Qualifying for a personal loan when self-employed can present some challenges. Self-employed individuals may find it difficult to produce traditional documentation — such as W-2s or pay stubs — used to verify income. And their income may not be steady, as it is with 9-to-5 workers. But that doesn’t necessarily mean you’re out of luck if you’re seeking a quick infusion of cash. Here’s a look at some ways to get a personal loan when you’re self-employed.
Key Points
• Self-employed individuals can face challenges securing personal loans due to unsteady incomes and difficulty providing traditional income verification.
• Self-employed applicants can provide alternative income documentation, such as tax statements and bank statements, to demonstrate earnings.
• Searching for lenders specializing in self-employed borrowers can streamline the personal loan application and approval process.
• Self-employed individuals often undergo increased scrutiny during underwriting, potentially requiring additional tax returns or banking documents.
• Building credit scores, collaborating with specialized lenders, and considering a cosigner can enhance personal loan approval odds.
How to Get a Personal Loan If You’re Self-Employed
A personal loan is a type of installment loan that can be used for nearly any personal expense, including home improvements, a vacation, or consolidating your credit card debt. If you’re considering making a big purchase, like buying an engagement ring, a personal loan can be an alternative to using a high-interest credit card when you don’t have the means to pay the balance off right away.
Personal loans are typically unsecured, meaning a lender won’t require collateral. However, they can also be secured, usually by the asset purchased with the loan. Unsecured loans are usually approved based on the financial standing and creditworthiness of the borrower.
In addition to looking at an applicant’s credit history, lenders will also typically consider a potential borrower’s income when deciding whether or not to approve a loan and, if so, what the rates and terms will be. Those who are self-employed may find it more difficult to show proof of income, especially if their income fluctuates from month to month and year to year.
Self-Employed Loan Requirements
Loan requirements for self-employed individuals will be similar to the typical loan requirements for any borrower as determined by the lender. In addition to evaluating factors like the applicant’s credit score, many lenders will require proof of income.
Typically, the requirements for personal loan approval include pay stubs and W-2s to verify income, which most self-employed people can’t provide. It is possible for self-employed individuals to show proof of income, but it may require a little more legwork, as you’ll learn below.
One point worth noting: In general, lenders are looking for borrowers who have income stability, and it can help if the borrower has been working in a single industry for at least two years. A shorter employment history as a freelancer could be seen as indicating that you are a borrowing risk.
Showing Proof of Income When Self-Employed
Those who are self-employed have a couple of options for showing a lender they have sufficient and reliable income. Here are a few options that self-employed individuals could provide as income documentation.
Tax statements: Self-employed individuals can use their tax returns from the prior two or three years to offer proof of income. These forms include your income earned and taxes paid for those tax years. Lenders often view tax documents as a reliable source of income proof because they are legal documents.
Bank statements: Bank statements could be used if there is a regular history of deposits that illustrate consistent income.
Profit and loss statement: If you own your own business, this document (called a P & L) provides an overview of your costs, expenses, and revenue.
Court-ordered agreements: These may include things like alimony or child support.
Keep in mind that each lender will likely have their own application requirements. Contact the individual lender if you have specific questions on the types of documentation they’ll accept.
Consider Having a Cosigner
In the event that you are still struggling to gain approval for a personal loan with your self-employed proof of income, one option is to consider adding a cosigner. A cosigner is someone who agrees to pay back the loan should you, the primary borrower, default on making payments.
A cosigner can be a close friend or family member, ideally one who has a strong credit history who will strengthen your loan application. Given that a cosigner’s responsibilities are significant, this is not an undertaking to enter into without considerable thought and trust.
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Build Your Credit Score Before Applying
Before applying for a personal loan (or any loan, for that matter), it can be wise to check your credit score. If it’s not at least in the good range, you may want to wait to apply for your loan until you can positively impact your rating. In general, the higher your score, the lower the interest rate and more favorable the terms you’ll be offered.
Key ways to build your score include always making payments on time, keeping your credit usage low, having a good credit mix and long credit history, and not applying for too much credit in a short period of time.
Compare Lenders Who Work With Self-Employed Borrowers
As you look for a personal loan, you may want to do an online search for lenders who explicitly say they work with self-employed borrowers. These financial institutions are likely to have systems in place that tailor the process to those who don’t, say, have W-2s. This can make application and approval simpler.
Prepare a Strong Loan Application Package
In addition to gathering the necessary documentation for your application (as detailed above), also consider ways to strengthen your package for a loan as a self-employed person. These include making sure you keep your personal and business finances separate, so you can accurately reflect your financial situation. If you are going to have a cosigner on the loan, ask them to prepare their paperwork as well.
Understand and Avoid Predatory Lenders
As you hunt for a personal loan when self-employed, you may come across unscrupulous predatory lenders, which typically offer no-credit-check loans at exorbitant interest rates (into the triple digits) and with steep fees. Often, they state the interest rate in a way that doesn’t reveal just how high it is (say, they cite a weekly payment vs. the monthly payment most people are accustomed to). They may use high-pressure tactics, such as saying the offer is only good for a very limited time.
If you are struggling to get approved due to a low credit score or lack of steady income, these lenders may seem to offer you a solution. Beware: These predatory lenders can keep you trapped in a cycle of growing debt.
Why It’s Difficult for the Self-Employed to Get a Personal Loan
It can be more challenging for self-employed individuals to provide proof of income to lenders, which can make it more challenging for them to get approved for a personal loan. But it’s important to note that each loan application is unique, and employment status is just one consideration.
For example, a self-employed individual who has a stellar credit history and who has been self-employed for a few years may be in a better position to apply for a personal loan than someone who has just transitioned into managing their own business.
The Income Challenge
Proving consistent and stable income can be the biggest challenge when getting a personal loan as a self-employed individual. Because you may not be guaranteed the same payment each pay period, lenders may request specific documentation in order to verify the fact that you have enough cash coming in to make payments on the loan. Some lenders may request tax returns for several years in order to verify your income.
Consistency Matters
Consistency in income is another major hurdle when seeking a loan for the self-employed. It’s not uncommon for self-employed people to experience fluctuation in their income. While some slight fluctuation may be acceptable to a lender, for the most part they are looking for consistent payments getting deposited into your account, even better if there is an increasing trend over time.
Higher Scrutiny During the Underwriting Process
Self-employed borrowers will likely face a higher level of scrutiny during the underwriting process which precedes final loan approval. For instance, if you lack steady, predictable income, you may be asked for additional tax returns or banking documents. Or P&L sheets or letters from your accountant about your business income could be requested. This is because lenders typically view those who are self-employed as less creditworthy and more of a risk to default on a loan.
Personal Loan Alternatives When Self-Employed
Personal loans aren’t the only option for self-employed individuals looking to borrow money to pay for expenses. Personal loan alternatives to consider include a credit card, cash advance, or a home equity loan.
Credit Cards With 0% APR Promotions
Credit cards can have high-interest rates, but ones with a 0% APR promotion (aka a balance transfer card) could be a great tool to pay for an upcoming expense. Just be sure to pay off the credit card before the promotional period ends and interest starts accruing.
A cash advance is a short-term loan generally offered by your credit card which allows you to borrow cash against your existing line of credit. Cash advances can provide an avenue for you to get quick access to cash, but there may be additional fees and a higher interest rate than usual. Be sure to read all the terms and conditions outlined by your credit card company before borrowing a cash advance.
Home Equity Loans or HELOCs
If you are a homeowner, you may be able to tap into the equity you’ve built in your home using a home equity loan or home equity line of credit (HELOC). A home equity loan is an installment loan where the borrower receives a lump sum payment and repays it in regular payments with interest.
A HELOC, on the other hand, is a revolving line of credit that the borrower can draw from and, once it is repaid, continue drawing from during a specified period of time.
Business Loans
Small business loans can be used to pay for business expenses. Self-employed individuals may be able to qualify for loans backed by the U.S. Small Business Administration (SBA), as well as private small business loans offered by banks, credit unions, and online lenders.
It is important to keep your personal and business expenses separate as a self-employed person. If you are using the money for a personal expense, you’ll want to avoid borrowing a business loan. Also keep in mind that many lenders don’t allow you to use personal loans for business expenses.
Peer-to-Peer Lending
Peer-to-peer lending bypasses the usual financial institutions and allows companies and individuals to invest in others via loans. You may have heard of some of the popular platforms, such as Kiva, Upstart, and Lending Club. These may be more accommodating for self-employed borrowers who are finding it challenging to secure a loan.
