RETUPD Archives | Page 7 of 21

Jan

2025

How Much Should I Contribute to My 401(k)?

By AJ Smith | Growing Wealth, Investing, Life & Career, Preparing for Retirement | No Comments

Once you set up your retirement plan at work, the next natural question is: How much to contribute to a 401(k)? While there’s no ironclad answer for how much to save in your employer-sponsored plan, there are some important guidelines that can help you set aside the amount that’s right for you, such as the tax implications, your employer match (if there is one), the stage of your career, your own retirement goals, and more.

Here’s what you need to think about when deciding how much to contribute to your 401(k).

Key Points

• Determining the right 401(k) contribution involves considering tax implications, employer matches, career stage, and personal retirement goals.

• The contribution limits for a 401(k) are $23,000 in 2024 and $23,500 in 2025 for those under age 50. Those aged 50 and over can make an additional catch-up contribution.

• Early career contributions might be lower, but capturing any employer match is beneficial.

• Mid-career individuals should aim to increase their contributions annually, even by small percentages.

• Approaching retirement, maximizing contributions and utilizing catch-up provisions can significantly impact savings.

401(k) Contribution Limits for 2024 and 2025

Like most tax-advantaged retirement plans, 401(k) plans come with caps on how much you can contribute. The IRS puts restrictions on the amount that you, the employee, can save in your 401(k); plus there is a cap on total employee-plus-employer contributions.

For tax year 2024, the contribution limit is $23,000, with an additional $7,500 catch-up provision for those 50 and older, for a total of $30,500. The combined employer-plus-employee contribution limit for 2024 is $69,000 ($76,500 with the catch-up amount).

The limits go up for tax year 2025. The 401(k) contribution limit in 2025 is $23,500, with an additional $7,500 catch-up provision for those 50 and older, for a total of $31,000. The combined employer-plus-employee contribution limit for 2025 is $70,000 ($77,500 with the catch-up amount).

Also in 2025, there is an extra 401(k) catch-up for those aged 60 to 63. Thanks to SECURE 2.0, these individuals can contribute $11,250 instead of the standard catch-up of $7,500, for a total of $81,250.

401(k) Contribution Limits 2024 vs 2025

	2024	2025
Basic contribution	$23,000	$23,500
Catch-up contribution	$7,500	$7,500 (ages 50-59, 64+) $11,250 (ages 60-63)
Total + catch-up	$30,500	$31,000
Employer + Employee maximum contribution	$69,000	$70,000
Employer + employee max + catch-up	$76,500	$77,500 (ages 50-59, 64+) $81,250 (ages 60-63)

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

How Much Should You Put Toward a 401(k)?

Next you may be thinking, now I know the retirement contribution limits, but how much should I contribute to my 401(k)? Here are some guidelines to keep in mind as you’re deciding on your contribution amount.

When You’re Starting Out in Your Career

At this stage, you may be starting out with a lower salary and you also likely have commitments to pay for, like rent, food, and maybe student loans. So you may decide to contribute a smaller amount to your 401(k). If you can, however, contribute enough to get the employer match, if your employer offers one.

Here’s how it works: Some employers offer a matching contribution, where they “match” part of the amount you’re saving and add that to your 401(k) account. A common employer match might be 50% up to the first 6% you save.

In that scenario, let’s say your salary is $100,000 and your employer matches 50% of the first 6% you contribute to your 401(k). If you contribute up to the matching amount, you get the full employer contribution. It’s essentially “free” money, as they say.

To give an example, if you contribute 6% of your $100,000 salary to your 401(k), that’s $6,000 per year. Your employer’s match of 50% of that first 6%, or $6,000, comes to $3,000 for a total of $9,000.

As You Move Up in Your Career

At this stage of life you likely have a lot of financial obligations such as a mortgage, car payments, and possibly child care. It may be tough to also save for retirement, but it’s important not to fall behind. Try to contribute a little more to your 401(k) each year if you can — even 1% more annually can make a difference.

That means if you’re contributing 6% this year, next year contribute 7%. And the year after that bump up your contribution to 8%, and so on until you reach the maximum amount you can contribute. Some 401(k) plans have an auto escalation option that will automate the extra savings for you, to make the process even easier and more seamless. Check your plan to see if it has such a feature.

As You Get Closer to Retirement

Once you reach age 50, you’ll likely want to figure out how much you might need for retirement so you have a specific goal to aim for. To help reach your goal, consider maxing out your 401(k) at this time and also make catch-up contributions if necessary.

Maxing out your 401(k) means contributing the full amount allowed. For 2024, that’s $23,000 for those 49 and under, and in 2025, it’s $23,500 for those 49 and under. If, at 50, you haven’t been contributing as much as you wish you had in previous years, you can also contribute the catch-up contribution of $7,500 in 2024 and 2025. So you’d be saving $30,500 for retirement in your 401(k) in 2024, and $31,000 in 2025. And if you are aged 60 to 63, you can contribute an additional catch-up of $11,250 in 2025, instead of $7,500, for a total of $81,250. With the potential of compounding returns, maxing out your 401(k) until you reach full retirement age of 67 could go a long way to helping you achieve financial security in retirement.

The Impact of Contributing More Over Time

The earlier you start saving for retirement, the more time your money will potentially have to grow, thanks to the power of compounding returns, as mentioned above.

In addition, by increasing your 401(k) contributions each year, even by just 1% annually, the savings could really add up. For instance, consider a 35-year-old making $60,000 who contributes 1% more each year until their full retirement age of 67. Assuming a 5.5% annual return and a modest regular increase in salary, they could potentially save more than an additional $85,000 for retirement.

That’s just an example, but you get the idea. Increasing your savings even by a modest amount over the years may be a powerful tool in helping you realize your retirement goals.

💡 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.

Factors That May Impact Your Decision

In addition to the general ideas above for the different stages of your life and career, it’s also wise to think about taxes, your employer contribution, your own goals, and more when deciding how much to contribute to your 401(k).

1. The Tax Effect

The key fact to remember about 401(k) plans is that they are tax-deferred accounts, and they are considered qualified retirement plans under ERISA (Employment Retirement Income Security Act) rules.

That means: The money you set aside is typically deducted from your paycheck pre-tax, and it grows in the account tax free — but you pay taxes on any money you withdraw. (In most cases, you’ll withdraw the money for retirement expenses, but there are some cases where you might have to take an early 401(k) withdrawal. In either case, you’ll owe taxes on those distributions.)

The tax implications are important here because the money you contribute effectively reduces your taxable income for that year, and potentially lowers your tax bill.

Let’s imagine that you’re earning $120,000 per year, and you’re able to save the full $23,500 allowed by the IRS for 2025. Your taxable income would be reduced from $120,000 to $96,500, thus putting you in a lower tax bracket.

2. Your Earning Situation

One rule-of-thumb is to save at least 10% of your annual income for retirement. So if you earn $100,000, you’d aim to set aside at least $10,000. But 10% is only a general guideline. In some cases, depending on your income and other factors, 10% may not be enough to get you on track for a secure retirement, and you may want to aim for more than that to make sure your savings will last given the cost of living longer.

For instance, consider the following:

• Are you the sole or primary household earner?

