Guide to 457 Retirement Plans

Guide to 457 Retirement Plans

A 457 plan — technically a 457(b) plan — is similar to a 401(k) retirement account. It’s an employer-provided retirement savings plan that you fund with pre-tax contributions, and the money you save grows tax-deferred until it’s withdrawn in retirement.

But a 457 plan differs from a 401(k) in some significant ways. While any employer may offer a 401(k), 457 plans are designed specifically for state and local government employees, as well as employees of certain tax-exempt organizations. That said, a 457 has fewer limitations on withdrawals.

This guide will help you decide whether a 457 plan is right for you.

What Is a 457 Retirement Plan?

A 457 plan is a type of deferred compensation plan that’s used by certain employees when saving for retirement. The key thing to remember is that a 457 plan isn’t considered a “qualified retirement plan” based on the federal law known as ERISA (from the Employee Retirement Income Security Act of 1974).

These plans can be established by state and local governments or by certain tax-exempt organizations. The types of employees that can participate in 457 savings plans include:

•   Firefighters

•   Police officers

•   Public safety officers

•   City administration employees

•   Public works employees

Note that a 457 plan is not used by federal employees; instead, the federal government offers a Thrift Savings Plan (TSP) to those workers. Nor is it exactly the same thing as a 401(k) plan or a 403(b), though there are some similarities between these types of plans.


💡 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.

How a 457 Plan Works

A 457 plan works by allowing employees to defer part of their compensation into the plan through elective salary deferrals. These deferrals are made on a pre-tax basis, though some plans can also allow employees to choose a Roth option (similar to a Roth 401(k)).

The money that’s deferred is invested and grows tax-deferred until the employee is ready to withdraw it. The types of investments offered inside a 457 plan can vary by the plan but typically include a mix of mutual funds. Some 457 retirement accounts may also offer annuities as an investment option.

Unlike 401(k) plans, which require employees to wait until age 59 ½ before making qualified withdrawals, 457 plans allow withdrawals at whatever age the employee retires. The IRS doesn’t impose a 10% early withdrawal penalty on withdrawals made before age 59 ½ if you retire (or take a hardship distribution). Regular income tax still applies to the money you withdraw, except in the case of Roth 457 plans, which allow for tax-free qualified distributions.

So, for example, say you’re a municipal government employee. You’re offered a 457 plan as part of your employee benefits package. You opt to defer 15% of your compensation into the plan each year, starting at age 25. Once you turn 50, you make your regular contributions along with catch-up contributions. You decide to retire at age 55, at which point you’ll be able to withdraw your savings or roll it over to an IRA.

Who Is Eligible for a 457 Retirement Plan?

In order to take advantage of 457 plan benefits you need to work for an eligible employer. Again, this includes state and local governments as well as certain tax-exempt organizations.

There are no age or income restrictions on when you can contribute to a 457 plan, unless you’re still working at age 73. A 457 retirement account follows required minimum distribution rules, meaning you’re required to begin taking money out of the plan once you turn 73. At this point, you can no longer make new contributions.

A big plus with 457 plans: Your employer could offer a 401(k) plan and a 457 plan as retirement savings options. You don’t have to choose one over the other either. If you’re able to make contributions to both plans simultaneously, you could do so up to the maximum annual contribution limits.

Pros & Cons of 457 Plans

A 457 plan can be a valuable resource when planning for retirement expenses. Contributions grow tax-deferred and as mentioned, you could use both a 457 plan and a 401(k) to save for retirement. If you’re unsure whether a 457 savings plan is right for you, weighing the pros and cons can help you to decide.

Pros of 457 Plans

Here are some of the main advantages of using a 457 plan to save for retirement.

No Penalty for Early Withdrawals

Taking money from a 401(k) or Individual Retirement Account before age 59 ½ can result in a 10% early withdrawal tax penalty. That’s on top of income tax you might owe on the distribution. With a 457 retirement plan, this rule doesn’t apply so if you decide to retire early, you can tap into your savings penalty-free.

Special Catch-up Limit

A 457 plan has annual contribution limits and catch-up contribution limits but they also include a special provision for employees who are close to retirement age. This provision allows them to potentially double the amount of money they put into their plan in the final three years leading up to retirement.

Loans May Be Allowed

If you need money and you don’t qualify for a hardship distribution from a 457 plan you may still be able to take out a loan from your retirement account (although there are downsides to this option). The maximum loan amount is 50% of your vested balance or $50,000, whichever is less. Loans must be repaid within five years.

Cons of 457 Plans

Now that you’ve considered the positives, here are some of the drawbacks to consider with a 457 savings plan.

Not Everyone Is Eligible

If you don’t work for an eligible employer then you won’t have access to a 457 plan. You may, however, have other savings options such as a 401k or 403(b) plan instead which would allow you to set aside money for retirement on a tax-advantaged basis. And of course, you can always open an IRA.

Investment Options May Be Limited

The range of investment options offered in 457 plans aren’t necessarily the same across the board. Depending on which plan you’re enrolled in, you may find that your investment selections are limited or that the fees you’ll pay for those investments are on the higher side.

Matching Is Optional

While an employer may choose to offer a matching contribution to a 457 retirement account, that doesn’t mean they will. Matching contributions are valuable because they’re essentially free money. If you’re not getting a match, then it could take you longer to reach your retirement savings goals.


💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

457 Plan Contribution Limits

The IRS establishes annual contribution limits for 457 plans. There are three contribution amounts:

•   Basic annual contribution

•   Catch-up contribution

•   Special catch-up contribution

Annual contribution limits and catch-up contributions follow the same guidelines established for 401(k) plans.

The special catch-up contribution is an additional amount that’s designated for employees who are within three years of retirement. Not all 457 retirement plans allow for special catch-up contributions.

Here are the 457 savings plan maximum contribution limits for 2023 and 2024.

2023

2024

Annual Contribution Up to 100% of an employees’ includable compensation or $22,500, whichever is less Up to 100% of an employees’ includable compensation or $23,000, whichever is less
Catch-up Contribution Employees 50 and over can contribute an additional $7,500 Employees 50 and over can contribute an additional $7,500
Special Catch-up Contribution $22,500 or the basic annual limit plus the amount of the basic limit not used in prior years, whichever is less* $23,000 or the basic annual limit plus the amount of the basic limit not used in prior years, whichever is less*

*This option is not available if the employee is already making age-50-or-over catch-up contributions.

457 vs 403(b) Plans

The biggest difference between a 457 plan and a 403(b) plan is who they’re designed for. A 403(b) plan is a type of retirement plan that’s offered to public school employees, including those who work at state colleges and universities, and employees of certain tax-exempt organizations. Certain ministers may establish a 403(b) plan as well. This type of plan can also be referred to as a tax-sheltered annuity or TSA plan.

Like 457 plans, 403(b) plans are funded with pre-tax dollars and contributions grow tax-deferred over time. These contributions can be made through elective salary deferrals or nonelective employer contributions. Employees can opt to make after-tax contributions or designated Roth contributions to their plan. Employers are not required to make contributions.

The annual contribution limits to 403(b) plans, including catch-up contributions, are the same as those for 457 plans. A 403(b) plan can also offer special catch-up contributions, but they work a little differently and only apply to employees who have at least 15 years of service.

Employees can withdraw money once they reach age 59 ½ and they’ll pay tax on those distributions. A 403(b) plan may allow for loans and hardship distributions or early withdrawals because the employee becomes disabled or leaves their job.

Investing for Retirement With SoFi

When weighing retirement plan options, a 457 retirement account may be one possibility. That’s not the only way to save and invest, however. If you don’t have a retirement plan at work or you’re self-employed, you can still open a traditional or Roth IRA to grow wealth.