Secured Personal Loan
While most personal loans are unsecured, meaning they are approved based on the applicant’s creditworthiness, some of them are secured, meaning they are backed by an asset, known as collateral. Since these secured loans involve collateral, they are considered less risky. If the borrower defaults, the lender knows they can seize an asset that can help them recoup what is owed. Typical examples of collateral for personal loans include real estate, vehicles, cash in a bank or investment account, and other items of value.
The Takeaway
The challenge for self-employed individuals applying for a personal loan will generally be providing proof of income. Alternatives to traditional proof of income documents include tax or bank statements. Fortunately, many lenders understand that a full-time job isn’t the only qualifier of financial stability and will also consider factors like your credit score, financial history, and whether you have a cosigner.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Can you get any loans if you’re self-employed with no proof of income?
It is possible to get a loan if you are self-employed. However, with zero proof of income, it may be challenging to gain approval for a loan. To improve your odds of approval, you may consider adding collateral to the loan or applying with a cosigner.
Are there any loans for self-employed people with bad credit?
While a strong credit history can help strengthen a loan application, it’s not impossible to qualify for a loan with bad credit. If you can show a consistent and stable income history, that could help improve your application. You’ll likely pay a higher interest rate and enjoy less favorable terms than if your score were higher, however. Another option to qualify could be to add a cosigner.
Can self-employed freelance workers get personal loans?
Yes, self-employed freelance workers can qualify for a personal loan. Instead of providing W-2 documents to verify their income, they will need to provide alternatives such as tax documents or bank statements. Applicants who have been working in a specific industry as a freelancer for two years or more may be viewed more favorably by lenders.
What documents do self-employed borrowers need to apply for a loan?
To apply for a personal loan, a self-employed person should probably gather tax returns, bank statements, profit and loss statements, and any documentation of other income sources (such as alimony). If you are working with a cosigner, they will also need to gather their documentation.
How can self-employed people improve their chances of getting approved for a loan?
Ways that a self-employed person can improve their chances of personal loan approval include building your credit score, working with lenders who specialize in loans for the self-employed, and considering whether to add a cosigner.
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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.
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
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Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
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For most Americans, having a car is a necessity to get to work, school, the supermarket, the doctor, and everywhere else. However, both new and used cars are expensive — and auto loan rates can be considerable, too.
So when buying a car, does it ever make sense to use a personal loan instead of traditional financing? Here, you’ll learn the difference between personal loans and car loans and when you might want to use each to buy a new set of wheels.
• Personal loans can be used to buy a car, offering no down payment, and protection from repossession, but may come with higher interest rates.
• Car loans are secured by the vehicle, which lowers lender risk and typically results in lower interest rates than personal loans.
• Auto loans may be easier to qualify for, with lower credit score requirements, and dealerships often assist in arranging financing.
• Using a personal loan may give buyers more negotiating power at dealerships and avoid lender-mandated insurance requirements.
• In many cases, car loans can be cheaper in the long run, while personal loans may appeal to those seeking convenience or avoiding collateral.
Personal Loan vs Auto Loan: An Overview
You can use a personal loan for almost any legal purpose, including buying a car. (Typically, though, you cannot use personal loans for business purposes or for tuition.) But why would you use a personal loan to purchase a vehicle when there are very specific loans — auto loans — to finance this purchase?
As you’ll see, personal loans can offer some benefits over car loans, including less buyer risk, no down payment needed, better negotiating power, and potential savings on car insurance. But car loans still have their place and may be cheaper in the long run.
Personal Loans
A personal loan allows you to borrow money from a bank, credit union, or lender to fund nearly any kind of purchase. People commonly use personal loans for debt consolidation, home renovations, weddings, vacations, and even new and used car purchases.
Personal loans can be unsecured (no collateral required) or secured (collateral required). For the sake of our personal loan vs. auto loan comparison, we’ll be looking at unsecured personal loans, as they’re more common.
How Interest Rates Work on Personal Loans
Because unsecured personal loans aren’t backed by any collateral, interest rates tend to be higher than what you’d get for a car loan. Average personal loan interest rates vary depending on your credit score and the loan terms. As of November 2025, the average rate was 12.25%, and these loans tend to max out at a rate of about 36%.
Most personal loans come with fixed rates, meaning your interest rate will stay the same over the life of the loan. It is possible, however, to get a variable-rate personal loan. Check out options for a fixed- vs. variable-rate loan to figure out which is right for you.
Terms for Personal Loans
Terms for personal loans vary by lender, but you can typically take out a loan with a repayment term of one to seven years. The faster you pay it off, the less you’ll pay in interest — but your monthly payments will be larger.
When Personal Loans Make Sense
A personal loan can be useful in many scenarios, including:
• For debt consolidation. If you have several debts (say, balances on a couple of high-interest credit cards), you could pay them off with a single personal loan, simplifying your financial life since you only need to make one monthly payment. What’s more, the personal loan may charge a lower interest rate.
• Unexpected major bills. If you get hit by a big medical, dental, or car repair bill and can’t cover it with emergency fund savings, a personal loan could be used for financing.
• Home renovations. If you need to replace your hot water heater or want to renovate a dated bathroom, a personal loan can be an option that doesn’t require tapping your home equity or using your property as collateral.
• Major purchases. When it’s time to get a new laptop or a used car, a personal loan could be the right option.
• Pricey life events. Maybe you’re getting married or planning a big vacation for your whole family. A personal loan can help you afford this kind of big-ticket, memorable experience.
When buying a new or used car through a dealership, the dealer’s finance department can help you find a loan through a bank or credit union. Alternatively — or when buying from a private seller — you can shop around for a car loan from various banks and credit unions on your own.
Auto loans are usually secured loans, meaning the car you’re buying serves as collateral. This means that if you fall behind on payments, the lender can repossess your car. (It’s possible, but less common and more expensive, to get a car loan without putting the car up as collateral.)
An important note: For tax years 2025 to 2028, interest paid on a car loan can now be deducted on your federal tax return, up to $10,000 annually, even if you take the standard deduction. The loan must be for new cars assembled in the U.S. and used for personal purposes only. The deduction phases out for taxpayers with a MAGI (modified adjusted gross income) over $100,000 per year.
How Interest Rates Work on Car Loans
The collateral on the car loan reduces the risk to the lender, which usually results in a lower interest rate. As of mid-2025, the average car loan interest rate for a new car was 6.73% and 11.87% for a used car. That said, auto loan interest rates depend on your credit score. You can use an online auto loan calculator to get a better idea of how different rates and terms compare.
Car loan rates for both new and used cars have increased in recent years, but they’re still typically lower than the average personal loan rate. Notably, car loan refinancing rates are lower than regular financing rates.
Terms for Car Loans
Like personal loans, car loans might stretch 84 months (that’s seven years), but some are as short as 24 months (two years). Also like personal loans, it’s common to repay your car loan over three to five years.
When Car Loans Make Sense
There are several scenarios when getting an automobile loan can make good sense:
• You lack the cash to buy a car. For many people, cars are necessities to get to work, school, and run errands that are necessary for daily life. A car loan can enable the purchase of a car when you don’t have the funds to pay upfront.
• You want to protect your savings. Perhaps you do have enough money in the bank to buy a car, but you’d rather save it for a goal like buying a house. Getting a loan can be a good option in this case.
• You have a good, very good, or exceptional credit score. Typically, the higher your credit score, the lower your interest rate on a loan. If you have a solid score, a personal loan may offer a relatively affordable avenue to financing.
• You want to build your credit history. Securing a loan and making on-time payments every month can positively impact your credit score.
Can You Use a Personal Loan to Buy a Car?
Yes, you can use a personal loan to buy a car. In fact, you can use a personal loan for (almost) any legal purpose (though typically not for business expenses or tuition, as mentioned above). However, it often makes more sense to get traditional vehicle financing when buying a car.
In some ways, it can be better to buy a car with a personal loan. You don’t have to stress about saving up for a down payment, there’s no risk of your car being repossessed, and you might even have more negotiating power at the dealership.
However, many buyers prefer the structure of an auto loan. These loans tend to be cheaper in the long run because of the lower interest rates. And they’re easier to get — both because of lower credit score requirements for car loans and because dealerships can help you find the best car loan for you.
Key Differences Between Personal Loans and Car Loans
Here’s a summary of the key ways that personal loans and auto loans differ when you’re shopping for a new car.
Secured vs Unsecured Debt
As noted above, a car loan is secured by the vehicle. When you use an auto as collateral in this way, the loan is less risky for the lender and therefore the interest rate is typically lower. However, you do run the risk of losing your car (that is, having it repossessed) if you default on the loan.