• Are you saving for your retirement alone, or for your spouse’s/partner’s retirement as well?

• When do you and your spouse/partner want to retire?

If you are the primary earner, and the amount you’re saving is meant to cover retirement for two, that’s a different equation than if you were covering just your own retirement. In this case, you might want to save more than 10%.

However, if you’re not the primary earner and/or your spouse also has a retirement account, setting aside 10% might be adequate. For example, if the two of you are each saving 10%, for a combined 20% of your gross income, that may be sufficient for your retirement needs.

All of this should be considered in light of when you hope to retire, as that deadline would also impact how much you might save as well as how much you might need to spend.

3. Your Retirement Goals

What sort of retirement do you envision for yourself? Even if you’re years away from retirement, it’s a good idea to sit down and imagine what your later years might look like. These retirement dreams and goals can inform the amount you want to save.

Goals may include thoughts of travel, moving to another country, starting your own small business, offering financial help to your family, leaving a legacy, and more.

You may also want to consider health factors, as health costs and the need for long-term care can be a big expense as you age.

4. Do You Have Debt?

It can be hard to prioritize saving if you have debt. You may want to pay off your debt as quickly as possible, then turn your attention toward saving for the future.

The reality is, though, that debt and savings are both priorities and need to be balanced. It’s not ideal to put one above the other, but rather to find ways to keep saving even small amounts as you work to get out of debt.

Then, as you pay down the money you owe — whether from credit cards or student loans or another source — you can take the cash that frees up and add that to your savings.

The Takeaway

Many people wonder how much to contribute to a 401(k). There are a number of factors that will influence your decision. First, there are the contribution limits imposed by the IRS. In 2024, the maximum contribution you can make to your 401(k) is $23,000, plus an additional $7,500 catch-up contribution if you’re 50 and up. In 2025, you can contribute a maximum of $23,500, plus an additional $7,500 catch-up contribution if you’re 50 or older. And if you are aged 60 to 63, in 2025, you can contribute $11,250 instead of $7,500, thanks to SECURE 2.0

While few people can start their 401(k) journey by saving quite that much, it’s wise, if possible, to contribute enough to get your employer’s match early in your career, then bump up your contribution amounts at the midpoint of your career, and max out your contributions as you draw closer to retirement, if you can.

Another option is follow a common guideline and save 10% of your income beginning as soon as you can swing it. From there, you can work up to saving the max. And remember, you don’t have to limit your savings to your 401(k). You may also be able to save in other retirement vehicles, like a traditional IRA or Roth IRA.

Of course, a main determination of the amount you need to save is what your goals are for the future. By contemplating what you want and need to spend money on now, and the quality of life you’d like when you’re older, you can make the decisions that are best for you.

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

Help grow your nest egg with a SoFi IRA.

FAQ

How much should I contribute to my 401(k) per paycheck?

If you can, try to contribute at least enough of each paycheck to get your employer’s matching funds, if they offer a match. So if your employer matches 6% of your contributions, aim to contribute at least 6% of each paycheck.

What percent should I put in my 401(k)?

A common rule of thumb is to contribute at least 10% of your income to your 401(k) to help reach your retirement goals. Just keep in mind the annual 401(k) contribution limits so you don’t exceed them. For 2025, those limits are $23,500, plus an additional $7,500 for those 50 and up. In 2025, those aged 60 to 63 may contribute an additional $11,250 (instead of $7,500).

Is 10% too much to contribute to 401(k)? What about 20%?

Contributing at least 10% to your 401(k) is a common rule of thumb to help save for retirement. If you are able to contribute 20%, it can make sense to do so. Just be sure not to exceed the annual 401(k) contribution limits. The contribution limits may change each year, so be sure to check annually.

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

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

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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Jan

2025

What Is a Non-Deductible IRA?

By Laurel Tincher | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A non-deductible IRA is an IRA, or IRA contributions, that cannot be deducted from your income. While contributions to a traditional IRA are tax-deductible, non-deductible IRA contributions offer no immediate tax break.

In both cases, though, contributions grow tax free over time — and in the case of a non-deductible IRA, you wouldn’t owe taxes on the withdrawals in retirement.

Why would you open a non-deductible IRA? If you meet certain criteria, such as your income is too high to allow you to contribute to a traditional IRA or Roth IRA, a non-deductible IRA might help you increase your retirement savings.

It helps to understand how non-deductible contributions work, what the rules and restrictions are, as well as the potential advantages and drawbacks.

Who Is Eligible for a Non-Deductible IRA?

Several factors determine whether an individual is ineligible for a traditional IRA, and therefore if their contributions could fund a non-deductible IRA. These include an individual’s income level, tax-filing status, and access to employer-sponsored retirement plans (even if the individual or their spouse don’t participate in such a plan).

If you and your spouse do not have an employer plan like a 401(k) at work, there are no restrictions on fully funding a regular, aka deductible, IRA. You can contribute up to $7,000 in 2024; $8,000 if you’re 50 and older. In 2025, you can contribute up to $7,000; $8,000 if you’re 50 or older.

However, if you’re eligible to participate in an employer-sponsored plan, or if your spouse is, then the amount you can contribute to a deductible IRA phases out — in other words, the amount you can deduct gets smaller — based on your income:

• For single filers/head of household: the 2024 contribution amount is reduced if you earn more than $77,000 and less than $87,000. If you earn $87,000 and above, you can only contribute to a non-deductible IRA. For 2025, the phaseout begins when you earn more than $79,000 and less than $89,000. If you earn $89,000 or more, you can’t contribute to a traditional IRA.)

• For married, filing jointly:

◦ If you have access to a workplace plan, the phaseout for 2024 is when you earn more than $123,00 and less than $143,000. For 2025, the phaseout is when you earn more than $126,000, but less than $146,000.

◦ If your spouse has access to a workplace plan, the 2024 phaseout is when you earn more than $230,000 and less than $240,000. For 2025, the phaseout is when you earn more than $236,000 but less than $246,000.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

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.

Non-Deductible IRA Withdrawal Rules

The other big difference between an ordinary, deductible IRA and a non-deductible IRA is how withdrawals are taxed after age 59 ½. (IRA withdrawals prior to that may be subject to an early withdrawal penalty.)

• Regular (deductible) IRA: Contributions are made pre-tax. Withdrawals after 59 ½ are taxed at the individual’s ordinary income rate.

• Non-deductible IRA: Contributions are after tax (meaning you’ve already paid tax on the money). Withdrawals are therefore not taxed, because the IRS can’t tax you twice.

To make sure of this, you must report non-deductible IRA contributions on your tax return, and you use Form 8606 to do so. Form 8606 officially documents that some or all of the money in your IRA has already been taxed and is therefore non-deductible. Later on, when you take distributions, a portion of those withdrawals will not be subject to income tax.

If you have one single non-deductible IRA, then the process is similar to a Roth IRA. You deposit money you’ve paid taxes on, and your withdrawals are tax free.

It gets more complicated when you mix both types of contributions — deductible and non-deductible — in a single IRA account.

Here’s an example of different IRA withdrawal rules:

Let’s say you qualified to make deductible IRA contributions for 10 years, and now you have $50,000 in a regular IRA account. Then, your situation changed — perhaps your income increased — and now only 50% of the money you deposit is deductible; the other half is non-deductible.

