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Dec

2025

What Happens to a 401k When You Leave Your Job?

What Happens to Your 401(k) When You Leave Your Job?

By Austin Kilham | invest, Investing, Money & Life, Preparing for Retirement | Comments Off

Table of Contents

A Quick 401(k) Overview
What Happens to Your 401(k) When You Quit?
How Long Do You Have to Move Your 401(k)?
Next Steps for Your 401(k) After Leaving a Job
FAQ

There are many important decisions to make when starting a new job, including what to do with your old 401(k) account. Depending on the balance of the old account and the benefits offered at your new job, you may have several options, including keeping it where it is, rolling it over into a brand new account, or cashing it out.

A 401(k) may be an excellent way for workers to build a retirement fund, as it allows them to save for retirement on a tax-advantaged basis, and many employers offer matching contributions.

Key Points

When leaving a job, you have options for your 401(k) account, including leaving it with your former employer, rolling it over into a new account, or cashing it out.
If your 401(k) balance is less than $7,000, your former employer may cash out the funds or roll them into another retirement account in your name.
If you have more than $7,000 in your 401(k), your former employer cannot force you to cash out or roll over the funds without your permission.
If you quit or are fired, you may lose employer contributions that are not fully vested.
It is important to consider the tax implications, penalties, and long-term financial security before making decisions about your 401(k) when leaving a job.

A Quick 401(k) Overview

A 401(k) is a type of retirement savings plan many employers offer that allows employees to save and invest with tax advantages. With a 401(k) plan, an employer will automatically deduct workers’ contributions to the account from their paychecks before taxes are taken out.

In 2025, employees can contribute up to $23,500 a year in their 401(k)s, and employees aged 50 and older can make catch-up contributions of $7,500 a year for a total of $31,000. In 2026, employees can contribute up to $24,500 annually in their 401(k)s, and those 50 and older can contribute a catch-up of $8,000, for a total of $32,500. Also in both 2025 and 2026, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500 and $8,000, for an annual total of $34,750 and $35,750, respectively.

Employees will invest the funds in a 401(k) account in several investment options, depending on what the employer and their 401(k) administrator offer, such as stocks, bonds, mutual funds, and target date funds.

The money in a 401(k) account grows tax-free until the employee withdraws it, typically after reaching age 59 ½. At that point, the employee must pay taxes on the money withdrawn. However, if the employee withdraws money before reaching 59 ½, they will typically have to pay 401(k) withdrawal taxes and penalties.

Some employers also offer matching contributions, which are additional contributions to an employee’s account based on a certain percentage of the employee’s own contributions. Employers may use 401(k) vesting schedules to determine when employees can access these contributions.

Generally, the more you can save in a 401(k), the better. If you can’t max out your 401(k) contributions, start by contributing at least enough money to qualify for your employer’s 401(k) match if they offer one.

What Happens to Your 401(k) When You Quit Your Job?

When you quit your job, you generally have several options for your 401(k) account. You can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, move it over to an IRA rollover, or cash it out.

However, if your 401(k) account has less than $7,000, your former employer may not allow you to keep it open. If there is less than $1,000 in your account, your former employer may cash out the funds and send them to you via check. If there is between $1,000 and $7,000 in the account, your employer may roll it into another retirement account in your name, such as an IRA. You may also suggest a specific IRA for the rollover.

With most 401(k) plans, if you have more than $7,000 in your account, your funds can usually remain in the account indefinitely.

Also, if you quit your job and you are not fully vested, you forfeit your employer’s contributions to your 401(k). But you do get to keep your vested contributions.

Is There Any Difference if You’re Fired?

If you are fired from your job, your 401(k) account options are similar to those if you quit your job. As noted above, you can leave the money in the account with your former employer, roll it into a new employer’s 401(k) plan, roll it over into an IRA, or cash it out. The same account limits mentioned above apply as well.

Additionally, if you are fired from your job, you may be eligible for a severance package, which may include a lump sum payment or continuation of benefits, including a 401(k) plan. But these benefits depend on your company and the circumstances surrounding your termination. And, like with quitting your job, you do not get to keep any employer contributions that are not fully vested.

How Long Do You Have to Move Your 401(k)?

If you leave your job, you don’t necessarily have to move your 401(k). Depending on the amount you have in the 401(k), you can usually keep it with your previous employer’s 401(k) administrator.

