Investing Archives

Dec

2025

Understanding the 403(b) Retirement Plan: A Comprehensive Guide

By Pam O’Brien | Investing | Comments Off

If you work for a tax-exempt organization or a public school, you typically have access to a 403(b) plan rather than a 401(k). What is a 403(b)? It’s a workplace retirement plan that can help you start saving for your post-work future.

In this guide, find out how 403(b) plans work, who is eligible for them, and the rules for contributing.

Key Points

• A 403(b) plan serves as a retirement savings option for employees of tax-exempt organizations and public schools, allowing for tax-deductible contributions.

• Two main types of 403(b) plans exist: traditional plans, which use pre-tax contributions, and Roth plans, which utilize after-tax dollars, impacting tax obligations at withdrawal.

• The contribution limit for a 403(b) in 2025 is $23,500, and the contribution limit in 2026 is $24,500, with additional catch-up contributions available for long-term employees and those age 50 or older.

For both 2025 and 2026, those age 60 to 63 may contribute an additional catch-up of up to $11,250 to their 403(b), instead of $7,500 in 2025 and $8,000 in 2026, thanks to SECURE 2.0.

• Investment options in a 403(b) may be more limited compared to other retirement plans, often focusing on annuities and mutual funds rather than a diverse portfolio.

• Employees can adjust their contributions to a 403(b) and may access funds through loans or hardship distributions, subject to specific plan rules and penalties.

Demystifying the 403(b) Plan

A retirement plan for employees of tax-exempt organizations and public schools, a 403(b) is also known as a tax-sheltered annuity or TSA plan. Employees can contribute to the plan directly from their paycheck, and their employer may contribute as well. A 403(b) can help you save for retirement.

What Exactly is A 403(b) Retirement Plan?

What is a 403(b)? The 403(b) retirement plan is a type of qualified retirement plan designed to help employees save for retirement. Certain schools, religious organizations, hospitals and other organizations often offer this plan to employees. (In layman’s terms, it’s the 401(k) of the nonprofit world.)

Like 401(k)s, 403(b) plans allow for regular contributions toward an employee’s retirement goal. Contributions are tax-deductible in the year they’re made. Also, you won’t pay taxes on any earnings in the account until you make withdrawals.

However, unlike 401(k)s, 403(b)s sometimes invest contributions in an annuity contract provided through an insurance company rather than allocate it into a stocks-and-bonds portfolio.

Distinguishing Between Different 403(b) Options

There are two main types of 403(b) plans: traditional and Roth. With a traditional 403(b), employees contribute pre-tax money to their 403(b) account. This reduces their taxable income, giving them an immediate tax advantage. They will pay taxes on the money when they withdraw it.

With a Roth 403(b), employees contribute after-tax dollars to the plan. They will not owe taxes on the money when they withdraw it.

Not every 403(b) plan offers a Roth version.

The 403(b) Plan in Action: Participation and Contributions

The IRS states that a 403(b) plan “must be maintained under a written program which contains all the terms and conditions…” In other words, for the plan to be legitimate, paperwork is required.

An employee may get a whole packet of information about the 403(b) plan as part of the onboarding process. This package can include salary reduction agreement terms (this refers to employee contributions from the plan that come from the employee’s paychecks), eligibility rules, explanations of benefits, and more.

In certain limited cases, an employer may not be subject to this requirement. For example, church plans that don’t contain retirement income aren’t required to have a written 403(b) plan.

Who Gets to Participate?

Only employees of specific public and nonprofit employers are eligible to participate in 403(b)s, as are some ministers. You may have access to a 403(b) plan if you’re any of the following:

• An employee of a tax-exempt 501(c)(3) nonprofit organization

• An employee of the public school system, including state colleges and universities, who is involved in the day-to-day operations of the school

• An employee of a public school system organized by Indian tribal governments

• An employee of a cooperative hospital service organization

• A minister who works for a 501(c)(3) nonprofit organization and is self-employed, or who works for a non-501(c)(3) organization but still functions as a minister in their day-to-day professional life

Employers may automatically enroll employees in a 403(b), though employees can opt out if they so choose. Of course, participating in an employer-sponsored retirement plan is one good way to start saving for retirement.

Universal Availability Rule: Who Doesn’t Qualify for 403(b) Participation?

Employers must offer 403(b) coverage to all qualifying employees if they offer it to one — this rule is known as “universal availability.” However, plans may exclude certain employees, including those under the following circumstances:

• Employees working fewer than 20 hours per week

• Employees who contribute $200 or less to their 403(b) each year

• Employees who participate in a retirement plan, like a 401(k) or 457(b), of the employer

• Employees who are non-resident aliens

• Employees who are students performing certain types of services

The same laws that allow these coverage limits also require employers to give employees notice of specific significant plan changes, like whether or not they have the right to make elective deferrals.