You contribute another $50,000 in the next 10 years, but only $25,000 is deductible; $25,000 is non-deductible. You diligently record the different types of contributions using Form 8606, so the IRS knows what’s what.

When you’re ready to retire, the total balance in the IRA is $100,000, but only $25,000 of that was non-deductible (meaning, you already paid tax on it). So when you withdraw money in retirement, you’ll owe taxes on three-quarters of that money, but you won’t owe taxes on one quarter.

Contribution Limits and RMDs

There are limits on the amount that you can contribute to an IRA each year, and deductible and non-deductible IRA account contributions have the same contribution caps. People under 50 years old can contribute up to $7,000 for 2024, and those over 50 can contribute $8,000 per year. People under 50 years old can contribute up to $7,000 for 2023, and those over 50 can contribute $8,000 per year.

IRA account owners are required to start taking required minimum distributions (RMDs), similar to a 401(k), from their account once they turn 73 years old. Prior to that, account holders can take money out of their account between ages 59 ½ and 73 without any early withdrawal penalty.

Individuals can continue to contribute to their IRA at any age as long as they still meet the requirements.

Benefits and Risks of Non-Deductible IRA

While there are benefits to putting money into a non-deductible IRA, there are some risks that individuals should be aware of as well.

Benefits

There are several reasons you might choose to open a non-deductible IRA. In some cases, you can’t make tax-deductible contributions to a traditional IRA, so you need another retirement savings account option. Though your contributions aren’t deductible in the tax year you make them, funds in the IRA that earn dividends or capital gains are not taxed, because the government doesn’t tax retirement savings twice.

Another reason people use non-deductible IRAs is as a stepping stone to a Roth IRA. Roth IRAs also have income limits, but they come with additional choices. High income earners can start by contributing funds to a non-deductible IRA, then convert that IRA into a Roth IRA. This is called a backdoor Roth IRA.

One thing to keep in mind with a backdoor Roth is that the conversion may not be entirely tax free. If an IRA account is made up of a combination of deductible and non-deductible contributions, when it gets converted into a Roth account some of those funds would be taxable.

Risks

The primary benefits of non-deductible IRAs come when used to later convert into a Roth IRA. It can be risky to keep a non-deductible IRA ongoing, especially if it’s made up of both deductible and non-deductible contributions, which can be tricky to keep track of for tax purposes. You can keep a blended IRA, it just takes more work to keep track of the amounts that are taxable.

As noted above, it requires dividing non-deductible contributions by the total contributions made to all IRAs one has in order to figure out the amount of after-tax contributions that have been made.

Non-Deductible IRA vs Roth IRA

With a non-deductible IRA, you contribute funds after you’ve paid taxes on that money, and therefore you’re not able to deduct the contributions from your income tax. The contributions that you make to the non-deductible IRA earn non-taxable interest while they are in the account. The money isn’t taxed when it is withdrawn later.

Roth IRA contributions are similarly made with after-tax money and one can’t get a tax deduction on them. Also, a Roth IRA allows an individual to take out tax-free distributions during retirement.

Unlike other types of retirement accounts, a Roth IRA doesn’t require the account holder to take out a minimum distribution amount.

There are income limits on Roth IRAs, so some high-income earners may not be able to open this type of account. The non-deductible IRA is one way to get around this rule, because an individual can start out with a non-deductible IRA and convert it into a Roth IRA.

How Can I Tell If a Non-Deductible IRA Is the Right Choice?

Non-deductible IRAs can be a way for high-income savers to make their way into a backdoor Roth account. This strategy can help them reduce the amount of taxes they owe on their savings. However, they may not be the best type of account for long-term savings or lower-income savers.

The Takeaway

For many people, contributing to an ordinary IRA is a clearcut proposition: You deposit pre-tax money, and the amount can be deducted from your income for that year. Things get more complicated, however, for higher earners who also have access (or their spouse has access) to an employer-sponsored plan like a 401(k) or 403(b). In that case, you may no longer qualify to deduct all your IRA contributions; some or all of that money may become non-deductible. That means you deposit funds post tax and you can’t deduct it from your income tax that year.

In either case, though, all the money in the IRA would grow tax free. And the upside, of course, is that with a non-deductible IRA the withdrawals are also tax free. With a regular IRA, because you haven’t paid taxes on your contributions, you owe tax when you withdraw money in retirement.

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

Help grow your nest egg with a SoFi IRA.

Photo credit: iStock/Drazen Zigic

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.

SoFi Invest®

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

Jan

2025

SIMPLE IRA Contribution Limits for Employers & Employees

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

A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a way for self-employed individuals and small business employers to set up a retirement plan.

It’s one of a number of tax-advantaged retirement plans that may be available to those who are self-employed, along with solo 401(k)s, and traditional IRAs. These plans share a number of similarities. Like 401(k)s, SIMPLE IRAs are employer-sponsored (if you’re self-employed, you would be the employer in this case), and like other IRAs they give employees some flexibility in choosing their investments.

SIMPLE IRA contribution limits are one of the main differences between accounts: meaning, how much individuals can contribute themselves, and whether there’s an employer contribution component as well.

Here’s a look at the rules for SIMPLE IRAs.

SIMPLE IRA Basics

SIMPLE IRAs are a type of employer-sponsored retirement account. Employers who want to offer one cannot have another retirement plan in place already, and they must typically have 100 employees or less.

Employers are required to contribute to SIMPLE IRA plans, while employees can elect to do so, as a way to save for retirement.

Employees can usually participate in a SIMPLE IRA if they have made $5,000 in any two calendar years before the current year, or if they expect to receive $5,000 in compensation in the current year.

An employee’s income doesn’t affect SIMPLE IRA contribution limits.

💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

SIMPLE IRA Contribution Limits, 2024 and 2025

Employee contributions to SIMPLE IRAs are made with pre-tax dollars. They are typically taken directly from an employee’s paycheck, and they can reduce taxable income in the year the contributions are made, often reducing the amount of taxes owed.

Once deposited in the SIMPLE IRA account, contributions can be invested, and those investments can grow tax deferred until it comes time to make withdrawals in retirement. Individuals can start making withdrawals penalty free at age 59 ½. But withdrawals made before then may be subject to a 10% or 25% early withdrawal penalty.

Employee contributions are capped. For 2024, contributions cannot exceed $16,000 for most people. For 2025, it’s $16,500. Employees who are aged 50 and over can make additional catch-up contributions of $3,500 for 2024 and 2025, bringing their total contribution limit to $19,500 in 2024 and $20,000 in 2025. Beginning in 2025, those aged 60 to 63 can make a catch-up contribution of up to $5,250, instead of $3,500, for a total of $21,750 in 2025.

See the chart below for SIMPLE IRA contribution limits for 2024 and 2025.

	2024	2025
Annual contribution limit	$16,000	$16,500
Catch-up contribution for age 50 and older	$3,500	$3,500 (ages 50-59, 64+) $5,250 (ages 60-63)

2024

2025

Annual contribution limit

$16,000

$16,500

Catch-up contribution for age 50 and older

$3,500

$3,500 (ages 50-59, 64+)

$5,250 (ages 60-63)

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.