A personal loan, on the other hand, is unsecured, meaning it’s not backed by an asset. For this reason, the rate is typically somewhat higher but you don’t face the possibility of losing your property if you don’t pay the loan.
Vehicle Ownership and Title
With an auto loan, the lender typically holds onto the title until the loan is fully paid off. However, with a personal loan, you usually buy the car with the funds provided and take ownership and title right away. This quicker path to holding the title may appeal to some borrowers.
Loan Approval and Credit Score Considerations
Because a car loan is a secured loan, it carries less risk to the lender. That means the lender may approve a loan for a borrower with a lower credit score vs. what’s required for a personal loan.
Pros & Cons: Personal Loan vs Car Loan
Buying a car with a personal loan instead of an auto loan has its share of advantages, but there are also drawbacks to consider. Once you know these, you can decide whether a personal loan is right for you or if you should use an auto loan as an alternative to a personal loan.
Pros
First, the upsides of using a personal loan:
• Less risk: When you take out a car loan, the car itself serves as collateral for the loan. If you miss enough payments, the lender could repossess your vehicle. With an unsecured personal loan, you don’t face that risk, though there are still consequences if you default on a personal loan.
• More negotiating power: When you don’t have to go through the hassle of securing financing, the car buying process is much easier and faster for you and the dealer. That means you might be able to negotiate a better deal, like a discount for paying in full.
• Lower insurance costs: When financing a car, the lender may require you to carry comprehensive, collision, and gap insurance. But when you pay for the vehicle outright with the funds from your personal loan, no one can require you to carry those car insurance coverages, just what is dictated by your state law.
• No need to save for a down payment: Personal loans don’t require a down payment. Though some have origination fees, you might even be able to roll those into the cost of the loan. That means you could use a personal loan to get a car with no money down.
Cons
Next, review the potential downsides of using a personal loan to buy a car:
• Higher cost: Interest rates are typically higher for personal loans, which means you’ll end up spending more money on your car in the long run than you would if you got traditional auto financing. Origination fees for personal loans may also be higher than they are for car loans.
• Higher credit score requirements: Because auto loans are secured by the vehicle being financed, lenders are a little more willing to work with lower credit scores. The credit score you need for a personal loan is typically higher (usually in the good range), though this varies by lender.
• More insurance risk: There may not be an auto lender requiring you to carry comprehensive, collision, or gap insurance. However, declining those coverages just because your personal loan lender doesn’t mandate them could open you up to considerable risk. If your car is totaled and you don’t have the proper coverage to get reimbursed, you’ll still be on the hook for making your personal loan payments — so think carefully before minimizing your car insurance coverage.
The Takeaway
Both auto loans and personal loans can help you get behind the wheel of a new (or used) car. Determining which type of loan is right for you comes down to your needs, preferences, and financial profile.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Is it easier to get a personal loan or car loan?
Getting a car loan is usually easier than getting a personal loan. That’s because car loans are secured by the vehicle you’re buying. That means less risk to the lender, who will be willing to accept lower credit scores.
Should I take out a personal loan to buy a car?
It depends. While you can get an auto loan through a bank, credit union, or the dealership, you can also pay for a car with a personal loan. Personal loans reduce your risk — there’s no chance of your car being repossessed — and they may give you more negotiating power. However, personal loans typically cost more in the long run.
Am I allowed to use a personal loan to buy a car?
Yes, you can use a personal loan to buy a new or used car. In fact, you can use personal loans for just about any legal purpose (though usually not for business expenses or tuition). Just read the fine print of any loan agreement to make sure.
Which loan type typically offers better interest rates?
When comparing auto loans and personal loans, an auto loan usually has somewhat lower interest rates since it’s a secured loan vs. an unsecured loan. However, that also means that with a vehicle loan, you risk possible repossession of the auto (the collateral) if you default. With an unsecured personal loan, there’s no asset that the lender could lay claim to if you don’t make payments.
What are the risks of using a personal loan to buy a car?
The risks of using a personal loan to buy a car can include higher costs (interest rates and origination fees may be higher than for auto loans), which means your monthly payment may be steeper. Also, there can be higher credit requirements for approval, and if you fail to make timely payments, your credit score will likely be negatively impacted.
Photo credit: iStock/skynesher
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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.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Capital gains are the profits investors may see from selling investments and other assets, like stocks, bonds, properties, vehicles, and so on. Capital gains tax doesn’t apply when you own these assets — it only applies when you profit from selling them, and the gain has to be reported to the IRS.
Short-term capital gains (from assets you’ve held for a year or less) are taxed at a higher marginal income tax rate. Long-term capital gains, which apply to assets you’ve held for more than a year, are taxed at the lower capital gains rate.
Other factors can affect an investor’s tax rate on gains, including: which asset you’re selling, your annual income, as well as your filing status. Capital gains tax rates typically change every year. Here, we’ll cover 2025 capital gains tax rates (for returns filed in 2026), and 2026 rates (for returns filed in 2027). Investment gains may also be subject to state and local taxes, as well.
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Key Points
• Capital gains tax is levied on the profit (capital gains) you make from selling investments or assets like stocks and properties.
• Gains are classified as either short-term (from assets held for one year or less) or long-term (from assets held for more than a year).
• Short-term gains are taxed at a higher marginal income tax rate compared to the lower long-term capital gains rate.
• Investments held within tax-advantaged retirement accounts, such as an IRA or 401(k), are generally not subject to capital gains tax as the money grows, though withdrawals may be subject to income tax.
• Holding an investment for more than a year to qualify for the long-term rate, and utilizing strategies like tax-loss harvesting (selling investments at a loss to offset capital gains) can help lower your overall capital gains tax liability.
Capital Gains Tax Rates Today
Capital gains and losses result from selling assets. Capital gains occur when the asset is sold for more than its purchase price. A capital loss is when an investor sells an asset for less than its original value.
How long you hold an investment before selling it can make a big difference in how much you pay in taxes.
When you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. If you profit from it after owning it for at least a year, it’s a long-term capital gain.
Capital gains tax applies to investments that are sold when you’re investing online or through a traditional taxable brokerage; again, appreciated assets are not taxed until they’re sold. Gains may also be subject to state and local tax.
With a tax-deferred retirement account, such as an IRA or 401(k), you don’t pay any capital gains; you do owe income tax on withdrawals, however.
Other Capital Gains Tax Rules
Certain investments are subject to capital gains even if you don’t sell those securities. For example, a dividend-paying stock can produce a taxable gain because dividends are a type of income.
Taxes on qualified dividends are paid at long-term capital gains rates. Taxes on ordinary dividends are taxed at the marginal income tax rate, the same as short-term gains. Because the long-term capital gains tax rate is lower than the marginal income tax rate, qualified dividends are generally preferred vs. ordinary dividends.
Again, if divided-paying investments are held in a tax-advantaged account, those dividends are also tax deferred.
Capital Gains Tax Rates for Tax Year 2025
Long-term capital gains taxes for an individual are simpler and lower than for married couples. These rates apply to gains from an asset sold after one year, and fall into three brackets: 0%, 15%, and 20%.
Long-Term Capital Gains Rates, 2025
The following table shows the long-term capital-gains tax rates, by income bracket and filing status, for the 2025 tax year, according to the IRS.
Capital Gains Tax Rate
Single
Married, Filing Jointly
Married, Filing Separately
Head of Household
0%
Up to $48,350
Up to $96,700
Up to $48,350
Up to $64,750
15%
$48,351 to $533,400
$96,701 to $600,050
$48,351 to $300,000
$64,751 – $566,700
20%
Over $533,401
Over $600,051
Over $300,001
Over $566,701
Long-Term Capital Gains Tax Rates, 2026
The following table shows the long-term capital gains tax rates for the 2026 tax year by income and filing status, according to the IRS.
The Internal Revenue Service (IRS) changes these numbers every year to adjust for inflation. You may learn your tax bracket by going to the IRS website, or asking your accountant.
2025 Short-Term Capital Gains Tax Rates
Here’s a table that shows the federal income tax brackets for the 2025 tax year, which are used for short-term gains, for tax returns that are usually filed in 2026, according to the IRS.
Marginal Rate
Single filers
Married, filing jointly
Head of household
Married, filing separately
10%
$0 to $11,925
$0 to $23,850
Up to $17,000
$0 to $11,925
12%
$11,926 to $48,475
$23,851 to $96,950
$17,001 to $64,850
$11,926 to $48,475
22%
$48,476 to $103,350
$96,951 to $206,700
$64,851 to $103,350
$48,476 to $103,350
24%
$103,351 to $197,300
$206,701 to $394,600
$103,351 to $197,300
$103,351 to $197,300
32%
$197,301 to $250,525
$394,601 to $501,050
$197,301 to $250,500
$197,301 to $250,525
35%
$250,526 to $626,350
$501,051 to $751,600
$250,501 to $626,350
$250,526 to $375,800
37%
Over $626,350
Over $751,600
Over $626,350
Over $375,800
Short-Term Capital Gains Tax Rates for Tax Year 2026
This table shows the federal marginal income tax rates for tax year 2026, which apply to short-term capital gains (for tax returns that are usually filed in 2027).
