Investing Archives | Page 35 of 194

Jan

2025

Important Retirement Contribution Limits

By Amanda Holden | Growing Wealth, Investing, Preparing for Retirement | No Comments

By saving and investing for retirement, you are working toward financial freedom — a goal worthy of your time and effort.

As you may know, there are benefits to using an account designed specifically for retirement, such as a 401(k) plan or Roth IRA.

For instance, some company retirement programs may offer a match program. Second, these accounts are designed to hold investments so that you can earn compound returns.

Retirement accounts also have tax advantages. Because these accounts have special tax treatment, there’s a limit to how much money the IRS allows you to contribute to each of them in a given year.

These retirement contribution limits vary depending on the type of account you have. For example, 401(k) contribution limits are different from IRA contribution limits.

To build a successful long-term financial plan, you’ll likely want a solid understanding of your retirement plan options. Below is a summary of these retirement accounts and their respective annual retirement contribution limits.

What Are Retirement Contribution Limits?

Ever heard someone say that they have “maxed out” their retirement account? Maxing out means contributing the total amount allowed by the IRS in a given year. In some cases, you may be able to contribute more than the allowable maximum, but that money will not qualify for the tax advantages of the money within the retirement contribution limit.

Generally, the IRS increases retirement contribution limits every few years as the cost of living increases. Many of the 2025 contribution limits were increased from the previous year.

There are a lot of different types of retirement accounts, and each comes with its own nuances, which can make it hard to keep them straight.

This list of the account types along with their contribution limits will help keep track.

Note that if you have any questions about what type of account is best for you, or whether you can use multiple accounts concurrently, you may want to consult a tax professional.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

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

401(k) Contribution Limits

A 401(k) plan is a tax-deferred retirement account that is typically set up through a person’s employer, usually as part of a benefits package. With a 401(k) plan, the employee can opt to have a certain percentage of their salary withheld from their paycheck on a pretax basis.

Individual 401(k) plans — also known as solo 401(k) plans — are becoming more popular. These accounts are available to people who are self-employed and have an employee identification number (EIN).

2024 Employee contribution limit: $23,000
2025 Employee contribution limit: $23,500

Plans may allow for catch-up contributions for employees age 50 and over.

2024 Catch-up contribution limit: $7,500
2025 Catch-up contribution limit: $7,500

In 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

Some employers may offer a company match in their 401(k) plans. A typical match would see employers match around 3% of an employee’s salary when that employee contributes 6% to the plan. The company match plan is determined by the employer.

Employer contributions to a 401(k) do not count toward the employee’s contribution limits. But instead of putting a cap on how much the employer alone can contribute, there’s a total contribution limit that includes both the employer and employee contributions.

2024 Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $69,000 — if the employee is eligible for the catch-up contribution, then it would be $76,500.

2025 Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $70,000 — if the employee is eligible for the catch-up contribution, then it would be $77,500. (If the employee is eligible for the Secure 2.0 catch-up contribution, then it would be $81,250.)

403(b) Contribution Limits

A 403(b) plan is similar to a 401(k) but is offered to employees of public schools, nonprofit hospital workers, tax-exempt organizations, and certain ministers.

2024 Employee contribution limit: $23,000
2025 Employee contribution limit: $23,500

2024 Catch-up contribution limit: $7,500
2025 Catch-up contribution limit: $7,500

Catch-up contributions are for employees aged 50 and older. Employees of any age who have been in service for 15 or more years with the same eligible 403(b) employer can potentially contribute another $3,000. There is a $15,000 lifetime limit for the latter catch-up provision. It may be possible to qualify for both catch-up provisions; if you think you qualify, check with the plan or your CPA to be sure.

2024 Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $69,000.

2025 Total employer plus employee contribution limit: The lesser of 100% of the employee’s compensation or $70,000.

It is important to keep in mind that some 403(b) plans have mandatory employee contributions. These mandatory contributions are made by the employee, but since you do not have a choice they do not count towards the employee contribution limit. If you are part of a plan like this you might actually be able to contribute your annual contribution maximum plus the mandatory contributions.

457(b) Contribution Limits

A 457(b) plan is similar to a 401(k) plan but for governmental and certain nonprofit employees. Unlike a 401(k), there is only one contribution limit for both employer and employee.

2024 Total employer plus employee contribution: $23,000
2025 Total employer plus employee contribution: $23,500

If permitted by the plan, a participant who is within three years of the normal retirement age may contribute the lesser of twice the annual limit or the standard annual limit plus the amount of the limit not used in prior years.

Thrift Savings Plan (TSP) Contribution Limits

A TSP is similar to a 401(k), but for federal employees and members of the military.

2024 Employee contribution limit: $23,000
2025 Employee contribution limit: $23,500

Tax-free combat zone contributions: Military members serving in tax-free combat zones are allowed to make the full $69,000 in employee contributions for 2024, and $70,000 in 2025.