Employer vs Employee Contribution Limits

Employers are required to contribute to each one of their employees’ SIMPLE plans each year, and each plan must be treated the same, including an employer’s own.

There are two options available for contributions: Employers may either make matching contributions of up to 3% of employee compensation — or they may make a 2% nonelective contribution for each eligible employee.

If an employer chooses the first option, call it option A, they have to make a dollar-for-dollar match of each employee’s contribution, up to 3% of employee compensation. (If the employer chooses option B, the nonelective contribution, this requirement doesn’t apply.) An employer can offer smaller matches, but they must match at least 1% for no more than two out of every five years.

In option A, if an employee doesn’t make a contribution to their SIMPLE account, the employer does not have to contribute either.

In the second option, option B: Employers can choose to make nonelective contributions of 2% of each individual employee’s compensation. If an employer chooses this option, they must make a contribution whether or not an employee makes one as well.

Contributions are limited. Employers may make a 2% contribution up to $345,000 in employee compensation for 2024, and up to $350,000 in employee compensation for 2025.

(The 3% matching contribution rule for option A is not subject to this same annual compensation limit.)

Whatever contributions employers make to their employees’ plans are tax deductible. And if you’re a sole proprietor you can deduct the employer contributions you make for yourself.

See the chart below for employer contribution limits for 2024 and 2025.

	2024	2025
Matching contribution	Up to 3% of employee contribution	Up to 3% of employee contribution
Nonelective contribution	2% of employee compensation up to $345,000	2% of employee compensation up to $350,000

SIMPLE IRA vs 401(k) Contribution Limits

There are other options for employer-sponsored retirement plans, including the 401(k), which differs from an IRA in some significant ways.

Like SIMPLE IRAs, 401(k) contributions are made with pre-tax dollars, and money in the account grows tax deferred. Withdrawals are taxed at ordinary income tax rates, and individuals can begin making them penalty-free at age 59 ½.

For employees, contribution limits for 401(k)s are higher than those for SIMPLE IRAs. In 2024, individuals could contribute up to $23,000 to their 401(k) plans. Plan participants age 50 and older could make $7,500 in catch-up contributions for a total of $30,500 per year. In 2025, individuals can contribute $23,500 to their 401(k), and those 50 and older can make $7,500 in catch-up contributions for a total of $31,000. In addition, 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.

Employers may also choose to contribute to their employees’ 401(k) plans through matching contributions or non-elective contributions. Employees often use matching contributions to incentivize their employees to save, and individuals should try to save enough each year to meet their employer’s matching requirements.

Employers may also make nonelective contributions regardless of whether an employee has made contributions of their own. Total employee and employer contributions to a 401(k) could equal up to $69,000 in 2024, or 100% of an employee’s compensation, whichever is less. For those aged 50 and older, that figure jumps to $76,500. In 2025, total employee and employer contributions are $70,000, or $77,500 for those 50 and up, or $81,250 for those aged 60 to 63.

As a result of these higher contribution limits, 401(k)s can help individuals save quite a bit more than they could with a SIMPLE IRA. See chart below for a side-by-side comparison of 401(k) and SIMPLE IRA contribution limits.

	SIMPLE IRA 2024	SIMPLE IRA 2025	401(k) 2024	401(k) 2025
Annual contribution limit	$16,000	$16,500	$23,000	$23,500
Catch-up contribution	$3,500	$3,500 (ages 50-59, 64+) $5,250 (ages 60-63)	$7,500	$7,500 (ages 50-59, 64+) $11,250 (ages 60-63)
Employer Contribution	Up to 3% of employee contribution, or 2% of employee compensation up to $345,000	Up to 3% of employee contribution, or 2% of employee compensation up to $350,000	Matching and nonelective contributions up to $69,000	Matching and nonelective contributions up to $70,000.

SIMPLE IRA 2024

SIMPLE IRA 2025

401(k) 2024

401(k) 2025

Annual contribution limit

$16,000

$16,500

$23,000

$23,500

Catch-up contribution

$3,500

$3,500 (ages 50-59, 64+)

$5,250 (ages 60-63)

$7,500

$7,500 (ages 50-59, 64+)

$11,250 (ages 60-63)

Employer Contribution

Up to 3% of employee contribution, or 2% of employee compensation up to $345,000

Up to 3% of employee contribution, or 2% of employee compensation up to $350,000

Matching and nonelective contributions up to $69,000

Matching and nonelective contributions up to $70,000.

💡 Quick Tip: The advantage of opening a Roth IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

SIMPLE IRA vs Traditional IRA Contribution Limits

Individuals who want to save more in tax-deferred retirement accounts than they’re able to in a SIMPLE IRA alone can consider opening an IRA account. Regular IRAs come in two flavors: traditional and Roth IRA.

Traditional IRAs

When considering SIMPLE vs. traditional IRAs, the two actually work similarly. However, contribution limits for traditional accounts are quite a bit lower. For 2024, individuals could contribute $7,000, or $8,000 for those 50 and older. In 2025, as well, individuals can contribute $7,000, or $8,000 for those 50 and older.

That said, when paired with a SIMPLE IRA, individuals under 50 could make $23,000 in total contributions in 2024, which is the same as a 401(K) for that year. In 2025, they could make $23,500 in total contributions, which is the same as a 401(k) for that year, as well.

Roth IRAs

Roth IRAs work a little bit differently.

Contributions to Roths are made with after-tax dollars. Money inside the account grows-tax free and individuals pay no income tax when they make withdrawals after age 59 ½. Early withdrawals may be subject to penalty. Because individuals pay no income tax on withdrawals in retirement, Roth IRAs may be a consideration for those who anticipate being in a higher tax bracket when they retire.

Roth contributions limits are the same as traditional IRAs. Individuals are allowed to have both Roth and traditional accounts at the same time. However, total contributions are cumulative across accounts.

See the chart for a look at SIMPLE IRA vs. traditional and Roth IRA contribution limits.

	SIMPLE IRA 2024	SIMPLE IRA 2025	Traditional and Roth IRA 2024	Traditional and Roth IRA 2025
Annual contribution limit	$16,000	$16,500	$7,000	$7,000
Catch-up contribution	$3,500	$3,500 (ages 50-59, 64+) $5,250 (ages 60-63)	$1,000	$1,000
Employer Contribution	Up to 3% of employee contribution, or 2% of employee compensation up to $345,000	Up to 3% of employee contribution, or 2% of employee compensation up to $350,000	None	None

SIMPLE IRA 2024

SIMPLE IRA 2025

Traditional and Roth IRA 2024

Traditional and Roth IRA 2025

Annual contribution limit

$16,000

$16,500

$7,000

Catch-up contribution

$3,500

$3,500 (ages 50-59, 64+)

$5,250 (ages 60-63)

$1,000

Employer Contribution

Up to 3% of employee contribution, or 2% of employee compensation up to $345,000

Up to 3% of employee contribution, or 2% of employee compensation up to $350,000

None

The Takeaway

SIMPLE IRAs are an easy way for employers and employees to save for retirement — especially those who are self-employed (or for companies with under 100 employees). In fact, a SIMPLE IRA gives employers two ways to help employees save for retirement — by a direct matching contribution of up to 3% (assuming the employee is also contributing to their SIMPLE IRA account), or by providing a basic 2% contribution for all employees, regardless of whether the employees themselves are contributing.

