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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.


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IRA vs 401(k): What Is the Difference?

IRA vs 401(k): What Is the Difference?

The biggest difference between an IRA vs. a 401(k) is the amount you can save. You can save over three times as much in a 401(k) vs. an IRA — $23,000 versus $7,000 for tax year 2024, and $22,500 versus $6,500 for tax year 2023. But not everyone has access to a 401(k), because these are sponsored by an employer, typically for full-time employees.

“A 401(k) is probably one of the most common retirement vehicles,” says Brian Walsh, a CFP® at SoFi. “A 401(k) will be available through work. Your employer is going to choose whether or not to make a 401(k) available to all the employees. Generally speaking, 401(k)s are the most popular retirement plan employers provide.”

Other than that, a traditional IRA and a 401(k) are similar in terms of their basic provisions and tax implications. Both accounts are considered tax deferred, which means you can deduct the amount you contribute each year — unless you have a Roth account, which has a different tax benefit.

Before you decide whether one or all three types of retirement accounts might make sense for you, it helps to know all the similarities and differences between a 401(k) and a traditional IRA and Roth IRA.

Key Points

•   An IRA (Individual Retirement Account) and a 401(k) are both retirement savings accounts, but they have different features and eligibility requirements.

•   IRAs are typically opened by individuals, while 401(k)s are offered by employers to their employees.

•   IRAs offer more investment options and flexibility, while 401(k)s may have employer matching contributions and higher contribution limits.

•   Both accounts offer tax advantages, but the timing of tax benefits differs: IRAs provide tax benefits during retirement, while 401(k)s offer tax benefits upfront.

•   Choosing between an IRA and a 401(k) depends on factors like employment status, employer contributions, investment options, and personal financial goals.

How Are IRAs and 401(k)s Different?

The government wants you to prioritize saving for retirement. As a result, they provide tax incentives for IRAs vs. 401(k)s.

In that respect, a traditional IRA and a 401(k) are somewhat similar; both offer tax-deferred contributions, which may lower your taxable income, and tax-deferred investment growth. Also, you owe taxes on the money you withdraw from these accounts in retirement (or beforehand, if you take an early withdrawal).

There is a bigger difference between a Roth IRA and a 401(k). Roth accounts are funded with after-tax contributions — so they aren’t tax deductible. But they provide tax-free withdrawals in retirement.

And while you can’t withdraw the contributions you make to a traditional IRA until age 59 ½ (or incur a penalty), you can withdraw Roth contributions at any time (just not the earning or growth on your principal).

These days, you may be able to fund a Roth 401(k), if your company offers it.

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.

Other Key Differences Between IRAs and 401(k)s

As with anything that involves finance and the tax code, these accounts can be complicated. Because there can be stiff penalties when you don’t follow the rules, it’s wise to know what you’re doing.

Who Can Set Up a 401(k)?

As noted above, a key difference between an IRA and a 401(k) is that 401(k)s are qualified employer-sponsored retirement plans. You typically only have access to these plans through an employer who offers them as part of a full-time compensation package.

In addition, your employer may choose to provide matching 401(k) funds as part of your compensation, which is typically a percentage of the amount you contribute (e.g. an employer might match 3%, dollar for dollar).

Not everyone is a full-time employee. You may be self-employed or work part-time, leaving you without access to a traditional 401(k). Fortunately, there are other options available to you, including solo 401(k) plans and opening an IRA online (individual retirement accounts).

Who Can Set Up an IRA?

Anyone can set up an individual retirement account (IRA) as long as they’re earning income. (And if you’re a non-working spouse of someone with earned income, they can set up a spousal IRA on your behalf.)

If you already have a 401(k), you can still open an IRA and contribute to both accounts. But if you or your spouse (if you’re married) are covered by a retirement plan at work, you may not be able to deduct the full amount of your IRA contributions.

Understanding RMDs

Starting at age 73 (for those who turn 72 after December 31, 2022), you must take required minimum distributions (RMDs) from your tax-deferred accounts, including: traditional IRAs, SEP and SIMPLE IRAs, and 401(k)s. Be sure to determine your minimum distribution amount, and the proper timing, so that you’re not hit with a penalty for skipping it.

It’s worth noting, though, that RMD rules don’t apply to Roth IRAs. If you have a Roth IRA, or inherit one from your spouse, the money is yours to withdraw whenever you choose. The rules change if you inherit a Roth from someone who isn’t your spouse, so consult with a professional as needed.

However, RMD rules do apply when it comes to a Roth 401(k), similar to a traditional 401(k). The main difference here, of course, is that the Roth structure still applies and withdrawals are tax free.

A Closer Look at IRAs

An IRA is an individual retirement account that has a much lower contribution limit than a 401(k) (see chart below). Anyone with earned income can open an IRA, and there are two main types of IRAs to choose from: traditional and Roth accounts.

Self-employed people can also consider opening a SEP-IRA or a SIMPLE IRA, which are tax-deferred accounts that have higher contribution limits.

