Investing in Movies and the Film Industry

Investors who are film buffs have a number of avenues for investing in movies and the film industry, including buying stock in entertainment companies, crowdfunding individual movie projects, and more. It’s important to keep in mind that while Hollywood is seemingly all glitz and glamour, many films are financial failures, which can hurt an investor’s bottom line.

Investing in film is considered a type of alternative investment — similar to real estate, commodities, collectibles, and such — because these investments fall outside the realm of traditional stock and bond markets. Film investments, like other alts, can offer some portfolio diversification, but also come with specific risk factors.

Note that SoFi does not currently offer film-related investments, but offers alternative funds that provide access to commodities, real estate, hedge funds, venture capital, and more.

Key Points

•   Investing in the film industry can be done through stocks, crowdfunding, film funds, and other options.

•   Investing in film is a type of alternative investment strategy. Alts typically offer low correlation with traditional stock and bond markets, and can be risky.

•   Unique risks include box office volatility, production delays, cost overruns, distribution issues, and legal disputes.

•   Potential rewards include industry growth, portfolio diversification, and owning a passion investment.

•   Due diligence is crucial for assessing project success and mitigating risks.

•   Tax incentives for film production vary by state, and may benefit production companies and studios.

Ways to Invest in Movies

There are a few primary methods for investing in movies and the entertainment industry, including buying stocks or equity in production companies, investing via crowdfunding platforms to support specific projects, or investing in film funds that help budding filmmakers gain traction in the industry.

While investing in stocks of public film companies, or companies that produce equipment or technology relating to film production, would fall under the umbrella of traditional investing, crowdfunding and film funds would generally be considered alternative investments.

Recommended: Alt Investment Guide

Alternative Investments

As noted, alternative investments fall outside traditional markets. Alts include tangible assets like commodities, real estate, art and antiques, as well as other collectibles (e.g. books, toys, comics) and many other types of investments.

While they’re generally high risk, alts can offer potential upsides: e.g., higher returns compared to stocks and bonds, and sometimes the opportunity to earn passive income. That said, alternative strategies are typically illiquid, not well regulated, and lack transparency.

For investors interested in a wider range of opportunities — or seeking diversification — understanding the definition of alternative assets can offer some options.

Alternative investments,
now for the rest of us.

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Film Production Companies

Perhaps the easiest way for many investors to make an initial investment in the movie industry is to buy stocks of film production companies, or those that support the industry. This allows investors to directly own a piece of the companies that are producing movies and TV shows, and more.

Many, if not most large studios are publicly traded. And it may be possible to invest in private companies, although those types of investments require accredited investors.

Further, investors could also consider investing in larger companies that own movie production studios or capabilities — think companies like Disney or Amazon, which are active in the entertainment industry but also have other arms that drive revenue.

It’s also possible to invest in movie theater chains, which can also help investors gain exposure to the industry.

Note, of course, that investing in stocks of any type carries with it numerous risks, and that investing in the entertainment industry, specifically, can have its own risks.

Crowdfunding Platforms

Another relatively low-key way for investors to gain exposure to the filmmaking industry is via one of the crowdfunding platforms, which can allow you to invest in specific film projects. For instance, if there’s a movie you really want to see produced, the producers might solicit investment on a crowdfunding platform to generate the capital to get it made. And investors could, in that hypothetical scenario, invest in the project.

Crowdfunding platforms can be very niche, too, aiming to fund films or projects within specific genres. There are multitudes of crowdfunding platforms out there, each with its own terms. Investors should carefully vet the platform, as well as the project they might invest in, to assess factors such as:

•   How long your money might be locked up

•   Repayment terms

•   Percentage of profits

•   Fees

•   Legal or contractual restrictions

Investors should be aware that crowdfunding projects are typically very risky, and that there’s a good chance you will see little return for your money, if you see any at all. Unless your investment is seeding the next hit film franchise, it’s unlikely that these types of investments will generate a notable rate of return.

Recommended: What Is Portfolio Diversification?

Film Funds and Slates

Another potential avenue for investing in the film industry is through film funds or slate financing.

Slate financing is relatively common in the industry, and involves a studio co-partnering with a third-party entity to get investors to finance multiple films at once — a “slate” of projects. It’s effective for studios, and potentially for investors, as a method of risk diversification, and may help the studio to potentially lower production costs.

But slate financing is typically done through a third-party or private equity fund, which raises money from investors. Investors in that fund are then entitled to a portion of the returns generated by the movies that are produced, assuming there is any cash to divvy up.

In some ways, it’s a type of pooled investment strategy, but the stakes are much higher, retail investors may not qualify for slate investments, and there are more mechanics and risks at play when it comes to private equity and hedge funds.

LIke crowdfunding, there are platforms out there that allow investors to invest in film slates — an internet search will likely lead you to several of them.

💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Evaluating Potential Movie Investments

As discussed, investing in movies or film projects is different from investing in other sectors, like technology or consumer goods. There are a lot of variables in the mix, and each project is different. Unless investors are buying stocks in film studios, production companies, or other firms involved in the movie industry, there are many factors to evaluate before putting up your money.

When investing in individual film projects, it’s important to do some due diligence and research who is involved. For instance, if you’re thinking of investing in a film project helmed by a certain producer or director, it can be a good idea to consider their past productions, their reputation, and their track record at the box office. Also, if you know what talent or actors are involved, that can help, too. There’s also the writing and script to consider.

Further, does the film have broad appeal? Or could it be too niche to appeal to a broad market, and potentially limit its earnings? Assessing the pros and cons, as well as getting to know industry insiders and experts, can help investors expand their knowledge of this industry.

And remember, just because a film may lack A-list talent or a superstar director doesn’t mean it won’t be successful. There have been numerous small-budget films with no-name actors that have become profitable. But those are very few and far between.

Recommended: A Closer Look at ETFs vs Mutual Funds

Risks and Rewards of Film Investing

As noted, while a film always has a chance of becoming a box office hit — or later in its life cycle, a cult favorite that earns a lot of money through post-box-office sales — there are some significant risks involved in investing in movies. If you plan on investing in studio stocks, the usual stock market risks apply, plus the risks associated with the filmmaking industry specifically.

Risks of Investing in the Film Industry

But when it comes to investing in films, some of the individual risks that may be unique to the industry include box office sales (ticket sales can fall short of projections), production delays and cost overruns, distribution issues, and even risks related to legal or contractual disputes.

Similar to other kinds of alternatives, there are liquidity risks, the potential for volatility, and industry and legal issues that can impact profitability.

Rewards of Investing in the Film Industry

Of course, for some people investing in film can be rewarding. People love movies, and in the last 10 years the industry has seen growth on the heels of big-budget blockbusters and streaming services that produce original movies.

Films also don’t necessarily correlate to the stock market, which means they may serve as a method for diversifying a portfolio. Finally, they may be a sort of passion-investment for some investors, who want a chance to capture some of the magic of Hollywood in their portfolios.

Tax Incentives and Other Considerations

Taxes play a big role in film production, both for the project and for investors who may see a profit from their investments.

