The biggest difference between an IRA vs. a 401(k) is the amount you can save. You can save over three times as much in a 401(k) vs. an IRA — $23,500 versus $7,000 for tax year 2025, and $24,500 versus $7,500 for tax year 2026. But not everyone has access to a 401(k), because these are sponsored by an employer, typically for full-time employees.
“A 401(k) is probably one of the most common retirement vehicles,” says Brian Walsh, a CFP® at SoFi. “A 401(k) will be available through work. Your employer is going to choose whether or not to make a 401(k) available to all the employees. Generally speaking, 401(k)s are the most popular retirement plan employers provide.”
Other than that, a traditional IRA and a 401(k) are similar in terms of their basic provisions and tax implications. Both accounts are considered tax deferred, which means you can deduct the amount you contribute each year — unless you have a Roth account, which has a different tax benefit.
Before you decide whether one or all three types of retirement accounts might make sense for you, it helps to know all the similarities and differences between a 401(k) and a traditional IRA and Roth IRA.
Key Points
• An IRA (Individual Retirement Account) and a 401(k) are both retirement savings accounts, but they have different features and eligibility requirements.
• IRAs are typically opened by individuals, while 401(k)s are offered by employers to their employees.
• IRAs offer more investment options and flexibility, while 401(k)s may have employer matching contributions and higher contribution limits.
• Both accounts offer tax advantages, but the timing of tax benefits differs: IRAs provide tax benefits during retirement, while 401(k)s offer tax benefits upfront.
• Choosing between an IRA and a 401(k) depends on factors like employment status, employer contributions, investment options, and personal financial goals.
How Are IRAs and 401(k)s Different?
The government wants you to prioritize saving for retirement. As a result, they provide tax incentives for IRAs vs. 401(k)s.
In that respect, a traditional IRA and a 401(k) are somewhat similar; both offer tax-deferred contributions, which may lower your taxable income, and tax-deferred investment growth. Also, you owe taxes on the money you withdraw from these accounts in retirement (or beforehand, if you take an early withdrawal).
There is a bigger difference between a Roth IRA and a 401(k). Roth accounts are funded with after-tax contributions — so they aren’t tax deductible. But they provide tax-free withdrawals in retirement.
And while you can’t withdraw the contributions you make to a traditional IRA until age 59 ½ (or incur a penalty), you can withdraw Roth contributions at any time (just not the earning or growth on your principal).
These days, you may be able to fund a Roth 401(k), if your company offers it.
Other Key Differences Between IRAs and 401(k)s
As with anything that involves finance and the tax code, these accounts can be complicated. Because there can be stiff penalties when you don’t follow the rules, it’s wise to know what you’re doing.
Who Can Set Up a 401(k)?
As noted above, a key difference between an IRA and a 401(k) is that 401(k)s are qualified employer-sponsored retirement plans. You typically only have access to these plans through an employer who offers them as part of a full-time compensation package.
In addition, your employer may choose to provide matching 401(k) funds as part of your compensation, which is typically a percentage of the amount you contribute (e.g. an employer might match 3%, dollar for dollar).
Not everyone is a full-time employee. You may be self-employed or work part-time, leaving you without access to a traditional 401(k). Fortunately, there are other options available to you, including solo 401(k) plans and opening an IRA online (individual retirement accounts).
Who Can Set Up an IRA?
Anyone can set up an individual retirement account (IRA) as long as they’re earning income. (And if you’re a non-working spouse of someone with earned income, they can set up a spousal IRA on your behalf.)
If you already have a 401(k), you can still open an IRA and contribute to both accounts. But if you or your spouse (if you’re married) are covered by a retirement plan at work, you may not be able to deduct the full amount of your IRA contributions.
Understanding RMDs
Starting at age 73 (for those who turn 72 after December 31, 2022), you must take required minimum distributions (RMDs) from your tax-deferred accounts, including: traditional IRAs, SEP and SIMPLE IRAs, and 401(k)s. Be sure to determine your minimum distribution amount, and the proper timing, so that you’re not hit with a penalty for skipping it.
It’s worth noting, though, that RMD rules don’t apply to Roth IRAs. If you have a Roth IRA, or inherit one from your spouse, the money is yours to withdraw whenever you choose. The rules change if you inherit a Roth from someone who isn’t your spouse, so consult with a professional as needed.
However, RMD rules do apply when it comes to a Roth 401(k), similar to a traditional 401(k). The main difference here, of course, is that the Roth structure still applies and withdrawals are tax free.