But if you do choose to roll over your 401(k) as an indirect rollover, you typically have 60 days from the date of distribution to roll over your 401(k) account balance into an IRA or another employer’s 401(k) plan. If you fail to roll over the funds within 60 days, the distribution will be subject to taxes and penalties, and if you are under 59 ½ years old, an additional 10% early withdrawal penalty.

Next Steps for Your 401(k) After Leaving a Job

As you decide what to do with your funds, you have several options, from cashing out to rolling over your 401(k)s to expanding your investment opportunities.

Cash Out Your 401(k)

You can cash out some or all of your 401(k), but in most cases, there are better choices than this from a personal finance perspective. As noted above, if you are younger than 59 ½, you may be slammed with income taxes and a 10% early withdrawal penalty, which can set you back in your ability to save for your future.

If you are age 55 or older, you may be able to draw down your 401(k) penalty-free thanks to the Rule of 55. But remember, when you remove money from your retirement account, you no longer benefit from tax-advantaged growth and reduce your future nest egg.

Roll Over Your 401(k) Into a New Account

Your new employer may offer a 401(k). If this is the case and you are eligible to participate, you may consider rolling over the funds from your old account. This process is relatively simple. You can ask your old 401(k) administrator to move the funds from one account directly to the other in what is known as a direct transfer.

Doing this as a direct transfer rather than taking the money out yourself is important to avoid triggering early withdrawal fees. A rollover into a new 401(k) has the advantage of consolidating your retirement savings into one place; there is only one account to monitor.

Keep Your 401(k) With Your Previous Employer

If you like your previous employer’s 401(k) administrator, its fees, and investment options, you can always keep your 401(k) where it is rather than roll it over to an IRA or your new employer’s 401(k).

However, keeping your 401(k) with your previous employer may make it harder to keep track of your retirement investments because you’ll end up with several accounts. It’s common for people to lose track of old 401(k) accounts.

Moreover, you may end up paying higher fees if you keep your 401(k) with your previous employer. Usually, employers cover 401(k) fees, but if you leave the company, they may shift the cost onto you without you realizing it. High fees may end up eating into your returns, making it harder to save for retirement.

Does Employer Match Stop After You Leave?

Once you leave a job, whether you quit or are fired, you will no longer receive the matching employer contributions.

Look for New Investment Options

If you don’t love the investment options or fees in your new 401(k), you may roll the funds over into an IRA account instead. Rolling assets into a traditional IRA is relatively simple and can be done with a direct transfer from your 401(k) plan administrator. You also may be allowed to roll a 401(k) into a Roth IRA, but you’ll have to pay taxes on the amount you convert.

The advantage of rolling funds into an IRA is that it may offer a more comprehensive array of investment options. For example, a 401(k) might offer a handful of mutual or target-date funds. In an IRA, you may have access to individual securities like stocks and bonds and a wide variety of mutual funds, index funds, and exchange-traded funds.

Test your understanding of what you just read.

The Takeaway

Changing jobs is an exciting time, whether or not you’re moving, and it can be a great opportunity to reevaluate what to do with your retirement savings. Depending on your financial situation, you could leave the funds where they are or roll them over into your new 401(k) or an IRA. You can also cash out the account, but that may harm your long-term financial security because of taxes, penalties, and loss of a tax-advantaged investment account.

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 build your nest egg with a SoFi IRA.

FAQ

How long can a company hold your 401(k) after you leave?

A company can hold onto an employee’s 401(k) account indefinitely after they leave, but they are required to distribute the funds if the employee requests it or if the account balance is less than $7,000.

Can I cash out my 401(k) if I quit my job?

You can cash out your 401(k) if you quit your job. However, experts generally do not advise cashing out a 401(k), as doing so will trigger taxes and penalties on the withdrawn amount. Instead, it is usually better to either leave the funds in the account or roll them over into a new employer’s plan or an IRA.

What happens if I don’t rollover my 401(k)?

If you don’t roll over your 401(k) when you leave a job, the funds will typically remain in the account and be subject to the rules and regulations of the plan. If the account balance is less than $7,000, the employer may roll over the account into an IRA or cash out the account. If the balance is more than $7,000, the employer may offer options such as leaving the funds in the account or rolling them into an IRA.

You may also be interested in:

Guide to Transferring 401(k) to a New Job

How to Roll Over Your 401(k)

When Can You Withdraw From Your 401(k)?

Article Sources

IRS. 401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000.

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Dec

2025

What Is 401(k) Auto Escalation?

