Credit card interest and fees are tax-deductible in some cases. That means every dollar you pay in credit card interest might reduce a dollar of your taxable income.
If that sounds too good to be true, there is a catch — credit card interest and fees are typically only considered tax-deductible if they are legitimate business expenses. If you don’t run a business or the interest and fees were not incurred in the operation of a business, you generally won’t be able to deduct them on your tax return.
• Credit card interest and fees are tax-deductible if they are legitimate business expenses.
• Personal credit card interest and fees are never tax-deductible.
• Separating business and personal expenses is crucial for accurate tax deductions.
• Avoiding credit card interest can save more money than the tax deduction benefit.
• Consult a tax advisor for specific questions about credit card interest and fees.
How Credit Card Interest Works
When you make a purchase with a credit card, you don’t have to pay for it right away. Instead, you are borrowing the money for the duration of your statement (usually one month). At the end of your statement balance, you must make at least a minimum payment. But if you don’t pay the full statement amount, you will be charged credit card interest on any outstanding balance.
Charging this interest is one way that issuers fund credit card perks and benefits like credit card rewards.
Business credit card interest may be tax-deductible in certain situations. Generally speaking, in order to deduct any expenses, they must be incurred in the regular operation of the business. The IRS does not have requirements about what type of credit card is used, as long as the interest is incurred on business expenses.
You may be able to deduct credit card interest on a personal credit card used for business purchases. However, most credit card agreements prohibit the use of personal credit cards for business purposes on a regular basis.
Not surprisingly, you cannot typically deduct credit card interest on personal expenses charged to a business credit card. And if you pay for personal and business expenses with the same credit card, you may not be able to deduct the full amount of interest. Consult with your accountant or tax advisor if you have questions about what can and cannot be deducted.
Personal Credit Card Interest
Personal credit card interest is not tax-deductible under any circumstances. You cannot deduct interest that you pay for personal expenses on a credit card. That’s one more reason to always pay your credit card statement in full, each and every month. That way you aren’t charged any credit card interest.
Just like credit card interest, the deductibility of credit card fees largely depends on whether they are for business expenses.
Business Credit Card Fees
Credit card fees that are incurred as business expenses are generally considered deductible. This includes credit card annual fees, overdraft fees, foreign transaction fees, late fees, and balance transfer fees. As long as the credit card is used for business purposes, any fees charged by the credit card issuer will be tax-deductible.
💡 Quick Tip: When using your credit card, make sure you’re spending within your means. Ideally, you won’t charge more to your card in any given month than you can afford to pay off that month.
Personal Credit Card Fees
In contrast, personal credit card fees are not generally considered deductible. Any fees that you are charged by your credit card issuer that are not business expenses cannot be deducted from your taxable income.
While it’s important to understand that you may be able to deduct credit card interest and fees if they are business expenses, avoiding credit card interest may be the more prudent thing to do. If you are in a 30% tax bracket, that means deducting one dollar of interest will save you 30 cents. But if you pay your balance in full, you won’t be charged any interest and save the full dollar.
The Takeaway
Some credit card fees and interest is deductible on your annual tax return. Generally speaking, you cannot deduct personal credit card interest or fees. You may be able to deduct interest and fees if they are legitimate business expenses. Keeping your business and personal expenses separate can help you determine which fees and interest you may be able to deduct.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Can you deduct credit card interest as business expense?
As credit card interest rates rise, the amount of interest that you’re charged each month on any unpaid balances also rises. So you may be wondering if you can deduct credit card interest from your taxable income. The good news is that as long as the interest is a legitimate business expense, you can generally deduct the interest.
Are credit card fees tax-deductible?
It’s important to understand how different credit card-related items affect your taxes. Credit card rewards are generally not considered taxable, while some credit card fees may be tax-deductible. You may be able to deduct most credit card fees as long as they are considered legitimate business expenses. Personal credit card fees are not generally considered deductible.
Can you write off personal credit card annual fees?
No, in nearly all cases, you cannot take a tax deduction for personal credit card fees. Only credit card fees that are legitimate business expenses are tax-deductible. However, it’s important to understand that the IRS does not make any distinction between what might be marketed as a “personal” card or a “business” credit card.
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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.
Determining how long your retirement savings will last can be a complicated, highly personal calculation. It’s based on how much you’ve saved, how you’ve chosen to invest your money, your Social Security benefit, whether you have other income streams — and more.
And even when you have all the information at your fingertips, it can be hard to make an accurate calculation, because life is fraught with unexpected events that can impact how much money we need and how long we’re going to live.
