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When you pay off your mortgage, you may have some paperwork and account switching (such as property taxes) to take care of. And you may look forward to greater cash flow.

But is paying off a mortgage always the right move? In some cases, a person who is about to pay off a mortgage may want to consider a couple of options that could make more sense for their particular financial situation.

Learn more about the payoff path and alternatives here.

Pros and Cons of Paying Off Your Mortgage

Paying off your mortgage is a fantastic milestone to reach, but it’s not without trade-offs. Here are a few considerations to help you make the best decision for your situation.

💡 Quick Tip: Thinking of using a mortgage broker? That person will try to help you save money by finding the best loan offers you are eligible for. But if you deal directly with an online mortgage lender, you won’t have to pay a mortgage broker’s commission, which is usually based on the mortgage amount.

What Happens When You Pay Off Your Mortgage?

Here’s how mortgage payoff works:

•   To get the amount you need to pay off your mortgage, the first thing you need to do is request a mortgage payoff letter. If you pay the amount on your last statement, you won’t have the right amount. A mortgage payoff letter will include the appropriate fees and the amount of interest through the day you’re planning to pay the loan off.

•   Know that the payoff letter is only good for a set amount of time, and make sure to get your payment in on time.

•   Follow the instructions you’re given about where and how to submit the payment.

•   Once you’ve sent the payoff amount, your mortgage lender is responsible for sending you and the county recorder documentation to release the mortgage and lien on your home.

•   You should be sent any funds remaining in escrow.

•   You will want to contact your insurance company about this change if your insurance was paid along with your mortgage payment and have the bills switched over to you directly.

•   If your property taxes were paid as part of your mortgage, you will want to contact your local tax collector about shifting those bills to you as well.

What Documents Do You Get After Paying Off a Mortgage?

After paying off your mortgage, you should receive (or have access to) documents proving you paid off the mortgage and no longer have a lien attached to your home. These include:

•   Satisfaction or release of mortgage. This document will be filed with the county recorder (or other applicable recording agency). It states that the mortgage has been satisfied and the lien released.

•   A canceled promissory note. When you closed on your home, one of the documents you signed was called a promissory note. Now that the mortgage has been satisfied, you may receive this document back with a “canceled” or “paid in full,” though it’s also possible you may have to call and request the document.

•   A statement on the paid-off loan balance. Your lender should send you a statement showing that your loan has been paid in full.

What Should You Do After Paying Off Your Mortgage?

After you pay off your mortgage, you’ll need to take care of a few housekeeping items (a couple are mentioned above).

•   Close your escrow account. Since you’re no longer sending a mortgage payment to a mortgage servicer, you’ll need to take care of the items in your escrow account, primarily your taxes and homeowners insurance.

•   Contact your county recorder’s office to double-check that the mortgage satisfaction paperwork has been filed. Once that has been filed, you will have a clear title on the property.

•   Make plans for the extra money. Whether you want to make a bigger push in your retirement account, enlarge your emergency fund, or pay off other debts, you now likely have more cash to do it with. If you don’t make plans for the extra money, it might just evaporate.

Recommended: 2024 Home Loan Help Center

Is Prepaying a Good Idea?

Generally, paying off your mortgage early is a great idea. It reduces the principal, which in turn reduces the amount you’ll pay in interest over the life of your loan. Still, there are reasons that some homeowners consider not paying their mortgage off early.

Most lenders do not charge a prepayment penalty, but home loans signed before January 10, 2014, may include one. Nonconforming mortgage loans signed after that date may have a prepayment penalty that applies within the first three years of repayment. (The different types of mortgage loans include conforming and nonconforming conventional mortgages.)

The best way to find out if prepayment is subject to a penalty is to call your mortgage servicer. The terms of your mortgage paperwork should also outline whether or not you have a prepayment penalty.

Should You Refinance Instead?

Another option you may consider is refinancing your mortgage. There are several reasons you may want to refinance instead of paying off your mortgage.

Lower monthly payment. Getting a lower rate or different loan term may lower your monthly payment. Be sure to check out current rates, and use a calculator for mortgages to find out what a possible new payment would be.

Shorter mortgage term. Refinancing a 30-year mortgage to, say, a 15-year mortgage can keep you close to paying off your mortgage while also providing financial flexibility.