A Closer Look at IRAs
An IRA is an individual retirement account that has a much lower contribution limit than a 401(k) (see chart below). Anyone with earned income can open an IRA, and there are two main types of IRAs to choose from: traditional and Roth accounts.
Self-employed people can also consider opening a SEP-IRA or a SIMPLE IRA, which are tax-deferred accounts that have higher contribution limits.
Traditional IRA
Like a 401(k), contributions to a traditional IRA are tax deductible and may help lower your tax bill. In 2025, IRA contribution limits are $7,000, or $8,000 for those ages 50 or older. In 2026, IRA contribution limits are $7,500, or $8,600 for those 50 or older.
With a traditional IRA, investments inside the account grow tax-deferred. And unlike 401(k)s where an employer might offer limited options, IRAs are more flexible because they are classified as self-directed and you typically set up an IRA through a brokerage firm of your choice.
Thus it’s possible to invest in a wider range of investments in your IRA, including stocks, bonds, mutual funds, exchange-traded funds, and even real estate.
When making withdrawals at age 59 ½, you will owe income tax. As with 401(k)s, any withdrawals before then may be subject to both income tax and the 10% early withdrawal penalty.
What Are Roth Accounts?
So far, we’ve discussed traditional 401(k) and IRA accounts. But each type of retirement account also comes in a different flavor — known as a Roth.
The main difference between traditional and Roth IRAs lies in when your contributions are taxed.
• Traditional accounts are funded with pre-tax dollars. The contributions are tax deductible and may provide an immediate tax benefit by lowering your taxable income and, as a result, your tax bill.
• Money inside these accounts grows tax-deferred, and you owe income tax when you make withdrawals, typically when you’ve reached the age of 59 ½.
Roth accounts, on the other hand, are funded with after-tax dollars, so your deposits aren’t tax deductible. However, investments inside Roth accounts also grow tax-free, and they are not subject to income tax when withdrawals are made at or after age 59 ½.
As noted above, Roths have an additional advantage in that you can withdraw your principal at any time (but you cannot withdraw principal + earnings until you’ve had the account for at least five years, and/or you’re 59 ½ or older — often called the five-year rule).
Roth accounts may be beneficial if you anticipate being in a higher tax bracket when you retire versus the one you’re in currently. Then tax-free withdrawals may be even more valuable.
It’s possible to hold both traditional and Roth IRAs at the same time, though combined contribution limits are the same as those for traditional accounts. And those limits can’t be exceeded.
Additionally, the ability to fund a Roth IRA is subject to certain income limits: above a certain limit you can’t contribute to a Roth. There are no income limits for a designated Roth 401(k), however.
A Closer Look at a 401(k)
Contributions to your 401(k) are made with pre-tax dollars. This makes them tax-deductible, meaning the amount you save each year can lower your taxable income in the year you contribute, possibly resulting in a smaller tax bill.
In 2025, you can contribute up to $23,500 to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $31,000. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for a total of $34,750.
In 2026, you can contribute up to $24,500 to your 401(k), or up to $32,500 (including $8,000 extra in catch-up contributions). And again in 2026, individuals aged 60 to 63 can contribute an additional $11,250 instead of $8,000, for a total of $35,750.
Also, under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, you pay taxes on contributions upfront, but can make eligible withdrawals tax-free in retirement. Those impacted by the new law should check with their employer or plan administrator to find out how to proceed.
401(k) catch-up contributions allow people nearing retirement to boost their savings. In addition to the contributions made, an employer can also match their employee’s contribution, up to a combined employer and employee limit of $70,000 in 2025 and $72,000 in 2026.
An employer may offer a handful of investment options to choose from, such as exchange-traded funds (ETFs), mutual funds, and target date mutual funds. Money invested in these options grows tax-deferred, which can help retirement investments grow faster.
When someone begins taking withdrawals from their 401(k) account at age 59 ½ (the earliest age at which you can start taking penalty-free withdrawals), those funds are subject to income tax. Any withdrawals made before 59 ½ may be subject to a 10% early withdrawal penalty, on top of the tax you owe.
When Should You Use a 401(k)?
If your employer offers a 401(k), it may be worth taking advantage of the opportunity to start contributing to your retirement savings. After all, 401(k)s have some of the highest contribution limits of any retirement plans, which means you might end up saving a lot. Here are some other instances when it may be a good idea:
1. If your employer matches your contributions
If your company matches any part of your contribution, you may want to consider at least contributing enough to get the maximum employer match. After all, this match is tantamount to free money, and it can add up over time.
2. You can afford to contribute more than you can to an IRA
For tax year 2025, you can put up to $7,000 in an IRA, but up to $23,500 in a 401(k) — if you’re 50 or over, those amounts increase to $8,000 for an IRA and $31,000 for a 401(k). And those aged 60 to 63 can contribute up to $34,750 to a 401(k), thanks to SECURE 2.0.
