Jul
30
2025

Averaging Down Stocks: Meaning, Example, Pros & Cons

By | Growing Wealth, invest, Investing | Comments Off on Averaging Down Stocks: Meaning, Example, Pros & Cons

Averaging down stocks is when an investor buys more shares of a stock they already own after that stock has lost value — and essentially buys more of the same stock at a discount. In effect, the averaging-down strategy is a way of lowering the average cost of a stock you already own.

It’s similar to dollar-cost averaging, where you invest the same amount of money in the same securities at steady intervals, regardless of whether the prices are rising or falling, thereby lowering your average cost basis over time.

While this strategy has a potential upside — if the stock price rises again — it can expose investors to greater risk if the price continues to decline.

Key Points

•   To average down, an investor buys additional shares of a stock they already own, after the price has declined.

•   Averaging down is a way to lower the average per-share cost of a position, potentially setting the investor up for bigger gains, assuming the stock rebounds.

•   The advantage of the averaging down strategy is the potential for gains, if the stock prices rises again.

•   If the stock price continues to fall, however, the investor would face larger losses.

•   Averaging down is similar to dollar-cost averaging, which involves investing the same dollar amount on a steady basis, which can lower the average cost per share in a portfolio.

What Is Averaging Down?

By using the strategy of averaging down and purchasing more of the same stock at a lower price, the investor lowers the average price (or cost basis) for all the shares of that stock in their portfolio.

So if you buy 100 shares at one price, and the price drops 10%, for example, and you decide to buy 100 more shares at the lower price, the average cost of all 200 shares is now lower.

Example of Averaging Down

Consider this example: Imagine you’ve purchased 100 shares of stock for $70 per share ($7,000 total) by investing online or through a broker. Then, the value of the stock falls to $35 per share, a 50% drop.

To average down, you’d purchase 100 shares of the same stock at $35 per share ($3,500). Now, you’d own 200 shares for a total investment of $10,500. This creates an average purchase price of $52.50 per share.

Potential of Gain Averaging Down

If the stock price then jumps to $80 per share, your position would be worth $16,000, a $5,500 gain on your initial investment of $10,500.

In this case, averaging down helped boost your average return. If you’d simply bought 200 shares at the initial price of $70 ($14,000), you’d only see a gain of $2,000.

Potential Risk of Averaging Down

As with any strategy, there’s risk in averaging down. If, after averaging down, the price of the stock goes up, then your decision to buy more of that stock at a lower price would have been a good one. But if the stock continues its downward price trajectory, it would mean you just doubled down on a losing investment.

While averaging down can be successful for long-term investors as part of a buy-and-hold strategy, it can be hard for inexperienced investors to discern the difference between a dip and a true price decline.

Why Average Down on Stock

Some investors may use averaging down stocks as part of other strategies when trading stocks.

1. Value Investing

Value investing is a style of investing that focuses on finding stocks that are trading at a “good value” — in other words, value stocks are typically underpriced. By averaging down, an investor buys more of a stock that they like, at a discount.

But in some cases, a stock may appear undervalued when it’s not. This can lead investors who may not understand how to value stocks into something called a value trap. A value trap is when a company has been trading at low valuation metrics (e.g. the P/E ratio or price-to-book value) for some time, and is not likely to rise.

While it may seem like a bargain, if it’s not a true value proposition the price is likely to decline further.

2. Dollar-Cost Averaging

For some investors, averaging down can be a way to get more money into the market. This is a similar philosophy to the strategy known as dollar-cost averaging, as noted above, where the idea is to invest steadily regardless of whether the market is down or up, to reap the long-term average gains.

3. Loss Mitigation

Some investors turn to the averaging down strategy to help dig out of the very hole that the lower price has put them into. That’s because a stock that has lost value has to grow proportionally more than it fell in order to get back to where it started. Again, an example will help:

Let’s say you purchase 100 shares at $75 per share, and the stock drops to $50, that’s a 33% loss. In order to regain that lost value, however, the stock needs to increase by 50% (from $50 to $75) before you can see a profit.

Averaging down can change the math here. If the stock drops to $50 and you buy another 100 shares, the price only needs to increase by 25% to $62.50 for the position to become profitable.

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

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

*Customer must fund their Active Invest account with at least $50 within 45 days of opening the account. Probability of customer receiving $1,000 is 0.026%. See full terms and conditions.

Pros and Cons of Averaging Down

As you can see, averaging down stocks is not a black-and-white strategy; it requires some skill and the ability to weigh the advantages and disadvantages of each situation.

Pros of Averaging Down

The primary benefit to averaging down is that an investor can buy more of a stock that they want to own anyway, at a better price than they paid previously — with the potential for gains.

Whether to average down should as much be a decision about the desire to own a stock over the long-term as it is about the recent price movement. After all, recent price changes are only one part of analyzing a stock.

If the investor feels committed to the company’s growth and believes that its stock will continue to do well over longer periods, that could justify the purchase. And, if the stock in question ultimately turns positive and enjoys solid growth over time, then the strategy will have been a success.

Cons of Averaging Down

The averaging-down strategy requires an investor to buy a stock that is, at the moment, losing value. And it is always possible that this fall is not temporary — and is actually the beginning of a larger decline in the company and/or its stock price. In this scenario, an investor who averages down may have just increased their holding in a losing investment.

Price change alone should not be an investor’s only indication to buy more of any stock. An investor with plans to average down should research the cause of the decline before buying — and even with careful research, projecting the trajectory of a stock can be difficult and potentially risky.

Another potential downside is that the averaging down strategy adds to one particular position, and therefore can affect your asset allocation. It’s always wise to consider the implications of any shift in your portfolio’s allocation, as being overweight in a certain asset class could expose you to greater risk of loss.

Tips for Averaging Down on Stock

If you are going to average down on a stock you own, be sure to take a few preparatory steps.

•   Have an exit strategy. While it may be to your benefit to buy the dip, you want to set a limit should the price continue to fall.

•   Do your research. In order to understand whether a stock’s price drop is really an opportunity, you may need to understand more about the company’s fundamentals.