Utilizing Tax Breaks

One factor that can help support a film’s revenue strategy is when producers take advantage of tax incentives. Many states in the U.S. offer tax breaks for films in the form of tax credits and rebates and other types of tax credits.

There are numerous rules and restrictions that a film project must adhere to in order to qualify for these tax breaks. Investors who want to commit to a specific project may want to investigate the production’s tax strategy.

How Profits Might Be Taxed

Unlike investing in traditional securities, which typically fall under capital gains tax or ordinary income tax rules, per the IRS, the returns from different types of alts can receive different tax treatment.

This may be the case, even when investing in these alts via a mutual fund or exchange-traded fund (ETF).

When investing in alts, it’s wise to involve a professional to help address the tax-planning side of the equation.

The Takeaway

Investing in movies and the film industry can offer a way for investors to add diversification to their portfolios. There are numerous ways to invest in the film industry, and that includes buying stocks related to studios or production companies, using crowdfunding platforms to support specific film projects, and more. Investors would do well, however, to consider the specific risks involved with filmmaking and the entertainment industry, which may differ from other industries and sectors.

Ready to expand your portfolio's growth potential? Alternative investments, traditionally available to high-net-worth individuals, are accessible to everyday investors on SoFi's easy-to-use platform. Investments in commodities, real estate, venture capital, and more are now within reach. Alternative investments can be high risk, so it's important to consider your portfolio goals and risk tolerance to determine if they're right for you.

Invest in alts to take your portfolio beyond stocks and bonds.

FAQ

Can I invest in Hollywood movies as an individual?

Yes, it’s possible to invest in the film industry and even specific film projects as an individual. There are crowdfunding platforms that may allow investors to do so, and for private equity investors, slate investing opportunities offered through similar platforms that can allow investors exposure to specific projects.

What’s the average return on investment for movies?

It’s difficult to zero in on an average return on investment for movies, as it would depend on the specific type of investment (stocks versus investing in a specific project, for example), and myriad other factors such as where and when a film was released, and more.

Are there tax benefits to invest in films?

There may be tax benefits and credits associated with film productions, which vary from state to state, and typically benefit production companies and studios, not individual investors.


Photo credit: iStock/Massonstock

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
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Please note that Interval Funds are illiquid instruments, hence the ability to trade on your timeline may be restricted. Investors should review the fee schedule for Interval Funds via the prospectus.


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

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Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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Organization of the Petroleum Exporting Countries (OPEC)

Organization of the Petroleum Exporting Countries (OPEC)

OPEC is the Organization of the Petroleum Exporting Countries, an intergovernmental organization of 12 nations focused on coordinating and unifying the oil production policies of its member countries. The organization was founded in 1960 and is headquartered in Vienna, Austria.

OPEC’s primary goal is to regulate the supply of oil to stabilize the market and ensure that member countries receive an ideal price for their oil. To achieve this, the organization holds regular meetings where member countries discuss current market conditions and decide on production levels for each country. By controlling the oil supply, OPEC can influence the price of oil on the global market, which affects the global economy and, thus, investors.

Key Points

•   OPEC aims to coordinate and unify oil policies among member countries.

•   Stabilizing the international oil market is a core objective of OPEC.

•   Ensuring fair prices for oil producers is crucial for OPEC.

•   OPEC’s actions impact global oil supply and demand dynamics.

•   Member countries work together to manage oil production levels.

What Is OPEC?

The Organization of the Petroleum Exporting Countries (OPEC) is a cartel of oil-producing countries founded in 1960 in Baghdad, Iraq. The founding members of OPEC were Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Since then, the group has expanded to include as many as 16 countries, but currently has 12 member countries.

As noted above, the main function of OPEC is to regulate the oil supply that its member countries produce to manage the price of the global oil market. The organization achieves this by setting production levels, conducting research, and promoting cooperation among member countries.

Despite its power, OPEC has faced criticism over the years for its production policies. Some critics claim that OPEC’s decisions to limit oil production have led to higher oil prices and gas prices that benefit member countries while harming the global economy and consumers. Others argue that the cartel’s power has diminished in recent years due to increased competition from non-OPEC countries such as the United States and Canada.

Which Countries Are Members of OPEC?

OPEC currently has 12 member countries. At its height, OPEC had 16 member countries, but Qatar, Ecuador, and Indonesia withdrew membership in recent years.

The current member countries of OPEC are:

•   Algeria

•   Congo

•   Equatorial Guinea

•   Gabon

•   Iran

•   Iraq

•   Kuwait

•   Libya

•   Nigeria

•   Saudi Arabia

•   United Arab Emirates

•   Venezuela

These countries are major producers and exporters of oil, and they play a significant role in the global oil market. Together, they account for about 80% of the world’s crude oil reserves and produce about 40% of the world’s oil. This makes OPEC a major player in the global energy market and allows it to wield significant power in setting the price of oil.

However, several large oil-producing countries that are not a part of OPEC, including:

•   The United States is the world’s largest oil producer and consumer.

•   Canada is the world’s fourth-largest oil producer.

•   China is the world’s fifth-largest oil producer and the second-largest oil-consuming country.

•   Brazil is the eighth-largest oil-producing country.

The decisions of oil producers in these countries may counteract OPEC policies.

OPEC vs OPEC Plus

OPEC Plus (commonly written as OPEC+) is an extension of OPEC that includes a number of non-OPEC countries that have significant oil industries. These countries have joined forces with OPEC in an effort to collectively manage the global oil market and stabilize oil prices. OPEC+ was formed in 2016 and currently includes Azerbaijan, Bahrain, Brunei, Kazakhstan, Russia, Mexico, Malaysia, Oman, South Sudan, and Sudan.

The main difference between OPEC and OPEC+ is that the latter is a broader group that includes both OPEC and non-OPEC countries, and was formed more recently in response to changing market conditions. Both groups have the same goal of regulating the supply of oil to stabilize the global oil market.

What Is the Purpose of OPEC?

The main purpose of OPEC is to coordinate and unify the oil, gas, and energy policies of its member countries. This is done to stabilize the international oil market and secure fair and stable prices for energy producers in the member countries. By working together, OPEC member countries can ensure that they are able to influence the supply of oil in the global market, which in turn can help to maintain stable prices.

Pros and Cons of OPEC

The pros of OPEC include:

•   Stabilizing the market: By regulating the supply of oil, OPEC can help to stabilize the global oil market and prevent prices from fluctuating wildly. This can provide a degree of predictability and reliability for both producers and consumers.

•   Ensuring fair prices: OPEC’s goal is to ensure that member countries receive fair prices for their oil. By controlling the supply of oil, the organization can influence the price of oil on the global market and help to ensure that member countries are not exploited by outside parties.

•   Providing economic benefits: The oil industry is a major source of revenue for many of the member countries of OPEC. By controlling the supply of oil, OPEC can help to maximize the economic benefits for its member countries.

The cons of OPEC include:

•   Harming the global economy: Critics argue that OPEC’s decisions to limit oil production can lead to higher oil prices, which can harm the global economy and consumers. High oil prices can lead to inflation and reduce the purchasing power of consumers, which can slow economic growth.

•   Diminishing power: Some argue that the power of OPEC has diminished in recent years as a result of increased competition from non-OPEC countries such as the United States and Canada. This has led to a more fragmented and complex global oil market, which has reduced OPEC’s ability to influence the price of oil.

