated in a Direct Consolidation Loan, any unpaid interest on them capitalizes, which means it’s added to the principal balance. You’ll then pay interest on the new higher balance.

• Will not lower interest rates: When it comes to student loan consolidation rates, the interest rate on a new consolidated loan is the weighted average of the interest rates on your current loans, rounded up to the nearest one-eighth of a percent.

• Repayment period might be longer: Consolidation may extend your payment period, which means you’ll be in debt longer

• May pay more interest over time: A longer repayment term can result in paying more interest over the life of the loan.

Pros of Refinancing:

• Easier to manage: Refinancing student loans into one new loan means just one monthly loan payment rather than multiple different payments.

• Flexible repayment terms: You can choose a longer loan term, which can lower your monthly payments, or a shorter term, which may raise your monthly payments but allow you to pay off your loan faster.

• Possibly a lower interest rate: If you have very good credit, you may be able to get a lower interest rate, which would lower your payment and the amount of interest you pay over the life of the loan.

Cons of Refinancing:

• Credit score may temporarily take a hit: Refinancing involves a hard credit inquiry that could cause your credit score to dip temporarily.

• Lose access to federal programs and benefits: Refinancing federal student loans makes them ineligible for federal programs and benefits like income-driven repayment and deferment.

• May not result in lower payments: You generally need excellent credit to qualify for the lowest interest rates.

• May pay more interest over time: Choosing a longer loan term may cause you to pay more interest over the life of the loan.

Alternatives to Student Loan Consolidation

If, after weighing the pros and cons of student loan consolidation, you decide it’s not right for you, there are other repayment options available.

Income-Driven Repayment

If you’re struggling to make your current monthly loan payments, you may want to consider an income-driven repayment (IDR) plan.

As of January 2026, IDR offers three plans with repayment terms of 20 or 25 years. Your payments are based on your discretionary income and family size. Additionally, if you’re on the Income-Based Repayment IDR plan, and you still have a balance at the end of your term, the remaining amount might qualify for student loan forgiveness.

Be aware, however, that IDR plans are changing. A new plan called the Repayment Assistance Plan (RAP) will be introduced in July 2026. RAP will base a borrower’s payments on their adjusted gross income (AGI). Depending on their income, they’ll pay 1% to 10% of their AGI over a term of up to 30 years. If they still have a balance after that time, it will be forgiven. Existing borrowers will be able to access the RAP or IBR plans, but those who are new borrowers as of July 1, 2026 will only have RAP as an income-based option.

Federal Deferment or Forbearance

If you’re experiencing short-term financial hardship, you might be able to pause or reduce your federal student loan payments temporarily. The Education Department offers deferment and forbearance programs that let you pause your payments without the loan going into default.

Keep in mind that while loans are in deferment, interest might accrue on certain federal loans, including Direct Unsubsidized Loans. If you’ve requested forbearance, interest is charged during this period, regardless of the federal loan type you have.

Student Loan Refinancing

Private student loans aren’t eligible for the two alternatives just described. However, student loan refinancing might be an option to explore if you have private loans that you are struggling to pay or you have federal student loans and don’t plan to take advantage of federal benefits or programs.

As noted previously, since student loan refinancing requires a credit check, having strong credit might help you secure a lower interest rate and a lower monthly payment and/or favorable loan terms.

Private lenders have their own eligibility requirements, rates, and refinancing offers. You can shop around and use a student loan refinancing calculator to see if refinancing makes sense for you.

Loan Rehabilitation for Defaulted Loans

If your federal student loans are in default, loan rehabilitation is a one-time method for getting them out. Rehabilitation involves making nine on-time consecutive payments (the amount is typically based on your income) within 10 months under a loan rehabilitation agreement worked out with your loan holder. After you make all the agreed-upon payments, your loan will be placed back in good standing.

If your loan is in default and you’d like to try loan rehabilitation, contact your loan holder to discuss the process. Loan rehabilitation is not available for defaulted private student loans.

How Credit Score Factors Are Affected by Consolidation

Federal consolidation and student loan refinancing may both affect your credit score, with a few differences between them. Here are some of the impacts involved.

Length of Credit History

Because both consolidation and refinancing involve closing your old loan accounts and opening one new account, the length of your credit history will be affected. The average age of your account will be lowered, which may impact your credit score.