Traditional IRA

Like a 401(k), contributions to a traditional IRA are tax deductible and may help lower your tax bill. In 2024, IRA contribution limits are $7,000, or $8,000 for those aged 50 or older. In 2023, IRA contribution limits are $6,500, or $7,500 for those aged 50 or older.

With a traditional IRA, investments inside the account grow tax-deferred. And unlike 401(k)s where an employer might offer limited options, IRAs are more flexible because they are classified as self-directed and you typically set up an IRA through a brokerage firm of your choice.

Thus it’s possible to invest in a wider range of investments in your IRA, including stocks, bonds, mutual funds, exchange-traded funds, and even real estate.

When making withdrawals at age 59 ½, you will owe income tax. As with 401(k)s, any withdrawals before then may be subject to both income tax and the 10% early withdrawal penalty.

What Are Roth Accounts?

So far, we’ve discussed traditional 401(k) and IRA accounts. But each type of retirement account also comes in a different flavor — known as a Roth.

The main difference between traditional and Roth IRAs lies in when your contributions are taxed.

•   Traditional accounts are funded with pre-tax dollars. The contributions are tax deductible and may provide an immediate tax benefit by lowering your taxable income and, as a result, your tax bill.

•   Money inside these accounts grows tax-deferred, and you owe income tax when you make withdrawals, typically when you’ve reached the age of 59 ½.

Roth accounts, on the other hand, are funded with after-tax dollars, so your deposits aren’t tax deductible. However, investments inside Roth accounts also grow tax-free, and they are not subject to income tax when withdrawals are made at or after age 59 ½.

As noted above, Roths have an additional advantage in that you can withdraw your principal at any time (but you cannot withdraw principal + earnings until you’ve had the account for at least five years, and/or you’re 59 ½ or older — often called the five-year rule).

Roth accounts may be beneficial if you anticipate being in a higher tax bracket when you retire versus the one you’re in currently. Then tax-free withdrawals may be even more valuable.

It’s possible to hold both traditional and Roth IRAs at the same time, though combined contribution limits are the same as those for traditional accounts. And those limits can’t be exceeded.

Additionally, the ability to fund a Roth IRA is subject to certain income limits: above a certain limit you can’t contribute to a Roth. There are no income limits for a designated Roth 401(k), however.

A Closer Look at a 401(k)

Contributions to your 401(k) are made with pre-tax dollars. This makes them tax-deductible, meaning the amount you save each year can lower your taxable income in the year you contribute, possibly resulting in a smaller tax bill.

In 2024, you can contribute up to $23,000 to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $30,500. In 2025, you can contribute up to $23,500 each year to your 401(k). If you’re 50 or older, you can also make catch-up contributions of an extra $7,500, for a total of $31,000. For 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0, for a total of $34,750,

401(k) catch-up contributions allow people nearing retirement to boost their savings. In addition to the contributions made, an employer can also match their employee’s contribution, up to a combined employer and employee limit of $69,000 in 2024 and $70,000 in 2025.

An employer may offer a handful of investment options to choose from, such as exchange-traded funds (ETFs), mutual funds, and target date mutual funds. Money invested in these options grows tax-deferred, which can help retirement investments grow faster.

When someone begins taking withdrawals from their 401(k) account at age 59 ½ (the earliest age at which you can start taking penalty-free withdrawals), those funds are subject to income tax. Any withdrawals made before 59 ½ may be subject to a 10% early withdrawal penalty, on top of the tax you owe.

When Should You Use a 401(k)?

If your employer offers a 401(k), it may be worth taking advantage of the opportunity to start contributing to your retirement savings. After all, 401(k)s have some of the highest contribution limits of any retirement plans, which means you might end up saving a lot. Here are some other instances when it may be a good idea:

1. If your employer matches your contributions

If your company matches any part of your contribution, you may want to consider at least contributing enough to get the maximum employer match. After all, this match is tantamount to free money, and it can add up over time.

2. You can afford to contribute more than you can to an IRA

For tax year 2024, you can put up to $7,000 in an IRA, but up to $23,000 in a 401(k) — if you’re 50 or over, those amounts increase to $8,000 for an IRA and $30,500 for a 401(k).

For tax year 2025, you can put up to $7,000 in an IRA, but up to $23,500 in a 401(k) — if you’re 50 or over, those amounts increase to $8,000 for an IRA and $31,000 for a 401(k). And again, if you’re aged 60 to 63, you can contribute up to $34,750 for 2025. If you’re in a position to save more than the IRA limit, that’s a good reason to take advantage of the higher limits offered by a 401(k).

3. When your income is too high

Above certain income levels, you can’t contribute to a Roth IRA. How much income is that? That’s a complicated question that is best answered by our Roth IRA calculator.

And if you or your spouse are covered by a workplace retirement plan, you may not be able to deduct IRA contributions.

If you can no longer fund a Roth, and can’t get tax deductions from a traditional IRA, it might be worth throwing your full savings power behind your 401(k).

When Should You Use an IRA?