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 does a 457 plan pay out?

If you have a 457 savings plan, you can take money out of your account before age 59 ½ without triggering an early withdrawal tax penalty in certain situations. Those distributions are taxable at your ordinary income tax rate, however. Like other tax-advantaged plans, 457 plans have required minimum distributions (RMDs), but they begin at age 73.

What are the rules for a 457 plan?

The IRS has specific rules for which types of employers can establish 457 plans; these include state and local governments and certain tax-exempt organizations. There are also rules on annual contributions, catch-up contributions and special catch-up contributions. In terms of taxation, 457 plans follow the same guidelines as 401(k) or 403(b) plans: Contributions are made pre-tax; the employee pays taxes on withdrawals.

When can you take money out of a 457 plan?

You can take money out of a 457 plan once you reach age 59 ½. Withdrawals are also allowed prior to age 59 ½ without a tax penalty if you’re experiencing a financial hardship or you leave your employer. Early withdrawals are still subject to ordinary income tax.


Photo credit: iStock/Nomad

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
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.

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Guide to Cash Balance Pension Plans

Guide to Cash Balance Pension Plans

A cash balance pension plan is a defined benefit plan that offers employees a stated amount at retirement. The amount of money an employee receives can be determined by their years of service with the company and their salary. Employers may offer a cash balance retirement plan alongside a 401(k) or in place of one.

If you have a cash balance plan at work, it’s important to know how to make the most of it when preparing for retirement. Read on to learn more about what a cash balance pension plan is and the pros and cons.

What Are Cash Balance Pension Plans?

A cash balance pension plan is a defined benefit plan that incorporates certain features of defined contribution plans. Defined benefit plans offer employees a certain amount of money in retirement, based on the number of years they work for a particular employer and their highest earnings. Defined contribution plans, on the other hand, offer a benefit that’s based on employee contributions and employer matching contributions, if those are offered.

In a cash balance plan, the benefit amount is determined based on a formula that uses pay and interest credits. This is characteristic of many employer-sponsored pension plans. Once an employee retires, they can receive the benefit defined by the plan in a lump sum payment.

This lump sum can be rolled over into an individual retirement account (IRA) or another employer’s plan if the employee is changing jobs, rather than retiring. Alternatively, the plan may offer the option to receive payments as an annuity based on their account balance.


💡 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.

How Cash Balance Pension Plans Work

Cash balance pension plans are qualified retirement plans, meaning they’re employer-sponsored and eligible for preferential tax treatment under the Internal Revenue Code. In a typical cash balance retirement plan arrangement, each employee has an account that’s funded by contributions from the employer. There are two types of contributions:

•   Pay credit: This is a set percentage of the employee’s compensation that’s paid into the account each year.

•   Interest credit: This is an interest payment that’s paid out based on an underlying index rate, which may be fixed or variable.

Fluctuations in the value of a cash pension plan’s investments don’t affect the amount of benefits paid out to employees. This means that only the employer bears the investment risk.

Here’s an example of how a cash balance pension works: Say you have a cash balance retirement plan at work. Your employer offers a 5% annual pay credit. If you make $120,000 a year, this credit would be worth $6,000 a year. The plan also earns an interest credit of 5% a year, which is a fixed rate.

Your account balance would increase year over year, based on the underlying pay credits and interest credits posted to the account. The formula for calculating your balance would look like this:

Annual Benefit = (Compensation x Pay Credit) + (Account Balance x Interest Credit)

Now, say your beginning account balance is $100,000. Here’s how much you’d have if you apply this formula:

($120,000 x 0.05) + ($100,000 x 1.05) = $111,000

Cash balance plans are designed to provide a guaranteed source of income in retirement, either as a lump sum or annuity payments. The balance that you’re eligible to receive from one of these plans is determined by the number of years you work, your wages, the pay credit, and the interest credit.

Cash Balance Plan vs 401(k)

Cash balance plans and 401(k) plans offer two different retirement plan options. It’s possible to have both of these plans through your employer or only one.

In terms of how they’re described, a cash balance pension is a defined benefit plan while a 401(k) plan is a defined contribution plan. Here’s an overview of how they compare:

Cash Balance Plan

401(k)

Funded By Employer contributions Employee contributions (employer matching contributions are optional)
Investment Options Employers choose plan investments and shoulder all of the risk Employees can select their own investments, based on what’s offered by the plan, and shoulder all of the risk
Returns Account balance at retirement is determined by years of service, earnings, pay credit, and interest credit Account balance at retirement is determined by contribution amounts and investment returns on those contributions
Distributions Cash balance plans must offer employees the option of receiving a lifetime annuity; can also be a lump sum distribution Qualified withdrawals may begin at age 59 ½; plans may offer in-service loans and/or hardship withdrawals

Pros & Cons of Cash Balance Pension Plans

A cash balance retirement plan can offer both advantages and disadvantages when planning your retirement strategy. If you have one of these plans available at work, you may be wondering whether it’s worth it in terms of the income you may be able to enjoy once you retire.

Here’s more on the pros and cons associated with cash balance pension plans to consider when you’re choosing a retirement plan.

Pros of Cash Balance Pension Plans

A cash balance plan can offer some advantages to retirement savers, starting with a guaranteed benefit. The amount of money you can get from a cash balance pension isn’t dependent on market returns, so there’s little risk to you in terms of incurring losses. As long as you’re still working for your employer and earning wages, you’ll continue getting pay credits and interest credits toward your balance.

From a tax perspective, employers may appreciate the tax-deductible nature of cash balance plan contributions. As the employee, you’ll pay taxes on distributions but tax is deferred until you withdraw money from the plan.

As for contribution limits, cash balance plans allow for higher limits compared to a 401(k) or a similar plan. For 2024, the maximum annual benefit allowed for one of these plans is $275,000. For 2023, the maximum annual benefit allowed is $265,000.

When you’re ready to retire, you can choose from a lump sum payment or a lifetime annuity. A lifetime annuity may be preferable if you’re looking to get guaranteed income for the entirety of your retirement. You also have some reassurance that you’ll get your money, as cash balance pension plans are guaranteed by the Pension Benefit Guaranty Corporation (PBGC). A 401(k) plan, on the other hand, is not.


💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).

Cons of Cash Balance Pension Plans

Cash balance pension plans do have a few drawbacks to keep in mind. For one, the rate of return may not be as high as what you could get by investing in a 401(k). Again, however, you’re not assuming any risk with a cash balance plan so there’s a certain trade-off you’re making.

It’s also important to consider accessibility, taxation, and fees when it comes to cash balance pension plans. If you need to borrow money in a pinch, for example, you may be able to take a loan from your 401(k) or qualify for a hardship withdrawal. Those options aren’t available with a cash balance plan. And again, any money you take from a cash balance plan would be considered part of your taxable income for retirement.

Pros Cons

•   Guaranteed benefits with no risk

•   Tax-deferred growth

•   Flexible distribution options

•   Higher contribution limits

•   Guaranteed by the PBGC

•   Investing in a 401(k) may generate higher returns

•   No option for loans or hardship withdrawals

•   Distributions are taxable

Investing for Retirement With SoFi

A cash balance retirement plan is one way to invest for retirement. It can offer a stated amount at retirement that’s based on your earnings and years of service. You can opt to receive the funds as either a lump sum or an annuity. Your employer may offer these plans alongside a 401(k) or in place of one, and there are pros and cons to each option to weigh.

If you don’t have access to either one at work, you can still start saving for retirement with an IRA. You can set aside money on a tax-advantaged basis and begin to build wealth for the long-term.