Credit Mix and New Inquiries

Your credit mix, which is a factor that helps determine your credit score, may also be affected when you close your existing student loan accounts and open one new refinance or consolidation loan. Lenders typically look for a mix of different types of credit accounts, such as installment accounts like loans, and revolving credit like credit cards, to see that you can responsibly handle diverse types of credit responsibly. Losing some installment accounts may lower that mix, which might affect your credit score.

Plus, refinancing involves a new hard credit inquiry that can temporarily drop your credit score by a few points. Consolidation does not require a hard inquiry.

When to Consider Consolidation vs Refinancing

If you’re debating whether consolidation or refinancing might be best for you, think carefully about your current financial situation as well as your financial future.

Long-Term Financial Goals

Refinancing may help you get out of debt faster if you qualify for a lower interest rate and if you choose a shorter repayment term. Paying off your debt sooner can help you direct more money toward your other financial goals, such as a down payment on a house, your children’s education, or your own retirement.

However, if you have federal loans and you might be eligible for forgiveness in the future, Direct Consolidation might help you achieve that goal, which could save you money. When you refinance federal loans, you lose benefits like forgiveness.

Interest Rates and Loan Terms

If you have strong credit, you may be able to qualify for a lower interest rate through refinancing, which could save you money on interest and loan payments. You may also get more favorable loan terms to pay off your loan faster. However, unless you have excellent credit, you likely won’t qualify for the best rates and terms.

With Direct Consolidation, your interest rate will not be lower because the rate of the new consolidation loan is the weighted average of your existing loans rounded up to the nearest one-eighth of a percent. A consolidation loan also has an extended loan term of 10 to 30 years. That can lower your monthly payments, but it also stretches out your repayment over a longer period, which means you’ll pay more interest over time.

The Takeaway

Consolidating your federal loans has little direct effect on your credit score over the long term. However, its indirect effect on your credit history and the age of your credit accounts might temporarily lower your score. If consolidating means securing a lower, more manageable payment or realizing federal benefits like forgiveness, the slight impact on your credit might be worth it.

However, if your main concern is getting relief from high monthly student loan payments, you may want to consider other repayment options that might give you some relief, such as income-driven plans, deferment, or student loan refinancing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Can consolidating student loans directly raise your credit score?

No, consolidating your student loans doesn’t directly raise your credit score. It can simplify your monthly payments and possibly reduce your payment amount (though it may extend your term, which means you’ll pay more interest over the life of the loan). Simplified payments and lower amounts may help you consistently make your loan payments on time, which could help build your credit.

Can consolidating student loans directly lower your credit score?

Student loan consolidation might temporarily lower your score. Loan consolidation adds a new account to your credit history while closing older accounts, which negatively affects the length of your credit history and average credit age. Also, consolidating student loans through refinancing involves a hard credit inquiry, which can temporarily reduce your score by a few points.

Are there any indirect effects of student loan refinancing on your credit score?

Student loan refinancing requires a hard credit inquiry that can lower your score by a few points for a short period of time. Additionally, refinancing might affect the average age of your credit accounts and your credit history, which are other factors that contribute to your credit score.

Does consolidating student loans affect your credit utilization ratio?

Student loan consolidation generally does not affect your credit utilization ratio. Credit utilization, which measures the amount of available revolving credit you have, mainly applies to revolving accounts like credit cards rather than installment accounts like loans. Consolidating student loans does not change or affect the amount of revolving credit you have.

How long does it take to see credit changes after consolidation?

It may take a month or two to see credit changes after consolidation since loan servicers typically make reports to the credit bureaus monthly. Consolidating through a student loan refinance involves a hard credit check that may cause a temporary dip in credit scores. Additionally, whether you opt for federal consolidating or refinancing, closing old loan accounts and opening a new one may lower your average credit account age, potentially indirectly lowering your score.

Photo credit: iStock/Ridofranz

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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

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

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

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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

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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Feb

2026

What Happens to a 401k When You Leave Your Job?

What Happens to Your 401(k) When You Leave Your Job?