Types of Contributions: Understanding Your Options

You can contribute to your 403(b) through automatic paycheck deductions. This process is similar to that of a 401(k) — the employee agrees to have a certain amount of their salary redirected to the retirement plan during each pay period.

However, other types of 403(b)contributions are also eligible, including:

• Nonelective contributions from your employer, such as matching or discretionary contributions

• After-tax contributions can be made by an employee and reported as income in the year the funds are earned for tax purposes. These funds may or may not be designated Roth contributions. In this case, the employer needs to keep separate accounting records for Roth contributions, gains, and losses.

The Cap on Contributions: Limits and Regulations

For 2025, workers can contribute up to $23,500 into a 403(b) plan. In 2026, workers can contribute up to $24,500 into a 403(b) plan. Workers who’ve been with their employer for 15 years may be able to contribute an additional $3,000 if they meet certain requirements. Those age 50 or older can contribute an additional $7,500 to a 403(b) in 2025, and $8,000 in 2026.

For 2025 and 2026, those ages 60 to 63 may contribute up to an additional $11,250 to their 403(b) plan, instead of $7,500 and $8,000, thanks to SECURE 2.0. This is sometimes called the “super catch-up” provision.

Combined contributions from the employee and the employer may not exceed the lesser of 100% of the employee’s most recent yearly compensation or $70,000 in 2025 ($77,500 with the standard catch-up for those 50 and up, and $81,250 with SECURE 2.0 catch-up for those ages 60 to 63), and $72,000 in 2026 ($80,000 with the standard catch-up; $83,250 with SECURE 2.0 catch-up for those ages 60 to 63 only).

Investing Within Your 403(b) Plan

A 403(b) may offer an employee a more limited number of investment options compared to other retirement savings plans.

Exploring Investment Choices for Your 403(b)

One way 403(b) plans diverge from other retirement plans, like 401(k)s and even IRAs, is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds (ETFs), 403(b)s commonly invest in annuity contracts sold by insurance companies.

Part of the reason these plans are known as “tax-sheltered annuities” is that they were once restricted to annuity investments alone — a limit removed in 1974. While many 403(b) plans still offer annuities, they have also largely embraced the portfolio model that 401(k) plans typically offer. 403(b) plans now typically also offer custodial accounts invested in mutual funds.

Comparing 403(b) with Other Retirement Plans

How does a 403(b) stack up against other retirement plans, such as 401(k)s, IRAs, and pension plans? Here’s how they compare.

403(b) vs. 401(k): Similarities and Differences

These two plans share many similarities. However, one notable difference between 403(b) plans and 401(k) plans is there is no profit sharing in 403(b)s — workplaces that are 403(b)-eligible aren’t working toward a profit.

Another way 403(b) plans diverge from 401(k)s is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds, 403(b)s commonly invest in annuity contracts sold by insurance companies or in custodial accounts invested in mutual funds.

403(b) vs. IRA vs. Pension Plans: What’s Right for You?

An IRA offers more investment choices than a 403(b). With a 403(b), your investment options are narrower.

403(b) plans may also have higher fees than other retirement plans. In addition, certain 403(b) plans aren’t required to adhere to standards set by the Employee Retirement Income Security Act (ERISA), which protects employees who contribute to a retirement account.

However, 403(b)s have much higher contribution limits than IRAs. IRA contributions are $7,000 for 2025 and $7,500 for 2026 for individuals under age 50, compared to $23,500 in contributions for a 403(b) in 2025, and $24,500 for 2026.

As for pension plans, public school teachers are typically eligible for defined benefit pension plans that their employer contributes to that gives them a lump sum or a set monthly payment at retirement. These teachers should also be able to contribute to a 403(b), if it’s offered, to help them save even more for retirement.

Advantages and Challenges of a 403(b) Plan

There are both pros and cons to participating in a 403(b) plan. Here are some potential benefits and disadvantages to consider.

Tax Benefits and Employer Matching: The Upsides

As mentioned, a 403(b) offers tax advantages, whether you have a traditional or Roth 403(b) plan. Contribution limits are also higher than they are for an IRA.

Employers may match employees’ contributions to a 403(b). Check with your HR department to find out if your employer matches, and if so, how much.

Potential Drawbacks: Fees and Investment Choices

Some 403(b)s charge higher fees than other types of plans. They also have a narrower range of investment options, as mentioned earlier.

Making Changes to Your 403(b) Plan

If a situation arises that requires you to make changes to your 403(b), such as contributing less from your paychecks to the plan, it is possible to do so.

When Life Changes: Adjusting Your 403(b) Contributions

You can adjust your contributions to a 403(b). Check with your employer to find out if they have any rules or guidelines for when and how often you can make changes to your contributions, and then get the paperwork you’ll need to fill out to do so.

Plan Termination: Understanding the Process and Implications

An employer has the right to terminate a 403(b), but they’re required to distribute all accumulated benefits to employees and beneficiaries “as soon as administratively feasible.”