If you can swing it, it may not hurt to fund an IRA. This is especially true if you don’t have access to a 401(k). But even if you do, IRAs can be important tools. For example:

1. When you leave your company

When you leave a job, you can rollover an old 401(k) into an IRA — and it’s generally wise to do so. It’s easy to lose track of old plans, and companies can merge or even go out of business. Then it can become a real hassle to find your money and get it out.

You can also roll the funds into your new company’s retirement plan (or stick with an IRA rollover, which may give you more control over your investment choices).

Recommended: How to Roll Over Your 401(k)

2. If your 401(k) investment choices are limited

If you have a good mix of mutual funds in your 401(k), or even some target date funds and low-fee index funds, your plan is probably fine. But, some plans have very limited investment options, or are so confusing that people can’t make a decision and end up in the default investment — a low interest money market fund.

If this is the case, you might want to limit your contributions to the amount needed to get your full employer match and put the rest in an IRA.

3. When you’re between jobs

Not every company has a 401(k), and people are not always employed. There may be times in your life when your IRA is the only option. If you have self-employment income, you can make higher contributions to a SEP IRA or a Solo 401(k) you set up for yourself.

4. If you can “double dip.”

If you have a 401(k), are eligible for a Roth IRA, or can deduct contributions to a traditional IRA, and you can afford it — it may be worth investing in both. After all, saving more now means more money — and financial security — down the line. Once again, you can check our IRA calculator to see if you can double dip. Just remember that the IRA contribution limit is for the total contributed to both a Roth and traditional IRA.

The real question is not: IRA vs. 401(k), but rather — which of these is the best place to put each year’s contributions? Both are powerful tools to help you save, and many people will use different types of accounts over their working lives.

When Should You Use Both an IRA and 401(k)?

Using an IRA and a 401(k) at the same time may be a good way to save for your retirement goals. Funding a traditional or Roth IRA and 401(k) at once can allow you to save more than you would otherwise be able to in just one account.

Bear in mind that if you or your spouse participate in a workplace retirement plan, you may not be able to deduct all of your traditional IRA contributions, depending on how high your income is.

Having both types of accounts can also provide you some flexibility in terms of drawing income when you retire. For example, you might find a 401(k) as a source of pre-tax retirement income. At the same time you might fund a Roth IRA to provide a source of after-tax income when you retire.

That way, depending on your financial and tax situation each year, you may be able to strategically make withdrawals from each account to help minimize your tax liability.

The Takeaway

What is the difference between an IRA and a 401(k)? Most simply, the biggest difference is the amount you can save in each. However, as you can see now, the answer can be pretty complicated, depending on which type of IRA you’re talking about.

Roth accounts — whether a Roth IRA or a Roth 401(k) — have a different tax treatment. You deposit after-tax funds in these types of accounts. And then you don’t pay any tax on your withdrawals in retirement.

Another difference is that a 401(k) is generally sponsored by your employer, so you’re beholden to the investment choices of the firm managing the company’s plan, and the fees they charge. By contrast, you set up an IRA yourself, so the investment options are greater — and the fees can be lower.

Generally, you can have an IRA as well as a 401(k). The rules around contribution limits, and how much you can deduct may come into play, however.

If you’re ready to open an IRA, it’s easy when you set up an Active Invest account with SoFi Invest.

Not sure what the right strategy is for you? SoFi Invest® offers educational content as well as access to financial planners. The Active Investing platform lets investors choose from an array of stocks, ETFs or fractional shares. For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.

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.

FAQ

Is a 401(k) considered an IRA for tax purposes?

No. A 401(k) is a completely separate account than an IRA because it’s sponsored by your employer.

Is it better to have a 401(k) or an IRA?

You can save more in a 401(k), and your employer may also offer matching contributions. But an IRA often has a much wider range of investment options. It’s wise to weigh the differences, and decide which suits your situation best.

Can you roll a 401(k) Into an IRA penalty-free?

Yes. If you leave your job and want to roll over your 401(k) account into an IRA, you can do so penalty free within 60 days. If you transfer the funds and hold onto them for longer than 60 days, you will owe taxes and a penalty if you’re under 59 ½.

Can you lose money in an IRA?

Yes. You invest all the money you deposit in an IRA in different securities (i.e. stocks, bonds, mutual funds, ETFs). Ideally you’ll see some growth, but you could also see losses. There are no guarantees.


External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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When Can I Retire This Formula Will Help You Know_780x440

When Can I Retire Calculator

When it comes to figuring out when you can retire, there are a number of factors to consider: Social Security, inflation, and health care costs.

Thankfully, there’s retirement calculators for figuring out these costs, which might help you plan for the future. But first, to decide when you can retire, determine at what age you want to retire and then see how that decision affects your finances.

Key Points

•   Factors to consider when deciding when to retire include Social Security benefits, inflation, and healthcare costs.

•   The full retirement age for Social Security benefits varies based on birth year.

•   Early retirement can result in reduced Social Security benefits, while delaying retirement can increase monthly benefits.

•   Different retirement accounts have specific rules for withdrawals, such as Roth IRAs and traditional IRAs.

•   Other sources of retirement income to consider include part-time work, pensions, inheritance, and rental income.