By Austin Kilham | invest, Investing, Money & Life, Preparing for Retirement | Comments Off

Table of Contents

A Quick 401(k) Overview
What Happens to Your 401(k) When You Quit?
How Long Do You Have to Move Your 401(k)?
Next Steps for Your 401(k) After Leaving a Job
FAQ

There are many important decisions to make when starting a new job, including what to do with your old 401(k) account. Depending on the balance of the old account and the benefits offered at your new job, you may have several options, including keeping it where it is, rolling it over into a brand new account, or cashing it out.

A 401(k) may be an excellent way for workers to build a retirement fund, as it allows them to save for retirement on a tax-advantaged basis, and many employers offer matching contributions.

Key Points

When leaving a job, you have options for your 401(k) account, including leaving it with your former employer, rolling it over into a new account, or cashing it out.
If your 401(k) balance is less than $7,000, your former employer may cash out the funds or roll them into another retirement account in your name.
If you have more than $7,000 in your 401(k), your former employer cannot force you to cash out or roll over the funds without your permission.
If you quit or are fired, you may lose employer contributions that are not fully vested.
It is important to consider the tax implications, penalties, and long-term financial security before making decisions about your 401(k) when leaving a job.

A Quick 401(k) Overview

A 401(k) is a type of retirement savings plan many employers offer that allows employees to save and invest with tax advantages. With a 401(k) plan, an employer will automatically deduct workers’ contributions to the account from their paychecks before taxes are taken out.

In 2025, employees can contribute up to $23,500 a year in their 401(k)s, and employees aged 50 and older can make catch-up contributions of $7,500 a year for a total of $31,000. In 2026, employees can contribute up to $24,500 annually in their 401(k)s, and those 50 and older can contribute a catch-up of $8,000, for a total of $32,500. Also in both 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500 and $8,000, for an annual total of $34,750 and $35,750, respectively.

Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

Employees will invest the funds in a 401(k) account in several investment options, depending on what the employer and their 401(k) administrator offer, such as stocks, bonds, mutual funds, and target date funds.

The money in a 401(k) account grows tax-free until the employee withdraws it, typically after reaching age 59 ½. At that point, the employee must pay taxes on the money withdrawn. However, if the employee withdraws money before reaching 59 ½, they will typically have to pay 401(k) withdrawal taxes and penalties.

Some employers also offer matching contributions, which are additional contributions to an employee’s account based on a certain percentage of the employee’s own contributions. Employers may use 401(k) vesting schedules to determine when employees can access these contributions.

Generally, the more you can save in a 401(k), the better. If you can’t max out your 401(k) contributions, start by contributing at least enough money to qualify for your employer’s 401(k) match if they offer one.

What Happens to Your 401(k) When You Quit Your Job?

When you quit your job, you generally have several options for your 401(k) account. You can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, move it over to an IRA rollover, or cash it out.

However, if your 401(k) account has less than $7,000, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer may cash out the funds and send them to you via check. If there is between $1,000 and $7,000 in the account, your employer may roll it into another retirement account in your name, such as an IRA. You may also suggest a specific IRA for the rollover.

With most 401(k) plans, if you have more than $7,000 in your account, your funds can usually remain in the account indefinitely.

Also, if you quit your job and you are not fully vested, you forfeit your employer’s contributions to your 401(k). But you do get to keep your vested contributions.

Is There Any Difference if You’re Fired?

If you are fired from your job, your 401(k) account options are similar to those if you quit your job. As noted above, you can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, roll it over into an IRA, or cash it out. The same account limits mentioned above apply as well.

Additionally, if you are fired from your job, you may be eligible for a severance package, which may include a lump sum payment or continuation of benefits, including a 401(k) plan. But these benefits depend on your company and the circumstances surrounding your termination. And, like with quitting your job, you do not get to keep any employer contributions that are not fully vested.

How Long Do You Have to Move Your 401(k)?

If you leave your job, you don’t necessarily have to move your 401(k). Depending on the amount you have in the 401(k), you can usually keep it with your previous employer’s 401(k) administrator.

But if you do choose to roll over your 401(k) as an indirect rollover, you typically have 60 days from the date of distribution to roll over your 401(k) account balance into an IRA or another employer’s 401(k) plan. If you fail to roll over the funds within 60 days, the distribution will be subject to taxes and penalties, and if you are under 59 ½ years old, an additional 10% early withdrawal penalty.