Employees may be eligible to roll their 403(b) funds over into a new retirement fund upon termination.

Loans, Distributions, and Withdrawals from 403(b) Plans

Here’s information about taking money out of your 403(b), whether it’s a loan or a withdrawal.

Borrowing from Your 403(b): What You Need to Know

There are rules that limit how and when an account holder can access funds in a 403(b) account. Generally, employees can’t take distributions, without penalties, from their 403(b) plan until they reach age 59 ½.

However, some 403(b) plans do allow loans and hardship distributions. Loan rules vary by the plan. Hardship distributions require the employee to demonstrate immediate and heavy financial need to avoid the typical early withdrawal penalty. Check with your employer to find out the particulars of your plan.

Taking Distributions: The When and How

Like other retirement plans, 403(b)s have limits on how and when participants can take distributions. Generally, account holders cannot touch the funds until they reach age 59 1/2 without paying taxes and a penalty of 10%. Furthermore, required minimum distributions, or RMDs, apply to 403(b) plans and kick in at age 73.

If you leave your job, you can keep your 403(b) where it is, or roll it over to another retirement account, such as an IRA or a retirement plan with your new employer.

Maximizing Your 403(b) Plan

If you have a 403(b), the amount you contribute to the plan could potentially help you grow your savings. Here’s how.

Strategic Contribution Planning: How to Maximize Growth

If your employer offers a match on contributions to your 403(b), you should aim to contribute at least enough to get the full match. Not doing so is like leaving free money on the table.

Beyond that, many financial advisors suggest aiming to contribute at least 10% of your income for retirement. You may be able to save less if you have access to guaranteed retirement income such as a pension, as many teachers do, but consider all your options carefully before deciding.

If 10% seems like an unreachable goal, contribute what you can, and then consider increasing the amount that you save each time you get a raise. That way, the higher contribution will not put as much of a dent in your take-home pay.

Doing some calculations to figure out how much you need to save and when you can retire can help you determine the best amount of save.

The Takeaway

If you work for a nonprofit employer, contributing to a 403(b) is a tax-efficient way to start saving for retirement. The earlier you can start saving for retirement, the more time your money can have to grow.

If your employer does not offer a 403(b), or if you’re interested in additional ways to save or invest for retirement, you may want to consider opening another tax-advantaged retirement savings account such as an IRA to help you reach your financial goals.

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.

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.

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

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

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

SOIN1023151
CN-Q425-3236452-75

Dec

2025

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.

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. 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): $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

Dec

2025

Understanding Highly Compensated Employees (HCEs)

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

Internal Revenue Service (IRS) rules require companies with 401(k) retirement plans to identify highly compensated employees (HCEs). An HCE, according to the IRS, passes either an ownership test or a compensation test. Someone owning more than 5% of the company would qualify as an HCE, as would someone who was compensated more than $160,000 for tax years 2025 or 2026.

The IRS uses this information to help all employees receive fair treatment when participating in their 401(k). As a result, your HCE status can affect the amount you can contribute to your 401(k).

What Does It Mean to Be an HCE?

A highly compensated employee’s 401(k) contributions will be subject to additional scrutiny by the IRS. Again, you’re identified as an HCE if you either:

• Owned more than 5% of the business this year or last year, regardless of how much compensation you earned or received, or

• Received at least $160,000 in compensation for tax years 2025 or 2026 and, if your employer so chooses, you were in the top 20% of employees ranked by compensation.

If you meet either of these criteria, you’re considered an HCE, though that doesn’t necessarily mean that you earn a higher salary.

For example, someone could own 6% of a business while also drawing a salary of less than $100,000 a year. Because they meet the ownership test, they would still be classified as an HCE.

It’s also possible for you to be on the higher end of your company’s salary range and yet not qualify as an HCE. This can happen if your company chooses to rank employees by pay. If your income is above the IRS’s HCE threshold but you still earn less than the highest-paid 20% of employees (while not owning 5% of the company), you don’t meet the definition of an HCE.

Highly Compensated Employee vs Key Employee

Highly compensated employees may or may not also be key employees. Under IRS rules, a key employee meets one of the following criteria:

• An officer making over $230,000 for 2025; $235,000 for 2026

• Someone who owns more than 5% of the business

• A person who owns more than 1% of the business and also makes more than $150,000 a year

• Someone who meets none of these conditions is a non-key employee.

In order for a highly compensated employee to be a key employee, they must pass the ownership or officer tests. For IRS purposes, ownership is determined on an aggregate basis. For example, if you and your spouse work for the same company and each own a 2.51% share, then you’d collectively pass the ownership test.

Benefits of Being a Highly Compensated Employee

Being a highly compensated employee can offer certain advantages. Here are some of the chief benefits of being an HCE:

• Having an ownership stake in the company you work for may entail additional employee benefits or privileges, such as bonuses or the potential to purchase company stock at a discount.