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

One way to ensure you’re steadily working toward your retirement goals is to automate as much of the process as possible. Some employers streamline the retirement savings process for their employees with automatic enrollment, signing you up for a retirement plan unless you choose to opt out.

There are many ways to automate a 401(k) experience at every step of the way. You can have contributions taken directly from your paycheck before they ever hit your bank account and invest them right away. With automatic deductions, you’re more likely to save for your future rather than spending on immediate needs.

In some cases, you may also be able to automatically increase the amount you save. Some employers also offer a 401(k) auto escalation option that could increase your retirement savings amount as you get older. Here’s a closer look at how 401(k) auto escalation works and how it may help you on your way to your retirement goals.

Key Points

• 401(k) auto escalation automatically increases contributions at regular intervals until a preset maximum is reached.

• The SECURE Act allows auto escalation up to 15% of an employee’s salary.

• Auto escalation helps employees save more for retirement without needing to adjust contributions manually.

• Employers benefit from auto escalation by attracting and retaining talent and possibly reducing payroll taxes.

• Employees should assess if auto escalation aligns with their financial capabilities and retirement goals.

401(k) Recap

A 401(k) is a defined contribution plan offered through your employer. It allows employees to contribute some of their wages directly from their paycheck. Contributions are made with pre-tax money, which may reduce taxable income in the year they are made, providing an immediate tax benefit.

In 2025, employees can contribute up to $23,500 a year to their 401(k), and in 2026, they can contribute up to $24,500. Those aged 50 and older can contribute an extra $7,500 in 2025 and $8,000 in 2026, bringing their potential contribution total to $31,000 in 2025 and $32,500 in 2026. For 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.

For many individuals, the goal is to eventually max out a 401(k) up to the contribution limit. Employers may offer matching funds to help encourage employees to save. Individuals should aim to contribute at least enough to meet their employer’s match, in order to get that “free money” from their employer to invest in their future.

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

How 401(k) Auto Escalation Works

An auto escalation is a 401(k) feature that automatically increases your contribution at regular intervals by a set amount until a preset maximum is achieved. The SECURE Act, signed into law in 2019, allows auto escalation programs to raise contributions up to 15%. Before then, the cap on default contributions was 10% for auto escalation programs.

For example, you may choose to set your auto escalation rate to raise your contributions by 1% each year. Once you hit that 15% ceiling, auto escalation will cease. However, you can still choose to increase the amount you are saving on your own beyond that point.

Advantages of 401(k) Auto Escalation

When it comes to auto escalation programs, there are important factors to consider — for employees as well as for employers who sponsor the 401(k) plan.

Advantages for Employees

• Auto escalation is one more way to automate savings for retirement, so that it is always prioritized.

• Auto escalation may increase the amount employees save for retirement more than they would on their own.

• Employees don’t have to remember to make or increase contributions themselves until they reach the auto escalation cap.

• Increasing tax-deferred contributions may help reduce an employee’s tax burden.

Advantages for Sponsors

Employers who offer auto escalation may find it helps with both employee quality and retention as well as with reducing taxes.

• Auto escalation provides a benefit that may help attract top talent.

• It helps put employees on track to automatically save, which may increase retention and contribute to their sense of financial well-being.

• It reduces employer payroll taxes, because escalated funds are contributed pre-tax by employees.

• It may generate tax credits or deductions for employers. For example, matching contributions may be tax deductible.

• As assets under management increase, 401(k) companies may offer lower administration fees or even the ability to offer additional services to participants.

Disadvantages of 401(k) Auto Escalation

While there are undoubtedly benefits to 401(k) auto escalation, there are also some potential downsides to consider.

Disadvantages for Employees

Even on autopilot, it can be important to review contributions so as to avoid these disadvantages.

• Auto escalation may lull employees into a false sense of security. Even if they’re increasing their savings each year, if their default rate was too low to begin with, they may not be saving enough to meet their retirement goals.

• If an employee experiences a pay freeze or hasn’t received a raise in a number of years, auto escalation will mean 401(k) contributions represent an increasingly larger proportion of take-home pay.

Disadvantages for Sponsors

Employers may want to consider these potential downsides before offering 401(k) auto escalation.

• Auto escalation requires proper administrative oversight to ensure that each employee’s escalation amounts are correct — and it may be time-consuming and costly to fix mistakes.

• This option may increase the need to communicate with 401(k) record keepers.

• Auto escalation may cause employer contribution amounts to rise.

Is 401(k) Auto Escalation Right for You?