Next Steps for Your 401(k) After Leaving a Job

As you decide what to do with your funds, you have several options, from cashing out to rolling over your 401(k)s to expanding your investment opportunities.

Cash Out Your 401(k)

You can cash out some or all of your 401(k), but in most cases, there are better choices than this from a personal finance perspective. As noted above, if you are younger than 59 ½, you may be slammed with income taxes and a 10% early withdrawal penalty, which can set you back in your ability to save for your future.

If you are age 55 or older, you may be able to draw down your 401(k) penalty-free thanks to the Rule of 55. But remember, when you remove money from your retirement account, you no longer benefit from tax-advantaged growth and reduce your future nest egg.

Roll Over Your 401(k) Into a New Account

Your new employer may offer a 401(k). If this is the case and you are eligible to participate, you may consider rolling over the funds from your old account. This process is relatively simple. You can ask your old 401(k) administrator to move the funds from one account directly to the other in what is known as a direct transfer.

Doing this as a direct transfer rather than taking the money out yourself is important to avoid triggering early withdrawal fees. A rollover into a new 401(k) has the advantage of consolidating your retirement savings into one place; there is only one account to monitor.

Keep Your 401(k) With Your Previous Employer

If you like your previous employer’s 401(k) administrator, its fees, and investment options, you can always keep your 401(k) where it is rather than roll it over to an IRA or your new employer’s 401(k).

However, keeping your 401(k) with your previous employer may make it harder to keep track of your retirement investments because you’ll end up with several accounts. It’s common for people to lose track of old 401(k) accounts.

Moreover, you may end up paying higher fees if you keep your 401(k) with your previous employer. Usually, employers cover 401(k) fees, but if you leave the company, they may shift the cost onto you without you realizing it. High fees may end up eating into your returns, making it harder to save for retirement.

Does Employer Match Stop After You Leave?

Once you leave a job, whether you quit or are fired, you will no longer receive the matching employer contributions.

Look for New Investment Options

If you don’t love the investment options or fees in your new 401(k), you may roll the funds over into an IRA account instead. Rolling assets into a traditional IRA is relatively simple and can be done with a direct transfer from your 401(k) plan administrator. You also may be allowed to roll a 401(k) into a Roth IRA, but you’ll have to pay taxes on the amount you convert.

The advantage of rolling funds into an IRA is that it may offer a more comprehensive array of investment options. For example, a 401(k) might offer a handful of mutual or target-date funds. In an IRA, you may have access to individual securities like stocks and bonds and a wide variety of mutual funds, index funds, and exchange-traded funds.

Test your understanding of what you just read.

The Takeaway

Changing jobs is an exciting time, whether or not you’re moving, and it can be a great opportunity to reevaluate what to do with your retirement savings. Depending on your financial situation, you could leave the funds where they are or roll them over into your new 401(k) or an IRA. You can also cash out the account, but that may harm your long-term financial security because of taxes, penalties, and loss of a tax-advantaged investment account.

Help build your nest egg with a SoFi IRA.

FAQ

How long can a company hold your 401(k) after you leave?

A company can hold onto an employee’s 401(k) account indefinitely after they leave, but they are required to distribute the funds if the employee requests it or if the account balance is less than $7,000.

Can I cash out my 401(k) if I quit my job?

You can cash out your 401(k) if you quit your job. However, experts generally do not advise cashing out a 401(k), as doing so will trigger taxes and penalties on the withdrawn amount. Instead, it is usually better to either leave the funds in the account or roll them over into a new employer’s plan or an IRA.

What happens if I don’t rollover my 401(k)?

If you don’t roll over your 401(k) when you leave a job, the funds will typically remain in the account and be subject to the rules and regulations of the plan. If the account balance is less than $7,000, the employer may roll over the account into an IRA or cash out the account. If the balance is more than $7,000, the employer may offer options such as leaving the funds in the account or rolling them into an IRA.

You may also be interested in:

Guide to Transferring 401(k) to a New Job

How to Roll Over Your 401(k)

When Can You Withdraw From Your 401(k)?

Article Sources

IRS. 401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000.

