Should I Put My Bonus Into My 401k? Here's What You Should Consider

Should I Put My Bonus Into My 401k? Here’s What You Should Consider

If you’re wondering what to do with bonus money, you’re not alone. Investing your bonus money in a tax-advantaged retirement account like a 401(k) has some tangible advantages. Not only will the extra cash help your nest egg to grow, you could also see some potential tax benefits.

Of course, we live in a world of competing financial priorities. You could also pay down debt, spend the money on something you need, save for a near-term goal — or splurge! The array of choices can be exciting — but if a secure future is your top goal, it’s important to consider a 401k bonus deferral.

Here are a few strategies to think about before you make a move.

Receiving a Bonus Check

First, a practical reminder. When you get a bonus check, it may not be in the amount that you expected. This is because bonuses are subject to income tax. Knowing how your bonus is taxed can help you understand how much you’ll end up with so you can determine what to do with the money that’s left. The IRS considers bonuses as supplemental wages rather than regular wages.

Ultimately, your employer decides how to treat tax withholding from your bonus. Employers may withhold 22% of your bonus to go toward federal income taxes. But some employers may add your whole bonus to your regular paycheck, and then tax the larger amount at normal income tax rates. If your bonus puts you in a higher tax bracket for that pay period, you may pay more than you expected in taxes.

Also, your bonus may come lumped in with your paycheck (not as a separate payout), which can be confusing.

Whatever the final amount is, or how it arrives, be sure to set aside the full amount while you weigh your options — otherwise you might be tempted to spend it, as behavioral finance research has shown.

What to Do With Bonus Money

There’s nothing wrong with spending some of your hard-earned bonus from your compensation. One rule of thumb is to set a percentage of every windfall (e.g. 10% or 20%) — whether a bonus or a birthday check — to spend, and save the rest.

To get the most out of a bonus, though, many people opt for a 401k bonus deferral and put some or all of it into their 401k account. The amount of your bonus you decide to put in depends on how much you’ve already contributed, and whether it makes sense from a tax perspective.

Contributing to a 401k

The contribution limit for 401k plans in 2024 is $23,000; for those 50 and older you can add another $7,500, for a total of $30,500. The contribution limit for 401k plans in 2023 is $22,500; for those 50 and older you can add another $7,500, for a total of $30,000. If you haven’t reached the limit yet, allocating some of your bonus into your retirement plan can be a great way to boost your retirement savings.

In the case where you’ve already maxed out your 401k contributions, your bonus can also allow you to invest in an IRA or a non-retirement (i.e. taxable) brokerage account.

Contributing to an IRA

If you’ve maxed out your 401k contributions for the year, you may still be able to open a traditional tax-deferred IRA or a Roth IRA. It depends on your income.

In 2024, the contribution limit for traditional IRAs and Roth IRAs is $7,000; with an additional $1,000 catch-up provision if you’re over 50. In 2023, the contribution limit for traditional IRAs and Roth IRAs is $6,500; with an additional $1,000 catch-up provision if you’re over 50. But if your income is over $161,000 (for single filers) or over $240,000 (for married filing jointly) in 2024, you aren’t eligible to contribute to a Roth. For 2023, you can’t contribute to a Roth if your income is over $153,000 (for single filers) or over $228,000 (for married filing jointly). And while a traditional IRA doesn’t have income limits, the picture changes if you’re covered by a workplace plan like a 401k.

If you’re covered by a workplace retirement plan and your income is too high for a Roth, you likely wouldn’t be eligible to open a traditional, tax-deductible IRA either. You could however open a nondeductible IRA. To understand the difference, you may want to consult with a professional.

Recommended: How Much Can You Put in an IRA This Year?

Contributing to a Taxable Account

Of course, when you’re weighing what to do with bonus money, you don’t want to leave out this important option: Opening a taxable account.