For tax year 2026, you can put up to $7,500 in an IRA, but up to $24,500 in a 401(k) — if you’re 50 or older, those amounts increase to $8,600 for an IRA and $32,500 for a 401(k). And again, if you’re aged 60 to 63, you can contribute up to $35,750 to a 401(k). If you’re in a position to save more than the IRA limit, that’s a good reason to take advantage of the higher limits offered by a 401(k).
3. When your income is too high
Above certain income levels, you can’t contribute to a Roth IRA. How much income is that? That’s a complicated question that is best answered by our Roth IRA calculator.
And if you or your spouse are covered by a workplace retirement plan, you may not be able to deduct IRA contributions.
If you can no longer fund a Roth, and can’t get tax deductions from a traditional IRA, it might be worth throwing your full savings power behind your 401(k).
When Should You Use an IRA?
If you can swing it, it may not hurt to fund an IRA. This is especially true if you don’t have access to a 401(k). But even if you do, IRAs can be important tools. For example:
1. When you leave your company
When you leave a job, you can rollover an old 401(k) into an IRA — and it’s generally wise to do so. It’s easy to lose track of old plans, and companies can merge or even go out of business. Then it can become a real hassle to find your money and get it out.
You can also roll the funds into your new company’s retirement plan (or stick with an IRA rollover, which may give you more control over your investment choices).
If you have a good mix of mutual funds in your 401(k), or even some target date funds and low-fee index funds, your plan is probably fine. But, some plans have very limited investment options, or are so confusing that people can’t make a decision and end up in the default investment — a low interest money market fund.
If this is the case, you might want to limit your contributions to the amount needed to get your full employer match and put the rest in an IRA.
3. When you’re between jobs
Not every company has a 401(k), and people are not always employed. There may be times in your life when your IRA is the only option. If you have self-employment income, you can make higher contributions to a SEP IRA or a Solo 401(k) you set up for yourself.
4. If you can “double dip.”
If you have a 401(k), are eligible for a Roth IRA, or can deduct contributions to a traditional IRA, and you can afford it — it may be worth investing in both. After all, saving more now means more money — and financial security — down the line. Once again, you can check our IRA calculator to see if you can double dip. Just remember that the IRA contribution limit is for the total contributed to both a Roth and traditional IRA.
The real question is not: IRA vs. 401(k), but rather — which of these is the best place to put each year’s contributions? Both are powerful tools to help you save, and many people will use different types of accounts over their working lives.
When Should You Use Both an IRA and 401(k)?
Using an IRA and a 401(k) at the same time may be a good way to save for your retirement goals. Funding a traditional or Roth IRA and 401(k) at once can allow you to save more than you would otherwise be able to in just one account.
Bear in mind that if you or your spouse participate in a workplace retirement plan, you may not be able to deduct all of your traditional IRA contributions, depending on how high your income is.
Having both types of accounts can also provide you some flexibility in terms of drawing income when you retire. For example, you might find a 401(k) as a source of pre-tax retirement income. At the same time you might fund a Roth IRA to provide a source of after-tax income when you retire.
That way, depending on your financial and tax situation each year, you may be able to strategically make withdrawals from each account to help minimize your tax liability.
The Takeaway
Roth accounts — whether a Roth IRA or a Roth 401(k) — have a different tax treatment. You deposit after-tax funds in these types of accounts. And then you don’t pay any tax on your withdrawals in retirement.
Another difference is that a 401(k) is generally sponsored by your employer, so you’re beholden to the investment choices of the firm managing the company’s plan, and the fees they charge. By contrast, you set up an IRA yourself, so the investment options are greater — and the fees can be lower.
Generally, you can have an IRA as well as a 401(k). The rules around contribution limits, and how much you can deduct may come into play, however.
If you’re ready to open an IRA, it’s easy when you set up an Active Invest account with SoFi Invest.
Not sure what the right strategy is for you? SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.
Opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.¹
FAQ
Is a 401(k) considered an IRA for tax purposes?
No. A 401(k) is a completely separate account than an IRA because it’s sponsored by your employer.
Is it better to have a 401(k) or an IRA?
You can save more in a 401(k), and your employer may also offer matching contributions. But an IRA often has a much wider range of investment options. It’s wise to weigh the differences, and decide which suits your situation best.
Can you roll a 401(k) Into an IRA penalty-free?