Spare cash. Whatever your need is — home renovations, college funding, paying off higher-interest debt — a cash-out refinance might be an option.

💡 Quick Tip: Compared to credit cards and other unsecured loans, you can usually get a lower interest rate with a cash-out refinance loan.

The Takeaway

What happens when you pay off your mortgage? After doing a jig in the living room, you’ll need to take care of a few housekeeping tasks and make plans for the extra money.

An option to consider: Would a refinance to a shorter term make more sense, or pulling cash out with a cash-out refi? It can be wise to review all your options as you move toward taking this major financial step.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

Is paying off your mortgage a good idea?

The answer depends on an individual’s situation. If you have the money and you’d love to shed that monthly obligation for good, paying off a mortgage is a good idea. But if you’re worried about funding your retirement or losing opportunities to invest, paying off your mortgage may not be a good idea for you.

What do you do after you pay off your mortgage?

Ensure that you have received your canceled promissory note, and update your property tax and insurance billers on where to bill you. Since you no longer will have a mortgage servicing company, you must pay your insurance and property taxes yourself.

Is it better to pay off a mortgage before you retire?

Paying off a mortgage could give you more money to work with in retirement. But if your retirement accounts need a boost, most financial experts contend that allocating money there is a better idea than paying off your mortgage. Paying off a mortgage when you have low cash reserves can also put you at risk.

Does paying off your mortgage early affect your credit score?

Surprisingly, paying off your mortgage early won’t affect your credit score much. Your credit score has already taken into account the years of full, on-time payments you made each month.

Photo credit: iStock/katleho Seisa

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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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If you’re thinking about refinancing your home loan or paying off your mortgage early, you might request a mortgage payoff statement. The amount due on this document is likely to be different from your current balance because it includes interest owed until the payoff date and any fees due.

Read on to learn more about what a mortgage payoff statement or letter is and when you might need one.

What Is a Mortgage Payoff Statement?

Starting with mortgage basics, a mortgage is a loan used to purchase different types of real estate, including a primary home. A bank or other lender agrees to lend money, which the borrower commits to pay back monthly for a set period of time and with interest.

The different types of mortgage loans include conventional and government-insured mortgages and reverse mortgages.

There are jumbo loans, which exceed the dollar limits set by the Federal Housing Finance Agency, and home equity loans.

Say you have a mortgage and want to know exactly how much you’d need to pay to satisfy the loan. A mortgage payoff letter will tell you that magic number. Unlike your current balance, the payoff amount includes interest owed up to the day you intend to pay off the loan. It may also include fees that you’re on the hook for and haven’t paid yet.

Your monthly mortgage statement, on the other hand, only shows your loan balance and the amount due for your next monthly payment.


💡 Quick Tip: You’ve found an award-winning home. Enjoy an award-winning mortgage experience, too. SoFi has knowledgeable Mortgage Loan Officers to guide you through the process.

How Does a Mortgage Payoff Statement Work?

You can request a payoff statement from your loan servicer at any time. Note: Your mortgage servicer may be different from your lender. The company that manages your loan handles billing, accepts loan payments, keeps track of your principal and interest, and fields questions from borrowers.

You may request a payoff statement for any type of loan, including mortgages, student loans, personal loans, and auto loans. However, if you need your mortgage payoff statement, go to your mortgage servicer directly. The name and contact information of your mortgage servicer is included in your monthly statements.

When you make the request from the company that handles your mortgage servicing, you’ll need to provide the following details:

•   Your name

•   Address

•   Phone number

•   Your loan number

•   The date you want your payoff to be effective if you’re seeking to pay off your mortgage early.

Asking for a payoff statement does not necessarily mean that you intend to pay off your loan immediately. You may simply be determining whether or not paying off your mortgage early is feasible, for example. The request itself does not initiate the prepayment process.

Traditional lenders, such as brick-and-mortar banks, may mail you a paper mortgage payoff statement. Online lenders may send a payoff statement online.

Recommended: 5 Tips for Finding a Mortgage Lender

What Information Do Mortgage Payoff Letters Contain?

All mortgage payoff letters tend to contain similar information, including:

•   Payoff amount: The amount of money that would satisfy the loan.