•   Keep an eye on the market. Market conditions can impact stock price as well, so it’s wise to know what factors are at play here.

The Takeaway

Simply put, averaging down is a strategy where an investor buys more of a stock they already own after the stock has lost value, in order to lower the average cost basis of that position.

The idea is that by buying a stock you own (and like) at a discount, you lower the average purchase price of your position as a whole, and set yourself up for gains if the price should increase. Of course, it can be quite tricky to predict whether a stock price has simply taken a dip or is on a downward trajectory — so there are risks to the averaging down strategy for this reason.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

FAQ

Is averaging down a good idea?

It depends on the stock in question. Averaging down can be a good idea when the investor has done their due diligence, and believes they can buy at the lower price and the stock is likely to rebound. Otherwise, averaging down can put the investor at a risk of further losses.

What is an alternative to averaging down?

One alternative is to sell the stock you have, rather than add to the position. This has the potential advantage of freeing up funds to invest in another stock or security. Another option is to do nothing, observe how the stock behaves, and use that to inform later decisions.

When does averaging down not work?

When the stock price doesn’t rise. So, if an investor sees that shares of a stock they own are dropping, they could attempt to average down by buying more shares of that stock. But if the stock continues to decline in value, they will see bigger losses.

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.

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.

[cd_dca]
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.

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.

SOIN-Q325-023

Read more
Jul
24
2025
piggy bank and egg on seesaw

The Difference Between an Investment Portfolio and a Savings Account

By | Budgeting & Goals, invest, Investing | No Comments

A key part of wrangling your personal finances can be building personal wealth and preparing for the future. There are various ways you can accumulate funds, such as putting your cash in a savings account or investing in the market. If you’re not sure which option is right for you (or are wondering if you should have both), then consider this deep dive into saving vs. investing accounts.

Key Points

•   Savings accounts provide security and liquidity, ideal for short-term, low-risk goals.

•   Investment portfolios, though riskier, can offer potential for significant long-term gains, suitable for long-term objectives.

•   Multiple bank accounts simplify financial management, enhance privacy, and aid in budgeting and goal setting.

•   A savings portfolio can combine savings and investments, offering flexibility and diversification for future goals.

•   Starting a savings and investment plan involves setting goals, saving regularly, building an emergency fund, and learning about risk.

What’s the Difference Between Saving and Investing?

Savings accounts and investments can both help you get your finances on track for your future, but they can be used to meet very different goals. A big difference between savings vs. investing is risk.

When to Save

Think of savings as a nice safe place to park your cash and earn some interest.

You probably want lower risk on money you’ll need sooner, say for a fabulous vacation in two years. A savings account will fit the bill nicely for that goal because you want to be able to get to the money quickly, and savings accounts are highly liquid (they can be tapped on short notice).

When to Invest

With investing, you take on risk when you buy securities, but there’s also the potential for a return on investment.

For goals that are 10, 20, or even 40 years away, it might make sense to invest to meet those goals. Investments can make money in various ways, but when you invest, you are essentially buying assets on the open market; however, some investment vehicles are riskier than others.

Ways to Get Started Saving and Investing

So, what are some smart ways to start your savings and investment plan?

•   First, if you’re not already saving, start today. Time works against savers and investors, so write out some of your goals and attach reasonable time frames to them. Saving for a really great vacation may take a year or two. Saving for the down payment of a house may take years, depending on your circumstances.

•   One of the first goals to consider is an emergency fund. This money would ideally bail you out of an emergency, like having to pay a hefty medical bill or buying a last-minute plane ticket to see a sick loved one. Or paying your bills if you lost your job. You should save the equivalent of three to six months’ worth of expenses and debt payments available. You can use an online emergency fund calculator to help you do the math.

•   When it comes to saving vs investing, investing shines in reaching long-term goals. Many Americans invest to provide for themselves in retirement, for example. They use a company-sponsored 401(k) or self-directed IRA to build a portfolio over several decades.

•   Many retirement plans invest in mutual funds. Mutual funds are bundles of individual stocks or other securities, professionally managed. Because they have multiple stocks within, the account achieves diversification, which can help reduce some (but not all) investment risk.



💡 Quick Tip: Banish bank fees. Open a new bank account with SoFi and you’ll pay no overdraft, minimum balance, or any monthly fees.

Increase your savings
with a limited-time APY boost.*

*Earn up to 4.00% Annual Percentage Yield (APY) on SoFi Savings with a 0.70% APY Boost (added to the 3.30% APY as of 12/23/25) for up to 6 months. Open a new SoFi Checking and Savings account and pay the $10 SoFi Plus subscription every 30 days OR receive eligible direct deposits OR qualifying deposits of $5,000 every 31 days by 3/30/26. Rates variable, subject to change. Terms apply here. SoFi Bank, N.A. Member FDIC.

Do Investments Count as Savings?

While there are similarities between saving and investing, there are also very important distinctions.

•   When you save, you are putting your money in a secure place. A bank account that offers Federal Deposit Insurance Corporation, or FDIC, or NCUA (National Credit Union Administration) insurance is a great example of this. You will be insured for up to $250,000 per account holder, per account ownership category, per insured institution in the very rare instance of a bank failure. And in many cases, you will be earning some interest.

•   With investments, you have the opportunity to grow your money significantly over time. For almost 100 years, the average return on the stock market has averaged 10%. However, it could be higher or it could be lower. And your funds are not insured, so you might wind up withdrawing funds at a moment where the economy is in a downturn and you experience a loss.

Because of this element of uncertainty, it’s wise to understand the distinction between saving and investing.

What Are the Different Bank Accounts I Should Own?

While some first-time savers think it’s either/or, savings account vs. investing, both have their role. Savings accounts can help you get to a spot in life where you can begin investing consistently.

There are two rules of thumb when it comes to savings and checking accounts.

•   On the one hand, you should own as few as you need. That reduces the strain of keeping up with multiple accounts and all those login passwords (and possibly fees).