When Can You Get Full Social Security Benefits?

As you consider when to apply for Social Security, you’ll want to understand at what age the government allows people to retire with full Social Security benefits. Not only that, at what age can people start withdrawing from their retirement accounts without facing penalties? For Social Security, the rules are based on your birth year.

The Social Security Administration has a retirement age calculator . For example, people born between 1943 and 1954 could retire with full Social Security benefits at age 66.

Meanwhile, those born in 1955 could retire at age 66 and two months, and those born in 1956 could retire at age 66 and four months. Those born in or after 1960 can retire at age 67 to receive full benefits. This can help with your retirement planning.

Social Security Early Retirement

A recipient will be penalized if they retire before full retirement age. The earlier a person retires, the less they’ll receive in Social Security.

Let’s use Jane Doe as an example and say she was born in 1960, so full retirement age is 67. If she retires at age 66, she’ll receive 93.3% of Social Security benefits; age 65 will get Jane 86.7%. If she retires on her 62nd birthday — the earliest she can receive Social Security — she’ll only receive 70% of earnings.

Here’s a retirement planner table for those born in 1960, which shows how one’s benefits will be reduced with early retirement.

How Early Retirement Affects Your Social Security Benefits

Source: Social Security Administration

Social Security Late Retirement

If a person wants to keep working until after full retirement age, they could earn greater monthly benefits. This is helpful to know when choosing your retirement date.

For example, if the magic retirement number is 66 years but retirement is pushed back to 66 and one month, then Social Security benefits rise to 100.7% per month. So if your monthly benefit was supposed to be $1,000, but you wait until 66 years and one month, then your monthly allotment would increase to $1,007.

If retirement is pushed back to age 70, earnings go up to 132% of monthly benefits. But no need to calculate further: Social Security benefits stop increasing once a person reaches age 70. Here is a SSA table on delayed retirement .

💡 Quick Tip: You can’t just sit on the money you save in an IRA account forever. The government requires withdrawals each year, starting at age 73 (for those born in 1950 or later). These are called required minimum distributions or RMDs.

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.

Other Retirement Income to Consider

In retirement, you may have other income sources that can help you support your lifestyle and pay the bills. These might include:

Part-Time Work

Working after retirement by getting a part-time job, especially if it’s one you enjoy, could help cover your retirement expenses. And as long as you have reached your full retirement age (which is based on your year of birth, as noted above), your Social Security benefits will not be reduced, no matter what your earnings are.

However, if you retire early, you need to earn under an annual limit, which is $22,320 in 2024, and $23,400 in 2025, to keep your full benefits. If you earn more than that, you’ll lose $1 in Social Security benefits for every $2 you earn over the limit.

Pension

A pension, also sometimes known as a defined benefits plan, from your employer is usually based on how long you worked at your company, how much you earned, and when you stopped working. You’ll need to be fully vested, which typically means working at the company for five years, to collect the entire pension. Check with the HR rep at your company to get the full details about your pension.

A pension generally gives you a set monthly sum for life or a lump sum payment when you retire.

Inheritance

If you inherit money from a relative, these funds could also help you pay for your retirement. And fortunately, receiving an inheritance won’t affect your Social Security benefits, because Social Security is based on money you earn.

Rental Income

Another potential money-earning idea: You could rent out a home you own, or rent out just the upper floors of the house you live in, for some extra income in retirement. Like an inheritance, rental income will not affect your social security benefits.

Major Expenses in Retirement

It’s important to draw up a budget for retirement to help determine how much money you might need. The amount may be higher than you realize. These are some of the major expenses retirees commonly face.

Healthcare

For most people, healthcare costs increase as they get older, as medical problems can become more serious or pervasive. According to Fidelity, the average amount that a couple who are both age 65 will spend on healthcare during their first year of retirement is $12,300.

Housing

Your mortgage, home insurance, and the costs of maintaining your house can be a significant monthly and yearly expense. In fact, Americans aged 65 and older spent $16,880 annually on housing during the years from 2016 to 2020, according to the Bureau of Labor Statistics.

Travel

If you’re planning to take trips in retirement, or even just drive to visit family, transportation costs can quickly add up. From 2016 to 2020, people over age 65 averaged about $7,062 in transportation costs a year.

When Can You Withdraw From Retirement Accounts?

Now let’s look at retirement accounts. Each type of account has different rules about when money can be taken out.

If a Roth IRA account has existed for at least five years, withdrawals from the account are usually okay after age 59 ½ without consequences. Taking out money earlier or withdrawing money from a Roth IRA that’s been open for fewer than five years could result in paying penalties and/or taxes.

There is a little wiggle room. Retirement withdrawal rules do have exceptions for issues like disability or educational expenses, and there is an option to withdraw money early and pay taxes or penalties.

If a person is at least 59 ½ and has a Roth IRA that is less than five years old, taxes will need to be paid upon withdrawal but not penalties. Taxes or penalties might not need to be paid at age 59 ½ and if the Roth IRA has been open for five years or more.