While SIMPLE IRAs don’t offer the same high contribution limits that 401(k)s do, individuals who want to save more can compensate by opening a traditional or Roth IRA on their own.

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

Help grow your nest egg with a SoFi IRA.

Photo credit: iStock/FatCamera

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 full listing of the fees associated with Sofi Invest please view our fee schedule.

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

SOIN1023162

Jan

2025

What Is the Average Rate of Return on a 401(k)?

By Samuel Becker | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

The average rate of return on 401(k)s is typically between 5% and 8%, depending on specific market conditions in a given year. Keep in mind that returns will vary depending on the individual investor’s portfolio, and that those numbers are a general benchmark.

While not everyone has access to a 401(k) plan, those who do may wonder if it’s an effective investment vehicle that can help them reach their goals. The answer is, generally, yes, but there are a lot of things to take into consideration. There are also alternatives out there, too.

Key Points

• The average rate of return on 401(k)s is typically between 5% and 8%, depending on market conditions and individual portfolios.

• 401(k) plans offer benefits such as potential employer matches, tax advantages, and federal protections under ERISA.

• Fees, vesting schedules, and early withdrawal penalties are important considerations for 401(k) investors.

• 401(k) plans offer limited investment options, typically focused on stocks, bonds, and mutual funds.

• Asset allocation and individual risk tolerance play a significant role in determining 401(k) returns and investment strategies.

Some 401(k) Basics

To understand what a 401(k) has to offer, it helps to know exactly what it is. The IRS defines a 401(k) as “a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.”

In other words, employees can choose to delegate a portion of their pay to an investment account set up through their employer. Because participants put the money from their paychecks into their 401(k) account on a pre-tax basis, those contributions reduce their annual taxable income.

Taxes on the contributions and their growth in a 401(k) account are deferred until the money is withdrawn (unless it’s an after-tax Roth 401(k)).

A 401(k) is a “defined-contribution” plan, which means the participant’s balance is determined by regular contributions made to the plan and by the performance of the investments the participant chooses.

This is different from a “defined-benefit” plan, or pension. A defined-benefit plan guarantees the employee a defined monthly income in retirement, putting any investment risk on the plan provider rather than the employee.

Benefits of a 401(k)

There are a lot of benefits that come with a 401(k) account, and some good reasons to consider using one to save for retirement.

Potential Employer Match

Employers aren’t required to make contributions to employee 401(k) plans, but many do. Typically, an employer might offer to match a certain percentage of an employee’s contributions.

Tax Advantages

As mentioned, most 401(k)s are tax-deferred. This means that the full amount of the contributions can be invested until you’re ready to withdraw funds. And you may be in a lower tax bracket when you do start withdrawing and have to pay taxes on your withdrawals.

Federal Protections

One of the less-talked about benefits of 401(k) plans is that they’re protected by federal law. The Employee Retirement Security Act of 1974 (ERISA) sets minimum standards for any employers that set up retirement plans and for the administrators who manage them.

Those protections include a claims and appeals process to make sure employees get the benefits they have coming. Those include the right to sue for benefits and breaches of fiduciary duty if the plan is mismanaged, that certain benefits are paid if the participant becomes unemployed, and that plan features and funding are properly disclosed. ERISA-qualified accounts are also protected from creditors.

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

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.

401(k) Fees, Vesting, and Penalties

There can be some downsides for some 401(k) investors as well. It’s a good idea to be aware of them before you decide whether to open an account.

Fees

The typical 401(k) plan charges a fee of around 1% of assets under management. That means an investor who has $100,000 in a 401(k) could pay $1,000 or more. And as that participant’s savings grow over the years, the fees could add up to thousands of dollars.

Fees eat into your returns and make saving harder — and there are companies that don’t charge management fees on their investment accounts. If you’re unsure about what you’re paying, you should be able to find out from your plan provider or your employer’s HR department, or you can do your own research on various 401(k) plans.

Vesting

Although any contributions you make belong to you 100% from the get-go, that may not be true for your employer’s contributions. In some cases, a vesting schedule may dictate the degree of ownership you have of the money your employer puts in your account.

Early Withdrawal Penalties

Don’t forget, when you start withdrawing retirement funds, some of the money in your tax-deferred retirement account will finally go toward taxes. That means it’s in Uncle Sam’s interest to keep your 401(k) savings growing.

So, if you decide to take money out of a 401(k) account before age 59 ½, in addition to any other taxes due when there’s a withdrawal, you’ll usually have to pay a 10% penalty. (Although there are some exceptions.) And at age 73, you’re required to take minimum distributions from your tax-deferred retirement accounts.

Potentially Limited Investment Options

One more thing to consider when you think about signing up for a 401(k) is what kind of investing you’d like to do. Employers are required to offer at least three basic options: a stock investment option, a bond option, and cash or stable value option. Many offer more than that minimum, but they stick mostly to mutual funds. That’s meant to streamline the decision-making. But if you’re looking to diversify outside the basic asset classes, it can be limiting.

How Do 401(k) Returns Hold Up?

Life might be easier if we could know the average rate of return to expect from a 401(k). But the unsatisfying answer is that it depends.

Several factors contribute to overall performance, including the investments your particular plan offers you to choose from and the individual portfolio you create. And of course, it also depends on what the market is doing from day to day and year to year.

Despite the many variables, you may often hear an annual return that ranges from 5% to 8% cited as what you can expect. But that doesn’t mean an investor will always be in that range. Sometimes you may have double-digit returns. Sometimes your return might drop down to negative numbers.

Issues With Looking Up Average Returns As a Metric

It’s good to keep in mind, too, that looking up average returns can create some issues. Specifically, averages don’t often tell the whole story, and can skew a data set. For instance, if a billionaire walks into a diner with five other people, on average, every single person in the diner would probably be a multi-millionaire — though that wouldn’t necessarily be true.

It can be a good idea to do some reading about averages and medians, and try to determine whether aiming for an average return is feasible or realistic in a given circumstance.

Some Common Approaches to 401(k) Investing

There are many different ways to manage your 401(k) account, and none of them comes with a guaranteed return. But here are a few popular strategies.

60/40 Asset Allocation

One technique sometimes used to try to maintain balance in a portfolio as the market fluctuates is a basic 60/40 mix. That means the account allocates 60% to equities (stocks) and 40% to bonds. The intention is to minimize risk while generating a consistent rate of return over time — even when the market is experiencing periods of volatility.

Target-Date Funds

As a retirement plan participant, you can figure out your preferred mix of investments on your own, with the help of a financial advisor, or by opting for a target-date fund — a mutual fund that bases asset allocations on when you expect to retire.

A 2050 target-date fund will likely be more aggressive. It might have more stocks than bonds, and it will typically have a higher rate of return. A 2025 target-date fund will lean more toward safety. It will likely be designed to protect an investor who’s nearer to retirement, so it might be invested mostly in bonds. (Again, the actual returns an investor will see may be affected by the whims of the market.)