While employer-sponsored retirement accounts typically have some restrictions on what you can invest in, taxable brokerage accounts allow you to invest in a wider range of investments. So if your 401k is maxed out, and an IRA isn’t an option for you, you can use your bonus to invest in stocks, bonds, exchange-traded funds (ETFs), mutual funds, and more in a taxable account.

Deferred Compensation

You also may be able to save some of your bonus from taxes by deferring compensation. This is when an employee’s compensation is withheld for distribution at a later date in order to provide future tax benefits.

In this scenario, you could set aside some of your compensation or bonus to be paid in the future. When you defer income, you still need to pay taxes later, at the time you receive your deferred income.

Your Bonus and 401k Tax Breaks

Wondering what to do with a bonus? It’s a smart question to ask. In order to maximize the value of your bonus, you want to make sure you reduce your taxes where you can.

One method that’s frequently used to reduce income taxes on a bonus is adding some of it into a tax-deferred retirement account like a 401k or traditional IRA. The amount of money you put into these accounts typically reduces your taxable income in the year that you deposit it.

Here’s how it works. The amount you contribute to a 401k or traditional IRA is tax deductible, meaning you can deduct the amount you save from your taxable income, often lowering your tax bill. (The same is not true for a Roth IRA or a Roth 401k, where you make contributions on an after-tax basis.)

The annual contribution limits for each of these retirement accounts noted above may vary from year to year. Depending on the size of your bonus and how much you’ve already contributed to your retirement account for a particular year, you may be able to either put some or all of your bonus in a tax-deferred retirement account.

It’s important to keep track of how much you have already contributed to your retirement accounts because you don’t want to put too much of your bonus and exceed the contribution limit. In the case where you have reached the contribution limit, you can put some of your bonus into other tax deferred accounts including a traditional IRA or a Roth IRA.

Recommended: Important Retirement Contribution Limits

How Investing Your Bonus Can Help Over Time

Investing your bonus can help increase its value over the long-run. As your money grows in value over time, it can be used in many ways: You can stow part of it away for retirement, as an emergency fund, a down payment for a home, to pay outstanding debts, or another financial goal.

While it can be helpful to have some of your bonus in cash, your money is better suited invested in an investment vehicle where it works for you and doesn’t lose value due to inflation. If you start investing your bonus each year in either a tax-deferred retirement account or non-retirement account, this will ensure you are steps closer to enjoying greater financial security in the future.

Investing for Retirement With SoFi

The yearly question of what to do with a bonus is a common one. Just having that windfall allows for many financial opportunities, such as saving for immediate needs — or purchasing things you need now. But it may be wisest to use your bonus to boost your retirement nest egg — for the simple reason that you could stand to gain more financially down the road, while also potentially enjoying tax benefits in the present.

The fact is, most people don’t max out their 401k contributions each year, so if you’re in that boat it might make sense to take some or all of your bonus and fill up the gas tank, so to say. If you have maxed out your 401k, you still have options to save for the future via traditional or Roth IRAs, deferred comp, or investing in a taxable account.

A taxable account might offer you different or complementary investment options that could also round out your portfolio.

Keeping in mind the tax implications of where you invest can also help you allocate this extra money where it fits best with your plan.

If you get a bonus this year, you can help grow your retirement savings with SoFi Invest®. It’s easy to set up an Active Invest account and open a traditional or Roth IRA online with SoFi. With either an active or automated approach to investing in these retirement accounts, you can choose from a wide range of investment options and services, such as speaking with financial professionals at no additional cost. Learn more about how to take control of your retirement with SoFi Invest.

FAQ

Is it good to put your bonus into a 401k?

The short answer is yes. It might be wise to put some or all of your bonus in your 401k, depending on how much you’ve contributed to your workplace account already. You want to make sure you don’t exceed the 401k contribution limit.

How can I avoid paying tax on my bonus?

Your bonus will be taxed, but you can lower the amount of your taxable income by depositing some or all of it in a tax-deferred retirement account such as a 401k or IRA. However, this does not mean you will avoid paying taxes completely. Once you withdraw the money from these accounts in retirement, it will be subject to ordinary income tax.