Marginal Rate
Single filers
Income Married, filing jointly
Head of household
Married, filing separately
10%
$0 to $12,400
$0 to $24,800
$0 to $17,700
$0 to $12,400
12%
$12,401 to $50,400
$24,801 to $100,800
$17,701 to $67,450
$12,401 to $50,400
22%
$50,401 to $105,700
$100,801 to $211,400
$67,451 to $105,700
$50,401 to $105,700
24%
$105,701 to $201,775
$211,401 to $403,550
$105,701 to $201,750
$105,701 to $201,775
32%
$201,776 to $256,225
$403,551 to $512,450
$201,751 to $256,200
$201,776 to $256,225
35%
$256,226 to $640,600
$512,451 to $768,700
$256,201 to $640,600
$256,226 to $384,350
37%
Over $640,600
Over $768,700
Over $640,600
Over $384,350
Tips for Lowering Capital Gains Taxes
Hanging onto an investment for more than a year can lower your capital gains taxes significantly.
Capital gains taxes also don’t apply to tax-advantaged accounts like 401(k) plans, 529 college savings accounts, or when you open an IRA. So selling investments within these accounts won’t generate capital gains taxes.
Instead, traditional 401(k)s and IRAs are taxed when you take distributions, while qualified distributions for Roth IRAs and 529 plans are tax-free.
Single homeowners also get a tax exclusion on the first $250,000 in profit they make from the sale of their primary residence, which they need to have lived in for at least two of the past five years. The limit is $500,000 for a married couple filing jointly.
Tax-Loss Harvesting
Tax-loss harvesting is another way to potentially save money on capital gains. Tax-loss harvesting is the strategy of selling some investments at a loss to offset the tax on profits from another investment.
Using short-term losses to offset short-term gains is a way to take advantage of tax-loss harvesting — because, as discussed above, short-term gains are taxed at higher rates. IRS rules also dictate that short-term or long-term losses must be used to offset gains of the same type, unless the losses exceed the gains from the same type.
Investors can also apply losses from investments of as much as $3,000 to offset ordinary income. And because tax losses don’t expire, if only a portion of losses was used to offset income in one year, the investor can “save” those losses to offset taxes in another year. This is known as a tax-loss carryforward.
Understanding the Wash-Sale Rule
While it may be useful in some cases to sell securities in order to harvest losses, it’s important to know about something called the wash-sale rule.
Per the IRS, the wash-sale rule states that if an investor sells an investment for a loss, then buys the same or a “substantially identical” asset within 30 days before or after the sale, they cannot use the original loss to offset capital gains or ordinary income and claim the tax benefit.
The wash-sale rule sounds straightforward, but the details are complicated. If you plan to sell securities at a loss in order to claim the tax benefit, you may want to consult a professional.
Generally, capital gains tax rates affect the wealthiest taxpayers, who typically make a bigger chunk of their income from profitable investments.
Here’s a closer look at how capital gains taxes compare with other taxes, including those in other countries.
Compared to Other Taxes
The highest long-term capital gains taxes rate of 20% is lower than the highest marginal rate of 37%.
Proponents of the lower long-term capital gains tax rate say the discrepancy exists to encourage investments.
Comparison to Capital Gains Taxes in Other Countries
In 2025, the Tax Foundation listed the capital gains taxes of the 35 different European Organization for Economic Cooperation and Development (OECD) countries. The U.S. maximum rate of 20% is roughly midway on the spectrum of comparable capital gains taxes.
In comparison, Denmark had the highest top capital gains tax at a rate of 42%. Norway was second-highest at 37.8%. The Netherlands were third on the list, at 36%. In addition, the following European countries all levied higher capital gains taxes than the U.S. (listed in order from the highest to lowest rate): Finland, France, Ireland, Sweden, Spain, Latvia, Austria, Germany, Italy, Czech Republic, and Iceland.
Comparing Historical Capital Gains Tax Rates
Because short-term capital gains tax rates are the same as those for wages and salaries, they adjust when ordinary income tax rates change. As for long-term capital gains tax, Americans today are paying rates that are relatively low historically. Today’s maximum long-term capital gains tax rate of 20% started in 2013.
For comparison, the high point for long-term capital gains tax was in the 1970s, when the maximum rate was at 35%.
Going back in time, in the 1920s the maximum rate was around 12%. From the early 1940s to the late 1960s, the rate was around 25%. Maximum rates were also pretty high, at around 28%, in the late 1980s and 1990s. Then, between 2004 and 2012, they dropped to 15%.
The Takeaway
Capital gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year to adjust for inflation.
It’s important for investors to know that capital gains tax rates can differ significantly based on whether they’ve held an investment for a year or less (for short-term gains), or more than a year (for long-term gains). An investor’s income level also determines how much they pay in capital gains taxes.
An accountant or financial advisor can suggest ways to lower your capital gains taxes as well as help you set financial goals.
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FAQ
Why is capital gains tax important?
When investors decide how long to hold investments, it’s a complex decision. Given that long-term capital gains rates are more favorable, some investors may want to hold onto their profitable investments for at least a year to get the lower rate.
Can you pay zero capital gains tax?
If you meet certain income criteria, yes. The lowest capital gains rate of 0% applies if your taxable income for tax year 2025 is equal to or less than $94,050 (married filing jointly); $47,025 (single, married filing separately, qualifying surviving spouse); and $63,000 for head of household. For tax year 2026, the 0% rate applies if your taxable income is equal to or less than $98,900 (married, filing jointly); $49,450 (single, married filing separately, qualifying surviving spouse); $66,200 (head of household).
Can capital losses reduce personal income tax?
In some cases yes: If your capital losses for a given year exceed your capital gains, you can deduct up to $3,000 in losses from your ordinary income (married, filing jointly; $1,500 if you’re married, filing separately). Losses can be applied to future capital gains or to income, in what’s known as a tax-loss carryforward.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
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.
This article is not intended to be legal advice. Please consult an attorney for advice.
Participating in a 401(k) through your employer can be a good way to contribute to and save for your retirement. One important thing to know is that there are limits on how much you can contribute each year and the amount typically changes, as per guidelines from the IRS.
Read on to find out about the 401(k) contribution limit for 2025 and 2026.
Overview of 401(k) Contribution Limits
The IRS reviews and often adjusts annual 401(k) plan contribution limits. The amount you can contribute to your 401(k) increased in 2025 and it’s increasing again in 2026.
Changes in Contribution Limits for 2025
In 2025, you can contribute up to $23,500 in your 401(k) (up from $23,000 in 2024). If you’re age 50 or older, you can contribute an additional $7,500 to your 401(k) plan for a grand total of $31,000 in annual contributions for 2025. Also in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.
Changes in Contribution Limits for 2026
For 2026, the IRS is raising the 401(k) contribution limit once again. You may contribute up to $24,500 to your 401(k) in 2026. The catch-up contribution limit for older employees is also increasing in 2026 to $8,000. That means those age 50 and up may contribute an additional $8,000 to their 401(k) for 2026, for a total of $32,500. Also, in 2026, those aged 60 to 63 may once again contribute an additional $11,250 instead of $8,000, for a total of $35,750.
Yearly Contribution Limits Explained
The IRS reviews the annual contribution limits for 401(k)s, typically in the fall of each year, and adjusts them when necessary to account for inflation. As noted above, the IRS changed the yearly 401(k) contribution limits (also known as elective deferral limits) for 2025 and 2026.
Employer Contributions and Catch-Up Provisions
One of the factors that makes a 401(k) a good vehicle for saving for retirement is that an employer may also contribute to the plan on your behalf.
And for employees aged 50 and up, the opportunity to make catch-up contributions to help save for retirement can be especially helpful.
Understanding Employer Match Limits
Your employer can make matching contributions to your 401(k) in addition to the funds you contribute. Matching funds may be based on the amount you choose to contribute.
For example, your employer might offer matching funds if you contribute 5% or more of your salary, as an incentive to get you to save. It’s a good idea to save at least the minimum amount to receive an employer’s match. If you don’t, you could be giving up free money.
