Most people should open a Roth IRA at Vanguard, right after they take any 401(k) match at work. Pick a Traditional IRA instead if you are in a high tax bracket today, and add a taxable brokerage account once those are funded.
Self-employed savers have two more choices. Vanguard still opens a SEP-IRA for a business owner with no employees. A Solo 401(k) that holds Vanguard funds is now set up through Ascensus, not Vanguard. For a child, a 529 plan fits college savings. A custodial account or the new Trump account fits general savings, and our guide to the best investment account for a child compares them in detail.
The 2027 IRA limit is $7,500, or $8,600 at age 50 or older. The 2026 limit is the same, and you can still make 2026 contributions until April 15, 2027. A brokerage account has no such cap, but you pay tax on dividends and capital gains along the way.
Understanding Vanguard Account Categories and Their Legal Structures
Vanguard's sign-up screen shows a long list of account names, and many new investors stall right there. The list is shorter than it looks. Almost every choice falls into one of four families: retirement, taxable, small business, or accounts for children. The tax code sets the rules for each family. Those rules decide how your money is taxed, when you can take it out, and what an early withdrawal costs.
Retirement accounts trade tax breaks for limits on withdrawals before age 59½. Traditional individual retirement accounts (IRAs) fall under Internal Revenue Code Section 408. Roth IRAs fall under Section 408A. Both need earned income, and both share one yearly cap that the Internal Revenue Service (IRS) adjusts for inflation. That cap did not change between 2026 and 2027.
Brokerage accounts work without these limits but also without the tax breaks. You pay tax on dividends and realized gains each year, even if you reinvest them. There is no contribution cap. You can withdraw at any time with no penalty, though you still owe tax on profits.
Today Vanguard opens these accounts directly: IRAs, brokerage accounts, SEP-IRAs for self-employed people with no employees, UGMA/UTMA custodial accounts, and The Vanguard 529 Plan, which Nevada sponsors. Individual 401(k) plans are now set up with Ascensus.
2026 vs 2027 Contribution Limits at a Glance
Until April 15, 2027, you can still choose which year an IRA deposit counts for. The figures below come from IRS Notice 2026-66 and the IRS inflation adjustments for 2027.
| Limit | Tax year 2026 | Tax year 2027 |
|---|---|---|
| IRA contribution (age 50 or older) | $7,500 ($8,600) | $7,500 ($8,600) |
| 401(k) employee deferral | $24,500 | $25,500 |
| 401(k) catch-up, age 50 or older | $8,000 | $8,500 |
| 401(k) catch-up, ages 60 to 63 | $11,250 | $11,750 |
| SEP-IRA and Solo 401(k) total cap | $72,000 | $75,000 |
| Roth IRA phase-out, single | $153,000 to $168,000 | $158,000 to $173,000 |
| Roth IRA phase-out, married filing jointly | $242,000 to $252,000 | $250,000 to $260,000 |
| Traditional IRA deduction phase-out, single with a workplace plan | $81,000 to $91,000 | $83,000 to $93,000 |
| Annual gift tax exclusion | $19,000 | $20,000 |
| Deadline for IRA contributions | April 15, 2027 | The 2028 tax filing deadline |
Traditional IRA: When Immediate Tax Deductions Matter Most
A Traditional IRA lowers your taxable income in the year you contribute, under Internal Revenue Code Section 219. It helps most when your bracket is high now and likely lower in retirement.
The deduction shrinks if you or your spouse has a retirement plan at work. For 2027, a single filer covered by a workplace plan phases out between $83,000 and $93,000 of modified adjusted gross income (MAGI). Joint filers phase out from $133,000 to $153,000 when the contributing spouse is covered, and from $250,000 to $260,000 when only the other spouse is covered. Married people filing separately phase out between $0 and $10,000. For 2026 contributions made by April 15, 2027, the ranges are $81,000 to $91,000 for single filers and $129,000 to $149,000 for covered joint filers.