People with a traditional IRA can make withdrawals from ages 59 ½ to 72 without being penalized. The government will charge a 10% penalty on withdrawals before age 59.5, and depending on location, a state penalty tax might also be charged.

People with 401(k)s can typically retire by age 55 and make withdrawals without receiving a penalty. People with either a traditional IRA or 401(k) must start making withdrawals by age 72 or face a hefty penalty.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

Deciding at what age to retire is a personal choice. However, by planning ahead for some common expenses, and understanding the age at which you can get full Social Security benefits, you can use a retirement calculator formula to figure out how much money you’ll need each year to live on. And you can supplement your Social Security benefits with other forms of income and by making smart decisions about savings and investments.

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).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How do I calculate my retirement age?

To calculate your full retirement age, which is the age you can receive your full retirement benefits, you can use the Social Security administration’s retirement age calculator . Essentially, if you were born in 1960 or later, your full retirement age is 67. For those born between 1954 and 1959, the full retirement age is between 66 and 67, depending exactly how old they are when they retire (such as age 66 and two months). And for those born between 1943 and 1954, full retirement age is 66.

The earlier you retire before your full retirement age, the less you’ll receive in benefits. Conversely, the longer you keep working, up to age 70, the more you can receive.

Can you legally retire before 55?

Yes, you can legally retire before age 55. However, your Social Security benefits typically won’t kick in until age 62. And even then, because you’ll be tapping into those benefits before your full retirement age of 66 or 67, you’ll get a reduced amount, or just 70%, of your benefits.

There is something called the rule of 55 that allows you to withdraw funds from a 401(k) or 403(b) at age 55 without paying a penalty. That may be something to look into if you’re planning to retire early.

Can you retire after 20 years of work?

In some lines of work, you can retire after 20 years on the job and likely get a pension. This includes those in the military, firefighters, police officers, and certain government employees.

That said, anyone in any industry can retire at any time. However, Social Security benefits don’t typically begin until age 62.


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.

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.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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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How to Open Your First IRA

How to Open an IRA in 5 Steps

Saving for retirement may be the biggest financial goal many of us will ever set. So it makes sense to explore all retirement savings options, including an IRA, or individual retirement account. Individual retirement accounts are tax-advantaged tools that can be opened by virtually anyone with earned income, unlike employer-sponsored 401(k) plans. The sooner you open your first IRA, the more opportunity your savings have to grow over time, potentially leading to a nice nest egg upon retirement.

There are other benefits to opening an IRA. For one, it can deliver attractive tax perks — either up front or in retirement — and it can be especially attractive to individuals who don’t have an employer-sponsored 401(k) plan, or have maxed it out already.

This article will walk you through the steps of opening an IRA — whether a traditional, Roth, or SEP IRA.

Key Points

•   Opening an IRA provides a tax-advantaged way to save for retirement, allowing individuals with earned income to benefit regardless of employer-sponsored plans.

•   Selecting the right investing style, either through a robo-advisor for automation or an online broker for hands-on management, is crucial when setting up an IRA.

•   Different types of IRAs, including Traditional, Roth, and SEP IRAs, offer various tax benefits and contribution limits based on income and employment status.

•   The process of opening an IRA involves providing personal information, identification, and selecting beneficiaries, followed by funding the account through transfers or rollovers.

•   Choosing the right investments within an IRA, such as stocks, bonds, or target date funds, should align with individual risk tolerance and retirement goals for optimal growth.

How to Open an IRA

1. Choose Your Investing Style

When setting up an IRA, you have the option to select the investing style that aligns with your preferences and goals. You can choose between two primary methods: using an online broker for self-directed investing or opting for a robo-advisor for automated investing.

•   Consider a robo-advisor for a hands-off approach: If you find the array of investment choices daunting or you’re unsure where to begin, a robo-advisor might be the ideal solution. This option allows you to take a more hands-off approach and automate your investments. Simply share your retirement and investment objectives, and the robo-advisor will create and maintain a tailored portfolio specifically designed to meet your needs.

•   Choose an online broker to take control of your investments: For those who prefer to be more involved and make their own investment decisions, using an online broker for self-directed investing is the way to go. This method allows you to directly manage your investments and typically comes with the benefit of commission-free trades. This is a great choice for individuals who want to actively participate in the management of their IRA investments.

2. Decide Where to Open Your IRA

You can open an IRA online, a bank, mutual fund company, or other financial services provider. Typically, the more personal care and advice you get, the higher the account fees will be. A robo-advisor, for instance, might charge lower fees than a brokerage.

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.

3. Determine the Type of IRA You Want to Open

Traditional IRA

If you have earned income, you can open a traditional IRA regardless of how much you make per year. An IRA can be a good next step if you’ve maxed out your 401(k), for instance.

One notable difference between traditional and Roth IRA accounts is that traditional IRAs allow you to deduct your contributions on your tax returns now, meaning you pay taxes on distributions when you retire. You’ll pay a 10% penalty tax (in addition to regular income tax) on any money you withdraw from a traditional IRA before age 59 ½, with a few exceptions.

