Feb
04
2026
A couple sit at a table with financial papers on it staring intently at a laptop screen.

401(k) Taxes: Rules on Withdrawals and Contributions

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on 401(k) Taxes: Rules on Withdrawals and Contributions

Employer-sponsored retirement plans like a 401(k) are a common way for workers to save for retirement. According to the Bureau of Labor Statistics, a little more than half of private industry employees participate in a retirement plan at work. So participants need to understand how 401(k) taxes work to take advantage of this popular retirement savings tool.

With a traditional 401(k) plan, employees can contribute a portion of their salary to an account with various investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and cash.

There are two main types of workplace 401(k) plans: a traditional 401(k) plan and a Roth 401(k). The 401(k) tax rules depend on which plan an employee participates in.

Traditional 401(k) Tax Rules

When it comes to this employer-sponsored retirement savings plan, here are key things to know about 401(k) taxes and 401(k) withdrawal tax.

Recommended: Understanding the Different Types of Retirement Plans

401(k) Contributions Are Made With Pre-tax Income

One of the biggest advantages of a 401(k) is its tax break on contributions. When you contribute to a 401(k), the money is deducted from your paycheck before taxes are taken out, which reduces your taxable income for the year. This means that you’ll pay less in income tax, which can save you a significant amount of money over time.

If you’re contributing to your company’s 401(k), each time you receive a paycheck, a self-determined portion of it is deposited into your 401(k) account before taxes are taken out, and the rest is taxed and paid to you.

For 2025, participants can contribute up to $23,500 each year to a 401(k) plan, plus $7,500 in catch-up contributions if they’re 50 or older. In 2026, participants can contribute up to $24,500 a year to a 401(k), plus $8,000 in catch-up contributions if they 50 or older.

There is also an extra catch-up provision: For 2025 and 2026, those ages 60 to 63 may contribute up to an additional $11,250 per year instead of $7,500 in 2025 and $8,000 in 2026, thanks to SECURE 2.0 — for a total of $34,750 in 2025 and $35,750 in 2026.

However, there is one important change to be aware of. Under a law regarding catch-up contributions that went into effect on January 1, 2026, individuals aged 50 and older whose FICA wages exceeded $150,000 in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make eligible withdrawals tax-free in retirement. (See more about Roth 401(k)s below.)

401(k) Contributions Lower Your Taxable Income

The more you contribute to your 401(k) account, the lower your taxable income is in that year (aside from the catch-up exception noted above for certain individuals). If you contribute 15% of your income to your 401(k), for instance, you’ll only owe taxes on 85% of your income.

Withdrawals From a 401(k) Account Are Taxable

When you take withdrawals from your 401(k) account in retirement, you’ll be taxed on your contributions and any earnings accrued over time.

The withdrawals count as taxable income, so during the years you withdraw funds from your 401(k) account, you will owe taxes in your retirement income tax bracket.

Early 401(k) Withdrawals Come With Taxes and Penalties

If you withdraw money from your 401(k) before age 59 ½, you’ll owe both income taxes and a 10% tax penalty on the distribution.

Although individual retirement accounts (IRAs) allow penalty-free early withdrawals for qualified first-time homebuyers and qualified higher education expenses, that is not true for 401(k) plans.

That said, if an employee leaves a company during or after the year they turn 55, they can start taking distributions from their 401(k) account without paying taxes or early withdrawal penalties.

Can you take out a loan or hardship withdrawal from your plan assets? Many plans do allow that up to a certain amount, but withdrawing money from a retirement account means you lose out on the compound growth from funds withdrawn. You will also have to pay interest (yes, to yourself) on the loan.

Roth 401(k) Tax Rules

Here are some tax rules for the Roth 401(k).

Your Roth 401(k) Contributions Are Made With After-Tax Income

When it comes to taxes, a Roth 401(k) works the opposite way of a traditional 401(k). Your contributions are post-tax, meaning you pay taxes on the money in the year you contribute.

If you have a Roth 401(k) and your company offers a 401(k) match, that matching contribution will go into a pre-tax account, which would be a traditional 401(k) account. So you would essentially have a Roth 401(k) made up of your own contributions and a traditional 401(k) of your employer’s contributions.

Recommended: How an Employer 401(k) Match Works

Roth 401(k) Contributions Do Not Lower Your Taxable Income

When you have Roth 401(k) contributions automatically deducted from your paycheck, your full paycheck amount will be taxed, and then money will be transferred to your Roth 401(k).

For instance, if you’re making $50,000 and contributing 10% to a Roth 401(k), $5,000 will be deposited into your Roth 401(k) annually, but you’ll still be taxed on the full $50,000.

Roth 401(k) Withdrawals Are Tax-Free

When you take money from your Roth 401(k) in retirement, the distributions are tax-free, including your contributions and any earnings that have accrued (as long as you’ve had the account for at least five years).

No matter what your tax bracket is in retirement, qualified withdrawals from your Roth 401(k) are not counted as taxable income.

It can also be helpful to know that, like a Roth IRA, a Roth 401(k) no longer requires participants to start taking required minimum distributions at age 73.

There Are Limits on Roth 401(k) Withdrawals

In order for a withdrawal from a Roth 401(k) to count as a qualified distribution — meaning, it won’t be taxed — an employee must be age 59 ½ or older and have held the account for at least five years.

If you make a withdrawal before this point — even if you’re age 61 but have only held the account since age 58 — the withdrawal would be considered an early, or unqualified, withdrawal. If this happens, you would owe taxes on any earnings you withdraw and could pay a 10% penalty.

Early withdrawals are prorated according to the ratio of contributions to earnings in the account. For instance, if your Roth 401(k) had $100,000 in it, made up of $70,000 in contributions and $30,000 in earnings, your early withdrawals would be made up of 70% contributions and 30% earnings. Hence, you would owe taxes and potentially penalties on 30% of your early withdrawal.

If the plan allows it, you can take a loan from your Roth 401(k), just like a traditional 401(k), and the same rules and limits apply to how much you can borrow. Any Roth 401(k) loan amount will be combined with outstanding loans from that plan or any other plan your employer maintains to determine your loan limits.

You Can Roll Roth 401(k) Money Into a Roth IRA

Money in a Roth 401(k) account can be rolled into a Roth IRA. Like an employer-sponsored Roth 401(k), a Roth IRA is funded with after-tax dollars.

It’s important to note, however, that there’s also a five-year rule for Roth IRAs: Earnings cannot be withdrawn tax- and penalty-free from a Roth IRA until five years after the account’s first contribution. If you roll a Roth 401(k) into a new Roth IRA, the five-year clock starts over at that time.

Do You Have to Pay Taxes on a 401(k) Rollover?

If you do a direct rollover of your 401(k) into an IRA or another eligible retirement account, you generally won’t have to pay taxes on the rollover. However, if you receive the funds from your 401(k) and then roll them over yourself within 60 days, you may have to pay taxes on the amount rolled over, as the IRS will treat it as a distribution from the 401(k).

Recommended: How to Roll Over Your 401(k)

Do You Have to Pay 401(k) Taxes after 59 ½?

If you have a traditional 401(k), you will generally have to pay taxes on withdrawals after age 59 ½. This is because the money you contributed to the 401(k) was not taxed when you earned it, so it’s considered income when you withdraw it in retirement.

However, if you have a Roth 401(k), you can withdraw your contributions and earnings tax-free in retirement as long as you meet certain requirements, such as being at least 59 ½ and having had the account for at least five years.

Do You Pay 401(k) Taxes on Employer Contributions?

The taxation of employer contributions to a 401(k) depends on whether the account is a traditional or Roth 401(k).

In the case of traditional 401(k) contributions, the employer contributions are not included in your taxable income for the year they are made, but you will pay taxes on them when you withdraw the funds from the 401(k) in retirement.