•   Facilitating corruption: Because OPEC is a cartel of oil-producing countries, it has been criticized for facilitating corruption and non-transparent practices. This can lead to abuses of power and mismanagement of oil revenues, which can have negative consequences for both the member countries and the global market.

How Does OPEC Affect Oil Prices?

OPEC’s decisions about production levels can have a significant impact on the price of oil. If OPEC decides to reduce production levels, it can lead to a decrease in the global supply of oil, which can cause the price of oil to increase. On the other hand, if OPEC decides to raise production levels, it can increase the global supply of oil, which can cause the price of oil to decrease.

Therefore, OPEC’s decisions about production levels can significantly impact the price of oil on the global market, as well as global investments. By controlling the oil supply, the organization can influence the price of oil and help ensure that member countries receive fair prices for their oil.

However, OPEC’s influence on oil prices has arguably waned in recent years, largely because the United States has become the world’s largest producer and one of the largest exporters of oil. Because the U.S. has grown its oil-production market share, it has lessened the influence of OPEC on the markets.

OPEC is also facing challenges to its oil hegemony because of the rise of renewable energy sources, like solar energy, which may lessen the demand for oil in the future.

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Does OPEC Affect Investing in the Oil Sector?

The decisions made by the Organization of the Petroleum Exporting Countries (OPEC) may affect investors. Because OPEC members control a large portion of the world’s oil supply, its decisions about production levels can affect the global supply of oil and, ultimately, the price of oil on the market.

If OPEC decides to reduce production levels, it can lead to a decrease in the global supply of oil, which can cause the price of oil to increase. This can be beneficial for investors who have invested in energy stocks or oil-related assets, as they may see an increase in the value of their investments. However, higher oil prices could also harm the global economy, which may be a drag on an investor’s overall portfolio.

On the other hand, if OPEC decides to boost production levels, it can increase the global oil supply, which can cause the price of oil to decrease. This can be detrimental for investors who have invested in oil companies or oil-related assets, as they may see a decrease in the value of their investments.

Therefore, it is essential for investors to monitor OPEC’s decisions and how they may affect the global oil market. By understanding the organization and its role in the market, investors can make more informed decisions about their investments in the oil industry.

💡 Recommended: How and Why to Invest in Oil

The Takeaway

meets and makes production decisions, it can ultimately affect consumers at the gas pump and investors’ portfolios. Thus, staying up to speed with OPEC and its decisions can help you understand how the organization affects your wallet.
If you’re interested in investing in the energy sector, SoFi can help. With a SoFi Invest® online brokerage account, you can trade energy-related stocks and exchange-traded funds (ETF), along with IPOs and more, with no commissions for as little as $5. All you need to do is open an account.

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

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.


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SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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woman holding laptop

Retirement Plan Options for the Self-Employed

If you’re an entrepreneur, consultant, or small business owner, you might be surprised to learn that the retirement plan options when you’re self-employed — like a SEP-IRA or solo 401(k) — are very robust.

Not only do you have more options in terms of self-employed retirement plans than you might think, some of these plans come with higher contribution limits and greater tax benefits than traditional plans. That’s especially true since the passage of the SECURE 2.0 Act, which has favorably adjusted the rules of many retirement plans.

Key Points

•   Self-employed individuals have many retirement plan options, including SEP-IRAs and solo 401(k)s.

•   These plans are similar to traditional ones, allowing long-term contributions and a range of investment selections, and may offer higher contribution limits and tax benefits.

•   SEP-IRAs are ideal for business owners with employees, offering simplified contributions that are tax-deductible.

•   Solo 401(k) plans suit owner-only businesses, allowing substantial contributions when you’re both employer and employee.

•   SIMPLE IRAs are designed for small businesses with fewer than 100 employees, enabling both employer and employee contributions.

•   Thanks to SECURE 2.0, in 2025 there are additional “super catch-up” contributions allowed for those aged 60 to 63 for some accounts, as well as other new provisions.

What Are Self-Employed Retirement Plans?

In some ways, self-employed retirement plans aren’t so different from regular retirement plans. You can set aside money now, select investments within the account, and continue to contribute and invest for the long term.

Similar to traditional retirement plans, there are two main categories most self-employed plans fall into:

•   Tax-deferred retirement accounts (e.g traditional, SEP, or SIMPLE IRAs and solo 401(k) plans). The amount you can save varies by the type of account. The money you set aside is deductible, and you don’t pay tax on that portion of your income. You do pay taxes on the funds you withdraw in retirement.

•   After-tax retirement accounts (typically designated as Roth IRAs or Roth 401(k) accounts). Here you can also save up to the prescribed annual limit, but the money you save is after-tax income and cannot be deducted. That said, withdrawals in retirement are tax free.

A note about Roth eligibility: Roth IRAs come with income limits. If your income is higher than the prescribed limit, you may not be eligible. Roth 401(k) plans do not come with income restrictions. Details below.

Understanding Beneficiary Rules for Self-Employed Plans

The rules that apply to inherited retirement accounts are extremely complicated. If you’re the beneficiary of an IRA, solo 401(k) or other retirement account, you may want to consult a professional as terms vary widely, and penalties can apply.

Administrative Factors to Consider

When selecting a self-employed retirement plan, it’s important to weigh the set up, administrative, and IRS filing rules. Some plans are easier to establish and maintain than others.

Given that running a plan can add to your overall time and personnel costs, it’s important to do a cost-benefit analysis when choosing a retirement plan when you’re a freelancer, consultant, or small business owner.

💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

5 Types of Self-Employed Retirement Plans

The IRS outlines a number of retirement plans for those who are freelance, self-employed, or who run their own businesses. Here are the basics.

1. Traditional and Roth IRAs

What they are: One of the most popular types of retirement plans is an IRA — or Individual Retirement Arrangement.

As noted above, there are traditional IRAs, which are tax deferred, as well as Roth IRAs, which are after-tax accounts.

Suited for: While anyone with earned income can open a traditional or Roth IRA, these accounts can also be used specifically as self-employed retirement plans. They are simple to set up; and most financial institutions offer IRAs.

That said, IRAs have the lowest contribution limits of any self-employed plans, and may be better suited to those who are starting out, or who have a side hustle, and can’t contribute large amounts to a retirement account.

Contribution limits. There is no age limit for contributing to a traditional or Roth IRA, but there are contribution limits (and for Roth IRAs there are income limits; see below).

For tax years 2024 and 2025, the annual contribution limit for traditional and Roth IRAs is $7,000. These IRAs allow for a catch-up contribution of up to $1,000 per year if you’re 50 or older, for a total annual limit of $8,000.

Note that your total annual combined contributions across all your IRA accounts cannot exceed those limits. So if you’re 35 and contribute $3,000 to a Roth IRA for 2024, you cannot contribute more than $4,000 to a traditional IRA in the same year, for a maximum total annual contribution of $7,000.

Remember: You have until tax day in April of the following year to contribute to an IRA.For example, you can contribute to a traditional or a Roth IRA for tax year 2024 up until April 15, 2025.