If your employer offers auto escalation, first determine your goals for retirement. Consider whether or not your current savings rate will help you achieve those goals and whether escalation could increase the likelihood that you will.

Also decide whether you can afford to increase your contributions. Perhaps your default rate is already set high enough that you are maxing out your retirement savings budget. In this case, auto escalation might land you in a financial bind.

However, if you have room in your budget, or you expect your income to grow each year, auto escalation may help ensure that your retirement savings continue to grow as well.

If your employer does not offer auto escalation, or you choose to opt out, consider using pay raises as an opportunity to change your 401(k) contributions yourself.

The Takeaway

A 401(k) is one of many tools available to help you save for retirement — and auto escalation can help you increase your contributions regularly without any additional thought or effort on your part.

If you’ve maxed out your 401(k) or you’re looking for a retirement account with more flexible options, you might want to consider a traditional or Roth IRA. Both types of IRAs offer tax-advantaged retirement savings.

Help grow your nest egg with a SoFi IRA.

FAQ

Is 401(k) auto enrollment legal?

Yes, automatic enrollment allows employers to automatically deduct 401(k) contributions from an employee’s paycheck unless they have expressly communicated that they wish to opt out of the retirement plan.

What is automatic deferral increase?

Automatic deferral increase is essentially the same as auto escalation. It automatically increases the amount that you are saving by a set amount at regular intervals.

Can a company move your 401(k) without your permission?

Your 401(k) can be moved without your permission by a former employer if the 401(k) has a balance of $5,000 or less.

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Dec

2025

Default Deferral Rate 401(k) Explained

By Rebecca Lake | Growing Wealth, invest, Investing | Comments Off

Your 401(k) deferral rate is the amount that you contribute to the plan via your paychecks. Many companies have a default deferral rate on 401(k) plans, in which they automatically direct a certain amount of your paycheck to your 401(k) plan. This occurs automatically, unless you opt out of participation or select a higher default rate.

The default deferral rate on 401(k) plans varies from one plan to another (and not all plans have a default rate), though the most common rate is 7%. If you’re currently saving in a 401(k) plan or will soon enroll in your employer’s plan, it’s important to understand how automatic contributions work.

What Is a 401(k) Deferral Rate?

A deferral rate is the percentage of salary contributed to a 401(k) plan or a similar qualified plan each pay period. Each 401(k) plan can establish a default deferral percentage, which represents the minimum amount that employees automatically contribute, unless they opt out of the plan.

For example, someone making a $50,000 annual salary would automatically contribute a minimum of $1,500 per year to their plan if it had a 3% automatic deferral rate.

Employees can choose not to participate in the plan, or they can contribute more than the minimum deferral percentage set by their plan. They may choose to contribute 10%, 15% or more of their salary into the plan each year, and receive a tax benefit up to the annual limit. Again, the more of your income you defer into the plan, the larger your retirement nest egg may be later.

There are several benefits associated with changing your 401(k) contributions to maximize 401(k) salary deferrals, including:

• Reducing taxable income if you’re contributing pre-tax dollars

• Getting the full employer matching contribution

• Qualifying for the retirement saver’s credit

If you qualify, the Saver’s Credit is worth up to $1,000 for single filers or $2,000 for married couples filing jointly. This credit can be used to reduce your tax liability on a dollar-for-dollar basis.

Average Deferral Rate

Studies have shown that more employers are leaning toward the higher end of the scale when setting the default deferral rate. According to research from the Plan Sponsor Council of America (PSCA), for instance, 32.9% of employers use an automatic default deferral rate of 6% versus 29% that set the default percentage at 3%.

In terms of employer matching contributions, a recent survey from the PSCA found that 96% of employers offer some level of match. The most recent data available from the Bureau of Labor suggests that the average employer match works out to around 3.5%. Again, it’s important to remember that not every employer offers this free money to employees who enroll in the company’s 401(k).

Research shows that higher default rates result in higher overall retirement savings for participants.

What Is the Actual Deferral Percentage Test?

The actual deferral percentage (ADP) test is one of two nondiscrimination tests employers must apply to ensure that employees who contribute to a 401(k) receive equal treatment, as required by federal regulations. The ADP test counts elective deferrals of highly compensated employees and non-highly compensated employees to determine proportionality. A 401(k) plan passes the ADP test if the actual deferral percentage for highly compensated employees doesn’t exceed the greater of:

• 125% of the ADP for non-highly compensated employees, or the lesser of

• 200% of the ADP for non-highly compensated employees or the ADP for those employees plus 2%

If a company fails the ADP test or the second nondiscrimination test, known as actual contribution percentage, then it has to remedy that to avoid an IRS penalty. This can mean making contributions to the plan on behalf of non-highly compensated employees.