Withdrawals in retirement are taxed as ordinary income. Under 2027 rules, a withdrawal before age 59½ also brings a 10% early withdrawal penalty. Exceptions cover a first home purchase up to $10,000, education costs, certain medical costs, one emergency withdrawal of up to $1,000 a year, and up to $5,000 for a birth or adoption.
Required minimum distributions (RMDs) start at age 73 if you were born from 1951 through 1959, and at 75 if you were born in 1960 or later. As of 2027, a missed RMD costs 25% of the amount you should have taken, or 10% if you fix it within two years.
| Traditional IRA move (tax year 2027) | Consequence |
|---|---|
| Single filer earning $80,000 contributes $7,500 | Saves about $1,650 at the 22% rate. Fully deductible because $80,000 is under $83,000. |
| Withdraw $50,000 at age 55 | $5,000 penalty plus about $11,000 of income tax at 22%. The age-55 exception covers 401(k)s, not IRAs. |
| Miss an $8,000 RMD | $2,000 penalty at 25%, or $800 at 10% if corrected in time. The withdrawal is still required. |
Roth IRA: Tax-Free Growth for Long-Term Wealth Building
A Roth IRA gives no deduction up front, but withdrawals in retirement are tax-free. That suits younger workers and anyone who expects a higher tax rate later.
Income limits decide who can contribute directly. For 2027, single filers and heads of household phase out between $158,000 and $173,000 of MAGI, and no direct contribution is allowed above $173,000. Joint filers have a 2027 phase-out range of $250,000 to $260,000. Married people filing separately lose the contribution almost at once. For 2026 contributions made by April 15, 2027, the ranges are $153,000 to $168,000 and $242,000 to $252,000.
You can take out your contributions at any time with no tax and no penalty. Earnings taken before age 59½ are taxed and penalized, unless an exception such as disability or a first home purchase applies. Earnings are also tax-free only once five tax years have passed since January 1 of the year of your first Roth contribution.
Roth IRAs have no RMDs during your lifetime. Most heirs other than a spouse must empty the account within 10 years, though their withdrawals are usually tax-free.
| Roth IRA scenario (2027 rules) | Tax outcome |
|---|---|
| Contribute $7,500 a year for 30 years at an assumed 7% return | About $708,000 with year-end deposits, or about $758,000 with January deposits, tax-free. The 7% return is not guaranteed. |
| Withdraw $20,000 of contributions after 2 years | No tax and no penalty on the $20,000 |
| Withdraw $30,000 of earnings at age 57 (account open 10 years) | $3,000 penalty plus income tax at ordinary rates, owed only on the earnings |
Choosing Between Traditional and Roth: The Tax Bracket Decision
Compare your tax rate today with the rate you expect in retirement. A higher rate today favors the Traditional IRA. The same or a higher rate later favors the Roth.
Take the 2027 federal brackets and the 2027 standard deduction of $16,600 for a single filer. A single person earning $95,000 has taxable income of $78,400. That is in the 22% bracket, which starts above $52,025. If that person withdraws $60,000 a year in retirement, taxable income is $43,400, in the 12% bracket. Deducting at the higher rate and paying the lower one later favors the Traditional IRA, as long as the contribution is still deductible.
Younger workers often do better with a Roth. A 25-year-old earning $55,000 is in the 12% bracket for 2027. At $150,000 the same person would be in the 24% bracket, which starts above $109,125 of taxable income for 2027.
High earners above the Roth limits can use the backdoor Roth strategy. You make a nondeductible Traditional IRA contribution, then convert it to a Roth soon after. Both steps go on Form 8606. If you hold pre-tax money in any Traditional, SEP or SIMPLE IRA, the pro-rata rule treats all of it as one pool, and part of the conversion becomes taxable.
Brokerage Accounts: Flexibility Without Tax Advantages
Vanguard brokerage accounts are standard taxable accounts with no contribution limit, no income limit and no withdrawal penalty.