Can I put all of my bonus into a 401k?

Possibly. You can put all of your bonus in your 401k if you haven’t reached the contribution limit for that particular year, and if you won’t surpass it by adding all of your bonus. For 2023, the contribution limit for a 401k is $22,500 if you’re younger than 50 years old; Those over 50 can contribute an additional $7,500 for a total of $30,000.


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.



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Guide to Maxing Out Your 401(k)

Maxing out your 401(k) involves contributing the maximum allowable to your workplace retirement account to increase the benefit of compounding and appreciating assets over time.

All retirement plans come with contribution caps, and when you hit that limit it means you’ve maxed out that particular account.

There are a lot of things to consider when figuring out how to max out your 401(k) account. And if you’re a step ahead, you may also wonder what to do after you max out your 401(k).

What Does It Mean to Max Out Your 401(k)?

Maxing out your 401(k) means that you contribute the maximum amount allowed by law in a given year, as specified by the established 401(k) contribution limits. But it can also mean that you’re maxing out your contributions up to an employer’s percentage match, too.

If you want to max out your 401(k) in 2024, you’ll need to contribute $23,000 annually. If you’re 50 or older, you can contribute an additional $7,500, for an annual total of $30,500. If you want to max out your 401(k) in 2023, you’ll need to contribute $22,500 annually. If you’re 50 or older, you can contribute an additional $7,500, for an annual total of $30,000.

For some quick background, 401(k) plans are one of the most common types of retirement plans in the U.S. They are employer-sponsored accounts that allow both you and your employer to make contributions.

When you set up a 401(k), you can opt to have a certain amount or percentage of your paycheck go directly to your 401(k), and sometimes an employer will match your own contributions up to a certain percentage or dollar amount. For example, you might contribute 3%, and your employer might match your 3% dollar for dollar, for a total of 6%. If your employer’s maximum match is 3%, and you contribute up to that matching amount, then in this case, you’re “maxing out” your 401(k).

If you were contributing less than 3%, you might want to make changes to your 401(k) contributions to “max” it out.

But on a broader scale, and what we’ll stick with for the purposes of this piece, maxing out a 401(k) primarily refers to contributing as much as legally possible during a given year.

So, to max out a 401(k) for tax year 2023, an employee would need to contribute $22,500 in salary deferrals — or $30,000 if they’re over age 50. Some investors might think about maxing out their 401(k) as a way of getting the most out of their retirement savings strategy.

Is It Good to Max Out Your 401(k)?

4 Goals to Meet Before Maxing Out Your 401(k)

Generally speaking, yes, it’s a good thing to max out your 401(k) so long as you’re not sacrificing your overall financial stability to do it. Saving for retirement is important, which is why many financial experts would likely suggest maxing out any employer match contributions first.

But while you may want to take full advantage of any tax and employer benefits that come with your 401(k), you also want to consider any other financial goals and obligations you have before maxing out your 401(k).

That doesn’t mean you should put other goals first, and not contribute to your retirement plan at all. That’s not wise. Maintaining a baseline contribution rate for your future is crucial, even as you continue to save for shorter-term aims or put money toward debt repayment.

Other goals could include:

•   Is all high-interest debt paid off? High-interest debt like credit card debt should be paid off first, so it doesn’t accrue additional interest and fees.

•   Do you have an emergency fund? Life can throw curveballs—it’s smart to be prepared for job loss or other emergency expenses.

•   Is there enough money in your budget for other expenses? You should have plenty of funds to ensure you can pay for additional bills, like student loans, health insurance, and rent.

•   Are there other big-ticket expenses to save for? If you’re saving for a large purchase, such as a home or going back to school, you may want to put extra money toward this saving goal rather than completely maxing out your 401(k), at least for the time being.

Once you can comfortably say that you’re meeting your spending and savings goals, it might be time to explore maxing out your 401(k). There are many reasons to do so — it’s a way to take advantage of tax-deferred savings, employer matching (often referred to as “free money”), and it’s a relatively easy and automatic way to invest and save, since the money gets deducted from your paycheck once you’ve set up your contribution amount.