In the case of Roth contributions, the employer contributions are not included in a post-tax Roth 401(k) but rather in a pre-tax traditional 401(k) account. So, you do not pay taxes on the employer contributions in a Roth 401(k), but you do pay taxes on withdrawals.

How Can I Avoid 401(k) Taxes on My Withdrawal?

The only way to avoid taxes on 401(k) withdrawals is to take advantage of a Roth 401(k), as noted above. With a Roth 401(k), your contributions are made post-tax, but withdrawals are tax-free if you meet certain criteria to avoid the penalties mentioned above.

However, even if you have to pay taxes on your 401(k) withdrawals, you can take the following steps to minimize your taxes.

Consider Your Tax Bracket

Contributing to a traditional 401(k) is essentially a bet that you’ll be in a lower tax bracket in retirement — you’re choosing to forgo taxes now and pay taxes later.

Contributing to a Roth 401(k) takes the opposite approach: Pay taxes now, so you don’t have to pay taxes later. The best approach for you will depend on your income, your tax situation, and your future tax treatment expectations.

Strategize Your Account Mix

Having savings in different accounts — both pre-tax and post-tax — may offer more flexibility in retirement.

For instance, if you need to make a large purchase, such as a vacation home or a car, it may be helpful to be able to pull the income from a source that doesn’t trigger a taxable event. This might mean a retirement strategy that includes a traditional 401(k), a Roth IRA, and a taxable brokerage account.

Decide Where To Live

Eight U.S. states don’t charge individual income tax at all: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. And New Hampshire only taxes interest and dividend income.

This can affect your tax planning if you live in a tax-free state now or intend to live in a tax-free state in retirement.

The Takeaway

Saving for retirement is one of the best ways to prepare for a secure future. And understanding the tax rules for 401(k) withdrawals and contributions is essential for effective retirement planning. By educating yourself on the rules and regulations surrounding 401(k) taxes, you can optimize your retirement savings and minimize your tax burden.

Another strategy to help stay on top of your retirement savings is to roll over a previous 401(k) to a rollover IRA. Then you can manage your money in one place.

SoFi makes the rollover process seamless. The process is automated so there’s no need to watch the mail for your 401(k) check — and there are no rollover fees or taxes.

Easily manage your retirement savings with a SoFi IRA.

FAQ

Do you get taxed on your 401(k)?

You either pay taxes on your 401(k) contributions — in the case of a Roth 401(k) — or on your traditional 401(k) withdrawals in retirement.

When can you withdraw from 401(k) tax free?

You can withdraw from a Roth 401(k) tax-free if you have had the account for at least five years and are over age 59 ½. With a traditional 401(k), withdrawals are generally subject to income tax.

How can I avoid paying taxes on my 401(k)?

You never truly avoid paying taxes on a 401(k), as you either have to pay taxes on contributions or withdrawals, depending on the type of 401(k) account. By contributing to a Roth 401(k) instead of a traditional 401(k), you can withdraw your contributions and earnings tax-free in retirement.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

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

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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04
2026
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IRA Tax Deduction Rules

By | Growing Wealth, invest, Investing, Preparing for Retirement | Comments Off on IRA Tax Deduction Rules

Broadly speaking, individual retirement accounts, or IRAs, offer some sort of tax benefit — either during the year that contributions are made or when distributions take place after retiring. But not all retirement accounts are taxed the same.

With a traditional IRA, it’s possible for certain individuals to both invest for their future and reduce their present tax liability. For tax year 2025, the maximum IRA deduction is $7,000 for people younger than 50, and $8,000 for those 50 and older. For tax year 2026, the maximum IRA deduction is $7,500 for people younger than 50, and $8,600 for those 50 and older.

To maximize deductions in a given year, the first step is understanding how IRA tax deductions work. A good place to start is learning the differences between common retirement accounts — and their taxation. And since each financial situation is different, an individual may also want to speak with a tax professional about their specific situation.

Read on to learn more about IRA tax deductions, including how both traditional and Roth IRA accounts are taxed in the U.S.

What Is a Tax Deduction?

First, here’s a quick refresher on tax deductions for income taxes — the tax owed/paid on a person’s paycheck, bonuses, tips, and any other wages earned through work. “Taxable income” also includes interest earned on bank accounts and some types of investments.

Tax deductions are subtracted from a person’s total taxable income. After deductions, taxes are paid on the amount of taxable income that remains. Eligible deductions can allow qualifying individuals to reduce their overall tax liability to the Internal Revenue Service (IRS).

For example, let’s say Person X earns $70,000 per year. They qualify for a total of $10,000 in income tax deductions. When calculating their income tax liability, the allowable deductions would be subtracted from their income — leaving $60,000 in taxable income. Person X then would need to pay income taxes on the remaining $60,000 — not the $70,000 in income that they originally earned.

For the 2025 and 2026 tax years, 22% is the highest federal income tax rate for a person earning $70,000, according to the IRS. By deducting $10,000 from their taxable income, they are able to lower their federal total tax bill by $2,200, which is 22% of the $10,000 deduction. (There may be additional state income tax deductions.)

A tax deduction is not the same as a tax credit. Tax credits provide a dollar-for-dollar reduction on a person’s actual tax bill — not their taxable income. For example, a $3,000 tax credit would eliminate $3,000 in taxes owed.

Putting the IRA Tax Deduction to Use

Traditional IRA tax deductions are quite simple. If a qualifying individual under age 50 contributes the maximum allowed to a traditional IRA in a year — $7,000 for the 2025 tax year and $7,500 for the 2026 tax year — they can deduct the full amount of their contribution from their taxable income.

That said, you are not eligible to claim your IRA deduction if you are:

•  Single and covered by a workplace retirement account and your modified adjusted gross income (MAGI) is $89,000 or more for tax year 2025 ($91,000 or more for tax year 2026)

•  Married filing jointly and covered by a work 401(k) plan and your MAGI is $146,000 or more for tax year 2025 ($149,00 or more for tax year 2026).

•  Married, only your spouse is covered by a work 401(k) plan, and your MAGI is $246,000 or more in 2025 ($252,000 or more in tax year 2026).

401(k), 403(b), and other non-Roth workplace retirement plans work in a similar way (when it comes to a Roth IRA vs a traditional IRA, contributions to a Roth IRAs are not tax deductible).

For the 2025 tax year, the contribution maximum for a 401(k) is $23,500 with an additional $7,500 catch-up contribution for employees 50 and older. For tax year 2026, the contribution maximum is $24,500 with an additional $8,000 catch-up contribution for employees 50 and older. Also for both 2025 and 2026, those aged 60 to 63 may contribute up to an additional $11,250 instead of $7,500 in 2025 and $8,000 in 2026, thanks to SECURE 2.0.

Thus, a person under 50 who contributes the full amount in 2025 could then deduct $23,500 from their taxable income ($24,500 in 2026), potentially lowering their tax bracket.

One common source of confusion: The tax deduction for an IRA will reduce the amount a person owes in federal and state income taxes, but will not circumvent payroll taxes, which fund Social Security and Medicare. Also known as Federal Insurance Contributions Act (FICA) taxes, these are assessed on a person’s gross income. Both the employer and the employee pay FICA taxes at a rate of 7.65% each.

Understanding Tax-Deferred Accounts

Traditional IRAs, 401(k) plans, and other non-Roth retirement accounts are deemed “tax-deferred.” Money that enters into one of these accounts is deducted from an eligible person’s total income tax bill. In this way, qualifying individuals do not pay income taxes on that invested income until later.

Because these taxes are simply deferred until a later time, the money in the account is usually taxed when it’s withdrawn.

Here’s an example of this: Having reached retirement age, a person chooses to withdraw $30,000 per year from a traditional IRA plan. As far as the IRS is concerned, this withdrawal is taxable income. The traditional IRA money will be taxed as the income.