2024 Catch-up contribution limit: $7,500
2025 Catch-up contribution limit: $7,500

According to the “spillover” method for TSP catch-up contributions, for those eligible to make catch-up contributions, any contributions made that exceed the annual employee contribution limit will automatically count toward the catch-up contribution limit of $7,500 in 2024 and 2025.

Traditional IRA Contribution Limits

The traditional IRA is a tax-deferred account that is set up by the individual. IRA stands for individual retirement account. Unlike workplace retirement plans, IRA accounts tend to have lower contribution limits. These contribution limits are combined totals for both your traditional and Roth IRAs.

2024 Contribution limit: $7,000
2025 Contribution limit: $7,000

2024 & 2025 Catch-up contribution limit: $1,000 (for a total of $8,000 in 2024, and $8,000 in 2025) for those age 50 or over

Additionally, there are income limits for tax deductions on contributions that vary based on whether or not you are covered by a retirement plan at work.

Calculate your IRA contributions.

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

Roth IRA Contribution Limits

Similar to a traditional IRA, a Roth IRA is set up by the individual.

Unlike tax-deferred retirement accounts, Roth IRA contributions are not tax deductible. The trade-off is that you will not need to pay income taxes on qualified withdrawals. Again, these contribution limits are combined totals for both your traditional and Roth IRAs.

2024 Contribution limit: $7,000
2025 Contribution limit: $7,000

2024 & 2025 Catch-up contribution limit: $1,000 (for a total of $8,000 in 2024, and $8,000 in 2025) for those age 50 or over

There are income limitations for who is able to use a Roth IRA. These limits exist on a phase-out schedule and ability to use a plan slowly tapers off until the final income cap.

Single-filer income limit: Under $161,000 for tax year 2024, and under $165,000 for tax year 2025.

Married, filing jointly income limit: under $240,000 for tax year 2024, and under $246,000 for tax year 2025.

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

SEP IRA Contribution Limits

A simplified employee pension simplified employee pension (SEP) IRA is a tax-deferred retirement account for employers and self-employed individuals.

2024 Contribution limit: An employer’s contributions to an employee’s SEP IRA can’t exceed the lesser of 25% of the employee’s compensation or $69,000.

2025 Contribution limit: An employer’s contributions to an employee’s SEP IRA can’t exceed the lesser of 25% of the employee’s compensation or $70,000.

Catch-up contributions are not permitted in SEP plans.

SIMPLE IRA

In 2025, those aged 60 to 63 may contribute an additional $5,250 instead of $3,500, due to SECURE 2.0.

A savings incentive match plan for employees (SIMPLE) IRA is a retirement savings plan for small businesses with 100 or fewer employees.

2024 Employee contribution limit: $16,000
2025 Employee contribution limit: $16,500

2024 Catch-up contribution limit: $3,500 for savers age 50 and older
2025 Catch-up contribution limit: $3,500 for savers age 50 and older

Employer contribution limit: The employer is generally required to make a 100% match for each employee’s contributions up to 3% of the employee’s compensation. In certain circumstances, an employer may choose to make a matching contribution of less than 3%.

Also, under a SECURE Act 2.0 provision, an employer can make an additional 10% nonelective contribution to eligible employees, up to $5,000.

Maxing Out Your Retirement Contributions

If you have a 401(k), you would need to contribute $1,958.33 each month to reach the $23,500 limit for 2025. With IRAs, that number is $583.33 per month to reach the annual $7,000 contribution limit for 2025.

Now that you know how much you can contribute to an account, you may be wondering how one actually goes about contributing the full amount.

For some people, it may help to understand the monthly dollar figure necessary to max out your annual retirement plan contributions. If you have a 401(k), you would need to contribute $1,916.67 each month to reach the $23,000 limit for 2024. With IRAs, that number is $583.33 per month to reach the annual $7,000 contribution limit for 2024.

A bit of good news: When you are making pre-tax contributions to a tax-deferred account such as a 401(k), the money is entering into the account before income tax deductions. Therefore, the difference in your post-tax paycheck might not be as drastic as you think.

There are several tactics you can take when working to increase how much you’re contributing to your retirement plan.

But whether you increase your contribution each month, quarter, or year, you may want to consider automating the saving process. Automation removes human emotion from the equation, which may help you save.

You may want to try to avoid massive lifestyle creep as your income increases over the years. It’s a balance to take care of both your current self and your future self. When you get raises or bonuses, consider allocating those funds to your retirement instead of a material purchase.

The most successful savers will likely have a strategy that focuses on earning more and cutting costs.

Opening Your Own Retirement Account

If you have a retirement account through work, this may be the easiest option, as contributions are taken directly from your paycheck and you can take advantage of a company match program if it’s offered.

Ease of use shouldn’t be discounted; the most important characteristic of a retirement plan is that you actually use it.

For those without a workplace retirement plan, getting set up with an account may take slightly more initiative. Luckily, opening an account doesn’t have to be hard. An account like a traditional IRA, Roth IRA, SEP IRA, or Solo 401(k) can be set up at a brokerage firm of your choosing.