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*Offer lasts through Tax Day, 4/15/24. Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.

6 Steps to Maxing Out Your 401(k)

For 2023, the IRS has set the 401(k) contribution limit as $22,500 in salary deferrals. Individuals over the age of 50 can contribute an additional $7,500 in catch-up contributions. Only a relatively small percentage of people actually do max out their 401(k)s, however. Here are some strategies for how to max out your 401(k).

1. Max Out 401(k) Employer Contributions

Your employer may offer matching contributions, and if so, there are typically rules you will need to follow to take advantage of their match.

An employer may require a minimum contribution from you before they’ll match it, or they might match only up to a certain amount. They might even stipulate a combination of those two requirements. Each company will have its own rules for matching contributions, so review your company’s policy for specifics.

For example, suppose your employer will match your contribution up to 3%. So, if you contribute 3% to your 401(k), your employer will contribute 3% as well. Therefore, instead of only saving 3% of your salary, you’re now saving 6%. With the employer match, your contribution just doubled. Note that employer contributions can range from nothing at all to upwards of 15%. It depends.

Since saving for retirement is one of the best investments you can make, it’s wise to take advantage of your employer’s match. Every penny helps when saving for retirement, and you don’t want to miss out on this “free money” from your employer.

If you’re not already maxing out the matching contribution and wish to, you can speak with your employer (or HR department, or plan administrator) to increase your contribution amount, you may be able to do it yourself online.

2. Max Out Salary-Deferred Contributions

While it’s smart to make sure you’re not leaving free money on the table, maxing out your employer match on a 401(k) is only part of the equation.

In order to make sure you’re setting aside an adequate amount for retirement, consider contributing as much as your budget will allow. Again, individuals younger than age 50 can contribute up to $22,500 in salary deferrals per year — and if you’re over age 50, you can max out at $30,000 in 2023.

It’s called a “salary deferral” because you aren’t losing any of the money you earn; you’re putting it in the 401(k) account and deferring it until later in life.

Those contributions aren’t just an investment in your future lifestyle in retirement. Because they are made with pre-tax dollars, they lower your taxable income for the year in which you contribute. For some, the immediate tax benefit is as appealing as the future savings benefit.

3. Take Advantage of Catch-Up Contributions

As mentioned, 401(k) catch-up contributions allow investors over age 50 to increase their retirement savings — which is especially helpful if they’re behind in reaching their retirement goals. Individuals over age 50 can contribute an additional $7,500 for a total of $30,000 for the year. Putting all of that money toward retirement savings can help you truly max out your 401(k).

As you draw closer to retirement, catch-up contributions can make a difference, especially as you start to calculate when you can retire. Whether you have been saving your entire career or just started, this benefit is available to everyone who qualifies.

And of course, this extra contribution will lower taxable income even more than regular contributions. Although using catch-up contributions may not push everyone to a lower tax bracket, it will certainly minimize the tax burden during the next filing season.

4. Reset Your Automatic 401(k) Contributions

When was the last time you reviewed your 401(k)? It may be time to check in and make sure your retirement savings goals are still on track. Is the amount you originally set to contribute each paycheck still the correct amount to help you reach those goals?

With the increase in contribution limits most years, it may be worth reviewing your budget to see if you can up your contribution amount to max out your 401(k). If you don’t have automatic payroll contributions set up, you could set them up.

It’s generally easier to save money when it’s automatically deducted; a person is less likely to spend the cash (or miss it) when it never hits their checking account in the first place.

If you’re able to max out the full 401(k) limit, but fear the sting of a large decrease in take-home pay, consider a gradual, annual increase such as 1% — how often you increase it will depend on your plan rules as well as your budget.

5. Put Bonus Money Toward Retirement

Unless your employer allows you to make a change, your 401(k) contribution will likely be deducted from any bonus you might receive at work. Many employers allow you to determine a certain percentage of your bonus check to contribute to your 401(k).