Yes. If you leave your job and want to roll over your 401(k) account into an IRA, you can do so penalty free within 60 days. If you transfer the funds and hold onto them for longer than 60 days, you will owe taxes and a penalty if you’re under 59 ½.
Can you lose money in an IRA?
Yes. You invest all the money you deposit in an IRA in different securities (i.e. stocks, bonds, mutual funds, ETFs). Ideally you’ll see some growth, but you could also see losses. There are no guarantees.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
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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.
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¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
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Matching in 401(k) retirement accounts involves an employee making a contribution to the account, and their employer mirroring that contribution — or matching it. A 401(k) is a mechanism for saving retirement funds by making pre-tax contributions through deductions from payroll.
Some plans offer a 401(k) employer match, which can be the equivalent of getting “free money” from an employer. That can help increase an investor’s retirement savings over time.
Key Points
• 401(k) matching involves employers contributing to an employee’s retirement plan, matching the employee’s contributions up to a certain limit.
• Benefits include tax-deferred growth on investments and immediate ownership of contributions.
• Matching rates vary, with some employers offering dollar-for-dollar matches and others a percentage.
• Contribution limits are set annually, with additional catch-up contributions allowed for those over 50.
• Vesting schedules determine when employees gain full ownership of employer contributions.
What Is 401(k) Matching?
Matching a 401(k) contribution means that an employer matches or mirrors an employee’s contribution to their retirement account, typically up to a certain percentage. In effect, if an employee contributes $1 to their 401(k), an employer would also contribute $1, thereby “matching” the contribution. But again, there are limits to how much employers are generally willing to match.
There are certain advantages to 401(k) matching.
For one, investment gains and elective deferrals to 401(k) plans are not subject to federal income tax until they’re distributed, which is typically when:
• The participant reaches the age of 59 ½
• The participant becomes disabled, deceased, or otherwise has a severance from employment
• The plan terminates and no subsequent plan is established by the employer
• The participant incurs a financial hardship
Second, elective deferrals are 100% vested. The participant owns 100% of the money in their account, and the employer cannot take it back or forfeit it for any reason.
And third, participants choose how to invest their 401(k). The plans are mainly self-directed, meaning participants decide how they’d like to invest the money in their account. This could mean mutual funds or exchange-traded funds (ETFs) which invest in a wide array of sectors and companies, but typically doesn’t include investing in individual companies and stocks.
Investment tactics might vary from person to person, but by understanding their goals, investors can decide whether their portfolio will have time to withstand market ups and downs with some high-risk, high-reward investments, or if they should shift to a more conservative allocation as they come closer to retirement.
💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.
How Does 401(k) Matching Work?
A 401(k) match is an employee benefit that allows an employer to contribute a certain amount to their employee’s 401(k) plan. The match can be based on a percentage of the employee’s contribution, up to a certain portion of their total salary or a set dollar amount, depending on the terms of the plan.
So, some employers might offer a dollar-for-dollar match, while others might offer matching based on a percentage, or a partial-match. Others may not offer any type of match.
That’s important to keep in mind: Not all employers offer this benefit, and some have prerequisites for participating in the match, such as a minimum required contribution or a cap up to a certain amount.
Meeting with an HR representative or a benefits administrator is a one way to get a better idea of what’s possible. Learning the maximum percent of salary the company will contribute is a start, then the employee can set or increase their contribution accordingly to maximize the employer match benefit.
401(k) Matching Example
Many employers use a match formula to determine their 401(k) matches (assuming they offer it at all). Some formulas are more common than others, too, which can help us with an example.
Consider this: Many 401(k) plans use a single-tier match formula, with $0.50 on the dollar on the first 6% of pay being common. But others use multi-tier match formulas, e.g., dollar-on-dollar on the first 3% of pay and $0.50 on the dollar on the next 2% of pay.
For the sake of breaking a few things down, here’s a retirement saving scenario that can illuminate how 401(k) matching works in real life:
Let’s say a person is 30 years old, with a salary of $50,000, contributing 3% of their salary (or $1,500) to a 401(k). Let’s also say they keep making $50,000 and contributing 3% every year until they’re 65. They will have put $52,500 into their 401(k) in those 35 years.
Now let’s say they opt into an employer match with a dollar-for-dollar up to 3% formula. Putting aside the likelihood of an increase in the value of the investments, they’ll have saved $105,000 — with $52,500 in free contributions from their employer.
That, effectively, is a no-cost way to increase retirement savings by 100%.
Average 401(k) Match
Average 401(k) matches is generally around 4% or 5%, and can vary from year to year. With that in mind, workers who are getting an employer match in that range, or within a broader range — perhaps 3% to 6% — are likely getting a “good” match.