•   Expiration date: The date through which the payoff amount is valid. The letter may also include an adjusted amount should you pay before or after the expiration date.

•   Payment information: The letter will also usually tell you who to make the final check out to and where to mail it.

•   Additional charges: You will be alerted to any additional fees and charges that you’ll need to include.

💡 Quick Tip: Your parents or grandparents probably got mortgages for 30 years. But these days, you can get them for 20, 15, or 10 years — and pay less interest over the life of the loan.

Do You Need a Mortgage Payoff Statement?

There are a few common situations in which you might need a payoff statement.

•   Refinancing a mortgage: When you refinance your mortgage, your chosen lender pays off your old home loan with a new one, preferably with a lower interest rate and possibly a new term. When you seek to refinance, your new lender may ask you to provide a payoff statement on your current loan.

•   Prepaying a mortgage: It’s possible to pay off a mortgage early. A payoff statement will show you exactly how much you’d need to pay to do so. Most prepayment penalties for residential home loans that originated after January 10, 2014, are prohibited. Still, check before you decide to prepay.

•   Working with a debt relief company: If you’re having trouble managing your debts, you’ve fallen behind on payments, or you otherwise need mortgage relief, you may choose to work with a debt relief company that can help negotiate with your lenders. The company will need to see payoff statements to get an idea of the scope of your debt.

“No matter what method works best for you, it’s important to cut spending as much as you can while you’re tackling your debts,” said Kendall Meade, a Certified Financial Planner at SoFi.

•   Collections and liens: A lender might send you a payoff statement if you’ve fallen behind on your payments and they are sending your debt to a collection agency. In this case, the payoff statement may tell you how much you need to pay to stop the collection action.

   If your lender decides to seize your home to recoup unpaid mortgage payments, they may place a lien on the property. They may send a payoff statement that alerts you that your property will be seized if the specified amount isn’t paid in full.

There are other ways to figure out how much you owe on your mortgage loan. You can talk to your lender and ask for a verbal payoff quote. This will provide an estimate, but understand that it is not a legal agreement and isn’t binding.

The Takeaway

If you have a home loan, you may want to request a mortgage payoff statement, especially if you’re thinking about refinancing or paying off your mortgage early. Requesting the mortgage payoff letter does not initiate any formal processes, so it’s fine to think of it as an information-gathering exercise.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

How do I get my mortgage payoff statement?

Contact your loan servicer to request your mortgage payoff statement.

When should I get my mortgage payoff statement?

Request your mortgage payoff statement when planning to prepay your mortgage, refinance, or consolidate debt.

How long does it take to get a mortgage payoff statement?

Generally speaking, you should receive your mortgage payoff statement within seven business days of your request.

Photo credit: iStock/Vadym Pastukh

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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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The average cost of an oil change varies depending on where you live. The type of oil used is another factor, with varieties including conventional, synthetic, and semi-synthetic. For basic service with conventional oil and no extra quarts, you can count on paying between $35 and $75, according to Kelley Blue Book.

We’ll discuss the ins and outs of oil changes, including how often you should get it done, the benefits to your vehicle and the environment, and how to save money on your next oil change.

How Much Does an Oil Change Cost on Average?

The cost of an oil change depends on several things:

•   Vehicle’s year, make, and model

•   DIY vs. service station

•   Geographic location

•   Service provider

•   Type of oil: conventional, synthetic, or synthetic blend

•   Add-on services like filter changes and tire rotation

You’ll pay about $35 for basic service with no extra quarts. Top service with extra quarts will run about $75. This is likely to be with conventional oil.

With semi-synthetic oil, the average cost will be higher: $40-$100. And with fully synthetic oil, the price inches up to $65-$125. Some luxury vehicles require special filters, which can cost $260 or more.

The average cost of an oil change at a dealership is generally around $100; this typically includes a filter change. Another popular add-on is tire rotation, which can tack on $20-$50. It’s possible that a dealership or auto repair shop will offer a small discount for more than one service.

In case you were wondering, oil changes are not covered by car insurance because they’re considered a regular part of car maintenance. Learn more in our Insurance Tips for First-time Drivers.


💡 Quick Tip: Saving money on your fixed costs isn’t always easy. One exception is auto insurance. Shopping around for a better deal really can pay off.