Another way to save for retirement is through a general investment account, like SoFi Invest. With SoFi Invest, you can either make trades on your own through active investing or you can use an automated investing service which invests your money on your behalf using your goals as a guide.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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

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.

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.

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Jan

2025

SEP IRA Contribution Limits for 2024

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

A SEP IRA, or Simplified Employee Pension IRA, is a tax-advantaged retirement plan for people who are self-employed or run a small business. SEP IRA contribution limits determine how much you can contribute to the account each year.

The IRS sets contribution limits for SEP IRAs and adjusts them annually for inflation. SEP IRA contribution rules permit employers to make contributions to their own or their employees’ SEP accounts; employees do not contribute to a SEP.

Key Points

• SEP IRAs offer a tax-advantaged way to save for retirement, beneficial for self-employed and small business owners.

• It’s possible to contribute as much as $69,000 to a SEP IRA in 2024, an increase from the previous year.

• For 2024, employers can contribute up to the lesser of 25% of an employee’s compensation or $69,000 to a SEP IRA.

• Contributions to SEP IRAs are tax-deductible and must be reported on IRS Form 5498.

• Since contributions to SEP IRAs are made with pre-tax dollars, qualified withdrawals are subject to ordinary income tax.

What Is a SEP IRA?

A SEP IRA is a tax-advantaged retirement account that allows employers to make contributions on behalf of employees. Businesses of any size can establish a SEP IRA, including self-employed individuals who have no employees.

SEP IRAs are subject to the same tax treatment as traditional IRAs. Specifically, that means:

• Contributions to a SEP IRA are tax-deductible for employers or self-employed individuals

• Qualified withdrawals are subject to ordinary income tax since SEP IRAs are funded with pre-tax dollars

• Early withdrawals before age 59 ½ may be subject to taxes and penalties

• Required minimum distributions (RMDs) are required at age 73 (assuming you turn 72 after Dec. 31, 2022).

The SECURE 2.0 Act permits employers to offer employees a Roth SEP IRA option, though they’re not required to. It’s also possible to convert a traditional SEP IRA to a Roth IRA, to get tax-free retirement withdrawals. However, the account owner would have to pay tax on earnings at the time of the conversion.

SEP IRA Contribution Limits for 2024

Once you open an IRA, it’s important to be aware that the IRS determines the maximum SEP IRA contribution limits each year. For 2024, it’s possible to contribute as much as $69,000, up from the maximum limit of $66,000 in 2023.

Unlike traditional or Roth IRAs, catch-up contributions are not allowed with SEP IRAs.

Here are the details on how the 2024 SEP IRA contribution limits work.

Maximum Contribution Amounts

The SEP IRA max contribution by employers for 2024 is the lesser of the following:

• 25% of an employee’s compensation

• $69,000

This limit applies to employers who make contributions on behalf of employees. As noted above, employees cannot make elective salary deferrals to a SEP IRA the way they can with a traditional or Roth 401(k) plan.

If you’re self-employed your SEP IRA contribution limits for 2024 are the lesser of:

• 25% of your net self-employment earnings (see how to calculate net self-employment earnings below)

• $69,000

Self-employed individuals may want to compare a solo 401(k) vs SEP IRA to decide which one offers the most benefits in terms of contribution levels and tax advantages.

Calculation Methods and Factors

Whether you’re an employer or a self-employed individual dictates how you calculate the amount you can contribute to a SEP IRA.

According to SEP IRA rules, employer contributions are based on each employee’s compensation. The IRS limits the amount of compensation employers can use to calculate the SEP IRA max contribution for the year.

For 2024, employers can base their calculations on the first $345,000 of compensation. As with the SEP IRA contribution limit, the IRS adjusts the compensation threshold annually.

In addition, contribution rates are required to be the same for all employees and the owner of the company. So if you’re a business owner who is contributing a certain amount to your own account, you must contribute funds at that same rate to your employees.

If you’re self-employed, you’ll need to calculate your net earnings from self-employment less the deductions for:

• One-half of self-employment tax

AND

• Contributions to your own SEP IRA

Net earnings from self-employment is the difference between your business income and business expenses. For 2024, the self-employment tax rate is 15.3% of net earnings, which consists of 12.4% for Social Security and 2.9% for Medicare.

Strategies for Maximizing SEP IRA Contributions

Maximizing SEP IRA contributions comes down to understanding the annual contribution limit and the deadline for making contributions.

The IRS releases updated SEP IRA contribution limits as soon as they’re finalized to allow employers and self-employed individuals sufficient time to plan. You’ll have until the annual income tax filing deadline each year to make contributions to a SEP IRA on behalf of your eligible employees or yourself, if you’re self-employed.

Once you open an investment account like a SEP IRA, you can make monthly contributions or contribute a lump sum to meet the max SEP IRA limit for the year. If you’re self-employed, you may find it helpful to contribute something monthly and then make one larger lump sum contribution just ahead of the tax filing deadline once you’ve had a chance to calculate your net earnings from self-employment.