Taking those caveats into account, though, it’s still important to make an educated estimate of how much money you’re likely to accumulate by the time you retire, as well as how much you’re likely to spend.
Key Points
How long retirement savings might last depends on savings, investments, Social Security, and other income sources.
The 4 Percent Rule to calculate how much may be needed for retirement suggests a 4% or 4.5% initial withdrawal rate, adjusted for inflation annually.
The Multiply by 25 Rule estimates retirement savings by multiplying desired annual income in retirement by 25.
The Replacement Ratio helps estimate post-retirement income needs based on pre-retirement income.
Strategies to extend retirement savings include reducing fixed expenses, maximizing Social Security benefits, maintaining health, and continuing to work full-time or part-time for a few additional years to earn extra income.
What Factors Affect My Retirement Savings?
Here are some of the many variables that can come into play when deciding how long your retirement savings might last.
Retirement Plan Type
Whether it’s a defined-benefit plan like a pension, or a defined contribution plan like an employer-sponsored 401(k), 403(b), or 457, the kind of account you contribute to will likely have an impact on how much and what method you use to save for retirement.
Pension Plan
With a pension plan, retirement income is usually based on an employee’s tenure with the company, how much was earned, and their age at the time of retirement. Pensions can be a reliable retirement savings option when available because they reward employees with a steady income, typically once per month.
One potential downside, however, is that pension plans can be terminated if a company is acquired, goes out of business, or decides to update or suspend its employee benefits offerings. Indeed, pension plans are far less common compared with defined-contribution plans like 401(k)s and 403(b)s and the like.[1]
401(k) Plan
With a 401(k) plan, participants can contribute either a percentage of or a predetermined amount from each paycheck. The money is deposited pre-tax, and the account holder generally owes taxes when they withdraw the money in retirement.
In some cases, the funds employees contribute are matched by their employer up to a certain amount (e.g. the employer might contribute 50 cents for every dollar up to 6%).
Unlike a pension plan, the amount of retirement funds the participant saves in a 401(k) is based on how much they personally contributed, whether they received an employer match, the rate of return on their investments, and how long they’ve had the plan.
IRA or Roth IRA
An Individual Retirement Account, or IRA, is a retirement savings account that’s not sponsored by an employer. Individuals with earned income can open an IRA. There are different types of IRAs, including traditional and Roth IRAs, which each have their own tax treatments.
For both traditional and Roth IRAs, you can contribute a certain amount a year; the amount frequently changes annually. For 2025, individuals can contribute up to $7,000, or $8,000 if they’re age 50 or older.
There are no income limits for a traditional IRA, so account holders can contribute up to the limit. Contributions are made with pre-tax dollars, and a certain amount can be deducted from your income taxes, depending on your income, tax-filing status, and whether you (or your spouse, if applicable) are covered by a workplace retirement plan. You pay taxes on your withdrawals from a traditional IRA in retirement.
On the other hand, a Roth IRA has limits on contributions based on filing status and income level. Contributions are made with after-tax dollars and withdrawals from the account are tax-free in retirement.
Other types of retirement plans like Employee Stock Ownership Plans (ESOP) and Profit Sharing Plans are less common and have their own unique benefits, drawbacks, and details. For example, with an ESOP you get shares of company stock purchased for you, with no investment on your behalf, and these plans are designed so that you receive fair market share for the stock when you leave the company. However, because an ESOP only holds shares of company stocks, there is no diversification. You’ll also owe income tax on the distributions.
Social Security
Social Security is a federally run program used to pay people ages 62 and older a continuing income. Social Security benefits are structured so that the longer you wait to claim your benefit check, the higher the amount will be. If you wait until your full retirement age — 67 for anyone born in 1960 or later, and between ages 66 and 67 for those born from 1943 to 1959 — to start collecting benefits, you’ll receive the full benefit amount. However, if you start collecting benefits at age 62, for instance, you’ll only receive about 70% of your full benefit.[2]
Expected Rate of Return on Investments
If a person puts money into a defined-contribution plan or makes investments in stocks, bonds, real estate, or other assets, there are a number of return outcomes that could affect their retirement savings.
An investment’s performance is about more than just appreciation over time. Learning how to calculate the expected rate of return on the investment can help you get a clearer picture of what the payoff will look like when it’s time to retire.
Unexpected Expenses
One never really knows what retired life might bring. Lots of unexpected expenses could arise.
An extensive home repair or renovation or maybe even a costly relocation to another state or country might make an unforeseen dent in retirement funds.
A major medical incident or the factoring in of long-term care can be another unexpected expense, as are caregiver costs if you or a family member need help.