Most 401(k) plans offer target-date funds, and they make investing easy for hands-off investors. But if that’s not what you’re looking for, and your 401(k) plan makes an advisor available to you, you may be able to get more specific advice. Or, if you want more help, you could hire a financial professional to work with you on your overall plan as it relates to your long- and short-term goals.

Multiple Retirement Accounts

Another possibility might be to go with the basic choices in your workplace 401(k), but also open a separate investing account with which you could take a more hands-on approach. You could try a traditional IRA if you’re still looking for tax advantages, a Roth IRA (read more about what Roth IRAs are) if you want to limit your tax burden in retirement, or an account that lets you invest in what you love, one stock at a time.

There are some important things to know, though, before deciding between a 401(k) vs. an IRA.

💡 Quick Tip: Can you save for retirement with an automated investment portfolio? Yes. In fact, automated portfolios, or robo advisors, can be used within taxable accounts as well as tax-advantaged retirement accounts.

How Asset Allocation Can Make a Difference

How an investor allocates their resources can make a difference in terms of their ultimate returns. Generally speaking, riskier investments tend to have higher potential returns — and higher potential losses. Stocks also tend to be riskier investments than bonds, so if an investor were to construct a portfolio that’s stock-heavy relative to bonds, they’d probably have a better chance of seeing bigger returns.

But also, a bigger chance of seeing a negative return.

With that in mind, it’s going to come down to an investor’s individual appetite for risk, and how much time they have to reach their financial goals. While there are seemingly infinite ways to allocate your investments, the chart below offers a very simple look at how asset allocation associates with risks and returns.

Asset Allocations and Associated Risk/Return
Asset Allocation	Risk/Return
75% Stock-25% Bonds	Higher risk, higher potential returns
50% Stock-50% Bonds	Medium risk, variable potential returns
25% Stock-75% Bonds	Lower risk, lower potential returns

Ways to Make the Most of Investment Options

It’s up to you to manage your employer-sponsored 401(k) in a way that makes good use of the options available. Here are some pointers.

Understand the Match

One way to start is by familiarizing yourself with the rules on how to maximize the company match. Is it a dollar-for-dollar match up to a certain percentage of your salary, a 50% match, or some other calculation? It also helps to know the policy regarding vesting and what happens to those matching contributions if you leave your job before you’re fully vested.

Consider Your Investments

With or without help, taking a little time to assess the investments in your plan could boost your bottom line. It may also allow you to tailor your portfolio to better accomplish your financial goals. Checking past returns can provide some information when choosing investments and strategies, but looking to the future also can be useful.

Plan for Your Whole Life

If you have a career plan (will you stay with this employer for years or be out the door in two?) and/or a personal plan (do you want to buy a house, have kids, start your own business?), factor those into your investment plans. Doing so may help you decide how much to invest and where to invest it.

Find Your Lost 401(k)s

Have you lost track of the 401(k) plans or accounts you left behind at past employers? It may make sense to roll them into your current employer’s plan, or to roll them into an IRA separate from your workplace account. You might also want to review and update your portfolio mix, and you might be able to eliminate some fees.

Know the Maximum Contributions for Retirement Accounts

Keep in mind that there are different contribution limits for 401(k)s and IRAs. Contribution limits for a 401(k) are $23,000 in 2024 and $23,500 in 2025 for those under age 50. Those age 50 and over can make an additional catch-up contribution of $7,500, per year, to a 401(k) in 2024 and 2025.

And in 2025, those aged 60 to 63 may contribute an additional $11,250 to a 401(k) instead of $7,500, thanks to SECURE 2.0.

For tax years 2024 and 2025, the contribution limits for traditional and Roth IRAs are $7,000; $8,000 for those who are 50 and older.

Learn How to Calculate Your 401(k) Rate of Return

This information can be useful as you assess your retirement saving strategy, and the math isn’t too difficult.

For this calculation, you’ll need to figure out your total contributions and your total gains for a specific period of time (let’s say a calendar year).

You can find your contributions on your 401(k) statements or your pay stubs. Add up the total for the year.

Your gains may be listed on your 401(k) statements as well. If not, you can take the ending balance of your account for the year and subtract the total of your contributions and the account balance at the beginning of the year. That will give you your total gains.

Once you have those factors, divide your gains by your ending balance and multiply by 100 to get your rate of return.

Here’s an example. Let’s say you have a beginning balance of $10,000. Your total contributions for the year are $6,000. Your ending balance is $17,600. So your gains equal $1,600. To get your rate of return, the calculation is:

(Gains / ending balance) X 100 =

($1,600 / $17,600) X 100 = 9%

Savings Potential From a 401(k) Potential by Age

It can be difficult to really get a feel for how your 401(k) savings or investments can grow over time, but using some of the math above, and assuming that you keep making contributions over the years, you’ll very likely end up with a sizable nest egg when you reach retirement age.

This all depends, of course, on when you start, and how the markets trend in the subsequent years. But for an example, we can make some assumptions to see how this might play out. For simplicity’s sake, assume that you start contributing to a 401(k) at age 20, with plans to start taking distributions at age 70. You also contribute $10,000 per year (with no employer match, and no inflation), at an average return of 5% per year.

Here’s how that might look over time:

401(k) Savings Over Time
Age	401(k) Balance
20	$10,000
30	$128,923
40	$338,926
50	$680,998
60	$1,238,198
70	$2,145,817

Using time and investment returns to supercharge your savings, you could end up with more than $2 million through dutiful saving and investing in your 401(k). Again, there are no guarantees, and the chart above makes a lot of oversimplified assumptions, but this should give you an idea of how things can add up.

Alternatives to 401(k) Plans

While 401(k) plans can be powerful financial tools, not everyone has access to them. Or, they may be looking for alternatives for whatever reason. Here are some options.

Roth IRA

Roth IRAs are IRAs that allow for the contribution of after-tax dollars. Accordingly, the money contained within can then be withdrawn tax-free during retirement. They differ from traditional IRAs in a few key ways, the biggest and most notable of which being that traditional IRAs are tax-deferred accounts (contributions are made pre-tax).

Learn more about what IRAs are, and what they are not.

Traditional IRA

As discussed, a traditional IRA is a tax-deferred retirement account. Contributions are made using pre-tax funds, so investors pay taxes on distributions once they retire.

HSA

HSAs, or health savings accounts, are another vehicle that can be used to save or invest money. HSAs have triple tax benefits, in that account holders can contribute pre-tax dollars to them, allow that money to grow tax-free, and then use the holdings on qualified medical expenses — also tax-free.

Retirement Investment

Typical returns on 401(k)s may vary, but looking for an average of between 5% and 8% would likely be a good target range. Of course, that doesn’t mean that there won’t be up or down years, and averages, themselves, can be a bit misleading.

While your annual return on your 401(k) may vary, the good news is that, as an investor, you have options about how you save for the future. The choices you make can be as aggressive or as conservative as you want, as you choose the investment mix that best suits your timeline and financial goals.

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

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

FAQ

What is the typical 401(k) return over 20 years?