This strategy could mean that you miss out on some earnings from compounding returns since you’re putting in less money throughout the year. However, it may prevent you from making excess contributions to your SEP IRA, which can result in a penalty.

Recommended: What is a Self-Directed IRA?

Potential Changes and Updates for Future Years

SEP IRA contribution limits don’t stay the same each year. The amount you contribute for 2024 increases for 2025. Staying on top of changes to the contribution limits can ensure that you don’t miss out on opportunities to maximize your SEP IRA.

Cost-of-Living Adjustments (COLAs)

Internal Revenue Code (IRC) Section 415 requires annual cost of living increases for retirement plans and IRAs. Cost-of-living adjustments are meant to help your savings rate keep pace with the inflation rate.

These COLA rules apply to:

• SEP IRAs

• SIMPLE IRAs

• Traditional and Roth IRAs

• 401(k) plans

• 403(b)plans

• 457 plans

• Profit-sharing plans

The IRC also applies COLAs to Social Security benefits to ensure that people who rely on them can maintain a similar level of purchasing power even as consumer prices rise.

Monitoring IRS Announcements

The IRS typically announces COLA limits and adjustments in November or December of the preceding year. For example, the IRS released the Internal Revenue Bulletin detailing SEP IRA contribution limits for 2025 and other COLA adjustments on November 1, 2024.

These bulletins are readily available on the IRS website. You can review the latest and past bulletins on the IRS bulletins page.

Compliance and Tax Implications

SEP IRAs are fairly easy to set up and maintain, but there are compliance rules you will need to follow. As an employer, you’re not required to make contributions to a SEP IRA for eligible employees every year, and if you are self-employed, you are not required to make yearly contributions to your own SEP. However, if you make contributions on behalf of one eligible employee, you have to make contributions on behalf of all eligible employees.

And remember, the contribution percentage you use to calculate the SEP IRA maximum for each employee, and for yourself as the business owner, must be the same.

Reporting SEP IRA Contributions

SEP IRA contributions must be reported on IRS Form 5498. If you’re using tax filing software to complete your return you should be prompted to enter your SEP IRA contributions when reporting your income. The software program will record contributions and calculate your deduction for you.

There’s one more thing to note. Contributions must be reported for the year in which they’re made to the account, regardless of which tax year the contributions are for.

Excess Contribution Penalties

The IRS treats excess SEP IRA contributions as gross income for the employee. If you make excess contributions, the employee would need to withdraw them, plus any related earnings, before the federal tax filing deadline.

If they fail to do so, the IRS can impose a 6% excise tax on excess SEP IRA contributions left in the employee’s account. The employer can also be hit with a 10% excise tax on excess nondeductible contributions.

The Takeaway

For small business owners and the self-employed, SEP IRAs can be a good way to save and invest for retirement. Just be aware that SEP IRA rules are more complicated than the rules for other types of IRAs when it comes to contributions and deductions. If you’re contributing to one of these plans for your employees, or for yourself as a self-employed business owner, it’s important to know how much you can contribute, what each year’s contribution limits are, and when contributions are due.

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

FAQ

What is the maximum SEP IRA contribution for 2024?

The SEP IRA contribution limit for 2024 tops out at $69,000. That’s the maximum amount you can contribute to a SEP account on behalf of an employee or to your own SEP IRA if you’re self-employed.

Can I contribute to both a SEP IRA and a 401(k)?

It’s possible to contribute to both a SEP IRA and a 401(k) if you’re employed by multiple businesses. The plans must be administered by separate companies, or you must work for a company that has a 401(k) and then contribute to a SEP IRA for yourself as a self-employed business owner.

Are SEP IRA contributions tax-deductible for employers?

Employers can deduct SEP IRA contributions made on behalf of employees. Contributions must be within the annual contribution limit to be deductible. Excess SEP IRA contributions are not eligible for a deduction.

Photo credit: iStock/Prostock-Studio

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

SOIN-Q324-036

Jan

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.

• Contribution limits for a 403(b) in 2025 are $23,500 and for 2024 are $23,000, with additional catch-up contributions available for long-term employees and those aged 50 or older.

For 2025, those age 60 to 63 may contribute an additional $11,250 to their 403(b) instead of $7,500, 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.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

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

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 2024, workers can contribute up to $23,000 into a 403(b) plan. In 2025, workers can contribute up to $23,500 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).

For 2025, those ages 60 to 63 only may contribute an additional $11,250 to their 403(b) plan instead of $7,500, thanks to SECURE 2.0. This is sometimes called the “super catchup” 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 $69,000 in 2024 ($76,500 with the standard catch-up for those 50 and up) and $70,000 in 2025 ($77,500 with standard catch-up; $81,250 with Secure 2.0 “super” 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 2024 and 2025 for individuals under age 50, compared to $23,000 in contributions for a 403(b) in 2024; $23,500 for 2025.