The trade-off is yearly tax. Every dividend, interest payment and realized gain is taxed for that year, even when you reinvest. For 2027, long-term gains on investments held more than one year are taxed at 0%, 15% or 20%. A 3.8% net investment income tax is added once MAGI passes $200,000 for single filers, with a higher threshold for joint filers.
These accounts fit goals that come before retirement, such as a house down payment, and money left after you fund tax-advantaged accounts. The 2027 IRA limit does not apply here, so you can invest as much as you have.
Many savers also keep an emergency fund at Vanguard, in a brokerage settlement fund or a Cash Plus Account. They are different products with similar names, so compare the yield and how fast you can reach the cash.
Tax-loss harvesting is one edge over a retirement account. A loss on a sale offsets other gains. For 2027, losses beyond your gains offset up to $3,000 of ordinary income, or $1,500 if married filing separately, and the rest carries forward. The wash-sale rule cancels the loss if you buy a substantially identical security within 30 days before or after the sale.
Brokerage accounts also allow margin and short selling, which IRAs do not. Most long-term investors never need them.
| Brokerage account action (2027 rules) | Federal tax consequence |
|---|---|
| Earn $2,000 in qualified dividends | $0 to about $476, even if reinvested (0%, 15%, or 20% plus the 3.8% tax). Nonqualified dividends are taxed at ordinary rates. |
| Sell stock for a $15,000 profit after 2 years | $0 to about $3,570 of long-term capital gains tax, including the 3.8% tax |
| Sell a losing investment for a $5,000 loss | Offsets $5,000 of other gains, or $3,000 of income with the other $2,000 carried forward |
SEP IRA: Retirement Savings for Self-Employed Individuals
A Simplified Employee Pension IRA lets self-employed people and small business owners save far more than a regular IRA. For 2027, the cap is 25% of compensation or $75,000, whichever is less. The 2026 cap is $72,000.
An employer can contribute that same share of an employee's W-2 wages. For 2027, a self-employed person ends up at about 20% of net profit, because half of the self-employment tax comes off first.
Only the employer contributes, so there are no employee deferrals. You can change the amount each year or skip a lean year. Federal law lets a SEP accept Roth contributions if the provider supports them, but Vanguard's SEP-IRA page says it does not offer that option at this time.
If you have employees, you must contribute the same percentage of pay for each eligible one. An employee is eligible after working for you in three of the last five years, reaching age 21, and earning at least $800 in 2026. IRS Notice 2026-66 keeps that pay threshold unchanged for 2027. Vanguard opens SEP-IRAs directly only for self-employed people with no employees. Plans with more participants have moved to Ascensus.
A sole proprietor can make 2026 SEP contributions until April 15, 2027, or October 15, 2027 with an extension. Contributions for 2027 are due by the 2028 filing deadline, including extensions. Withdrawals and RMDs follow Traditional IRA rules.
| SEP IRA scenario (tax year 2027) | Contribution calculation |
|---|---|
| Self-employed net profit of $100,000 | Contribute $18,587 (20% after the self-employment tax adjustment) |
| Employee earning $80,000 in W-2 wages | Employer can contribute $20,000 (25% of wages) |
| Variable income drops to $30,000 one year | Can reduce the contribution to $5,576 or skip it |
These 2027 figures assume the 15.3% self-employment tax rate and net earnings below the 2027 Social Security wage base of $192,300.
Solo 401(k): Maximum Contributions for One-Person Businesses
A Solo 401(k) lets you contribute as both employee and employer. For 2027, you can defer $25,500 as the employee, then add an employer contribution figured the same way as a SEP. The combined cap is $75,000. For 2026, the figures are $24,500 and $72,000.