It may be better to go with a traditional IRA if you think you’ll be in a lower tax bracket after retirement. This is because you’ll be saving on a higher tax rate now (vs. the lower rate you’d be paying later, since you’d be in a lower tax bracket in retirement).

Roth IRA

Unlike traditional IRAs, Roth IRAs have income limits for contributions. For 2024 and 2025, single filers can contribute the maximum amount to a Roth IRA if their income meets a certain threshold. If their income exceeds this threshold but falls below another, they can contribute a reduced amount. Similarly, married couples filing jointly can contribute the maximum if their income meets a specific level, with a reduced contribution amount available for those who don’t meet the full threshold.

Roth IRA contributions are made with after-tax income. While that doesn’t offer any tax advantages now, it does mean that when you withdraw money upon retirement, you won’t have to pay taxes on it. As such, a Roth IRA may make sense for eligible individuals who typically get a tax refund and expect to be in a similar or higher tax bracket when they retire (for example, if they plan to have substantial income from a business, investments, or work).

SEP IRA

A SEP IRA, or simplified employee pension, can be set up by either an employer at a small business or by someone who is self-employed. For 2024, you can contribute up to 25% of your total compensation or a maximum of $69,000, whichever is less, to a SEP IRA. For 2025, you can contribute the lesser of up to 25% of your total compensation or a maximum of $70,000.

Employers get a tax deduction when they contribute to their employees’ IRAs, and they’re also allowed to contribute on a “discretionary basis” (meaning the employer doesn’t have to contribute in years where it’s not as financially feasible for the company.) For employees, this option may allow you to contribute a greater amount than other IRAs, depending on your income.

4. Open the IRA Account

Once you decide where to open an IRA, you’ll need to follow through with doing so. The process to open an IRA can vary a bit from provider to provider, but it’s generally pretty straightforward.

What You’ll Need to Open an IRA

•   A copy of your government-issued ID

•   Personal information, including contact information and Social Security number

•   Details on intended beneficiaries

5. Fund Your Account

Once your account is opened, you’ll receive guidance on funding an IRA. If you want to fund your account through an electronic transfer, you’ll be asked to provide banking information. It’s also possible to roll over existing retirement accounts — and yes, it is possible to open an IRA if you have a 401(k) already.

In 2024 and 2025, you can contribute up to $7,000 a year to a traditional or Roth IRA, or up to $8,000 if you’re 50 or older. If you take home more than the maximum earnings allowed for a Roth IRA but still prefer a Roth IRA over a traditional account, you might be able to contribute a reduced amount of Roth IRA contribution limits. An IRA contribution calculator can help you get an idea of how much you can contribute this year.

In many cases, it’s a good idea to invest as much as you can up to that amount each year to take full advantage of the power of compound growth.

A retirement calculator can help you figure out whether you’re on track for retirement. A quick rule of thumb: By the time you’re 30, it’s typically good to have the equivalent of one year’s salary saved.

Rolling Over a 401(k) into an IRA

If you’re leaving a job with an employee-sponsored retirement plan, you can roll over your 401(k) into a traditional IRA. When you roll money over from a 401(k), there’s no limit to how much you can add to an IRA at that time. Going forward, additional contributions will be capped at the typical IRA contribution limit.

6. Select Your Investments

Investors can choose to invest in stocks, bonds, mutual funds, low-cost index funds, or exchange-traded funds (ETFs) — or a combination thereof – through a financial institution.

One popular type of investment fund geared toward retirement savings is a “target date fund.” A target date fund is calibrated to the year you plan to retire, and it’s meant to automatically update your mix of assets, like stocks and bonds, so they’re more aggressive earlier in life and more conservative as you approach retirement.

Ultimately, the mix of investments in your IRA should depend on your personal risk tolerance, lifestyle, and retirement goals.

Investing in Your Retirement

Once you’re familiar with how to open an individual retirement account, the process itself is pretty straightforward — possibly the biggest lift involved is deciding which IRA suits your personal situation and retirement goals best: a traditional, Roth, or SEP IRA. From there, you’ll need to decide where to start a Roth IRA or other type or IRA, then go through the formal process of starting an IRA, which includes providing certain information, funding the account, selecting a contribution amount, and deciding where to invest your funds.

That can all sound like a lot, but getting started on saving for your retirement doesn’t have to be difficult. SoFi Invest makes opening an IRA simple — it’s possible to sign up in less than five minutes. You can be as involved in the investment process as you want to be — either with hands-on investing or our automated investing technology, in which our algorithm will recommend an appropriate mix of investments based on your age and retirement goals.

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.

FAQ

How much money is required to open an IRA?

There’s no universal minimum amount required to open an IRA. That being said, some providers will have minimum requirements.

Can you open an IRA all on your own?

Yes, it’s definitely possible to open an IRA on your own. The process is simple, similar to opening a bank account, and you can do so at most banks, brokerages, or other financial institutions. Often, it’s possible to start an IRA online.

Can you open an IRA at a bank?

Yes, many banks offer IRAs. You can also open an IRA at credit unions, brokerages, and investment companies.


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.