Income limits: There are no income limits for contributing to a traditional IRA, but Roth IRAs do come with income restrictions. In 2024, that limit is $146,000 for single people (people earning more than $146,000 but less than $161,000 can contribute a reduced amount). For those individuals who are married and file taxes jointly, the limit is $230,000 to make a full contribution, and between $230,000 to $240,000 for a reduced amount.

•   In 2024 for single filers, those limits are: up to $146,000; those earning more than $146,000 but less than $161,000 can contribute a reduced amount. If your income is $161,000 or higher, you cannot contribute to a Roth IRA.

•   For 2025, the income limit for single filers is up to $150,000 to make a full contribution. Those with incomes between $150,000 and $165,000 can contribute a reduced amount. If you’re single and your income is $165,000 or higher, you cannot contribute to a Roth IRA.

•   For 2024, individuals who are married and file taxes jointly have an income limit up to $230,000 to make a full contribution to a Roth, and from $230,000 to $240,000 to contribute a reduced amount.

•   For 2025, the income limit if you’re married, filing jointly, is up to $236,000 to make a full contribution. Those with incomes between $236,000 and $246,000 can contribute a reduced amount. If your income is $246,000 or higher, you cannot contribute to Roth.

Tax benefits: The main difference between a traditional vs. Roth IRA is the tax treatment of the money you save.

•   With a traditional IRA, the contributions you make are tax-deductible when you make them (unless you’re covered by a retirement plan at work, in which case conditions apply). Withdrawals are taxed at ordinary income rates.

•   With a Roth IRA, there are no tax breaks for your contributions, but qualified withdrawals are tax free.

Withdrawal rules: You owe ordinary income tax on withdrawals from a traditional IRA after age 59 ½. You may owe a 10% penalty on early withdrawals, i.e. before age 59 ½. There are exceptions to this rule for medical and educational expenses, as well as other conditions, so be sure to check with a professional or on IRS.gov.

The rules and restrictions for taking withdrawals from a Roth are more complex. Although your contributions to a Roth IRA (i.e. your principal) can be withdrawn at any time, investment earnings on those contributions can only be withdrawn tax-free and without penalty once the investor reaches the age of 59½ — and as long as the account has been open for at least five years (a.k.a. the 5-year rule).

Required Minimum Distributions (RMDs): You are required to take RMDs from a traditional IRA starting at age 73. You are not required to take minimum distributions from a Roth IRA account. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.

2. Solo 401(k)

What it is: A solo 401(k) is a self-employed retirement plan that the IRS also refers to as a one-participant 401(k) plan. It works a bit like a regular employer-backed 401(k), except that in this instance you’re the employer and the employee. There are contribution rules for each role, but this dual structure enables freelancers and solo business owners to save more than a standard 401(k) would allow.

Suited for: A solo 401(k) covers a business owner who has no employees, or employs only their spouse.

Contribution limits:

•   As the employee: For 2024, you can contribute up to $23,000 or 100% of compensation (whichever is less), with an additional $7,500 in catch-up contributions allowed if you’re over 50, for a total of $30,500.

   For 2025, you can contribute up to $23,500, or 100% of compensation (whichever is less), with an additional $7,500 in catch-up contributions allowed if you’re over 50, for a total of $31,000.

•   As the employer: You can contribute up to 25% of your net earnings, with separate rules for single-member LLCs or sole proprietors.

For 2024, total contributions cannot exceed a total of $69,000, or $76,500 if you’re 50 and over. For 2025, it’s $70,000 or $77,500 with the $7,500 catch-up provision.

•   Super catch-up contribution rules: For tax year 2025, those aged 60 to 63 only can contribute an additional $11,250, instead of the standard $7,500, or $81,250 total.

You cannot use a solo 401(k) if you have any employees, though you can hire your spouse so they can also contribute to the plan (and you can match their contributions as the employer), further reducing your taxable income.

Note that 401(k) contribution limits are per person, not per plan (similar to IRA rules), so if either you or your spouse are enrolled in another 401(k) plan, then the $69,000 employer + employee limit per person for 2024 ($70,000 for 2025) must take into account any contributions to that other 401(k) plan.

Income limits: There is a limit on the amount of compensation that’s allowed for use in determining your contributions. For tax year 2024 it’s $345,000; for 2025 it’s $350,000.

Tax benefits: A solo 401(k) has a similar tax setup as a traditional 401(k). Contributions can be deducted, thus reducing your taxable income and potentially the amount of tax you owe for the year you contribute. But you owe ordinary income tax on any withdrawals.

Withdrawal rules: You can take withdrawals from a solo 401(k) without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability (you can find a list of exceptions at IRS.gov), but you may owe a 10% penalty as well as income tax on the withdrawal.

Required Minimum Distributions (RMDs): You are required to take minimum distributions from a solo 401(k) starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.

3. Simplified Employee Pension (or a SEP-IRA)

What it is: A SEP-IRA, or Simplified Employee Pension plan, is similar to a traditional IRA with a streamlined way for an employer (in this case, you) to make contributions to their own and their employees’ retirement savings. Note that when using a SEP-IRA, the employer makes all contributions; employees do not contribute to the SEP.

Suited for: A key difference in a SEP-IRA vs. other self-employment retirement plans is that it’s designed for those who run a business with employees. Employers have to contribute an equal percentage of salary for every employee (and you are counted as an employee). Again, employees may not contribute to the SEP-IRA.

That means, as the employer, you can not contribute more to your retirement account than to your employees’ accounts (as a percentage, not in absolute dollars). On the plus side, it’s slightly simpler than a solo 401(k) to manage in terms of paperwork and annual reporting.

Contribution limits: For 2024, the SEP-IRA rules and limits are as follows: you can contribute up to $69,000 ($70,000 for 2025) or 25% of an employee’s total compensation, whichever is less. Be sure to understand employee eligibility rules.

As the employer you can contribute up to 20% of your net compensation.

Note that SEP-IRAs are flexible: Contribution amounts can vary each year, and you can skip a year.

Compensation limits: For tax year 2024 there is a $345,000 limit on the amount of compensation used to determine contributions; it’s $350,000 for 2025.

Tax benefits: Employers and employees can deduct contributions from their earnings, and withdrawals in retirement are taxed as income.

Withdrawal rules: You can take withdrawals from a SEP-IRA without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability (you can find a list of exceptions at IRS.gov), but you may owe a 10% penalty as well as income tax on the withdrawal.

Required Minimum Distributions (RMDs): You are required to take minimum distributions from a SEP-IRA starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.

New rules under SECURE 2.0: Starting in 2024, SEP-IRA plans can now include a designated Roth option. But not all plan providers offer the Roth option at this time.

💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.

4. SIMPLE IRA

What it is: A SIMPLE IRA (which stands for Savings Incentive Match Plan for Employees) is similar to a SEP-IRA except it’s designed for larger businesses. Unlike a SEP plan, individual employees can also contribute to their own retirement as salary deferrals out of their paycheck.

Suited for: Small businesses that typically employ 100 people or less.

Contribution limits for employers: A small business owner who sets up a SIMPLE plan has two options.

•   Matching contributions. The employer can match employee contributions dollar for dollar, up to 3%.