The typical return for 401(k)s over 20 years is between 5% and 8%, assuming a portfolio sticks to an asset mix of roughly 60% stocks and 40% bonds. There’s also no guarantee that returns will fall within that range.

What is the typical 401(k) return over 10 years?

Again, the average rate of return for 401(k)s tends to land between 5% and 8%, with some years providing higher returns, and some years providing lower, or even negative returns.

What was the typical 401(k) return for 2022?

The average 401(k) lost roughly 20% of its value during 2022, as increasing interest rates and shifting economic conditions over the course of the year (largely due to increasing inflation) caused the economy to sputter.

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 full listing of the fees associated with Sofi Invest please view our fee schedule.

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

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0123020

Jan

2025

Roth 401(k) vs Traditional 401(k): Which Is Best for You?

By AJ Smith | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off

A traditional 401(k) and a Roth 401(k) are tax-advantaged retirement plans that can help you save for retirement. While both types of accounts follow similar rules — they have the same contribution limits, for example — the impact of a Roth 401(k) vs. traditional 401(k) on your tax situation, now and in the future, may be quite different.

In brief: The contributions you make to a traditional 401(k) are deducted from your gross income, and thus may help lower your tax bill. But you’ll owe taxes on the money you withdraw later for retirement.

Conversely, you contribute after-tax funds to a Roth 401(k) and can typically withdraw the money tax free in retirement — but you don’t get a tax break now.

To help choose between a Roth 401(k) vs. a traditional 401(k) — or whether it might make sense to invest in both, if your employer offers that option — it helps to know what these accounts are all about.

Key Points

• Traditional 401(k) contributions are made with pre-tax dollars, reducing taxable income for the year of contribution.

• Roth 401(k) contributions are made with after-tax dollars, offering tax-free withdrawals in retirement.

• Withdrawals from traditional 401(k)s are taxed as income, whereas Roth 401(k) withdrawals are tax-free if rules are followed.

• Early withdrawals from both accounts may incur taxes and penalties, though Roth contributions can be withdrawn tax-free.

• Starting January 2024, Roth 401(k)s are not subject to required minimum distributions, unlike traditional 401(k)s.

5 Key Differences Between Roth 401(k) vs Traditional 401(k)

Before deciding on a Roth 401(k) or traditional 401(k), it’s important to understand the differences between each account, and to consider the tax benefits of each in light of your own financial plan. The timing of the tax advantages of each type of account is also important to weigh.

1. How Each Account is Funded

• A traditional 401(k) allows individuals to make pre-tax contributions. These contributions are typically made through elective salary deferrals that come directly from an employee’s paycheck and are deducted from their gross income.

• Employees contribute to a Roth 401(k) also generally via elective salary deferrals, but they are using after-tax dollars. So the money the employee contributes to a Roth 401(k) cannot be deducted from their current income.

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

2. Tax Treatment of Contributions

• The contributions to a traditional 401(k) are tax-deductible, which means they can reduce your taxable income now, and they grow tax-deferred (but you’ll owe taxes later).

• By contrast, since you’ve already paid taxes on the money you contribute to a Roth 401(k), the money you contribute isn’t deductible from your gross income, and withdrawals are generally tax free (some exceptions below).

3. Withdrawal Rules

• You can begin taking qualified withdrawals from a traditional 401(k) starting at age 59 ½, and the money you withdraw is taxed at ordinary income rates.

• To withdraw contributions + earnings tax free from a Roth 401(k) you must be 59 ½ and have held the account for at least five years (often called the 5-year rule). If you open a Roth 401(k) when you’re 57, you cannot take tax-free withdrawals at 59 ½, as you would with a traditional 401(k). You’d have to wait until five years had passed, and start tax-free withdrawals at age 62.

4. Early Withdrawal Rules

• Early withdrawals from a 401(k) before age 59 ½ are subject to tax and a 10% penalty in most cases, but there are some exceptions where early withdrawals are not penalized, including certain medical expenses; a down payment on a first home; qualified education expenses.

You may also be able to take a hardship withdrawal penalty-free, but you need to meet the criteria, and you would still owe taxes on the money you withdrew.

• Early withdrawals from a Roth 401(k) are more complicated. You can withdraw your contributions at any time, but you’ll owe tax proportional to your earnings, which are taxable when you withdraw before age 59 ½.

For example: If you have $100,000 in a Roth 401(k), including $90,000 in contributions and $10,000 in taxable gains, the gains represent a 10% of the account. Therefore, if you took a $20,000 early withdrawal, you’d owe taxes on 10% to account for the gains, or $2,000.

5. Required Minimum Distribution (RMD) Rules

With a traditional 401(k), individuals must take required minimum distributions starting at age 73, or face potential penalties. While Roth 401(k)s used to have RMDs, as of January 2024, they no longer do. That means you are not required to withdraw RMDs from a Roth 401(k) account.

For a quick side-by-side comparison, here are the key differences of a Roth 401(k) vs. traditional 401(k):

Traditional 401(k)	Roth 401(k)
Funded with pre-tax dollars.	Funded with after-tax dollars.
Contributions are deducted from gross income and may lower your tax bill.	Contributions are not deductible.
All withdrawals taxed as income.	Withdrawals of contributions + earnings are tax free after 59 ½, if you’ve had the account for at least 5 years. (However, matching contributions from an employer made with pre-tax dollars are subject to tax.)
Early withdrawals before age 59 ½ are taxed as income and are typically subject to a 10% penalty, with some exceptions.	Early withdrawals of contributions are not taxed, but earnings may be taxed and subject to a 10% penalty.
Account subject to RMD rules starting at age 73.	No longer subject to RMD rules as of January 2024.

Bear in mind that a traditional 401(k) and Roth 401(k) also share many features in common:

• The annual contribution limits are the same for a 401(k) and a Roth 401(k). For 2024, the total amount you can contribute to these employer-sponsored accounts is $23,000; if you’re 50 and older you can save an additional $7,500 for a total of $30,500. The 2025 limit is capped at $23,500; $31,000 if you’re 50 and older. Those aged 60 to 63 may contribute a total of $34,750 in 2025, thanks to SECURE 2.0.

• For both accounts, employers may contribute matching funds up to a certain percentage of an employee’s salary.

• In 2024, total contributions from employer and employee cannot exceed $69,000 ($76,500 for those 50 and up). In 2025, total contributions from employer and employee cannot exceed $70,000 ($77,500 for those 50 and up, and $81,250 for those 60 to 63).

• Employees may take out a loan from either type of account, subject to IRS restrictions and plan rules.

Because there are certain overlaps between the two accounts, as well as many points of contrast, it’s wise to consult with a professional when making a tax-related plan.

How to Choose Between a Roth and a Traditional 401(k)

In some cases it might make sense to contribute to both types of accounts (more on that below), but in other cases you may want to choose either a traditional 401(k) or a Roth 401(k) to maximize the specific advantages of one account over another. Here are some considerations.

When to Pay Taxes

Traditional 401(k) withdrawals are taxed at an individual’s ordinary income tax rate, typically in retirement. As a result these plans can be most tax efficient for those who will have a lower marginal rate after they retire than they did while they were working.