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

Is a cash balance plan worth it?

A cash balance plan can be a nice addition to your retirement strategy if you’re looking for a source of guaranteed income. Cash balance plans can amplify your savings if you’re also contributing to a 401(k) at work or an IRA.

Is a cash balance plan the same as a pension?

A cash balance plan is a type of defined benefit plan or pension plan, in which your benefit amount is based on your earnings and years of service. This is different from a 401(k) plan, in which your benefit amount is determined by how much you (and possibly your employer) contribute and the returns on those contributions.

Can you withdraw from a cash balance plan?

You can withdraw money from a cash balance plan in a lump sum or a lifetime annuity once you retire. You also have the option to roll cash balance plan funds over to an IRA or to a new employer’s qualified plan if you change jobs.


Photo credit: iStock/sturti

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
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.

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Understanding the Different Types of Retirement Plans

Types of Retirement Plans and Which to Consider

Retirement will likely be the most significant expense of your lifetime, which means saving for retirement is a big job. This is especially true if you envision a retirement that is rich with experiences such as traveling through Europe or spending time with your grown children and grandkids. A retirement savings plan can help you achieve these financial goals and stay on track.

There are all types of retirement plans you may consider to help you build your wealth, from 401(k) to Individual Retirement Accounts (IRAs) to annuities. Understanding the nuances of these different retirement plans, like their tax benefits and various drawbacks, may help you choose the right mix of plans to achieve your financial goals.

Key Points

•   There are various types of retirement plans, including traditional and non-traditional options, such as 401(k), IRA, Roth IRA, SEP IRA, and Cash-Balance Plan.

•   Employers offer defined contribution plans (e.g., 401(k)) where employees contribute and have access to the funds, and defined benefit plans (e.g., Pension Plans) where employers invest for employees’ retirement.

•   Different retirement plans have varying tax benefits, contribution limits, and employer matches, which should be considered when choosing a plan.

•   Individual retirement plans like Traditional IRA and Roth IRA provide tax advantages but have contribution restrictions and penalties for early withdrawals.

•   It’s possible to have multiple retirement plans, including different types and accounts of the same type, but there are limitations on tax benefits based on the IRS regulations.

Types of Retirement Accounts

There are several different types of retirement plans, including some traditional plan types you may be familiar with as well as non-traditional options.

Traditional retirement plans can be IRAs or 401(k)s. These tax-deferred retirement plans allow you to contribute pre-tax dollars to an account. With a traditional IRA or 401(k), you only pay taxes on your investments when you withdraw from the account.

Non-traditional retirement accounts can include Roth 401(k)s and IRAs, for which you pay taxes on funds before contributing them to the account.

Here’s information about some of the most common retirement plan types:

•   401(k)

•   403(b)

•   Solo 401(k)

•   SIMPLE IRA (Savings Incentive Match Plan for Employees)

•   SEP Plan (Simplified Employee Pension)

•   Profit-Sharing Plan (PSP)

•   Defined Benefit Plan (Pension Plan)

•   Employee Stock Ownership Plan (ESOP)

•   457(b) Plan

•   Federal Employees Retirement System (FERS)

•   Cash-Balance Plan

•   Nonqualified Deferred Compensation Plan (NQDC)

•   Multiple Employer Plans

•   Traditional Individual Retirement Accounts (IRAs)

•   Roth IRAs

•   Payroll Deduction IRAs

•   Guaranteed Income Annuities (GIAs)

•   Cash-Value Life Insurance Plan

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


money management guide for beginners



💡 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.

Retirement Plans Offered by Employers

There are typically two types of retirement plans offered by employers:

•   Defined contribution plans (more common): The employee invests a portion of their paycheck into a retirement account. Sometimes, the employer will match up to a certain amount (e.g. up to 5%). In retirement, the employee has access to the funds they’ve invested. 401(k)s and Roth 401(k)s are examples of defined contribution plans.

•   Defined benefit plans (less common): The employer invests money for retirement on behalf of the employee. Upon retirement, the employee receives a regular payment, which is typically calculated based on factors like the employee’s final or average salary, age, and length of service. As long as they meet the plan’s eligibility requirements, they will receive this fixed benefit (e.g. $100 per month). Pension plans and cash balance accounts are common examples of defined benefit plans.

Let’s get into the specific types of plans employers usually offer.

401(k) Plans

A 401(k) plan is a type of work retirement plan offered to the employees of a company. Traditional 401(k)s allow employees to contribute pre-tax dollars, where Roth 401(k)s allow after-tax contributions.

•   Income Taxes: If you choose to make a pre-tax contribution, your contributions may reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Some employers allow you to make after-tax or Roth contributions to a 401(k). You should check with your employer to see if those are options.

•   Contribution Limit: $22,500 in 2023 and $23,000 in 2024 for the employee; people 50 and older can contribute an additional $7,500.

•   Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. There is a significantly higher limit than with Traditional IRA and Roth IRA accounts.

•   Cons: With a 401(k) plan, you are largely at the mercy of your employer — there’s no guarantee they will pick plans that you feel are right for you or are cost effective for what they offer. Also the value of a 401(k) comes from two things: the pre-tax contributions and the employer match, if your employer doesn’t match, a 401(k) may not be as valuable to an investor. There are also penalties for early withdrawals before age 59 ½, although there are some exceptions, including for certain public employees.

•   Usually best for: Someone who works for a company that offers one, especially if the employer provides a matching contribution. A 401(k) retirement plan can also be especially useful for people who want to put retirement savings on autopilot.

•   To consider: Sometimes 401(k) plans have account maintenance or other fees. Because a 401(k) plan is set up by your employer, investors only get to choose from the investment options they provide.

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

403(b) Plans

A 403(b) retirement plan is like a 401(k) for certain individuals employed by public schools, churches, and other tax-exempt organizations. Like a 401(k), there are both traditional and Roth 403(b) plans. However, not all employees may be able to access a Roth 403(b).

•   Income Taxes: With a traditional 403(b) plan, you contribute pre-tax money into the account; the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Additionally, some employers allow you to make after-tax or Roth contributions to a 403(b); the money will grow tax-deferred and you will not have to pay taxes on withdrawals in retirement. You should check with your employer to see if those are options.

•   Contribution Limit: $22,500 in 2023 and $23,000 in 2024 for the employee; people 50 and older can contribute an additional $7,500 in both of those years. The maximum combined amount both the employer and the employee can contribute annually to the plan is generally the lesser of $66,000 in 2023 and $69,000 in 2024, or the employee’s most recent annual salary.

•   Pros: Money is deducted from your paycheck, automating the process of saving. Some companies offer a company match. Also, these plans often come with lower administrative costs because they aren’t subject to Employee Retirement Income Security Act (ERISA) oversight.

•   Cons: A 403(b) account generally lacks the same protection from creditors as plans with ERISA compliance.

•   To consider: 403(b) plans offer a narrow choice of investments compared to other retirement savings plans. The IRS states these plans can only offer annuities provided through an insurance company and a custodial account invested in mutual funds.

Solo 401(k) Plans

A Solo 401(k) plan is essentially a 1-person 401(k) plan for self-employed individuals or business owners with no employees, in which you are the employer and the employee. Solo 401(k) plans may also be called a Solo-k, Uni-k, or One-participant k.

•   Income Taxes: The contributions made to the plan are tax-deductible.

•   Contribution Limit: $22,500 in 2023 and $23,000 in 2024, or 100% of your earned income, whichever is lower, plus “employer” contributions of up to 25% of your compensation from the business. The 2023 total cannot exceed $66,000, and the 2024 total cannot exceed $69,000. (On top of that, people 50 and older are allowed to contribute an additional $7,500 in 2023 and 2024.)