Consider possibly redirecting a large portion of a bonus to 401k contributions, or into another retirement account, like an individual retirement account (IRA). Because this money might not have been expected, you won’t miss it if you contribute most of it toward your retirement.

You could also do the same thing with a raise. If your employer gives you a raise, consider putting it directly toward your 401(k). Putting this money directly toward your retirement can help you inch closer to maxing out your 401(k) contributions.

6. Maximize Your 401(k) Returns and Fees

Many people may not know what they’re paying in investment fees or management fees for their 401(k) plans. By some estimates, the average fees for 401(k) plans are between 1% and 2%, but some plans can have up to 3.5%.

Fees add up — even if your employer is paying the fees now, you’ll have to pay them if you leave the job and keep the 401(k).

Essentially, if an investor has $100,000 in a 401(k) and pays $1,000 or 1% (or more) in fees per year, the fees could add up to thousands of dollars over time. Any fees you have to pay can chip away at your retirement savings and reduce your returns.

It’s important to ensure you’re getting the most for your money in order to maximize your retirement savings. If you are currently working for the company, you could discuss high fees with your HR team. One of the easiest ways to lower your costs is to find more affordable investment options. Typically, the biggest bargains can be index funds, which often charge lower fees than other investments.

If your employer’s plan offers an assortment of low-cost index funds or institutional funds, you can invest in these funds to build a diversified portfolio.

If you have a 401(k) account from a previous employer, you might consider moving your old 401(k) into a lower-fee plan. It’s also worth examining what kind of funds you’re invested in and if it’s meeting your financial goals and risk tolerance.

What Happens If You Contribute Too Much to Your 401(k)?

After you’ve maxed out your 401(k) for the year — meaning you’ve hit the contribution limit corresponding to your age range — then you’ll need to stop making contributions or risk paying additional taxes on your overcontributions.

In the event that you do make an overcontribution, you’ll need to take some additional steps such as letting your plan manager or administrator know, and perhaps withdrawing the excess amount. If you leave the excess in the account, it’ll be taxed twice — once when it was contributed initially, and again when you take it out.

What to Do After Maxing Out a 401(k)?

If you max out your 401(k) this year, pat yourself on the back. Maxing out your 401(k) is a financial accomplishment. But now you might be wondering, what’s next? Here are some additional retirement savings options to consider if you have already maxed out your 401(k).

Open an IRA

An individual retirement account (IRA) can be a good complement to your employer’s retirement plans. The pre-tax guidelines of this plan are pretty straightforward.

You can save up to $7,000 pre-tax dollars in an IRA if you meet individual IRS requirements for tax year 2024, and $6,500 for tax year 2023. If you’re 50 or older, you can contribute an extra $1,000, totaling $8,000 for 2024 and $7,500 for 2023, to an IRA.

You may also choose to consider a Roth IRA. Roth IRA accounts have income limits, but if you’re eligible, you can contribute with after-tax dollars, which means you won’t have to pay taxes on earnings withdrawals in retirement as you do with traditional IRAs.

You can open an IRA at a brokerage, mutual fund company, or other financial institution. If you ever leave your job, you can roll your employer’s 401(k) into your IRA without facing any tax consequences as long as they are both traditional accounts and it’s a direct rollover – where funds are transferred directly from one plan to the other. Doing a rollover may allow you to invest in a broader range of investments with lower fees.

Boost an Emergency Fund

Experts often advise establishing an emergency fund with at least six months of living expenses before contributing to a retirement savings plan. Perhaps you’ve already done that — but haven’t updated that account in a while. As your living expenses increase, it’s a good idea to make sure your emergency fund grows, too. This will cover you financially in case of life’s little curveballs: new brake pads, a new roof, or unforeseen medical expenses.

The money in an emergency fund should be accessible at a moment’s notice, which means it needs to comprise liquid assets such as cash. You’ll also want to make sure the account is FDIC insured, so that your money is protected if something happens to the bank or financial institution.