Some seniors are surprised to learn that health care can get costly in retirement and Medicare may not always be free. Many of the services they might need could require out-of-pocket payments that eat into savings.
As much as individuals might not want to imagine such scenarios, there could be the chance of a divorce during retirement, which could cause a redraft of the savings plan.
Creating a budget to estimate expenses is a great way to get ahead of any surprising financial setbacks that could sneak up down the line.
Inflation
Inflation can take a hefty toll on retirement savings. Even average rates of inflation might have a significant impact on how much retirement funds will actually be worth when they’re withdrawn. For example, $1,500 in January 2021 had the same buying power as $1,810.12 in October 2024.[3]
Understanding how inflation can affect your retirement savings might ensure you have enough funds padded out to support you for the long haul.
Market Volatility and Investment Losses
Regardless of financial situation or age, checking in on retirement accounts and the climate on Wall Street could help clarify how market swings might affect your retirement savings.
Retirees with defined contribution plans might suffer financial losses if they withdraw invested funds during a volatile market. Not panicking and having enough emergency funds to cover 3 to 6 months of living expenses can help you weather the storm.
Talking to an investment advisor about rebalancing an investment account portfolio to reduce risk is another option for getting ahead of this unexpected savings speedbump.
Ways to Calculate How Much You Might Need to Retire
Are you on track for retirement? That’s something that can be calculated in many ways, which vary in efficacy depending on who you ask.
Here are a few formulas and calculations you can use to consider how much to save for retirement:
The 4 Percent Rule
The 4 Percent Rule, first used by financial planner William Bengen in 1994, assesses how different withdrawal rates can affect a person’s portfolio to ensure they won’t outlive the funds. According to the rule, “assuming a minimum requirement of 30 years of portfolio longevity, a first-year withdrawal of 4 percent, followed by inflation-adjusted withdrawals in subsequent years, should be safe [for retirement].” Bengen has since adjusted the rule to 4.5% for the first year’s withdrawal.
The jury is out on whether 4% is a safe withdrawal rate in retirement, but some financial professionals have noted that the rule is rigid and some flexibility may be called for, though it is ultimately up to each investor and their specific situation.[4]
The Multiply by 25 Rule
This one can get a little controversial, but the Multiply by 25 rule, which expanded upon Bengen’s 4% Rule with the 1998 Trinity Study, involves taking a “hoped for” annual retirement income and multiplying it by 25 to determine how much money would be needed to retire.
For example, if you’d like to bring in $75,000 annually without working, multiply that number by 25, and you’ll find you need $1,875,000 to retire. That figure might seem scary, but it doesn’t factor in alternate sources of income like Social Security, investments, etc.
However, it’s based on a 30-year retirement period. For those hoping to retire before the age of 65, this could mean insufficient funds in the later years of life.
The Replacement Ratio
The Replacement Ratio helps estimate what percentage of someone’s pre-retirement income they’ll need to keep up with their current lifestyle during retirement.
The typical target in many studies shows 70-85% as the suggested range, but variables like income level, marital status, homeownership, health, and other demographic differences all affect a person’s desired replacement ratio, as do the types of retirement accounts they hold.
Also, the Replacement Ratio is based on how much a person was making pre-retirement, so while an 85% ratio might make sense for a household bringing in $100,000 to $150,000 per year, a household with higher earnings — say $250,000 — might not actually need $212,000 each year during retirement. A way to supplement this calculation could be to estimate how much of your current spending will stay the same during retirement.
Social Security Benefits Calculator
By entering the date of birth and highest annual work income, the Consumer Financial Protection Bureau’s Social Security Calculator can determine how much money you might receive in estimated Social Security benefits during retirement.
Other Factors To Calculate
Expected Rate of Returns
Determining the rate of return on investments in retirement can help clarify how long your savings could last. An investment’s expected rate of returns can be calculated by taking the potential return outcomes, multiplying them by the likelihood that they’ll occur, and totaling the results.
Here’s an example: If an investment has a 50% chance of gaining 30% and a 50% chance of losing 20%, the expected rate of returns would be 50% ⨉ 30% + 50% ⨉ 20%, which is an estimated 25% return on the investment.
Home Improvement Costs
If a renovation is looking like it will be necessary down the line, you might calculate how much that home repair project could cost and factor it into your retirement planning.
Inflation
You might also consider using an inflation calculator to uncover what your buying power might really be worth when you retire. To do the calculation, you could assume an annual inflation rate of around 2% to 3%, which is what most central banks consider to be modest and balanced.