•   Pros: A solo 401(k) retirement plan allows for large amounts of money to be invested with pre-tax dollars. It provides some of the benefits of a traditional 401(k) for those who don’t have access to a traditional employer-sponsored 401(k) retirement account.

•   Cons: You can’t open a solo 401(k) if you have any employees (though you can hire your spouse so they can also contribute to the plan as an employee — and you can match their contributions as the employer).

•   Usually best for: Self-employed people with enough income and a large enough business to fully use the plan.

SIMPLE IRA Plans (Savings Incentive Match Plans for Employees)

A SIMPLE IRA plan is set up by an employer, who is required to contribute on employees’ behalf, although employees are not required to contribute.

•   Income Taxes: Employee contributions are made with pre-tax dollars. Additionally, the money will grow tax-deferred and employees will pay taxes on the withdrawals in retirement.

•   Contribution Limit: $15,500 in 2023 and $16,000 in 2024. Employees aged 50 and over can contribute an extra $3,500 in 2023 and in 2024, bringing their total to $19,000 in 2023 and $19,500 in 2024.

•   Pros: Employers contribute to eligible employees’ retirement accounts at 2% their salaries, whether or not the employees contribute themselves. For employees who do contribute, the company will match up to 3%.

•   Cons: The contribution limits for employees are lower than in a 401(k) and the penalties for early withdrawals — up to 25% for withdrawals within two years of your first contribution to the plan — before age 59 ½ may be higher.

•   To consider: Only employers with less than 100 employees are allowed to participate.

💡 Recommended: Comparing the SIMPLE IRA vs. Traditional IRA

SEP Plans (Simplified Employee Pension)

This is a retirement account established by a small business owner or self-employed person for themselves (and if applicable, any employees).

•   Income Taxes: Your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on withdrawals in retirement.

•   Contribution Limit: For 2023, whichever is lower: $66,000 or 25% of earned income; for 2024, $69,000 or 25% of earned income, whichever is lower.

•   Pros: Higher contribution limit than IRA and Roth IRAs, and contributions are tax deductible for the business owner.

•   Cons: These plans are employer contribution only and greatly rely on the financial wherewithal and available cash of the business itself.

•   Usually best for: Self-employed people and small business owners who wish to contribute to an IRA for themselves and/or their employees.

•   To consider: Because you’re setting up a retirement plan for a business, there’s more paperwork and unique rules. When opening an employer-sponsored retirement plan, it generally helps to consult a tax advisor.

Profit-Sharing Plans (PSPs)

A Profit-Sharing Plan is a retirement plan funded by discretionary employer contributions that gives employees a share in the profits of a company.

•   Income taxes: Deferred; assessed on distributions from the account in retirement.

•   Contribution Limit: The lesser of 25% of the employee’s compensation or $66,000 in 2023. (On top of that, people 50 and older are allowed to contribute an additional $7,500 in 2023.) In 2024, the contribution limit is $69,000 or 25% of the employee’s compensation, whichever is less. Those 50 and up can contribute an extra $7,500 in 2024.

•   Pros: An employee receives a percentage of a company’s profits based on its earnings. Companies can set these up in addition to other qualified retirement plans, and make contributions on a completely voluntary basis.

•   Cons: These plans put employees at the mercy of their employers’ profits, unlike retirement plans that allow employees to invest in securities issued by other companies.

•   Usually best for: Companies who want the flexibility to contribute to a PSP on an ad hoc basis.

•   To consider: Early withdrawal from the plan is subject to penalty.

Defined Benefit Plans (Pension Plans)

These plans, more commonly known as pension plans, are retirement plans provided by the employer where an employee’s retirement benefits are calculated using a formula that factors in age, salary, and length of employment.

•   Income taxes: Deferred; assessed on distributions from the plan in retirement.

•   Contribution limit: Determined by an enrolled actuary and the employer.

•   Pros: Provides tax benefits to both the employer and employee and provides a fixed payout upon retirement that many retirees find desirable.

•   Cons: These plans are increasingly rare, but for those who do have them, issues can include difficulty realizing or accessing benefits if you don’t work at a company for long enough.

•   Usually best for: Companies that want to provide their employees with a “defined” or pre-determined benefit in their retirement years.

•   To consider: These plans are becoming less popular because they cost an employer significantly more in upkeep than a defined contribution plan such as a 401(k) program.

Employee Stock Ownership Plans (ESOPs)

An Employee Stock Ownership Plan is a qualified defined contribution plan that invests in the stock of the sponsoring employer.

•   Income taxes: Deferred. When an employee leaves a company or retires, they receive the fair market value for the stock they own. They can either take a taxable distribution or roll the money into an IRA.

•   Contribution limits: Allocations are made by the employer, usually on the basis of relative pay. There is typically a vesting schedule where employees gain access to shares in one to six years.

•   Pros: Could provide tax advantages to the employee. ESOP plans also align the interests of a company and its employees.

•   Cons: These plans concentrate risk for employees: An employee already risks losing their job if an employer is doing poorly financially, by making some of their compensation employee stock, that risk is magnified. In contrast, other retirement plans allow an employee to invest in stocks in other securities that are not tied to the financial performance of their employer.

457(b) Plans

A 457(b) retirement plan is an employer-sponsored deferred compensation plan for employees of state and local government agencies and some tax-exempt organizations.

•   Income taxes: If you choose to make a pre-tax contribution, your contributions will reduce your taxable income. Additionally, the money will grow tax-deferred and you will pay taxes on the withdrawals in retirement. Some employers also allow you to make after-tax or Roth contributions to a 401(k).

•   Contribution limits: The lesser of 100% of employee’s compensation or $22,500 in 2023 and $23,000 in 2024; some plans allow for “catch-up” contributions.

•   Pros: Plan participants can withdraw as soon as they are retired at any age, they do not have to wait until age 59 ½ as with 401(k) and 403(b) plans.

•   Cons: 457 plans do not have the same kind of employer match as a 401(k) plan. While employers can contribute to the plan, it’s only up to the combined limit for individual contributions.

•   Usually best for: Employees of governmental agencies.

Federal Employees Retirement System (FERS)

The Federal Employees Retirement System (FERS) consists of three government-sponsored retirement plans: Social Security, the Basic Benefit Plan, and the Thrift Savings Plan.

The Basic Benefit Plan is an employer-provided pension plan, while the Thrift Savings Plan is most comparable to what private-sector employees can receive.

•   Income Taxes: Contributions to the Thrift Savings Plan are made before taxes and grow tax-free until withdrawal in retirement.

•   Contribution Limit: The contribution limit for employees is $22,500 in 2023, and the combined limit for all contributions, including from the employer agency, is $66,000. In 2024, the employee contribution limit is $23,000, and the combined limit for all contributions, including those from the employer, is $69,000. Also, those 50 and over are eligible to make an additional $7,500 in “catch-up” contributions in both 2023 and 2024.

•   Pros: These government-sponsored plans are renowned for their low administrative fees and employer matches.

•   Cons: Only available for federal government employees.

•   Usually best for: Federal government employees who will work at their agencies for a long period; it is comparable to 401(k) plans in the private sector.

Cash-Balance Plans

This is another type of pension plan that combines features of defined benefit and defined contribution plans. They are sometimes offered by employers that previously had defined benefit plans. The plans provide an employee an “employer contribution equal to a percent of each year’s earnings and a rate of return on that contribution.”

•   Income Taxes: Contributions come out of pre-tax income, similar to 401(k).