•   On the other hand, don’t neglect the benefits of having an additional savings account that you set aside for a certain purpose, like a house down payment.

You might even want to have additional different kinds of savings accounts. One could be for your emergency fund, kept at the same bank as your checking account. Another might be a high-interest one for that big vacation you’re planning. And the third might come with a cash bonus when you open it and be used to salt away money for that down payment on a home.

Having Multiple Bank Accounts

It can be a good idea to have at least one savings and one checking account. If you’re married, consider owning a joint checking account for paying family bills like the rent, mortgage, groceries, and other monthly expenses. You may also want separate accounts for you and your spouse to allow for some privacy. Decide what is the right path for your family.

There are many good reasons to open a checking account. It can be the hub for your personal finances. Money rushes in from your paycheck, and then it is sent off to pay some bills. Savings accounts are more like long-term car storage, letting you stow away money for longer periods.

Both can be interest-bearing accounts, but don’t simply look for the highest rates. Shop around for low or no fees, too. You may find the right combination of these factors at online banks, which don’t have the overhead of brick-and-mortar branches and can pass the savings along to you.

Any income for regular expenses can be placed in a checking account. If you have a business or do freelance work, maybe create a completely different checking account for it.

A savings account can be a secure, liquid spot to stash an emergency fund. You might look for a high-yield savings account to earn a higher rate of interest. These are typically found at online banks and may charge lower or no fees.

A money-market account could also be good for an emergency fund since it’s an interest-bearing account. Unlike savings accounts, however, money-market accounts often have minimum deposit requirements. Keep an eye out for the lowest limits that suit your situation. The nice thing about money-market accounts is that they also offer such features as a debit card and checks. And typically, money market accounts are insured by the FDIC for up to $250,000.

What Is an Investment Portfolio?

The difference between saving and investing can be summed up with two words: safety and risk. A collection of bank accounts suggests liquidity. It’s where you keep cash so you can get hold of it in a hurry. A collection of investment assets doesn’t have as much liquidity, because you may not want to pull your money out at a particular moment, which could be due to the funds thriving or falling, depending on your scenario. It’s riskier, but also has the potential for long-term gains.

An investment portfolio can hold all manner of investments, including bonds, stocks, mutual funds, real estate, and even hard assets like gold bars. A mix can be a good way to diversify investments and help mitigate some market risk.

When you start building your savings and investment, it’s a good idea to learn all you can and start slow. Figure how much risk you can live with. That will dictate the kind of portfolio you own.

What Is a Savings Portfolio?

A savings portfolio can mean a couple of different things:

•   A savings portfolio can refer to the different ways you hold money for the future, possibly a combination of savings accounts and/or investments.

•   There are also savings portfolios which are investment vehicles for saving for college.

How Should I Start a Savings and Investment Plan?

A good way to start your savings and investment strategy could be to look into an investment account. These accounts offer services such as financial advice, retirement planning, and some combination of savings and investment vehicles, usually for one set fee, which may be discounted or waived in some situations.

In addition, you’ll likely want to make sure you have money in savings. A bank account can be a secure place for your funds, thanks to their being insured. Plus, they are liquid, meaning easily accessed, and may well earn you some interest as well.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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 SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

Is it better to have a savings account or invest?

Whether a savings or investing account is better depends on your specific needs and situation. You may want both. Investing can hold the promise of high returns, but it involves risk. A savings account can grow your money steadily and securely.

How much can investing $1,000 a month give me?

The amount you make from investing $1,000 a month will vary tremendously depending on your rate of return and fees involved. It’s wise to consider the risk involved in investing, historic returns, and how much of any growth will go to paying fees.

What is the 50/30/20 rule?

The 50/30/20 budget rule is a popular way of allocating your take-home pay. It says that 50% of your fund should go to necessities, 30% to discretionary (or “fun”) spending, and 20% to savings or additional debt payments.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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®

SOBNK-Q325-092

Read more
Jul
16
2025
IRA Withdrawal Rules: All You Need to Know

Traditional and Roth IRA Withdrawal Rules & Penalties

By | invest, Investing, Preparing for Retirement | Comments Off on Traditional and Roth IRA Withdrawal Rules & Penalties

The purpose of an Individual Retirement Account (IRA) is to save for retirement. Ideally, you sock away money consistently in an IRA and your investment grows over time.

However, IRAs have strict withdrawal rules both before and after retirement. It’s very important to understand the IRA rules for withdrawals to avoid incurring penalties.

Here’s what you need to know about IRA withdrawal rules.

Key Points

  • Traditional and Roth IRAs have specific withdrawal rules and penalties.
  • Roth IRA withdrawal rules include the five-year rule for penalty-free withdrawals of earnings, and required minimum distributions (RMDs) for inherited IRAs. You can always withdraw your Roth IRA contributions tax-free and penalty-free.
  • Traditional IRA withdrawals before age 59 ½ incur regular income taxes and a 10% penalty on the taxable portion.
  • There are exceptions to the penalty, such as using funds for unreimbursed medical expenses (exceeding 7.5% of AGI), health insurance premiums during unemployment, total and permanent disability, qualified higher education expenses, and first-time home purchases (up to $10,000 lifetime limit).
  • Generally speaking, early IRA withdrawals might be thought of as a last resort due to the potential impact on retirement savings and tax implications, including lost opportunity for growth.

Roth IRA Withdrawal Rules

So when can you withdraw from a Roth IRA? The IRA withdrawal rules are different for Roth IRAs vs traditional IRAs. For instance, qualified withdrawals from a Roth IRA are tax-free, since you make contributions to the account with after-tax funds.

There are some other Roth IRA withdrawal rules to keep in mind as well.[1]

The Five-year Rule

The date you open a Roth IRA and how long the account has been open is a factor in taking your withdrawals.

According to the five-year rule, you can generally withdraw your earnings tax- and penalty-free if you’re at least 59 ½ years old and it’s been at least five years since you opened the Roth IRA. You can withdraw contributions to a Roth IRA anytime without taxes or penalties. (The annual IRA contribution limits for 2024 and 2025 are $7,000, or $8,000 for those age 50 and up.)