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.

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

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.

SoFi Invest®

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

SOIN1023151

Jan

2025

What Is a SIMPLE 401(k) Plan & How Do You Utilize It?

By Austin Kilham | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

The Savings Incentive Match Plan for Employees 401(k), or SIMPLE 401(k), is a type of retirement account that can be offered by companies with 100 employees or less. SIMPLE plans were created so that small businesses could have a cost-efficient way to offer retirement plans to their workers.

Unlike many other workplace retirement plans, SIMPLE 401(k) plans do not require annual nondiscrimination tests to ensure that a plan is in line with IRS rules. This type of testing can be prohibitively expensive for small employers, preventing them from using other types of 401(k)s.

A SIMPLE 401(k) retirement plan is available to businesses with 100 or fewer employees including sole proprietorships, partnerships, and corporations. For small business owners or self-employed individuals, understanding how SIMPLE plans work can help decide whether it makes sense to set one up.

For employees whose employer already offers a SIMPLE 401(k), getting to know the ins and outs of the plan can help to understand the role they play in saving for retirement.

How Does a SIMPLE 401(k) Work?

A SIMPLE 401(k) functions much like a regular 401(k). Employees contribute pre-tax money directly from their paycheck and invest that money in a handful of options offered by the plan administrator.

In 2024, the SIMPLE 401(k) limits are as follows: The maximum for employee elective deferrals is $16,000 per year, $16,500 for 2025. As with other types of retirement accounts, employees 50 and older can make an additional “catch-up” contribution of $3,500 to boost their savings. For those age 60, 61, 62, or 63 there is a “super catch-up” contibution allowed of up to $5,250 instead of $3,500.

One significant difference between traditional 401(k) plans and SIMPLE 401(k) plans is that while employer contributions are optional with a 401(k) plan, under a SIMPLE 401(k) plan they are mandatory and clearly defined. Employers must make either a matching contribution of up to 3% of each employee’s pay or make a nonelective contribution (independent of any employee contributions) of 2% of each eligible employee’s pay. The contribution must be the same for all plan participants: For example, an employer couldn’t offer himself a 3% match while offering his employees a 2% nonelective contribution.

There are other limits on how much an employer can contribute annually. The maximum compensation that could be used to figure out employer contributions and benefits is $345,000 for 2024, $350,000 for 2025. So if an employer offered a 2% nonelective contribution (e.g., funds an employer contributes regardless of whether the employee contributes to the account), and an employee earned $355,000 in 2024, the maximum contribution the employer could make would be 2% of $345,000, or $6,900.

As with a regular 401(k), contributions to a SIMPLE plan grow tax-deferred — meaning an employee contributes pre-tax dollars to their plan, and doesn’t pay income tax on that money until they withdraw funds upon retirement. Typically, the tax-deferred growth means that there is more money subject to compounding interest, the returns investments earn on their returns.

Withdrawals made during retirement are subject to income tax.

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

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

Who Is Eligible for a SIMPLE 401(k)?

To be eligible for a SIMPLE 401(k), employers must have 100 or fewer employees. They cannot already offer these employees another retirement plan, and must offer the plan to all employees 21 years and older.

Employers must also file Form 5500 every year if they establish a plan.

For employees to be eligible, they must have received at least $5,000 in compensation from their employer in the previous calendar year. Employers cannot require that employees complete more than one year of service to qualify for the SIMPLE plan.

A SIMPLE IRA is also one of a number of retirement options for the self-employed.

What Are the Pros of a SIMPLE 401(k) Plan?

SIMPLE 401(k)s offer a number of benefits that make them attractive to employers and employees.

• Simplified rules: While large companies may have the money and staff to devote to nondiscrimination testing, smaller companies may not have the same resources. SIMPLE 401(k)s do not have these compliance rules, making them more accessible for small employers. What’s more, the straightforward benefit formula is easy for employers to administer.

• “Free money”: Employees are guaranteed employer contributions to their retirement account, whether via 3% matching contributions or 2% nonelective contributions.

• Fully-vested contributions: All contributions — those made by employees and their employers — are fully vested immediately. Employees who qualify for distributions can take money out whenever they need it. While this can be good news for employees, for employers it removes the option to incentivize workers to stay in their job longer by having their contributions vest several years into their tenure with the company.

• Loans and hardship withdrawals: While withdrawals made before age 59 ½ are subject to tax and a possible 10% early withdrawal penalty, employees can take out loans against their SIMPLE 401(k) just as they can with a traditional 401(k). These options add flexibility for individuals who need money in an emergency. It’s important to note that 401(k) loans come with strict rules for paying them back. Failing to follow these rules may result in penalties.

What Are the Cons of a SIMPLE 401(k) Plan?

While there are plenty of positives that come from offering or contributing to a SIMPLE 401(k), there are also some important downsides.

• Plan limitations: Employers cannot offer employees covered by a SIMPLE 401(k) another retirement plan.