•   Contribution Limit: The plans combine a “pay credit” based on an employee’s salary and an “interest credit” that’s a certain percentage rate; the employee then gets an account balance worth of benefits upon retirement that can be paid out as an annuity (payments for life) or a lump sum. Limits depend on age, but for those over 60, they can be more than $250,000.

•   Pros: Can reduce taxable income.

•   Cons: Cash-balance plans have high administrative costs.

•   Usually best for: High earners, business owners with consistent income.

Nonqualified Deferred Compensation Plans (NQDC)

These are plans typically designed for executives at companies who have maxed out other retirement plans. The plans defer payments — and the taxes — you would otherwise receive as salary to a later date.

•   Income Taxes: Income taxes are deferred until you receive the payments at the agreed-upon date.

•   Contribution Limit: None

•   Pros: The plans don’t have to be entirely geared around retirement. While you can set dates with some flexibility, they are fixed.

•   Cons: Employees are not usually able to take early withdrawals.

•   Usually best for: Highly-paid employees for whom typical retirement plans would not provide enough savings compared to their income.

Multiple Employer Plans

A multiple employer plan (MEP) is a retirement savings plan offered to employees by two or more unrelated employers. It is designed to encourage smaller businesses to share the administrative burden of offering a tax-advantaged retirement savings plan to their employees. These employers pool their resources together to offer a defined benefit or defined contribution plan for their employees.

Administrative and fiduciary responsibilities of the MEP are performed by a third party (known as the MEP Sponsor), which may be a trade group or an organization that specializes in human resources management.

Compare Types of Retirement Accounts Offered by Employers

To recap retirement plans offered by employers:

Retirement Plans Offered by Employers

Type of Retirement Plan

May be Funded By

Pro

Con

401(k) Employee and Employer Contributions are deducted from paycheck Limited investment options
Solo 401(k) Employee and Employer Good for self-employed people Not available for business owners that have employees
403(b) Employee and Employer Contributions are deducted from paycheck Usually offer a narrow choice of investment options
SIMPLE IRA Employer and Employee Employer contributes to account High penalties for early withdrawals
SEP Plan Employer High contribution limits Contributions are at the mercy of financial wherewithal of the employer
Profit-Sharing Plan Employer Can be paired with other qualified retirement plans Plan is at the mercy of an employer’s profits
Defined Benefit Plan Employer Fixed payout upon retirement Can be difficult to access benefits
Employee Stock Ownership Plan Employer Aligns interest of a company and its employees Risky for employees
457 Employee You don’t have to wait until age 59 ½ to withdraw Does not have same employer match possibility like a 401(k)
Federal Employees Retirement System Employee and Employer Low administrative fees Only available for federal government employees
Cash-Balance Plan Employer Can reduce taxable income High administrative costs
Nonqualified Deferred Compensation Plan Employer Don’t have to be retirement focused Employees are not usually able to take early withdrawals

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Retirement Plans Not Offered by Employers

Traditional Individual Retirement Accounts (IRAs)

Individual retirement accounts (IRAs) are managed by the individual policyholder.

With an IRA, you open and fund the IRA yourself. As the name suggestions, it is a retirement plan for individuals. This is not a plan you join through an employer.

•   Income Taxes: You may receive an income tax deduction on contributions (depending on your income and access to another retirement plan through work). The balance in the IRA will always grow tax-deferred, and withdrawals will be taxed (the amount will vary depending on whether contributions were deductible or non-deductible).

•   Contribution Limit: $6,500 in 2023, or $7,500 for people age 50 or over. In 2024, the contribution limit is $7,000, or $8,000 for people 50 and older.

•   Pros: You might be able to lower your tax bill if you’re eligible to make deductible contributions. Additionally, the money will grow tax-deferred, which can make a difference over a long period of time. Finally, there are no income limits for contributing to a traditional IRA.

•   Cons: Traditional IRAs come with a number of restrictions, including how much can be contributed and when you can start withdrawals without penalty. Traditional IRAs are also essentially a bet on the tax rate you will be paying when you begin withdrawals after age 59 ½, as the accounts grow tax-deferred but are taxed upon withdrawal. Also, traditional IRAs generally mandate withdrawals starting at age 73.

•   Usually best for: People who can make deductible contributions and want to lower their tax bill, or individuals who earn too much money to contribute directly to a Roth IRA. Higher-income earners might not get to deduct contributions from their taxes now, but they can take advantage of tax-deferred growth between now and retirement. An IRA can also be used for consolidating and rolling over 401(k) accounts from previous jobs.

•   To consider: You may be subject to a 10% penalty for withdrawing funds before age 59 ½. As a single filer, you cannot deduct IRA contributions if you’re already covered by a retirement account through your work and earn more (according to your modified gross adjusted income) than $83,000 in 2023 (with a phase-out beginning at $73,000 in 2023) and more than $87,000 in 2024, with a phase-out starting at $77,000.

Roth IRAs

A Roth IRA is another retirement plan for individuals that is managed by the account holder, not an employer.

•   Income Taxes: Roth IRA contributions are made with after-tax money, which means you won’t receive an income tax deduction for contributions. But your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.

•   Contribution Limit: $6,500 in 2023, or $7,500 for people age 50 or over. In 2024, the contribution limit is $7,000, or $8,000 for those 50 and up.

•   Pros: While contributing to a Roth IRA won’t lower your tax bill now, having the money grow tax-free and being able to withdraw the money tax-free down the road provides value in the future.

•   Cons: Like a traditional IRA, a Roth IRA has tight contribution restrictions. Unlike a traditional IRA, it does not offer tax deductions for contributions. As with a traditional IRA, there’s a penalty for taking some kinds of distributions before age 59 ½.

•   Usually best for: Someone who wants to take advantage of the flexibility to withdraw from an account during retirement without paying taxes. Additionally, it can be especially beneficial for people who are currently in a low income-tax bracket and expect to be in a higher income tax bracket in the future.

•   To consider: To contribute to a Roth IRA, you must have an earned income. Your ability to contribute begins to phase out when your income as a single filer (specifically, your modified adjusted gross income) reaches $138,000 in 2023 and $146,000 in 2024. As a joint filer, your ability to contribute to a Roth IRA phases out at $218,000 in 2023 and at $230,000 in 2024.

Payroll Deduction IRAs

This is either a traditional or Roth IRA that is funded through payroll deductions.

•   Income Taxes: For a Traditional IRA, you may receive an income tax deduction on contributions (depending on income and access to a retirement plan through work); the balance in the IRA will always grow tax-deferred, and withdrawals will be taxed (how much is taxed depends on if you made deductible or non-deductible contributions). For a Roth IRA, contributions are made with after-tax money, your balance will grow tax-free and you’ll be able to withdraw the money tax-free in retirement.

•   Contribution Limit: $6,500 in 2023, or $7,500 for people age 50 or over. In 2024, the limit is $7,000, or $8,000 for those 50 and older.

•   Pros: Automatically deposits money from your paycheck into a retirement account.

•   Cons: The employee must do the work of setting up a plan, and employers can not contribute to it as with a 401(k). Participants cannot borrow against the retirement plan or use it as collateral for loans.

•   Usually best for: People who do not have access to another retirement plan through their employer.

•   To consider: These have the same rules as a Traditional IRA, such as a 10% penalty for withdrawing funds before age 59 ½. Only employees can contribute to a Payroll Deduction IRA.

Guaranteed Income Annuities (GIAs)

Guaranteed Income Annuities are products sold by insurance companies. They are similar to the increasingly rare defined benefit pensions in that they have a fixed payout that will last until the end of life. These products are generally available to people who are already eligible to receive payouts from their retirement plans.