Even if you’re 59 ½ or older, you may face a Roth IRA early withdrawal penalty if the retirement account has been open for less than five years when you withdraw earnings from it.

These Roth IRA withdrawal rules also apply to the earnings in a Roth that was a rollover IRA. If you roll over money from a traditional IRA to a Roth and you then make a withdrawal of earnings from the Roth IRA before you’ve owned it for at least five years, you’ll owe a 10% penalty on the earnings.

For inherited Roth IRAs, the five-year rule applies to the age of the account. If your benefactor opened the account more than five years ago, you can withdraw earnings penalty-free. If you tap into the money before that, though, you’ll owe taxes on the earnings.

Required Minimum Distributions (RMDs) on Inherited Roth IRAs

In most cases, you do not have to pay required minimum distributions (RMDs) on money in a Roth IRA account.

However, according to the SECURE Act, if your loved one passed away in 2020 or later, you don’t have to take RMDs, but you do need to withdraw the entire amount in the Roth IRA within 10 years.[2]

There are two ways to do that without penalty:

  • Withdraw funds by December 31 of the fifth year after the original holder died. You can do this in either partial distributions or a lump sum. If the account is not emptied by that date, you could owe a 50% penalty on whatever is left.
  • Take withdrawals each year, based on your life expectancy.

Tax Implications of Roth IRA Withdrawals

Contributions to a Roth IRA can be withdrawn any time without taxes or penalties. However, let’s say an individual did active investing through their account, which generated earnings. Any earnings withdrawn from a Roth before age 59 ½ are subject to a 10% penalty and income taxes.

Recommended: Retirement Planning Guide

Traditional IRA Withdrawal Rules

If you take funds out of a traditional IRA before you turn 59 ½, you’ll owe regular income taxes on the contributions and the earnings, per IRA tax deduction rules, plus a 10% penalty. Brian Walsh, CFP® at SoFi specifies, “When you make contributions to a traditional retirement account, that money is going to grow without paying any taxes. But when you take that money out — say 30 or 40 years from now — you’re going to pay taxes on all of the money you take out.”

RMDs on a Traditional IRA

The rules for withdrawing from an IRA mean that required minimum distributions kick in the year you turn 73 (as long as you turned 72 after December 31, 2022). After that, you have to take distributions each year, based on your life expectancy. If you don’t take the RMD, you’ll owe a 25% penalty on the amount that you did not withdraw. The penalty may be lowered to 10% if you correct the mistake and take the RMD within two years.[3]

Early Withdrawal Penalties for Traditional IRAs

In general, an early withdrawal from a traditional IRA before the account holder is at least age 59 ½ is subject to a 10% penalty and ordinary income taxes.[4] However, there are some exceptions to this rule.

Recommended: What Is a SEP IRA?

When Can You Withdraw from an IRA Without Penalties?

As noted, you can make withdrawals from an IRA once you reach age 59 ½ without penalties.

In addition, there are other situations in which you may be able to make withdrawals without having to pay a penalty. These include having medical expenses that aren’t covered by health insurance (as long as you meet certain qualifications), having a permanent disability that means you can no longer work, and paying for qualified education expenses for a child, spouse, or yourself.

Read more about these and other penalty-free exceptions below.

9 Exceptions to the 10% Early-Withdrawal Penalty on IRAs

Whether you’re withdrawing from a Roth within the first five years or you want to take money out of an IRA before you turn 59 ½, there are some exceptions to the 10% penalty on IRA withdrawals.

1. Medical Expenses

You can avoid the early withdrawal penalty if you use the funds to pay for unreimbursed medical expenses that total more than 7.5% of your adjusted gross income (AGI).

2. Health Insurance

If you’re unemployed for at least 12 weeks, IRA withdrawal rules allow you to use funds from an IRA penalty-free to pay health insurance premiums for yourself, your spouse, or your dependents.

3. Disability

If you’re totally and permanently disabled, you can withdraw IRA funds without penalty. In this case, your plan administrator may require you to provide proof of the disability before signing off on a penalty-free withdrawal.

4. Higher Education

IRA withdrawal rules allow you to use IRA funds to pay for qualified education expenses, such as tuition and books for yourself, your spouse, or your child without penalty.

5. Inherited IRAs

IRA withdrawal rules for inherited IRAs state that you don’t have to pay the 10% penalty on withdrawals from an IRA, unless you’re the sole beneficiary of a spouse’s account and roll it into your own, non-inherited IRA. In that case, the IRS treats the IRA as if it were yours from the start, meaning that early withdrawal penalties apply.

6. IRS Levy

If you owe taxes to the IRS, and the IRS levies your account for the money, you will typically not be assessed the 10% penalty.

7. Active Duty

If you’re a qualified reservist, you can take distributions without owing the 10% penalty. This goes for a military reservist or National Guard member called to active duty for at least 180 days.[5]

8. Buying a House

While you can’t take out IRA loans, you can use up to $10,000 from your traditional IRA toward the purchase of your first home — and if you’re purchasing with a spouse, that’s up to $10,000 for each of you. The IRS defines first-time homebuyers as someone who hasn’t owned a principal residence in the last two years. You can also withdraw money to help with a first home purchase for a child or your spouse’s child, grandchild, or parent.

In order to qualify for the penalty-free withdrawals, you’ll need to use the money within 120 days of the distribution.

9. Substantially Equal Periodic Payments

Another way to avoid penalties under IRA withdrawal rules is by starting a series of distributions from your IRA spread equally over your life expectancy. To make this work, you must take at least one distribution each year and you can’t alter the distribution schedule until five years have passed or you’ve reached age 59 ½, whichever is later.

The amount of the distributions must use an IRS-approved calculation that involves your life expectancy, your account balance, and interest rates.

Understanding How Exceptions Are Applied

If you believe that any of the exceptions to early IRA withdrawal penalties apply to your situation, you may need to file IRS form 5329 to claim them.[6] However, it’s wise to consult a tax professional about your specific circumstances.