So, what’s the point of deferring taxes? Generally speaking, people may be in a higher marginal tax bracket as a working person than they are as a retired person. Therefore, the idea is to defer taxes until a time when an individual may pay proportionally less in taxes.

Tax Brackets and IRA Deductions

Income tax brackets can work in a stair-step fashion. Each bracket reveals what a person owes at that level of income. Still, when a person is “in” a certain tax bracket, they do not pay that tax rate on their entire income.

For instance, in 2025, single filers pay a 12% federal income tax rate for the income earned between $11,926 and $48,475. Then, the tax rate “steps up,” and they pay a 22% tax on the income earned that falls in the range of $48,476 and $103,350. In 2026, single filers pay a 12% federal income tax rate for the income earned between $12,401 and $50,400, and they pay 22% tax on income between $50,401 and $105,700. Even if a person is a high-earner and “in” the 37% tax bracket, they still pay the lower rates on their lower levels of income.

401(k) Withdrawals and Taxation

Now, let’s compare that with the taxation on a $30,000 withdrawal from a 401(k). Assuming 2025 income tax rates, the withdrawal would be taxed at a 10% rate up to $11,925 and then a 12% rate for the remaining $18,075.

Taxes are assessed at a person’s “effective,” or average, tax rate. This is another reason that some folks prefer to defer their taxes until later, when they can pay a hypothetically lower effective tax rate on their withdrawals, rather than taxes at their highest marginal rate.

But, here’s why it’s not so simple: All of the above assumes that income tax rates remain the same over time. And, income tax rates (and eligible deductions) can change with federal legislation.

Still, plenty of earners opt to reduce their tax bill at their highest rate in the current year — and a tax deduction via an eligible retirement contribution may do just that.

For tax questions about an individual’s specific scenarios, it’s a good idea to consult a tax professional.

What About Roth IRAs and Taxes?

Simply put, there are no tax deductions for Roth retirement accounts. Both Roth IRA and Roth 401(k) account contributions are not tax-deductible.

The trade-off is that Roth money is not taxed when it is withdrawn in retirement, as is the case with tax-deferred accounts like a 401(k) and traditional IRA. In fact, this is the primary difference between Roth and non-Roth retirement accounts. With Roth accounts, taxes are already paid on money that is contributed, whereas income taxes on a non-Roth 401k are deferred until later.

So, then, what are some advantages of a Roth retirement account? All retirement accounts provide an additional type of tax benefit as compared to a non-retirement investment account: There are no taxes on interest or capital gains, which is money earned via the sale of an investment.

CFP® Brian Walsh explains, “With a Roth IRA, you’re going to pay taxes on your money and then you’re going to put after-tax money into the Roth IRA. That money is going to grow without paying any taxes. But when you take it out—ideally that money grew quite a bit—you’re not going to pay any taxes on the withdrawal.”

Someone might choose a Roth over a tax-deferred retirement account because they prefer to pay the income taxes up front, instead of in retirement. For example, imagine a person who earned $30,000 this year. They pay a relatively low income tax rate, so they simply may prefer to pay the income taxes now. That way, the taxes are potentially less of a burden come retirement age.

Not everyone qualifies for a Roth IRA. There are limits to how much a person can earn. For a single filer, the ability to contribute to a Roth IRA for tax year 2025 begins to phase out when a person earns $150,000 or more ($153,000 or more for tax year 2026), and is completely phased out at an income level of $165,000 in 2025 ($168,000 for tax year 2026). For a person that is married and filing jointly, the phase-out begins at $236,000 in 2025 ($242,000 for tax year 2026), ending at $246,000 in 2025 ($252,000 for 2026).

Deduction and Contribution Limits

The maximum amount a person is able to deduct from their taxes by contributing to a retirement account may correspond to an account’s contribution limits.

Here are the maximum contributions for the 2025 tax year:

•  Traditional IRA Limits: $7,000 ($8,000 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan

•  401(k): $23,500 (additional $7,500 if age 50 or older; those aged 60 to 63 can contribute up to an extra $11,250 instead of $7,500). Under a new law that went into effect on January 1, 2026 as part of SECURE 2.0, individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. With Roths, individuals pay taxes on contributions upfront, but can make eligible withdrawals tax-free in retirement.

•  403(b): $23,500 (additional $7,500 if age 50 or older; those aged 60 to 63 can contribute up to an extra $11,250 instead of $7,500). As of 2026, those age 50-plus with FICA wages exceeding $150,000 in 2025 are required to put their 403(b) catch-up contributions into a Roth account.

•  457(b): $23,500 (additional $7,500 if age 50 or older; those aged 60 to 63 can contribute up to an extra $11,250 instead of $7,500). As of 2026, those age 50-plus with FICA wages exceeding $150,000 in 2025 are required to put their 457(b) catch-up contributions into a Roth account.

•  Thrift Savings Plan (TSP): $23,500 (additional $7,500 if age 50 or older; those aged 60 to 63 can contribute up to an extra $11,250 instead of $7,500)

•  SEP IRA: The lower of 25% of an employee’s income, or $70,000

•  Simple IRA or 401(K): $16,500 (additional $3,500 if age 50 or older; those aged 60 to 63 can contribute up to an extra $5,250 instead of $3,500, thanks to SECURE 2.0)

Here are the maximum contributions for the 2026 tax year:

•  Traditional IRA: $7,500 ($8,600 if age 50 or older), deductibility depends on whether the person is covered by a workplace retirement plan

•  401(k): $24,500 (additional $8,000 if age 50 or older; for 2026, those aged 60 to 63 can contribute up to an extra $11,250 instead of $8,000)

•  403(b): $24,500 (additional $8,000 if age 50 or older; for 2026, those aged 60 to 63 can contribute up to an extra $11,250 instead of $8,000)

•  457(b): $24,500 (additional $8,000 if age 50 or older; for 2026, those aged 60 to 63 can contribute up to an extra $11,250 instead of $8,000)

•  Thrift Savings Plan (TSP): $24,500 (additional $8,000 if age 50 or older; for 2026, those aged 60 to 63 can contribute up to an extra $11,250 instead of $8,000)

•  SEP IRA: The lower of 25% of an employee’s income, or $72,000

•  Simple IRA or 401(K): $17,000 (additional $4,000 if age 50 or older; for 2026, those aged 60 to 63 can contribute up to an extra $5,250 instead of $4,000)

The above lists are only meant as a guide and do not take into account all factors that could impact contribution or deduction limits — such as catch-up contributions. Anyone with questions about what accounts they qualify for should consult a tax professional.

Investing for Retirement

Different types of retirement accounts come with distinct tax benefits and, for eligible investors, IRA tax deductions. Opening a retirement account and contributing to certain tax-deferred accounts may affect how much a person owes in income taxes in a given year. Roth accounts may provide tax-free withdrawals later on.

Prepare for your retirement with an individual retirement account (IRA). It’s easy to get started when you open a traditional or Roth IRA with SoFi. Whether you prefer a hands-on self-directed IRA through SoFi Securities or an automated robo IRA with SoFi Wealth, you can build a portfolio to help support your long-term goals while gaining access to tax-advantaged savings strategies.

Easily manage your retirement savings with a SoFi IRA.

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

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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04
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Can You Contribute to Both a 401(k) and an IRA?

By | Budgeting & Goals, Growing Wealth, invest | Comments Off on Can You Contribute to Both a 401(k) and an IRA?

“Can I contribute to a 401(k) and IRA?” It’s a question many individuals ask themselves as they start planning for their future. The short answer is yes, it’s possible to have a 401(k) or other employer-sponsored plan at work and also make contributions to an individual retirement plan, either a traditional or a Roth IRA.

If you have the money to do so, contributing to both a 401(k) and an IRA could help you fast track your retirement goals while enjoying some tax savings. But your income and filing status may affect the amounts you are allowed to contribute, in addition to the tax benefits you might see from a dual contribution strategy.