Save for Health Care Costs

Contributing to a health savings account (HSA) can reduce out-of-pocket costs for expected and unexpected health care expenses. For tax year 2023, eligible individuals can contribute up to $3,850 pre-tax dollars for an individual plan or up to $7,750 for a family plan.

The money in this account can be used for qualified out-of-pocket medical expenses such as copays for doctor visits and prescriptions. Another option is to leave the money in the account and let it grow for retirement. Once you reach age 65, you can take out money from your HSA without a penalty for any purpose. However, to be exempt from taxes, the money must be used for a qualified medical expense. Any other reasons for withdrawing the funds will be subject to regular income taxes.

Increase College Savings

If you’re feeling good about maxing out your 401(k), consider increasing contributions to your child’s 529 college savings plan (a tax-advantaged account meant specifically for education costs, sponsored by states and educational institutions).

College costs continue to creep up every year. Helping your children pay for college helps minimize the burden of college expenses, so they hopefully don’t have to take on many student loans.

Open a Brokerage Account

After you max out your 401(k), you may also consider opening a brokerage account. Brokerage firms offer various types of investment account brokerage accounts, each with different services and fees. A full-service brokerage firm may provide different financial services, which include allowing you to trade securities.

Many brokerage firms require you to have a certain amount of cash to open their accounts and have enough funds to account for trading fees and commissions. While there are no limits on how much you can contribute to the account, earned dividends are taxable in the year they are received. Therefore, if you earn a profit or sell an asset, you must pay a capital gains tax. On the other hand, if you sell a stock at a loss, that becomes a capital loss. This means that the transaction may yield a tax break by lowering your taxable income.

Will You Have Enough to Retire After Maxing Out 401(k)?

There are many factors that need to be considered, however, start by getting a sense of how much you’ll need to retire by using a retirement expense calculator. Then you can decide whether maxing out your 401(k) for many years will be enough to get you there, even assuming an average stock market return and compounding built in.

First and foremost, you’ll need to consider your lifestyle and where you plan on living after retirement. If you want to spend a lot in your later years, you’ll need more money. As such, a 401(k) may not be enough to get you through retirement all on its own, and you may need additional savings and investments to make sure you’ll have enough.

Pros and Cons of Maxing Out Your 401(k)

There are some pros and cons to maxing out your 401(k).

Pros of 401(k) Max Out

The most obvious advantage to maxing out your 401(k) is that your retirement savings account will be bigger, which can lead to more growth over time. That’s critical if you hope to indeed retire some day, and by maxing out your 401(k) every year, you might be able to hit your goals sooner.

Maxing out your 401(k) can also make your saving and investing relatively easy, as long as you’re taking a no-lift approach to setting your money aside thanks to automatic contributions.

Cons of 401(k) Max Out

The downsides of maxing out a 401(k) include the fact that not everyone is in a financial position to do so. Depending on your specific financial situation, you simply may not be able to afford to contribute the maximum amount per year, especially if you’re also tackling debt and taking aim at other savings goals.

There are also opportunity costs to consider, which boil down to the fact that you may be able to do something else with your money besides put it in your retirement plan. For instance, during years when the stock market realizes substantial returns, your money could be more immediately accessible if invested in these assets via a non-retirement account, rather than being tied up in a retirement fund.

That said, putting money away — no matter how you do it — isn’t necessarily a bad thing, and it’s likely always better than frittering it away on unnecessary expenditures.

The Takeaway

Maxing out your 401(k) involves matching your employer’s maximum contribution match, and also, contributing as much as legally allowed to your retirement plan in a given year. For 2024, that limit is $23,000, or $30,500 if you’re over age 50. For 2023, that limit is $22,500, or $30,000 if you’re over age 50. If you have the flexibility in your budget to do so, maxing out a 401(k) can be an effective way to build retirement savings.