Making Retirement Savings Last Longer
If you’re still wondering how long your savings will last or seeking potential ways to make it last longer, a few of these strategies could help:
Lower Fixed Expenses
Unexpected expenses are likely to creep up regardless of how much you save, but by lowering fixed expenses like mortgage and rent payments (by downsizing to a less expensive house or rental) as well as food, insurance, and transportation costs, you might be able to slow the spending of your savings over time. Setting a budget is a solid way to see this in black and white.
Maximize Social Security
While opting into Social Security benefits immediately upon eligibility at 62 might sound appealing, it could significantly reduce the benefit over time, as noted above. With smaller cost of living adjustments later in life, a lengthy retirement (people are living longer than ever before) could mean less money when you need it the most.
Stay Healthy
Unexpected medical expenses might still occur, but by safeguarding health and well-being earlier in life, you may be able to avoid costly chronic conditions like high blood pressure, diabetes, or heart disease.
Keep Earning
Whether it’s staying in the full-time workforce for a couple more years or starting a ride-share side hustle during retirement, continuing to bring in money can help you stretch your savings out a little longer.
The Takeaway
Everyone wants a secure retirement. An important step in your retirement plan is calculating how long your savings will likely last. While there is no way to know for sure, this is such an important step in long-term planning that many different methods and strategies have evolved to help people feel more in control.
There are investment strategies, tax strategies, and income strategies that can help you create a forecast of how you’re doing now, and how your retirement savings may play out in the future. Because there are so many risks and variables — from the markets to an individual’s own health — just having a basic calculation will prove useful.
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Buying insurance coverage helps keep you protected from the full financial fallout of an accident or injury. But even with insurance, you’ll probably still be responsible for some costs when you file a claim.
An insurance deductible is the amount of money the insured party is responsible for at the time of loss or damage: it’s the cost you have to pay before the insurance company pays out its share.
Here’s what you need to know about the different types of insurance deductibles and other insurance-related costs you may face.
Key Points
• Lower deductibles typically result in higher premiums; higher deductibles result in lower premiums.
• Higher deductibles can save on monthly costs but may increase personal financial risk.
• Zero-deductible policies are available but are typically more expensive.
• Copays are fixed payments at service, while deductibles are initial out-of-pocket costs.
• Out-of-pocket maximums cap annual healthcare expenses, offering financial protection.
What Is a Deductible?
When you buy insurance, you’ll encounter several different costs depending on the type of coverage you’re purchasing. These may include monthly premiums, copays, out-of-pocket maximums, and possibly others.
The vast majority of insurance policies, whether they’re auto, health, or homeowners, carry a deductible. So what is a deductible, and how does it work?
The deductible is a sum of money you, as the insured party, are expected to pay toward a loss. Another way to think about it: It’s the amount the insurance company deducts from the total claim and asks you to pay.
For instance, say you get into a car accident in which you sustain $8,000 worth of damage and you have a $1,000 deductible. When you file your claim, you’ll pay $1,000 toward repairs, and the insurance company will cover the remaining $7,000 (or up to whatever limits are laid out in your insurance contract).
Your deductible can be a fixed dollar amount or a percentage, depending on your individual plan and the kind of insurance policy you’re talking about. Homeowners insurance, for instance, is commonly offered with deductibles calculated as a percentage of the property’s total insured value.
It’s important to understand that your deductible is separate from your premium, which is the amount of money you pay each month in order to keep your insurance policy active.
Also remember that you may also be responsible for other insurance-related expenses, like copays or coinsurance, so always read the fine print carefully.
Copay vs Deductible
With certain types of insurance — primarily health insurance products — you may be required to pay a copay each time you go to the doctor’s office or receive a covered service. This copay is separate from your deductible, and, generally, your copay doesn’t count toward your deductible amount.
As with other types of insurance, the health insurance deductible must be paid by the insured person before the insurance company begins its coverage. However, individual health plans may cover certain services, such as regular check-ups, even before the deductible is paid in full.
Here’s an example: Say you twist your ankle and visit your doctor, who orders an MRI. If your copay is $25, you’ll pay $25 at the office before or after you see your physician. If the total cost of the doctor’s care and imaging services is $1,000 and you have a $500 deductible, you may still be responsible for the full $500. Any copays you’ve paid along the way won’t be subtracted from your deductible.
Some plans may carry a coinsurance cost rather than a copay. The two are similar, but not identical. Coinsurance is an amount you pay when you receive a medical service, separate from your deductible. Unlike copays, which are charged at a fixed dollar amount, coinsurance is calculated as a percentage of the total cost of the service. Your plan might even include both copays and coinsurance.