Read on to learn more about the guidelines and restrictions for having these two types of accounts and to answer the question “Can I contribute to a 401(k) and IRA?”

Key Points

•   It is possible to contribute to both a 401(k) and an IRA for retirement savings.

•   401(k) plans are employer-sponsored and allow both employee and employer contributions.

•   IRAs are individual retirement accounts that anyone can set up for themselves.

•   Contribution limits and tax benefits vary for 401(k)s and IRAs based on income and filing status.

•   Having both types of accounts can provide flexibility and help optimize taxes and distribution strategies.

Introduction to Retirement Savings Accounts

Although both IRAs and 401(k)s are retirement savings accounts, there are some important differences to know. The main one is that a 401(k) is an employer-sponsored retirement plan that allows both the employee and employer to contribute to the account.

IRAs are Individual Retirement Accounts that anyone can set up for themselves. There are two main types of IRAs: traditional and Roth.

Here’s a closer look at key differences between 401(k) plans and IRAs.

Understanding the Basics of 401(k)s and IRAs

A 401(k) is an employer-sponsored retirement plan. Employees sign up for a 401(k) through work and their contributions are automatically deducted directly from their paychecks. The money contributed to a 401(k) is tax deferred, which means you are not taxed on it until you withdraw it in retirement. Some employers match employees’ contributions to a 401(k) up to a certain amount.

An IRA is a tax-advantaged savings account that you can use to put away money for retirement. Money in an IRA can potentially grow through investment. While there are different types of IRAs, two of the most common types are traditional IRAs and Roth IRAs. The main difference between the two is the way they are taxed.

With a Roth IRA, you make after-tax contributions, and those contributions are not tax deductible. However, the money can potentially grow tax-free, and typically, you won’t owe taxes on it when you withdraw it in retirement (or at age 59 ½ and older). Individuals need to fall within certain income limits to open a Roth IRA (more about that later).

With a traditional IRA, your contributions are made with pre-tax dollars. Your contributions may lower your taxable income in the year you contribute. The money in a traditional IRA is tax-deferred, and you pay income taxes on it when you withdraw it. Traditional IRAs tend to have fewer eligibility requirements than Roth IRAs.

The Importance of Investing in Your Future

Retirement might seem like a long way off, but it’s vital to keep in mind that saving for it now can help you to meet your lifestyle needs and goals in your post-working years.

As you start planning your retirement savings, it’s a good idea to determine the estimated age you can retire, as the timing can influence other choices — like how much you choose to save, and what investments you might pick.

There are plenty of resources available online, including SoFi’s retirement calculator to help you determine potential retirement timelines and scenarios.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

Can I Contribute to a 401(k) and an IRA?

This is a good question to ask if you’re just getting started on your retirement planning journey. For example, if you’re already contributing to a plan at work, you may be wondering if you can also save money in an IRA.

Or maybe you opened an IRA in college but now you’re starting your career and have access to a 401(k) for the first time. You may be unsure whether it makes sense to keep making contributions to an IRA if you’ll soon be enrolled in your employer’s retirement plan.

Having a basic understanding of how 401(k)s and IRAs work can help you make the most of these accounts when mapping out your retirement strategy.

Rules and Regulations for Multiple Retirement Accounts

There is no limit to the number of retirement accounts you can have. However, there are IRS rules about how much you can contribute to these accounts. And if you have multiples of the same type of retirement account, like two IRAs, you need to stay within the overall limit for both accounts combined. In other words, there is one single annual contribution limit for multiple IRAs.

In many cases, it may be beneficial to have more than one retirement account type. Brian Walsh, CFP® at SoFi says multiple accounts allow you have “added flexibility to optimize your taxes and your overall distribution strategy in 30, 40, or 50 years.”

Key Takeaways for Dual Contributions

When contributing to a 401(k) and an IRA you’ll want to remember these important points:

•   You can contribute up to the limit on your workplace 401(k) and up to the limit on your IRA annually.

•   If you have multiples of the same type of retirement account, such as two IRAs, you cannot exceed the single annual contribution limit across the accounts.

•   If you have a 401(k) at work, the tax deduction on your contributions for a traditional IRA may be limited, or you may not be eligible for a deduction at all.

2025 and 2026 Contribution Limits for 401(k) and IRA Plans

The IRS sets annual contribution limits for 401(k) and IRA plans and those limits change each year. These are the contribution limits for 2025 and 2026.

401(k) Contribution Limits and Considerations

As noted, a 401(k) plan may be funded by employer and employee contributions. Here are the annual 401(k) contribution limits for 2025:

•  $23,500 for employee contributions

•  $7,500 in catch-up contributions for employees age 50 or older

•  $11,250 (instead of $7,500) in catch-up contributions for employees aged 60 to 63

•  $70,000 limit for total employer and employee contributions ($77,500 including catch-up contributions for those 50 and older; $81,250 for those aged 60 to 63)

These are the annual 401(k) contribution limits for 2026:

•  $24,500 for employee contributions

•  $8,000 in catch-up contributions for employees age 50 or older

•  $11,250 (instead of $8,000) in catch-up contributions for employees aged 60 to 63

•  $72,000 limit for total employer and employee contributions ($80,000 including catch-up contributions for those 50 and older; $83,250 for those aged 60 to 63)

Under a new law that went into effect on January 1, 2026 (as part of SECURE 2.0), individuals aged 50 and older who earned more than $150,000 in FICA wages in 2025 are required to put their 401(k) catch-up contributions into a Roth 401(k) account. Because of the way Roth accounts work, these individuals will pay taxes on their catch-up contributions upfront, but can make eligible withdrawals tax-free in retirement. Those impacted by the new law should check with their employer or plan administrator to find out how to proceed.

IRA Contribution Limits and Income Thresholds

IRAs are funded solely by individual contributions. Here are the annual contribution limits for traditional and Roth IRAs for 2025:

•  $7,000 for regular contributions

•  $1,000 catch-up contributions for those age 50 and older

And here are the annual contribution limits for traditional and Roth IRAs for 2026:

•  $7,500 for regular contributions

•  $1,100 catch-up contributions for those age 50 and older

These limits apply to total contributions to traditional and Roth IRAs, as mentioned earlier. So if you have more than one IRA, the most you could add to those accounts combined in 2025 is $7,000 — or $8,000 if you’re 50 or older. And, likewise, the most you could contribute to those IRA accounts combined in 2026 is $7,500, or $8,600 if you’re 50 or over.

The Intricacies of IRA Contributions

There are some rules about IRA contributions that it’s vital to be aware of. For instance, you can’t save more than you earn in taxable income in your IRA. That means if you earn $4,000 for a year, you can only contribute $4,000 in your IRA.

Plus, as discussed above, the most you can contribute, whether you have one IRA or multiple IRAs, is the annual contribution limit.

And finally, the type of IRA you have affects the portion of your contributions (if any) you can deduct from your taxes.

Traditional vs Roth IRA: What You Need to Know

The main difference between a traditional IRA and a Roth IRA is how and when you are taxed. There are also some eligibility requirements and deduction limits.

IRA Deduction Limits and Eligibility Requirements

Traditional IRAs offer the benefit of tax-deductible contributions. The money you deposit is pre-tax (meaning, you don’t pay taxes on those funds), and contributions grow tax-deferred. You pay tax when making qualified withdrawals in retirement.

However, if either you or your spouse is covered by a retirement plan at work and your income is higher than a certain level, the tax deduction of your annual contributions to a traditional IRA may be limited.