💡 Quick Tip: For investors who want a diversified portfolio without having to manage it themselves, automated investing could be a solution (although robo advisors typically have more limited options and higher costs). The algorithmic design helps minimize human errors, to keep your investments allocated correctly.

Is Early IRA Withdrawal Worth It?

While there may be cases where it makes sense to take an early withdrawal, many financial professionals agree that it should be a last resort. These are disadvantages and advantages to consider.

Pros of IRA Early Withdrawal

  • If you have a major expense and there are no other options, taking an early withdrawal from an IRA could help you cover the cost.
  • An early withdrawal may help you avoid taking out a loan you would then have to repay with interest.

Cons of IRA Early Withdrawal

  • By taking money out of an IRA account early, you’re robbing your own nest egg not only of the current value of the money but also the chance for future years of compound growth.
  • Money taken out of a retirement account now can have a big impact on your financial security in the future when you retire.
  • You may owe taxes and penalties, depending on the specific situation.

Alternatives to Early IRA Withdrawal

Rather than taking an early IRA withdrawal and incurring taxes and possible penalties, as well as impacting your long-term financial goals, you may want to explore other options first, such as:

  • Using emergency savings: Building an emergency fund that you can draw from is one way to cover unplanned expenses, whether it’s car repairs or a medical bill, or to tide you over if you lose your job. Financial professionals often recommend having at least three to six months’ worth of expenses in your emergency fund.

    To create your fund, start contributing to it weekly or bi-weekly, or set up automatic transfers for a certain amount to go from your checking account into the fund every time your paycheck is direct-deposited.

  • Taking out a loan: You could consider asking a family member or friend for a loan, or even taking out a personal loan, if you can get a good interest rate and/or favorable loan terms. While you’ll need to repay a loan, you won’t be taking funds from your retirement savings. Instead, they can remain in your IRA where they can potentially continue to earn compound returns.

Opening an IRA With SoFi

IRAs are tax-advantaged accounts you can use to save for retirement. However, it is possible to take money out of an IRA if you need it before retirement age. Just remember, even if you’re able to do so without paying a penalty, the withdrawals could leave you with less money for retirement later.

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.

Help build your nest egg with a SoFi IRA.

FAQ

Can you withdraw money from a Roth IRA without penalty?

You can withdraw your contributions to a Roth IRA without penalty no matter what your age. However, you generally cannot withdraw the earnings on your contributions before age 59 ½, or before the account has been open for at least five years, without incurring a penalty.

What are the rules for withdrawing from a Roth IRA?

You can withdraw your own contributions to a Roth IRA at any time penalty-free. But to avoid taxes and penalties on your earnings, withdrawals from a Roth IRA must be taken after age 59 ½ and once the account has been open for at least five years.

However, there are a number of exceptions in which you typically don’t have to pay a penalty for an early withdrawal, including some medical expenses that aren’t covered by health insurance, being permanently disabled and unable to work, or if you’re on qualified active military duty.

What are the 5 year rules for Roth IRA withdrawal?

Under the 5-year rule, if you make a withdrawal from a Roth IRA that’s been open for less than five years, you’ll owe a 10% penalty on the account’s earnings. If your Roth IRA was inherited, the 5-year rule applies to the age of the account. So if you inherited the Roth IRA from a parent, for instance, and they opened the account more than five years ago, you can withdraw the funds penalty-free. If the account has been opened for less than five years, however, you’ll owe taxes on the gains.

How do inherited IRA withdrawal rules differ?

According to inherited IRA withdrawal rules, you don’t have to pay the 10% penalty on withdrawals from an IRA unless you’re the sole beneficiary of a spouse’s account and roll it into your own, non-inherited IRA. In that case, the IRS treats the IRA as if it were yours from the start, meaning that early withdrawal penalties apply.

In addition, for inherited IRAs, the five-year rule applies to the age of the account. If the person you inherited the IRA from opened the account more than five years ago, you can withdraw earnings penalty-free.

Are there penalties for missing RMDs?

Yes, there are penalties for missing RMDs. You are required to start taking RMDs when you turn 73, and then each year after that. If you miss or don’t take RMDs, you’ll typically owe a 25% penalty on the amount that you failed to withdraw. The penalty could be lowered to 10% if you correct the mistake and take the RMD within two years.

Article Sources
  1. IRS. IRA FAQs – Distributions (withdrawals).
  2. IRS. Retirement topics – Beneficiary.
  3. IRS. Retirement plan and IRA required minimum distributions FAQs.
  4. IRS. What if I withdraw money from my IRA?.
  5. U.S. Army. The HEART Act.
  6. H&R Block. When Should You Use Form 5329?.

Photo credit: iStock/Fly View Productions

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.

Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA(www.finra.org)/SIPC(www.sipc.org). For all 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.

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.

SOIN-Q125-060

Read more
Jul
07
2025

What Are Excessive Transaction Fees?

By | Budgeting & Goals, Family Finances, money | Comments Off on What Are Excessive Transaction Fees?

Excessive transaction fees are penalties incurred by consumers when they make too many withdrawals from a savings account or money market account in a single month.

These fees were once tied to a federal law (Regulation D) that capped certain types of withdrawals and transfers from savings accounts to six per month. However, the Federal Reserve suspended the six-per-month limit in April 2020 to give consumers greater access to their funds during the pandemic. Transactions limits (and fees) are still optional today; some financial institutions impose them and others don’t.

Since most people want to avoid fees as often as possible, read on to learn how excessive transaction fees work and how much they cost.

Key Points

•   Excessive transaction fees penalize customers for making too many withdrawals from savings accounts.

•   Fees typically range from $3 to $5 for each additional transaction.

•   Some banks do not impose excessive transaction fees.

•   Regulation D previously limited withdrawals from savings accounts to six per month.

•   Strategies to avoid fees include using ATMs; making fewer, large transactions; and opting out of overdraft coverage.

What Is an Excessive Withdrawal Fee?