But again, considering that some employers don’t offer any match at all, the chance to secure almost any type of match could be considered good for some investors.
• If a company offers a 401(k) employer match, the participant might consider contributing enough to meet whatever the minimum match requirements are.
• If a participant is closer to retirement age, they’ll probably have a pretty good idea of what they already have saved and what they need to reach their retirement goals. An increase in contributions can make a difference, and maxing out their 401(k) might be a solid strategy.
A retirement calculator can also be helpful in determining what the right contribution amount is for a specific financial situation.
In addition to the uncertainty that can come with choosing how much to contribute to a 401(k), there’s the added pressure of potential penalties for going over the maximum 401(k) contribution limit.
Three common limits to 401(k) contributions:
1. Elective deferral limits: Contribution amounts chosen by an employee and contributed to a 401(k) plan by the employer. In 2025, participants can contribute up to $23,500. In 2026, participants can contribute up to $24,500.
2. Catch-up contribution limits: After the age of 50, participants can contribute more to their 401(k) with catch-up contributions. In 2025, participants can make up to $7,500 in catch-up contributions per year, and in 2026, they can make up to $8,000 in catch-up contributions annually. In both 2025 and 2026, those aged 60 to 63 may contribute up to an additional $11,250, instead of $7,500 and 8,000 respectively, thanks to SECURE 2.0.
However, under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roths, individuals pay taxes on contributions upfront, but can make qualified withdrawals tax-free in retirement.
3. Employer contribution limits: An employer can also make contributions and matches to a 401(k). The combined limit (not including catch-up contributions) on employer and employee contributions in 2025 is $70,000 and in 2026 is $72,000.
If participants think their total deferrals will exceed the limit for that particular year, the IRS recommends notifying the plan to request the difference (an “excess deferral”) “be paid out of any of the plans that permit these distributions. The plan must then pay the employee that amount by April 15 of the following year (or an earlier date specified in the plan).”
401(k) Vesting Schedules
“Vesting ” means “ownership” in a retirement plan. The employee will vest, or own, some percent of their account balance. In the case of a 401(k), being 100% vested means they’ve met their employer’s vesting schedule requirements to ensure complete ownership of their funds.
Vesting schedules, determined by 401(k) plan documents, can lay out certain employer vesting restrictions that range from immediate vesting to 100% vesting after three years to a schedule that increases the vested percentage based on years of service. Either way, all employees must be 100% vested if a plan is terminated by the employer or upon reaching the plan’s standard retirement age.
Tips on Making the Most of 401(k) Matching
Here are some things to keep in mind when trying to make the most of 401(k) matching.
Remember: It’s “Free” Money
An employer match is one part of the overall compensation package and another way to maximize the amount of money an employer pays their employees. Those employees could be turning their backs on free money by not contributing to an employer-matched 401(k) plan.
You Can Reduce Taxable Income
According to FINRA, “with pre-tax contributions, every dollar you save will reduce your current taxable income by an equal amount, which means you will owe less in income taxes for the year. But your take-home pay will go down by less than a dollar.”
If a participant contributed $1,500 a year to a 401(k), they’d only owe taxes on their current salary minus that amount, which could save some serious money as that salary grows.
Every Dollar Counts
It can be tempting to avoid contributing to your retirement plan, and instead, use the money for something you want or need now. But remember: The more time your money has to potentially grow while it’s invested, the more likely you are to reach your financial goals sooner. While that’s not guaranteed, every dollar you can save or invest now for future use is a dollar you don’t need to save or invest later.
The Takeaway
A 401(k) match is an employee benefit that allows an employer to contribute a certain amount to their employee’s 401(k) plan. Matches can be based on a percentage of the employee’s contribution, up to a certain portion of their total salary or a set dollar amount, depending on the terms of the plan.
Taking advantage of employer matches in a 401(k) plan can help workers reach their financial goals sooner, as a match is, in effect, “free money.” If you’re considering how matches can help bolster your investment strategy, it may be worth discussing with a financial professional.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Help grow your nest egg with a SoFi IRA.
FAQ
How much should I match 401(k)?
It’ll be up to the individual investor, but to make the most of a 401(k) match, workers should likely try to contribute as much as possible up to their employer’s match — it may be worth discussing with a financial professional for additional guidance.
What does 6% 401(k) match mean?
A 6% 401(k) match means that an employer is willing to match up to 6% of an employee’s total salary or compensation in their 401(k) account through matching contributions.
What is a good 401(k) match?
A good 401(k) match could be in the 3% to 6% range, as average employer matches tend to be between 4% and 5%.
Is a 3% match good? Is a 4% match good?