There is an overall limit on how much you and your employer can contribute to your 401(k) plan each year. The combined limit for employer plus employee contributions in 2025 for those under age 50 cannot exceed 100% of your income or $70,000, whichever is lower. The 2026 combined limit for those under age 50 is 100% of your income or $72,000, whichever is lower.
Catch-Up Contributions
If you are 50 or older, your retirement contribution limit increases. The 401(k) catch-up contribution lets you fill in gaps in your retirement savings as you get closer to retirement. In 2025, you can make up to $7,500 in catch-up contributions. Also, in 2025, those aged 60 to 63 can contribute an extra $11,250, instead of $7,500.
In 2026, you can make up to $8,000 in catch-up contributions if you are 50 or older, and those aged 60 to 63 can contribute an extra $11,250, instead of $8,000.
Roth 401(k) vs Traditional 401(k) Limits
In addition to traditional 401(k)s, there are other types of employer-sponsored retirement accounts, such as a Roth 401(k). The main difference between a traditional 401(k) and a Roth 401(k) is that contributions to a Roth 401(k) are made after-tax, while contributions to a traditional 401(k) are made with pre-tax dollars. Money may grow inside a Roth 401(k) account tax-free and is not subject to income tax when you withdraw it.
Like a traditional 401(k), a Roth 401(k) has contribution limits.
Understanding Roth 401(k) Limits
Employee contribution limits for Roth 401(k)s are $23,500 for 2025, and $24,500 for 2026, the same as traditional 401(k)s. Roth 401(k) catch-up contribution limits for those 50 and up are $7,500 in 2025, and $8,000 in 2026 — also the same as catch-up contribution limits for traditional 401(k)s. And just like a traditional 401(k), in 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.
Comparing Traditional 401(k) Limits
Here’s a side-by-side comparison of traditional 401(k) contribution limits for 2025 and 2026.
Traditional 401(k)
2025
2026
Employee contribution limit
$23,500
$24,500
Catch-up contribution limit
$7,500
$8,000
SECURE 2.0 higher catch-up contribution limit for those aged 60 to 63
$11,500
$11,500
Combined employee and employer contribution limit
$70,000
($77,500 with standard catchup; $81,250 with SECURE 2.0 catch-up)
$72,000
($80,000 with standard catchup; $83,250 with SECURE 2.0 catch-up)
Managing Multiple 401(k) Plans
You may have multiple 401(k) plans, including some with previous employers. In that case, the same yearly contribution limits still apply.
Contribution Limits with Multiple Employers
Even if you have 401(k) plans with multiple employers, you must abide by the same annual contribution limits across all your plans. So, assuming you’re under age 50, for 2025, the maximum you can contribute to all your 401(k) plans is $23,500, and for 2026, the maximum amount you can contribute is $24,500. You can split these total amounts across the different plans, or contribute them to just one plan.
After-Tax 401(k) Contribution Rules
Some 401(k) plans allow for after-tax contributions. What this means is that as long as you haven’t reached the maximum combined limit of your plan — which is $70,000 in 2025 and $72,000 in 2026 — you can make after-tax contributions up to the maximum combined limit.
For instance, if you contribute $23,500 to your 401(k) in 2025, and your employer contributes $5,000 through an employer match, you can contribute an additional $41,500 in after-tax dollars, if your plan allows it, to reach the $70,000 maximum.
Excess Contributions and Their Implications
Figuring out how much you want to contribute to your 401(k) can be tricky. And you’re not allowed to go over the contribution limits or you may face penalties.
Handling Over-Contribution
If you contribute too much to your 401(k), you could be charged a 10% fine. You might also owe income tax on the excess amount.
Fortunately, many 401(k) plans have automatic cut-offs in place to help you avoid excess contributions. However, if you change jobs or you have more than one 401(k) plan, you might accidentally contribute too much. If you realize you’ve done this, you have until April 15 to request that the excess contributions be returned to you, along with any earnings those contributions made while they were in your 401(k). You can report excess contributions when you file your taxes using form 1099-R.
Strategies to Avoid Excess Contributions
To avoid making excess 401(k) contributions:
• Check the maximum contribution limits each year.
• If you get a raise, reassess your contribution amount to make sure you’re not exceeding it.
• If you have more than one 401(k) plan, review your contributions across all of your plans to make sure you’re not exceeding the maximum contribution limits.
Maximizing Your 401(k) Contributions
When you have a 401(k), you’ll want to get the most out of it to help you save for retirement. Here’s how.
Ideal Contribution Strategies
To maximize your 401(k):
• Start contributing to the plan as soon as you can. The earlier you start saving, the more time your money has to grow.
• Contribute at least enough to get the employer match on your 401(k). If you don’t, you are essentially passing up free money.
• Keep track of all your 401(k) plans to make sure you don‘t exceed the annual contribution limits. And if you have a 401(k) from a previous employer, you might want to do a 401(k) rollover to potentially get more out of the plan.
Balancing 401(k) with Other Retirement Plans
Along with your 401(k), you can open other types of retirement accounts to help you save for your golden years. For instance, consider opening a tax-advantaged IRA online. You can contribute up to $7,000 in 2025 in a traditional or Roth IRA, plus an extra $1,000 if you are age 50 or older, and in 2026, you can contribute $7,500 in an IRA plus an extra $1,100 if you are 50 or older — and that’s in addition to what you can contribute to your 401(k).
The Takeaway
Having more than one type of retirement plan could potentially help you reach your financial goals faster. Not only can you put away more money for your retirement, an IRA typically gives you more investing options that a 401(k) does, making it more flexible. It can also assist you with diversifying your portfolio to help manage risk and potentially help grow your retirement savings.
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 build your nest egg with a SoFi IRA.
🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of Individual Retirement Accounts (IRAs).
FAQ
What is the maximum 401(k) contribution for 2025?
The maximum 401(k) contribution limit for 2025 is $23,500. Those aged 50 and up may contribute an additional $7,500 in 2025. Those aged 60 to 63 may contribute an extra $11,250, instead of $7,500, thanks to SECURE 2.0.
Are 401(k) contribution limits changing in 2026?
Yes, 401(k) contribution limits are changing in 2026. The 401(k) contribution limit in 2026 is $24,500. Individuals who are 50 and older can contribute an additional $8,000 to their 401(k) in 2026. And in 2026, those aged 60 to 63 may again contribute an extra $11,250, instead of $8,000.
Can I contribute 100% of my salary to a 401(k)?
If you make less than $23,500 in 2025, and less than $24,500 in 2026, you may be able to contribute 100% of your salary to a 401(k). However, your specific 401(k) plan may limit the amount you can contribute.
You should also note that there is an overall limit on how much you and your employer can contribute to your 401(k) plan each year. The combined limit for employer plus employee contribution in 2025 cannot exceed 100% of your income or $70,000, whichever is lower. The 2026 combined limit is 100% of your income or $72,000, whichever is lower.
Is there a salary cap for 401(k) contributions?
There is a cap on how much of an employee’s salary can be used to calculate 401(k) contributions as well as a cap on how much the employee can contribute. The amount of compensation eligible for determining 401(k) contributions in 2025 is $350,000, and in 2026 it’s $360,000. Anything above that amount of compensation is not taken into account for contributions. What this means is that while you can contribute up to the maximum employee contribution, which is $23,500 in 2025 and $24,500 in 2026, your employer can only match contributions up to the income limit.
What happens if I exceed the 401(k) max?
If you contribute too much to your 401(k), you could be charged a 10% penalty. You might also owe income tax on the excess amount. If you realize you’ve exceeded the 401(k) maximum, you have until tax day, which is typically April 15, to request that the excess contributions be returned to you, along with any earnings the contributions made while they were in your 401(k). You can report excess contributions on form 1099-R when you file your taxes.
How much can I contribute to a 401(k) if I’m 50 years of age or older?
If you are 50 or older, you can contribute up to $31,000 in your 401(k) in 2025, and up to $32,500 in 2026. This includes an additional $7,500 in 2025, and an additional $8,000 in 2026, in catch-up contributions. And if you are aged 60 to 63, you may contribute an extra $11,250 in both 2025 and 2026, instead of $7,500 for 2025, and $8,000 for 2026, thanks to SECURE 2.0.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
Retirement will likely be the most significant expense of your lifetime, which means saving for retirement is a big job. This is especially true if you envision a retirement that is rich with experiences such as traveling through Europe or spending time with your grown children and grandkids. A retirement savings plan may help you achieve these financial goals and stay on track.
There are all types of retirement plans you may consider to help you build your wealth, from 401(k)s to Individual Retirement Accounts (IRAs) to annuities. Understanding the nuances of these different retirement plans, like their tax benefits and various drawbacks, may help you choose the right mix of plans to achieve your financial goals.