Specifically, if you have a workplace retirement plan, a full deduction of the amount you can contribute to a traditional IRA in 2025 is allowed if:

•  You file single or head of household and your modified adjusted gross income (MAGI) is $79,000 or less

•  You’re married and file jointly, or a qualifying widow(er), with a MAGI of $126,000 or less

If your spouse has a workplace retirement plan and you’re married filing jointly, a full deduction of the amount you can contribute to a traditional IRA in 2025 is allowed if your MAGI is $236,000 or less

For 2026, if you have a workplace returement plan, you can take a full deduction of your yearly contributions to a traditional IRA if:

•  You file single or head of household and your modified adjusted gross income (MAGI) is $81,000 or less

•  You’re married and file jointly, or a qualifying widow(er), with an MAGI of $129,000 or less

If your spouse has a workplace retirement plan and you’re married filing jointly, a full deduction of the amount you can contribute to a traditional IRA in 2026 is allowed if your MAGI is $242,000 or less

A partial deduction is allowed for incomes over all these limits, though it does eventually phase out entirely.

Roth IRAs allow you to make contributions using after-tax dollars. This means you don’t get the benefit of deducting the amount you contribute from your current year’s taxes. The upside of Roth accounts, though, is that you can typically make qualified withdrawals in retirement tax-free.

But there’s a catch: Your ability to contribute to a Roth IRA is based on your income. So how much you earn could be a deciding factor in answering the question, can you have a Roth IRA and 401(k) at the same time.

You can make a full contribution to a Roth IRA if:

•  In 2025, you file single or head of household, or you’re legally separated, and have a modified adjusted gross income of less than $150,000. For 2026, your MAGI must be less than $153,000 to make the full contribution.

•  In 2025, you’re married and file jointly, or are a qualifying widow(er), and your MAGI is less than $236,000. For 2026, you need a MAGI less than $242,000 to be able to make a full contribution.

The amount you can contribute to a Roth IRA is reduced as your income increases until it phases out altogether.

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

How Contributing to Both a 401(k) and an IRA Affects Your Taxes

Both 401(k) plans and IRAs can offer tax benefits. Here are the key tax benefits to know when contributing to these plans:

•   401(k) contributions are tax-deductible

•   Traditional IRA contributions can be tax-deductible for eligible savers

•   Roth IRA contributions are not tax deductible, but Roth plans allow you to make tax-free withdrawals in retirement

Understanding the Tax Implications

You might choose to contribute to a Roth IRA and a 401(k) if you anticipate being in a higher tax bracket when you retire. By paying taxes now, rather than when you’re in the higher tax bracket later, you could limit your tax liability.

However, if you expect to be in a lower tax bracket when you retire, you may want to opt for a traditional IRA so that you pay the taxes later.

Strategies for Minimizing Taxes on Withdrawals

Both 401(k) plans and IRAs are designed to be used for retirement, which is why the taxes you pay are deferred (and why these accounts are typically called tax-deferred accounts). As such, early withdrawals from 401(k) plans are discouraged and you may trigger taxes and a penalty when taking money from these plans prior to age 59 ½.

Here are the most important things to know about withdrawing money from 401(k) plans or traditional and Roth IRAs:

•   Withdrawals from 401(k) and traditional IRA accounts are subject to ordinary income tax at the time you withdraw them. If you withdraw funds before age 59 ½, you would owe taxes and a 10% penalty — although some exceptions apply (e.g. an emergency or hardship withdrawal).

•   Roth IRA contributions and earnings are treated somewhat differently. Withdrawals of original contributions (not earnings) to a Roth IRA can be made tax- and penalty-free at any time.

•   If you withdraw earnings from a Roth account prior to age 59 ½, and if you haven’t owned the account for at least five years, the money could be subject to taxes and a 10% penalty. This is called the five-year rule. Special exceptions may apply for a first-time home purchase, college expenses, and other situations.

In addition to taxes, a 10% early withdrawal penalty can apply to withdrawals made from 401(k) plans or IRAs before age 59 ½ unless an exception applies. But the IRS does allow for several exceptions. In terms of what constitutes an exception, the IRS waives the penalty in certain scenarios, including total and permanent disability of the plan participant or owner, payment for qualified higher education expenses, and withdrawals of up to $10,000 toward the purchase of a first home.

You might also avoid the penalty with 401(k) plans if you meet the rule of 55. This rule allows you to withdraw money from a 401(k) penalty-free if you leave your job in the year you turn 55, although you would still owe ordinary income taxes on that money. This scenario also has some restrictions, so you may want to discuss it with your plan administrator or a financial advisor.

Finally, once you reach a certain age, you are required to withdraw minimum amounts from 401(k) plans and traditional IRAs or else you could be charged a significant tax penalty. These are known as required minimum distributions or RMDs.

The IRS generally requires you to begin taking RMDs from these plans at age 73 (as long as you reached age 72 after December 31, 2022). The amount you’re required to withdraw is based on your account balance and life expectancy, and many retirement plan providers offer help calculating the exact amount of your required distributions.

This is critical, because if you don’t take RMDs on time you may trigger a 50% tax penalty on the amount you were required to withdraw.

RMDs are not required for Roth IRAs.

Choosing Between a 401(k) and an IRA

If you are deciding between a 401(k) and an IRA, there are a number of factors you’ll want to weigh carefully before making a decision.

Factors to Consider When Making Your Choice

Overall, IRAs tend to offer more investment options, and 401(k)s allow higher annual contributions. If your employer matches 401(k) contributions up to a certain amount, that’s another important consideration. Additionally, you’ll want to think about the tax advantages and implications of each type of account.

Comparing Benefits and Drawbacks of Each Plan

Both 401(k)s and IRAs have advantages and disadvantages. It’s important to consider all variables in determining which account is best for your situation.

401(k)

 IRA
Pros

•   Larger contribution limits than IRAs.

•   Employers may match employee contributions up to a certain amount.

•   Wide array of investment options.

•   A traditional IRA may allow tax deductions for contributions for those who meet the modified adjusted income requirements.
Cons

•   Limited investment options.

•   Potentially high fees.

•   Contribution amount is much smaller than it is for a 401(k).

•   Roth IRAs have income requirements for eligibility.

Neither plan is necessarily better than the other. They each offer different features and possible benefits. If your employer doesn’t offer a 401(k) plan, you may want to set up a traditional or Roth IRA depending on your personal financial situation. And if you’re already contributing to a 401(k), you may still want to think about opening an IRA.

The Combined Power of a 401(k) and IRA

Instead of investing in only an IRA or your company’s retirement plan, consider how you can blend the two into a powerful investment strategy. One reason this makes sense is that you can invest more for your retirement, with the additional savings and potential growth providing even more resources to fund your retirement dreams.

How to Strategically Invest in Both Accounts

Since employers often match 401(k) contributions up to a certain percentage (for instance, your company might match the first 3% of your contributions), this boosts your overall savings. The employer match is essentially free money that you could get simply by making the minimum contribution to your plan.

Now imagine adding an IRA to the picture. Remember, with an IRA you have flexibility when investing. With a 401(k), you have limited options when it comes to investment funds. With an IRA, you’re able to decide what you’d like to invest in, whether it be stocks, bonds, mutual funds, exchanged-traded funds (ETFs), or other options.

To strategically invest in both accounts, consider contributing to 401(k) and IRA plans up to the annual limits, if you can realistically afford to. Make sure this is feasible given your budget, spending, and other financial goals you may have such as paying down debt or saving for your child’s education. And do some research into how this approach may affect your retirement tax deductions.

Not everyone is able to max out both retirement fund options, but even if you can’t, you can still create a powerful one-two punch by making strategic choices. First, think about your company-matching benefit for your 401(k). This is a key benefit and it makes sense to take as much advantage as you can.

Let’s say that your company will match a certain percentage of the first 6% of your gross earnings. Calculate what 6% is and consider contributing that much to your 401(k) and opening an IRA with other money you can invest this year.

And, if you end up having even more money to invest? Consider going back to your 401(k). There still may be value in contributing to your 401(k) beyond the amount that can be matched — for the simple reason that company-sponsored plans allow you to save more than an IRA does.