How Much Should I Contribute to Retirement?

If you’re ready to start saving for retirement, using your employer’s 401(k), one of the most important steps is determining your personal deferral rate. The appropriate deferral percentage can depend on several things, including:

• How much you want to save for retirement total

• Your current age and when you plan to retire

• What you can realistically afford to contribute, based on your current income and expenses

A typical rule of thumb suggested by financial specialists is to save at least 15% of your gross income toward retirement each year. So if you’re making $100,000 a year before taxes, you’d save $15,000 in your 401(k) following this rule. But it’s important to consider whether you can afford to defer that much into the plan.

Using a 401(k) calculator or retirement savings calculator can help you to get a better idea of how much you need to save each year to reach your goals, based on where you’re starting from right now. As a general rule, the younger you are when starting to invest for retirement the better, as you have more time to take advantage of the power of compounding returns.

If you don’t have a 401(k), you can still save for retirement through an individual retirement account (IRA) and set up automatic deposits to mimic paycheck deferrals and give you the benefit of dollar-cost averaging.

Contribution Limits

It’s important to keep in mind that there are annual contribution limits for 401(k) plans. These limits determine how much of your income you can defer in any given year and are established by the IRS. The IRS adjusts annual contribution limits periodically to account for inflation.

For 2025, employees are allowed to contribute $23,500 to their 401(k) plans. An additional catch-up contribution of $7,500 is allowed for employees aged 50 or older. That means older workers may be eligible to make a total contribution of $31,000. Those aged 60 to 63 can make an extra contribution of up to $11,250, instead of $7,500 in 2025, for a total of $34,750, thanks to SECURE 2.0

For 2026, employees can contribute $24,500 to their 401(k). Those 50 and older can make an additional catch-up contribution of $8,000 for a total of $32,500. Those aged 60 to 63 can make the SECURE 2.0 contribution of up to $11,250, instead of $8,000 in 2026, for a total of $35,750.

The total annual 2025 contribution limit for 401(k) plans, including both employee and employer matching contributions, is $70,000 ($77,500 with the standard catch-up and $81,250 with the SECURE 2.0 catch-up). For 2026, the total annual contribution limit is $72,000 ($80,00 with the standard catch-up and $83,250 with the SECURE 2.0 catch-up).

The money that you contribute to the 401(k) is yours, but you might not own the contributions from your employer until a certain period of time has passed, if your plan uses a 401(k) vesting schedule.

You’re not required to max out the annual contribution limit and employers are not required to offer a match. But the more of your salary you defer to the plan and the bigger the matching contribution, the more money you could end up with once you’re ready to retire.

The Takeaway

Contributing to a 401(k) can be one of the most effective ways to save for retirement but it’s not your only option. If you don’t have a 401(k) at work or you want to supplement your salary deferrals, you can also save using an Individual Retirement Account (IRA).

An IRA allows you to set aside money for the future while snagging some tax breaks. With a traditional IRA, your contributions may be tax-deductible. A Roth IRA, meanwhile, allows for tax-free distributions in retirement.

Help grow your nest egg with a SoFi IRA.

FAQ

What is a good deferral rate for 401(k)?

A good deferral rate for 401(k) contributions is one that allows you to qualify for the full employer match if one is offered, at a minimum. The more money you defer into your plan, the more opportunity you have to grow wealth for retirement.

What is an automatic deferral?

An automatic deferral is a deferral of salary into a 401(k) plan or similar qualified plan through paycheck deductions. Your employer automatically redirects money from your paycheck into your retirement account.

What is the maximum default automatic enrollment deferral rate?

This depends on your employer. Some employers may set the threshold higher to allow employees to make better use of the plan.

About the author

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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

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

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

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

Dec

2025

Top 5 401(k) Alternatives: Saving for Retirement Without a 401(k)

By Pam O’Brien | Growing Wealth, invest, Investing | Comments Off

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

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

5 Alternatives to a 401(k)

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

Traditional IRA

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

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

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

Once an individual opens an account, they may make contributions up to an annual limit at any time prior to the tax filing deadline. For tax year 2025, the limit is $7,000 ($8,000 for individuals 50 and older). For tax year 2026, the limit is $7,500 ($8,500 for individuals 50 and older).