• Even with a high salary, you can still contribute to your 401(k) retirement plan, possibly with matching contributions from your employer.

• You may be able to supplement 401(k) contributions with contributions to an individual retirement account (IRA) or health savings account (HSA).

There are, however, some downsides to consider if you’re under the HCE umbrella.

Disadvantages of Being a Highly Compensated Employee

Highly compensated employees are subject to additional oversight when making 401(k) contributions. If you’re an HCE, here are a few disadvantages to be aware of:

• You may not be able to max out your 401(k) contributions each year.

• Lower contribution rates could potentially result in a shortfall in your retirement savings goal.

• Earning a higher income could make you ineligible to contribute to a Roth IRA for retirement.

• Any excess contributions that get refunded to you will count as taxable income when you file your return.

Benefits	Disadvantages
HCEs may get certain perks or bonuses.	401(k) contributions may be limited.
Can still contribute to a company retirement plan.	Limits may make it more difficult to reach retirement goals.
Can still contribute to an IRA.	High earnings may make you ineligible to contribute to a Roth IRA.
	Refunds of excess contributions could raise employee’s taxable income.

Nondiscrimination Regulatory Testing

The IRS requires employers to conduct 401(k) plan nondiscrimination compliance testing each year. The purpose of this testing is to ensure that highly compensated employees and non-highly compensated employees have a more level playing field when it comes to 401(k) contributions.

Employers calculate the average contributions of non-highly compensated employees when testing for nondiscrimination. Depending on the findings, highly compensated employees may have their contributions restricted in certain ways. If you aren’t sure, it’s best to ask someone in your HR department, or the plan sponsor.

If an employer reviews the plan and finds that it’s overweighted in favor of HCEs, the employer must take steps to correct the error. The IRS allows companies to do that by either making additional contributions to the plans of non-HCEs or refunding excess contributions back to HCEs.

401(k) Contribution Limits for HCEs

In theory, highly compensated employees’ 401(k) limits are the same as retirement contribution limits for other employees. For 2025, the contribution limit is $23,500. Those 50 and older can add another $7,500, for a total of $31,000. Those aged 60 to 63 can contribute an additional $11,250, for a total of $34,750. For 2026, the contribution limit is $24,500. Those 50 and older can add another $8,000, for a total of $32,500. Those aged 60 to 63, can contribute an additional $11,250, for a total of $35,750.

But, as noted above, these plans may be restricted for HCEs, so it’s wise to know the terms before you begin contributing.

Other Retirement Plan Considerations

For example, one thing to watch out for if you’re a highly compensated employee is the possibility of overfunding your 401(k). If your employer determines that you, as an HCE, have contributed more than the rules allow, the employer may need to refund some of that money back to you.

As mentioned earlier, refunded money would be treated as taxable income. Depending on the refunded amount, you could find yourself in a higher tax bracket and facing a larger tax bill. So it’s important to keep track of your contributions throughout the year so the money doesn’t have to be refunded to you.

Recommended: Should You Retire at 62?

401(k) vs IRAs for HCEs

A highly compensated employee might consider opening an IRA account, traditional or Roth IRA, to supplement their 401(k) savings. Either kind of IRA lets you contribute money up to the annual limit and make qualified withdrawals after age 59 ½ without penalty.

However, income-related rules could constrain highly compensated employees in terms of funding both a 401(k) and a traditional or Roth IRA.

• An HCE’s contributions to a traditional IRA may not be fully tax-deductible if they or their spouse are covered by a workplace retirement plan. Phaseouts depend on income and filing status.

• Highly compensated employees may be barred from contributing to a Roth IRA. Eligibility phases out as income rises. For the 2025 tax year, people become ineligible when their MAGI reaches $165,000 (if single) or $246,000 (if married, filing jointly). For the 2026 tax year, people cannot contribute to a Roth IRA when their MAGI reaches $168,000 (single filers) or $252,000 (married, filing jointly).

The Takeaway

A highly compensated employee is generally someone who owns more than 5% of the company that employs them, or who received compensation of more than $160,000 in 2025 or 2026.

Being an HCE can restrict how much you’re able to save in your company’s 401(k); under certain circumstances the IRS may require the employer to refund some of your contributions, with potential tax consequences for you. Even so, HCEs may still be able to save and invest through other retirement accounts.

SoFi offers traditional and Roth IRAs to help you grow your retirement savings. You can open an account online in minutes and build a diversified portfolio that suits your goals. It’s a hassle-free way to work toward a secure financial future.

Help grow your nest egg with a SoFi IRA.

FAQ

Does HCE income include bonuses?

The IRS treats bonuses as compensation for determining which employees are highly compensated. Overtime, commissions, and salary deferrals to a 401(k) account are also counted as compensation.

What is the difference between a key employee and a highly compensated employee?