Catch-ups raise the ceiling. For 2027, people aged 50 to 59, or 64 and older, can add $8,500, for a total of $83,500. People aged 60 to 63 can add $11,750, for a total of $86,750. The 2026 totals are $80,000 and $83,250. A rule that forces high earners to make catch-ups as Roth looks at FICA wages from the prior year, with a $150,000 threshold for 2026 catch-ups. Sole proprietors have no FICA wages, so it does not reach them. You can also choose Roth treatment for your deferrals if the plan allows it.
Vanguard no longer runs these plans. It transferred its Individual 401(k) business to Ascensus, and new plans that hold Vanguard funds are opened with Ascensus, which charges its own fees. Compare those fees with other providers before you open a Solo 401(k) anywhere.
The old December 31 setup deadline is gone for most one-person businesses. A sole proprietor or single-member LLC can set up a new plan after year-end, up to the tax filing deadline without extensions, and still make employee deferrals for that first year. Employer contributions can wait until the extended deadline.
Under 2027 rules, a plan that allows loans lets you borrow up to $50,000 or half of your balance, whichever is less, and repay it within five years. Paperwork grows with the balance. Once plan assets pass a quarter of a million dollars, you must file Form 5500-EZ every year, which a SEP never requires.
| Solo 401(k) calculation (tax year 2027) | Amount |
|---|---|
| Employee deferral (age 62, self-employed) | $37,250 ($25,500 plus the $11,750 catch-up) |
| Employer contribution on $100,000 of net earnings | $18,587 (about 20% after adjustments) |
| Total contribution potential | $55,837 |
529 College Savings Plans: Tax-Free Education Funding
A Vanguard 529 plan grows tax-free when the money pays for qualified education costs, such as college tuition, room and board, and apprenticeship programs. Since 2026, Public Law 119-21 allows up to $20,000 a year per beneficiary for K-12 costs, which now include tuition, books, tutoring, testing fees and educational therapy. Postsecondary credential programs also qualify. Some states have not adopted these changes.
There is no federal deduction, but more than 30 states offer a deduction or credit. Pennsylvania's deduction matches the federal annual gift exclusion per beneficiary, which is $19,000 for 2026 and rises for 2027. It doubles for joint filers. New Mexico, South Carolina and West Virginia let you deduct the full contribution. Colorado caps its deduction at $26,200 per beneficiary for single filers for 2026. California, Hawaii, Kentucky and North Carolina offer nothing.
The account owner keeps control and can switch the beneficiary to another family member. Under the 2027 federal aid formula, a parent-owned 529 reduces aid by at most 5.64% of the balance. A grandparent-owned 529 is not reported on the Free Application for Federal Student Aid (FAFSA).
A withdrawal for anything else brings income tax and a federal penalty, but only on the earnings. The penalty is waived if the beneficiary gets a scholarship, dies or becomes disabled.
Leftover money can move to a Roth IRA for the beneficiary. Under 2027 rules, the 529 must have been open for 15 years, and contributions from the last five years do not qualify. Each rollover counts against the beneficiary's annual IRA limit, the beneficiary needs earned income, and the lifetime cap is $35,000.
| 529 plan state | Single filer deduction (tax year 2026 unless noted) |
|---|---|
| Pennsylvania | $19,000 (2026); $20,000 (2027), per beneficiary |
| Illinois | $10,000 |
| New York | $5,000 |
| Colorado | $26,200 per beneficiary |
| California | $0 (no deduction) |
UGMA/UTMA Custodial Accounts: Unrestricted Gifts to Minors
Uniform Gifts to Minors Act and Uniform Transfers to Minors Act accounts let an adult give money that the child legally owns. A custodian manages the account until the child reaches the age set by state law, usually 18 or 21. Then the child takes full control.
There is no contribution limit, but gift tax rules apply. For 2027, each giver can give $20,000 per child with no gift tax return, or $40,000 for a married couple. The 2026 exclusion was $19,000. Larger gifts are reported on Form 709. Few people owe gift tax, because the lifetime exemption is $15,480,000 for 2027 and $15,000,000 for 2026.