Average Cost of Oil Change by Provider

The table below lists the price of the cheapest oil change option at a number of national service providers. Differences in price are often due to the quality of oil used, and the speed and scope of the service.

Recommended: How to Lower Your Car Insurance

The Difference Between Synthetic and Conventional Oil

Conventional oil is crude oil that’s been refined, while synthetic is made from chemical compounds. Synthetic oil has fewer impurities and is designed to protect car engines.

Conventional oil needs changing more often and can have problems flowing in extreme temperatures. Synthetic oil can be used for longer periods and flows in a wider range of temperatures. Although there are clear advantages to synthetic oil, there’s one disadvantage: It costs more.

Check your owner’s manual to see what type and grade are recommended for your vehicle’s engine. How much your car is worth may factor into your choice of which oil to use.

How Often Should You Get an Oil Change?

Your owner’s manual should also list how often to change the oil in your specific vehicle. In general, conventional motor oil needs to be changed after about 5,000 miles of driving. Synthetic oil can go as long as 10,000 miles. If you use semi-synthetic motor oil (a blend of the two), you may get 8,000 miles of usage before it needs to be changed.

Did you know you should also be evaluating your insurance on a regular basis? Annual personal insurance planning sessions can help your coverage keep up with important life changes.

Benefits of Getting Your Oil Changed

The benefits of regular oil changes are significant. They include:

•   Cleaner engine. When you change the oil, you’re also getting rid of the dirt, debris, and contaminants in the old oil.

•   More efficient engine. When the engine is clean and the oil is new, the engine has better lubrication and works more efficiently. This helps boost performance and maximizes the life of the engine.

•   Better gas mileage. A more efficient engine will help your car get better gas mileage and save you money on fuel.

•   Environmental benefits. When oil stays in your vehicle for too long, it starts to degrade. At this point, it releases potentially toxic hydrocarbons.

•   Prevents overheating. Engine components generate heat, especially when you’re driving at faster speeds. When the engine is freshly and appropriately lubricated with motor oil, this lowers friction and reduces the risk of overheating.

How to Lower the Cost of Oil Changes

As noted above, timely oil changes can reduce fuel costs. To save money on oil changes, you can shop around for the best prices in auto shops or do it yourself.
Before your first DIY oil change, you may need to invest in a few supplies. These include a wrench to remove the drain plug (your owner’s manual should list what size and type), an oil filter wrench, an oil pan, latex gloves, and perhaps a jack.

You can save $25 to $75 per oil change on average, depending on the oil and filter you use. So, once you’ve saved enough to “pay back” what you invested in the right tools, you can enjoy savings each time you change your own oil. Check out more tips for saving on car maintenance costs.


💡 Quick Tip: If your car is paid off and worth only a few thousand dollars, consider updating your car insurance: You might choose to opt out of collision coverage and double down on liability.

The Takeaway

The average cost of a basic oil change with conventional oil is $35, but you can find low-cost oil changes for as little as $19. Higher prices may indicate a better quality of oil, add-ons like filter replacement, or faster service. Your vehicle’s owner manual will recommend a type and grade of oil. Conventional oil is typically cheapest, followed by semi-synthetic, and then fully synthetic. Synthetic oils allow you to go longer between oil changes — 10,000 miles compared to 5,000 with conventional. To save the most money on your oil change, don’t be afraid to DIY.

When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.

FAQ

Is $100 a lot for an oil change?

It depends on where you live, the type of oil used, your vehicle, and add-ons such as filter changes and tire rotation. The average cost of a basic oil change is $35, with prices as low as $19. Ask your service provider for a breakdown of what goes into that $100 oil change.

Should I get my tires rotated when I get an oil change?

Consumer Reports recommends rotating your tires every 5,000-8,000 miles. Tires protect you on the road, so this maintenance task shouldn’t be overlooked. Depending on the kind of oil you use and your owner manual’s recommendation, you may want to have your oil changed every 5,000-10,000 miles. If you can combine your oil change schedule with your tire rotation schedule, you might save a bit of money.

How much do oil changes cost in 2024?

The overall average with conventional oil and no other services provided is somewhere about $35. No-frills service with conventional oil starts at $19. You’ll pay for more synthetic oil and add-ons like filter replacement.

Photo credit: iStock/Phynart Studio

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

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.