And once you max out your 401(k)? There are other smart ways to direct your money. You can open an IRA, contribute more to an HSA, or to a child’s 529 plan. If you’re looking to roll over an old 401(k) into an IRA, or open a new one, SoFi Invest® can help. SoFi doesn’t charge commissions (the full fee schedule is here), and you can access complimentary professional advice.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

What happens if I max out my 401(k) every year?

Assuming you don’t overcontribute, you may see your retirement savings increase if you max out your 401(k) every year, and hopefully, be able to reach your retirement and savings goals sooner.


Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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 employees to save for retirement, as it allows them to save for retirement on a tax-advantaged basis, and also many employers offer matching contributions. Here are a few things to know about keeping track of your 401(k) accounts as you change jobs and move through your career

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 2024, employees can contribute up to $23,000 a year in their 401(k)s, up from $22,500 in 2023. Employees age 50 and older can make catch-up contributions of $7,500 a year for a total of $30,500 in 2024 and $30,000 in 2023.

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 employees 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.

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?

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, roll it over into an IRA, or cash it out.

However, if your 401(k) account has less than $5,000, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer will cash out the funds and send them to you via check. If there is between $1,000 and $5,000 in the account, your employer has 60 days to roll it into another retirement account, such as an IRA, that they help you set up. You may also suggest a specific IRA for the rollover.

If you have more than $5,000 in your account, your former employer can only force you to cash out or roll over into another account with your permission. 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) and it is 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.

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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.

Recommended: How an Employer 401(k) Match Works

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.

Recommended: ​​What To Invest In Besides Your 401(k)

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.

If you have an old 401(k) you’d like to roll over to an online IRA, SoFi Invest® can help. With a SoFi Roth or Traditional IRA, investors can investment options, member services, and our robust suite of planning and investment tools. And SoFi makes the 401(k) rollover process seamless and straightforward — with no need to watch the mail for your 401(k) check. There are no rollover fees, and you can complete your 401(k) rollover quickly and easily.

Help grow 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 $5,000.

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 $5,000, the employer may roll over the account into an IRA or cash out the account. If the balance is more than $5,000, the employer may offer options such as leaving the funds in the account or rolling them into an IRA.


Photo credit: iStock/chengyuzheng

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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How Much Should I Contribute to My 401(k)?

Once you set up your retirement plan at work, the next natural question is: How much should I put in my 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you: e.g. the tax implications, your employer match (if there is one), your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401k.

How Much Can You Contribute to a 401(k)?

There are several factors to consider when weighing how much to contribute to a 401k account, which are detailed in the sections below. The main thing to consider off the bat, however, are the IRS contribution limits themselves.

The IRS may change the retirement contribution limits and other parameters of various retirement accounts from time to time, so it’s always a good idea to double check before you decide how much you want to contribute.

2024 vs 2023 401(k) Contribution Limits

Like most tax-advantaged retirement plans — e.g. 403bs, 457 plans, different types of IRAs — 401k plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401k; plus there is a cap on total employee-plus-employer contributions.

For tax year 2024, the contribution limit is $23,000, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,500. The combined employer-plus-employee contribution limit for 2024 is $69,000 ($76,500 with the catch-up amount).

For tax year 2023, the contribution limit is $22,500, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,000. The combined employer-plus-employee contribution limit for 2024 is $66,000 ($73,500 with the catch-up amount).

401(k) Contribution Limits 2024 vs 2023

2024

2023

Basic contribution $23,000 $22,500
Catch-up contribution $7,500 $7,500
Total + catch-up $30,500 $30,000
Employer + Employee maximum contribution $69,000 $66,000
Employer + employee max + catch-up $76,500 $73,500

How Much Should You Put Toward a 401(k)?

Next you may be wondering, Ok, those are the limits, but how much should I put in my 401k?

One rule-of-thumb is to save at least 10% of your annual income for retirement. So if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and many experts suggest aiming for 15% or even 20% — to make sure your savings will last given the cost of living longer.

In addition, you may want to consider the following:

•   Are you the sole or primary household earner?

•   Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?

•   When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

Here are some other factors that should be weighed carefully as you decide how much to save in a 401k.