The money can be used for anything that benefits the child. Once the child takes over, it can pay for college, a car or a business. That freedom is a drawback if you want the money to fund school.
The kiddie tax applies to children under 19 and full-time students under 24. For 2027, the first $1,400 of unearned income is tax-free. The next $1,400 is taxed at the child's rate. Anything above $2,800 is taxed at the parents' rate.
Aid formulas treat these accounts as the student's asset and count a far larger share of the balance than they count for a parent's asset. Under the 2027 aid formula, a $40,000 custodial balance cuts aid by $8,000 a year. The same $40,000 in a parent-owned 529 cuts it by only $2,256.
The gift is also permanent. Once money goes in, you cannot take it back, even if your situation changes. The custodian must use it for the child's benefit.
| Account type | Financial aid impact (2027 federal formula) |
|---|---|
| Parent-owned 529 ($50,000 balance) | Reduces aid by up to $2,820 per year (5.64%) |
| UGMA/UTMA ($50,000 balance) | Reduces aid by $10,000 per year (20%) |
| Grandparent-owned 529 | Not reported on the FAFSA |
Trump Accounts: A New Option for Children
A Trump account is a new type of IRA for children under Internal Revenue Code Section 530A. A child qualifies with a valid Social Security number, as long as the child will not turn 18 by the end of the year the account is set up.
Contributions have been allowed since July 4, 2026. Family, friends and employers can put in up to $5,000 a year combined for 2026 and 2027, and an employer may supply up to $2,500 of that. U.S. citizen children born from 2025 through 2028 can also get a one-time $1,000 federal deposit, requested on Form 4547.
The IRS Trump Accounts page says Treasury began opening accounts automatically for eligible children on October 1, 2026. A parent or guardian claims the account in the Trump Accounts app. Until the year the child turns 18, the money must stay in low-cost index funds that track U.S. stocks.
A 529 gives tax-free withdrawals for education and keeps the adult in control. A UGMA/UTMA allows any investment and any use for the child, but it is taxed each year. A Trump account grows tax-deferred, but the money is locked until 18. Our guide to the best account for a child weighs all three. Confirm on Vanguard's site that it accepts Trump accounts before you plan around one.
Three Common Scenarios: Matching Accounts to Your Situation
Scenario 1: Recent College Graduate Age 25, Earning $60,000
Emily earns $60,000, and her 401(k) matches half of the first 6% of her salary. After the 2027 standard deduction of $16,600, her taxable income is $43,400, which is the 12% federal bracket.
She should contribute enough to get the full match, then fill a Roth IRA for 2027. Paying tax at her low rate now is likely cheaper than her rate in retirement. With money left, she can raise her 401(k) deferral toward the 2027 limit, then use a brokerage account for a house down payment. She earns too much for the federal saver's benefit, which has a 2027 income cap of $41,500 for single filers.
Scenario 2: Self-Employed Consultant Age 45, Earning $180,000
Marcus is a sole proprietor with no employees and $180,000 of net self-employment income.
A Solo 401(k) beats a SEP-IRA for him. For 2027, his self-employment tax is about $25,433, and half of it is $12,717. That leaves about $167,283 of net earnings, so the employer contribution is about $33,457. Adding the full employee deferral brings him to about $58,957. A SEP-IRA would stop at the employer amount.
He would open the plan with Ascensus or another provider, not Vanguard, and our guide to Solo 401(k) providers compares the choices. He can make the deferral as Roth if the plan allows it. His 2027 income is too high for a direct Roth IRA contribution, so he can use the backdoor Roth. Any SEP-IRA balance would make part of that conversion taxable.
Scenario 3: Parents Age 35, Two Children, Household Income $140,000
Sarah and James have two children, ages 3 and 6, and each gets the full match in a workplace 401(k).
For 2027, their taxable income is $106,800 after the $33,200 standard deduction for joint filers. That is the 22% bracket, and they are well under the Roth limit. Each should fund a Roth IRA, for a combined $15,000.