All insurance policies are different, and your individual costs and experience may vary depending on the services you’ve received and the specific coverage you have. You can consult your insurance paperwork or contact your insurer for full details on what’s covered in your plan.
Out-of-Pocket Maximums
Health insurance policies in particular are subject to federally mandated out-of-pocket maximums. This is the highest total dollar amount you’ll have to pay toward covered healthcare over the course of a single year, including both deductibles and copays.
The out-of-pocket maximum does not include the amount you pay toward your monthly premium, however. Nor does it include out-of-network services or services that your plan expressly does not cover.
For 2025, the out-of-pocket maximum for a Marketplace plan can’t be more than $9,200 for an individual or $18,400 for a family. In 2026, that limit rises to $10,600 for an individual or $21,200 for a family. (The maximum is allowed to be lower, however, so consult your plan paperwork for full details.)
Do You Want a High or Low Deductible?
When shopping for insurance coverage, you’ll likely have a range of options to consider, including varying deductible costs. And when it comes to figuring out whether you want a high or low deductible, the answer is: It depends.
Generally speaking, the lower your deductible, the higher your premium will be and vice versa. This makes sense when you think about it. If you have a low deductible, the insurer will have to pay out a higher amount when you incur a loss. So in exchange for the promise of covering most of the costs when a claim is filed, the company expects you to pay more up front in the form of a higher premium.
While choosing a higher deductible can help you save money over time since your monthly premiums will be lower, it also means you’re assuming more risk. If something happens and costs are incurred, you’ll be responsible for a larger share of those expenses.
On the other hand, choosing a lower deductible means you’ll likely pay a higher premium each month. But you’ll also have less to worry about if you do need to file a claim, since the insurance company will cover more of the costs (assuming that all the damages and expenses are covered under your policy).
As with so many other financial matters, what’s right for you comes down to a number of factors, including your risk tolerance, budget, and even your lifestyle. If you participate in extreme sports, for instance, and are at risk for catastrophic injuries, you might want to pick a health insurance policy with a lower deductible and higher premiums.
You may see ads for zero-deductible insurance policies and wonder if they’re too good to be true. While zero-deductible insurance policies do exist, they usually carry higher premiums than policies with deductibles, and you may also be responsible for a one-time no-deductible fee or waiver.
Furthermore, some insurance coverages are required by state law to carry a minimum deductible, particularly when it comes to auto insurance.
Before you sign up for any kind of insurance coverage, be sure to read the contract thoroughly to ensure you understand what costs you’re responsible for.
The deductible amount varies by type of insurance, company, and plan, among other factors.
The Takeaway
Purchasing insurance is an important — and sometimes legally mandated — step toward protecting yourself from the high costs of personal accidents, property damages, and medical bills. But most policies involve set costs, including deductibles. This is the portion of the claim the insured party is responsible for paying.
Whether you’re comparison shopping or switching from your current plan, it’s important to understand what your deductible will be. Having a full picture of all the costs involved can help you find coverage that fits your life and finances.
When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.
Find affordable auto, life, homeowners, and renters insurance with SoFi Protect.
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Comments Off on How to Buy Homeowners Insurance in 2025
Buying homeowners insurance involves a few simple steps that ensure you’re purchasing a policy tailored to your needs. By investing a little time, you’ll be rewarded with coverage that protects your home and your belongings at the right price. This holds true whether you’re buying a house and insurance for the first time or shopping around for a better rate.
Insurance can be tricky, and many policies have a flurry of exceptions when it comes to what’s covered and what isn’t. Having an insurance policy with certain kinds of exceptions can wind up costing you hundreds of dollars for coverage that might fall short when it’s needed.
Fortunately, you can avoid that scenario. Here, we’ll walk you through how to buy homeowners insurance as well as offer some tips on how to find the best rate on your policy this year.
Key Points
• Determine appropriate coverage for personal property, dwelling, liability, and additional living expenses.
• Create a detailed inventory of belongings to estimate personal property coverage.
• Verify home details to ensure accurate policy pricing and prevent claim issues.
• Consider additional coverage for excluded events like floods and earthquakes.
• Set deductible and premium payment options, and finalize policy start date.
5 Steps to Shopping for Homeowners Insurance
When shopping for homeowners insurance, it’s a good idea to compare similar policies. You want to be sure you’re reviewing what different insurers charge for policies with almost identical coverage.
You’ll also want to shop around to get the best deal you can. Policies from the same company can vary widely by geography, property type, and even between two different zip codes.
It’s also a smart move to compare some intangibles, such as a company’s reputation for customer service and claims satisfaction. They can have a big impact when it comes time to file a claim.