Factors That May Impact Your Decision

Before you decide to go with the general rule-of-thumb above, it’s wise to think about taxes, your employer contribution, your own goals, and more.

1. The Tax Effect

The key fact to remember about 401k plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions, as they’re called.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $100,000 per year, and you’re able to save the full $22,500 allowed by the IRS for 2023. Your taxable income would be reduced from $100,000 to $77,500, thus putting you in a lower tax bracket.

2. The Employer Match

Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401k account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say you save 10% of your $100,000 salary, or $10,000 per year. But your employer might match 50% of the first 6% ($6,000), which comes to $3,000. So the total would be $13,000.

If your employer does offer a match, you likely want to save at least up to the matching amount, so you get the full employer contribution. It’s free money, as they say.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

Consider 401(k) Alternatives Like an IRA

You don’t have to limit your savings to your 401k. You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Can you contribute to 401k and IRA plans simultaneously? For example, if you’re already contributing to a 401k plan at work, you may be wondering if you can also save money in an IRA.

Or maybe you opened an IRA in college, but now you’re starting your career and have access to a 401k. Does it make sense to keep making contributions if you’ll soon be enrolled in your employer’s retirement plan?

Contributing to a Traditional IRA and a 401(k)

The short answer is yes, according to the IRS you can contribute to a 401k at work and a traditional IRA. But there are limits on the amount of IRA contributions you can deduct in this scenario. You can deduct the full amount of your IRA contributions if:

•   You file single or head of household and your modified adjusted gross income (MAGI) is $73,000 or less.

•   You’re married filing jointly with a MAGI of $116,000 or less.

For incomes over these limits, the amount you can deduct phases out gradually.

Contributing to a Roth IRA and a 401(k)

Can you have a Roth IRA and a 401k? You fund a Roth IRA with after-tax dollars, meaning you don’t get the benefit of deducting the amount you contribute from your current year’s taxes. The upside of Roth accounts, though, is that qualified withdrawals in retirement are tax free.

But there’s a catch: Your ability to contribute to a Roth IRA is based on your income. So how much you earn — not necessarily whether you have a 401k at work — could be a deciding factor in answering the question, can you have a Roth IRA and 401k at the same time.

The rules for combining a 401k account with an IRA can be complicated. It’s best to consult a professional.

The Takeaway

Many people wonder: How much should I contribute to my 401k? There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS. In 2023, the maximum contribution you can make to your 401k is $22,500, plus an additional $7,500 catch-up contribution if you’re 50 and up.

While few people can start their 401k journey by saving quite that much, it’s also possible to follow the common guideline and save 10% of your income. From there, you can work up to saving the max. In fact, many plans offer an automatic savings increase that bumps up your savings rate by a small amount, like 1% per year.

In addition, you’ll want to consider whether your employer offers a matching contribution — and at least save that amount, to get the additional funds from your company.

Of course, the main determination of the amount you need to save is what your goals are for the future. This is where you should focus, because saving is never easy. But by contemplating what you want to spend money on now, and the quality of life you’d like when you’re older, you can make trade-offs.

If you’re ready to open an IRA or start investing for retirement on your own, it’s easy when you open a SoFi Invest® account. You can trade stocks, exchange-traded funds (ETFs), and fractional shares. And SoFi members are entitled to complimentary financial advice from professionals who can help answer your questions.


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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

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

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

What Is 401(k) Catch-Up?

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

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

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

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

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

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

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

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

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

Making Catch-Up Contributions

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

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

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

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

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

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

401(k) Catch-Up Contribution Limits

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

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

Retirement Plan Contribution Limits in 2023

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

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

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

💡 Recommended: How to Open Your First IRA

Tax Benefits of Making Catch-Up Contributions

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

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

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

Roth 401(k) Catch-Up Contributions

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

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

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

The Takeaway

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

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

Help grow your nest egg with a SoFi IRA.

FAQ

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

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

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

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


Photo credit: iStock/1001Love

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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