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

Roth IRA

There are a few key differences when it comes to a traditional IRA vs. a Roth IRA. To begin with, not everyone qualifies to contribute to a Roth IRA. The upper earnings limit to contribute even a reduced amount for tax year 2025 is $165,000 for singles, and $246,000 for married joint filers. The upper earnings limit for even a partial contribution for tax year 2026 is $168,000 for singles, and $252,000 for married joint filers.

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

Like a traditional IRA, Roth IRAs carry an annual contribution limit of $7,000 ($8,000 for those 50 and up) for 2025 and $7,500 ($8,600 for those 50 and up) for 2026. Roth IRAs also offer similar flexibility to traditional IRAs in that individuals can open online IRA accounts with a provider that best suits their needs—whether that means an account that offers more hands-on investing support or one with cheaper fees.

Self-Directed IRA (SDIRA)

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

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

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

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

Simplified Employee Pension (SEP) IRA

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

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

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

Solo 401(k)

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

In 2025, total contribution limits for a solo 401(k) are $70,000 if you’re under 50. You can contribute an additional $7,500 in catch-up contributions if you’re age 50-59 or age 64 or older. Those between age 60 and 63 can contribute an additional $11,250 (instead of $7,500) in catch-up contributions.

In 2026, total contribution limits are $72,000 if you’re under 50. You can contribute an additional $8,000 if you’re age 50-59 or age 64 or older. Those between age 60 and 63 can contribute an additional $11,250 (instead of $8,000).

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

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

How a 401(k) Differs From Alternatives

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

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

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

There are annual limits on 401(k) contributions, and the ceilings on contributions change annually. In 2025, the limit for traditional 401(k)s is $23,500 (individuals 50 and older can contribute an additional $7,500 in catch-up contributions; individuals aged 60 to 63 can contribute an additional $11,250, instead of $7,500).

In 2026, the 401(k) contribution limit is $24,500 (those age 50 or older can contribute an additional $8,000; individuals aged 60 to 63 can contribute up to $11,250, instead of $8,000). If a person participates in multiple 401(k) plans from several employers, they still need to abide by this limit, so it’s a good idea to add up all contributions across plans.

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

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

The Takeaway

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

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

Help grow your nest egg with a SoFi IRA.

FAQ

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

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

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

If your employer does not offer a 401(k), you can still save for retirement using several other tax-advantaged accounts such as individual retirement accounts (IRAs) and health savings accounts (HSAs), or a standard taxable brokerage account. Self-employed individuals have even more options, including SEP IRAs and Solo 401(k)s.

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

For self-employed individuals, there are several tax-advantaged retirement plan alternatives to a traditional 401(k), including Solo 401(k)s, SEP IRAs, SIMPLE IRAs, and traditional or Roth IRAs. The best choice depends on factors like income, number of employees, and desired contribution limits.

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.

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

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

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Alternative investments, including funds that invest in alternative investments, are risky and may not be suitable for all investors. Alternative investments often employ leveraging and other speculative practices that increase an investor's risk of loss to include complete loss of investment, often charge high fees, and can be highly illiquid and volatile. Alternative investments may lack diversification, involve complex tax structures and have delays in reporting important tax information. Registered and unregistered alternative investments are not subject to the same regulatory requirements as mutual funds.
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.

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CN-Q425-3236452-89

Dec

2025

Are You Asking Yourself: Are 401(k)s Worth It Anymore?

By Dan Miller | invest, Investing, Preparing for Retirement | Comments Off

401(k) plans have been around for decades, and millions of Americans have successfully used them to help with saving for retirement. Named for the section of the tax code that enables them, a 401(k) is an employer-sponsored plan that allows you to withdraw funds directly from your paycheck to save for retirement. Having the money come out directly from your paycheck makes it quite easy to save for retirement.

There are several benefits that come from contributing to a 401(k) plan. You’ll get a tax break for contributing to your account, since contributions made to a traditional 401(k) are made with pre-tax dollars, reducing the gross income you’ll need to report to the IRS that year. Many employers also make matching contributions to their employees’ 401(k) accounts. Still, with so many other ways to save for retirement available now, you might be wondering if 401(k)s are worth it.

Key Points

• A 401(k) is an employer-sponsored retirement plan allowing tax-advantaged contributions that can be invested and withdrawn in later years.

• Traditional 401(k)s allow employees to make pre-tax contributions, meaning they reduce taxable income for that year, while Roth 401(k)s allow employees to make after-tax contributions.