Generally speaking, a 3% match could be considered “good,” as could a 4% match. On average, employers match somewhere between 4% and 5%, and when you get down to it, almost any employer match is “good.”
How do I maximize my 401(k) match?
Maximizing your 401(k) match involves contributing enough to get at least your employer’s full match, whatever that match may be. You should be able to change your contribution levels through your provider, or by speaking with your employer.
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.
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.
¹Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.
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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.
And under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make eligible withdrawals tax-free in retirement.
• 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. As noted above with 401(k) plans, as of January 1, 2026, individuals aged 50 and older with FICA wages exceeding $150,000 in 2025 are required to put their catch-up contributions into a Roth account.
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. For those plans that do allow catch-ups, under the new law that went into effect on January 1, 2026, individuals aged 50 and older with FICA wages above $150,000 in 2025 are required to put their catch-up contributions into a Roth account.
• 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
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
Easily manage your retirement savings with a SoFi IRA.
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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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.
Under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make eligible withdrawals tax-free in retirement. Those impacted by the new law should check with their employer or plan administrator to find out how to proceed.
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.
Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.
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🛈 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. Just be aware that under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older with FICA wages above $150,000 in 2025 are required to put their catch-up contributions into a Roth 401(k) account.
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.
For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.
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.
Tax-sheltered accounts like the IRA and 401(k) have long been the go-to investment accounts for retirement planning. These types of accounts offer ways to build up tax-advantaged savings for the future. However, investing in taxable brokerage accounts is another common way to build wealth for the short or long term.
The most notable difference between an IRA and a taxable brokerage account can be seen around tax season. With taxable brokerage accounts, you typically pay taxes on your capital gains and dividends each year. In contrast, tax-advantaged accounts generally only involve paying taxes when you make your contribution or withdraw your money, depending on the type of account.
Investors should know the similarities and differences between IRAs and taxable brokerage accounts. Learning the ins and outs of these accounts can help you decide which is right for you to build wealth and meet your financial goals.
Key Points
• Taxable brokerage accounts and IRAs serve different purposes, with brokerage accounts focusing on general investment and IRAs designed specifically for retirement savings.
• Taxable brokerage accounts require annual taxes on capital gains and dividends, while IRAs allow for tax-deferred growth until funds are withdrawn.
• Different types of IRAs, such as Traditional and Roth, offer unique tax advantages and rules regarding contributions and withdrawals tailored to individual financial situations.
• A combination of both account types can provide flexibility and diversification, allowing investors to meet both short-term and long-term financial goals.
• Each account type has its pros and cons, making it essential to evaluate personal financial objectives before deciding on the appropriate investment strategy.
What Are Taxable Brokerage Accounts?
Think of taxable brokerage accounts as “traditional” investment accounts — brokerage-offered investment accounts with stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Investors who utilize these accounts, including online brokerage accounts, invest and trade to build short- or long-term wealth, but not necessarily for retirement.
The investments within a taxable brokerage account are subject to tax on any capital gains, dividends, or interest earned. Brokerage account holders pay taxes each year based on investment income.
It’s also important to note that tax liability can vary based on variables like the types of investments held within the brokerage account, the length of time they are held, and an individual’s tax bracket. For example, short-term capital gains, which are gains on investments held for less than a year, are taxed at the same rate as ordinary income. In contrast, long-term capital gains, which are gains on investments held for more than a year, are typically taxed at a lower rate.
An IRA, or individual retirement account, is an investment account designed specifically to save for retirement. Contributions to an IRA may be tax-deductible or tax-deferred, and the accounts’ investments can grow tax-free until they are withdrawn at retirement age.
There are several different types of IRAs, including Traditional IRAs, Roth IRAs, and SEP IRAs, which have different rules for contributions, taxes, and withdrawals. An IRA can be a helpful tool for saving for retirement and taking advantage of potential tax benefits.
Taxable Brokerage Accounts vs IRA Accounts
Tax-sheltered, or tax-deferred, investment accounts like IRAs differ from taxable brokerage accounts because they generally offer tax advantages and have restrictions on contributions and withdrawals. The tax advantages make them designed for long-term retirement saving and investing. Besides having money invested for retirement, the most notable benefits of IRAs are no yearly tax burden and, in some cases, tax-deductible contributions.
Here’s a breakdown of what each tax-deferred account may offer compared to a brokerage account.
Traditional IRAs vs Taxable Brokerage Accounts
The traditional IRA has no income limits; as long as someone has a taxable income, they can contribute to a traditional IRA. The gains, dividends, and interest earned in IRAs grow tax-deferred during contributing years. Contributions to a traditional IRA may be tax-deductible, though the benefits phase out if you have a high enough income.