Now, let’s walk through the steps of how to shop for homeowners insurance.
Step 1: Decide How Much Coverage You Need
When deciding how much homeowners insurance coverage you need, you’ll want to make sure that you have enough coverage to replace your most important belongings; rebuild your house in the event it’s destroyed; and cover any liability for injuries that might occur on your property. Your policy will be there in case a fire, storm, or crime causes a loss.
In industry terms, homeowners insurance coverage for the aforementioned events is typically broken into four categories:
• Personal property coverage: Insures against losses to personal property — including furniture, clothing and electronics — in the event of a covered incident.
• Dwelling coverage: Covers the repair or replacement of your property and any attached structures, like a garage, fence, or any sheds.
• Liability coverage: Protects against any medical or legal expenses that you may be liable for as a result of injuries that occurred on your property.
• Additional living expense coverage (ALE or Loss of use coverage): Pays for temporary housing and related costs in the event you’re displaced from your home due to a covered loss.
Each of the coverages listed above are subject to their own insurance limits. These are calculated based on both the insurers’ proprietary formulas and the amount coverage you choose to purchase. Here’s a closer look at each kind of coverage and how much you might want to buy.
Personal Property Coverage
Just as the name suggests, personal property coverage covers the cost of any personal property that you would need replaced in the event of a covered loss. This can include all the contents of your home, including furniture, electronics, kitchenware, and jewelry.
Generally, you’ll want enough personal property coverage to cover the cost of replacing all of your important belongings. To help you calculate how much this might cost, create a written inventory of all your major belongings and their cost. This allows you to better estimate how much personal property coverage you need and gives your insurer a reference point for how much insurance you might need. You might even consider doing a video inventory to keep track of your property.
Bear in mind that not all items are covered under your home insurance policy. For example, any vehicles damaged while housed in your garage should be covered under your auto insurance. Additionally, rare and high-value items, like art, fine jewelry, and antiques, may be subject to value caps under your policy and may require separate/supplemental insurance policies for full coverage.
Dwelling coverage covers the cost to repair or rebuild the building on your property, in addition to any attached structures, like garages, balconies, or fences. When you think about the dollar amount here, you probably want to be prepared for the worst-case scenario of totally rebuilding your home. Though rare, this kind of catastrophic incident can happen.
Liability Coverage
Liability coverage helps shield you from lawsuits in the event you’re found liable for any accidents that occur on your property. These can range from slips and falls to any damage caused by falling trees from your property.
Generally, the more assets you have, the more liability insurance you’ll want to purchase. However, liability coverage will only pay out to a set dollar limit as listed on your policy, with you responsible for any balance. If you’re looking for added liability coverage, you may want to look into a personal umbrella policy.
Additional Living Expense Coverage
Additional living expense coverage, or loss of use coverage, pays for reasonable housing and living costs if you’re displaced for an extended period due to a covered event. Imagine that a storm sent a tree branch crashing through your roof and your bedrooms became uninhabitable. That’s the kind of situation that would lead you to move out and tap what’s sometimes called ALE coverage.
Typically, your loss of use coverage will encompass a fixed percentage of your dwelling coverage. Larger families may wish to opt for more coverage if your weekly living expenses are particularly burdensome.
Learn the Difference Between ACV, RCV, and GRC Coverage
Once you have some ballpark numbers in mind for the amount of coverage you need, you also need to decide what kind of coverage you want in terms of potential payout. There are three terms to know — ACV, RCV, and GRC — and these will impact how claim amounts are determined as well as your premiums.
• Actual Cash Value (ACV): Typically the cheapest option, ACV calculates your home and property’s value based on its current market value minus depreciation. Depreciation occurs naturally over time. Let’s say you had a 10-year-old refrigerator that had cost $1,000 when you bought it. After 10 years, its “cash value” might be, say, $100, so that is what ACV would reimburse you if it were destroyed during a covered event. This would not enable you to go out and buy a similar unit.
• Replacement Cost Value (RCV): This policy is more expensive. In the event of loss, it insures your home for the cost it takes to rebuild it like new and replace the items in it at their full cost. Unlike actual cash value, RCV does not factor in depreciation.
• Guaranteed Replacement Cost (GRC): The most expensive policy of the bunch, this policy insures your home and property for its replacement cost value plus a certain percentage over that amount, which can help protect against inflation.
Step 2: Verify Details About Your Home
Before an insurer can give you a quote, you’ll need to provide them with details about you and your home so they can accurately price your home insurance policy.