Now, let’s say you have a 401(k) plan but your employer doesn’t offer a matching benefit. Then, consider contributing to an IRA first. You may benefit from having a wider array of investment choices. Once you’ve maxed out what you can contribute to your IRA, then contribute to your 401(k).

These are all just options and examples, of course. What you ultimately decide to do depends on your financial and personal situation.

Long-term Growth Potential

By investing in both a 401(k) and IRA, you are taking advantage of employer-matched contributions and diversifying your retirement portfolio which can help manage risk and may potentially improve the overall performance of your investments in aggregate.

In addition, while a 401(k) offered by your employer may have limited investment options to choose from, with an IRA, you have more access to different investment options. That could, potentially, help grow your money for retirement, depending on what you invest in and the rate of return of those investments.

Plus, by contributing to both kinds of retirement accounts, you are likely putting more money overall into saving for retirement.

Step-by-Step Guide to Contributing to Both 401(k) and IRA

If you’ve decided to open and contribute to both a 401(k) and an IRA, here’s how to get started.

Eligibility Verification and Contribution Processes

To determine if you’re eligible to contribute to a 401(k), find out if your employer offers such a plan. Your HR or benefits department should be able to help you with this.

If a 401(k) is available, fill out the paperwork to enroll in the plan. Decide how much you want to contribute. This will typically either be a set dollar amount or a percentage of your paycheck that will usually be automatically deducted. Next, select the type of investment options you’d like from those that are available. You could diversify your investments across a range of asset classes, such as index funds, stocks, and bonds, to help reduce your risk exposure.

Individuals with earned income can open an IRA — even if they also have a 401(k). First, decide what type of IRA you’d like to open. A traditional IRA generally has fewer eligibility requirements. A Roth IRA has income limits on contributions. So, in this case, you’ll need to find out if you are income-eligible for a Roth.

You can typically open an IRA through a bank, an online lender, or a brokerage. Once you’ve decided where to open the account and the type of IRA you’d like, you can begin the process of opening the account. You’ll need to supply personal information such as your name and address, date of birth, Social Security number, and employment information. You’ll also need to provide your banking information to transfer funds into the IRA.

Next decide how much to invest in the IRA, based on the annual maximum contribution amount allowed, as discussed above, and choose your investment options. Remember, diversifying your investments across different asset classes and investment sectors can help manage risk.

Examples of Diversified Retirement Portfolios

To build a diversified portfolio, one guideline is the 60-40 rule of investing. That means investing 60% of your portfolio in stocks and 40% in fixed income and cash.

However, that formula varies depending on your age. The closer you get to retirement, the more conservative with your investments you may want to be to help minimize your risk.

No matter what your age, make sure your investments are in line with your financial goals and tolerance for risk.

The Takeaway

Not only is it possible to have a 401(k) and also a traditional or Roth IRA, it might offer you significant benefits to have both, depending on your circumstances. The chief upside, of course, is that having two accounts gives you the option to save even more for retirement.

The main downside of deciding whether to fund a 401(k) and a traditional or Roth IRA is that it can be a complicated question: You have to consider your ability to save, your risk tolerance, and the tax implications of each type of account, as well as your long-term goals. Then, if you decide to move ahead with both types of accounts, you can work on opening them up and contributing to them.

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Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Can you max out both a 401(k) and an IRA?

Yes, you can max out both a 401(k) and an IRA up to the annual amounts allowed by the IRS. For 2025 that’s $7,000 for an IRA ($8,000 if you’re 50 or older), and $23,500 for a 401(k) ($31,000 if you’re 50 or older; $34,750 if you’re aged 60 to 63). For 2026, it’s $7,500 for an IRA ($8,600 if you’re 50 or older), and $24,500 for a 401(k) ($32,500 if you’re 50 or older; $35,750 if you’re aged 60 to 63).

How do employer contributions affect your IRA contributions?

Employer contributions to a 401(k) don’t affect your IRA contributions. You can still contribute the maximum allowable amount annually to your IRA even if your employer contributes to your 401(k). However, having a retirement plan like a 401(k) at work does affect the portion of your IRA contributions that may be deductible from your taxable income. In this case, the deductions are limited, and potentially not allowed, depending on the size of your salary.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.


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For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

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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Feb
04
2026
Student Loan Forgiveness Tax Bomb, Explained

Do You Have to Pay Taxes on Forgiven Student Loans?

By | Fresh Out of School, Student Loans, student_loan | Comments Off on Do You Have to Pay Taxes on Forgiven Student Loans?

The Internal Revenue Service (IRS) generally requires that you report a forgiven or canceled debt as income for tax purposes. But tax on student loan forgiveness is a different matter.

The American Rescue Plan (ARP) Act specifies that student loan debt forgiven between 2021 and 2025, and incurred for postsecondary education expenses, will not be counted as income, and therefore does not incur a federal tax liability.

This includes federal Direct Loans, Family Federal Education Loans (FFEL), Perkins Loans, and federal consolidation loans. Additionally, nonfederal loans such as state education loans, institutional loans direct from colleges and universities, and even private student loans may also qualify.

However, some states have indicated that they still count canceled student loans as taxable income. Read on for more information about taxes on student loans, including which forgiven student debt is taxable and by whom.

Key Points

•   Because of the American Rescue Plan Act, student loans forgiven between 2021 and 2025 are exempt from federal taxation.

•   Eight states — Arkansas, California, Illinois, Indiana, Minnesota, Mississippi, North Carolina, and Wisconsin — still tax forgiven loans.

•   Use a student loan forgiveness tax calculator to estimate potential state tax liability.

•   Set aside monthly payments to save for potential tax bills on forgiven student loans after 2025.

•   Explore the student loan interest deduction to help reduce federal taxable income.

Types of Student Loan Forgiveness Programs

Federal student debt can typically be canceled through an income-driven repayment plan (IDR) or forgiveness programs. However, as of February 2026, applications for some income-driven repayment plans are on hold due to legal challenges. You can find out more about this situation on the Federal Student Aid (FSA) website.

Here are some common federal forgiveness programs and how typically they work.

Public Service Loan Forgiveness (PSLF)

If you are employed full-time for the government or a nonprofit organization, you may be eligible for Public Service Loan Forgiveness for federal student loans like federal Direct Loans.

After you make 120 qualifying payments under an income-driven repayment plan for an eligible employer, the PSLF program forgives the remaining balance on your federal student loans.

However, because IDR plans are currently not accepting applications, and you must achieve forgiveness by repaying your loans under one of these plans, you will likely need to wait before you can start working toward PSLF. You can get more details about PSLF on the FSA website.

Income-Driven Repayment (IDR) Forgiveness

IDR options generally offer loan forgiveness after borrowers make consistent payments for a certain number of years. However, forgiveness on all but one of the IDR plans is paused as of February 2026.

On an IDR plan, how much you owe each month is based on your monthly discretionary income and family size. These are the types of IDR plans.

•   Income-Based Repayment: With IBR, payments are generally about 10% of a borrower’s discretionary income, and any remaining balance is forgiven after 20 or 25 years. On the IBR plan, forgiveness (after the repayment term has been met) is still proceeding as of February 2026, since this plan was separately enacted by Congress.

•   Pay As You Earn (PAYE): The monthly payment on PAYE is about 10% of a borrower’s discretionary income, and after 20 years of qualifying payments, the outstanding loan balance is forgiven. As of February 2026, forgiveness has been paused for borrowers who were already enrolled in this plan.

•   Income-Contingent Repayment (ICR): The monthly payment amount on ICR is either 20% of a borrower’s discretionary income divided by 12, or the amount they would pay on a repayment plan with a fixed payment over 12 years, whichever is less. After 25 years of repayment, the remaining loan balance is forgiven. As of February 2026, forgiveness has been paused for borrowers who were already enrolled in the plan.