•   Income Taxes: If the annuity is funded by 401(k) benefits, then it is taxed like income. Annuities purchased with Roth IRAs, however, have a different tax structure. For “non-qualified annuities,” i.e. annuities purchased with after-tax income, a formula is used to determine the taxes so that the earnings and principal can be separated out.

•   Contribution Limit: Annuities do not have contribution limits.

•   Pros: These allow for payouts until the end of life and are fixed, meaning they’re not dependent on market performance.

•   Cons: Annuities are expensive; to buy an annuity, you’ll likely pay a high commission to a financial advisor or insurance salesperson.

•   Usually best for: People who have high levels of savings and can afford to make expensive initial payments on annuities.

Cash-Value Life Insurance Plan

Cash-value life insurance covers the policyholder’s entire life and has tax-deferred savings, making it comparable to other retirement plans. Some of the premium paid every month goes to this investment product, which grows over time.

•   Income Taxes: Taxes are deferred until the policy is withdrawn from, at which point withdrawals are taxed at the policyholder’s current income tax rate.

•   Contribution Limit: The plan is drawn up with an insurance company with set premiums.

•   Pros: These plans have a tax-deferring feature and can be borrowed from.

•   Cons: While you may be able to withdraw money from the plan, this will reduce your death benefit.

•   Usually best for: High earners who have maxed out other retirement plans.

Compare Types of Retirement Accounts Not Offered by Employers

To recap retirement plans not offered by employers:

Retirement Plans Not Offered by Employers

Type of Retirement Plan

Pro

Con

IRA Contributions may be tax deductible Penalty for withdrawing funds before age 59 ½
Roth IRA Distributions are not taxed Not available for individuals with high incomes
Payroll Deduction IRA Automatically deposits money from your paycheck into the account Participants can’t borrow against the plan
Guaranteed Income Annuity Not dependent on market performance Expensive fees and commissions
Cash-Value Life Insurance Plan Tax-deferred savings May be able to withdraw money from the plan, but this will reduce death benefit

Specific Benefits to Consider

As you’re considering the different types of retirement plans, it’s important to look at some key benefits of each plan. These include:

•   the tax advantage

•   contribution limits

•   whether an employer will add funds to the account

•   any fees associated with the account



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

Determining Which Type of Retirement Plan Is Best for You

Depending on your employment circumstances, there are many possible retirement plans in which you can invest money for retirement. Some are offered by employers, while other retirement plans can be set up by an individual.

Likewise, the benefits for each of the available retirement plans differ. Here are some specific benefits and disadvantages of a few different plans to consider.

With employer-offered plans like a 401(k) and 403(b), you have the ability to:

Take them with you. If you leave your job, you can roll these plans over into a plan with a new employer or an IRA.

Possibly earn a higher return. With these plans, you typically have more investment choices, including stock funds.

With retirement plans not offered by employers, like a SEP IRA, you may get:

A wider variety of investment options. You could have even more options to choose from with these plans, including those that may offer higher returns.

You may be able to contribute more. The contribution limits for some of these plans tend to be higher.

Despite their differences, the many different types of retirement accounts all share one positive attribute: utilizing and investing in them is an important step in saving for retirement.

Because there are so many retirement plans to choose from, it may be wise to talk to a financial professional to help you decide your financial plan.

Can You Have Multiple Types of Retirement Plans?

You can have multiple retirement savings plans, whether employer-provided plans like a 401(k), IRAs, or annuities. Having various plans can let you take advantage of the specific benefits that different retirement savings plans offer, thus potentially increasing your total retirement savings.

Additionally, you can have multiple retirement accounts of the same type; you may have a 401(k) at your current job while also maintaining a 401(k) from your previous employer.

Nonetheless, there are limitations on the tax benefits you may be allowed to receive from these multiple retirement plans. For example, the IRS does not allow individuals to take a tax deduction for traditional IRA contributions if they also have an employer-sponsored 401(k).

Opening a Retirement Investment Account With SoFi

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

Easily manage your retirement savings with a SoFi IRA.

FAQ

Why is it important to understand the different types of retirement plans?

Understanding the different types of retirement plans is important because of the nuances of taxation in these accounts. The various rules imposed by the Internal Revenue Service (IRS) can affect your contributions, earnings, and withdrawals. And not only does the IRS have rules around taxation, but also about contribution limits and when you can withdraw money without penalties.

Additionally, the various types of retirement plans differ regarding who establishes and uses each account and the other plan rules. Ultimately, understanding these differences will help you determine which combination of retirement plans is best for you.

How can you determine which type of retirement plan is best for you?

The best type of retirement plan for you is the one that best meets your needs. Many types of retirement plans are available, and each has its own benefits and drawbacks. When choosing a retirement plan, some factors to consider include your age, investing time horizon, financial goals, risk tolerance, and the fees associated with a retirement plan.


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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.

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How to File a Tax Extension

How to File a Tax Extension

You can file a tax extension in a few different ways, such as online or by mail. This process can help people who may need more time to finalize their return, whether they are missing documents, dealing with a personal emergency, or have other reasons for being behind schedule.

While a six-month extension can be a good safety net, it’s important to learn the facts. For instance, an extension doesn’t mean you have more time to pay any taxes you may owe.

Read on to learn the facts and important considerations to know when filing a tax extension.

What Is a Tax Extension?

A tax extension extends the deadline for filing your federal tax return by six months. All you have to do to get an extension is request one by April 15, 2024. Here are important points to know:

•   A tax extension does not give you extra time to pay any taxes owed. If you can’t afford to pay your full tax bill, it’s a good idea to pay as much as you can by Tax Day and then apply for an individual payment plan on IRS.gov or call the IRS (Internal Revenue Service) at 800-829-1040 to discuss payment options.

•   The agency may waive the late-payment penalty in a few cases, but it will not waive interest charges on unpaid tax bills. The interest rate is the federal short-term rate plus three percentage points. In early 2024, for individuals, the rate was 8%, compounded daily.

•   The late-payment penalty, aka failure-to-pay penalty (you filed for an extension on time but still owe taxes), is much less severe than the failure-to-file penalty (you didn’t file your tax return by the due date and did not request an extension). The failure-to-file penalty is usually 5% of the tax owed for each month or part of a month that your return is late, up to 25% of the total owed.

Either way, a penalty plus interest on taxes owed past the deadline might be a good incentive for many taxpayers to try to cough up most of their bill on time.

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How Do Tax Extensions Work?

There are three ways to request an automatic extension of time to file your return:

1.    File IRS Form 4868 electronically using your personal computer or through a tax professional who uses e-file. You’ll be asked to provide your prior year’s adjusted gross income for verification purposes. (If you do not know your prior year’s AGI and do not have a copy of that tax return, you can find the information by signing in to your IRS online account.)

2.    Mail a paper Form 4868. (The IRS says, though, not to mail in Form 4868 if you file electronically unless you’re making a payment with a check or money order.)

3.    Pay all or part of your estimated income tax due, and indicate that the payment is for an extension, using Direct Pay or the Electronic Federal Tax Payment System. You can also pay taxes with a credit card or debit card.

Special rules about filing extensions may apply to those serving in a combat zone or a qualified hazardous duty area or living outside the United States.

Recommended: Tax Season 2024 Help Center

Reasons to File for a Tax Extension

Many high earners routinely seek tax extensions because their business dealings and investments can take longer to sort out.
Other people might seek a tax extension for different reasons, such as:

•   Needing extra time to track down missing tax documents, especially if you’re dealing with an extenuating circumstance (for instance, the closure of a place of employment shortly before tax documents were due to be issued).