For a limited time, funding an account gives you the opportunity to win up to $1,000 in the stock of your choice. All you have to do is open and fund a SoFi Invest account.
CalculatorThis retirement calculator is provided for educational purposes only and is based on mathematical principles that do not reflect actual performance of any particular investment, portfolio, or index. It does not guarantee results and should not be considered investment, tax, or legal advice. Investing involves risks, including the loss of principal, and results vary based on a number of factors including market conditions and individual circumstances. Past performance is not indicative of future results.

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.

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.

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When to Start Saving for Retirement

When Should You Start Saving for Retirement?

If you ask any financial advisor when you should start saving for retirement, their answer would likely be simple: Now, or in your 20s if possible.

It’s not always easy to prioritize investing for retirement. If you’re in your 20s or 30s, you might have student loans or other goals that seem more “immediate,” such as a down payment on a house or your child’s tuition. But starting early is important because it can allow you to save much more. In fact, setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age.

No matter what age you are, putting away money for the future is a good idea. Read on to learn more about when to start saving for retirement and how to do it.

Key Points

•   Starting to save for retirement in your 20s is ideal, as it gives your money more time to potentially grow and benefit from compounding. Compounding occurs when any earnings received are added to your principal balance, so future earnings are calculated on this updated, larger amount.

•   Assessing personal financial situations and retirement goals is crucial when determining how much to save for retirement, regardless of age.

•   Individuals in their 30s, 40s, 50s, or 60s can still successfully start saving for retirement, with different strategies tailored to each age group.

•   Regular contributions and taking advantage of employer-sponsored plans are key steps in building a solid retirement savings strategy at any age.

This article is part of SoFi’s Retirement Planning Guide, our coverage of all the steps you need to create a successful retirement plan.


money management guide for beginners

What Is the Ideal Age to Start Saving for Retirement?

Ideally, you should start saving for retirement in your 20s, if possible. By getting started early, you could reap the benefits of compound interest. That’s when money in savings accounts earns interest, that interest is added to the principal amount in the account, and then interest is earned on the new higher amount.

Starting to save for retirement in your 20s can allow you to save much more. In fact, setting aside a little every year starting in your 20s could mean an additional hundreds of thousands of dollars of accumulated investment earnings by retirement age.

That said, if you are older than your 20s, it’s not too late to start saving for retirement. The important thing is to get started, no matter what your age.

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.

The #1 Reason to Start Early: Compound Interest

If you start saving early, you could reap the benefits of compound interest.

CFP®, Brian Walsh says, “Time can either be your best friend or your worst enemy. If you start saving early, you make it a habit, and you start building now, time becomes your best friend because of compounded growth. If you delay — say 5, 10, 15 years to save — then time becomes your worst enemy because you don’t have enough time to make up for the money that you didn’t save.”

Here’s how compound interest works and why it can be so valuable: The money in a savings account, money market account, or CD (certificate of deposit) earns interest. That interest is added to the balance or principle in the account, and then interest is earned on the new higher amount.

Depending on the type of account you have, interest might accrue daily, weekly, monthly, quarterly, twice a year, or annually. The more frequently interest compounds on your savings, the greater the benefit for you.

Investments — including investments in retirement plans, such as an employee-sponsored 401(k) plan or a traditional or Roth IRA — likewise benefit from compounding returns. Over time, you can see returns on both the principal as well as the returns on your contributions. Essentially, your money can work for you and potentially grow through the years, just through the power of compound returns.

The sooner you start saving and investing, the more time compounding has to do its work.

💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.

Saving Early vs Saving Later

To understand the power of compound returns, consider this:

If you start investing $7,000 a year at age 25, by the time you reach age 67, you’d have a total of $2,129,704.66. However, if you waited until age 35 to start investing the same amount, and got the same annual return, you’d have $939,494.76.

Age

Annual Return

Savings

25 8% $2,129,704.66
35 8% $939,494.76

As you can see, starting in your 20s means you may save double the amount you would have if you waited until your 30s.

Starting Retirement Savings During Different Life Stages

Retirement is often considered the single biggest expense in many peoples’ lives. Think about it: You may be living for 20 or more years with no active income.

Plus, while your parents or grandparents likely had a pension plan that kicked off right at the age of 65, that may not be the case for many workers in younger generations. Instead, the 401(k) model of retirement that’s more common these days requires employees to do their own saving.

As you get started on your savings journey, do a quick assessment of your current financial situation and goals. Be sure to factor in such considerations as:

•   Age you are now

•   Age you’d like to retire

•   Your income

•   Your expenses

•   Where you’d like to live after retirement (location and type of home)

•   The kind of lifestyle you envision in retirement (hobbies, travel, etc.)

To see where you’re heading with your savings you could use a retirement savings calculator. But here are more basics on how to get started on your retirement savings strategy, at any age.

Starting in Your 20s

Starting to save for retirement in your 20s is something you’ll later be thanking yourself for.

As discussed, the earlier you start investing, the better off you’re likely to be. No matter how much or little you start with, having a longer time horizon till retirement means you’ll be able to handle the typical ups and downs of the markets.