• Lower contribution limits: For 2024, a traditional 401(k) plan allows up to $23,000 per year from employees, and for 2025 it’s $23,500 — with an additional $7,500 catch-up contribution for those 50 and older. For 2025, those aged 60 to 63 only may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.

• The annual contribution limits for SIMPLE plans are lower: in 2024 the employee limit is $16,000 with an additional “catch-up” contribution of $3,500 for employees over age 50. Thanks to SECURE 2.0, for those aged 60, 61, 62, or 63 there is a “super catch-up” contribution allowed of up to $5,250 instead of $3,500.

• Limited size: SIMPLE Plans are only available to employers with fewer than 100 employees. That means if a business grows beyond that point, they have a two-year grace period to switch from their SIMPLE plan to another option.

SIMPLE 401(k) vs SIMPLE IRA

Generally speaking, when comparing SIMPLE IRAs and SIMPLE 401(k)s, the rules are similar:

• They’re only available to businesses with 100 or fewer employees.

• Employers must either offer a 3% matching contribution or a 2% nonelective contribution.

• Employers can only make contributions on up to $345,000 in employee compensation in 2024; up to $350,000 in 2025.

• Employee contribution limits to SIMPLE IRAs are the same as their 401(k) counterparts.

• Employer and employee contributions are fully vested immediately.

There are a few differences worth mentioning:

• Whereas all employer contributions are subject to the compensation cap for SIMPLE 401(k)s, only nonelective contributions are subject to the compensation cap for SIMPLE IRAs. (This makes it possible for employees making more than the annual limit annually to receive higher matching contributions from a SIMPLE IRA than they would from a SIMPLE 401(k).)

• If employers make matching contributions of 3%, they may elect to limit their contribution to no less than 1% for two out of every five years.

• SIMPLE IRAs do not allow employees to take out loans from their account for any reason.

• There are no minimum age requirements for SIMPLE IRA contributions.

The Takeaway

SIMPLE 401(k) plans can be especially attractive for self-employed individuals or small business owners, as they have many of the same benefits of a traditional 401(k) plan — including tax-deferred contributions and loan options — but without the administrative compliance costs that come with a regular 401(k) plan.

SIMPLE 401(k) plans can be especially attractive for self-employed individuals or small business owners.

Some of the requirements and rules associated with a SIMPLE 401(k) plan might be unattractive to some employers, however, including the fact that the IRS prohibits employers from offering other types of retirement plans to employees who are covered by a SIMPLE 401(k).

There are many answers to the question of which retirement savings plan is right for you or your business. Beyond traditional 401(k) and SIMPLE (401)k plans, there are traditional, Roth, SIMPLE and SEP IRAs, among other options.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Who is a SIMPLE IRA best for?

A SIMPLE IRA may be a good option for small business owners with no more than 100 employees who want to offer a retirement savings plan to their employees. These plans tend to be fairly simple to set up and administer compared to some other plans. A SIMPLE IRA allows employers to contribute to their own and their employees’ retirement savings.

What is the 2 year rule for SIMPLE IRAs?

The 2-year rule says that during the first two years an individual participates in a SIMPLE IRA plan, they can only transfer money to another SIMPLE IRA. After the two years are up, they can make tax-free rollovers to other non-Roth IRAs or to another employer-sponsored retirement plan.

Does money grow in a SIMPLE IRA?

Money may grow tax-deferred in a SIMPLE IRA until distributions are taken from the plan in retirement. Withdrawals can be made without penalty at age 59 ½.

What happens to my SIMPLE IRA if I quit my job?

If you have participated in the SIMPLE IRA plan for at least two years, you can make a tax-free rollover to another non-Roth IRA or to a new employer’s workplace retirement plan. However, if you’ve participated in the plan for less than two years, you can only transfer your money to another SIMPLE IRA.

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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.

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

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

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

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Jan

2025

What Is a Non-Deductible IRA?

By Laurel Tincher | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A non-deductible IRA is an IRA, or IRA contributions, that cannot be deducted from your income. While contributions to a traditional IRA are tax-deductible, non-deductible IRA contributions offer no immediate tax break.

In both cases, though, contributions grow tax free over time — and in the case of a non-deductible IRA, you wouldn’t owe taxes on the withdrawals in retirement.

Why would you open a non-deductible IRA? If you meet certain criteria, such as your income is too high to allow you to contribute to a traditional IRA or Roth IRA, a non-deductible IRA might help you increase your retirement savings.

It helps to understand how non-deductible contributions work, what the rules and restrictions are, as well as the potential advantages and drawbacks.

Who Is Eligible for a Non-Deductible IRA?

Several factors determine whether an individual is ineligible for a traditional IRA, and therefore if their contributions could fund a non-deductible IRA. These include an individual’s income level, tax-filing status, and access to employer-sponsored retirement plans (even if the individual or their spouse don’t participate in such a plan).