For college, they should check their home state's 529 plan first for a state deduction. If there is none, a low-fee plan such as The Vanguard 529 Plan sponsored by Nevada works. Custodial accounts would cost them more financial aid. They could also open a Trump account for each child, though children born before 2025 do not get the government seed deposit.
Mistakes to Avoid When Opening Vanguard Accounts
Contributing to a Traditional IRA Without Checking Deductibility
A single person with a workplace plan who earns $95,000 and contributes $7,500 may expect a $1,650 tax saving. For 2027, that income is above the top of the phase-out, so the deduction is zero. A Roth would have been the better home for the money.
Exceeding Roth IRA Income Limits Without Using the Backdoor Strategy
A single filer earning $175,000 in 2027 cannot contribute directly to a Roth IRA. The excess draws a 6% penalty for each year it stays. To avoid it, withdraw the excess and its earnings, or recharacterize it to a Traditional IRA, by your filing deadline including extensions. That is usually October 15.
Opening a SEP IRA When a Solo 401(k) Would Save More
On $120,000 of self-employment income, the 2027 SEP maximum is about $22,304. A Solo 401(k) adds the full employee deferral on top, for about $47,804. That is more than double.
Choosing UGMA/UTMA Over 529 Plans for College Savings
Under the 2027 aid formula, a $60,000 UGMA/UTMA balance cuts aid by $12,000 a year, against $3,384 in a parent-owned 529. That $8,616 gap adds up to $34,464 over four years.
Missing Required Minimum Distributions
Skip a required $12,000 withdrawal in 2027 and the penalty is $3,000. Correct it within two years and it falls to $1,200. You still must take the money out and pay income tax on it.
Not Considering State Tax Benefits for 529 Plans
New York joint filers get a state deduction only for the New York plan. At a 2026 New York rate of about 5.4%, a couple who puts the full deductible amount in another state's plan gives up roughly $540 a year.
Contributing Too Much Across Multiple IRAs
The 2027 IRA limit covers all of your IRAs combined. Fill a Traditional IRA and a Roth IRA to the limit in the same year and you are over by one full limit. The penalty on that excess is $450 for every year it stays, and you report it on Form 5329.
Vanguard Account Features and Investment Minimums
Vanguard sets no minimum to open most accounts, but its mutual funds have minimums, and that page lists each one. As of 2026, Target Retirement Funds have the lowest minimum to start. Most index funds, such as VTSAX (Total Stock Market Index), need three times that amount for Admiral Shares. Most actively managed funds need that same higher amount for Investor Shares, or $50,000 for Admiral Shares.
Exchange-traded funds (ETFs) skip those minimums, since you can buy a single share. Any broker sells Vanguard ETFs, so you do not need a Vanguard account to own them.
Online trades of stocks, ETFs and Vanguard mutual funds cost $0 in 2026. Vanguard's fee schedule, effective July 10, 2026, lists a $25 annual account service fee, waived if you choose e-delivery. Cash Plus Accounts are exempt. Vanguard may also charge $100 per account to close it or transfer it in full to another firm.
As of 2026, the Securities Investor Protection Corporation covers up to $500,000 per customer, with half of that as the cap for cash, if a brokerage firm fails. That coverage does not include market losses, and it is not bank deposit insurance. Our article on whether Vanguard accounts are FDIC insured explains which cash products carry it. If the menus still confuse you, a phone call to Vanguard settles most questions quickly.
Do's and Don'ts for Vanguard Account Selection
- Do take the employer match first. It is an instant return no fund can promise.
- Do favor a Roth IRA when you are young or in a low bracket. A Traditional IRA tends to win when your rate today is higher than the rate you expect in retirement.
- Do figure self-employed limits on net earnings after half of the self-employment tax. The real rate is lower than the headline percentage.