•   Fixed contributions. The employer can contribute a fixed 2% of compensation for each employee.

Employer contributions are required every year (unlike a SEP-IRA plan), and similar to a SEP, contributions are based on a maximum compensation amount of $350,000 for 2025.

Contribution limits for employees: Employees can contribute up to $16,000 to a SIMPLE plan for 2023, an additional $3,500 for those 50 and up; $16,500 for tax year 2025, and the same $3,500 standard catch-up contribution.

2025 Super catch-up contributions: For savers age 60 to 63 only, a SECURE 2.0 provision allows an extra contribution amount of $5,250 instead of the standard $3,500 catch-up contribution starting in 2025.

Tax benefits: Employer and employees can deduct contributions from their earnings, and withdrawals in retirement are taxed as income.

Withdrawal rules: Withdrawals are taxed as income. If you make an early withdrawal before the age of 59 ½ , you’ll likely incur a 10% penalty much like a regular 401(k); do so within the first two years of setting up the SIMPLE account and the penalty jumps to 25%.

Required Minimum Distributions (RMDs): You are required to take minimum distributions from a SEP-IRA starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.

New rules under SECURE 2.0: Starting in 2024, the federal law permits employers that provide a SIMPLE plan to make additional contributions on behalf of employees, as long as the amount doesn’t exceed 10% of compensation or $5,000, whichever is less. This amount will be indexed for inflation.

Also under these new rules, student loan payments that employees make can be treated as elective deferrals (contributions) for the purpose of the employer’s matching contributions.

In addition, SIMPLE plans can now include a designated Roth option, but not all plan providers offer the Roth option at this time.

5. Defined-Benefit Retirement Plan

Another retirement option you’ve probably heard about is the defined-benefit plan, or pension plan. Typically, a defined benefit plan pays out set annual benefits upon retirement, usually based on salary and years of service.

Typically pension plans have been set up and run by very large entities, such as corporations and federal and local governments. But it is possible for a self-employed individual to set up a DB plan.

These plans do allow for very high contributions, but the downside of trying to set up and run your own pension plan is the cost and hassle. Because a pension provides fixed income payments in retirement (i.e. the defined benefit), actuarial oversight is required annually.

The Takeaway

When you’re an entrepreneur, freelance, or otherwise self-employed, it may feel as if you’re out on your own, and your options are limited in terms of retirement plans. But in fact there are a number of options to consider, including various types of IRAs and a solo 401(k).

In some cases, these plans can be just as robust as employer-provided plans in terms of contribution limits and tax benefits, or even more so. Also, be aware that some plans now offer additional contribution amounts, thanks to SECURE 2.0.

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

Easily manage your retirement savings with a SoFi IRA.


SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

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

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

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Choosing the Best IRA for Young Adults

Saving for retirement may be lower on the priority list for young adults as they deal with the right-now reality of paying rent, bills, and student loans. But the truth is, it’s never too soon to start saving for the future. The more time your money has to grow, the better. And saving even small amounts now could make a big difference later. An IRA, or individual retirement account, is one option that could help young adults start investing in their future.

There are different types of IRAs, and each has different requirements and benefits. So which IRA is best for young adults? Read on to learn about different types of IRAs, how much you can contribute, the possible tax advantages, and everything else you need to know about choosing the best IRA for young people.

Understanding IRAs

First things first, what is an IRA exactly? An IRA is a retirement savings account that allows you to save for the future over the long term. It typically also has tax advantages that may help you build your savings more efficiently.

There are several types of IRAs, but the two most common are traditional IRAs and Roth IRAs. The key difference between the two accounts is how they’re taxed. With a traditional IRA, you contribute pre-tax dollars. That means you take deductions on your contributions upfront, which may lower your taxable income for the year, and then pay taxes on the distributions when you take them in retirement.

With Roth IRAs, you contribute after-tax dollars. Your contributions are not tax deductible when you make them. However, you withdraw your money tax-free in retirement.

How much you can contribute to an IRA each year is determined by the IRS, and the amount generally changes annually. In 2024 and 2025, those under age 50 can contribute a maximum of $7,000 annually to a traditional or Roth IRA. (Those 50 and up can contribute an extra $1,000 per year in 2024 and 2025 in what’s called a catch-up contribution.) However, the contribution cannot exceed the individual’s earned income for the year. So if a child made $2,000 babysitting for the year, the most they could contribute is $2,000 to a Roth IRA that year.

Get a 1% IRA match on rollovers and contributions.

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

Factors to Consider & Eligibility

When choosing the best IRA for young adults, it’s important to consider your specific situation, the eligibility requirements, and what type of tax treatment would benefit you most.

Eligibility

The eligibility rules are different for traditional and Roth IRAs. One thing that’s not a requirement for either type is age — an individual of virtually any age can open an IRA as long as they have earned income for the year. How much money you make is another matter. Roth IRAs have income limits, while traditional IRAs do not.

How a Roth IRA works is that your modified adjusted gross income (MAGI) must be below a certain level to qualify for a Roth. In 2024, the limit on MAGI is up to $146,000 for those who are single. Single individuals who earn $146,000 or more but less than $161,000 can contribute a partial amount to a Roth, while those who earn $161,000 or more are not eligible to open or contribute to a Roth. For married couples who file taxes jointly, the limit in 2024 is up to $230,000 for a full contribution to a Roth, and between $230,000 to $240,000 for a partial contribution.

In 2025, single individuals who earn up to $150,000 can contribute the full amount to a Roth. Single filers with a MAGI of $150,000 or more but less than $165,000 can contribute a partial amount, and those who earn more than $165,000 are not eligible to open or contribute to a Roth. For married couples who file jointly, the limit in 2025 is up to $236,000 for a full contribution to a Roth, and between $236,000 to $246,000 for a partial contribution.

Young adults starting out in their career might be earning less than they will in the future — in fact, the average college grad salary in 2024 ranged from approximately $61,399 to $76,736, depending on the type of degree earned. So it could make sense for a young adult to open a Roth now when they may not have to worry about earning too much to qualify. In this case, a Roth might be the best IRA for young people.

Taxes

Another important factor to consider when looking at which IRA is best for young adults is taxes. For those who are currently in a lower tax bracket, the upfront tax deductions with a traditional IRA may not be as beneficial. On the other hand, a Roth, with its tax-free distributions in retirement, might be worth exploring, especially if the individual expects to be in a higher tax bracket in retirement.

With a traditional IRA, your income is important in determining how much of your contributions you can deduct. Deduction limits depend on your MAGI, whether you are single or married, your tax filing status, and if you’re covered by a retirement plan at work.

For instance, if you’re single and not covered by a retirement plan from your employer, you can deduct the entire amount you contribute to a traditional IRA in 2024. But if you’re covered by a workplace retirement plan, you can only deduct the full contribution limit if your MAGI is $77,000 or less. If you earn more than $77,000 and less than $87,000 you can take a partial deduction, and if you earn $87,000 or more, you can’t take any deductions at all.