Excessive transaction fees (also called excess transfer fees, withdrawal limit fees, or excessive withdrawal fees) refer to penalties for excessive withdrawals from any type of savings account. Historically, Regulation D restricted consumers to six “convenient transfers and withdrawals” each month.

Though the Federal Reserve revised Regulation D in 2020, many banks have maintained the six-transaction limit, while others have increased the number of allowable transactions from savings accounts. If you exceed your bank’s transaction limit, you may get hit with an excessive withdrawal fee.

If you repeatedly exceed them, you may face more than fees — the bank could potentially convert your savings account into a checking account, which could mean losing interest and potentially getting hit with monthly fees.

Increase your savings
with a limited-time APY boost.*

*Earn up to 4.00% Annual Percentage Yield (APY) on SoFi Savings with a 0.70% APY Boost (added to the 3.30% APY as of 12/23/25) for up to 6 months. Open a new SoFi Checking and Savings account and pay the $10 SoFi Plus subscription every 30 days OR receive eligible direct deposits OR qualifying deposits of $5,000 every 31 days by 3/30/26. Rates variable, subject to change. Terms apply here. SoFi Bank, N.A. Member FDIC.

Recommended: What Is the Difference Between a Deposit vs. Withdrawal

Types of Transactions Considered

Not every withdrawal from a savings account counts toward the transaction limit. Below are the types of transactions that could get you to the six-a-month max:

•   Electronic funds transfers (EFTs), like when you transfer money from your savings account to checking account (or transfer money from one bank to another)

•   Automated Clearing House (ACH) payments, including online bill pay

•   Pre-authorized transfers, like overdraft transfers to avoid overdraft fees

•   Wire transfers

•   Online and phone transfers

•   Debit card and check transactions drawing from the savings account.

Notably absent from this list are in-person withdrawals at banks and ATMs. Such withdrawals typically do not count toward a bank’s transaction limit. You can generally also move funds from savings to checking at an ATM or with a teller in person without it counting toward your limit.

How Much Do Excessive Transaction Fees Cost?

Though Regulation D previously specified a maximum of six convenient withdrawals, it did not specify the amount of any resulting excess transfer fee. Financial institutions were free to set that amount — and still are today, if they continue to charge excessive transaction fees.

Typically, excessive transaction fees cost between $3 and $5 per transaction. Under Regulation DD (Truth in Savings), financial institutions must disclose the fee amount (if applicable) at account opening; if the bank changes the amount afterward, it must legally notify you at least 30 days before the change.

If you’re not sure what your bank charges, you can typically find this information on the bank’s website or in the fine print of your account documents.

Recommended: What Are Bank Transaction Deposits?

Why Do Banks Charge Excessive Transaction Fees?

Before the Federal Reserve revised Regulation D, banks were expected to either prevent excess transactions from savings accounts or monitor for them. One way institutions discouraged customers from exceeding the six-per-month limit was by charging excess withdrawal fees.

The federal government created Regulation D to ensure that financial institutions had enough cash reserves available. Though this meant consumer funds were a little less liquid in a savings account or money market account, banks made such accounts appealing to consumers by offering interest on those funds. Consumers who wanted easier access to their money could use a checking account.

Even though the Federal Reserve has eradicated that mandate, some banks have chosen to continue to maintain transaction limits and charge fees if customers exceed them. The reasoning for this decision may vary at each financial institution, though banks generally leverage fees to make a profit (they are a business, after all).

And remember: The federally imposed transfer limit previously served to ensure banks maintained proper cash reserves; banks still charging this fee may be doing so to discourage excessive withdrawals and thus protect their reserves.

Tips to Avoid Excessive Transaction Fees

How can you avoid excessive transaction penalties? Consider these tips to cut out this common bank fee.

•   Finding a bank that doesn’t charge excess transfer fees: Some banks do not charge excessive transaction fees.

•   Using your checking account: Banks may leverage fees when you make too many savings withdrawals by writing a check or paying bills online. Rather than using your savings account for such transactions, you may benefit from using a checking account, where such fees don’t apply, and making withdrawals from the cleared funds in that account.

•   Banking in person or at ATMs: Withdrawals at physical bank branches and ATMs typically don’t count toward your limit. By using these options to take funds out of your savings account (or money market account), you should be able to avoid excessive withdrawal fees. Just keep in mind that there may be ATM withdrawal limits in terms of how much you can take out in a certain time period.

•   Making fewer (but bigger) withdrawals: If you’re able to anticipate your needs throughout the month, you may be able to make one or two big electronic funds transfers from savings to checking each month, rather than several smaller ones. Doing so may mean you can avoid excess transfer fees.

•   Opting out of overdraft coverage: If your savings account is tied to your overdraft program and you overdraw too many times in one month, you could wind up paying an excessive transfer fee. You can avoid this by opting out of overdraft protection (though it’s crucial that you understand what that means for your checking account if you overdraw). Or you might tap a line of credit as the source for your overdraft protection instead of your savings account.

•   Getting bank alerts: Monitoring your bank account is good for several reasons, including fraud protection and avoiding overdrafts. Opting into banking notifications can also help you keep track of when you’re approaching the monthly withdrawal limit.

The Takeaway

Though federal law no longer mandates limits on monthly savings account withdrawals, many banks and credit unions still charge excessive transaction fees. To avoid such fees, it’s important to monitor your monthly transactions and find other ways to access your savings. For example, you may be able to avoid excessive transaction fees by using ATMs or making fewer, larger transfers and/or withdrawals. Finding a bank whose policies are flexible and suit your needs is a wise move too.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible 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 SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy 3.30% APY on SoFi Checking and Savings with eligible direct deposit.

FAQ

How much are excessive transaction fees?

Excessive transaction fees can typically range from $3 to $5 each, depending on the institution’s policies.

Do all banks charge excessive transaction fees?

No, not all banks charge excessive transaction fees. Before signing up for any account, it’s a good idea to read the fine print, including the fee structure. Federal law requires that banks disclose these fees to consumers.

Why do banks charge excessive transaction fees?