• Employer-matching in 401(k)s can provide additional funds, enhancing retirement savings.

• 401(k)s have higher contribution limits than IRAs but are limited by employer investment options.

• In comparison with savings accounts, 401(k)s offer higher potential returns but come with penalties for early withdrawal.

How 401(k) Plans Work

A 401(k) is an employer-sponsored plan, which means that you have to be employed by a company that offers one. If your employer does not offer a 401(k) program, in most cases, you can not start one on your own. In that case, you may need to look for other options, and may want to think about opening an IRA.

If you do have a 401(k), you can specify a percentage of your total pay or an amount to be withheld from your paycheck each pay period. Contributions to a traditional 401(k) account are made with pre-tax dollars and are therefore not counted in the gross income you’ll need to report to the IRS (likely lowering your overall tax bill). Instead, you will pay income tax based on the amount of money you withdraw from your account when you reach retirement age. You can also choose how to invest your contributions, based on a list of investment options provided by your employer.

401(k) Matching Explained

Many employers offer 401(k) matching as an additional employee benefit, and employers can set up matching programs in a variety of different ways.

One example might be that a company might offer to match 50% of your contributions, up to a maximum of 6% of your pay. So if you contribute the full 6% of each paycheck to your 401(k) account, your employer will contribute an additional 3%.

Effectively, employer matching allows employees to benefit from “free money” coming from their employer directly into their retirement plans.

Pros and Cons of 401(k)s

401(k)s, like any other investment and savings vehicle, have advantages and disadvantages. Here are some pros and cons of 401(k) accounts.

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Pros:

• 401(k) plans are tax-advantaged, allowing for pre-tax (traditional) or post-tax (Roth) contributions

• The contribution limits are higher than that of other retirement options (like IRAs)

• Your employer may offer matching funds

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Cons:

• Investment options are limited to what is offered by your employer

• There is a limit to how much you can contribute each year

• Some investment options may come with fees

401(k) vs Savings Account

If you’re considering where to put your money and deciding between 401(k) retirement savings versus stashing it in a regular savings account, there are a few things to keep in mind.

Money you put into a traditional 401(k) account is intended for retirement, so you may face penalties and an additional tax bill if you take it out before you reach retirement age. However, the investment options available in many 401(k) accounts may allow you to earn higher returns than those available in savings accounts. The money in a savings account would only accrue interest.

Here’s a hypothetical look at how returns may generate at various rates. All figures are for $50,000 invested in a diversified (401)k, assuming a 401(k) was invested entirely in an S&P 500 index fund, and at varying rates of return (compounding continuously, meaning that an investor earns returns on their initial investment, plus their returns, repeatedly) with no additional contributions.

Additionally, in the chart below, the percentage of corresponding rates of return is based on an inflation-adjusted return, and this percentage can be even lower based on time in the market. We’ve also included the rate of return for a hypothetical savings account, which might pay out 0.4% annual interest, for comparison:

Starting amount	Rate of Return	Ending amount after 20 years
$50,000	0.4%	$54,156
$50,000	3%	$90,306
$50,000	5%	$132,665
$50,000	7%	$193,484
$50,000	10%	$336,375

As you can see, even a small increase in your overall rate of return may pay dividends in the long term. There can also be a place in your overall financial plan for both retirement savings and regular savings accounts, but generally, it’s probably a good idea to make sure that any money you are investing for the long term has the highest possible rate of return, given your risk tolerance. Typically, the higher the potential rate of return is for an investment, the higher the potential risk involved.

Compound Interest vs Simple Interest

Depending on how you are investing or saving your money, you may earn interest. And that interest may be calculated as simple interest, or compounded on a particular schedule.

Many investments in the stock market that you might use in a 401(k) account may compound continuously. Other investments like bonds, CDs, or savings accounts may use simple interest or compound interest on other schedules.

Here’s a look at how a $50,000 investment would grow at a 7% interest rate, using either simple interest or interest compounded at various other timeframes:

Starting amount	APY	Ending amount after 20 years
$50,000	7%, simple interest	$120,000
$50,000	7%, compounded annually	$193,484
$50,000	7%, compounded quarterly	$200,320
$50,000	7%, compounded monthly	$201,936.94
$50,000	7%, compounded continuously	$202,760.00

401(k)s vs IRAs

401(k)s and Individual Retirement Accounts (IRAs) are both types of accounts that may give you tax advantages for saving for retirement. Again, a 401(k) is a retirement account sponsored by your employer, while an IRA is something you set up individually.