Photo credit: iStock/chengyuzheng

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Feb

2026

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

By Rebecca Lake | invest, Investing, Preparing for Retirement | Comments Off

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

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

Key Points

• Individuals aged 50 and older can contribute additional funds to their 401(k) accounts through catch-up contributions.

• The annual catch-up contribution limit for individuals 50 and up is $7,500 for 2025 and $8,000 for 2026, allowing eligible participants to save a total of $31,000 in 2025 and $32,500 in 2026. In both 2025 and 2026, those aged 60 to 63 may contribute up to an additional $11,250 (instead of $7,500 and $8,000), for a total of $34,750 in 2025, and $35,750 in 2026.

• Catch-up contributions can be made to various retirement accounts, including 401(k) plans, 403(b) plans, and IRAs, providing flexibility in retirement savings.

• Utilizing catch-up contributions effectively can help older savers offset previous under-saving and better prepare for retirement expenses.

What Is 401(k) Catch-Up?

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

There are limits on how much employees can contribute to their 401(k) plan each year, as well as limits on the total amount that employers can contribute. The regular employee contribution limit is $23,500 for 2025 and $24,500 for 2026. This is the maximum amount you can defer from your paychecks into your plan — unless you’re eligible to make catch-up contributions.

Under Internal Revenue Code Section 414(v), a catch-up contribution is defined as a contribution in excess of the annual elective salary deferral limit. For 2025, the 401(k) catch-up contribution limit is $7,500, and for $2026 the catch-up limit is $8,000. In 2025 and 2026, those aged 60 to 63 may contribute up to an additional $11,250 (instead of $7,500 and $8,000 respectively) to their 401(k) plan.

That means if you’re eligible to make these contributions, you would need to put a total of $31,000 in your 401(k) in 2025 to max out the account ($34,750 for those aged 60 to 63) and $32,500 in 2025 ($35,750 for those aged 60 to 63). That doesn’t include anything your employer matches.

Under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older whose FICA wages exceeded $150,000 in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make qualified withdrawals tax-free in retirement. Those impacted by the new law should check with their employer or plan administrator to find out how to proceed.

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

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

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

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

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

Making Catch-Up Contributions

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

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

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

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

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

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

401(k) Catch-Up Contribution Limits

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

The IRS determines how much to allow for elective salary deferrals, catch-up contributions, and aggregate employer and employee contributions to retirement accounts, periodically adjusting those amounts for inflation. Here’s how the IRS retirement plan contribution limits for 2025 and 2026 add up:

Retirement Plan Contribution Limits in 2025 and 2026
	Annual Contribution	Catch Up Contribution	Total Contribution for 50 and older
Traditional, Roth, and solo 401(k) plans; 403b and 457 plans	$23,500 in 2025; $24,500 in 2026	$7,500 in 2025 (ages 50-59, 64+), $11,250 (ages 60-63); $8,000 in 2026 (ages 50-59, 64+), $11,250 (ages (60-63)	$31,000 (ages 50-59, 64+) $34,750 (ages 60-63) in 2025; $32,500 (ages 50-59, 64+), $35,750 (ages 60-63) in 2026
Definined contribution maximum, including employer contributions	$70,000 in 2025, $72,000 in 2026	$7,500 in 2025 (ages 50-59, 64+), $11,250 (ages 60-63); $8,000 in 2026 (ages 50-59, 64+), $11,250 (ages (60-63)	$77,500 (ages 50-59, 64+) $81,250 (ages 60-63) in 2025; $80,000 (ages 50-59, 64+) $83,250 (ages 60-63) in 2026
SIMPLE IRA	$16,500 in 2025; $17,000 in 2026	$3,500 (ages 50-59, 64+) $5,250 (ages 60-63) in 2025; $4,000 (ages 50-59, 64+) $5,250 (ages 60-63) in 2026	$20,000 (ages 50-59, 64+) $21,750 (ages 60-63) in 2025; $21,000 (ages 50-59, 64+) $22,250 (ages 60-63) in 2026
Traditional and Roth IRA	$7,000 in 2025, $7,500 in 2026	$1,000 in 2025; $1,100 in 2026	$8,000 in 2025, $8,600 in 2026

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

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

Tax Benefits of Making Catch-Up Contributions

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

The exception to this is for those 50 and older who made more than $150,000 in 2025 and are required to put their catch-up contributions in a Roth 401(k), as noted earlier. Because these contributions are made with after-tax dollars, it won’t save them on their taxes now. But they will be able to make qualified withdrawals tax-free in retirement.