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A 401(k) is a popular way to save for retirement. But not everyone has access to these employer-sponsored 401(k) savings plans. For instance, many small companies don’t offer them. And self-employed individuals don’t have access to regular 401(k)s.

For those who don’t have access to a 401(k) at work or want to consider other retirement savings options, there are a number of 401(k) alternatives. Read on to learn about how to save for retirement without a 401(k), some 401(k) alternatives, and what you need to know about each of them to choose a plan that aligns with your retirement savings goals.

5 Alternatives to a 401(k)

These are some popular retirement savings plans available beyond a regular 401(k).

Traditional IRA

A traditional IRA (Individual Retirement Account) is similar to a 401(k) in that contributions aren’t included in an individual’s taxable annual income. Instead, they are deferred and taxed later when the money is withdrawn at age 59 ½ or later.

Early withdrawals from an IRA may be subject to an added 10% penalty (plus income tax on the distribution). However the main difference between an IRA vs. 401(k) is that IRAs tend to give individuals more control than company-sponsored plans—an individual can decide for themselves where to open an IRA account and can exert more control in determining their investment strategy.

Learning how to open an IRA is relatively simple—such accounts are available with a variety of financial services providers, including online banks and brokerages. This flexibility allows individuals to comparison shop, evaluating providers based on criteria such as account fees and other costs.

Once an individual opens an account, they may make contributions up to an annual limit at any time prior to the tax filing deadline. For tax year 2024, the limit is $7,000 ($8,000 for individuals 50 and older). For tax year 2023, the limit is $6,500 ($7,500 for individuals 50 and older).

💡 Quick Tip: How much does it cost to set up an IRA? Often there are no fees to open an IRA, but you typically pay investment costs for the securities in your portfolio.

Roth IRA

There are a few key differences when it comes to a traditional IRA vs. a Roth IRA. To begin with, not everyone qualifies to contribute to a Roth IRA. The upper earnings limit to contribute even a reduced amount for tax year 2024 is $161,000 for singles, and $240,000 for married joint filers. The upper earnings limit for even a partial contribution for tax year 2023 is $153,000 for singles, and $228,000 for married joint filers.

Another thing that distinguishes Roth IRAs is that they’re funded with after-tax dollars—meaning that while contributions are not income tax deductible, qualified distributions (typically after retirement) are tax-free. Additionally, while an IRA has required minimum distributions (RMD) rules that state investors must start taking distributions upon turning 73, there are no minimum withdrawals required on Roth IRAs.

Like a traditional IRA, Roth IRAs carry an annual contribution limit of $7,000 for 2024 and $6,500 for 2023. Individuals aged 50 and up can make an additional $1,000 in 2023 and in 2024 in catch-up contributions. Roth IRAs also offer similar flexibility to traditional IRAs in that individuals can open online IRA accounts with a provider that best suits their needs—whether that means an account that offers more hands-on investing support or one with cheaper fees.

Self-Directed IRA (SDIRA)

Another 401(k) alternative is a self-directed IRA. A SDIRA can be either a traditional or Roth IRA.

But whereas IRA accounts typically allow for investment in approved stocks, bonds, mutual funds, and CDs, self-directed IRAs allow for a much broader set of holdings, including things like REITs, promissory notes, tax lien certificates, and private placement securities. Some self-directed IRAs also permit investment in digital assets such as crypto trading and initial coin offerings.

While having the freedom to make alternative investments may be appealing to some individuals, the Security and Exchange Commission cautions that such ventures may be more vulnerable to fraud than traditional investing products.

The SEC cautions that individuals considering a self-directed IRA should do their homework before investing, taking steps to confirm both the investments and the person or firm selling them are registered. They also advise investors to be cautious of unsolicited offers and any promises of guaranteed returns.

Simplified Employee Pension (SEP) IRA

A SEP (Simplified Employee Pension) IRA follows the same rules as traditional IRAs with one key difference: They are employer-sponsored and allow companies to make contributions on workers’ behalf, up to 25% of the employee’s salary.

Though the proceeds of SEP IRAs are 100% vested with the employee, only the employer contributes to this type of retirement account. To be eligible, the employee must have worked for the company for three out of the last five years.