Plus, the sooner you start saving, the more time you’ll be able to benefit from compound returns, as noted.

Start by setting a goal: At what age would you like to retire? Based on current life expectancy, how many years do you expect to be retired? What do you imagine your retirement lifestyle will look like, and what might that cost?

Then, create a budget, if you haven’t already. Document your income, expenses, and debt. Once you do that, determine how much you can save for retirement, and start saving that amount right now.

💡 Learn more: Savings for Retirement in Your 20s

Starting in Your 30s

If your 20s have come and gone and you haven’t started investing in your retirement, your 30s is the next-best time to start. While there may be other expenses competing for your budget right now — saving for a house, planning for kids or their college educations — the truth remains that the sooner you start retirement savings, the more time they’ll have to grow.

If you’re employed full-time, one easy way to start is to open an employer-sponsored retirement savings plan, like a 401(k). We’ll get into details on that below, but one benefit to note is that your savings will come out of your paycheck each month before you get taxed on that money. Not only does this automate retirement savings, but it means after a while you won’t even miss that part of your paycheck that you never really “had” to begin with. (And yes, Future You will thank you.)

💡 Learn more: Savings for Retirement in Your 30s

Starting in Your 40s

When it comes to how much you should have saved for retirement by 40, one general guideline is to have the equivalent of your two to three times your annual salary saved in retirement money.

Once you have high-interest debt (like debt from credit cards) paid off, and have a good chunk of emergency savings set aside, take a good look at your monthly budget and figure out how to reallocate some money to start building a retirement savings fund.

Not only will regular contributions get you on a good path to savings, but one-off sources of money (from a bonus, an inheritance, or the sale of a car or other big-ticket item) are another way to help catch up on retirement savings faster.

Starting in Your 50s

In your 50s, a good ballpark goal is to have six times your annual salary in your retirement savings by the end of the decade. But don’t panic if you’re not there yet — there are a few ways you can catch up.

Specifically, the government allows individuals over age 50 to make “catch-up contributions” to 401(k), traditional IRA, and Roth IRA plans. That’s an additional $7,500 in 401(k) savings, and an additional $1,000 in IRA savings for 2024 and 2023.

The opportunity is there, but only you can manage your budget to make it happen. Once you’ve earmarked regular contributions to a retirement savings account, make sure to review your asset allocation on your own or with a professional. A general rule of thumb is, the closer you get to retirement age, the larger the ratio of less risky investments (like bonds or bond funds) to more volatile ones (like stocks, mutual funds, and ETFs) you should have.

Starting in Your 60s

It’s never too late to start investing, especially if you’re still working and can contribute to an employer-sponsored retirement plan that may have matching contributions. If you’re contributing to a 401(k), or a Roth or traditional IRA, don’t forget about catch-up contributions (see the information above).

In general, when you’re this close to retirement it makes sense for your investments to be largely made up of bonds, cash, or cash equivalents. Having more fixed-income securities in your portfolio helps lower the odds of suffering losses as you get closer to your target retirement date.

💡 Learn more: Savings for Retirement in Your 60s

The Takeaway

Investing in retirement and wealth accounts is a great way to jump-start saving and investing for your golden years, whether you invest $10,000 or just $100 to get started.

The first step is to open an account or use the one that’s already open. You could also increase your contribution. If you’re opening an account, you may want to consider one without fees, to help maximize your bottom line.

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Is 20 years enough to save for retirement?

It’s never too late to start investing for retirement. If you’re just starting in your 40s, consider contributing to an employer-sponsored plan if you can, so that you can take advantage of any employer matching contributions. In addition to regular bi-weekly or monthly contributions, make every effort to deposit any “windfall” lump sums (like a bonus, inheritance, or proceeds from the sale of a car or house) into a retirement savings vehicle in an effort to catch up faster.

Is 25 too late to start saving for retirement?

It’s not too late to start saving for retirement at 25. Take a look at your budget and determine the max you can contribute on a regular basis — whether through an employer-sponsored plan, an IRA, or a combination of them. Then start making contributions, and consider them as non-negotiable as rent, mortgage, or a utility bill.

Is 30 too old to start investing?

No age is too old to start investing for retirement, because the best time to start is today. The sooner you start investing, the more advantage you can take of compound returns, and potentially employer matching contributions if you open an employer-sponsored retirement plan.

Should I prioritize paying off debt over saving for retirement?

Whether you should prioritize paying off debt over saving for retirement depends on your personal situation and the type of debt you have. If your debt is the high-interest kind, such as credit card debt, for instance, it could make sense to pay off that debt first because the high interest is costing you extra money. The less you owe, the more you’ll be able to put into retirement savings.

And consider this: You may be able to pay off your debt and save simultaneously. For instance, if your employer offers a 401(k) with a match, enroll in the plan and contribute enough so that the employer match kicks in. Otherwise, you are essentially forfeiting free money. At the same time, put a dedicated amount each week or month to repaying your debt so that you continue to chip away at it. That way you will be reducing your debt and working toward saving for your retirement.


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