In 2025, those who are single and not covered by a retirement plan at work can deduct the entire amount they contribute to an IRA. However, if they are covered by a retirement plan from their employer, they can only deduct the full amount if their MAGI is $79,000 or less. If they earn more than $79,000 and less than $89,000, they can take a partial deduction. And if their MAGI is $89,000 or more, they cannot take any deductions.

Individuals who are married filing jointly and aren’t covered by a retirement plan at work can deduct the full amount of their traditional IRA contributions. However, if their spouse is covered by a workplace retirement plan, they can only deduct the full amount of their contribution if their combined MAGI in 2024 is $230,000 or less. If their combined MAGI is $240,000 or more, they can’t take a deduction. And if they themselves are covered by a retirement plan at work, they can deduct the full amount of their contributions only if their combined MAGI is $123,000 or less. If their combined MAGI is $143,000 or more, they can’t take a deduction.

In 2025, people who are married and filing jointly and aren’t covered by a retirement plan at work can deduct the full amount of their contributions to a traditional IRA. But if their spouse is covered by a workplace retirement plan, they can deduct the full amount only if their combined MAGI is $236,000 or less. If their combined MAGI is $246,000 or more, they can’t take a deduction. And if they themselves are covered by a retirement plan at work, they can deduct the full amount of their contributions only if their combined MAGI is $126,000 or less. If their combined MAGI is $146,000 or more, they can’t take a deduction.

Withdrawals

Whether you choose a Roth or traditional IRA, the idea is to keep your money in the account without touching it until retirement, when you begin making withdrawals. In fact, both types of IRA accounts have early withdrawal penalties.

With a traditional IRA, individuals who take withdrawals before age 59 ½ will generally be subject to a 10% penalty, plus taxes. A Roth IRA typically offers more flexibility: Individuals may withdraw their contributions penalty-free at any time before age 59 ½. However, any earnings can typically only be withdrawn tax- and penalty-free once the individual reaches age 59 ½ and the account has been open for at least five years. This is known as the Roth IRA 5-year rule.

That said, there are exceptions to the IRA withdrawal rules, including:

•   Death or disability of the individual who owns the account

•   Qualified higher education expenses for the account owner, spouse, or a child or grandchild

•   Up to $10,000 for first-time qualified homebuyers to help purchase a home

•   Health insurance premiums paid while an individual is unemployed

•   Unreimbursed medical expenses that are more than 7.5% of an individual’s adjusted gross income

Building a Strong Investment Strategy

As you explore the best IRA for young people, you’ll want to make sure that you’re getting the most out of your investing strategy to help you achieve financial security. Here are some ways to do that.

Contribute to a 401(k) and an IRA.

If your employer offers a 401(k), enroll in it and contribute as much as you can. If possible, aim to contribute enough to get the matching contribution, which is, essentially, “free” or extra money that can help you build your savings.

If you don’t have a workplace 401(k) — and even if you do — open an IRA as another account to help save for retirement. Contribute as much as you are able to. With an IRA, you typically have more investment options than you do with a 401(k), and you can also choose the type of IRA that could give you tax advantages.

Automate your contributions.

With a 401(k), your contributions usually happen automatically. Opening an investment account for an IRA could help you do something similar. Many brokerages allow you to set up automatic repeating deposits in an IRA. This way you don’t have to even think about contributing to your account — it just happens.

Understand your risk tolerance.

When you’re deciding what assets to invest in, consider your risk tolerance. All investments come with some risk, but some types are riskier than others. In general, assets that potentially offer higher returns (like stocks) come with higher risk.

If a drop in the market is going to send your anxiety level skyrocketing, you may want to make your portfolio a little more conservative. If you’re willing to take risks, you might want to be a bit more aggressive. Either way, try to find an asset allocation that balances your tolerance for risk with the amount of risk you may need to take to help meet your investment goals.

Diversify your investments.

Building a diversified portfolio across a range of asset classes — such as stocks, bonds, and REITs (real estate investment trusts), for instance — rather than concentrating all of it in one area — may help you offset some investment risk. Just be aware that diversification doesn’t eliminate risk.

Reassess your portfolio regularly.

Once or twice a year, review the performance of your portfolio to make sure it’s on track to help you get where you want to be in terms of your financial future.

Maximizing Your IRA Investments

After you open an IRA, contribute up to the annual limit if you can to help maximize your investments. If you’re not sure how to fund an IRA, you can start with a few basic techniques.

For instance, you could use your tax refund to contribute to an IRA. That way, you won’t be pulling money out of your savings or from the funds you have earmarked to pay your bills. The same is true if you get a raise or bonus at work, or if a relative gives you money for a birthday. Put those dollars into your IRA.

Another way to fund an IRA is to make small monthly contributions to it. You could start with $50 or $100 monthly. You could even set up a vault bank account specifically for money designated to your IRA so that you don’t end up spending it on something else.

Finally, when you change jobs, consider rolling over your 401(k) into an IRA (learn more about an IRA transfer vs. rollover). Once you’ve rolled the money over, you can choose how to invest it.

Considerations for Young Adults Looking to Start Investing

Young adults who are ready to begin investing should aim to get started as soon as possible. Thanks to the power of compounding returns, the longer your money has to compound, the bigger your account balance may be when you reach retirement.

When choosing an IRA, consider the tax advantages of traditional and Roth IRAs to decide which type of account may be most beneficial for your situation. Once you’ve opened an IRA, try to contribute as much as you can afford to each year, up to the annual limit.

Young adults should also think about their financial goals, at what age they plan to retire, and what their tolerance is for risk. Each of these factors can affect how they invest and what kinds of assets they invest in.

The Takeaway

An IRA can be a great way for young adults to start saving for retirement. The earlier they start, the longer their money may have to grow, which can make a big difference over time.

In order to choose the best IRA for young people, weigh the different tax benefits of Roth and traditional IRAs. If you’re leaning toward a Roth IRA, make sure you meet the income limit requirements, and if you’re considering a traditional IRA, check to see if you can deduct your contributions.

Once you’ve chosen the right IRA for you, start contributing to it regularly if you can. And no matter how much you’re able to contribute, remember this: Getting started with retirement savings is one of the most important steps you can take to build a nest egg and help secure your financial future.

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

Help grow your nest egg with a SoFi IRA.

FAQ

What are the different types of IRAs?

There are several types of IRAs. Two of the most popular are traditional and Roth IRAs, which individuals with earned income can open and contribute to. Contributions to traditional IRAs are made with pre-tax dollars and the contributions are generally tax deductible; the money is taxed on withdrawal in retirement. Contributions to Roth IRAs are made with after tax dollars, and the money is withdrawn tax-free in retirement.

Other types of IRAs include SEP IRAs for self-employed individuals and small business owners, and SIMPLE IRAs for small businesses with 100 employees or fewer.

Which IRA is suitable for young adults?

It depends on an individual’s specific situation, but for young adults choosing between a traditional or Roth IRA, a Roth may be the better choice for those in a low tax bracket now and who expect to be in a higher tax bracket in retirement. That’s because with a Roth, contributions are made with after tax dollars and distributions are withdrawn tax-free in retirement. With traditional IRAs, contributions are deducted upfront and you pay taxes on distributions when you retire.

Still, it’s important to weigh the different options and benefits to choose the IRA that’s best for you.