With a few exceptions, IRA withdrawal rules say account holders will have to pay a 10% early withdrawal penalty if they take a distribution before reaching age 59 ½. Additionally, account holders are required to start making withdrawals the year they turn age 73 (if they reach age 72 after December 31, 2022) that are taxed as income.
These limitations make a traditional IRA different from a taxable brokerage account, as taxable brokerage accounts do not have withdrawal restrictions and penalties.
With a traditional IRA, as with taxable brokerage accounts, account holders will need to manage it independently or with a financial planner’s help.
A traditional IRA might be a good option for investors who think they will be in a lower tax bracket when they retire. In theory, these investors would save money on taxes by paying them in retirement compared to paying taxes now.
For 2025, account holders can contribute up to $7,000 per year (or up to $8,000 if they are age 50 or older). For 2026, the total contributions investors can make to a traditional IRA is up to $7,500 (or up to $8,600 if they are 50 and up).
Roth IRAs vs Taxable Brokerage Accounts
Like taxable brokerage accounts, Roth IRA contributions aren’t tax-deductible. Investors contribute with post-tax dollars, but that also means they won’t be subject to taxes when they withdraw funds in retirement.
However, income limits exist for those who can contribute to a Roth IRA account. If you make more than the income limits, then the amount of money you can contribute to a Roth IRA may be reduced, and high earners may not be able to contribute to a Roth IRA at all. For 2025, income limits start at $150,000 per year for single tax filers and $236,000 for married couples filing jointly. For 2026, income limits start at $153,000 per year for single tax filers and $242,000 for married couples filing jointly. You can use a Roth IRA calculator to help determine your contribution limit.
As with brokerage accounts, Roth IRA account holders can contribute to their accounts at any age. Investors who want to make retirement contributions can do so even after they’ve retired.
Rules around Roth IRA withdrawals are less stringent than those for a traditional IRA. Roth account holders can also begin to take the account’s growth starting at age 59 ½ with no penalty as long as the account has been open for five years.
For those eligible to contribute to a Roth IRA, these accounts make the most sense if the account holder thinks they will be in a higher tax bracket in retirement. Since account holders pay taxes on the contributions in the year they were made, it makes the most sense to pay income taxes when in a lower tax bracket.
Similar to an IRA, 401(k) accounts are one of the most common tax-sheltered accounts. The big difference between an IRA and a 401(k) account is that the 401(k) is employer-sponsored, and employees and employers can contribute to the account.
Employees can contribute up to $23,500 to their 401(k) in 2025 and up to $24,500 in 2026. Employees over 50 can make additional catch-up contributions of $7,500 annually in 2025, and up to $8,000 in 2026. In both 2025 and 2026, those 60 to 63 can make a higher catch-up contribution of up to $11,250 under the SECURE 2.0 Act.
Also, under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roth accounts, individuals pay taxes on contributions upfront, but can make eligible withdrawals tax-free in retirement. Many employers offer employees 401(k) plans, some even matching contributions up to a certain percentage.
The 401(k) is one of the most common ways to build a retirement nest egg because the contributions are automatic and come out of the employee’s paycheck, so employees may not even notice the money is gone.
Tax Advantages of an IRA vs Taxable Brokerage Account
As noted above, IRAs offer several tax advantages compared to taxable brokerage accounts. Investors generally use IRAs for tax efficient investing.
Here are some of the main differences:
• Contributions to traditional IRAs may be tax-deductible: Contributions to a traditional IRA may be tax-deductible, depending on your income and whether a retirement plan at work covers you or your spouse. This means that the money you contribute to a traditional IRA can be deducted from your taxable income, potentially reducing the amount of tax you owe.
• Earnings in an IRA grow tax-free or tax-deferred: The money you earn in an IRA, including interest, dividends, and capital gains, grows tax-deferred or tax-free until you withdraw it in retirement. In a taxable brokerage account, you would have to pay taxes on any capital gains and dividends you earn each year.
• Withdrawals from traditional IRAs may be taxed at a lower rate: When you withdraw money from a traditional IRA in retirement, it is taxed as ordinary income at your marginal tax rate. However, if you are in a lower tax bracket in retirement than when you made the contributions, your withdrawals may be taxed at a lower rate.
• Contributions to a Roth IRA are not tax-deductible: Contributions to a Roth IRA are not tax-deductible, but the money you withdraw in retirement is tax-free, provided you meet specific requirements. This can be a good option if you expect to be in a higher tax bracket in retirement than you are now.
Which Type of Account Is Best for Me?