Because people who are self-employed or own their own companies are eligible to set up SEP IRAs—and can contribute up to a quarter of their salary—this type of account can be an attractive option for those individuals who would like to put away more each year than traditional or Roth IRAs allow.

Solo 401(k)

Self-employed individuals and business owners may want to consider a solo 401(k). This type of 401(k) is designed for those who have no employees other than their spouse, and the way it works is similar to a traditional 401(k). Contributions are made using pre-tax dollars and taxed when withdrawn in retirement. (However, there are also Roth solo 401(k)s using after-tax dollars.) The biggest difference between a regular 401(k) and a solo 401(k) is that there is no matching contribution from an employer with a solo 401(k).

The total contribution limits for a solo 401(k) are $66,000 for tax year 2023, and $69,000 for 2024. Catch-up contributions for those 50 and older are an additional $7,500 for each year.

One thing to consider: There are extra IRS rules and reporting requirements for a solo 401(k), which may make these plans more complicated.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

How a 401(k) Differs From Alternatives

As mentioned, a 401(k) is an employer-sponsored retirement fund. 401(k) contributions are determined by an employee and then drawn directly from their paycheck and deposited into a dedicated fund.

Income tax on 401(k) contributions is deferred until the time the money is withdrawn—usually after retirement—at which point it is taxed as income.

During the time that an employee contributes pre-tax dollars to their 401(k) plan, the contributions are deducted from their taxable income for the year, potentially lowering the amount of income tax they might own. For example, if a person earned a $60,000 annual salary and contributed $6,000 to their 401(k) in a calendar year, they would only pay income tax on $54,000 in earnings.

There are annual limits on 401(k) contributions, and the ceilings on contributions change annually. In 2024, the limit for traditional 401(k)s is $23,000—a $500 increase over the 2023 limit (individuals 50 and older can contribute an additional $7,500 in catch-up contributions). If a person participates in multiple 401(k) plans from several employers, they still need to abide by this limit, so it’s a good idea to add up all contributions across plans.

A 401(k) can be a helpful savings tool for a variety of reasons. Because withdrawals are set up in advance, and automatically deducted from an individual’s paycheck, it essentially puts retirement savings on “auto-pilot.” In addition, employers often contribute to these plans, whether through matching contributions or non-elective contributions.

But there are also some drawbacks to the plan, including penalties for early withdrawals. There are also mandatory fees, which may include plan administration and service fees, as well as investment fees such as sales and management charges. It’s helpful to brush up on all the costs associated with an employer’s 401(k) and look into other 401(k) alternatives if it makes sense.

The Takeaway

With a number of 401 (k) alternatives to choose from, it’s clear there’s no one right way to save for retirement. There are a variety of factors for an investor to consider, including current income, investment interests, and whether it makes sense to invest pre- or after-tax dollars.

Ultimately, the important thing is to identify a good retirement savings account for one’s individual needs, and then contribute to it regularly.

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).

FAQ

What is a better option than a 401(k)?

There isn’t necessarily a better option than a 401(k), but if you’re looking for another type of retirement savings plan, you may want to consider a traditional IRA or Roth IRA. These retirement savings plans allow you to invest your contributions in different types of investments, and you will generally have a wider array of offerings than you might get with a 401(k). Plus, you can have an IRA in addition to a 401(k), which could help you save even more for retirement.

How to save for retirement if my employer doesn’t offer 401(k)?

If your employer doesn’t offer a 401(k), you could save for retirement with a traditional or Roth IRA. Both plans allow you to contribute a certain amount each year ($6,500 for tax year 2023, and $7,000 for 2024), plus an additional $1,000 in catch-up contributions if you are 50 or older. With traditional IRAs, you contribute pre-tax dollars, and you pay tax on the money when you withdraw it in retirement. With a Roth IRA, you contribute after-tax dollars and then withdraw the money tax-free in retirement.

What 401(k) alternatives are there for the self-employed?

Some 401(k) alternatives for the self-employed include SEP (Simplified Employee Pension) IRAs and solo 401(k)s. With a SEP IRA, individuals who are self-employed or own their own companies can contribute up to a quarter of their salary. Solo 401(k)s are designed for self-employed individuals who have no employees other than a spouse, and allow for contributions of up to $66,000 in 2023, and $69,000 in 2024.

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