Regulation D was initially created to ensure banks could maintain enough cash reserves. Though Regulation D no longer limits convenient withdrawals from savings accounts to six, many banks still impose monthly transaction limits and will charge you a fee if you exceed them, potentially to protect their reserves and/or to make a profit.

Photo credit: iStock/MTStock Studio
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 12/23/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

We do not charge any account, service or maintenance fees for SoFi Checking and Savings. We do charge a transaction fee to process each outgoing wire transfer. SoFi does not charge a fee for incoming wire transfers, however the sending bank may charge a fee. Our fee policy is subject to change at any time. See the SoFi Bank Fee Sheet for details at sofi.com/legal/banking-fees/.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q325-021

Read more
Jun
19
2025
What Is the U.S. Debt Ceiling?

How the Debt Ceiling Could Impact Markets

By | Growing Wealth, invest, Investing | Comments Off on How the Debt Ceiling Could Impact Markets

The U.S. debt ceiling — sometimes called the debt limit — is the legal limit on how much money the U.S. federal government can borrow to fund government operations.

U.S. government debt comes from bonds issued to individuals, businesses, and foreign governments, as well as intragovernmental loans. As of January 2025, the U.S. government owed some $36.1 trillion — meaning it had reached the current debt ceiling.

Because the government is now poised to exceed the debt limit, the cap on federal borrowing will need to be lifted in order to allow the government to meet its obligations. As of Q3 2025, lawmakers were anticipating a new debt ceiling later this year, to avoid the risk of default.

The U.S. has never defaulted on its debts, and doing so could roil markets here and abroad. If lawmakers don’t raise the debt ceiling, the U.S. could see a credit downgrade, a potential spike in interest rates, which could impact the value of the dollar and could destabilize markets.

Key Points

•   The debt ceiling, or debt limit, refers to the maximum amount the federal government can borrow, by law.

•   The current debt ceiling is $36.1 trillion, which is the amount the government owes as of Q3 2025.

•   Ideally, the debt ceiling must be raised in 2025 in order for the government to borrow the funds it needs to repay its debts, or there could be a risk of default.

•   The debt ceiling has been raised more than 100 times since World War II, but the U.S. has never defaulted on its debts.

•   A default would lower demand for U.S. Treasuries, causing rates to rise, which could have a domino-like effect on domestic and global trade and investments.

What Is the Debt Ceiling?

All governments borrow money to fund various obligations. The United States has the largest debt obligation in the world, as of June 2025, with some $36.1 trillion in outstanding loans it has borrowed from individual investors, governments (like Japan, China, the U.K.), businesses, and even from itself, via intragovernmental loans.

The debt ceiling is set by the Department of the Treasury, and reflects the allowable amount the government can borrow to fund obligations such as interest payments on current debt, national programs like Social Security and Medicare, military salaries, and much more.

Recent Changes to the Debt Ceiling

Lawmakers suspended the debt ceiling from June of 2023 through January of 2025, when it was re-set to match the amount of the U.S. debt obligation at that time: some $36.1 trillion.

Because the debt ceiling only authorizes borrowing to cover existing obligations, and it does not allow for new spending, the government began 2025 in anticipation of another fight over whether to raise the debt ceiling yet again.

When federal spending bumps up against this limit, as it is right now, Congress must vote to raise the debt ceiling. And there is ongoing concern about whether it’s sustainable to continue to issue new debt.

The current debt ceiling of $36.1 trillion represents about 122% of the nation’s gross domestic product, or GDP, and grows by about $1 trillion every quarter.


💡 Quick Tip: How do you decide if a certain online trading platform or app is right for you? Ideally, the online investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

What Does the Debt Ceiling Mean for Investors?

In the last 65 years, Congress has either raised, extended, or changed the debt ceiling 78 times to allow for increased borrowing and reliable debt payments to Treasury bondholders. That’s largely because the U.S. government has always honored and repaid its debts, and thus owning U.S. government bonds has long been considered a safe haven for investors looking for stable securities.

The debt ceiling isn’t simply about bond payments, however. It’s a reflection of the financial stability of the U.S. If the government were forced to default on its obligations, this would not only be a historical event, the likely downgrade of U.S. creditworthiness could spark upheaval in markets worldwide.

The Debt Ceiling, the Economy and Securities

For example, a downturn in demand for government bonds would push up interest rates, which could spur inflation and lower the value of the dollar — with a decline in equity markets as well.

•   Higher interest rates would spell higher inflation.

•   Higher inflation impacts the value of the dollar.

•   Equity markets here and abroad could react negatively to a higher rate environment, fuelling volatility.

Although the current trade environment is in flux, if a default came to pass these combined factors have the potential to spark a financial crisis.

What Is the Status of the Debt Ceiling?

While precedent suggests that lawmakers will likely vote to increase the debt ceiling in 2025, it’s unclear how the current debt ceiling debate will pan out. Some potential outcomes:

•   Congress could vote to raise the debt limit, as it has done since the debt ceiling was first created in 1917 (see more on the history of the debt ceiling below).

•   Both political parties could negotiate a way forward, by agreeing to cut spending while also raising the debt ceiling.

•   The president could use his executive powers to bypass the debt ceiling.

Finally, although very unlikely, as noted above, the government could default on its debts. This has never occurred, and would be unprecedented — potentially leading to a global financial crisis.

Recommended: Who Owns the U.S. National Debt?

Where Did the Debt Ceiling Come From?

Congress first enacted the debt ceiling in 1917, at the beginning of World War I, through the Second Liberty Bond Act. That act set the debt ceiling at $11.5 billion. The creators of the debt ceiling believed it would make the process of borrowing easier and more flexible.

In 1939, as World War II loomed on the horizon, Congress established a debt limit of $45 billion that covered all government debt.

Before the creation of the debt ceiling, Congress had to approve loans individually or allow the Treasury to issue debt instruments for specific purposes. The debt ceiling granted the government greater freedom to borrow funds via issuing bonds, allowing it to spend as needed. And over time the ceiling was often raised, and rarely contested.

The debt ceiling has, however, become a partisan pain point in recent years.