Teacher Loan Forgiveness

With Teacher Loan Forgiveness (TLF), teachers who have been employed full-time for five consecutive years at an eligible school and meet certain other qualifications may be eligible to have up to $17,500 of their federal Direct Subsidized and Unsubsidized Loans and federal Stafford Loans forgiven.

Recommended: Do Student Loans Count as Income?

Which Student Loan Cancellations Are Not Federally Taxed?

When it comes to student loan forgiveness and taxes, under the provisions of the ARP Act, private or federal student debt for postsecondary education that was or is forgiven in the years of 2021 through 2025 will not be federally taxed. This means that these borrowers are not required to report their discharged loan amount as earned income, and the forgiven amount is not taxable.

Beyond the special five-year window of tax exemption provided by the ARP Act, participants in the Public Service Federal Loan program who receive forgiveness don’t have to pay taxes on their canceled loan amount. The PSLF program explicitly states that earned forgiveness through PSLF is not considered taxable income.

Which Student Loan Cancellations Are Federally Taxed?

Borrowers who receive loan cancellation after successfully completing an income-driven loan repayment plan can generally expect to pay taxes. However, those whose debt was or will be discharged in the years 2021 through 2025, will not need to pay federal taxes on their forgiven loans due to the ARP Act.

Forgiven amounts that are taxable are treated as earned income during the fiscal year it was received. Your lender might issue tax Form 1099-C to denote your debt cancellation.

💡Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.

Which States Tax Forgiven Student Loans?

Typically, states follow the tax policy of the federal government. But some states have announced that their residents must include their forgiven or canceled student loan amount on their state tax returns.

As of February 2026, the eight states that say certain forgiven loans are taxable are:

•   Arkansas (except for loans forgiven through PSLF)

•   California (except for loans forgiven through PSLF)

•   Illinois (except for loans forgiven through PSLF)

•   Indiana (except for loans forgiven through PSLF, TLF, and certain other programs)

•   Minnesota (except for loans forgiven through PSLF)

•   Mississippi

•   North Carolina

•   Wisconsin (except for loans forgiven through PSLF and TLF).

Additional states tend to conform to federal tax laws, so it’s important to consult a qualified tax professional who is knowledgeable about forgiveness of student loans in your state to confirm the latest information of how much you owe.

How to Prepare for Taxes on Forgiven Student Loans

If you’re anticipating a tax liability after receiving loan forgiveness, there are a few steps you can take to get ready.

Step 1: Calculate Your Potential Tax Bill

The first step when preparing for a student loan forgiveness tax bill is calculating how much you might owe come tax season. This can be influenced by factors including the type of forgiveness you are receiving and the forgiven amount.

To avoid sticker shock, you can use a student loan forgiveness tax calculator, like the Loan Simulator on StudentAid.gov. It lets you see how much of your student loan debt might be forgiven, based on your projected earnings.

Step 2: Choose the Right Plan

Although IDR plans are not currently accepting applications, they are designed to help keep borrowers’ monthly payments to a manageable amount while they’re awaiting loan forgiveness. All of these repayment plans calculate a borrower’s monthly payment based on their discretionary income and family size.

Step 3: Prioritize Saving

If you’re expecting loan forgiveness after 2025, it might be beneficial to start allocating extra cash flow to a dedicated tax savings fund now. Incrementally setting money aside over multiple years can ease the burden of a sudden lump-sum tax bill down the line.

Another way to potentially save some money is to take the student loan interest deduction on your taxes each year, if you qualify. The deduction, which is up to $2,500 annually, can reduce your taxable income.

You’ll need your student loan tax form to make sure you are eligible for the deduction. The form should be sent to you by your loan servicer or lender. You’ll file the form with your taxes.

Recommended: Guide to Student Loan Tax Deductions

What If I Can’t Afford to Pay the Taxes?

If you can’t afford to cover an increased tax bill, contact the IRS to discuss your options. Inquire about payment plans that can help you pay smaller tax payments over a longer period of time. However, be aware that fees and interest may accrue on such plans.

The Takeaway

Thanks to a special law passed by Congress in 2021, post-secondary education loans forgiven from 2021 through 2025 will not count as earned income and will not be federally taxed. That said, state taxes may be due on forgiven loans, depending on where the borrower lives.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.


With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

Is loan repayment considered taxable income?

If your employer offers loan repayment assistance benefits, they would typically be considered taxable income. However under the CARES Act, which was signed into law in 2020, employer assistance loan payments up to $5,250 made each year from 2021 through 2025 are tax-free.

Will refinancing my student loans help me avoid taxes?

Refinancing student loans does not involve taxes. However, the interest you pay on a refinanced student loan may qualify for the student loan interest deduction. If you’re eligible, you may be able to deduct up to $2,500, which could lower your taxable income.

Will student loan forgiveness be taxed after 2025?

The American Rescue Plan Act stipulates that forgiven student loans will not be taxed from 2021 through 2025. Currently, there are no plans to extend that tax relief beyond 2025.

Are state taxes different for forgiven student loans?

While states typically follow the federal tax policy, five states say that certain forgiven loans are taxable. Those five states are: Arkansas (except for loans forgiven through Public Service Loan Forgiveness), Indiana (except for loans forgiven through PSLF, Teacher Loan Forgivenesss, and certain other programs), Mississippi, North Carolina, and Wisconsin (except for loans forgiven through PSLF and TLF).

What steps should I take if I owe taxes on forgiven student loans?

If you owe taxes on forgiven student loans, calculate how much you’ll owe in taxes with the forgiven loan amount factored into your taxable income. Then, once you have the estimate of what you owe, you can start saving up to pay it. One way to do this is to put away the monthly amount you previously paid on your student loans to help offset the amount you owe. So if your student loan payment was $100 a month, deposit that amount monthly into a savings account, and use it to help pay what you owe in taxes.

Photo credit: iStock/fizkes

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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.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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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SOSLR-Q125-020

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Feb
02
2026

2026 VA Home Loan Limits vs. 2025 VA Home Loan Limits

By | Family Finances, Home Ownership, mortgage | Comments Off on 2026 VA Home Loan Limits vs. 2025 VA Home Loan Limits

Home prices may have flattened out a bit in some markets, but VA loan limits are still getting a bit of a boost in 2026.

For most U.S. counties, lenders’ baseline limit for VA loans (backed by the U.S. Department of Veterans Affairs) is now $832,750, compared to $806,500 in 2025. And loan limits for single-family homes in counties with higher home costs also increased — from a maximum (or “ceiling”) of $1,209,750 in 2025 to $1,249,125 in 2026.

What could higher loan limits mean for you? If you’re a veteran considering a home loan, read on for a breakdown of what you can expect if you purchase a home this year.

Key Points

•   VA home loan limits for 2026 have increased from $806,500 to $832,750, reflecting high home prices.

•   VA loan applicants with full entitlement because they are first-time homebuyers or have paid off previous VA loans do not have to worry about loan limits.

•   The national ceiling for high-cost counties has risen from $1,209,750 to $1,249,125.

•   Higher limits allow more veterans to qualify for larger loans without a down payment, benefiting those in expensive areas.

•   The VA guarantees up to 25% of the loan amount, with limits based on the borrower’s remaining entitlement.

What Is the VA Loan Limit?

To be clear: The VA doesn’t limit how much an eligible veteran, service member, or survivor using a VA loan benefit can borrow to finance a home. There are only limits on how much of the loan amount the VA will guarantee if the borrower is unable to repay the mortgage. And that limit can vary based on the status of the borrower’s VA entitlement.

Most borrowers who apply for a VA loan have something called “full entitlement.” This means that if the borrower defaults, the VA will guarantee — or repay the lender — up to 25% of whatever loan amount the lender approved based on its own criteria. If you’re a first-time homebuyer, or if you’ve paid off a past VA loan, you can expect to have a full entitlement.