If you and your spouse do not have an employer plan like a 401(k) at work, there are no restrictions on fully funding a regular, aka deductible, IRA. You can contribute up to $7,000 in 2024; $8,000 if you’re 50 and older. In 2025, you can contribute up to $7,000; $8,000 if you’re 50 or older.

However, if you’re eligible to participate in an employer-sponsored plan, or if your spouse is, then the amount you can contribute to a deductible IRA phases out — in other words, the amount you can deduct gets smaller — based on your income:

• For single filers/head of household: the 2024 contribution amount is reduced if you earn more than $77,000 and less than $87,000. If you earn $87,000 and above, you can only contribute to a non-deductible IRA. For 2025, the phaseout begins when you earn more than $79,000 and less than $89,000. If you earn $89,000 or more, you can’t contribute to a traditional IRA.)

• For married, filing jointly:

◦ If you have access to a workplace plan, the phaseout for 2024 is when you earn more than $123,00 and less than $143,000. For 2025, the phaseout is when you earn more than $126,000, but less than $146,000.

◦ If your spouse has access to a workplace plan, the 2024 phaseout is when you earn more than $230,000 and less than $240,000. For 2025, the phaseout is when you earn more than $236,000 but less than $246,000.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

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

Non-Deductible IRA Withdrawal Rules

The other big difference between an ordinary, deductible IRA and a non-deductible IRA is how withdrawals are taxed after age 59 ½. (IRA withdrawals prior to that may be subject to an early withdrawal penalty.)

• Regular (deductible) IRA: Contributions are made pre-tax. Withdrawals after 59 ½ are taxed at the individual’s ordinary income rate.

• Non-deductible IRA: Contributions are after tax (meaning you’ve already paid tax on the money). Withdrawals are therefore not taxed, because the IRS can’t tax you twice.

To make sure of this, you must report non-deductible IRA contributions on your tax return, and you use Form 8606 to do so. Form 8606 officially documents that some or all of the money in your IRA has already been taxed and is therefore non-deductible. Later on, when you take distributions, a portion of those withdrawals will not be subject to income tax.

If you have one single non-deductible IRA, then the process is similar to a Roth IRA. You deposit money you’ve paid taxes on, and your withdrawals are tax free.

It gets more complicated when you mix both types of contributions — deductible and non-deductible — in a single IRA account.

Here’s an example of different IRA withdrawal rules:

Let’s say you qualified to make deductible IRA contributions for 10 years, and now you have $50,000 in a regular IRA account. Then, your situation changed — perhaps your income increased — and now only 50% of the money you deposit is deductible; the other half is non-deductible.

You contribute another $50,000 in the next 10 years, but only $25,000 is deductible; $25,000 is non-deductible. You diligently record the different types of contributions using Form 8606, so the IRS knows what’s what.

When you’re ready to retire, the total balance in the IRA is $100,000, but only $25,000 of that was non-deductible (meaning, you already paid tax on it). So when you withdraw money in retirement, you’ll owe taxes on three-quarters of that money, but you won’t owe taxes on one quarter.

Contribution Limits and RMDs

There are limits on the amount that you can contribute to an IRA each year, and deductible and non-deductible IRA account contributions have the same contribution caps. People under 50 years old can contribute up to $7,000 for 2024, and those over 50 can contribute $8,000 per year. People under 50 years old can contribute up to $7,000 for 2023, and those over 50 can contribute $8,000 per year.

IRA account owners are required to start taking required minimum distributions (RMDs), similar to a 401(k), from their account once they turn 73 years old. Prior to that, account holders can take money out of their account between ages 59 ½ and 73 without any early withdrawal penalty.

Individuals can continue to contribute to their IRA at any age as long as they still meet the requirements.

Benefits and Risks of Non-Deductible IRA

While there are benefits to putting money into a non-deductible IRA, there are some risks that individuals should be aware of as well.

Benefits

There are several reasons you might choose to open a non-deductible IRA. In some cases, you can’t make tax-deductible contributions to a traditional IRA, so you need another retirement savings account option. Though your contributions aren’t deductible in the tax year you make them, funds in the IRA that earn dividends or capital gains are not taxed, because the government doesn’t tax retirement savings twice.

Another reason people use non-deductible IRAs is as a stepping stone to a Roth IRA. Roth IRAs also have income limits, but they come with additional choices. High income earners can start by contributing funds to a non-deductible IRA, then convert that IRA into a Roth IRA. This is called a backdoor Roth IRA.

One thing to keep in mind with a backdoor Roth is that the conversion may not be entirely tax free. If an IRA account is made up of a combination of deductible and non-deductible contributions, when it gets converted into a Roth account some of those funds would be taxable.

Risks

The primary benefits of non-deductible IRAs come when used to later convert into a Roth IRA. It can be risky to keep a non-deductible IRA ongoing, especially if it’s made up of both deductible and non-deductible contributions, which can be tricky to keep track of for tax purposes. You can keep a blended IRA, it just takes more work to keep track of the amounts that are taxable.