There are pros and cons with an IRA vs 401(k), so make sure you understand how they both work. That way you can make the best decision for your unique situation.

Perhaps the most stark difference between the two is the amount you can contribute in a year. For 2025, contribution limits are $23,500 (for those under age 50) in a 401(k) versus $7,000 in an IRA. For 2026, contribution limits are $24,500 in a 401(k) versus $7,500 in an IRA.

Is a 401(k) Right for You?

There are many different types of retirement accounts, and a 401(k) account can be an important part of your retirement plan. Check with your employer to see if they offer a 401(k) account, what investment options are available, and whether they offer any matching funds. Then consider how that fits in with your other retirement options to decide if a 401(k) is right for you.

The Takeaway

401(k) accounts are employer-sponsored retirement accounts that may be available as an employee benefit. When you contribute to a traditional 401(k) plan, the amount you contribute is not counted in the total gross income you’ll need to report that year. This may allow you to lower your overall tax liability. Additionally, many employers offer a 401(k) matching program, where they provide additional funds into your account as an employee benefit.

It can be a smart financial decision to use one of these accounts to make sure you have enough money put aside for your retirement.

🛈 While SoFi does not offer 401(k) plans at this time, we do offer a range of Individual Retirement Accounts (IRAs).

FAQ

Is a 401(k) worth it anymore?

There are many different kinds of retirement plans, and each come with their own pros and cons. A 401(k) is a valuable tool that may be a good choice for many Americans. Compare the benefits of a 401(k) with the benefits that come with other types of retirement plans to make the best choice for your specific situation.

Is it better to have a 401(k), or just save money?

It can make sense to keep some of your money in safe investments like cash or money market accounts. Having a few months’ worth of expenses in cash or cash equivalents can serve as a useful emergency fund. However, you likely won’t want to keep too much of your money in these types of investments, since they generally offer lower returns than investments that might be available in a 401(k) account.

What are the main disadvantages of a 401(k)?

While a 401(k) account has a lot of benefits and advantages, there are a few disadvantages. First is that you can only open a 401(k) account if your employer offers one, and your employer controls what investments are available. You also are limited in how much money you can contribute to a 401(k) account each year.

Photo credit: iStock/Pekic

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

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CN-Q425-3236452-82

A Quick 401(k) Overview

What Happens to Your 401(k) When You Quit Your Job?

Is There Any Difference if You’re Fired?

How Long Do You Have to Move Your 401(k)?

Next Steps for Your 401(k) After Leaving a Job

Cash Out Your 401(k)

Roll Over Your 401(k) Into a New Account

Keep Your 401(k) With Your Previous Employer

Does Employer Match Stop After You Leave?

Look for New Investment Options

The Takeaway

FAQ

How long can a company hold your 401(k) after you leave?

Can I cash out my 401(k) if I quit my job?

What happens if I don’t rollover my 401(k)?

You may also be interested in:

401(k) Recap

How 401(k) Auto Escalation Works

Advantages of 401(k) Auto Escalation

Advantages for Employees

Advantages for Sponsors

Disadvantages of 401(k) Auto Escalation

Disadvantages for Employees

Disadvantages for Sponsors

Is 401(k) Auto Escalation Right for You?

The Takeaway

FAQ

Is 401(k) auto enrollment legal?

What is automatic deferral increase?

Can a company move your 401(k) without your permission?

What Is a 401(k) Deferral Rate?

Average Deferral Rate

What Is the Actual Deferral Percentage Test?

How Much Should I Contribute to Retirement?

Contribution Limits

The Takeaway

FAQ

What is a good deferral rate for 401(k)?

What is an automatic deferral?

What is the maximum default automatic enrollment deferral rate?

5 Alternatives to a 401(k)

Traditional IRA

Roth IRA

Self-Directed IRA (SDIRA)

Simplified Employee Pension (SEP) IRA

Solo 401(k)

How a 401(k) Differs From Alternatives

The Takeaway

FAQ

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

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

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

How 401(k) Plans Work

401(k) Matching Explained

Pros and Cons of 401(k)s

Pros:

Cons:

401(k) vs Savings Account

Compound Interest vs Simple Interest

401(k)s vs IRAs

Is a 401(k) Right for You?

The Takeaway

FAQ

Is a 401(k) worth it anymore?

Is it better to have a 401(k), or just save money?

What are the main disadvantages of a 401(k)?

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