Key Points
• There are various types of retirement plans, including traditional and non-traditional options, such as 401(k), IRA, Roth IRA, SEP IRA, and Cash-Balance Plan.
• Employers offer defined contribution plans (e.g., 401(k)) where employees contribute and have access to the funds, and defined benefit plans (e.g., Pension Plans) where employers invest for employees’ retirement.
• Different retirement plans have varying tax benefits, contribution limits, and employer matches, which should be considered when choosing a plan.
• Individual retirement plans like Traditional IRA and Roth IRA provide tax advantages but have contribution restrictions and penalties for early withdrawals.
• It’s possible to have multiple retirement plans, including different types and accounts of the same type, but there are limitations on tax benefits based on the IRS regulations.
🛈 SoFi does not offer employer-sponsored plans, such as 401(k) or 403(b) plans, but we do offer a range of individual retirement accounts (IRAs).
Types of Retirement Accounts
There are several different types of retirement plans, including some traditional plan types you may be familiar with as well as non-traditional options.
Traditional retirement plans can be IRA accounts or 401(k). These tax-deferred retirement plans allow you to contribute pre-tax dollars to an account. With a traditional IRA or 401(k), you only pay taxes on your investments when you withdraw from the account.
Non-traditional retirement accounts can include Roth 401(k)s and IRAs, for which you pay taxes on funds before contributing them to the account and withdraw money tax-free in retirement.
Here’s information about some of the most common retirement plan types:
There are typically two types of retirement plans offered by employers:
• Defined contribution plans (more common): The employee invests a portion of their paycheck into a retirement account. Sometimes, the employer will match up to a certain amount (e.g. up to 5%). In retirement, the employee has access to the funds they’ve invested. 401(k)s and Roth 401(k)s are examples of defined contribution plans.
• Defined benefit plans (less common): The employer invests money for retirement on behalf of the employee. Upon retirement, the employee receives a regular payment, which is typically calculated based on factors like the employee’s final or average salary, age, and length of service. As long as they meet the plan’s eligibility requirements, they will receive this fixed benefit (e.g. $100 per month). Pension plans and cash balance accounts are common examples of defined benefit plans.
Let’s get into the specific types of plans employers usually offer.
401(k) Plans
A 401(k) plan is a type of work retirement plan offered to the employees of a company. Traditional 401(k)s allow employees to contribute pre-tax dollars, where Roth 401(k)s allow after-tax contributions.
• Income Taxes: If you choose to make a pre-tax contribution, your contributions may reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Some employers allow you to make after-tax or Roth contributions to a 401(k). You should check with your employer to see if those are options.
• Contribution Limit: $23,500 in 2025 and $24,500 in 2026 for the employee; people 50 and older can contribute an additional $7,500 in 2025 and $8,000 in 2026. However, in 2025 and 2026, under the SECURE 2.0 Act, a higher catch-up limit of $11,250 applies to individuals ages 60 to 63.
• Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. There is a significantly higher limit than with Traditional IRA and Roth IRA accounts.
• Cons: With a 401(k) plan, you are largely at the mercy of your employer — there’s no guarantee they will pick plans that you feel are right for you or are cost effective for what they offer. Also, the value of a 401(k) comes from two things: the pre-tax contributions and the employer match, if your employer doesn’t match, a 401(k) may not be as valuable to an investor. There are also penalties for early withdrawals before age 59 ½, although there are some exceptions, including for certain public employees.
• Usually best for: Someone who works for a company that offers one, especially if the employer provides a matching contribution. A 401(k) retirement plan can also be especially useful for people who want to put retirement savings on autopilot.
• To consider: Sometimes 401(k) plans have account maintenance or other fees. Because a 401(k) plan is set up by your employer, investors only get to choose from the investment options they provide.
403(b) Plans
A 403(b) retirement plan is like a 401(k) for certain individuals employed by public schools, churches, and other tax-exempt organizations. Like a 401(k), there are both traditional and Roth 403(b) plans. However, not all employees may be able to access a Roth 403(b).
• Income Taxes: With a traditional 403(b) plan, you contribute pre-tax money into the account; the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers allow you to make after-tax or Roth contributions to a 403(b); the money will grow tax-deferred and you will not have to pay taxes on withdrawals in retirement. You should check with your employer to see if those are options.
• Contribution Limit: $23,500 in 2025 and $24,500 in 2026 for the employee; people 50 and older can contribute an additional $7,500 in 2025 and $8,000 in 2026. In 2025 and 2026, under the SECURE 2.0 Act, those ages 60 to 63 can contribute a higher catch-up amount of $11,250. The maximum combined amount both the employer and the employee can contribute annually to the plan (not including the catch-up amounts) is generally the lesser of $70,000 in 2025 and $72,000 in 2026 or the employee’s most recent annual salary.
• Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. Also, these plans often come with lower administrative costs because they aren’t subject to Employee Retirement Income Security Act (ERISA) oversight.
• Cons: A 403(b) account generally lacks the same protection from creditors as plans with ERISA compliance.
• To consider: 403(b) plans offer a narrow choice of investments compared to other retirement savings plans. The IRS states these plans can only offer annuities provided through an insurance company and a custodial account invested in mutual funds.
Solo 401(k) Plans
A Solo 401(k) plan is essentially a one-person 401(k) plan for self-employed individuals or business owners with no employees, in which you are the employer and the employee. Solo 401(k) plans may also be called a Solo-k, Uni-k, or One-participant k.
• Income Taxes: The contributions made to the plan are tax-deductible.
• Contribution Limit: $23,500 in 2025 and $24,500 in 2026, or 100% of your earned income, whichever is lower, plus “employer” contributions of up to 25% of your compensation from the business. The 2025 total cannot exceed $70,000, and the 2026 total cannot exceed $72,000. (On top of that, people 50 and older are allowed to contribute an additional $7,500 in 2025 and $8,000 in 2026. In 2025 and 2026, those ages 60 to 63 can contribute a higher catch-up amount of $11,250 under the SECURE 2.0 Act .)
• Pros: A solo 401(k) retirement plan allows for large amounts of money to be invested with pre-tax dollars. It provides some of the benefits of a traditional 401(k) for those who don’t have access to a traditional employer-sponsored 401(k) retirement account.
• Cons: You can’t open a solo 401(k) if you have any employees (though you can hire your spouse so they can also contribute to the plan as an employee — and you can match their contributions as the employer).
• Usually best for: Self-employed people with enough income and a large enough business to fully use the plan.
SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)
A SIMPLE IRA plan is set up by an employer, who is required to contribute on employees’ behalf, although employees are not required to contribute.
• Income Taxes: Employee contributions are made with pre-tax dollars. Additionally, the money will grow tax-deferred and employees will pay taxes on the withdrawals in retirement.
• Contribution Limit: $16,500 in 2025 and $17,000 in 2026. Employees aged 50 and over can contribute an extra $3,500 in 2025 and $4,000 in 2026, bringing their total to $20,000 in 2025 and $21,000 in 2026. In 2025 and 2026, under the SECURE 2.0 Act, people ages 60 to 63 can contribute a higher catch-up amount of $5,250.
• Pros: Employers contribute to eligible employees’ retirement accounts at 2% their salaries, whether or not the employees contribute themselves. For employees who do contribute, the company will match up to 3%.
• Cons: The contribution limits for employees are lower than in a 401(k) and the penalties for early withdrawals — up to 25% for withdrawals within two years of your first contribution to the plan — before age 59 ½ may be higher.
• To consider: Only employers with less than 100 employees are allowed to participate.
This is a retirement account established by a small business owner or self-employed person for themselves (and if applicable, any employees).
• Income Taxes: Your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on withdrawals in retirement.
• Contribution Limit: For 2025, $70,000 or 25% of earned income, whichever is lower; for 2026, $72,000 or 25% of earned income, whichever is lower.
• Pros: Higher contribution limit than IRA and Roth IRAs, and contributions are tax deductible for the business owner.
• Cons: These plans are employer contribution only and greatly rely on the financial wherewithal and available cash of the business itself.
• Usually best for: Self-employed people and small business owners who wish to contribute to an IRA for themselves and/or their employees.
• To consider: Because you’re setting up a retirement plan for a business, there’s more paperwork and unique rules. When opening an employer-sponsored retirement plan, it generally helps to consult a tax advisor.
Profit-Sharing Plans (PSPs)
A Profit-Sharing Plan is a retirement plan funded by discretionary employer contributions that gives employees a share in the profits of a company.
• Income taxes: Deferred; assessed on distributions from the account in retirement.