As noted above, it requires dividing non-deductible contributions by the total contributions made to all IRAs one has in order to figure out the amount of after-tax contributions that have been made.

Non-Deductible IRA vs Roth IRA

With a non-deductible IRA, you contribute funds after you’ve paid taxes on that money, and therefore you’re not able to deduct the contributions from your income tax. The contributions that you make to the non-deductible IRA earn non-taxable interest while they are in the account. The money isn’t taxed when it is withdrawn later.

Roth IRA contributions are similarly made with after-tax money and one can’t get a tax deduction on them. Also, a Roth IRA allows an individual to take out tax-free distributions during retirement.

Unlike other types of retirement accounts, a Roth IRA doesn’t require the account holder to take out a minimum distribution amount.

There are income limits on Roth IRAs, so some high-income earners may not be able to open this type of account. The non-deductible IRA is one way to get around this rule, because an individual can start out with a non-deductible IRA and convert it into a Roth IRA.

How Can I Tell If a Non-Deductible IRA Is the Right Choice?

Non-deductible IRAs can be a way for high-income savers to make their way into a backdoor Roth account. This strategy can help them reduce the amount of taxes they owe on their savings. However, they may not be the best type of account for long-term savings or lower-income savers.

The Takeaway

For many people, contributing to an ordinary IRA is a clearcut proposition: You deposit pre-tax money, and the amount can be deducted from your income for that year. Things get more complicated, however, for higher earners who also have access (or their spouse has access) to an employer-sponsored plan like a 401(k) or 403(b). In that case, you may no longer qualify to deduct all your IRA contributions; some or all of that money may become non-deductible. That means you deposit funds post tax and you can’t deduct it from your income tax that year.

In either case, though, all the money in the IRA would grow tax free. And the upside, of course, is that with a non-deductible IRA the withdrawals are also tax free. With a regular IRA, because you haven’t paid taxes on your contributions, you owe tax when you withdraw money in retirement.

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

Help grow your nest egg with a SoFi IRA.

Photo credit: iStock/Drazen Zigic

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

Important Retirement Contribution Limits

What Are Retirement Contribution Limits?

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401(k) Contribution Limits

403(b) Contribution Limits

457(b) Contribution Limits

Thrift Savings Plan (TSP) Contribution Limits

Traditional IRA Contribution Limits

Roth IRA Contribution Limits

SEP IRA Contribution Limits

SIMPLE IRA

Maxing Out Your Retirement Contributions

Opening Your Own Retirement Account

SEP IRA Contribution Limits for 2024

What Is a SEP IRA?

SEP IRA Contribution Limits for 2024

Maximum Contribution Amounts

Calculation Methods and Factors

Strategies for Maximizing SEP IRA Contributions

Potential Changes and Updates for Future Years

Cost-of-Living Adjustments (COLAs)

Monitoring IRS Announcements

Compliance and Tax Implications

Reporting SEP IRA Contributions

Excess Contribution Penalties

The Takeaway

FAQ

What is the maximum SEP IRA contribution for 2024?

Can I contribute to both a SEP IRA and a 401(k)?

Are SEP IRA contributions tax-deductible for employers?

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

Demystifying the 403(b) Plan

What Exactly is A 403(b) Retirement Plan?

Distinguishing Between Different 403(b) Options

Get a 1% IRA match on rollovers and contributions.

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

Who Gets to Participate?

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

Types of Contributions: Understanding Your Options

The Cap on Contributions: Limits and Regulations

Investing Within Your 403(b) Plan

Exploring Investment Choices for Your 403(b)

Comparing 403(b) with Other Retirement Plans

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

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

Advantages and Challenges of a 403(b) Plan

Tax Benefits and Employer Matching: The Upsides

Potential Drawbacks: Fees and Investment Choices

Making Changes to Your 403(b) Plan

When Life Changes: Adjusting Your 403(b) Contributions

Plan Termination: Understanding the Process and Implications

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

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

Taking Distributions: The When and How

Maximizing Your 403(b) Plan

Strategic Contribution Planning: How to Maximize Growth

The Takeaway

What Is a SIMPLE 401(k) Plan & How Do You Utilize It?

How Does a SIMPLE 401(k) Work?

Get a 1% IRA match on rollovers and contributions.

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

Who Is Eligible for a SIMPLE 401(k)?

What Are the Pros of a SIMPLE 401(k) Plan?

What Are the Cons of a SIMPLE 401(k) Plan?

SIMPLE 401(k) vs SIMPLE IRA

The Takeaway

FAQ

Who is a SIMPLE IRA best for?

What is the 2 year rule for SIMPLE IRAs?

Does money grow in a SIMPLE IRA?

What happens to my SIMPLE IRA if I quit my job?

What Is a Non-Deductible IRA?

Who Is Eligible for a Non-Deductible IRA?

Get a 1% IRA match on rollovers and contributions.

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

Non-Deductible IRA Withdrawal Rules

Contribution Limits and RMDs

Benefits and Risks of Non-Deductible IRA

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

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

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

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

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