401Ks

Sizing up your options for saving while self-employed Both solo 401(k)s and SEP IRAs offer high contribution limits, but which one is right for you? Self-employed workers wear many hats. Accounting, admin, you name it. And that doesn't even include saving for retirement. Depending on your income, you may still have access to the tax benefits of an IRA, but some folks quickly run up against its $7,000 contribution limit. They may want (or need) to save more. So what's a gig worker, small-business owner, or solo practitioner to do? Luckily, two accounts offer up to 10x the capacity for tax-advantaged investing: the solo 401(k), and the SEP IRA. In general, SEPs tend to be better for business owners planning to hire employees in the future. Solos, meanwhile, often make sense for self-employed individuals without employees other than a spouse. But the best fit for you will depend on your business model, income level, and financial goals. So to help you make a pick, let’s compare these accounts across three categories: High contribution limits Easy admin Flexibility (Roth access and small-business growth) High contribution limits You can contribute roughly the same (upwards of $70,000) to each account type annually, but solos have a slight edge in two cases: Case #1: You're over the age of 50 and playing catch-up. In this case, a solo 401(k) offers additional catch-up contributions of $7,500 each year, or $11,250 for those between the ages of 60 and 63. Case #2: Say you're a super saver, someone whose saving rate is well above the standard advice of 10-15%, but you earn less than $280,000. You'll be able to save more in a solo in this scenario, because not only can you contribute up to 25% of your income as an employer (the same as a SEP), solo 401(k)s allow you to contribute up to $23,500 as an employee as well. Advantage: solo 401(k) Easy admin Simply put, a solo 401(k) takes more work to set up, and unlike a SEP IRA, it requires annual reporting once its balance exceeds $250,000. But there's a big caveat here. If you have a trusted advisor—and a truly modern solo 401(k) offering like our own—they can handle the heavy lifting of setting one up and keeping it compliant year-in and year-out. That's in large part why we offer solo 401(k)s as an exclusive Betterment Premium offering. Premium puts a team of advisors in your corner, experts who can not only assist with all things solos, but help you make the decision of whether to open one in the first place. If you decide a Betterment solo 401(k) is right for you, a paperless and pleasant experience awaits. Advantage: Tie Flexibility Both SEPs and solos offer flexibility, but in different ways. A solo 401(k), for example, allows for Roth (aka after-tax) and/or traditional contributions. But depending on your business goals, the ability to scale your business and keep saving may be the most important type of flexibility for you. In general, SEPs allow you to quickly shift from a solo practitioner to an employer who contributes to employees’ SEP IRAs on their behalf. The only catch is you must contribute the same amount to their SEPs as you do yours. With Betterment’s solo 401(k), however, our advisors can transition the plan to a group 401(k) should you hire employees beyond your spouse. A group 401(k) requires more work to administer, but offers more flexibility than a SEP in how you structure contributions for you and your employees. Advantage: Tie So which account is right for you? The good news is both SEP IRAs and solo 401(k)s offer excellent tax advantages that can help you reach retirement quicker. We offer both at Betterment, and make it easy to open either one. Because when you’re self-employed, you’re busy running your business. Optimizing your retirement savings? Consider that one less hat for your wardrobe.

Should you fill up your 401(k) first, or your IRA? Navigating one of retirement saving’s first forks in the road. Can you have both a 401(k) and an IRA? Yes! But having access to both accounts begs the question: Which one is more deserving of your retirement dollars? The answer, as it so often does in personal finance, depends on your situation. So let’s explore when a 401(k)-first mentality makes sense, and when it doesn't, before closing things out with a wildcard third option that might warrant both your attention and your savings. A quick refresher on retirement accounts For the sake of this conversation, we're focusing on the two most common retirement accounts: the IRA and the 401(k), including the non-profit/public equivalent 403(b) account. Both come with built-in tax advantages, annual contribution limits, and eligibility criteria: 401(k) Accessible to: Anyone whose employer offers one 2024 contribution limit: $23,500 (for those under 50) IRA Accessible to: Anyone whose Modified Adjusted Gross Income (MAGI) falls below the IRS's eligibility limits (see table below) qualifies for tax benefits. 2024 contribution limit: $7,000 (for those under 50) 2025 IRA income limits Traditional IRA* Modified Adjusted Gross Income (MAGI) Roth IRA Modified Adjusted Gross Income (MAGI) Full tax deduction $0-$77,000 (single) Full contribution $0-$145,999 (single) $0-$123,000 (married) $0-$229,999 (married) Partial tax deduction $77,001-$86,999 (single) Partial contribution $146,000-$160,999 (single) $123,001-$142,999 (married) $230,000-$239,999 (married) No tax deduction** $87,000 and up (single) No contribution $161,000 and up (single) $143,000 and up (married) $240,000 and up (married) *If covered by a retirement plan at work **Anyone is eligible to make taxable contributions to a traditional IRA Source: IRS Power ranking your retirement accounts In general, there are a few reasons why you might default to the 401(k), including but not limited to: You can contribute by way of payroll deductions and ease the sting of saving. Many employers offer matching contributions, aka free money. And you can contribute significantly more money to them than IRAs. Altogether, that's a lot of pros working in the 401(k)’s favor. But not all 401(k)s are created equal. Some providers charge more for limited investment options. According to the 24th edition of the 401k Averages Book, the average investment expense for some smaller plans1 was 1.12%. By comparison, you can invest with a Betterment IRA for an all-in fee well south of 1%. So ask your employer or 401(k) provider for help sizing up your total costs. Or take a look at your 401(k) statement for code names like: Management fees Asset-based fees Operating expenses Expense ratios If you find your 401(k) costs are significantly steeper than an IRA, consider the following order of operations: Fill up your 401(k) up to your employer’s match, assuming they offer one. Max out your IRA, assuming you’re eligible. Come back to your 401(k). On the other hand, if your 401(k)’s fees are competitive, congratulations! Things just got simpler. Consider maxing it out first before turning your attention to an IRA, or that wildcard option we mentioned earlier. A quick aside on the Health Savings Account (HSA) Sure, the name says "health," but HSAs can be repurposed for retirement savings as well. They come with a $4,150 contribution limit for individuals, and they’re available to anyone enrolled in a high-deductible health plan (HDHP). They’re also triple tax-advantaged, meaning money is tax-free going in, tax-free while it grows, and tax-free coming out, assuming it’s used for qualified expenses. That’s one more tax perk than 401(k)s and IRAs, which make you choose between either tax-deferred contributions or tax-free withdrawals. Tax-free contributions Tax-free growth Tax-free withdrawals Traditional 401(k)/IRA ✓ ✓ X Roth 401(k)/IRA X ✓ ✓ HSA ✓ ✓ ✓ So if an HDHP is right for your healthcare needs, consider prioritizing an HSA before an IRA. Between those two accounts and the 401(k), that's more than $30,000 worth of annual investing potential. Fill up those tanks, and you’ll be well on your way to retiring. Now just enjoy the ride.