Benefits and Drawbacks of the Debt Ceiling

The debt ceiling has several advantages. It allows Congress to fund government operations, and it simplifies the process of borrowing. It also, theoretically, serves as a way to keep government spending in check because the federal government should consider the debt ceiling as it passes spending bills.

However, there are also some drawbacks. Congress has consistently raised the debt ceiling when necessary, which some analysts claim dampens the legislative branch’s power as a check and balance. And if Congress does not increase the debt ceiling, there is a risk that the government will default on its loans, lowering the country’s credit rating and making it more expensive to borrow in the future.

Recent Overview of the Debt Ceiling and Congress

In the last 15 years, Congress has found itself embroiled in partisan battles over raising the debt ceiling. For example, during the Obama administration, there were two high-profile debt ceiling standoffs between the president and Congress.

In 2011, some members of Congress threatened to allow the U.S. government to hit the debt ceiling if their preferred spending cuts were not approved.

This standoff led Standard & Poor’s, a credit rating agency, to downgrade U.S. debt from a AAA to a AA+ rating.

Moreover, in 2013 there was a government shutdown when members of Congress would not approve a bill to fund the government and raise the debt ceiling unless the president made their preferred spending cuts. This standoff ended after 16 days when Congress finally approved a spending package and a debt ceiling increase partially due to the potential for a further downgrade of U.S. debt.

More recently, after a showdown in Congress in June 2023, lawmakers voted to suspend the debt ceiling altogether, until January 1, 2025.

Then, the debt ceiling was reinstated on January 2, 2025, reflecting the amount of outstanding debt from January 1, and setting the stage for another standoff. On May 16, Moody’s downgraded the U.S. credit rating one notch, from Aaa to Aa1.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

What Happens If Congress Fails to Raise the Debt Ceiling?

The current debate centers on finding a long-term solution for raising the debt ceiling. If the executive and legislative branches can not reach an agreement, there could be several consequences.

Potential Consequences for the Economy and Markets

•   The government will swiftly run out of cash if it cannot issue more bonds. At that point, the money the government has coming in would not cover the millions of debts that come due each day. The government may default, at least temporarily, on its obligations, such as pensions, Social Security payments, and veterans benefits.

•   A U.S. government default could also have a ripple effect throughout the global economy. Domestic and international markets depend on the stability of U.S. debt instruments like Treasuries, which are widely considered among the safest investments.

•   Interest rates for Treasury bills could rise, and interest rates across other sectors of the economy could follow suit, raising the borrowing cost for home mortgages and auto loans, for example.

•   A default could also create stock volatility in global equity markets, turmoil in bond markets, and push down the value of the U.S. dollar.

Recommended: What Is the U.S. Dollar Index?

What Are Extraordinary Measures?

When the government hits the debt limit, there are certain “extraordinary measures” it can take to continue paying its obligations. For example, the government can suspend new investments or cash in on old ones early. Or it can reduce the amount of outstanding Treasury securities, causing outstanding debt to fall temporarily.

These accounting techniques can extend the government’s ability to pay its obligations for a very short amount of time.

Once the government exhausts its cash and these extraordinary measures, it has no other way to pay its bills aside from incoming revenue, which doesn’t cover all of it. Revenue from income tax, payroll taxes, and other sources only cover about 80% of government outlays, according to the U.S. Treasury.

Can Congress Get Rid of the Debt Ceiling?

As noted above, the debt ceiling debate has become fertile ground for partisan fighting in Congress, but theoretically, it doesn’t have to be that way. For example, Congress could give responsibility for raising the debt ceiling to the president, subject to congressional review, or pass it off to the U.S. Treasury.

Congress could also repeal the debt ceiling entirely, which it came close to doing in mid-2023.

The Takeaway

A failure to raise the debt ceiling and a subsequent default on U.S. government debt obligations could have a significant impact on financial markets, from increased volatility to a decline in the value of the dollar to a lower national credit rating or even a recession. Given such consequences, it’s likely that Congress will continue to find ways to raise the debt ceiling, although political battles around the issue may continue.

Even if the debt ceiling continues to go up, the growing national debt could lead to economic instability, according to some economists. It’s hard to predict, since the debt ceiling has been raised about 100 times since World War I, when it was first established, and the U.S. has yet to face grave consequences as a result.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

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

FAQ

How much is the U.S. debt in 2025?

The U.S. government currently owes well over $36 trillion in debt to investors, businesses, other governments, and even itself via intragovernmental loans.

Who is the U.S. most in debt to?

The Federal Reserve is the largest domestic holder of U.S. debt, because it keeps Treasuries as part of monetary policy. Foreign countries also hold large amounts of U.S. debt, with Japan, China, and the U.K. in the top three.

Can the U.S. ever get out of debt?

While it might be possible, getting out of debt would require substantial changes to policies and programs and could take decades to accomplish.

Photo credit: iStock/William_Potter

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.

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.

SOIN-Q225-128

Read more
Close modal

See what SoFi can do for you and your finances.

Select a product below and get your rate in just minutes.

Student Loan
Refinancing

Personal
Loans

Online
Investments

Other

Terms and conditions apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or other eligible status, be residing in the U.S., and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates reserved for the most creditworthy borrowers. If approved, your actual rate will be within the range of rates at the time of application and will depend on a variety of factors, including term of loan, evaluation of your creditworthiness, income, and other factors. If SoFi is unable to offer you a loan but matches you for a loan with a participating bank, then your rate may be outside the range of rates listed above. Rates and Terms are subject to change at any time without notice. SoFi Personal Loans can be used for any lawful personal, family, or household purposes and may not be used for post-secondary education expenses. Minimum loan amount is $5,000. The average of SoFi Personal Loans funded in 2023 was around $33K. Information current as of 2/26/24. SoFi Personal Loans originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org). See SoFi.com/legal for state-specific license details. See SoFi.com/eligibility for details and state restrictions.

✝ To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

©2026 Social Finance, LLC All rights reserved.
TLS 1.2 Encrypted
Equal Housing Lender