• Contribution Limit: The lesser of 25% of the employee’s compensation or $70,000 in 2025 (On top of that, people 50 and older are allowed to contribute an additional $7,500 in 2025. And people ages 60 to 63 can make a higher contribution of $11,250 in 2025 under SECURE 2.0.) In 2026, the contribution limit is $72,000 or 25% of the employee’s compensation, whichever is less. Those 50 and up can contribute an extra $7,500 in 2025 and $8,000 in 2026. And people ages 60 to 63 can once again make a higher contribution of $11,250 in 2026 under SECURE 2.0.
• Pros: An employee receives a percentage of a company’s profits based on its earnings. Companies can set these up in addition to other qualified retirement plans, and make contributions on a completely voluntary basis.
• Cons: These plans put employees at the mercy of their employers’ profits, unlike retirement plans that allow employees to invest in securities issued by other companies.
• Usually best for: Companies who want the flexibility to contribute to a PSP on an ad hoc basis.
• To consider: Early withdrawal from the plan is subject to penalty.
Defined Benefit Plans (Pension Plans)
These plans, more commonly known as pension plans, are retirement plans provided by the employer where an employee’s retirement benefits are calculated using a formula that factors in age, salary, and length of employment.
• Income taxes: Deferred; assessed on distributions from the plan in retirement.
• Contribution limit: Determined by an enrolled actuary and the employer.
• Pros: Provides tax benefits to both the employer and employee and provides a fixed payout upon retirement that many retirees find desirable.
• Cons: These plans are increasingly rare, but for those who do have them, issues can include difficulty realizing or accessing benefits if you don’t work at a company for long enough.
• Usually best for: Companies that want to provide their employees with a “defined” or pre-determined benefit in their retirement years.
• To consider: These plans are becoming less popular because they cost an employer significantly more in upkeep than a defined contribution plan such as a 401(k) program.
Employee Stock Ownership Plans (ESOPs)
An Employee Stock Ownership Plan is a qualified defined contribution plan that invests in the stock of the sponsoring employer.
• Income taxes: Deferred. When an employee leaves a company or retires, they receive the fair market value for the stock they own. They can either take a taxable distribution or roll the money into an IRA.
• Contribution limits: Allocations are made by the employer, usually on the basis of relative pay. There is typically a vesting schedule where employees gain access to shares in one to six years.
• Pros: Could provide tax advantages to the employee. ESOP plans also align the interests of a company and its employees.
• Cons: These plans concentrate risk for employees: An employee already risks losing their job if an employer is doing poorly financially, by making some of their compensation employee stock, that risk is magnified. In contrast, other retirement plans allow an employee to invest in stocks in other securities that are not tied to the financial performance of their employer.
457(b) Plans
A 457(b) retirement plan is an employer-sponsored deferred compensation plan for employees of state and local government agencies and some tax-exempt organizations.
• Income taxes: If you choose to make a pre-tax contribution, your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Some employers also allow you to make after-tax or Roth contributions to a 401(k).
• Contribution limits: The lesser of 100% of employee’s compensation or $23,500 in 2025 and $24,500 in 2026; some plans allow for “catch-up” contributions.
• Pros: Plan participants can withdraw as soon as they are retired at any age, they do not have to wait until age 59 ½ as with 401(k) and 403(b) plans.
• Cons: 457 plans do not have the same kind of employer match as a 401(k) plan. While employers can contribute to the plan, it’s only up to the combined limit for individual contributions.
• Usually best for: Employees of governmental agencies.
Federal Employees Retirement System (FERS)
The Federal Employees Retirement System (FERS) consists of three government-sponsored retirement plans: Social Security, the Basic Benefit Plan, and the Thrift Savings Plan.
The Basic Benefit Plan is an employer-provided pension plan, while the Thrift Savings Plan is most comparable to what private-sector employees can receive.
• Income Taxes: Contributions to the Thrift Savings Plan are made before taxes and grow tax-free until withdrawal in retirement.
• Contribution Limit: The contribution limit for employees is $23,500 in 2025, and the combined limit for all contributions, including from the employer, is $70,000. In 2026, the employee contribution limit is $24,500, and the combined limit for contributions, including those from the employer, is $72,000. Also, those 50 and over are eligible to make an additional $7,500 in “catch-up” contributions in 2025 and an additional $8,000 in 2026. And in both 2025 and 2026, those ages 60 to 63 can make a higher catch-up contribution of $11,250 under the SECURE 2.0 Act.
• Pros: These government-sponsored plans are renowned for their low administrative fees and employer matches.
• Cons: Only available for federal government employees.
• Usually best for: Federal government employees who will work at their agencies for a long period; it is comparable to 401(k) plans in the private sector.
Cash-Balance Plans
This is another type of pension plan that combines features of defined benefit and defined contribution plans. They are sometimes offered by employers that previously had defined benefit plans. The plans provide an employee an “employer contribution equal to a percent of each year’s earnings and a rate of return on that contribution.”
• Income Taxes: Contributions come out of pre-tax income, similar to 401(k).
• Contribution Limit: The plans combine a “pay credit” based on an employee’s salary and an “interest credit” that’s a certain percentage rate; the employee then gets an account balance worth of benefits upon retirement that can be paid out as an annuity (payments for life) or a lump sum. Limits depend on age, but for those over 60, they can be more than $250,000.
• Pros: Can reduce taxable income.
• Cons: Cash-balance plans have high administrative costs.
• Usually best for: High earners, business owners with consistent income.
Nonqualified Deferred Compensation Plans (NQDC)
These are plans typically designed for executives at companies who have maxed out other retirement plans. The plans defer payments — and the taxes — you would otherwise receive as salary to a later date.
• Income Taxes: Income taxes are deferred until you receive the payments at the agreed-upon date.
• Contribution Limit: None
• Pros: The plans don’t have to be entirely geared around retirement. While you can set dates with some flexibility, they are fixed.
• Cons: Employees are not usually able to take early withdrawals.
• Usually best for: Highly-paid employees for whom typical retirement plans would not provide enough savings compared to their income.
Multiple Employer Plans
A multiple employer plan (MEP) is a retirement savings plan offered to employees by two or more unrelated employers. It is designed to encourage smaller businesses to share the administrative burden of offering a tax-advantaged retirement savings plan to their employees. These employers pool their resources together to offer a defined benefit or defined contribution plan for their employees.
Administrative and fiduciary responsibilities of the MEP are performed by a third party (known as the MEP Sponsor), which may be a trade group or an organization that specializes in human resources management.
This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.
Compare Types of Retirement Accounts Offered by Employers
To recap retirement plans offered by employers:
Retirement Plans Offered by Employers
Type of Retirement Plan
May be Funded By
Pro
Con
401(k)
Employee and Employer
Contributions are deducted from paycheck
Limited investment options
Solo 401(k)
Employee and Employer
Good for self-employed people
Not available for business owners that have employees
403(b)
Employee and Employer
Contributions are deducted from paycheck
Usually offer a narrow choice of investment options
SIMPLE IRA
Employer and Employee
Employer contributes to account
High penalties for early withdrawals
SEP Plan
Employer
High contribution limits
Employer decides whether and how much to contribute each year
Profit-Sharing Plan
Employer
Can be paired with other qualified retirement plans
Plan depends on an employer’s profits
Defined Benefit Plan
Employer
Fixed payout upon retirement
May be difficult to access benefits
Employee Stock Ownership Plan
Employer
Aligns interest of a company and its employees
May be risky for employees
457
Employee
You don’t have to wait until age 59 ½ to withdraw
Does not have same employer match possibility like a 401(k)
Federal Employees Retirement System
Employee and Employer
Low administrative fees
Only available for federal government employees
Cash-Balance Plan
Employer
Can reduce taxable income
High administrative costs
Nonqualified Deferred Compensation Plan
Employer
Don’t have to be retirement focused
Employees are not usually able to take early withdrawals
With an IRA, you open and fund the IRA yourself. As the name suggestions, it is a retirement plan for individuals. This is not a plan you join through an employer.
• Income Taxes: You may receive an income tax deduction on contributions (depending on your income and access to another retirement plan through work). The balance in the IRA is tax-deferred, and withdrawals will be taxed (the amount will vary depending on whether contributions were deductible or non-deductible).
• Contribution Limit: In 2025, the contribution limit is $7,000, or $8,000 for people 50 and older. In 2026, the contribution limit is $7,500, or $8,600 for people 50 and older.
• Pros: You might be able to lower your tax bill if you’re eligible to make deductible contributions. Additionally, the money in the account is tax-deferred, which can make a difference over a long period of time. Finally, there are no income limits for contributing to a traditional IRA..