Keep in mind that insurance agents will take steps to verify the accuracy of this information, so be sure to answer to the best of your ability. Here are some of the most commonly requested details:
• Property size and foundation
• Roof type, material, and age
• Age of structure and building materials
• Age and type of electrical, plumbing, and heating system
• Presence of any adjacent structures, pools, fences, etc.
• Presence and number of pets
• Intended use of property (rental, secondary, or primary home)
You can ask your real estate agent to forward you this information or obtain it from publicly available sources. Often, many of these details can be found in your home inspection and appraisal reports. Remember to disclose any improvements or renovations that have been made over time.
Step 3: Consider Whether You Need Added Coverage
A typical homeowners policy goes a long way towards protecting you from damage to or loss of your home and property. But it doesn’t cover everything. Acquaint yourself with these details and decide if you want additional coverage.
According to FEMA, a common myth among many Americans is that homeowners insurance covers flooding. However, in most cases, it does not.
In fact, here’s a list of common events that are often not covered under most home insurance:
• Floods
• Earthquakes
• Sinkholes
• Water and sewer backup
It’s important to review your insurance policy for any exceptions or issues not mentioned that you may want covered. You may be able to purchase additional insurance coverage for the above-mentioned issues as part of a separate policy, or what’s known as an endorsement, on your existing home insurance policy.
Also remember that personal property coverage often has a reimbursement cap on valuable items, which may limit the recoverable amount on certain rare or valuable goods. If you inherited valuable artwork or saved like crazy to afford a luxury watch, you may want to purchase additional endorsements for these.
Step 4: Take Advantage of Any Discounts Your Insurer Offers
Before finalizing your policy, check with the insurer about any discounts they offer and how many you might qualify for.
These can take them form of bundling discounts, which reward you for purchasing other policies (e.g. auto and life) through the same insurer; retention discounts which reward you for staying with a single insurer for an extended period of time; and even safety discounts, which reduce your premiums based on various improvements that you make to your home (e.g. adding a security system).
Each insurer has its own batch of discounts that you may be eligible for. Make sure to check with each potential policy provider to confirm that you’re getting the best deal possible.
Step 5: Finalize Your Policy and Figure Out Your Payments
Now that you’ve selected the coverage you want, at the price you want, it’s time to put the finishing touches on your homeowners insurance policy.
First, you’ll want to set your insurance policy deductible, which is the amount you agree to be personally responsible for before the insurance company pays out on any claims. This is similar to a copay on a health insurance plan and is charged on a per-claim basis.
Generally, higher deductibles lead to lower insurance premiums, because they transfer some of the financial burden of paying for claims from the insurer to you.
While you will end up paying more out of pocket when you need to file a claim, this can be a smart financial decision for newer homes and low-risk areas. Of course, this option will only make sense for you though if you are confident you can cover that deductible in an emergency.
Second, you’ll need to decide how you wish to pay your insurance premiums. Policies are typically written on an annual basis and can be paid on a monthly or quarterly basis, or even in one lump sum. Some insurers offer added discounts if you decide to pay the entire amount upfront.
Finally, you’ll need to set the date on which your policy takes effect. Generally, this should be the same day you take possession of the property if you’re buying a new home. If you’re switching insurance providers, it should coincide with the end date of the previous policy, without any lapse in coverage.
The Takeaway
Buying the right homeowners insurance ensures that your home is protected if disaster ever strikes. That said, shopping for a policy can feel overwhelming at first since there are a lot of new terms to be learned, figures to calculate, and decisions to be made.
As you gather the information and quotes you need to make your choice, you’ll be rewarded with a policy that suits your needs, is priced just right, and can give you peace of mind.
If you’re a new homebuyer, SoFi Protect can help you look into your insurance options. SoFi and Lemonade offer homeowners insurance that requires no brokers and no paperwork. Secure the coverage that works best for you and your home.
Find affordable homeowners insurance options with SoFi Protect.
Photo credit: iStock/JLco – Julia Amaral
Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
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SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.
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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.
Investing money in an individual retirement account (IRA) can be an important part of saving for retirement. Among the types of IRAs you might have are traditional IRAs and Roth IRAs. With a traditional IRA, you can often deduct your contributions in the year you make them and pay tax on your withdrawals. A Roth IRA works in the opposite way — contributions are generally not tax-deductible, and your earnings and withdrawals can be tax-free.
Because of the way taxes on withdrawals from IRAs work, it’s important to be aware of your IRA basis. When you withdraw money from a traditional or Roth IRA, you may only need to pay tax on withdrawals that exceed your basis.
Key Points
IRA basis represents the contributions to an IRA that were not tax-deductible in the year they were made.