A highly compensated employee is someone who passes the IRS’s ownership test or compensation test. A key employee is someone who is an officer or meets ownership criteria. Highly compensated employees can also be key employees.

Can you be a key employee and not an HCE?

It is possible to be a key employee and not a highly compensated employee in certain situations. For example, you might own 1.5% of the business and make between $150,000 and $200,000 per year, while not ranking in the top 20% of employees by compensation.

About the author

Rebecca Lake

Photo credit: iStock/nensuria

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

Dec

2025

Investment Strategies By Age

By Michael Flannelly | Growing Wealth, invest, Investing, Life & Career | No Comments

Your age is a major factor in the investment strategy you choose and the assets you invest in. The investments someone makes when they’re in their 20s should look very different from the investments they make in their 50s.

Generally speaking, the younger you are, the more risk you may be able to tolerate because you’ll have time to make up for investment losses you might incur. Conversely, the closer you are to retirement, the more conservative you’ll want to be since you have less time to recoup from any losses. In other words, your investments need to align with your risk tolerance, time horizon, and financial goals.

Most important of all, you need to start saving for retirement now so that you won’t be caught short when it’s time to retire. According to a 2024 SoFi survey of adults 18 and older, 59% of respondents had no retirement savings at all or less than $49,999.

Here is some information to consider at different ages.

Investing in Your 20s

In your 20s, you’ve just started in your career and likely aren’t yet earning a lot. You’re probably also paying off debt such as student loans. Despite those challenges, this is an important time to begin investing with any extra money you have. The sooner you start, the more time you’ll have to save for retirement. Plus, you can take advantage of the power of compounding returns over the decades. These strategies can help get you on your investing journey.

Strategy 1: Participate in a Retirement Savings Plan

One of the easiest ways to start saving for retirement is to enroll in an employer-sponsored plan like a 401(k). Your contributions are generally automatically deducted from your paycheck, making it easier to save.

If possible, contribute at least enough to qualify for your employer’s 401(k) match if they offer one. That way your company will match a percentage of your contributions up to a certain limit, and you’ll be earning what’s essentially free money.

Those who don’t have access to an employer-sponsored plan might want to consider setting up an individual retirement account (IRA). There are different types of IRAs, but two of the most common are traditional and Roth IRAs. Both let you contribute up to $7,000 in 2025 and 7,500 in 2026 for those under age 50. (Note that Roth IRAs have income limits.) But one key difference is the way the two accounts are taxed. With Roth IRAs, contributions are not tax deductible, but you can withdraw money tax-free in retirement. With traditional IRAs, you deduct your contributions upfront and pay taxes on distributions when you retire.

Strategy 2: Explore Diversification

As you’re building a portfolio, consider diversification. Diversification involves spreading your investments across different asset classes, such as stocks, bonds, and real estate investment trusts (REITs). One way twentysomethings might diversify their portfolios is by investing in mutual funds or exchange-traded funds (ETFs). Mutual funds are pooled investments typically in stocks or bonds, and they trade once per day at the end of the day. ETFs are baskets of securities that trade on a public exchange and trade throughout the day.

You may be able to invest in mutual funds or ETFs through your 401(k) or IRA. Or you could open a brokerage account to begin investing in them.

Strategy 3: Consider Your Approach and Comfort Level

As mentioned, the younger an individual is, the more time they may have to recover from any losses or market downturns. Deciding what kind of approach they want to take at this stage could be helpful.

For instance, one approach involves designating a larger portion of investments to growth funds, mutual funds or ETFs that reflect a more aggressive investing style, but it’s very important to understand that this also involves higher risk. You may feel that a more conservative approach that’s less risky suits you better. What you choose to do is fully up to you. Weigh the options and decide what makes sense for you.

Investing in Your 30s

Once you’re in your 30s, you may have advanced in your career and started earning more money. However, at this stage of life you may also be starting a family, and you likely have financial obligations such as a mortgage, a car loan, and paying for childcare. Plus, you’re probably still paying off your student loans. Still, despite these expenses, contributing to your retirement should be a top priority. Here are some ways to do that.

Strategy 1: Maximize Your Contributions

Now that you’re earning more, this is the time to max out your 401(k) or IRA if you can, which could help you save more for retirement. In 2025, you can contribute up to $23,500 in a 401(k) and up to $7,000 in an IRA. In 2026, you can contribute up to $24,500 in a 401(k) and up to $7,500 in an IRA. (Note: If you or your spouse have a 401(k), your ability to deduct traditional IRA contributions may be limited once your income passes certain thresholds.) If you have a Roth IRA, there are income limits you need to meet to be eligible to contribute the full amount, which is one thing to consider when choosing between a Roth IRA vs. a traditional IRA.

Strategy 2: Consider Adding Fixed-Income Assets to the Mix

While you can likely still afford some risk since you have several decades to recover from downturns or losses, you may also want to add some fixed-income assets like bonds or bond funds to your portfolio to help counterbalance the risk of growth funds and give yourself a cushion against potential market volatility. For example, an investor in their 30s might want 20% to 30% of their portfolio to be bonds. But, of course, you’ll want to determine what specific allocation makes the most sense for your particular situation.