Brian Walsh, Certified Financial Planner™ at SoFi, says ultimately, you’ll have a mixture of accounts. However, what’s right for you depends on your situation. “It depends if you have access to a 401(k) and an employer match … it depends on what you’re eligible for.” Here are a few considerations that can help you assess your situation.
Think About Investing in a Traditional IRA If…
• You want to take advantage of tax-deferred contributions.
• You expect to be in a lower tax bracket in retirement.
• You’ve maxed out your 401(k) contributions and make too much to contribute to a Roth account.
Think About Investing in a Roth IRA If…
• You expect to be in a higher tax bracket in retirement.
• You want the option to pass on the account easily to your heirs.
• You’ve maxed out your traditional 401(k) and want to offset some of your future tax burden with a Roth IRA.
Think About Investing in a 401(k) If…
• Your employer offers a plan with a match program.
• You’re uncertain about your future tax liability, and your employer allows you to split contributions between a traditional 401(k) and a Roth 401(k).
• You prefer a hands-off approach to investing.
Think About Investing in a Taxable Brokerage Account If…
• You’ve maxed out all contribution limits to your 401(k) and IRAs.
• You want to invest in investments not offered in your 401(k) or IRA, like options or cryptocurrency.
• You want more control over your investments with the opportunity to withdraw funds at your leisure.
Pros and Cons of Taxable Brokerage Accounts
Here are some of advantages and disadvantages of taxable brokerage accounts:
Pros of Taxable Accounts
• Flexibility: Taxable brokerage accounts allow you to invest in a wide range of assets, such as stocks and bonds, as well as derivatives. This allows you to create a diversified portfolio that may help you meet your investment goals.
• Growth potential: Taxable brokerage accounts offer the potential for significant growth, as you can earn capital gains on your investments if they increase in value.
• No contribution limits: Unlike tax-advantaged accounts, taxable brokerage accounts have no contribution limits. This means you can contribute as much as you want to your account, subject to income limits or restrictions.
Cons of Taxable Accounts
• Taxes: One of the main disadvantages of taxable brokerage accounts is that you will be required to pay taxes on your investment income and capital gains. This can significantly reduce your overall returns.
• Lack of tax benefits: Taxable brokerage accounts do not offer the same tax benefits as tax-advantaged accounts. For example, 401(k)s and IRA contributions may be tax-deductible, while investments in taxable brokerage accounts are not.
• Potential for loss: As with any investment, there is a risk of loss in a taxable brokerage account. If your investments decline in value, you could lose some or all of your initial investment.
Is it Smart to Have Both an IRA and a Taxable Brokerage Account?
It may be a consideration to have both an IRA and a taxable brokerage account, as each type has its specific benefits and drawbacks.
An IRA can be a good option if you are looking to open a retirement account and save for retirement and want the potential tax benefits of an IRA. On the other hand, a taxable brokerage account can be a good choice if you are looking to invest for goals other than retirement or if you are not eligible for a tax deduction on your contributions to an IRA.
Having both an IRA and a taxable brokerage account can give you more flexibility and diversification in your investments, which can help you manage risk and improve your overall financial situation.
The Takeaway
Every account — from taxable brokerage accounts to IRAs — has advantages and disadvantages, which is why some investors choose to invest in a few. The old cliche, “don’t put all your eggs in one basket,” is a solid philosophy for financial planning. Investing in several different “baskets” is one way to ensure that your money is working hard for you.
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FAQ
What is the difference between an IRA and a taxable brokerage account?
An IRA is designed specifically to save for retirement. Unlike a taxable brokerage account, which is used for general investing, contributions to a traditional IRA may be tax-deductible, and the investments within the account grow tax-deferred until they are withdrawn at retirement age. There are several other types of IRAs, including Roth IRAs, which have different rules for contributions, taxes, and withdrawals.
Is it better to contribute to an IRA or a taxable brokerage account?
Whether to contribute to an IRA or a taxable brokerage account depends on your circumstances and financial goals. In general, an IRA can be a good option if you are looking to save for retirement and want the potential tax benefits of an IRA. However, if you are not eligible for a tax deduction on your contributions or looking to invest for goals other than retirement, a taxable brokerage account may be a better choice.
How is a taxable brokerage account taxed?
The investments held within a taxable brokerage account may be subject to tax on any capital gains, dividends, or interest earned. Short-term capital gains, which are gains on investments held for less than a year, are taxed at the same rate as ordinary income. Long-term capital gains, which are gains on investments held for more than a year, are typically taxed at a lower rate. Dividends and interest income earned are also subject to tax.
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.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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.
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.