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

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

Roth 401(k) Catch-Up Contributions

The maximum amount you can contribute to a Roth 401(k) is the same as it is for a traditional 401(k): $23,500 and, if you’re 50 or older, $7,500 in catch-up contributions ($11,250 in catch-up contributions if you’re 60 to 63) for 2025. For 2026, it is $24,500 and, if you’re 50 or older, $8,000 in catch-up contributions ($11,250 in catch-up contributions if you’re 60 to 63). This means that if you’re age 50 and up, you are able to contribute a total of $31,000 to your Roth 401(k) in 2025 (or $34,750 if you’re 60 to 63), and $32,500 in 2025 (or $35,750 if you’re 60 to 63).

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

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

The Takeaway

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

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

Help grow your nest egg with a SoFi IRA.

FAQ

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

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

What is the 401(k) catch-up amount in 2025 and 2026?

For 2025, the 401(k) catch-up contribution limit is $7,500 if you’re aged 50 to 59 or 64-plus; for 2026, the catch-up contribution is $8,000 if you’re 50 to 59 or 64-plus. For those aged 60 to 63 in both 2025 and 2026, the 401(k) catch-up contribution limit is $11,250 (instead of $7,500 in 2025 and $8,000 in 2026).

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/1001Love

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

Feb

2026

Default Deferral Rate 401(k) Explained

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

Your 401(k) deferral rate is the amount that you contribute to the plan via your paychecks. Many companies have a default deferral rate on 401(k) plans, in which they automatically direct a certain amount of your paycheck to your 401(k) plan. This occurs automatically, unless you opt out of participation or select a higher default rate.

The default deferral rate on 401(k) plans varies from one plan to another (and not all plans have a default rate), though the most common rate is 7%. If you’re currently saving in a 401(k) plan or will soon enroll in your employer’s plan, it’s important to understand how automatic contributions work.

What Is a 401(k) Deferral Rate?

A deferral rate is the percentage of salary contributed to a 401(k) plan or a similar qualified plan each pay period. Each 401(k) plan can establish a default deferral percentage, which represents the minimum amount that employees automatically contribute, unless they opt out of the plan.

For example, someone making a $50,000 annual salary would automatically contribute a minimum of $1,500 per year to their plan if it had a 3% automatic deferral rate.

Employees can choose not to participate in the plan, or they can contribute more than the minimum deferral percentage set by their plan. They may choose to contribute 10%, 15% or more of their salary into the plan each year, and receive a tax benefit up to the annual limit. Again, the more of your income you defer into the plan, the larger your retirement nest egg may be later.

There are several benefits associated with changing your 401(k) contributions to maximize 401(k) salary deferrals, including:

• Reducing taxable income if you’re contributing pre-tax dollars

• Getting the full employer matching contribution

• Qualifying for the retirement saver’s credit

If you qualify, the Saver’s Credit is worth up to $1,000 for single filers or $2,000 for married couples filing jointly. This credit can be used to reduce your tax liability on a dollar-for-dollar basis.

Average Deferral Rate

Studies have shown that more employers are leaning toward the higher end of the scale when setting the default deferral rate. According to research from the Plan Sponsor Council of America (PSCA), for instance, 32.9% of employers use an automatic default deferral rate of 6% versus 29% that set the default percentage at 3%.

In terms of employer matching contributions, a recent survey from the PSCA found that 96% of employers offer some level of match. The most recent data available from the Bureau of Labor suggests that the average employer match works out to around 3.5%. Again, it’s important to remember that not every employer offers this free money to employees who enroll in the company’s 401(k).

Research shows that higher default rates result in higher overall retirement savings for participants.

What Is the Actual Deferral Percentage Test?