Strategy 3: Get Your Other Financial Goals On Track

While saving for retirement is crucial, you should also make sure that your overall financial situation is stable. That means paying off your debts, especially high-interest debt like credit cards, so that it doesn’t continue to accrue interest. In addition, build up your emergency fund with enough money to tide you over for at least three to six months in case of a financial setback, such as a major medical expense or getting laid off from your job. And finally, make sure you have enough funds to cover your regular expenses, such as your mortgage payment and insurance.

Investing in Your 40s

You may be in — or approaching — your peak earning years now. At the same time, you likely have more expenses, as well, such as putting away money for your children’s college education, and saving up for a bigger house. Fortunately, you probably have at least 20 years before retirement, so there is still time to help build your nest egg. Consider these steps:

Strategy 1: Review Your Progress

According to one rule of thumb, by your 40s, you should have 3x the amount of your salary saved for retirement. This is just a guideline, but it gives you an idea of what you may need. Another popular guideline is the 80% rule of aiming to save at least 80% of your pre-retirement income. And finally, there is the 4% rule that says you can take your projected annual retirement expenses and divide them by 4% (0.04) to get an estimate of how much money you’ll need for retirement.

These are all rough targets, but they give you a benchmark to compare your current retirement savings to. Then, you can make adjustments as needed.

Strategy 2: Get Financial Advice

If you haven’t done much in terms of investing up until this point, it’s not too late to start. Seeking help from financial advisors and other professionals may help you establish a financial plan and set short-term and long-term financial goals.

Even for those who have started saving, meeting with a financial specialist could be useful if you have questions or need help mapping out your next steps or sticking to your overall strategy.

Strategy 3: Focus on the Your Goals

Since they might have another 20-plus years in the market before retirement, some individuals may choose to keep a portion of their portfolio allocated to stocks now. But of course, it’s also important to be careful and not take too much risk. For instance, while nothing is guaranteed and there is always risk involved, you might feel more comfortable in your 40s choosing investments that have a proven track record of returns.

Investing in Your 50s

You’re getting close to retirement age, so this is the time to buckle down and get serious about saving safely. If you’ve been a more aggressive investor in earlier decades, you’ll generally want to become more conservative about investing now. You’ll need your retirement funds in 10 years or so, and it’s vital not to do anything that might jeopardize your future. These investment strategies by age may be helpful to you in your 50s:

Strategy 1: Add Stability to Your Portfolio

One way to take a more conservative approach is to start shifting more of your portfolio to fixed-income assets like bonds or bond funds. Although these investments may result in lower returns in the short term compared to assets like stocks, they can help generate income when you begin withdrawing funds in retirement since bonds provide you with periodic interest payments.

You may also want to consider lower-risk investments like money market funds at this stage of your investment life.

Strategy 2: Take Advantage of Catch-up Contributions

Starting at age 50, you become eligible to make catch-up contributions to your 401(k) or IRA. In 2025, you can contribute an additional $7,500 to your 401(k) for a total contribution of $31,000. In 2026, you can contribute an extra $8,000 for a total contribution of $32,500.

In 2025, the catch-up contribution for an IRA is an additional $1,000 for a total maximum contribution of $8,000. In 2026, you can contribute an extra $1,100 for a total of $8,600.This allows you to stash away even more money for retirement.

Strategy 3: Consider Downsizing

Your kids may be out of the house now, which can make it the ideal time to cut back on some major expenses in order to save more. You might want to move into a smaller home, for instance, or get rid of an extra car you no longer need.

Think about what you want your retirement lifestyle to look like — lots of travel, more time for hobbies, starting a small business, or whatever it might be — and plan accordingly. By cutting back on some expenses now, you may be able to save more for your future pastimes.

Investing in Your 60s

Retirement is fast approaching, but that doesn’t mean it’s time to pull back on your investing. Every little bit you can continue to save and invest now can help build your nest egg. Remember, your retirement savings may need to last you for 30 years or even longer. Here are some strategies that may help you accumulate the money you need.

Strategy 1: Get the Most Out of Social Security

The average retirement age in the U.S. is 65 for men and 63 for women. But you may decide you want to work for longer than that. Waiting to retire can pay off in terms of Social Security benefits. The longer you wait, the bigger your monthly benefit will be.

The earliest you can start receiving Social Security Benefits is age 62, but your benefits will be reduced by as much as 30% if you take them that early. If you wait until your full retirement age, which is 67 for those born in 1960 or later, you can begin receiving full benefits.

However, if you wait until age 70 by working longer or working part time, say, the size of your benefits will increase substantially. Typically, for each additional year you wait to claim your benefits up to age 70, your benefits will grow by 8%.