- Don't open several IRAs to contribute more. The 2027 cap applies across all of them. Fix an excess by withdrawing it and reporting it on Form 5329.
- Do check your state's 529 deduction before you choose a plan.
- Don't use a UGMA/UTMA for college savings if your child may qualify for aid.
- Do set up a Solo 401(k) before the tax filing deadline without extensions, or earlier if you want deferrals before year-end. Vanguard now sends new plans to Ascensus.
- Don't withdraw IRA money before age 59½ unless you must. The penalty and income tax together take a large share.
- Do convert a backdoor Roth contribution soon after you make it. Earnings that build up before the conversion are taxable.
- Don't skip an RMD. Put the date on your calendar each year.
Pros and Cons of Major Vanguard Account Types
| Traditional IRA (2027 rules) | Why it matters |
|---|---|
| Pro: Immediate tax deduction | Cuts taxable income dollar for dollar at your marginal rate |
| Pro: Tax-deferred growth | Investments compound with no yearly tax on dividends and gains |
| Con: Withdrawals taxed as ordinary income | The whole distribution is taxed at ordinary rates, not capital gains rates |
| Con: RMDs at 73 (75 if born 1960 or later) | Forces withdrawals and tax even if you do not need the money |
| Con: 10% penalty before age 59½ | Applies unless an exception fits, such as a first home, birth or adoption |
| Roth IRA (2027 rules) | Why it matters |
|---|---|
| Pro: Tax-free withdrawals in retirement | The full balance, including decades of growth, comes out tax-free |
| Pro: Contributions available anytime | Gives emergency access to what you put in, with no tax or penalty |
| Pro: No RMDs in your lifetime | Money can keep growing, which helps estate planning |
| Con: No deduction up front | You pay tax on the money before you contribute |
| Con: Income limits | No direct contribution above the 2027 phase-out ranges shown above; the backdoor Roth is the workaround. |
| Con: Five-year rule for earnings | Tax-free earnings need both age 59½ and five tax years since your first contribution |
| Brokerage account | Why it matters |
|---|---|
| Pro: No withdrawal penalties or restrictions | Access your money anytime for any reason |
| Pro: No contribution limits | Invest any amount in any year |
| Pro: Long-term capital gains rates | Investments held over one year qualify for lower rates than ordinary income |
| Pro: Tax-loss harvesting | Losses can offset gains and a limited amount of income |
| Con: Yearly tax on dividends and gains | You pay tax each year even if you reinvest, which drags on returns |
| Con: No deduction for contributions | Every dollar invested is after-tax |
| Con: Capital gains tax on profits | Tax on gains when you sell reduces your net proceeds |
| SEP IRA (2027 rules) | Why it matters |
|---|---|
| Pro: Very high contribution limit | The same cap as a Solo 401(k), far above the regular IRA limit. |
| Pro: Easy to set up and keep | Simple paperwork and no annual filing at any balance |
| Pro: Flexible contributions | Change the amount each year or skip a year |
| Pro: Roth option where offered | Federal law allows Roth SEP contributions if the provider supports them |
| Con: No catch-up at age 50 | No extra SEP amount for older workers |
| Con: Same percentage for employees | You must contribute for every eligible employee at your own rate |
| Con: Harder to max out than a Solo 401(k) | Reaching $75,000 takes $300,000 of W-2 pay, or about $375,000 of net self-employment earnings |
| Solo 401(k) (2027 rules) | Why it matters |
|---|---|
| Pro: Highest contribution potential | Employee deferrals plus employer contributions beat a SEP at most incomes |
| Pro: Catch-up contributions | Extra $8,500 at ages 50 to 59 or 64 and older, or $11,750 at ages 60 to 63 |
| Pro: Loans, if the plan allows them | Borrow up to $50,000 with no tax or penalty when repaid on time |
| Con: Form 5500-EZ above $250,000 | Yearly filing once plan assets pass that mark |
| Con: Not opened directly at Vanguard | Plans are set up with Ascensus or another provider, each with its own fees |
| Con: Only for businesses with no employees | A spouse can take part, but any other employee rules the plan out |
What to do next
- Find your 2027 bracket. Subtract the standard deduction from your income and compare the result with the IRS bracket table.