The actual deferral percentage (ADP) test is one of two nondiscrimination tests employers must apply to ensure that employees who contribute to a 401(k) receive equal treatment, as required by federal regulations. The ADP test counts elective deferrals of highly compensated employees and non-highly compensated employees to determine proportionality. A 401(k) plan passes the ADP test if the actual deferral percentage for highly compensated employees doesn’t exceed the greater of:

• 125% of the ADP for non-highly compensated employees, or the lesser of

• 200% of the ADP for non-highly compensated employees or the ADP for those employees plus 2%

If a company fails the ADP test or the second nondiscrimination test, known as actual contribution percentage, then it has to remedy that to avoid an IRS penalty. This can mean making contributions to the plan on behalf of non-highly compensated employees.

How Much Should I Contribute to Retirement?

If you’re ready to start saving for retirement, using your employer’s 401(k), one of the most important steps is determining your personal deferral rate. The appropriate deferral percentage can depend on several things, including:

• How much you want to save for retirement total

• Your current age and when you plan to retire

• What you can realistically afford to contribute, based on your current income and expenses

A typical rule of thumb suggested by financial specialists is to save at least 15% of your gross income toward retirement each year. So if you’re making $100,000 a year before taxes, you’d save $15,000 in your 401(k) following this rule. But it’s important to consider whether you can afford to defer that much into the plan.

Using a 401(k) calculator or retirement savings calculator can help you to get a better idea of how much you need to save each year to reach your goals, based on where you’re starting from right now. As a general rule, the younger you are when starting to invest for retirement the better, as you have more time to take advantage of the power of compounding returns.

If you don’t have a 401(k), you can still save for retirement through an individual retirement account (IRA) and set up automatic deposits to mimic paycheck deferrals and give you the benefit of dollar-cost averaging.

Contribution Limits

It’s important to keep in mind that there are annual contribution limits for 401(k) plans. These limits determine how much of your income you can defer in any given year and are established by the IRS. The IRS adjusts annual contribution limits periodically to account for inflation.

For 2025, employees are allowed to contribute $23,500 to their 401(k) plans. An additional catch-up contribution of $7,500 is allowed for employees aged 50 or older. That means older workers may be eligible to make a total contribution of $31,000. Those aged 60 to 63 can make an extra contribution of up to $11,250, instead of $7,500 in 2025, for a total of $34,750, thanks to SECURE 2.0

For 2026, employees can contribute $24,500 to their 401(k). Those 50 and older can make an additional catch-up contribution of $8,000 for a total of $32,500. Those aged 60 to 63 can make the SECURE 2.0 contribution of up to $11,250, instead of $8,000 in 2026, for a total of $35,750.

Under a new law regarding catch-up contributions that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.

The total annual 2025 contribution limit for 401(k) plans, including both employee and employer matching contributions, is $70,000 ($77,500 with the standard catch-up and $81,250 with the SECURE 2.0 catch-up). For 2026, the total annual contribution limit is $72,000 ($80,00 with the standard catch-up and $83,250 with the SECURE 2.0 catch-up).

The money that you contribute to the 401(k) is yours, but you might not own the contributions from your employer until a certain period of time has passed, if your plan uses a 401(k) vesting schedule.

You’re not required to max out the annual contribution limit and employers are not required to offer a match. But the more of your salary you defer to the plan and the bigger the matching contribution, the more money you could end up with once you’re ready to retire.

The Takeaway

Contributing to a 401(k) can be one of the most effective ways to save for retirement but it’s not your only option. If you don’t have a 401(k) at work or you want to supplement your salary deferrals, you can also save using an Individual Retirement Account (IRA).

An IRA allows you to set aside money for the future while snagging some tax breaks. With a traditional IRA, your contributions may be tax-deductible. A Roth IRA, meanwhile, allows for tax-free distributions in retirement.

Help grow your nest egg with a SoFi IRA.

FAQ

What is a good deferral rate for 401(k)?

A good deferral rate for 401(k) contributions is one that allows you to qualify for the full employer match if one is offered, at a minimum. The more money you defer into your plan, the more opportunity you have to grow wealth for retirement.

What is an automatic deferral?

An automatic deferral is a deferral of salary into a 401(k) plan or similar qualified plan through paycheck deductions. Your employer automatically redirects money from your paycheck into your retirement account.

What is the maximum default automatic enrollment deferral rate?

This depends on your employer. Some employers may set the threshold higher to allow employees to make better use of the plan.

About the author

Rebecca Lake

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