• Cons: Traditional IRAs come with a number of restrictions, including how much can be contributed and when you can start withdrawals without penalty. Traditional IRAs are also essentially a guess on the tax rate you will be paying when you begin withdrawals after age 59 ½, as the money in these accounts are tax-deferred but are taxed upon withdrawal. Also, traditional IRAs generally mandate withdrawals starting at age 73.
• Usually best for: People who can make deductible contributions and want to lower their tax bill, or individuals who earn too much money to contribute directly to a Roth IRA. Higher-income earners might not get to deduct contributions from their taxes now, but they can take advantage of tax-deferred growth between now and retirement. An IRA can also be used for consolidating and rolling over 401(k) accounts from previous jobs.
• To consider: You may be subject to a 10% penalty for withdrawing funds before age 59 ½. As a single filer, you cannot deduct IRA contributions if you’re already covered by a retirement account through your work and earn more (according to your modified gross adjusted income) than $89,000 or more in 2025, with a phase-out starting at more than $79,000, and $91,000 or more in 2026, with a phase-out starting at more than $81,000.
Roth IRAs
A Roth IRA is another retirement plan for individuals that is managed by the account holder, not an employer.
• Income Taxes: Roth IRA contributions are made with after-tax money, which means you won’t receive an income tax deduction for contributions. But your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.
• Contribution Limit: In 2025, the contribution limit is $7,000, or $8,000 for those 50 and up. In 2026, the contribution limit is $7,500, or $8,600 for those 50 and up.
• Pros: While contributing to a Roth IRA won’t lower your tax bill now, having the money grow tax-free and being able to withdraw the money tax-free down the road could provide value in the future.
• Cons: Like a traditional IRA, a Roth IRA has tight contribution restrictions. Unlike a traditional IRA, it does not offer tax deductions for contributions. As with a traditional IRA, there’s a penalty for taking some kinds of distributions before age 59 ½.
• Usually best for: Someone who wants to take advantage of the flexibility to withdraw from an account during retirement without paying taxes. Additionally, it can be especially beneficial for people who are currently in a low income-tax bracket and expect to be in a higher income tax bracket in the future.
• To consider: To contribute to a Roth IRA, you must have an earned income. Your ability to contribute begins to phase out when your income as a single filer (specifically, your modified adjusted gross income) reaches $150,000 in 2025, and $153,000 in 2026. As a married joint filer, your ability to contribute to a Roth IRA begins to phase out at $236,000 in 2025, and $242,000 in 2026.
Payroll Deduction IRAs
This is either a traditional or Roth IRA that is funded through payroll deductions.
• Income Taxes: For a Traditional IRA, you may receive an income tax deduction on contributions (depending on income and access to a retirement plan through work); the balance in the IRA will always grow tax-deferred, and withdrawals will be taxed (how much is taxed depends on if you made deductible or non-deductible contributions). For a Roth IRA, contributions are made with after-tax money, your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.
• Contribution Limit: In 2025, the limit is $7,000, or $8,000 for those 50 and older. In 2026, the limit is $7,500, or $8,600 for those 50 and older.
• Pros: Automatically deposits money from your paycheck into a retirement account.
• Cons: The employee must do the work of setting up a plan, and employers can not contribute to it as with a 401(k). Participants cannot borrow against the retirement plan or use it as collateral for loans.
• Usually best for: People who do not have access to another retirement plan through their employer.
• To consider: These have the same rules as a Traditional IRA, such as a 10% penalty for withdrawing funds before age 59 ½. Only employees can contribute to a Payroll Deduction IRA.
Guaranteed Income Annuities (GIAs)
Guaranteed Income Annuities are products sold by insurance companies. They are similar to the increasingly rare defined benefit pensions in that they have a fixed payout that will last until the end of life. These products are generally available to people who are already eligible to receive payouts from their retirement plans.
• Income Taxes: If the annuity is funded by 401(k) benefits, then it is taxed like income. Annuities purchased with Roth IRAs, however, have a different tax structure. For “non-qualified annuities,” i.e. annuities purchased with after-tax income, a formula is used to determine the taxes so that the earnings and principal can be separated out.
• Contribution Limit: Annuities typically do not have contribution limits.
• Pros: These are designed to allow for payouts until the end of life and are fixed, meaning they’re not dependent on market performance.
• Cons: Annuities can be expensive, often involving significant fees or commissions.
• Usually best for: People who have high levels of savings and can afford to make expensive initial payments on annuities.
Cash-Value Life Insurance Plan
Cash-value life insurance typically covers the policyholder’s entire life and has tax-deferred savings, making it comparable to other retirement plans. Some of the premium paid every month goes to this investment product, which grows over time.
• Income Taxes: Taxes are deferred until the policy is withdrawn from, at which point withdrawals are taxed at the policyholder’s current income tax rate.
• Contribution Limit: The plan is drawn up with an insurance company with set premiums.
• Pros: These plans have a tax-deferring feature and can be borrowed from.
• Cons: While you may be able to withdraw money from the plan, this will reduce your death benefit.
• Usually best for: High earners who have maxed out other retirement plans.
Compare Types of Retirement Accounts Not Offered by Employers
To recap retirement plans not offered by employers:
Retirement Plans Not Offered by Employers
Type of Retirement Plan
Pro
Con
IRA
Contributions may be tax deductible
Penalty for withdrawing funds before age 59 ½
Roth IRA
Distributions are not taxed
Not available for individuals with high incomes
Payroll Deduction IRA
Automatically deposits money from your paycheck into the account
Participants can’t borrow against the plan
Guaranteed Income Annuity
Not dependent on market performance
Expensive fees and commissions
Cash-Value Life Insurance Plan
Tax-deferred savings
May be able to withdraw money from the plan, but this will reduce death benefit
Specific Benefits to Consider
As you’re considering the different types of retirement plans, it’s important to look at some key benefits of each plan. These include:
• the tax advantage
• contribution limits
• whether an employer will add funds to the account
• any fees associated with the account
💡 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.
Determining Which Type of Retirement Plan Is Best for You
Depending on your employment circumstances, there are many possible retirement plans in which you can invest money for retirement. Some are offered by employers, while other retirement plans can be set up by an individual. Brian Walsh, a CFP® at SoFi, says “a mixture of different types of accounts help you best plan your retirement income strategy down the road.”
Likewise, the benefits for each of the available retirement plans differ. Here are some specific benefits and disadvantages of a few different plans to consider.
With employer-offered plans like a 401(k) and 403(b), you have the ability to:
Take them with you. If you leave your job, you can roll these plans over into a plan with a new employer or an IRA.
Possibly get an employer match. With some of these plans, an employer may match a certain percentage or amount of your contributions.
With retirement plans not offered by employers, like a SEP IRA, you may get:
A wider variety of investment options. You might have more options to choose from with these plans.
You may be able to contribute more. The contribution limits for some of these plans may be higher.
Despite their differences, the many different types of retirement accounts all share one positive attribute: utilizing and investing in them is an important step in saving for retirement.
Because there are so many retirement plans to choose from, it may be wise to talk to a financial professional to help you decide your financial plan.
Can You Have Multiple Types of Retirement Plans?
You can have multiple retirement savings plans, whether employer-provided plans like a 401(k), IRAs, or annuities. Having various plans can let you take advantage of the specific benefits that different retirement savings plans offer, thus potentially increasing your total retirement savings.
Additionally, you can have multiple retirement accounts of the same type; you may have a 401(k) at your current job while also maintaining a 401(k) from your previous employer.
Nonetheless, there are limitations on the tax benefits you may be allowed to receive from these multiple retirement plans. For example, the IRS does not allow individuals to take a tax deduction for traditional IRA contributions if they also have an employer-sponsored 401(k).
Opening a Retirement Investment Account With SoFi
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
Why is it important to understand the different types of retirement plans?
Understanding the different types of retirement plans is important because of the nuances of taxation in these accounts. The various rules imposed by the Internal Revenue Service (IRS) can affect your contributions, earnings, and withdrawals. And not only does the IRS have rules around taxation, but also about contribution limits and when you can withdraw money without penalties.
Additionally, the various types of retirement plans differ regarding who establishes and uses each account and the other plan rules. Ultimately, understanding these differences will help you determine which combination of retirement plans is best for you.
How can you determine which type of retirement plan is best for you?
The best type of retirement plan for you is the one that best meets your needs. Many types of retirement plans are available, and each has its own benefits and drawbacks. When choosing a retirement plan, some factors to consider include your age, investing time horizon, financial goals, risk tolerance, and the fees associated with a retirement plan.
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