Strategy 2: Review Your Asset Allocation

Just before and during retirement, it’s important to make sure your portfolio has enough assets such as bonds and dividend-paying stocks so that you’ll have income coming in. You’ll also want to stash away some cash for unexpected expenses that might pop up in the short term; you could put that money in your emergency fund.

Some individuals in their 60s may choose to keep some stocks with growth potential in their asset allocation as a way to potentially avoid outliving their savings and preserve their spending power. Overall, people at this stage of life may want to continue the more conservative approach to investing they started in their 50s, and not choose anything too aggressive or risky.

Strategy 3: Keep investing in your 401(k) as long as you’re still working.

If you can, max out your 401(k), including catch-up contributions, in your 60s to sock away as much as possible for retirement. In 2025 and 2026, those aged 60 to 63 can take advantage of an extra catch-up provision, thanks to SECURE 2.0: In 2025, they can contribute an additional $11,250 for a total of $34,750; in 2026, they can also contribute an extra $11,250 for a total of $35,750.

Also, you can continue to contribute to any IRAs you may have — up to the limit allowed by the IRS, which is $8,000 in 2025 and $8,600 in 2026, including catch-up contributions. Just keep in mind that if your or your souse is covered by a workplace 401(k), you can only contribute pre-tax dollars if you stay under certain income thresholds.

The Takeaway

Investing for retirement should be a priority throughout your adult life, starting in your 20s. The sooner you begin, the more time you’ll have to save. And while it’s never too late to start investing for retirement, focusing on investment strategies by age, and changing your approach accordingly, can generally help you reach your financial goals.

For instance, in your 20s and 30s you can typically be more aggressive since you have time to make up for any downturns or losses. But as you get closer to retirement in your 40s, 50s, and 60s, your investment strategy should shift and take on a more conservative approach. Like your age, your investment strategy should adjust across the decades to help you live comfortably and enjoyably in your golden years.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Invest with as little as $5 with a SoFi Active Investing account.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

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

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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.

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 emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.

¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
SOIN-Q224-1905241-V1
CN-Q425-3236452-90

Dec

2025

Guide to Cash Balance Pension Plans

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

A cash balance pension plan is a defined benefit plan that offers employees a stated amount at retirement. The amount of money an employee receives can be determined by their years of service with the company and their salary. Employers may offer a cash balance retirement plan alongside a 401(k) or in place of one.

If you have a cash balance plan at work, it’s important to know how to make the most of it when preparing for retirement. Read on to learn more about what a cash balance pension plan is and the pros and cons.

What Are Cash Balance Pension Plans?

A cash balance pension plan is a defined benefit plan that incorporates certain features of defined contribution plans. Defined benefit plans offer employees a certain amount of money in retirement, based on the number of years they work for a particular employer and their highest earnings. Defined contribution plans, on the other hand, offer a benefit that’s based on employee contributions and employer matching contributions, if those are offered.

In a cash balance plan, the benefit amount is determined based on a formula that uses pay and interest credits. This is characteristic of many employer-sponsored pension plans. Once an employee retires, they can receive the benefit defined by the plan in a lump sum payment.

This lump sum can be rolled over into an individual retirement account (IRA) or another employer’s plan if the employee is changing jobs, rather than retiring. Alternatively, the plan may offer the option to receive payments as an annuity based on their account balance.

How Cash Balance Pension Plans Work

Cash balance pension plans are qualified retirement plans, meaning they’re employer-sponsored and eligible for preferential tax treatment under the Internal Revenue Code. In a typical cash balance retirement plan arrangement, each employee has an account that’s funded by contributions from the employer. There are two types of contributions:

• Pay credit: This is a set percentage of the employee’s compensation that’s paid into the account each year.

• Interest credit: This is an interest payment that’s paid out based on an underlying index rate, which may be fixed or variable.

Fluctuations in the value of a cash pension plan’s investments don’t affect the amount of benefits paid out to employees. This means that only the employer bears the investment risk.

Here’s an example of how a cash balance pension works: Say you have a cash balance retirement plan at work. Your employer offers a 5% annual pay credit. If you make $120,000 a year, this credit would be worth $6,000 a year. The plan also earns an interest credit of 5% a year, which is a fixed rate.

Your account balance would increase year over year, based on the underlying pay credits and interest credits posted to the account. The formula for calculating your balance would look like this:

Annual Benefit = (Compensation x Pay Credit) + (Account Balance x Interest Credit)

Now, say your beginning account balance is $100,000. Here’s how much you’d have if you apply this formula:

($120,000 x 0.05) + ($100,000 x 1.05) = $111,000

Cash balance plans are designed to provide a guaranteed source of income in retirement, either as a lump sum or annuity payments. The balance that you’re eligible to receive from one of these plans is determined by the number of years you work, your wages, the pay credit, and the interest credit.