What factors should young adults consider when choosing an IRA?

Young adults should consider their current tax bracket and the tax bracket they expect to be in during retirement when choosing an IRA. If they’re in a low tax bracket now and anticipate that they’ll be in a higher tax bracket when they retire, a Roth IRA may make more sense since distributions are withdrawn tax-free in retirement. Conversely, if they’re in a higher tax bracket now than they expect to be in retirement, a traditional IRA may be a better option.

How can young adults maximize their IRA investments?

To maximize IRA investments, young adults should start contributing money to their IRA as early as possible. The longer their money has to compound, the bigger their IRA balance may grow over time. In addition, they should contribute as much as they can to their IRA each year, up to the annual limit ($7,000 for those under 50 in tax years 2024 and 2025).


Photo credit: iStock/andresr

SoFi Invest®

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

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


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

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

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

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Solo 401(k) vs SEP IRA: Key Differences and Considerations

Solo 401(k) vs SEP IRA: An In-Depth Comparison for Self-Employed Retirement Planning

Self-employment has its perks, but an employer-sponsored retirement plan isn’t one of them. Opening a solo 401(k) or a Simplified Employee Pension Individual Retirement Account (SEP IRA) allows the self-employed to save for retirement while enjoying some tax advantages.

So, which is better for you? The answer can depend largely on whether your business has employees or operates as a sole proprietorship and which plan yields more benefits, in terms of contribution limits and tax breaks.

Weighing the features of a solo 401(k) vs. SEP IRA can make it easier to decide which one is more suited to your retirement savings needs.

Key Points

•   Solo 401(k) allows tax-deductible contributions, employer contributions, employee contributions, and offers the option for Roth contributions and catch-up contributions.

•   SEP IRA allows tax-deductible contributions, employer contributions, but does not allow employee contributions, Roth contributions, catch-up contributions, or loans.

•   Withdrawals from traditional solo 401(k) plans and SEP IRAs are taxed in retirement.

•   Solo 401(k) plans allow loans, while SEP IRAs do not.

•   Solo 401(k) plans offer more flexibility and options compared to SEP IRAs.

Understanding the Basics

A solo 401(k) is similar to a traditional 401(k), in terms of annual contribution limits and tax treatment. A SEP IRA follows the same tax rules as traditional IRAs. SEP IRAs, however, typically allow a higher annual contribution limit than a regular IRA.

What Is a Solo 401(k)?

A solo 401(k) covers a business owner who has no employees or employs only their spouse. Simply, a Solo 401(k) allows you to save money for retirement from your self-employment or business income on a tax-advantaged basis.

These plans follow the same IRS rules and requirements as any other 401(k). There are specific solo 401(k) contribution limits to follow, along with rules regarding withdrawals and taxation. Regulations also govern when you can take a loan from a solo 401(k) plan.

A number of online brokerages offer solo 401(k) plans for self-employed individuals, including those who freelance or perform gig work. You can open a retirement account online and start investing, no employer other than yourself needed.

If you use a solo 401(k) to save for retirement, you’ll also need to follow some reporting requirements. Generally, the IRS requires solo 401(k) plan owners to file a Form 5500-EZ if it has $250,000 or more in assets at the end of the year.

What Is a SEP IRA?

A SEP IRA is another option to consider if you’re looking for retirement plans for the self-employed. This tax-advantaged plan is available to any size business, including sole proprietorships with no employees. SEP IRAs work much like traditional IRAs, with regard to the tax treatment of withdrawals. They do, however, allow you to contribute more money toward retirement each year above the standard traditional IRA contribution limit. That means you could enjoy a bigger tax break when it’s time to deduct contributions.

If you have employees, you can make retirement plan contributions to a SEP IRA on their behalf. SEP IRA contribution limits are, for the most part, the same for both employers and employees. If you’re interested in a SEP, you can set up an IRA for yourself or for yourself and your employees through an online brokerage.

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

Get a 1% IRA match on rollovers and contributions.

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


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

Diving Deeper: Pros and Cons of Each Plan

As you debate between a solo 401(k) vs. a SEP IRA as ways to build wealth for retirement, it’s helpful to learn more about how these plans work, including their benefits and drawbacks.

Advantages of Solo 401(k)s

In terms of differences, there are some things that set solo 401(k) plans apart from SEP IRAs.

With a solo 401(k), you can choose a traditional or Roth. You can deduct your contributions in the year you make them with a traditional solo 401(k), but you’ll pay taxes on your distributions in retirement. With a Roth solo 401(k) you pay taxes on your contributions in the year you make them, and in retirement, your distributions are tax free. You can choose the plan that gives you the best tax advantage.

Another benefit of a solo 401(k) is that those age 50 and older can make catch-up contributions to this plan. In addition, you may be able to take a loan from a solo 401(k) if the plan permits it.

Advantages of SEP IRAs

One of the benefits of a SEP IRA is that contributions are tax deductible and you can make them at any time until your taxes are due in mid-April of the following year.

The plan is also easy to set up and maintain.

If you have employees, you can establish a SEP IRA for yourself as well as your eligible employees. You can then make retirement plan contributions to a SEP IRA on your employees’ behalf. (All contributions to a SEP are made by the employer only, though employees own their accounts.)

SEP IRA contribution limits are, for the most part, the same for both employers and employees. This means that you need to make the same percentage of contribution for each employee that you make for yourself. That means if you contribute 15% of your compensation for yourself, you must contribute 15% of each employee’s compensation (subject to contribution limits).

A SEP IRA also offers flexibility. You don’t have to contribute to it every year.

However, under SEP IRA rules, no catch-up contributions are allowed. There’s no Roth option with a SEP IRA either.

Eligibility and Contribution Limits

Here’s what you need to know about who is eligible for a SEP IRA vs. a Solo 401(k), along with the contribution limits for both plans for 2024 and 2025.

Who Qualifies for a Solo 401(k) or SEP IRA?

Self-employed individuals and business owners with no employees (aside from their spouse) can open and contribute to a solo 401(k). There are no income restrictions on these plans.

SEP IRAs are available to self-employed individuals or business owners with employees. A SEP IRA might be best for those with just a few employees because IRS rules dictate that if you have one of these plans, you must contribute to a SEP IRA on behalf of your eligible employees (to be eligible, the employees must be 21 or older, they must have worked for you for three of the past five years, and they must have earned at least $750 in the tax year).

Plus, the amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

Contribution Comparison

With a solo 401(k), there are rules regarding contributions, including contribution limits. For 2024, you can contribute up to $69,000, plus an additional catch-up contribution of $7,500 for those age 50 and older. In 2025, you can contribute up to $70,000, plus an extra catch-up contribution of $7,500 for those age 50 and older. Also in 2025, those aged 60 to 63 may contribute an additional catch-up of $11,250 instead of $7,500, thanks to SECURE 2.0.

For the purposes of a solo 401(k) you play two roles — employer and employee. As an employee, you can contribute the lesser of 100% of your compensation or up to $23,000 in 2024 and up to $23,500 in 2025. If you’re 50 or older, you can contribute the $7,500 catch-up contribution in 2024 and 2025, and if you’re aged 60 to 63, in 2025 you may contribute an additional $11,250 instead of $7,500. As an employer, you can make an additional contribution of 25% of your compensation (up to $345,000 in 2024 and up to $350,000 in 2025) or net self-employment income.