- Read your 401(k) summary and set your deferral high enough to get the full match.
- Open a Roth or Traditional IRA at Vanguard and select e-delivery so the annual service fee is waived.
- Mark each IRA deposit made before April 15, 2027 as a 2026 or a 2027 contribution.
- If you are self-employed, price a Solo 401(k) at Ascensus and at one other provider before your tax filing deadline.
Frequently Asked Questions
Can I contribute to both a Traditional IRA and Roth IRA in the same year?
Yes. Your combined 2027 contributions cannot pass $7,500, or $8,600 at age 50 or older. You could put $4,000 in a Traditional IRA and $3,500 in a Roth. The same combined cap covers 2026 contributions made by April 15, 2027.
Do I need earned income to contribute to a Roth IRA?
Yes. You need wages or self-employment income. Investment income, Social Security and pensions do not count. One exception helps couples. A spouse with no income can contribute based on the working spouse's pay if they file a joint return. This is called a spousal IRA.
Can I open multiple Vanguard brokerage accounts?
Yes. You can open as many individual brokerage accounts as you want. Many investors keep separate accounts for separate goals, such as a house fund. Each account may carry the annual service fee unless you choose e-delivery.
What happens if I contribute to a Roth IRA but my income exceeds limits?
The amount becomes an excess contribution. A 6% excise tax applies for every year it stays in the account, and you report it on Form 5329. To avoid the tax, withdraw the excess plus its earnings, or recharacterize it to a Traditional IRA, by your filing deadline including extensions.
Can I use 529 funds for student loan repayment?
Yes. You can withdraw up to $10,000 per beneficiary for student loan payments with no federal tax or penalty. That is a lifetime cap, not a yearly one. Some states tax this kind of withdrawal, so check your state's rules first.
Does a Solo 401(k) allow Roth contributions?
Yes, if the plan document allows it. Vanguard no longer administers Individual 401(k) plans. The Ascensus plan that features Vanguard funds allows Roth deferrals, and so do most other providers. Federal law also lets employer contributions be designated as Roth when the plan permits.
Are UGMA/UTMA contributions tax deductible?
No. You give after-tax dollars, and gifts up to the annual exclusion need no gift tax return. The account's income is taxed each year. Under the 2027 kiddie tax, a child's unearned income above $2,800 is taxed at the parents' rate.
Can I withdraw Roth IRA contributions before age 59½?
Yes. Your direct contributions come out at any time with no tax or penalty. The IRS treats withdrawals in a set order: contributions first, then converted amounts, then earnings. Only earnings face tax and a penalty when taken early.
What is the pro-rata rule for backdoor Roth conversions?
The IRS adds up the year-end balances of all your Traditional, SEP and SIMPLE IRAs. With $7,500 of after-tax money and $92,500 of pre-tax money, about 92.5% of any conversion is taxable. You report it on Form 8606. Rolling pre-tax IRAs into a workplace plan first avoids the problem.
Do SEP IRA contributions count toward the $7,500 IRA limit?
No. Employer contributions to a SEP-IRA have their own 2027 cap and do not reduce your personal IRA limit. You can fund both in the same year if you have enough earned income.
Related reading
- Should High Earners Really Use Roth 401(k)? – Avoid This Mistake + FAQs
- Should You Use a Roth 401(k) or Traditional? – Avoid This Mistake + FAQs
- Should You Really Have a Taxable Investment Account? – Avoid This Mistake + FAQs
- Which Retirement Funds Should I Use First? (w/Examples) + FAQs
- What Are Tax Efficient Savings? (w/Examples) + FAQs
- Are 401(k) Plans Tax-Deferred? – Avoid This Mistake + FAQs