But if a borrower has what the VA refers to as a “remaining entitlement” (they have a VA loan they’re still paying back), the VA will limit its guarantee based on the Federal Housing Finance Agency (FHFA) loan limit in the county where the home is being purchased.

Instead of paying the lender up to 25% of the full loan amount if the borrower defaults, the VA will limit its guarantee to up to 25% of the applicable FHFA loan limit minus the amount of the entitlement the borrower already used. Borrowers can still get a VA loan using their remaining entitlement, but they may have to make a down payment to get that loan.

To check your VA entitlement status, you can request a certificate of eligibility (COE) through your lender, online, or by mail.

💡 Quick Tip: Buying a home shouldn’t be aggravating. SoFi’s online mortgage application is quick and simple, with dedicated Mortgage Loan Officers to guide you from start to finish.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.

When Do VA Loan Limits Apply?

You may wonder when VA loan limits apply and, more specifically, how annual changes to loan limits are calculated. The VA bases its loan guarantee limits on the conforming loan limits (CLL) the FHFA sets for conventional home mortgage loans that are eligible for purchase by Fannie Mae and Freddie Mac.

By law, the FHFA must adjust these limits annually to reflect changes to home prices in the U.S. Between the third quarter of 2024 and the third quarter of 2025, home prices increased, on average, by 3.26%, based on the FHFA House Price Index. So the 2026 baseline CLL increased by that percentage.

But your county’s loan limit could be considerably higher, depending on average home prices in your area.

These differences are, in part, due to the variability of cost of living by state.

2026 VA Loan Limit Calculator Table

Higher home prices across the U.S. brought the FHFA’s baseline limit (and, therefore, the VA’s baseline limit for 2026) to $832,750 for a single-family home in most counties.

But in counties where 115% of the median home value is higher than the baseline CLL, the limit has been increased by a percentage that reflects those higher prices. There is a ceiling, or cap, however, of 150%.

Here’s what that looks like for a single-family home in 2026 vs. 2025.

VA Loan Limits in 2026 and 2025

Year National Baseline 115% to 149% National Ceiling (150%)
VA Loan Limits 2026 $832,750 $957,662 to $1,240,797 $1,249,125
VA Loan Limits 2025 $806,500 $927,475 to $1,201,685 $1,209,750

If you’re buying in Alaska, Hawaii, Guam, or the U.S. Virgin Islands special statutory provisions dictate the loan limit, which in 2026 is $1,249,125 for a single-family home.

VA Loan Limit Example

Here’s a hypothetical example of how a borrower could be affected by the county loan limit on a VA loan.

Let’s say Joe, a Navy veteran, wants to buy a home in San Diego County, even though he knows the cost of living in California is higher than average. Joe manages to find a $715,000 single-family home and he wants to buy with a VA loan, but he still owes $100,000 on another VA loan.

The 2026 single-family limit in San Diego County is $1,104,000. Since the VA will guarantee up to a quarter of that amount, Joe has a maximum entitlement of $276,000.

$1,104,000 x .25 = $276,000

But Joe has to subtract the amount of his entitlement he’s already used, which leaves him with $176,000.

So, the VA would guarantee up to $176,000 of Joe’s loan.

Since most lenders want at least 25% of a borrower’s loan amount to be covered by the VA entitlement and/or a down payment, Joe might have to make a $2,750 down payment to get a VA loan for this home.

$715,000 x .25 = $178,750

$178,750 – $176,000 = $2,750

How Does My County Loan Limit Affect Me?

Just like Joe in the example above, if you’re using a remaining entitlement, your county loan limit could determine whether you’ll have to make a down payment to buy the home you want.

It doesn’t mean you can’t get the loan. If you have enough to make the down payment required by your lender, you may even qualify for a VA-backed loan that’s more than your county loan limit.

It’s important to note that though the example provided here is for a home purchase, the same entitlement limits apply if you’re considering refinancing your VA loan. In that case, your county limit could affect how much you’ll be asked to pay in closing costs.

💡 Quick Tip: Apply for a VA loan and borrow up to $1.5 million with a fixed- or adjustable-rate mortgage. The flexibility extends to the down payment, too — qualified VA homebuyers don’t even need one!

How to Apply for a VA Home Loan

Most VA loans are “VA-backed” loans, which means they’re issued by approved private lenders. The VA’s guarantee that it will help repay the lender if a borrower defaults is an incentive for lenders to offer these loans with attractive terms.

Still, it can be a good idea to shop around for the loan that best meets your family needs, and compare interest rates, fees, customer service, and any additional benefits various lenders might be offering.

You also may want to compare the terms of your top VA loan offer to what you can get with different types of mortgage loans, including a conventional loan.

Of course, no matter which type of loan you ultimately choose, you’ll still have to qualify for a mortgage with a lender.

There isn’t a requisite minimum credit score for VA loans. Instead, the VA asks lenders to review the borrower’s “entire loan profile,” which could include your credit history, DTI ratio, employment history, and assets. Individual lenders also may have their own approval criteria you should be aware of when you’re ready to apply for a VA loan.

Pros and Cons of VA Loan Limits

The VA loan limit is just one of several factors you may want to consider if you’re thinking about using a VA loan for a home purchase or a mortgage refinance. Like any other mortgage option, VA loans have their pros and cons. Here are a few to keep in mind:

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Pros:

•   Interest rates may be lower with a VA loan than with a conventional loan.

•   You may not need to make a down payment or pay mortgage insurance.

•   Though non-VA jumbo loans may require a higher down payment, this isn’t necessarily true with a VA jumbo loan.

•   If you decide to sell your home, you can allow the buyer to assume (or take over) your existing mortgage.

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Cons:

•   VA purchase loans are only for primary homes; you can’t use the loan to buy a vacation home or to invest in a home that isn’t your main residence.

•   The VA charges a one-time “funding fee” that’s designed to cover foreclosure costs when homebuyers default on a loan. Currently, the fee ranges from 1.25% to 3.3% of the loan.

•   The home you hope to buy must be evaluated by a VA-approved appraiser to ensure it meets the VA’s minimum property standards. If the home you want is too rundown, it may not pass this appraisal.

Recommended: 2026 Home Loan Help Center

The Takeaway

VA loan limits are based on home prices in the U.S., and they’re adjusted annually to reflect price increases.

If you’re a first-homebuyer or you’ve paid off a past VA loan, you shouldn’t have to worry about VA loan limits. But if you want to buy a home and you already have a VA loan, the loan limit for your county could determine whether you’ll have to make a down payment to qualify for the amount you hope to borrow.

SoFi offers VA loans with competitive interest rates, no private mortgage insurance, and down payments as low as 0%. Eligible service members, veterans, and survivors may use the benefit multiple times.

Our Mortgage Loan Officers are ready to guide you through the process step by step.

FAQ

Will VA home loan limits increase in 2026?

VA home loan limits increased significantly in 2026. The baseline limit for VA loans is now $832,750, compared to $806,500 in 2025.

What is the conforming loan limit for 2026?

The national baseline conforming loan limit for 2026 is $832,750, although some counties have higher limits. The VA loan limit for a county is the same as its conforming loan limit.

What is the DTI limit for a VA loan in 2026?

The Department of Veterans Affairs hasn’t set a hard-and-fast limit on the debt-to-income (DTI) ratio it requires for its loans. But generally, lenders allow a 41% maximum for a VA loan.

Photo credit: iStock/Thai Liang Lim

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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement. †Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency. ^SoFi VA ARM: At the end of 60 months (5y/1y ARM), the interest rate and monthly payment adjust. At adjustment, the new mortgage rate will be based on the one-year Constant Maturity Treasury (CMT) rate, plus a margin of 2.00% subject to annual and lifetime adjustment caps. Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
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SOHL-Q126-018

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