The contribution limits for a SEP IRA are the lesser of 25% of your compensation or $69,000 in 2024 and $70,000 in 2025. As mentioned earlier, there are no catch-up contributions with this plan.

And remember, per the IRS, if you have a SEP IRA, you must contribute to the plan on behalf of your eligible employees. The amount you contribute to your employees’ plan must be the same percentage that you contribute to your own plan.

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Key Differences That Could Influence Your Decision

When you’re deciding between a solo 401(k) vs. a SEP IRA, consider the differences between the two plans carefully. These differences include:

Roth Options and Tax Benefits

With a solo 401(k), you can choose between a traditional and Roth solo 401(k), depending on which option’s tax benefits make the most sense for you. If you expect to be in a higher tax bracket when you retire, a Roth may be more advantageous since you can pay taxes on your contributions upfront and get distributions tax-free in retirement.

On the other hand, if you anticipate being in a lower tax bracket at retirement, a traditional solo 401(k) that lets you take deductions on your contributions now and pay tax on distributions in retirement could be your best option.

Loan Options and Investment Flexibility

You may also be able to take a loan from a solo 401(k) if your plan permits it. Solo 401(k) loans follow the same rules as traditional 401(k) loans.

If you need to take money from a SEP IRA before age 59 ½, however, you may pay an early withdrawal penalty and owe income tax on the withdrawal.

Both solo 401(k)s and SEP IRA offer more investment options than workplace 401(k)s. So you can choose the investment options that best suit your needs.

The Impact of Having Employees

Whether you have employees or not will help determine which type of plan is best for you.

A solo 401(k) is designed for business owners with no employees except for a spouse.

A SEP IRA is for those who are self-employed or small business owners. A SEP IRA may be best for those who have just a few employees since, as discussed above, you must contribute to a SEP IRA on behalf of all eligible employees and you must contribute the same percentage of compensation as you contribute for yourself.

The Financial Implications for Your Business

The plan you choose, solo 401(k) vs. SEP IRA, does have financial and tax implications that you’ll want to consider carefully. Here’s a quick comparison of the two plans.

Solo 401(k) vs SEP IRA at a Glance

Both solo 401(k) plans and SEP IRAs make it possible to save for retirement as a self-employed person or business owner when you don’t have access to an employer’s 401(k). And both can potentially offer a tax break if you’re able to deduct contributions each year.

Here’s a rundown of the main differences between a 401(k) vs. SEP IRA.

Solo 401(k)

SEP IRA

Tax-Deductible Contributions Yes, for traditional solo 401(k) plans Yes
Employer Contributions Allowed Yes Yes
Employee Contributions Allowed Yes No
Withdrawals Taxed in Retirement Yes, for traditional solo 401(k) plans Yes
Roth Contributions Allowed Yes No
Catch-Up Contributions Allowed Yes No
Loans Allowed Yes No

How These Plans Affect Your Bottom Line

Both solo 401(k)s and SEP IRAs are tax-advantaged accounts that can help you save for retirement. With a SEP IRA, contributions are tax deductible, including contributions made on employees’ behalf, which offers a tax advantage. Solo 401(k)s give you the option of choosing a traditional or Roth option so that you can pay tax on your contributions upfront and not in retirement (traditional), or defer them until you retire (Roth).

Making the Choice Between SEP IRA and Solo 401(k): Which Is Right for You?

An important part of planning for your retirement is understanding your long-term goals. Whether you choose to open a solo 401(k) or make SEP IRA contributions can depend on how your business is structured, how much you want to save for retirement, and what kind of tax advantages you hope to enjoy along the way.

When to Choose a Solo 401(k)

If you’re self-employed and have no employees (or if your only employee is your spouse), you may want to consider a solo 401(k). A solo 401(k) could allow you to save more for retirement on a tax-advantaged basis compared to a SEP IRA. A solo 401(k) allows catch-up contributions if you are 50 or older, and you can also take loans from a solo 401(k).

Just be aware that a solo 401(k) can be more work to set up and maintain than a SEP IRA.

When to Choose a SEP IRA

If you’re looking for a plan that’s easy to set up and maintain, a SEP IRA may be right for you. And if you have a few employees, a SEP IRA can be used to cover them as well as your spouse. However, you will need to cover the same percentage of contribution for your employees as you do for yourself.

Remember that a SEP IRA does not allow catch-up contributions, nor can you take loans from it.

Step-by-Step Guide to Opening Your Account

You can typically set up a SEP IRA with any financial institution that offers other retirement plans, including an online bank or brokerage. The institution you choose will guide you through the set-up process and it’s generally quick and easy.

Once you establish and fund your account, you can choose the investment options that best suit your needs and those of any eligible employees you may have. You will need to set up an account for each of these employees.

To open a Solo 401(k), you’ll need an Employee Identification Number (EIN). You can get an EIN through the IRS website. Once you have an EIN, you can choose the financial institution you want to work with, typically a brokerage or online brokerage. Next, you’ll fill out the necessary paperwork, and once the account is open you’ll fund it. You can do this through direct deposit or a check. Then you can set up your contributions.

Additional Considerations for Retirement Planning

Besides choosing a SEP IRA or a solo 401(k), there are a few other factors to consider when planning for retirement. They include:

Rollover Process

At some point, you may want to roll over whichever retirement plan you choose — or roll assets from another retirement plan into your current plan. A SEP IRA allows for either option. You can generally roll a SEP IRA into another IRA or other qualified plan, although there may be some restrictions depending on the type of plan it is. You can also roll assets from another retirement plan you have into your SEP.

A solo 401(k) can also be set up to allow rollovers. You can roll other retirement accounts, including a traditional 401(k) or a SEP IRA, into your solo 401(k). You can also roll a solo 401(k) into a traditional 401(k), as long as that plan allows rollovers.

Can You have Both a SEP IRA and a Solo 401(k)?

It is possible to have both a SEP IRA and a solo 401(k). However, how much you can contribute to them depends on certain factors, including how your SEP was set up. In general, when you contribute to both plans at the same time, there is a limit to how much you can contribute. Generally, your total contributions to both are aggregated and cannot exceed more than $69,000 in 2024 and $70,000 in 2025.

Preparing for Retirement Beyond Plans

Choosing retirement plans is just one important step in laying the groundwork for your future. You should also figure out at what age you can retire, how much money you’ll need for retirement, and the typical retirement expenses you should be ready for.

Working on building your retirement savings is an important goal. In addition to opening and contributing to retirement plans, other smart strategies include creating a budget and sticking to it, paying down any debt you have, and simplifying your lifestyle and cutting unnecessary spending. You may even want to consider getting a side hustle to bring in extra income.

The Takeaway

Saving for retirement is something that you can’t afford to put off. And the sooner you start, the better so that your money has time to grow. Whether you choose a solo 401(k), SEP IRA, or another savings plan, it’s important to take the first step toward building retirement wealth.

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

Help grow your nest egg with a SoFi IRA.


Photo credit: iStock/1001Love

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