Roth IRA basis includes all contributions made to the account because no Roth IRA contributions are tax-deductible.
Traditional IRA basis is the total of all contributions that were not tax-deductible in the year they were made. It does not include deductible contributions.
Accurately tracking IRA basis can prevent having to pay tax or a penalty on qualified withdrawals.
IRA basis is not generally tracked by the IRS. IRA account holders are responsible for accurately tracking the basis.
🛈 SoFi Invest members currently do not have access to a feature within the platform to view IRA basis.
What Is a Roth IRA Basis?
The total amount that you’ve contributed to your Roth IRA over the years is considered your Roth IRA basis. Because Roth IRA contributions are not deductible in the year that you make them, you can withdraw your contributions at any time without tax or penalty.
Is a Roth IRA Basis Different From a Traditional IRA Basis?
Calculating your traditional IRA basis is a bit different than calculating your Roth IRA basis. Understanding these differences in large part comes down to understanding what an IRA is and how various types of IRAs work.
When calculating your Roth IRA basis, you add up all of the contributions you make. This is because no Roth IRA contributions are tax-deductible.
With a traditional IRA, on the other hand, often some contributions are deductible in the year that you make them. So your traditional IRA basis only includes contributions that were not tax-deductible in the year that you made them.
Contributing to a Roth IRA can be a great way to invest and save for retirement, because your earnings and withdrawals are tax-free, as long as you make qualified distributions.
Your Roth IRA basis is easy to calculate, since it’s the net total of any contributions that you make, minus any distributions.
What Are the Rules of a Traditional IRA Basis?
If you open an IRA and opt for a traditional IRA instead of a Roth, it’s important to be familiar with the rules of a traditional IRA basis. Your basis in a traditional IRA is the total of all non-deductible contributions you made, as well as any non-taxable amounts included in rollovers, minus all of your non-taxable distributions.[1]
How Is IRA Basis Calculated?
When you start saving for retirement, you’ll want to make sure that you are accurately calculating your IRA basis. The exact formula for calculating your IRA basis varies slightly based on whether you have a traditional or Roth IRA.
Contributions to a Roth IRA are never tax-deductible. That means that you will use the sum of all of your contributions to calculate your Roth IRA basis.
Traditional IRA Basis Formula
Calculating your Traditional IRA basis works in a slightly different fashion. Because many contributions to traditional IRAs are tax-deductible in the year you make them, you don’t include all of your contributions when calculating your basis. Instead, you will only use the contributions that are NOT tax-deductible when calculating your traditional IRA basis. If all of your traditional IRA contributions are tax-deductible, then your basis will be $0.
Why Is Knowing Your IRA Basis Important?
You want to know what your IRA basis is because it represents the amount of money that you can withdraw from your IRA without tax or penalty. Not knowing your IRA basis is a retirement mistake you can easily avoid.
Generally, any qualified IRA withdrawals up to your tax basis are tax- and penalty-free, while withdrawals above your tax basis may be subject to income tax and/or a 10% penalty if the funds are withdrawn early. While it is usually not a good idea to withdraw money from your retirement accounts until necessary, knowing your basis can help you make an informed decision.
The Takeaway
Understanding your IRA basis is an important part of investing and planning for your retirement. Your IRA basis is the amount that you can typically withdraw from your account without having to pay income tax and/or a penalty.
At its simplest, you can calculate your IRA basis by adding up all of your non-tax-deductible contributions and subtracting any previous distributions. For your Roth IRA basis, you can use all of your contributions, while for traditional IRAs you can only use the value of any contributions that you did not deduct from your taxes.
FAQ
Do I have an IRA basis?
Everyone with an IRA has an IRA basis, although it’s possible that your IRA basis may be $0 if all of your contributions to a traditional IRA were tax-deductible. Your IRA basis is the net total of your non-tax-deductible contributions minus any distributions. For a Roth IRA, you use the value of all your contributions (because none of your contributions are tax-deductible), while with a traditional IRA, it’s only the contributions that were not tax-deductible.
How do I find my IRA basis?
Your IRA basis is the sum of any non-tax-deductible contributions that you make to an IRA minus any distributions that you take from your account. Your IRA basis is not generally reported anywhere. So if you don’t know your basis, you will need to calculate it based on your historical contributions and distribution amounts.
Who keeps track of your IRA basis?
The IRS does not generally keep track of your IRA basis — you are responsible for making sure your IRA basis is accurately calculated. If you use an accountant, they may calculate and track your IRA basis. You’ll want to make sure that you are accurately tracking your basis so that you can correctly pay any taxes you owe on IRA distributions.
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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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