In other words, a traditional 401(k) may help you save on taxes now, if you’re in a higher tax bracket — and then pay lower taxes in retirement, when you’re ideally in a lower tax bracket.

On the other hand, an investor might look into the Roth 401(k) option if they feel that they pay lower taxes now than they will in retirement. In that case, you’d potentially pay lower taxes on your contributions now, and none on your withdrawals in retirement.

Your Age

Often, younger taxpayers may be in a lower tax bracket. If that’s the case, contributing to a Roth 401(k) may make more sense for the same reason above: because you’ll pay a lower rate on your contributions now, but then they’re completely tax free in retirement.

If you’re older, perhaps mid-career, and in a higher tax bracket, a traditional 401(k) might help lower your tax burden now (and if your tax rate is lower when you retire, even better, as you’d pay taxes on withdrawals but at a lower rate).

Where You Live

The tax rates where you live, or where you plan to live when you retire, are also a big factor to consider. Of course your location some years from now, or decades from now, can be difficult to predict (to say the least). But if you expect that you might be living in an area with lower taxes than you are now, e.g. a state with no state taxes, it might make sense to contribute to a traditional 401(k) and take the tax break now, since your withdrawals may be taxed at a lower rate.

💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

The Benefits of Investing in Both a Roth 401(k) and Traditional 401(k)

If an employer offers both a traditional and Roth 401(k) options, employees might have the option of contributing to both, thus taking advantage of the pros of each type of account. In many respects, this could be a wise choice.

Divvying up contributions between both types of accounts allows for greater flexibility in tax planning down the road. Upon retirement, an individual can choose whether to withdraw money from their tax-free 401(k) account or the traditional, taxable 401(k) account each year, to help manage their taxable income.

It is important to note that the $23,000 contribution limit ($30,500 for those 50 and older) for 2024 is a total limit on both accounts.

So, for instance, you might choose to save $13,500 in a traditional 401(k) and $9,500 in a Roth 401(k) for the year. You are not permitted to save $23,000 in each account.

What’s the Best Split Between Roth and Traditional 401(k)?

The best split between a Roth 401(k) and a traditional 401(k) depends on your individual financial situation and what might work best for you from a tax perspective. You may want to do an even split of the $23,000 limit you can contribute in 2024. Or, if you’re in a higher tax bracket now than you expect to be in retirement, you might decide that it makes more sense for you to put more into your traditional 401(k) to help lower your taxable income now. But if you expect to be in a higher income tax bracket in retirement, you may want to put more into your Roth 401(k).

Consider all the possibilities and implications before you decide. You may also want to consult a tax professional.

The Takeaway

Employer-sponsored Roth and traditional 401(k) plans offer investors many options when it comes to their financial goals. Because a traditional 401(k) can help lower your tax bill now, and a Roth 401(k) generally offers a tax-free income stream later — it’s important for investors to consider the tax advantages of both, the timing of those tax benefits, and whether these accounts have to be mutually exclusive or if it might benefit you to have both.

When it comes to retirement plans, investors don’t necessarily have to decide between a Roth or traditional 401(k). Some might choose one of these investment accounts, while others might find a combination of plans suits their goals. After all, it can be difficult to predict your financial circumstances with complete accuracy — especially when it comes to tax planning — so you may decide to hedge your bets and contribute to both types of accounts, if your employer offers that option.

Another step to consider is a 401(k) rollover, where you move funds from an old 401(k) into an IRA. When you do a 401(k) rollover it can help you manage your retirement funds.

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FAQ

Is it better to contribute to 401(k) or Roth 401(k)?

Whether it’s better to contribute to a traditional 401(k) or Roth 401(k) depends on your particular financial situation. In general, if you expect to be in a lower tax bracket in retirement, a traditional 401(k) may make more sense for you since you’ll be able to deduct your contributions when you make them, which can lower your taxable income, and then pay taxes on the money in retirement, when you’re in a lower income tax bracket.

But if you’re in a lower tax bracket now than you think you will be later, a Roth 401(k) might be the preferred option for you because you’ll generally withdraw the money tax-free in retirement.

Can I max out both 401(k) and Roth 401(k)?

No, you cannot max out both accounts. Per IRS rules, the annual 401(k) limits apply across all your 401(k) accounts combined. So for 2024, you can contribute a combined amount up to $23,000 (or $30,500 if you’re 50 or older) to your Roth 401(k) and your traditional 401(k) accounts.

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How Much Should I Contribute to My 401(k)?

401(k) Contribution Limits for 2024 and 2025

401(k) Contribution Limits 2024 vs 2025

How Much Should You Put Toward a 401(k)?

When You’re Starting Out in Your Career

As You Move Up in Your Career

As You Get Closer to Retirement

The Impact of Contributing More Over Time

Factors That May Impact Your Decision

1. The Tax Effect

2. Your Earning Situation

3. Your Retirement Goals

4. Do You Have Debt?

The Takeaway

FAQ

How much should I contribute to my 401(k) per paycheck?

What percent should I put in my 401(k)?

Is 10% too much to contribute to 401(k)? What about 20%?

What Is a Non-Deductible IRA?

Who Is Eligible for a Non-Deductible IRA?

Get a 1% IRA match on rollovers and contributions.

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Non-Deductible IRA Withdrawal Rules

Contribution Limits and RMDs

Benefits and Risks of Non-Deductible IRA

Benefits

Risks

Non-Deductible IRA vs Roth IRA

How Can I Tell If a Non-Deductible IRA Is the Right Choice?

The Takeaway

SIMPLE IRA Contribution Limits for Employers & Employees

SIMPLE IRA Basics

SIMPLE IRA Contribution Limits, 2024 and 2025

Get a 1% IRA match on rollovers and contributions.

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Employer vs Employee Contribution Limits

SIMPLE IRA vs 401(k) Contribution Limits

SIMPLE IRA vs Traditional IRA Contribution Limits

Traditional IRAs

Roth IRAs

The Takeaway

What Is the Average Rate of Return on a 401(k)?

Some 401(k) Basics

Benefits of a 401(k)

Potential Employer Match

Tax Advantages

Federal Protections

Get a 1% IRA match on rollovers and contributions.

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401(k) Fees, Vesting, and Penalties

Fees

Vesting

Early Withdrawal Penalties

Potentially Limited Investment Options

How Do 401(k) Returns Hold Up?

Issues With Looking Up Average Returns As a Metric

Some Common Approaches to 401(k) Investing

60/40 Asset Allocation

Target-Date Funds

Multiple Retirement Accounts

How Asset Allocation Can Make a Difference

Ways to Make the Most of Investment Options

Understand the Match

Consider Your Investments

Plan for Your Whole Life

Find Your Lost 401(k)s

Know the Maximum Contributions for Retirement Accounts

Learn How to Calculate Your 401(k) Rate of Return

Savings Potential From a 401(k) Potential by Age

Alternatives to 401(k) Plans

Roth IRA

Traditional IRA

HSA

Retirement Investment

FAQ

What is the typical 401(k) return over 20 years?

What is the typical 401(k) return over 10 years?

What was the typical 401(k) return for 2022?

Roth 401(k) vs Traditional 401(k): Which Is Best for You?

5 Key Differences Between Roth 401(k) vs Traditional 401(k)

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