•   A major unplanned life event interrupts your plans and makes it hard to get things together on time.

•   You’re still figuring out how to do taxes as a freelancer and want to take all the deductions you can.

•   You’re going to take the home office tax deduction as a self-employed person and want to carefully crunch the numbers because you’re skipping the simplified deduction of up to $1,500.

•   General life busyness led to the deadline sneaking up on you.

•   Maybe you’re filing taxes for the first time and you simply procrastinated.

•   You have a primary and second home and are still unsure whether to itemize and take the mortgage interest deduction.

Filing for a Tax Extension Online

Remember, you don’t need to file Form 4868 if you make a payment using IRS electronic payment options or by phone and indicate that you want an extension.

If you do need to file Form 4868, you can do so electronically by accessing the IRS e-file with your tax software or by using a tax professional who uses e-file.

IRS e-file options include Free File, which lets you prepare and file your federal income tax online using guided tax preparation at an IRS partner site (for filers with AGI of $73,000 or less) or Free File fillable forms (for any income level).

Filing for a Tax Extension by Mail

You can simply download and print Form 4868 from IRS.gov, fill it out, and mail it in, along with a check for estimated income taxes owed.

The form itself includes information about where to send the document, depending on where you live.

Recommended: Steps to Prepare for Tax Season

Can I File for a Tax Extension If I Owe Money?

Yes, you can still file for a tax return extension if you owe the government money — but the money itself is still due on the original due date.

Unfortunately, there’s no way to file for an extension of taxes owed. Rather, your best bet is to pay as much of your estimated taxes as you can when you file for the extension, and then apply for a payment plan online or call the IRS to learn about your options for complete repayment.

Can Someone Be Denied a Tax Extension?

Yes, but it’s uncommon. If your tax extension was denied, it was probably because of a mistake in your personal information on Form 4868.

You can resubmit your request and make sure to enter your current address, name, and Social Security number correctly.

How to Know If You Owe Taxes

While self-employed individuals must estimate their taxes and pay on a quarterly basis, those who file using
W-2 wage reports may not do this kind of taxation math.

There are several easy ways to find out if you owe Uncle Sam.

•   You may receive a notice in the mail from the IRS, but ensure that it’s official correspondence and not a note from a scammer. The IRS will never email, text, or reach out to individuals via social media.

•   “Your Online Account” on IRS.gov allows you to see how much you owe in taxes. This user profile also allows you to pay any owed taxes directly.

•   You can always call the IRS at 800-829-1040 to confirm any amount of back taxes you might owe.

The Takeaway

Is it hard to file a tax extension? Not really. What may prove difficult is paying all taxes owed by the filing deadline (aka Tax Day) or paying a balance still owed plus a penalty and interest after the April date to file taxes.

It’s important to have a handle on your tax status and tax bill as April 15th arrives. It’s also wise to have a good banking partner and accounts that allow easy payment of any money you owe or refunds you receive.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with up to 4.60% APY on SoFi Checking and Savings.

FAQ

How do I know if I’ve been approved for a tax extension?

Extension requests are rarely denied, but news of a denial would come by email. In the event of an error in an address or name, a taxpayer will be given a few days to remedy the error and file a tax extension again. Usually, you can get an automatic extension of time to file your tax return by filing Form 4868 electronically. You’ll receive an electronic acknowledgment of your request.

Is there a fee to file for a tax extension?

No. Filing for a tax extension is free.

Is the process for filing a tax extension easy?

Yes. You simply submit Form 4868 electronically or by mail before the filing deadline, or make a tax payment through approved methods and indicate you want an extension of time to file your federal return.

What happens if I file my taxes late and without an extension?

If you don’t pay your tax balance by the filing deadline and you did not file for an extension, you’ll get hit with a failure-to-file penalty (in most cases) and interest. Interest also compounds daily on any unpaid tax from the due date of the return until the date of payment in full.


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SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.


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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How to Evaluate a Stock Before You Buy

The value of a stock is made up of several factors, including the company’s ability to continue making a profit, its customer base, its financial structure, the economy, political and cultural trends, and how the company fits within the industry. Understanding those basic factors will go a long way toward helping you select stocks for your portfolio.

If you’ve never bought or sold stocks in the past, the thought of trading for the first time might be daunting. But once you’ve done your homework and have developed the right habits, it may not be nearly as intimidating.

Getting Started with Stock Evaluations

Learning how to evaluate stocks starts with some basic homework. But even for those familiar with the stock market basics, it can be helpful to keep some overarching things in mind.

•   When you buy a stock, you’re not simply buying a piece of paper. A stock is an ownership share in a company — you’re buying into that company and its potential performance. When a person invests, they gain an opportunity to join in on its success or failures over the long haul.

•   The more you know about the company, its industry, and general stock market trends, the better. Professional advice is important, but so is trusting common sense.

•   A consumer may be able to spot investing trends that eventually translate to a company’s strong performance down the line, asking questions like: Why am I investing in this company? Why now?

•   It’s important to assess your individual tolerance for risk before investing, and check in on that periodically. Additionally, make time to review your stocks’ performance and watch the market on a regular basis.

•   When considering how many stocks to buy, most investors may want to keep portfolio diversification in mind, with stocks across a range of sectors and risks. Being invested in only one stock means that if the company fails, you could lose your invested money.

Understand the Two Types of Stock Analysis

There are two general types of stock analysis: Fundamental, and technical.

Fundamental analysis as it relates to stocks involves analyzing the underlying company’s financial health and operations. It may include looking at financial statements, earnings reports, annual reports, and more, and the overall goal is to get a sense of the stock’s intrinsic value.

Technical analysis, on the other hand, incorporates the use of data and indicators from charts to try and identify patterns and trends. Its goal is to determine where a stock’s value might go next.

Review Stock Materials

With some general evaluation guidelines in mind, the next step is to dig deeper to calculate stock value. This involves reviewing a stock’s materials and documentation.

Balance Sheet and Other Financials

The Securities and Exchange Commission (SEC) requires all public companies to file regular financial documents that disclose their performance. These quarterly filings indicate profit and loss, material issues that can affect performance, expenses, and other key information that will help you gauge a company’s health, and get a better idea of a potential return on equity.

Recommended: FINRA vs. the SEC

Consumers can find these and other reports on SEC.gov:

Balance sheet: This records whether the company reduced or increased their debt. Some major items to look for here are the company’s tax paid and tax rate, along with expenses that aren’t related directly to profits, like administrative expenses.

Income statement: The revenue, major expenses, and bottom-line income may reveal trends in the company’s profitability.

Cash flow statement: Not all income is realized, so the cash flow statement shows you what the company actually got paid during the quarter — not what it’s expected to receive from sales 30, 60, or 90 days from now. The operating cash flow (which excludes a windfall or unusual influx of cash) provides a sense of the real, day-to-day (or quarter) activity of the business: how much cash comes in and how much goes out; how the company handles assets and investments; and the money it raises or distributes to lenders and shareholders. Some companies, most famously Amazon, can have meager profits relative to their sales but impressive cash flows.

In particular, as you read through these statements, pay attention to:

•   Revenue: The company’s gross income

•   Operating expenses and non-operating expenses: These are typical day-to-day expenses, and also ones that don’t relate to the core business (for example, a non-operating expense might be any interest paid on debt)

•   Total net income: This is the company’s actual profit, after deducting all expenses from revenue

•   Earnings before interest, taxes, depreciation, and amortization (also known as EBITDA): This figure excludes non-operating expenses

Financial performance ratios offer insight into a company’s financial health.