Cash Balance Plan vs 401(k)

Cash balance plans and 401(k) plans offer two different retirement plan options. It’s possible to have both of these plans through your employer or only one.

In terms of how they’re described, a cash balance pension is a defined benefit plan while a 401(k) plan is a defined contribution plan. Here’s an overview of how they compare:

	Cash Balance Plan	401(k)
Funded By	Employer contributions	Employee contributions (employer matching contributions are optional)
Investment Options	Employers choose plan investments and shoulder all of the risk	Employees can select their own investments, based on what’s offered by the plan, and shoulder all of the risk
Returns	Account balance at retirement is determined by years of service, earnings, pay credit, and interest credit	Account balance at retirement is determined by contribution amounts and investment returns on those contributions
Distributions	Cash balance plans must offer employees the option of receiving a lifetime annuity; can also be a lump sum distribution	Qualified withdrawals may begin at age 59 ½; plans may offer in-service loans and/or hardship withdrawals

Pros & Cons of Cash Balance Pension Plans

A cash balance retirement plan can offer both advantages and disadvantages when planning your retirement strategy. If you have one of these plans available at work, you may be wondering whether it’s worth it in terms of the income you may be able to enjoy once you retire.

Here’s more on the pros and cons associated with cash balance pension plans to consider when you’re choosing a retirement plan.

Pros of Cash Balance Pension Plans

A cash balance plan can offer some advantages to retirement savers, starting with a guaranteed benefit. The amount of money you can get from a cash balance pension isn’t dependent on market returns, so there’s little risk to you in terms of incurring losses. As long as you’re still working for your employer and earning wages, you’ll continue getting pay credits and interest credits toward your balance.

From a tax perspective, employers may appreciate the tax-deductible nature of cash balance plan contributions. As the employee, you’ll pay taxes on distributions but tax is deferred until you withdraw money from the plan.

As for contribution limits, cash balance plans allow for higher limits compared to a 401(k) or a similar plan. For 2025, the maximum annual benefit allowed for one of these plans is $280,000. For 2026, the maximum annual benefit allowed is $290,000.

When you’re ready to retire, you can choose from a lump sum payment or a lifetime annuity. A lifetime annuity may be preferable if you’re looking to get guaranteed income for the entirety of your retirement. You also have some reassurance that you’ll get your money, as cash balance pension plans are guaranteed by the Pension Benefit Guaranty Corporation (PBGC). A 401(k) plan, on the other hand, is not.

Cons of Cash Balance Pension Plans

Cash balance pension plans do have a few drawbacks to keep in mind. For one, the rate of return may not be as high as what you could get by investing in a 401(k). Again, however, you’re not assuming any risk with a cash balance plan so there’s a certain trade-off you’re making.

It’s also important to consider accessibility, taxation, and fees when it comes to cash balance pension plans. If you need to borrow money in a pinch, for example, you may be able to take a loan from your 401(k) or qualify for a hardship withdrawal. Those options aren’t available with a cash balance plan. And again, any money you take from a cash balance plan would be considered part of your taxable income for retirement.

Pros	Cons
• Guaranteed benefits with no risk • Tax-deferred growth • Flexible distribution options • Higher contribution limits • Guaranteed by the PBGC	• Investing in a 401(k) may generate higher returns • No option for loans or hardship withdrawals • Distributions are taxable

Pros

Cons

• Guaranteed benefits with no risk

• Tax-deferred growth

• Flexible distribution options

• Higher contribution limits

• Guaranteed by the PBGC

• Investing in a 401(k) may generate higher returns

• No option for loans or hardship withdrawals

• Distributions are taxable

Investing for Retirement With SoFi

A cash balance retirement plan is one way to invest for retirement. It can offer a stated amount at retirement that’s based on your earnings and years of service. You can opt to receive the funds as either a lump sum or an annuity. Your employer may offer these plans alongside a 401(k) or in place of one, and there are pros and cons to each option to weigh.

If you don’t have access to either one at work, you can still start saving for retirement with an IRA. You can set aside money on a tax-advantaged basis and begin to build wealth for the long-term.

Help grow your nest egg with a SoFi IRA.

FAQ

Is a cash balance plan worth it?

A cash balance plan can be a nice addition to your retirement strategy if you’re looking for a source of guaranteed income. Cash balance plans can amplify your savings if you’re also contributing to a 401(k) at work or an IRA.

Is a cash balance plan the same as a pension?

A cash balance plan is a type of defined benefit plan or pension plan, in which your benefit amount is based on your earnings and years of service. This is different from a 401(k) plan, in which your benefit amount is determined by how much you (and possibly your employer) contribute and the returns on those contributions.

Can you withdraw from a cash balance plan?

You can withdraw money from a cash balance plan in a lump sum or a lifetime annuity once you retire. You also have the option to roll cash balance plan funds over to an IRA or to a new employer’s qualified plan if you change jobs.

About the author

Rebecca Lake

Photo credit: iStock/sturti

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