Form 10-Q

While publicly traded companies tend to release their own financial statements in the form of a presentation for investors, analysts, and the media every three months, they are also required to produce a more comprehensive quarterly report known as the 10-Q, which is filed with the Securities and Exchange Commission (SEC).

This document “includes unaudited financial statements and provides a continuing view of the company’s financial position during the year,” according to the SEC, and can be useful to investors as it provides a comprehensive overview of the company’s performance for the previous three months. The 10-Q also offers insight into other factors that might give an impression of a company’s overall health, including:

•   Any risk factors to the business

•   Information about legal matters

•   Issues that might impact a company’s inventory

Form 10-K

Form 10-K is similar to form 10-Q but it comes out on an annual, as opposed to quarterly, basis. The form is meant to “provide a comprehensive overview of the company’s business and financial condition and includes audited financial statements,” according to the SEC. The annual 10-K can give investors a broader picture of the business through the ups and downs of a year, during which sales and expenses can often fluctuate.

These reports include both detailed financial information and actual writing from the company’s management about how their business is doing. They also outline how executives are paid, which is one more piece of information about the company’s management that can be useful to shareholders.

💡 Quick Tip: Are self-directed brokerage accounts cost efficient? They can be, because they offer the convenience of being able to buy stocks online without using a traditional full-service broker (and the typical broker fees).

Get up to $1,000 in stock when you fund a new Active Invest account.*

Access stock trading, options, auto investing, IRAs, and more. Get started in just a few minutes.


*Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

How to Value Stocks with Financial Ratios

If learning how to evaluate a stock starts with analyzing financial statements, step two is understanding performance through financial ratios. Ratios offer insight into a company’s financial health, allowing for comparisons to other companies in the same industry or against the overall market.

These are important financial ratios to know.

Price-to-earnings Ratio (P/E)

This is a stock valuation formula that will help you determine how one company’s stock price compares to another. The price-to-earnings ratio is straightforward: It divides the market price of a company’s stock by the company’s earnings per share. The ratio can reveal how many years it will take for a company to generate enough value to buy back its stock.

Price-to-earnings (PE) ratios can also indicate how much the market expects the company’s profits to grow in the future. When investors buy stocks with a high PE ratio, it typically means they’re “buying” present earnings at a high price, with the expectation that earnings will accelerate going forward. On the other hand, a stock with a low PE ratio could give an investor a good value for their money — but it could also be a sign that investors aren’t confident in the company’s future performance.

Looking back historically, the market has tended to have a PE ratio of about 15, meaning investors pay $15 for every $1 of earnings. But different companies and even different sectors can have wildly different PE ratios.

For example, software companies, especially younger ones, tend to have high PE ratios as investors think there’s a chance they could get much, much larger in the future and turn fast-growing revenue into profits. In software, PE ratios can be in the 30s or even much higher when companies see their stock prices take off quickly, with a PE or around 90.

Earnings Per Share (EPS)

Earnings per share (EPS) tells investors how much earnings each shareholder would receive if the company was liquidated immediately. Investors like to see growing earnings, and rising EPS means the company potentially has more money to distribute to shareholders or to roll back into the business. This figure is calculated by taking net income, subtracting any preferred stock dividends, and dividing the result by the total number of outstanding common stock shares.

Return on Equity (ROE)

Return on equity is a key guide for investors to measure the growth in profit for a company. ROE is determined by dividing the company’s net income by the shareholders’ equity, then multiplying by 100. The ratio tells you the value you would receive as a shareholder should the company liquidate tomorrow. Some investors like to see ROE rising by 10 percent or more per year, which reflects the performance of the S&P 500.

Debt-to-equity Ratio (D/E)

The debt-to-equity ratio, determined by dividing total liabilities by total shareholder equity, gives investors an idea of how much the company is relying on debt to fund its operation.

A high debt-to-equity ratio indicates a company that borrows a lot. Whether it’s too high depends on a comparison with other companies in the industry. For example, companies in the tech industry tend to have a D/E ratio of around 2, whereas companies in the financial sector may have D/E ratios of 10.

Debt-to-asset Ratio (D/A)

A debt-to-asset ratio can be informative when comparing a company’s debt load against that of other companies in the industry. This allows potential investors to better gauge the riskiness of the investment. Too much debt can be a warning sign for investors.

How to Evaluate Stocks with Qualitative Research

It’s important to note that using financial ratios and stock materials to evaluate stocks is a form of quantitative research. Investors can also use qualitative research methods to evaluate stocks, too. That can include intangible value and outside influences.

Intangible Value

Companies may have value that isn’t necessarily captured in traditional metrics, such as brand power or intellectual property rights. These sorts of intangibles can be considered in a stock’s value, too, though the value those intangibles add may be difficult to gauge.

Outside Influences

There are numerous outside influences that can affect a stock’s value, too, such as political or economic changes. Again, this can be hard to gauge or determine as it relates to a specific stock, but learning about a stock’s beta may be helpful.

Pay Attention

Once a potential investor has evaluated a stock they’re hoping to buy by analyzing the company’s financial filings and employing a few stock valuation formulas, there is one last step that can help inform the decision: Paying attention.

There are hundreds, if not thousands, of helpful online news sites and tools to help you research companies, screen stocks, and model a stock’s potential in the future. Here are some viable options.

Financial News Sites: There are numerous financial news sites to read, and you can even try looking at stock market forums to stay on top of things.

Online Financial Tools: Stock screeners help you filter stocks according to the parameters you set, whether you’re looking for blue chip stocks or less-established companies in which to invest.

Company Details: Research more than just the financial facts and figures. Find out how it makes money, the core values of the business, CEO performance, and more. Much information can be gleaned by searching reputable news and business media sites for articles and features about the company and its leaders.

Value Traps

Another common term to be familiar with is value trap, which is when a stock that appears deceptively cheap but is actually not a good pick. Investors who follow the value style of investing tend to be very wary of value traps.

They may seem like a good deal, but these stocks may be poor businesses and poor investments. Whether a stock is a value trap depends on how the stock performs, and investors generally can’t tell until some time has passed.

Again, this can be an important thing to remember before you start to buy stocks online or otherwise build a portfolio.

💡 Quick Tip: One advantage of using a robo investing advisor is that these services are intended to be cost effective. Still, it’s wise to learn what the underlying costs are for the investment choices these services provide, as fees offset returns over time.

The Takeaway

There are a number of key terms, indicators, tools and tips that can help potential investors learn to evaluate a stock and its company’s performance. Investors can review a company’s balance sheets, and forms 10-Q and 10-K to get relevant information about a company’s financial performance and outlook.

Investors looking to evaluate stocks should also be familiar with certain ratios, which can indicate earning potential, debt, and dividend performance, among other indicators that can signal the health of the company and the stock.

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 difference between price-to-earnings ratio and price-to-sales ratio?

The difference between price-to-earnings ratio and price-to-sales ratio is that P/E ratios compare a company’s share price to its annual profits, and P/S ratios compare share price to annual revenue.

What are some online financial tools that can help me screen and compare stocks?

There are numerous online stock screeners, market simulators, and comparison tools that can be found online, and investors who are interested can try them out to see which they prefer.

How far back should you go when evaluating stocks?

Investors may want to go back a couple of decades when evaluating stocks, as too short of a time frame may not provide enough context, and too much may not prove helpful. But ultimately, it’ll be up to personal preference.

What are some factors that can affect the stock price of a company besides its financial performance?

Stock values can be influenced by any number of factors, including changes to the economy, political changes in a given country, and even things like bad weather.


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

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 $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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